EToys Shareholders Having Blue Christmas

TIMES STAFF WRITER

The once red-hot stock of online retailer EToys Inc. is suddenly looking like a lump of coal--even though EToys is enjoying its busiest shopping season.

The stock has plunged more than 50% in the last two months--wiping out $5.5 billion of the Santa Monica-based company's market value--just as the holiday shopping period has been gearing up. The stock has plunged despite the fact that EToys' business continues to grow sharply.

"There's no evidence to be any less optimistic about the company's operating prospects," said Jeff Siegel, an analyst at the investment firm Ormes Capital Markets in New York.

But investors are preoccupied by the fact that EToys, which went public in May, faces several more electronic-commerce rivals than it did a year ago, when the company virtually had a lock on selling toys via the Internet.

Major conventional retailers such as Toys R Us, KB Toys and Wal-Mart Stores Inc. now have online shopping sites, and online bookseller Amazon.com Inc.--the most-visited Web retailer in the nation--also started selling toys this year.

Toysrus.com, for instance, last month signed a two-year agreement with America Online Inc. to be a major source for toys on AOL's Shop@AOL Marketplace.

"EToys just faces a lot more competition," said analyst Stacie Leone of Media Metrix, which tracks user traffic on Internet sites.

There's another factor that has likely pressured the stock. Since Nov. 16, institutional investors and others who owned EToys shares before the public offering have been free to sell the stock in the open market. Many have, totaling several million shares.

And it hasn't helped EToys' stock that recent published reports have cited EToys, along with some other e-commerce sites, for aggravating consumers with shipping delays, merchandise shortages, slow service and other problems.

EToys' slump has come even as many online rivals' shares have recovered from a summer downturn. Amazon.com is up 26% in the last two months, for instance, while auction site EBay Inc. is up 11%.

EToys' stock slipped again Thursday, losing $2.13 to close at $39.94 a share on the Nasdaq Stock Market. That's still nearly double the $20-a-share price at which the stock went public May 20, but the stock had climbed as high as $86 a share in mid-October before heading lower. The last time EToys closed below $40 was Aug. 16.

EToys said it won't comment on its stock's movement. But Ken Ross, its vice president for communications, said "we've had a significant uptick in volume this holiday season, and the fact is we've handled the vast majority of it extremely well. We've not been perfect, and we're not going to rest until we are."

To be sure, EToys remains popular and is growing fast. In the six months ended Sept. 30, its sales skyrocketed to $21.3 million from $989,000 a year earlier. But, like most fledgling Internet companies, EToys is still losing money. It lost $65.7 million in the latest six-month period, versus a $5.6-million loss a year earlier.

Figures released Thursday by Media Metrix showed how EToys remains very much in demand. Amazon.com was the most popular online retail site in the week ended Dec. 12, with 7.1 million visitors, followed by EBay with 4.7 million. Next came EToys at 2.3 million, a 59% jump from a year earlier.

But the figures also paint a stark portrait of EToys' growing competition. Also among the top 10 sites were http://www.toysrus.com and http://www.kbkids.com. The figures add up to "an increasing perception among investors of stiff competition for EToys," Siegel said.

EToys' Ross said competition "is a fact of life in our business." But he said "we believe our laser focus on the kids market, and our laser focus on the Internet channel, will differentiate us from all of the other players out there."

Some analysts said investors have excessively punished EToys. Although the company "has been under pressure because of the competition," the selling pressure on the stock has been "overdone," said Christopher Vroom, an analyst at Thomas Weisel Partners in San Francisco.

* Bloomberg News contributed to this report.

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Trouble in E-Toyland

The once highflying stock of online retailer EToys Inc. has plunged in recent weeks despite the company's rapid growth and a robust holiday selling season. Analysts cite heightened Internet competition from Toys R Us, KB Toys and others. Weekly closes and latest:

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Thursday: $39.94

Source: Bridge News

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