eToys Facing Operations Crisis

Blaming weaker-than-expected holiday sales, eToys (Nasdaq: ETYS) said Friday it will miss its revenue estimates for its third quarter and announced plans to cut its workforce next month in a bid to conserve a dwindling cash supply.

eToys said it will have net sales of US$120 million to $130 million for the quarter, well below the $210 million to $240 million the company had forecast in September, though still ahead of last year's sales of $106 million.

"We are disappointed that sales have not materialized to the degree we had expected," eToys president and chief executive officer Toby Lenk said. "Going forward and based on current operating realities, we will take aggressive steps to reshape the company's cost structure and to best position the company for the future."

The Los Angeles-based e-tailer said it had engaged investment bank Goldman Sachs to explore strategic alternatives, including "a merger, asset sale, investment in the company or another comparable transaction."

Shares of eToys were trading at 31 cents early Monday morning, an all-time low since the company went public in February 1999. The stock has traded at above $85 during the past 18 months.

Cash Running Out

eToys said it will begin 2001 with between $50 million and $60 million in cash on the books, rather than the $100 million it had previously estimated. The company said at current burn rates it will need to raise money again by March 31st -- three months earlier than expected -- in order to stay afloat.

The company said it will announce detailed plans to trim its workforce in January and withdrew its prediction that it will attain profitability by mid-2003.

Despite being an early leader and retaining the No. 2 ranking in the online toy space, eToys has struggled to keep the cash flowing. In May, Goldman Sachs analyst Anthony Noto cited eToys as one of several dot-com companies in danger of running out of cash by the end of 2000. Just a few weeks later, the company raised $100 million in cash through a stock sale.

Many Reasons for Shortfall

In issuing the revenue warning, eToys cited several factors, including a growing concern among consumers about the health of the economy, the distraction of a drawn-out presidential election and the "current disfavor of Internet retailing."

The last claim seems to fly in the face of some reports showing a strong showing so far for e-tail during the holiday season. Last week, BizRate.com said an online sales record was set when more than $200 million was spent in a single day.

Also, a study from PC Data said that Thanksgiving week sales were up 140 percent over the same period in 1999.

Toys Not Kid's Stuff

However, the toy market has already proven fatal for other e-tailers, even those with deep-pockets and big-name investors.

Toysmart.com, which enjoyed the backing of The Walt Disney Co., folded in May. Weeks later, Toytime.com gave up just nine months after launching behind a marketing barrage.

Though eToys has seen the pure play e-tail field thin, it is facing increased competition from offline retailers such as Kmart and Wal-Mart, which have made strong pushes onto the Web this holiday season.

Two for One Special

Additionally, eToys' two biggest competitors became one formidable foe in August when Toys 'R' Us and Amazon.com linked forces to offer a co-branded Web site.

According to recent figures from PCData, the Toysrus section of Amazon drew 8.6 million visitors in November, compared to 5.6 million for eToys.