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eToys earnings on target, says business model sustainable

EToys (Nasdaq: ETYS) met Wall Street estimates Thursday with a fiscal third quarter operating loss of $62.5 million, or 52 cents a share, as sales jumped 366 percent to $107 million.

EToys shares are now trading around their May IPO price of $20. Shares have fallen amid stiff competition and traffic gains from bricks and mortar competition such as Toysrus.com.

Including charges, eToys reported a third quarter loss of $75.5 million, or 63 cents a share. In the same quarter a year ago, eToys reported an operating loss of $8.2 million, or 9 cents a share, on sales of $22.9 million.

The December quarter, eToys' biggest, didn't disappoint. The company reported an average order size of $67 a share, a customer acquisition cost of $33 and gross margins of 19 percent. The company also said its inventory was manageable following the holidays. Many e-tailers, including Amazon.com (Nasdaq: AMZN), were planning to "err on the side of overcapacity" to meet demand.

EToys said its customer base jumped to 1.7 million in the December quarter, compared to 611,000 at the end of the September quarter.

On a conference call with financial analysts, eToys CEO Toby Lenk said the company maintained its leadership position and took a few swipes at competitors. Lenk said investors should look at quality sales -- revenue relative to total ad spending, discounts, coupons and free shipping.

Lenk said eToys held the line on free shipping and coupons because those practices don't make long-term sense. He said the company spent $36 million on advertising to drive $107 million in revenue.

"Spending a dollar on advertising for less than a dollar of revenue isn't sustainable," said Lenk. "There will be winners and losers."

The online toy market is crowded with eToys, Amazon, Wal-Mart (NYSE: WMT), Smarterkids.com (Nasdaq: SKDS) all vying for attention. Meanwhile, KBkids.com Inc. said Thursday it filed for an initial public offering. KBkids.com is a joint venture between Consolidated Stores (NYSE: CNS) and BrainPlay.com, Inc.

During the peak months of November and December, eToys said it shipped 96 percent of its orders on time. In total, 99 percent of orders placed prior to the holiday shipping deadline of Dec. 18 arrived in time for Christmas, the company said.

Lenk said delivery wasn't perfect and the company is working to get better. EToys said it is accelerating plans to use company-run distribution facilities as its primary means of order fulfillment and decrease its reliance on outsourcing vendors.

The company is currently outfitting an East Coast distribution center in Danville, Va., which is expected to begin shipping products in the spring, and expanding its existing West Coast distribution operations in Southern California.

EToys' financial chief, Steven Schoch, didn't offer much detail on the company's fiscal 2000 guidance or the company's international efforts. Schoch, however, said the company is showing it has a sustainable business model. "EToys is in an elite class of e-tailers that can boast a sustainable business model," he said.