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ONLINE RETAILERS EYE REVIVAL

Posted on September 17, 2001

      As the retail industry gears up for the fall shopping season, a growing number of analysts are cautiously optimistic about online retailers, saying that many of them have solid businesses that could lead a dot-com revival.

      Online retailers were among the first to unravel in December 1999. E-tailing stocks have been hammered as companies have gone bankrupt, closed shop and ditched any hopes of being profitable.

      But some analysts are finding solace in statistics from Webmergers.com, which released a study this month indicating that closures at e-tail and content companies declined for the third consecutive month.

      Retailing is an old, established business, but online retailers can use the Internet to lower costs related to customer service, delivery and customer acquisition. As long as companies keep their costs low and don't get ahead of themselves, they may be able to succeed, analysts say.

      "We believe most of the dot-com problems (but not all) have been played out and are generally out of the Internet economy," U.S. Bancorp Piper Jaffray analyst Safa Rashtchy wrote in a recent report. "What makes the e-commerce sector more interesting is that there is the potential for different players making money, and unlike the content and ad-based companies, there is a well-established business model."

The positive evidence is stacking up

      Priceline.com stunned dot-com watchers by announcing a second-quarter pro forma profit well above what most were expecting. It also upped its outlook for the third quarter.

      Global Sports, which provides back-end logistics and fulfillment support to online sporting-goods stores, is branching into new categories. On Friday it said it would buy online luxury-goods retailer Ashford.com, and it also has signed up with Kmart's BlueLight.com.

      Privately held electronics retailer 800.com has managed to secure $20 million in another round of funding at a time when many venture capitalists are giving up on the Internet market.

      "In today's challenging market this is a serious win; 800.com's continued growth and imminent profitability are assured," said Gerry Langeler, of OVP Venture Partners, the lead investor in the deal.

      Even Amazon.com--once an Internet darling and lately a dot-com scapegoat--has had some good news: It recently signed a deal with merchandising giant Target to open three new stores in time for the holidays, launched an online computer store, and partnered with Circuit City to offer electronics.

      Goldman Sachs analyst Anthony Noto has singled out dot-coms as a bright spot, writing that "select Internet stocks represent attractive investments within the tech sector, given strong earnings visibility, potential upside, and continued positive outlooks."

More reasonable expectations

      Although online retailers are expected to rebound, don't expect a return to the days where companies planned to conquer the world and supplant traditional retailers.

      "While the potential of e-commerce profitability was overstated, the promise of convenience and value is still valid for consumers who are continuing to increase their e-commerce purchases," Rashtchy said. "Although the bulk of these will go to the main players that include big offline retailers (and) eBay, Amazon and a few others, there is still room for lean and efficient e-commerce shops, as well as enabling service companies.

      "If a company doesn't aim for the stars and keeps (costs) manageable, it is actually possible to make money on e-commerce," he said.

      Rashtchy isn't the only one urging e-tailers to hold the line on costs.

      "The online-only retailers who once had delusions of grandeur have come back to earth," said Jupiter Media Metrix analyst Ken Cassar. "What's important is that they stay there. When they do have a profitable quarter, they need to be careful that they don't become overconfident and make big investments and try to sustain market share."

      It's especially important, analysts said, for those companies not to get overly optimistic about fourth-quarter sales, which tend to be much higher than the rest of the year. "I would be skeptical of viability of any company until they show they can turn an annual profit," Cassar said.

      Jupiter is predicting 2001 e-commerce sales to hit $34 billion, up $10 billion from a year ago, but to show a slower rate of growth than in previous years.

      "We're going from a stage where online retail sales doubled every six months to doubling every 12 months, to now maybe double every three years. That will go on for a while as the channel matures," Cassar said.

      And though the pickup in sales may help these companies turn a corner toward profitability, that doesn't necessarily mean investors should jump back in.

      Prudential analyst Mark Rowen, who recently upgraded Amazon from "sell" to "hold," said "some fundamental things have to change" before he'd be willing to recommend Amazon stock again.

      "From a fundamental basis they still don't have a lot of growth, if any, in their profitable businesses," he said. "They still have a long way to go to get to profitability."

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