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Tech Industry sees profit, opportunity in e-tailing woes

Privately held said Wednesday that it has become the first pure-play e-tailer to turn a profit. And the company's CEO said will grow sales to $20 million a month by the end of the first quarter. buys close-out inventory and resells it cheap. The demise of e-tailers has helped fuel's growth. The more e-tailers go bankrupt, the more can buy inventory for pennies on the dollar.

The strategy so far has worked well. In an interview, CEO Patrick Byrne didn't disclose the size of the profit, but just the fact that the company is in the black says a lot. In the last month,'s sales have jumped from $4 million to $9 million a month and early indicators show the company's sales are growing exponentially. The company said it can stay at break even with $4 million in sales.

Byrne also noted that took $27 million to turn a profit. Of that sum, Byrne, who ran uniform company Fechheimer Brothers for Warren Buffett's Berkshire Hathaway, put up $20 million through his personal investment fund. Byrne owns 60 percent of, which hasn't taken any venture capital handouts, he said.

For perspective, (Nasdaq: AMZN) has an accumulated deficit of $1.75 billion through Sept. 30 without a profit. EToys (Nasdaq: ETYS) has a $339.9 million deficit through Sept. 30 without a profit, according to the companies' Securities and Exchange Commission filings.

The business model's strategy is simple -- take a small slice of the $50 billion close-out business. In retail, goods that don't sell get pushed by "jobbers" and other parties, who then sell them to bargain basement stores. It's a fragmented market that could consolidate.

And the dot-com implosion has only helped the company. has purchased e-tailer inventories worth more than $44 million at retail value from the likes of,,,, and The company also bought, a sporting goods e-tailer, in an all-stock transaction.'s purchase of's inventory illustrates how the company makes money. had $8 million in inventory based on wholesale prices that could have been sold for $10 million to $11 million retail. Byrne said got ToyTime's inventory for $3.7 million. The margin gives "a lot of room to play" and to throw in perks like free shipping, said Byrne.

The company also partners with e-tailers and retailers to move goods anonymously. Retailers often don't want to upset suppliers by cutting prices just to clear out inventory. Under that scenario, takes a commission, said Byrne. has kept its expenses low. The company's Utah warehouse cost $2.5 million to build. Byrne shunned the automation other e-tailers crave because it doesn't make sense for moving close-out inventory.

Bigger e-tailers to fry

Byrne isn't shy about the company's ambition. "The pure play e-tailers won't last," he said. That statement includes all e-tailers not named

"We'll be opportunistic," he said. "Closeout buying has been around a long time."

Byrne admitted that he keeps tabs of publicly-traded e-tailers such as eToys, (Nasdaq: ASFD), (Nasdaq: BUYX) and their financial prospects. If Byrne's forecast that these e-tailers won't last is correct, could swoop in and buy their inventory in bankruptcy court.

But there's a catch. would need a lot of capital to buy out the inventory of a big e-tailer, and that may dictate an initial public offering in 2001. Byrne said there's a 50-50 chance of an IPO, but for now he doesn't want to talk about offerings. Employees that yap too much about IPOs face grounds for dismissal, said Byrne.

"You run a company like the stock market doesn't exist," he said. "Running a company for market hype is fatalistic.">