Etoys Inc - Wall Street Not Impressed With Strong Holiday Sales

WALL STREET NOT IMPRESSED WITH STRONG HOLIDAY SALES

In January 2000 Business Week reported, "eToys remains the player to beat in this fast-growing field." The company had more customers for the holiday quarter than in its previous two years combined and was the third-most-visited e-commerce site behind Amazon.com and eBay.com. Although eToys's holiday sales for the quarter ending December 31, 1999 more than quadrupled to $107 million, the company reported a quarterly loss of $62.5 million, compared to a loss of $8.2 million for the same quarter in 1998. Responding to the news, Wall Street sent eToys's stock down to around $17 a share at the end of January 2000. eToys attributed its losses to the high cost of fulfilling orders, due mainly to its outsourcing arrangement with Fingerhut. eToys planned to bring its order fulfillment in-house for 2000, opening a new warehouse in Virginia to service the eastern United States and expanding its southern California facility. During the 1999 holiday season eToys also declined to copy its competitors, many of whom offered free shipping, deep price discounts, and coupons worth as much as $10. As a result, eToys enjoyed a healthy gross profit margin of 19 percent. The company's customer service was also able to keep up with the heavy traffic, and eToys did not experience a high level of customer complaints like many other online retailers did that holiday season.

As Wall Street continued to punish tech and e-commerce stocks, eToys's stock price fell to around $6 a share in April 2000. Both Fortune and Los Angeles Business Journal reported that some analysts now thought eToys would have difficulty making it through the next e-Christmas. The company had about $220 million in cash and liquid assets, and in June it raised another $100 million through a direct placement of convertible preferred stock to private equity funds and a group of investors. Analysts felt that eToys needed to raise another $100 million to continue operating until it could turn a profit.

Meanwhile, the rest of the online toy industry was suffering. In May, Walt Disney Co. closed its Toysmart.com site after it was unable to raise additional capital. Other toy sites that closed included ToyTime and Red Rocket, which was backed by Viacom International through its subsidiary Nickelodeon. KBkids.com remained open but cancelled plans for its IPO in June. The early shakeout in the online toy industry was attributed in part to falling stock prices—especially on the Nasdaq, a technology-heavy stock market, distinct from the New York and American Stock Exchanges—and difficulty in raising new capital. Click-and-mortar operations that had both online and physical storefronts were coming into favor at the expense of "pure play" Internet companies. As a result, the largest toy sellers, Toys 'R' Us and Wal-Mart, appeared to be in the strongest market position for the coming holiday season.