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What&#039&#039s next for eToys?

    EToys' (Nasdaq: ETYS) only alternative may be finding a bricks-and-mortar buyer, according to analysts. The big question is what is the company worth?

    The e-tailer's worst-case scenario played itself out Friday when the company said it will significantly miss estimates for the December quarter. EToys, which said it was pursuing "strategic alternatives," projected sales of $120 million to $130 million, well below prior guidance of $210-$240 million. That puts year-over-year revenue growth at around 17 percent rather than 119 percent.

    It was a make or break Christmas for eToys and the company broke. The announcement was made at the same time that Media Metrix released November traffic data, showing eToys' unique visitor count at 4.2 million for November 2000, down 14 percent a year ago.

    May the speculation begin

    Analysts agree the company's best hope is to be bought, and most suggest bricks-and-mortar operations as the most likely purchasers.

    Gerard Klauer Mattison & Co. analyst Melissa Williams, who maintained a "neutral" rating on the stock, speculated that any company with a toy business who could leverage eToys' brand and technology year-round could be a buyer.

    She named Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) as possibilities, but said both were already developing their Web strategies.

    ABN AMRO analyst Kevin Silverman said "anyone that has a substantial toy business," could be a buyer for eToys. He listed Toys R Us, Wal-Mart, Kmart and Target as potential buyers, and added that foreign companies seeking a U.S. distribution channel were also possibilities. The company's brand name, distribution channel and inventory are its main assets, Silverman said.

    "There is value in the eToys brand, including its stable of url addresses, which includes eToys.com, eKids.com, and Toys.com, among others. The company has two state-of-the-art fulfillment centers that may have up to $1 billion in revenue capacity," Silverman said.

    The fallout

    Although analysts said eToys may be an acquisition target, they weren't about to go out on a limb for the stock. Shares of eToys were down 75 percent to 25 cents, down from a 52-week high of $43.

    Robertson Stephens analyst Lauren C. Levitan indefinitely suspended ratings and estimates for the company.

    Silverman downgraded the stock to a rare "sell" rating from "add," and lowered his target price down to 50 cents a share. Estimates for the March 2001 quarter have been halved, with a new December quarter earnings estimate of 60 cents a share. Silverman estimates that eToys will lose $181 million in pretax cash on revenue of $201 million for fiscal year March 2001.

    "Its prospects for breakeven have been pushed out beyond 2003, and we think the company's ability to survive beyond March 2001 is now in serious doubt," Silverman said in a research note.

    The company said it could run out of cash in March.

    What went wrong

    In its profit warning, eToys pinned its problems on a "harsh retail climate driven by concerns over the economy, the current disfavor of Internet retailing, and a consumer population meaningfully distracted by the presidential election and its aftermath."

    Silverman took it a little further and said the company was squeezed by traditional retail brands and their Web efforts.

    Levitan said eToys invested too heavily earlier this year on state-of-the-art technology that would ensure a good customer experience. Although that assessment may be true, many analysts applauded the eToys' investment at the time.

    "While these assets may be of value to potential strategic players, we view the options for eToys as extremely limited given their lack of financial flexibility and current market conditions," said Levitan.

    False hopes?

    Even though eToys may have desirable assets, there are no guarantees that a traditional retailer would swoop in to save the company.

    Many traditional companies have waited for bankruptcy court to pick up online assets, according to Webmergers.com, an online research firm.

    Indeed, eToys' cash position eliminates any leverage the company might have with a buyer. Because of the revenue shortfall, eToys said it will end its fiscal third quarter with $50 million to $60 million, about half of what the company projected.

    If a buyer cannot be found soon, Silverman warned that "shareholders will face considerable additional equity dilution, as the company is forced to use shares to pay back $28 million in convertible debt at a considerably lower share price with as many as 40 million additional shares."


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