Analysts question big brands' jump to Net

Attention Kmart investors: Traditional retailers who venture online face massive financial losses and a skeptical stock market.

3 min read
Attention Kmart investors: Traditional retailers who venture online face massive financial losses and a skeptical stock market.

Last year, traditional retailers saw a pop in their stock prices when they announced plans to build online stores. But a growing number of e-tailers in recent months have downsized or shut down, forcing investors to question the enormous expense necessary to power online sites--even for traditional retailers with deep pockets, such as Staples.

Stock in the office-supply retailer has been foundering, largely because of losses pegged to the expense of starting its Web store.

While the company earlier this month indicated that its Internet unit would have a lower loss than expected and would make a profit sooner than previously thought, shares of Staples have barely budged from their 52-week lows.

Staples stock closed Tuesday at $15.69, up 19 percent from its 52-week low of $13.18 but 45.7 percent below its 52-week high of $28.87.

"Our larger concern with (Staples') stock, and one we think the Street shared in terms of magnitude of importance, has been the Internet," Merrill Lynch analyst Peter Caruso wrote in a report earlier this month. "With no real solid foundation by which to judge how large losses could be, the Internet has represented a cloud of ambiguity that has resulted in an unexpected decline in earnings so far this year."

Kmart has also taken a beating as the beleaguered retailer struggles to find its online niche.

Kmart stock dropped almost 7 percent for the week when the retail giant earlier this month announced it would pump another $55 million into online division BlueLight.com. Venture capital firm Softbank chipped in another $25 million.

"Any benefits that BlueLight brings to Kmart in the foreseeable future are going to be so small in relation to Kmart's total operations," said David Simons, managing director of Digital Video Investments, an institutional money management researcher.

The Internet has also grounded the stock of office-supplies retailer OfficeMax.

Earlier this month, OfficeMax said its e-commerce sales for the first half of 2000 increased 439 percent to $52.3 million. But losses still reached almost $11 million.

OfficeMax blamed the loss on "incremental spending in marketing and advertising"--a major expense for all e-commerce units trying to build brand awareness. OfficeMax stock closed Tuesday at $5, down 53.7 percent from its 52-week high of $10.81.

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Other leading traditional retailers, including Wal-Mart and Sears, have pumped big money into their online units--with little to show in profits.

Although traditional retailers that venture online have not performed well, many Internet-only retailers seem to be in a death spiral.

Value America closed its retailing operation and filed for Chapter 11 bankruptcy protection this month, following the earlier demise of such e-tailers as Toysmart.com, Boo.com and Reel.com.

Toys "R" Us is the latest player to concede that running an online site may be more difficult than expected. The toy retailer recently cut a deal that transfers expensive sales and fulfillment operations to Amazon.

Although earlier pairings of online and offline companies have often ended in failure, analysts say the Toys "R" Us-Amazon deal could start a new wave of partnerships, as pure-play e-tailers seek to draw on the strengths of brick-and-mortar rivals.

"Investors will look at retailers to see if they have these kinds of relationships with online players," said Daniel Ries, an analyst at C.E. Unterberg Towbin. "Doing it on your own is much too expensive a proposition."

Other established brick-and-mortar players, including Disney, Hollywood Entertainment and Levi Strauss, have decided against running their own e-commerce sites.

Experts pinpoint the demise of many e-tailers on overly rapid growth, lavish spending on marketing, and inattention to core business strategies. But most believe that e-commerce is here to stay, and traditional retailers must experiment with online models--even if it means massive short-term losses in companies' Internet units.

"Obviously the irresponsible build-out didn't work, but that doesn't mean that there isn't an opportunity to sell stuff on the Web," said Darren Chervitz, a senior analyst at the Jacob Internet Fund. "It would be foolhardy for offline retailers to not even have an online presence."