eToys Falls on Analyst Downgrade

eToys (Nasdaq: ETYS) fell 25/32 to 2 9/16 Wednesday following reports that Merrill Lynch analyst Henry Blodget downgraded the stock’s long-term rating to neutral from accumulate.

J.P. Morgan analyst Tom Wyman also reportedly made some negative comments about the stock’s long-term outlook, saying the e-tailer will not see an operating profit until 2004, which is two years later than expected.

Separate news Tuesday of the demise of two publicly traded online stores — Pets.com (Nasdaq: IPET) and MotherNature.com (Nasdaq: MTHR) — also weighed on e-tail issues.

According to reports, Merrill Lynch’s Blodget also downgraded online grocer Webvan (Nasdaq: WBVN) and e-tailer Buy.com (Nasdaq: BUYX). Webvan fell 5/16 to 1 3/8, while Buy.com lost 9/32 to 1 21/32.

eToys announced last week that it has opened new party and hobby stores on its Web site, as part of a plan to increase its offerings and gain business going into the holiday season. The company estimates the market for kids’ party goods at $5 billion a year, and the hobby market at $4 billion. Hobby products are arranged by category and skill level to make shopping easier, eToys said.

The company is also preparing for the holidays with several marketing initiatives, including a line of proprietary products organized by themes such as sports and jungle. It is also offering a “Holiday Hot List” of most popular gifts and a “Big Gift” section highlighting products in the $100 range.

The Los Angeles, California-based company beat analysts’ estimates for the second quarter ended September 30th, saying it gained 223,000 new customers during the quarter, for a total of more than 2.4 million. Repeat customers accounted for 44 percent of eToys’ total orders, and the average order size reached $61, a record for a non-holiday quarter, the company said.

Overall, second-quarter sales rose 95 percent from a year earlier to $26 million, while the loss before charges totaled 33 cents per share, 2 cents better than analysts had expected.

The pure play e-tailer is being challenged by brick-and-mortar toy stores who are heavily promoting their Web sites, some of which underwent overhauls in October, in preparation for the holiday shopping season.