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Tuesday, November 18, 1997

Peapod Inc.
(Nasdaq: PPOD)
Phone: 847-583-9400
Website: http://www.peapod.com
Price (11/17/97): $9

HOW DID IT FIND TROUBLE?

Clean up, Cyber-aisle four! For Internet grocer Peapod, the spill began shortly after its $16 a share initial public offering this summer. After hitting $18 1/2 on its first day of trading, the stock has been "Slippery When Wet" ever since.

It is not as if the fundamentals have fallen apart in that time. Peapod has continued to grow its membership base and strike new and potentially lucrative retail alliances. The company has yet to turn a profit, but losses were expected by analysts and continue to be expected until early 1999.

Like a carton of milk well past its sell date, investors have simply soured on the Peapod story. While Internet commerce is a growing business, the few winners in the unproven sector have sold more traditional mail order fare like computers or books.

Shareholders have been hitting the express checkout. And, why not, the shares are now trading for less than $10.

BUSINESS DESCRIPTION

With centers in eight metropolitan markets (initially in Chicago and San Francisco but now with a presence in Columbus, Boston, Houston, Dallas, Austin and Atlanta), the company delivers groceries to more than 60,000 households.

Pricing plans vary by region. In Chicago, cybershoppers pay $4.95 a month for membership and then $4.95 and 5% of the total bill on each order. In Atlanta there are a few options, including $24.95 monthly membership and no delivery charges or free membership and an $11.95 flat-fee per order.

FINANCIAL FACTS

Income Statement
9-month sales: $51.1 million
9-month income: ($12.2 million)
9-month EPS: ($0.88)
Profit Margin: N/A
Market Cap: $149.2 million

Balance Sheet
Cash: $56.8 million
Current Assets: $66.5 million
Current Liabilities: $10.6 million
Long-term Debt: $0.6 million

Ratios
Price-to-earnings: N/A
Price-to-sales: 2.9

HOW COULD YOU HAVE SEEN IT COMING?

While shares have been pre-sliced, the company has made some savvy moves since going public. As the stock has gone Down Under, so has Peapod. In September the company announced it would license its proprietary software to Australian retailer Coles Meyer.

Domestically the large usage base has lead to alliances with sellers of greeting cards and premium wines. Next year FTD will open an online floral shop at Peapod's site.

Despite seemingly doing everything the company was expected to do and more, the stock price has been rolling downhill. The reasons seem to lie in its initial valuation and where the company is headed.

WHERE TO FROM HERE?

When this little piggy went to market it was not priced on fundamentals. A rational investor would not pay about eight times sales to get in on the IPO for a grocery delivery company, where margins are razor-thin.

It was the notion of latching on to the next Internet highflier, like Yahoo! or Amazon.com, that found buyers eager to participate in the IPO and that initially bid the shares higher.

Yet, the business model was not the same. For starters, Peapod does not mark up the supermarket tabs. Shoppers pay what Peapod initially pays for the groceries. Since 70% of Peapod's revenues come from the actual goods sold at cost, the bulk of the company's sales will always have zero profit margins. The other 30% is where the money will eventually have to be made. The fees members pay to shop with Peapod and the sums paid by retailers to participate in the program make up the lion's share of the balance along with interactive marketing services.

For now, and for at least the next few quarters, the expenses involved in doing the physical shopping and distribution as well as the corporate overhead and technological upkeep have been far greater than the gross profits.

The same can be argued for an upstart like Web-based bookseller Amazon.com, yet the consensus seems to be that books at a discount will be an easy sell on the Internet. As for Frosted Flakes, the prognosis is not so Grrrrrreat!

The average Peapod shopper is placing an order once every month and a half. For those on the monthly fee plan, once they figure the math, it may be hard to justify membership. However, the company also offers a direct Internet connection complete with free e-mail to users. Paying $4.95 a month for Internet access may not seem out of line to the passive shopper.

This may all seem trivial, but it is the petty knocks that have marked down the shares of this new media grocer. Critics seem to be forgetting the webvertising possibilities. With prized demographics of the rushed well-to-do, food companies like Kraft and Frito-Lay are paying Peapod for electronic ad space and offering real-time couponing.

As the company begins to grow its membership base by expanding to new cities and by marketing effectively in existing locations, high-margin Web ads should increase in value. The potential should not belittle the stagnant economics of the grocery delivery segment, but as the success of online search engine stocks has proven, investors are willing to bid up companies that thrive on the wide net of online advertising.

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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