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Global Sports eyes e-commerce expansion

Having dominated online sporting goods retailing, Global Sports is looking to widen the playing field--a move that could put it in competition with Amazon.com.

Tech Industry
Having dominated online sporting goods retailing, Global Sports is looking to widen the playing field--a move that could put it in competition with Amazon.com.

In the span of a week, Global Sports has inked a series of deals that change the game for the e-commerce company.

On Monday, the company announced that it would develop and operate the online retail site for Modell's Sporting Goods, a major sporting goods retailer in the Northeast. Global Sports also said that Comcast and QVC increased their respective stakes in the company by buying $40 million in stock. Comcast now owns a little less than 26 percent of Global Sports.

And last week, Global Sports announced it will develop and operate various merchandise categories for Kmart's BlueLight.com, a move that got the attention of analysts largely because it's very similar to Amazon's outsourcing pact with Toys "R" Us. The BlueLight pact gives Global Sports an avenue to expand into new markets.

"We always envisioned becoming a broad e-commerce company from the start," said Global Sports Chief Executive Michael G. Rubin. "It's just that we focused on sporting goods first."

The deals come amid almost daily reports of failing e-commerce companies. Since late 1999, scores of one-time "e-commerce leaders" such as Pets.com and Webvan have been wiped off the map, leaving whole sectors gutted and many tenuous survivors fast running out of money with no clear plan to make money in sight. Hundreds of technology companies hover on the Nasdaq with stock prices less than $1.

But several of the survivors in the e-commerce area are quietly cutting deals similar to Global Sports', arranging to split the responsibilities--and risks--of e-commerce operations by turning to brick and mortar partners for warehousing or delivering goods to customers while online companies operate the Web sites and take orders.

In the beginning of the Internet boom, most of the online companies bragged about their ability to handle all aspects of the supply chain and pointedly did not attempt to partner with so-called offline stores.

Analysts said Global Sports' deal with Kmart's BlueLight.com is very similar to the Amazon-Toys "R" Us pact because it's likely to boost profit margins significantly.

Under the Toys "R" Us deal, Amazon handles customer service and fulfillment, but the toy retailer has the inventory risk. With Amazon struggling to turn a profit, analysts said the company's bottom line largely depends on services deals. Indeed, Amazon recently announced a deal with Circuit City.

For Global Sports, which primarily operates and develops Web sites for sporting goods retailers such as The Sports Authority and The Athlete's Foot, the Kmart deal gives it an opportunity to expand beyond the sporting goods market.

Usually, Global Sports largely stays behind the scenes so its partners can promote their brands. Under its typical sporting goods arrangement, Global Sports buys inventory and distributes it for retailers. For example, if you make a purchase at The Sports Authority's Web site, it is completely handled by Global Sports right up to the customer service calls.

Expanding the field
Global Sports has made its name operating e-commerce sites for a host of retailing and media companies. Here's a sample of its major customers:

Bally Total Fitness

BlueLight.com

Denver Broncos

Dick's Sporting Goods

Fox Sports

G.I. Joe's

iQVC

The Athlete's Foot

The Sports Authority

WebMD

Source: Global Sports
Global Sports books the revenue and gives retailers an average of 5 percent on the sale, a better return than many sporting goods retailers could pull in with their own sites. Indeed, many current partners of Global Sports, including Dick's Sporting Goods, shelved expensive start-up ventures and partnered with the company under exclusive deals that span anywhere from 10 to 20 years.

Under that pact with Kmart, Global Sports gets a fee and a percentage of sales to fulfill Bluelight.com orders. Rubin, 29, said the Kmart deal highlights the company's second leg of its expansion and Global Sports, which already ran Kmart's sporting goods section, will selectively target new categories.

Investors apparently see the possibilities. Global Sports shares are up 165 percent from June 25 and 185 percent year-to-date through Aug. 24. Shares are currently hovering just below $16. Global Sports also recently raised its earnings and sales targets, predicting operating earnings of $10 million on sales of $185 million for 2001, well above First Call targets at the time.

Running into Amazon?
Although the structures of the deals are similar, the impact isn't. According to SoundView analyst Shawn Milne, Amazon's deal with Toys "R" Us generated about $40 million in services fees in the peak holiday season of 2000. The problem? "It barely moved the needle," said Milne, referring to Amazon's massive losses.

"Global Sports' Kmart deal is like Toys "R" Us and Amazon, but Global Sports doesn't have $2 billion in debt and high infrastructure costs," said Milne, who estimates the company will end the year with $100 million in cash on hand.

Analysts argue that Global Sports' services revenue should flow right to the bottom line. And with Kmart's marketing heft, BlueLight.com should generate a lot of fee income for Global Sports, said Richard Zimmerman, an analyst with Commerce Capital Markets, who started coverage of the stock Monday with a "strong buy" rating and a price target of $25.

Armed with the Kmart deal, Global Sports is likely to target other retailers who want to outsource their e-commerce operations, analysts said. That fact also means Global Sports may compete with Amazon, which also plans to partner with retailers to offer e-commerce services.

"We're going to be selective and take each opportunity individually," said Rubin regarding his strategy for boosting his customer base.

He said Global Sports will pursue categories where there's no clear e-commerce leader and use its sporting goods experience to show it can be a good behind-the-scenes partner. "The infrastructure is built, it's a great opportunity and we've already been doing this for two-and-a-half years," he said.

The un-dot-com
The emergence of the King of Prussia, Pa.-based company as an e-commerce survivor is largely due to its un-dot-com moves.

The company moved to the Nasdaq National Market from the Nasdaq SmallCap market in May 1999, but never enjoyed the skyrocketing prices of other e-tailers or a flashy initial public offering. Shares peaked at about $24 in November 1999 and fell to below $3 in March of this year.

Behind the scenes, however, Global Sports consolidated a category, recently purchasing ailing sporting goods e-tailer Fogdog.com.

Rubin attributes the company's success to not getting caught up in dot-com hype. The company built just one distribution center, quite a contrarian move for dot-coms in 1999 and early 2000. "We decided to add capacity as we grow the business," said Rubin, who estimated the company won't need another distribution center until 2003. "The biggest mistake would have been to build capacity based on what the Internet could be."

That thinking can largely be attributed to Rubin's brick-and-mortar roots. The company sold its brands division, which largely consisted of marketing Ryka and Yukon footwear, in late 1999 to focus on e-commerce.

Analysts said Global Sports has also been able to keep its costs low because about 80 percent of sporting goods inventory is redundant, meaning a baseball can be sold on any partner's Web site.

After a rocky start, Global Sports has delivered on its promises, said Janis Altshuler, vice president of e-commerce at The Sports Authority, a partner since 1999. She said Global Sports has done a good job managing the site and integrating with the retailer to coordinate marketing and pricing strategies.

Altshuler, like other Global Sports customers, doesn't see the company as a potential competitor even if e-commerce sales balloon. In 1999, Sports Authority was in turnaround mode and didn't have the capital, expertise or patience to build a site, she said, adding that her company has decided the best bet is to focus on its offline results.

"They've been true to their vision about not building their own brand," Altshuler said. "We're happy with the decision we made."

Softbank, which owns about 17 percent of CNET Networks, owns about 30 percent of Global Sports.

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