Buy.com Inc., the money-losing online retailer touted as Orange County’s answer to Amazon.com Inc., 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 cost to acquire them, has raised prices on some items. Revenue is up, and, for the first time, Buy.com showed a gross profit on sales in the first quarter. Advertising revenue, which the company hopes will offset low product 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, the company can’t turn to Wall Street to raise more money. Suffering along with other dot-com stocks, Buy.com shares trade at around 5, down from a high of 35 hit just after the company’s February initial public stock offering.
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 The Goldman Sachs Group, 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, Goldman Sachs analyst Anthony Noto said 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 changing 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, or net sales minus the cost of sales. Buy.com’s gross margin jumped from negative 0.8% in the first quarter of 1999 to a positive 4.3% in the quarter ended March 31.
Revenue, meanwhile, nearly doubled to $207.6 million, helped by a $24.5 million sales and marketing budget. The company’s customer acquisition costs,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.
Big Challengers
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 retail.
Among electronic retailers, Buy.com lags 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% gross margin towers Buy.com’s.
But not everyone is ready to say Buy.com’s days are numbered. Three of the five brokers who cover the company rate it a “strong buy.” One rates it a “moderate buy” and the other recommends a “hold.”
Still, Buy.com is a long way from net profitability. It lost $32.8 million in the first quarter as sales as marketing costs doubled. In the year-ago quarter, Buy.com lost $19.3 million after spending $12 million on marketing.
In filings with the Securities and Exchange Commission, officials said they’re not sure their current business model will ever generate a profit. The company’s original game plan, spawned by Orange County native Scott Blum, was to sell products below cost.
The low prices would draw visitors in droves, the theory goes, making Buy.com an attractive site for advertisers whose ad purchases would make up for losses on product sales.
Blum, who still owns 48% 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 holds a 30% stake.
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 idea. Advertising revenue is growing, accounting for nearly 5% of Buy.com’s overall sales in the first quarter, vs. 1.4% in the year-ago quarter.
The company’s lack of profits wouldn’t have been much of a liability just a few months ago. But after March’s correction in technology shares, investors are questioning dot-com strategies like those of Buy.com.
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 look-alike Web sites selling everything from shoes to pet food. About four-fifths of online retailers operating now won’t survive the year, Forrester predicts.
If investors continue to spurn dot-coms, company officials say they might be able to raise additional cash by entering creative mergers.
Softbank’s Role
Of course, Buy.com also could turn to Softbank. If executives can show their strategy is leading to profitability, Softbank could ante up more financial support in the hopes of seeing its initial investment pay off.
Buy.com could itself become an acquisition target. But officials contend their company’s position as the No. 2 online retailer makes the prospect unlikely.
“We never say never,” Hill said. “But we’re not mapping out a business plan with the idea of selling to someone else.
The 3-year-old company quickly established itself as one of the larger players in a crowded field. But some analysts think that Buy.com may have entered the market a year late and a few million dollars short.
Still, Buy.com officials are quick to point to rival Amazon’s more expensive “hybrid” e-commerce strategy, which includes building warehouses and handling distribution itself, like old-fashion retailers do.
Buy.com saves money by outsourcing most of its fulfillment, leaning heavily on Santa Ana distributor Ingram Micro Inc.
And 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 sold to Internet hub AltaVista Co., no longer operates as its own store and instead directs visitors to other online merchants.
Buy.com officials won’t project when they may turn a profit. But they say they have a clear read on what investors expect of the company.
“They want a path to profitability,” he said. “On that point, we’ve heard them loud and clear.”
