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Pets.com latest high-profile dot-com disaster

The online pet store known for its popular sock puppet spokesdog is shutting down its retail operations and laying off 255 employees.

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Pets.com is shutting down its retail operations and laying off hundreds of employees, the company said Tuesday.

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Pets.com: What went wrong?
Matt Stamski, analyst, Gomez

The Amazon.com-backed company was the leading online pet store and was known for its wildly popular sock puppet spokesdog. The San Francisco-based company said it would sell off its assets, including its catchy URL and the rights to the sock puppet icon.

"I am deeply saddened by this event," chief executive Julie Wainwright said in a statement.

The company said in a notice on its Web site that it will continue taking orders until 11 a.m. PT Thursday. Pets.com plans to shut down its Web site that day, although it may delay the closure depending on its order volume, company spokesman John Cummings said.

Some of the layoffs will be effective Tuesday, but Cummings said he did not know when the other employees would lose their jobs.

Unlike some of its dot-com brethren, Pets.com has not filed for bankruptcy and has no plans to do so, Cummings said. Instead, the e-tailer will distribute the proceeds from its asset sales to its shareholders, he said. Although no one stepped up to the plate to invest in Pets.com this summer or buy it outright, Cummings said that several companies have already expressed interest in buying its assets.

"It is well known that this is a very, very difficult environment for business-to-consumer Internet companies," Wainwright said. "With no better offers and avenues effectively exhausted, we felt that the best option was an orderly wind down with the objective to try to return something back to the shareholders."

Pets.com is only the latest Internet company to join the dot-com death watch. Monday, Furniture.com said it had shut down, and earlier this month, male lifestyle site TheMan.com closed down its site. In recent weeks, Beautyjungle.com, Eve.com and BigWords.com have either closed their doors or laid off staff.

Pets.com will be the second Amazon aligned e-tailer to close its doors. In July, home furnishings e-tailer Living.com closed shop and filed for bankruptcy.

"I think that the most interesting thing about this is the rapid collapse of an entire industry," Gomez senior analyst Matt Stamski said. "I think it's unprecedented in this recent shakeout."

As part of the winding down of its operations, Pets.com will lay off 255 of its 320 employees. As of Tuesday morning, the company's Web site was still up and running.

Founded in 1998, Pets.com raised $82.5 million in an initial public offering in February.

Tarnished domains
Many of the domain names that were once considered prime Internet real estate are now affiliated with companies that have gone out of business or suffered serious staff cuts. Since June:

Pets.com shut down.

Furniture.com shut down.

Politics.com shut down.

Stamps.com laid off 240 employees.

Drugstore.com laid off 10 percent of its staff.

Jewelry.com shut down.

Garden.com laid off 40 percent of its staff.

Food.com laid off 50 percent of its staff.

More.com sold off assets.

WebMD.com laid off 1,100 employees.

Living.com shut down.

Auctions.com shut down.

Hardware.com shut down.

Petstore.com shut down.

Reel.com shut down.

Pets.com bought rival Petstore.com in June and announced plans in September to move some of its staff to the Midwest to cut costs. Despite these moves, the company's stock price has been mired below the $1.50 level for months.

Trading in Pets.com stock was temporarily halted Tuesday. When trading resumed, the price promptly plunged to 22 cents from 66 cents, a one-day decline of 67 percent. Volume topped 4 million shares.

After trading as high as $14 this year, the rock-bottom stock price values the entire company at about $6.4 million. The month before it went public, the company spent almost half that amount on 30 seconds of advertising during the Super Bowl.

Marked initially for its fierce, well-financed competition, the online pet supply market has since been beset with consolidation and collapse. In addition to Pets.com's purchase of Petstore.com, Petopia, backed by offline pet supply giant Petco, laid off 60 percent of its staff last month.

Despite all the initial hype and funding--the four largest players each raised more than $50 million in private financing--pet supplies are not a natural e-tail market, Stamski said. Pet owners are less likely than others to shop online, he said.

Additionally, the e-tail pet stores have not offered a compelling reason to shop online. Although delivering pet food and supplies directly to consumers is a convenience, that benefit is outweighed by the fact that the consumer has to wait days to receive their orders, Stamski said. Considering that pet food is available at just about any neighborhood grocery, few people have a reason to shop online, he said.

"You had five Web sites selling the same products, the same level of service and essentially the same name and it was difficult to tell them apart," Stamski said. "This recent collapse will erase some of that confusion."

As of the end of October, Amazon owned nearly 30 percent of Pets.com, Amazon spokeswoman Patty Smith said. see A News.com webcast: Dot-coms: Down and out?Despite Amazon's large percentage stake in the pet supply retailer, Smith said Pets.com's failure would not have any "material" impact on Amazon's financial statements.

Amazon considered Pets.com an equity-method investee, meaning that Amazon has been deducting a portion of Pets.com's losses each quarter from the value of Amazon's initial investment. As of the end of September, the net value of Amazon's stake in Pets.com was less than a couple hundred thousand dollars, Smith said. A month later, the value of the investment reached zero, she said.

This "will not have any impact on our finances," she said.

Smith declined to say whether the failure of Pets.com and Living.com has dissuaded further investments by Amazon in pure-play e-tailers.

"We never discuss our future investment strategies one way or another," she said. "But we remain bullish on e-commerce."

Although most e-commerce companies have been operating in the red, Pets.com was among the more financially challenged. In every quarter of operation, the company contended with negative gross profit margins.

A company's gross margin is the difference between the amount it charges customers for its goods or services and the amount it pays suppliers for those goods and services. Having negative gross profit margins essentially meant that Pets.com lost money on every item it sold.

In Pets.com's third quarter, which the company reported late last month, the goods it sold cost Pets.com $277,000 more than it sold them for. That was an improvement from the second quarter, when Pets.com lost $1.7 million on its gross margins.

As of Sept. 30, Pets.com had about $23 million in cash, down from $37 million at the end of June. The company lost $21.7 million in the third quarter on $9.4 million in revenue.