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Tech Industry

2HRS2GO: No need to paint a gross picture

    This is not necessarily a gross image.

    Drugstore.com (Nasdaq: DSCM) and Buy.com (Nasdaq: BUYX) yesterday reported quarterly results. What a difference a few months and a falling stock market make.



    Have an opinion on this?



    Here's how drugstore.com's fourth quarter financial news release started off:

    "Drugstore.com today announced financial results for its fourth quarter ended January 2, 2000.

    "Net sales for the fourth quarter were $18.5 million, a sequential increase of 52% over net sales of $12.2 million for the third quarter ended October 3, 1999. Total annual net sales for 1999 were $34.8 million.

    "Cumulative customer accounts increased by..."

    Compare that to yesterday's first quarter PR:

    "drugstore.com, the leading Internet retailer of health, beauty and wellness products, today announced financial results for its first quarter ended April 2, 2000.

    "Net sales for the first quarter were $22.7 million, a sequential quarter-over-quarter increase of 23 percent. drugstore.com also achieved a positive gross profit (defined as net sales minus cost of sales) of $1.1 million, or 5 percent of total sales.

    "drugstore.com added 295,000 new customers..."

    I took the liberty of italicizing the relevant change. Subtlety has never been a strong point here.

    So positive gross profit suddenly became a meaningful statistic? Not really, although gross margin is a traditional metric of efficiency. Still, the mere fact that your overall product line sells for more than it cost to make or buy shouldn't be a terribly meaningful statistic, because it's expected. Amazon.com (Nasdaq: AMZN) may lose money on the occasional item, but the company's total gross margin has been positive since it went public in 1997.

    Buy.com also took pains to highlight its first quarter gross profit, mentioning it in the third paragraph ahead of net loss.

    How about giving us the bottom line first? At least give us the operating line, which is what Wall Street scrutinizes first anyway.

    Companies should give investors more credit. If Wall Street wants profit, tell them when you expect to post an operating profit. And if you don't know when you're going to do that, then why are you in business?

    Funny thing is, Drugstore.com and Buy.com did alright, at least by Internet company standards. On a sequential basis, revenue increased 23 percent (good) for Drugstore.com and 3.4 percent (not terrible coming off a holiday quarter, but not great compared to other e-tailers) for Buy.com.

    Both companies continue boosting their customer bases. And margins did improve.

    People are smart enough to give appreciation where it's deserved. If there are real profits there, they'll find them.

    Ethics and the market

    Yesterday's column on Microsoft (Nasdaq: MSFT) elicited a Talkback from an occasional critic of mine who identifies himself as Frederick Cryer. He raises the point:

    "I still think the professional literature owes its readership some comment on the ethics of applauding an illegal monopoly for the last 10 years or so."

    Leaving aside the fact that under U.S. law there is no such thing as an illegal monopoly -- the illegality stems from the use of the position, not the position itself -- the ethics of applauding Microsoft's actions are simple: the company made money for many people.

    Wall Street is not an immoral place. It's an amoral one. Call it a phenomenon, a situation, an industry. You buy stocks to "create wealth". Or put more accurately and succinctly, Make Money.

    I wouldn't call that greedy, because greed implies the desire for more than your fair share. But there's nothing wrong with investing or trading to make a buck, just as there's nothing wrong with working 9 to 5 to make a living.

    Microsoft generated wealth for plenty of folks, and generated it consistently over a sustained period of time. From a financial writer's point of view, that's the only standard by which you judge a stock: what kind of shareholder returns has it produced?

    You can combine investing and ethics, but even mutual funds that specialize in "socially responsible" investing must produce acceptable financial results to stay in business. And ethics is a mushy field -- one man's social responsibility is another's societal burden.

    Even were I to make the mistake of judging MSFT stock ownership as a moral activity, reasonable people can and do disagree on the ethics of Microsoft's actions. Regardless of what Judge Jackson rules, remember that even the highest of justices err. For more details, see Dred Scott v. Sandford, 1857.

    But I won't venture there. Wall Street is what it is. 22GO>