EToys Inc. has become the local poster child for dot-com failure.
As pundits around the country sought to examine and explain the recent crash in young, speculative tech stocks, Santa Monica-based eToys was perhaps the most frequently cited example of a one-time Wall Street darling whose future now looks dim.
Is there any hope for the plucky e-tailer?
"I don't think eToys is here to stay," said Seema Williams, senior analyst for Forrester Research Inc. in Cambridge, Mass. "I fought it for a long time, but their challenge is very heavy-duty competition offline, like Toys 'R' Us, which is growing very quickly."
Forrester Research recently released a report predicting that most dot-com retailers will be out of business by 2001. The loudest death knell was rung for companies like eToys.
"The plethora of merchants selling undifferentiated products at razor-thin margins including pet supplies, toys, and consumer electronics will collapse before marketing expenditures ramp up for the next holiday season," the Forrester report concludes.
One Internet analyst with a high-profile firm, who asked not to be identified, said he doesn't think eToys will last much past next Christmas. "They're gonna' run out of money; they only have enough cash through the end of the year," he said. "They have too much inventory on the balance sheet because they bought too much inventory in (the fourth quarter). I think the answer is, the (stock) price does reflect how they're doing. Yeah, sales are strong, but who cares what the sales are?"
EToys was created in 1996 by former Walt Disney Co. executive Toby Lenk and Idealab founder Bill Gross. Lenk remains president, CEO and "uncle of the board."
The company is the largest Internet retailer of children's products, with $30 million in sales in 1999. But its stock plunged to $4.75 on April 17, before inching up to $6 on April 20. That's more than a 90 percent drop from its high of $84.25 on Oct. 11, 1999.
The company went public last May and the stock shot up from its offer price of $20, closing on its first day of trading at $76.56. It was the biggest debut for a Los Angeles IPO ever, finishing its first day of trading with a market value of $7.8 billion.
The stock fell during the Christmas rush, when eToys had trouble filling orders and resorted to having a third party fulfill some shipments. During the all-important holiday season, the company was plagued by reports of shipping delays, merchandise shortages and slow service.
At the same time, the six-month "lockup period" during which company insiders and pre-IPO investors were prohibited from selling their shares expired in mid-November. And they didn't waste any time selling off hundreds of thousands of shares, sending the stock into a tailspin.
EToys officials are optimistic about the future and bristle at suggestions that they won't last another year.
"If you look at the facts, our last balance sheet at the end of December showed $220 million in cash at the bottom, and we will have a substantial amount of cash when we report our March numbers next week," said Chief Financial Officer Steven Schoch. "We have ample cash to certainly operate through the important holiday season."
Schoch also defended the company's potential to raise more public money, although he would not address its stock valuation directly. "We have always enjoyed capital market access. We have raised $330 million in the last 10 months, and there is every reason to believe, should we desire to raise (additional) capital, there are avenues available to us," he said.
Caught in the downdraft
Some analysts argue that eToys, like any dot-com company, is simply experiencing growing pains.
"As a whole, from a company standpoint, they're doing very well, in the sense of exceeding expectations and staying on plan," said Steve Weinstein, an analyst with Pacific Crest Securities in Portland, Ore. "EToys was caught up in a number of factors. First, their business is hyper-seasonal. Second, e-tailing moved out of favor we had the whole Internet move out of favor recently."
EToys recently committed to move into a new corporate headquarters now being built at Kilroy Realty Corp.'s Westside Media Center in West Los Angeles and to more than 750,000 square feet of distribution space in Ontario.
But there's speculation that the e-tailer won't be moving anytime soon.
"I bet that's a raging debate right now. It's a question of growth vs. profitability," Williams said. "I don't think they can afford to take that space on right now."
Schoch declined to comment on plans to move into the new headquarters or the distribution space.
Some analysts are pessimistic about eToys even as a target for acquisition. "It would have been great for Toys 'R' Us to acquire them, but it's too late for that, and Wal-Mart already has their dot-com, so they're not looking for an acquisition," Williams said. "To be acquired now, they're too expensive. Six months ago it would have worked."
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