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2HRS2GO: Fatbrain.com struggles for respect

Fatbrain.com shares hit the skids Wednesday, falling 1 3/4, or 18 percent, to 7 15/16 after it posted a first-quarter loss of $8.5 million, or 65 cents a share, on sales of $14 million.

However, including the results from its MightyWords subsidiary, it lost $13 million, or $1 a share.

Analysts surveyed by First Call Corp. predicted a loss of 88 cents a share in the quarter.

But the important news, if you're a Fatbrain.com shareholder, is the promise of profitability. Company officials said it expects to turn a profit sometime in the calendar year 2002.

That's still a long way off. And the company's going to need some more cash to get there.

That's what makes Wednesday's downgrade by Banc of America Securities analyst Tom Courtney so odd.

While Courtney wasn't immediately available to explain his decision to cut Fatbrain.com (Nasdaq: FATB) from a "buy" rating to a "market perform," it was most likely based on balance sheet concerns.

This isn't news. Everyone knows Fatbrain.com, along with dozens of other Internet retailers, will need a cash infusion in the next year. Let's just call it curious timing.

After all, Fatbrain.com actually exceeded the strong revenue forecast it offered earlier in the quarter.

It's set a timeframe for profitability, a rarity in its sector. Meanwhile, it's projecting smaller losses and higher sales until it reaches the breakeven point.

In a conference call Tuesday, acting CFO Janet Hall said the company expects to lose around $3 a share this fiscal year, well below the consensus estimate of $3.91 a share, on sales of between $70 million to $72 million.

In fiscal 2001, it expects to lose about $2 a share, far below the consensus estimate of $3.74 a share, on sales of around $130 million.

Yet, the day after topping analysts' earnings and sales estimates, the stock plunges 18 percent.

"The stock ran up into the earnings report," said Dalton Chandler, an analyst at Needham & Co. "There may have been some anticipation for a bit more spectacular news."

Chandler, who upgraded the stock from a "hold" to a "buy" Wednesday, said now that Wall Street has a better idea of what a stand alone Fatbrain.com looks like, it can better value its stock and prospects.

On the dark side, operating expenses in the quarter rose 133 percent from the year-ago period, jumping to $27.3 million from $11.7 million.

Meanwhile, its online sales jumped to $12.1 million, up 170 percent from the $4.5 million it recorded in the year-ago period.

It added 58,000 new customers, increasing its total customer base to more than 300,000. Online customer accounts increased 24 percent from the previous quarter, and repeat customer business represented 61 percent of order dollars placed.

Those figures are hardly sound like their coming from a company on the descent. At $8 a share, Fatbrain.com offers considerably better value in risk-reward terms than several stocks trading at twice its price.