A representative from buy.com Inc.’s biggest investor Softbank Corp. says the company is sticking by the struggling Internet retailer for now.
“We still believe the company is pretty much a survivor,” said Softbank’s E. Scott Russell, who sits on buy.com’s board of directors and is a general partner at Softbank Venture Capital in Mountain View. “We’re working on it day by day.”
Japan’s Softbank holds nearly a 30% stake in Aliso Viejo-based buy.com. Russell said Softbank still is banking on the dot-com, despite buy.com’s dismal fourth-quarter financial results and the steep comeback trail that lies ahead of it.
When asked at what point Softbank might consider walking away from its investment in buy.com, Russell said: “Softbank has no plans to walk away from buy.com. Like with all our investments, our plans are to work hard for a successful outcome.”
Buy.com reported a fourth-quarter operating loss of $33 million, vs. a $48 million operating deficit a year ago. The company’s once fast-growing sales ground to a halt in the critical holiday period, dropping 2% to $196.7 million,about $24 million short of analysts’ expectations.
In a bid to generate cash by year’s end, buy.com last week announced plans to lay off 125 employees,about 42% of its 300-person staff. The company also is exiting the golf business acquired from Buygolf.com and closing the company’s sports store.
The moves are expected reduce buy.com’s expenses by about $29 million annually, and, when coupled with other restructuring, cut yearly operating expenses by $70 million, according to the company.
This is buy.com’s third big stride in about a month to get back on its feet. Last month, the company laid off 25 employees, shut down its Canadian operations, sold its U.K. business and discontinued a joint venture in Australia, along with other measures.
“The board came to the conclusion not so long ago that we had to get more aggressive about driving to profitability,” Russell said.
Two weeks after those changes hit, chief executive Gregory Hawkins and chief financial officer Mitch Hill resigned. Board member James B. Roszak is serving as interim CEO and Donald Kendall is chairman for now. Neither is affiliated with Softbank.
“I’ve been on the board since the company was born,” Roszak said. “I felt strongly that we have a business model with outstanding opportunity.”
Buy.com must win its race against the clock. As of Dec. 31, the company reported $56.6 million in cash and equivalents, plus another $11 million in marketable securities. That’s down from $109 million in cash and securities as of Sept. 30.
Russell said he believes buy.com has enough money to get profitable without more funding. Roszak declined to comment on the assertion, but he said buy.com would update investors on its position by the end of the first quarter.
At least one analyst is skeptical the cash will last.
“We believe the company will need to seek additional financing or other alternatives, like a partnership,” said Anthony Gikas, an analyst at U.S. Bancorp Piper Jaffray. “We really don’t see any near-term catalyst for buy.com. We’re just waiting it out to see if the changes like shrinking the infrastructure pay off.”
Online retailers across the board are grappling with dips in online spending. Industry leader Amazon.com Inc. in January cut 1,300 jobs and closed a warehouse as its fourth-quarter operating loss widened from $274 million a year ago to $322 million.
Internet retail woes are expected to be made worse this year by “weakening economic conditions,” according to Gikas, who said that growth in the online retail sector isn’t going to be as strong as once anticipated.
Online retail sales for 2000 still were double those of 1999, according to initial estimates from Forrester Research Inc., the Cambridge, Mass.-based research firm. But Forrester analyst Stephen Zrike said not all companies were invited to the party.
“It was disappointing for dot-com companies that were looking for some astronomical growth percentage to rationalize to their investors that they should stay alive,” he said. “Those numbers didn’t come in.”
Buy.com and other online retailers face another challenge: portals with bigger names and deeper pockets. Those include AOL Time Warner Inc., Yahoo! Inc. and Microsoft Corp.’s MSN. The majority of online traffic is congregating around these sites, Zrike said, and they stand to grab more online sales.
For buy.com to stand out,and survive,the company needs to become a specialist in a niche area rather than “trying to be the be-all, end-all shopping site, which is what they have tried to do in the past,” Zrike said.
Roszak said it’s critical that buy.com keep a focus. He said the company, which dubs itself as the “Internet Superstore,” is selective about featured “stores” on its site and doesn’t carry inventory or run warehouses that “can drag down our balance sheet over time.”
“We want to be flexible so that when we want to move in and out of stores, it’s not a trauma,” Roszak said. “We can tighten right up if we have to and expand almost as quickly when the economy loosens up.”
Buy.com has said it plans to focus on bigger- ticket items offering higher profits, such as computers, software, consumer electronics and wireless devices. The company also offers videos, games, books, office supplies and more, but has said it will reduce marketing of those items in favor of items that “have greater potential to drive the business to positive operating cash flow.”
And the company can point to a couple of bright spots. Fourth-quarter gross profit on sales was $13.4 million, vs. a loss of $1.6 million in the same quarter last year. The company’s gross profit margin edged up slightly in the recently concluded quarter to 6.8%, up from 6.7% in the third quarter.
If buy.com continues making strides toward profitability, it has a possible life preserver in Softbank, according to Russell.
“Obviously Softbank wants buy.com to succeed,” he said. “If we believe that they are really close to succeeding and proving to the world that they can run a profitable business, then we’ll help make sure that we put them over the top.”
Roszak conceded that buy.com is keeping all of its options open, including turning to Softbank for financial support.
There are other possibilities for the online retailer, according to analysts.
Buy.com, which has done well helping customers search its site for products, could be folded into another Softbank investment that would benefit from its technology, Forrester’s Zrike said.
Or buy.com could partner with a portal or even be acquired by one looking to build its e-commerce system, analyst Gikas said.
While Roszak pointed out that buy.com must look at any opportunity, he said the company isn’t entertaining any of those scenarios right now.
And, for now, an acquisition seems unlikely, according to Gikas.
“Unfortunately, at this time there’s not a lot of acquisitions going on. Most of these portals and Internet companies are really just trying to keep their feet on the ground,” Gikas said.
Still, Gikas doesn’t count buy.com out as long as the company can show investors they’re serious.
“I think they have a chance of being a survivor. The absolute key thing for them to do is focus on the core business and get to profitability,” Gikas said. “The markets have obviously shut down for financing these types of ventures.”
Meantime, buy.com plans to sublease one of the two floors it currently occupies in Aliso Viejo as part of its streamlining.
“If we execute our plans we can be a survivor,” Roszak said. “After all, we have 3.5 million customers and 70% of them keep coming back.” n
