EToys to close up shop this spring

DSN Retailing Today, Feb 19, 2001 by Molly Prior

Retailers fall from grace exemplifies dot.com woes

NATIONWIDE DSN REPORT - This spring, eToys.com visionary Toby Lenk will officially join the ranks of fallen dot.com ceos. At the start of the critical holiday season, Lenk defended his high-risk, high-cost business strategy to The Wall Street Journal: "Pick a vision that works and pursue it relentlessly and passionately, and succeed or die trying." Unfortunately for Lenk, the latter prevailed and a combination of unrealistic expectations of the e-commerce channel and recent unfavorable market conditions plaguing all retailers greatly undermined Lenk's will to succeed.

Before third quarter numbers were tabulated, fiat site traffic and weak sales foretold eToys would fail to meet expectations. In mid-December, the company adjusted its forecast for the quarter and said net sales would come in between $120 million and $130 million, down sharply from its initial estimate of $210 million to $240 million.

EToys responded by shuttering its U.K. operations, closing two of its four domestic warehouses and laying off 700 employees, or roughly 70% of its workforce. Industry watchers agreed eToys was on the hunt for a buyer. Finally, to extend its lifeline to the end of March, the company unexpectedly announced Feb. 5 it had laid off its remaining staff of 293, effective April 6.

"The final straw is just the change in market conditions," said Barrett LaMothe Ladd of Gomez Advisors. "A year ago, it made sense to invest in distribution and infrastructure." In fact, eToys dedicated fiscal 2000 to improving fulfillment, aggressive advertising and entering new product categories.

The improvements were an attempt to iron out the seasonality issue inherent to on-line toy retailing, said Merrill Lynch analyst Daniel Good. The three-part strategy proved too costly for a business that's bottom line relies on two months of the year, and set eToys further away from profitability--originally projected at the end of 2002.

On Jan. 25, eToys reported an $85 million net loss for the fourth quarter and an operating loss of $74.5 million. The company burned through $49 million in the fourth quarter alone, leaving it with $63 million at the end of December.

An industry insider said the struggling toy e-tailer now relies on a staff of approximately 10 employees. Despite its gloomy outlook, the observer said a steady stream of potential buyers has been traipsing through the all but abandoned eToys offices. "Everybody in the industry believes eToys will be taken over," the source said.

At its peak, the site was lauded as a top performing Web site by both Gomez Advisors and Fortune magazine, and was often used as a barometer to indicate the overall health of e-commerce.

"EToys will definitely find a buyer for some or all the parts," said Ladd. The question is will someone buy the whole organization or purchase the fallen e-tailer in pieces, asked Ladd. Several analysts have speculated, but the answer remains unknown.

As eToys continues to minimize costs, all that remains is its domain name and weakened infrastructure. In a press release, the company reiterated that it would run out of cash by roughly March 31 of this year, "In order to continue operations in 2001, the company will require an additional, substantial capital infusion." The company added it does not believe that additional capital will be available.

                   ETOYS' SHARE PRICE SINCE IPO 5/20/99
                       (QUARTERLY LOSS IN MILLIONS)
'97  Oct. 1997
     Official launch
     of e-commerce
     site
'98  May 1998
     Acquires
     Toys.com
1999 May 20, 1999                        $76.56
     Completes IPO                       (loss = $21.7m)
     July 1, 1999                        1Q ended 6/30
     Acquires BabyCenter                 $66.56
     Aug. 11, 1999                       (loss = $32.1m)
     Signs $18m marketing                2Q ended 9/30
     agreement with AOL                  $26.25
     Oct. 20, 1999                       (loss = $62.5m)
     Launches eToys.co.uk                3Q ended 12/31
     Nov. 8, 1999
     Begins serving
     all of Canada
2000 Raises 13, 2000                     $8.84
     Raises $100 mil. in private capital (loss = $36.6m)
     July 2000                           4Q ended 3/31
     Named Best Internet Toy Store       $6.34
     by Gomez Advisors                   (loss = $45.5m)
     Aug. 29, 2000                       1Q ended 6/30
     Inaugurates 1.2 mil.-sq.-ft.        $5.34
     East Coast DC                       (loss = $41.8m)
     Dec. 15, 2000                       2Q ended 9/30
     Warns of 4Q revenue shortfall;
     hires Goldman Sachs advisors
2001 Jan. 4, 2001                        $0.19
     Fires 700 of 1000 employees;        (loss = $74.5m)
     closes two of four domestic         3Q ended 12/31
     warehouse; shutters
     UK operations
     Jan. 18, 2001
     Misses $2 mil. payment
     to creditor
     Feb. 5, 2001
     OOB announcement,
     effective April 6, 2001;
     fires remaining 293 employees