EToys’ Sales Soar, but Red Ink Still Flows

Online seller EToys Inc. said Thursday that sales for the most recent quarter tripled compared with a year ago--meaning better than expected operating results--but they weren’t enough to stem the company’s losses, which also nearly tripled.

In a conference call with market analysts, EToys executives said that even during a traditionally slow time of year, the number of customers grew at a healthy clip, and so did the amount those buyers spent.

That sent revenues to $24.86 million, up from $7.98 million during the same period a year ago. Losses for the quarter ended in June, however, reached $45.36 million excluding compensation and other charges, up from $16.92 million during the same time a year ago.

EToys, however, spent far more than average to woo those sales. The company spent $72 per customer during the quarter, compared with a $38 annual average, a cost the company often points to as among the best in e-tailing.

Losses were still lower than analysts expected, at 37 cents a share not including one-time costs, compared with 17 cents a year earlier. Analysts had predicted an average loss of 39 cents per share, according to a poll by First Call/Thomson Financial.

Based on a total loss last quarter of $59.5 million, EToys has lost about $279.5 million since it was established three years ago.

During the conference call and in interviews afterward, EToys founder and Chief Executive Toby Lenk said he continues to be encouraged by the company’s performance, and stands by a previously announced goal of being profitable by early 2003.

“What people don’t focus on often . . . is that you need healthy order sizes in order to have a good path to profitability,” Lenk said Thursday in an interview following the call. “[We had] our highest ever and we’d like people to focus on order size year-round.”

Average order size for the quarter ending June 30 was a record off-season high of $58, the company reported, or just slightly off the sizable holiday order, which last year totaled $67 on average.

The high order average was due in part to the revenue mix, the company said, which built upon higher-margin specialty products and the strong performance of its BabyCenter.com division.

Those numbers also seem to foretell strong numbers for the all-important holiday season, analysts said. EToys this fall will add high-margin private-label goods to the mix, and customers so far have apparently appreciated the exclusive products they find on the site.

Some analysts said the high spending on advertising per customer is better judged on a yearly, rather than quarterly basis.

“I think you will continue to see them try to drive traffic this year because it’s very important that they have a solid Christmas,” said Tony Cristello, an analyst with ABN Amro in Chicago. “Toys R Us is trying to regroup and they’re going to put a lot of pressure on these guys, as is Wal-Mart.”

Also on the plus side, the company said it increased its customer base by 219,000, bringing the total clientele to 2.1 million. Repeat customers accounted for 47% of sales in the last quarter, EToys said.

“It was a fine quarter, they showed a hell of a lot of growth and a hell of a lot better cost structure than this industry as a whole has traditionally had,” said Sean McGowan, a toy industry analyst for Gerard Klauer Mattison in New York. “Is the investment community going to care? They show signs of unreasonable expectations for what basically constitutes good performance.”

Investors seemed a bit wary before the company released its results. The stock fell 31 cents to close at $5.06 on Nasdaq; the report to investors was released after the market closed.

Last October, just five months after its initial public offering of $20 per share, EToys rocketed to a high of $86. In mid-April, the stock hit a 52-week low of $4.50.

EToys last month announced a crucial $100-million cash infusion from private investors, giving it cash through late next year.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

EToys’ Scorecard

Internet toy retailer EToys’ sales have tripled, but so have losses. A look at quarterly results, in millions:

*

Net sales

2nd quarter: $24.9 million

*

2nd quarter: --$59.5 million

*

Source: Bloomberg News