Webvan jumps 66 percent in debut

4 min read

Webvan Group Inc. (Nasdaq: WBVN) closed up 9 7/8, or 66 percent, to 24 7/8 Friday in its initial public offering. Its shares moved as high as 34 in early trading.

Webvan on Thursday raised its price range to $13 to $15, from the original target of $11 to $13.

Webvan delivers food, non-prescription drug products and general merchandise, with same-day delivery within a customer-selected 30-minute window. The IPO originally was delayed last month after news outlets published reports about the IPO road show for prospective institutional buyers.

Wait doesn't hurt

The cooling-off period ordered by the Securities and Exchange Commission only resulted in the online grocer's stock getting hotter. "All of the publicity surrounding Webvan got people a lot more interested in the stock," said Irv DeGraw of Worldfinancenet.com. "They really should write (SEC Chairman) Arthur Levitt a 'thank you' letter."

DeGraw said that Webvan will do well "even though it doesn't look that great in terms of fundamentals." The high visibility of Webvan will help boost its price. Broker Cantor Fitzgerald expected the stock to open $10 to $15 above the offer price.

Webvan, which initially planned to go public in early October, agreed to a cooling-off period after the SEC raised concerns about news reports emerging prior to the IPO. The latest version of the prospectus points to a column published Oct. 6 in TheStreet.com that discussed the company's upcoming IPO and made claims that company officials gave institutional buyers on a road show conference call information about the company's outlook beyond its registration statement with the SEC.

"While the factual statements about Webvan in the article are disclosed in this prospectus, the article presented these statements in isolation and did not disclose the related risks and uncertainties described in this prospectus," the company filing said.

Webvan's venture investors include Softbank America Inc., Sequoia Capital and Benchmark Capital Partners. Softbank owns 70 percent of Ziff Davis, the parent of ZDNet.

After going public Webvan will have more than 317 million shares, compared to 259 million currently for Yahoo! (Nasdaq: YHOO) and 337 million for Amazon.com (Nasdaq: AMZN). Although 25 million shares is a much larger float than usual for an Internet-related IPO, Webvan needs the money; in July, the company enlisted global builder Bechtel for a $1 billion, 26-market roll-out over the next three years.

Webvan's risk is linked to uncertainty surrounding that national roll-out, DeGraw said. Moreover, supermarkets operate in a low-margin, high-volume environment requiring razor's edge logistical operations without much room for mistakes.

"But whatever the fundamentals, we think the stock will open strong," DeGraw said.

Webvan opened its first and so far only distribution center in the San Francisco Bay Area in June, plans to open a second distribution center in Atlanta in the second quarter of 2000 and expand from there. Each distribution center costs about $25 million to $35 million, the company said.

Losses extend into future

The company has a list of things to do, including expand, hire more people, build brand, boost number of customers and order size, and acheive "favorable gross margins." In the first six months of this year, WebVan had a negative gross margin as it posted net losses of $35.2 million, mostly from ramp-up costs prior to opening its Web store on June 2.

Between that launch and Sept. 30, Webvan generated $4.2 million in sales from 21,000 customers. Average order size was $71, although that rose to $80 between Aug. 31 and Sept. 17. Repeat customers ordered every 10 days on average, although that figure was every six days in June and July.

"In light of our extremely limited operating history, and the daily and weekly fluctuations in our operating data since our commercial launch, we believe the most meaningful operating data, including data for average order size, is the cumulative data since our commercial launch," Webvan says in the IPO filing.

TheStreet.com column referred to a projected net loss of $302 million for the year 2001 that Webvan said today was mentioned by a representative of Goldman Sachs during the conference call with investors. That figure was "based on a number of estimates and assumptions" and that data was not prepared to comply with SEC and other accounting standards, the company says in its latest filing. "Projections are necessarily speculative in nature, and it can be expected that one or more of the estimates on which the projections were based will not materialize or will vary significantly from actual results," the filing reads.

Webvan does not make projections and in the future does "not intend to make public financial projections," according to the IPO prospectus.

However, the company did say that if its San Francisco distribution center runs at full capacity -- 8,000 orders daily, seven days a week, with an average order size of $103 -- it can achieve an operating margin of 12 percent, compared to 4 percent for a traditional supermarket. If the distribution facility hits "expected" volume and cost levels, it would start generating "significant" cash flow after a year of operation, the company said.

There's no guarantee the center will hit full capacity, Webvan said. At a rate of 1,200 orders daily, its San Francisco distribution center would generate annual income of $35 million, assuming it operates seven days a week. The center currently runs five days a week, the company said.

The company also appeared to back away from statements made by chief executive officer George Shaheen in an interview with Forbes magazine in the Oct. 18 edition where he spoke about Webvan's business plans. "These statements were not intended to be relied upon by potential investors in making an investment decision to purchase the common stock in this offering," Webvan's IPO now says.

-- Reuters contributed to this report