THE DAY AHEAD: Webvan revs IPO as questions abound

Online grocer Webvan Group's (Nasdaq: WBVN) IPO is finally here following a SEC-imposed a delay -- officials were too loud during the quiet period. The delay gave us a few more weeks to be sold on Webvan, but the conclusion is still the same -- there's too much van and not enough Web in this company.

Why beat around the groceries? Here's what lead underwriter Goldman Sachs' crystal ball sees for Webvan, according to revised regulatory filings. In 1999, Goldman is projecting revenue of $11.9 million and a $73.8 million loss. In 2000, Webvan is expected to report revenue of $120 million and a $154.3 million loss. In 2001, Webvan revenue should jump to $518.2 million with a $302 million net loss. Webvan has Amazon.com's (Nasdaq: AMZN) financials without the track record.

Webvan: Are you a believer?

Goldman had its own assumptions and Webvan threw in a few more in its filings.

Webvan said if it operated 7 days a week (it operates 5 days) and maintained its average order size of $80 (Peapod's is $120) then the company could have annual sales of $35 million in 1999. If it can raise order size to $103 with an average of 8,000 orders seven days a week, Webvan can operate at margins of 12 percent compared to 4 percent at traditional grocery stores. No guarantees of course, especially when actual order size from June 2 through Sept. 30 was about $71.

That's a lot of "ifs."

"It's a lousy business to be in," said William Schaff, fund manager for the Information Technology 100 Fund, referring to online groceries. "They've changed the interface, but the back-end is all the same bricks and mortar."

The official stats: Webvan has delivered orders to more than 21,000 separate customers for sales of $4.2 million through Sept. 30. Those sales are dramatically improved compared to the first six months of the year. The company posted sales of $395,000 in the six months ended June 30 and lost $35.1 million.

The company is scheduled to price 25 million shares between $11 to $13 Thursday night for trading Friday in what could be one of the most highly anticipated offerings of the year. "I'd flip 'em but wouldn't own them," said Schaff. "You won't see this turning up in my prospectus."

Here's a brief Webvan recap: The company had a big IPO on deck, but babbled too much to the press. The real kicker was a column on TheStreet.com, which documented how Webvan was revealing figures on the road show that were not in the regulatory filings. The Securities and Exchange Commission then forced the company into a cooling off period.

Now we have more figures and the online grocery business still doesn't look that great. You could take a leap and predict that Webvan could begin delivering other goods in a battle with Amazon.com, but first Webvan has to get the online grocery business right. Getting it right means rapid expansion, $1 billion in distribution facilities and little room for error.

Here are some issues to watch as the Webvan story unfolds:

1. Gross margins will be thin. Webvan, the brainchild of Louis Borders of Borders Books fame, delivers food, non-prescription drug products and general merchandise, with same-day delivery within a customer-selected 30-minute window. Webvan also said prices will be at or below everyday supermarket prices.

Webvan said it has an edge by delivering fresh veggies and high-end goods such as lobster via an automated distribution system with cost efficiencies. But delivering the goods won't be cheap. Drivers, gas, insurance and trucks all cost money. The company also hasn't proven it can scale its business model yet. Schaff said under the hood Webvan is an ordinary grocery store that has to build warehouses, account for depreciation and maintenance of trucks and insure drivers -- all for skimpy margins.

2. Webvan's ability to expand. Webvan currently only operates in the San Francisco Bay area. The company plans to open a second distribution center in Atlanta, Georgia in the second quarter of 2000 with two more in Chicago and Seattle later that year. Webvan plans seven additional distribution centers in 2001.

There are 26 distribution centers scheduled over the next three years. Each distribution center costs about $25 million to $35 million. Bechtel is constructing the distribution centers for a price tag of $1 billion. Don't be surprised if Webvan looks for more money from the markets once it blows through its cash hoard.

And there are no guarantees that Webvan can make its distribution centers click. "Webvan's model is as unproven as everyone else's," said Arvind Bhatia, an analyst with Southwest Securities who covers Peapod Inc. (Nasdaq: PPOD).

3. Webvan has a lot of shares outstanding. There's a whole lotta dilution going on. After the Webvan IPO the company will have more than 321 million shares outstanding. Yahoo! Inc. (Nasdaq: YHOO) has 296 million and Amazon.com has 332 million.

Webvan's offering of 25 million shares could also put a lid on first day gains.

4. The selling of Webvan to investors. About 25 days after the Webvan IPO look for an army of "buy" ratings.

Goldman Sachs is the lead underwriter for the IPO with an assist from Donaldson, Lufkin & Jenrette, Merrill Lynch & Co., BancBoston Robertson Stephens, Bear Stearns, Deutsche Banc Alex Brown, and Thomas Weisul Partners. That group has an army of brokers to sell Webvan to investors.

Management will also go a long way to selling the Webvan vision.

The company recruited George T. Shaheen, former managing partner and CEO of Andersen Consulting, to be its chief. It has also raised capital from the likes of Softbank America Inc., Sequoia Capital and Benchmark Capital Partners. Softbank owns 70 percent of Ziff Davis, the parent of ZDNet.

There will be no shortage of sales pitches for Webvan. It's up to you to decide whether to buy it.