BUY.COM — Buy.com Hikes Prices to Outlast Flood of Failing Firms

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Orange County Business Journal

Buy.com Inc., the money-losing online retailer touted as Orange County’s answer to Amazon.com, has tweaked its strategy in hopes of staving off the harsh new realities that have beset other dot-com hopefuls.

The Aliso Viejo-based company, which used to sell products for less than what it had paid to acquire them, has raised its prices. Revenue is up and, for the first time, Buy.com showed a gross profit on sales in the first quarter ended March 31. Advertising revenue, which the company needs to offset its low prices, also is rising.

“We see ourselves as being one of the dominant survivors of this whole shakeout,” said Mitch Hill, Buy.com’s chief financial officer.

But Buy.com’s effort to make a name for itself with lavish advertising, sports sponsorships and cheap product pricing is depleting cash reserves and putting the company at risk of running out of money. For now, it can’t turn to Wall Street to raise more.

Like other dot-com stocks, Buy.com shares have been plummeting, trading last week at around $5 down from a high of $35 hit just after the company’s February initial public offering.

War chest running out

The IPO raised $182 million, of which Buy.com still had $144 million on hand as of March 31. The company is spending about $8.5 million per month on marketing and other operations, a burn rate that will leave $50 million to $75 million at the end of the year.

That leaves ample wiggle room as Buy.com finds ways to speed up profitability, Hill said.

Not everyone thinks so. Investment banker Goldman, Sachs & Co., financial magazine Barron’s and market Web site TheStreet.com in recent weeks have pegged Buy.com as one of the next Internet retailers to face a cash crunch by year’s end or in early 2001. Buy.com and others will have to find ways to boost cash in coming months, Goldman Sachs analyst Anthony Noto stated in a May 31 report.

Buy.com officials say doomsayers are extrapolating long-term predictions from a single financial snapshot while ignoring the company’s evolving business plan not to mention a dynamic marketplace.

“It’s a simplistic analysis,” Hill said. “Nobody just wakes up one day and says ‘Gosh, we’re out of money.'”

The most telling measure, Hill said, is gross margin (the ratio of gross profit to net sales). Buy.com’s gross margin jumped from negative 0.8 percent in the first quarter ended March 31, 1999 to a positive 4.3 percent in the first quarter this year.

First-quarter revenue, meanwhile, nearly doubled to $207.6 million. The company’s customer acquisition cost the amount of money it takes to lure a repeat buyer dropped a buck to $31, a figure that is comparable to other online retailers.

But some industry observers wonder whether there’s room for Buy.com in the changing online landscape. Traditional retailers such as Wal-Mart Stores Inc., Target Corp. and Kmart Corp. are stepping up their online efforts, and some analysts predict they’ll come to dominate online retailing.

Among electronic retailers, Buy.com lags behind Amazon.com, which has a $1 billion cash war chest that’s seven times the size of Buy.com’s and brand awareness to match. And while Amazon is posting net losses, its 22 percent gross margin towers over Buy.com’s.

Not everyone is ready to say Buy.com’s days are numbered. Three of the five analysts who cover the company rate it a “strong buy.” One rates it a “moderate buy” and the other recommends a “hold.”

Buy.com is a long way from profitability. It lost $32.8 million in the first quarter, as sales and marketing costs doubled. In the year-earlier quarter, Buy.com lost $19.3 million after spending $12 million on marketing.

The company’s original game plan, spawned by Orange County native Scott Blum, was to sell products at below cost. The low prices would draw visitors in droves, the theory goes, making Buy.com an attractive site for advertisers whose business would more than offset losses on product sales.

Blum, who still owns 48 percent of Buy.com, has turned over control of his shares to a voting trust. The move gives de facto control to Japanese technology investor Softbank Inc., which itself owns a 30 percent stake.

A new business strategy

Buy.com has altered its original plan by raising prices to make money on some items and advertising “lower overall prices.” But officials say they remain committed to Blum’s original idea. Advertising revenue is growing, accounting for nearly 5 percent of Buy.com’s overall revenues in the first quarter, up from 1.4 percent in the year-ago quarter.

The company’s lack of profits wouldn’t have raised many eyebrows even a few months ago. But after March’s correction in technology shares, investors are questioning dot-com strategies like those of Buy.com.

As big-spending dot-coms face increased competition and investor skepticism, casualties seem to be a weekly occurrence. Last week, New York-based Fashionmall.com Inc. acquired what’s left of British Web apparel seller Boo.com, which closed its virtual doors earlier this month. Last week, Torrance-based ToyTime.com Inc. met a similar fate, posting a sign on its Web site saying it’s no longer taking orders.

E-commerce volume is booming online spending is projected to grow to $108 billion by 2003, compared to about $20.2 billion last year, according to market researcher Forrester Research Inc. But that growth has led to a flood of lookalike Web sites selling everything from shoes to pet food. About four-fifths of online retailers operating now won’t survive the year, Forrester predicts.

Amazon and Buy.com started out as single-category retailers Amazon in books and Buy.com in computers. Both have since tried to become the online equivalent of Wal-Mart, offering all sorts of merchandise to reach a wider range of customers.

While Buy.com has grown quickly on its memorable moniker and cutthroat pricing, even the best Internet addresses don’t guarantee success. Shopping.com, the Newport Beach Internet retailer that went public and then was sold to Internet hub AltaVista Co., no longer operates as its own store and instead directs visitors to other online merchants.

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