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.

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