Buy.com will soon carry the banner of e-tailing into the IPO market, but think twice: The company has a terrible habit of selling goods for less than what it paid for them.
And that's no way to make money.
Buy.com (Proposed ticker: BUYX, profile), however, has become one of the largest e-commerce sites on the Web in terms of revenue and users. The company, which plans to go public in early February, runs a network of online stores that peddle everything from computer hardware and software to books, music and video to golf and travel.
Buy.com: Good investment?
The company has 1.9 million customers, 4.7 unique visitors a month and stellar sales growth. For the three months ending Dec. 31, Buy.com had sales of $200.6 million. For 1999, Buy.com reported pro forma sales of $597.8 million.
Sounds great until you get to profit margins: Buy.com's gross margins improved from being very pitiful to just really pitiful. For the last three months of the year, margins improved to a negative 0.9 percent from a negative 1.4 percent for the same period in 1998. For 1999, the company lost $145.8 million.
"They have a strong brand," says Randall Roth, an analyst with Renaissance Capital. "But the margins are either going to be their genius or their downfall."
The theory behind Buy.com goes like this: Undercut the world on price, grow brand and potentially make up the margin difference with advertising. It hasn't worked so far because Buy.com only received about 2 percent of its sales from advertising, according to regulatory filings. To improve margins, the company said it has moved to raise prices on certain goods, but offers no guarantees for overall advances in this area.
Nevertheless, Buy.com's advertising campaign and sales growth could attract a few investors. The company is hoping to raise a little more than $141 million by offering 14 million shares priced between $10 and $12 each. Merrill Lynch is the lead underwriter.
Buy.com said $20 million to $30 million of the funds will be used for technology and fulfillment upgrades, $70 million to $90 million will go to sales and marketing, $12.5 million will repay debt and the remainder will be for working capital.
Here are some risks to ponder with Buy.com:
Softbank will "effectively control the votes of approximately 77.8 percent of our common stock on significant corporate actions and 29.7 percent on routine corporate governance matters immediately after this offering," the company said.