Buy.com Losses Grow--so Does Customer Base
One of the nation’s largest Internet retailers, Buy.com Inc., Monday reported widening losses in its first quarter as a public company. But the online superstoreshowed dramatic improvement in a key measure that could lead it to profitability.
The Aliso Viejo company lost $32.8 million, or 28 cents per share, in the year’s first three months, due largely to promotional and infrastructure expenses. That’s 70% more than the $19.3 million it lost in the same period last year, in line with Wall Street forecasts.
However, what surprised analysts was that the discount retailer added almost 450,000 customers in the first quarter while raising prices enough to make a modest profit on each purchase.
Its quarterly sales--mostly of computer products but also of books, music, consumer electronics and a widening menu of other goods--jumped 92% to $207.6 million. And the company’s gross margins, which measure the profitability of sales, went from -0.8% in last year’s fourth quarter to 4.3% in the first quarter.
“They blew away my gross-margin predictions,” said Genni Combes, an analyst with Chase Hambrecht & Quist in San Francisco. “This validates Buy.com as a brand and it validates [Chief Executive] Greg Hawkin’s strategy.”
Buy.com is the nation’s fifth-largest Web retailer. In recent months, the company has taken a beating on Wall Street along with most other business-to-consumer Internet ventures.
Buy.com’s stock has dropped more than 50% since the company’s initial public offering in early February. Before Monday’s results were announced, Buy.com shares lost 19 cents to close at $6.06 on a day the Nasdaq index dropped by more than 4%.
Fortunes Shifting in a Big Shakeout
Market pressure has exposed cracks even in top sites like music retailer CDNow.com and electronics superstore Valueamerica.com, threatening their existence as heavy losses burn through their cash reserves and backers grow reluctant to pony up more.
Buy.com’s revenue growth rate--and losses--continue to outpace many competitors. Egghead.com, a similarly sized software e-tailer, reported recently that its revenue had risen 34% and its net loss had grown by 37% during the year’s first quarter.
Despite Buy.com’s red ink, analysts said its first-quarter numbers indicated that the company could join industry behemoth Amazon.com. and some others that survive the nascent shakeout in electronic commerce.
“We think it’s a huge turning point in this business,” said Hawkins in an interview Monday. “Even the naysayers, the people who said we couldn’t raise prices and keep customers without having customers run for the door, have to see that.”
Buy.com made a shift in direction last June to ease Wall Street doubts that it could ever become profitable, moving away from its initial, attention-grabbing ploy of offering products at deep discounts or even at a loss. The company now uses loss leaders to draw in customers, then steers them to higher-margin products. Analysts and company officials said that strategy shift is taking root.
Buy.com still faces formidable obstacles. For instance, its traffic halved after the holiday season, while rival Amazon’s remained constant. And with about one-fourth as many buyers as the industry leader, Buy.com still lacks Amazon’s scale.
That may be the most crucial asset in e-tailing, which is emerging as an even lower-margin business than retailing, said Cameron Meierhoefer, an Internet research analyst for PC Data Online.
“Buy.com doesn’t have the same stable buyer base that Amazon does,” Meierhoefer said. “The traffic suggests they are still getting the bargain hunters. But they are certainly holding their ground. They are reasonably well-positioned to survive.”
