2HRS2GO: PlanetRX.com gives dot-com investors an ugly preview

Nine months ago, Wall Street couldn't get enough of the dot.com mania, racing one iffy offering after another to market as fast as possible. We told you profits and realistic business models would eventually tell the story, but no one wanted to hear it.

Well listen up.

In the next six to nine months, if not sooner, you're going to be reading and hearing a lot more stories just like the tale PlanetRX.com (Nasdaq: PLRX) gave us last night.

The online health and beauty retailer said it's running out of money and needs an investor to bail it out. Maybe some company or some group of investors is willing to pony up tens of millions of dollars for the right to sell Advil to PlanetRX.com's estimated customer base of around 500,000 shoppers.

But why would they?

Here's a company that lost more than $35 million in its most recent quarter on sales of only $8.8 million.

Monday's depressing announcement suggests that sales will only improve fractionally to $9 million this quarter and the company is expecting sequential revenue growth of 15 percent to 25 percent for the third and fourth quarters of fiscal 2000.

Assuming it meets it the high end of those projections, we're only talking about $11.3 million in sales for a three-month period.

Planet.RX.com shares were off 7/16 to a 52-week low of 1 9/16 Tuesday afternoon.

As Conan Laughlin, an analyst at Deutsche Banc Alex. Brown, points out even if the company manages to reduce its ridiculous burn rate, it will still go through between $7 million to $9 million a month.

"Their access to capital has been an issue for a while now," said Laughlin, whose wasn't one of the Planet.RX.com IPO underwriters. "This is the first evidence that it's going to impact its fundamentals."

I take issue with Laughlin's claim that this was the first sign that PlanetRX.com or any other marginal online retailer was going to face serious operational issues because it was running out of money.

The first sign of trouble was the company's failure to even attempt to guess at when it might turn a profit. That doesn't fly anymore.

If VCs, which end up holding millions of worthless or nearly worthless shares, are going to pony up the big bucks for the next great Internet company, they want to hear that profitability is one of the company's top priorities.

My how things have changed.

The other troubling sign came last week when the company said it would eliminate about 70 jobs, or 15 percent of its work force, to cut costs. For such an alleged up-and-coming site with great growth prospects, it's hard to understand why they'd be laying off employees unless, of course, they're in trouble.

Laughlin, who cut PlanetRX.com from a "strong buy" rating to a "market perform," said it will close the quarter with about $50 million to $55 million in cash. That means about five or six more months of operations before it will have to close its doors.

Unless it finds a savior.

That brings us to the next chapter: Who will take a gamble on Planet.RX.com and why?

"They have a pretty sizable customer base and a high level of repeat customers," Laughlin said. "Those assets are worth something."

Maybe I'm na?ve, but I'm thinking that those 500,000 or so customers will find their own way to another online pharmacy site. Sure, they all won't end up at Drugstore.com (Nasdaq: DSCM), but a good majority probably will.

What's the incentive to buy PlanetRX.com and take on its debt and overhead when these valuable customers will eventually end up at one of its main competitors sites anyway?

That's going to be an increasingly relevant question as more and more .coms (Streamline.com, Drkoop.com, CDNow, Quepasa.com) find themselves on the brink of insolvency. All that first-mover stuff doesn't mean a whole lot when you're one of the first movers out of business.

While PlanetRX.com has finally learned that the age-old principles of economics do in fact apply to Internet companies, it still can't break its annoying habit of trying to "spin" itself back into the hearts of investors.

CEO Michael Biendorff said Monday the company expects to only post a loss of 62 cents to 63 cents a share, slightly better than the current First Call Corp. consensus estimate predicting a loss of 67 cents a share.

It seems laughable now, but six or nine months ago that might have been good enough for a 30 or 40 percent pop in the stock price.