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Wednesday, February 24, 1999

An Investment Opinion
by Louis Corrigan

Bluefly Passes GO, Investors Collect $200 Plus

Today, Bud Fox liked Bluefly (Nasdaq: BFLY). Shares of this new discount e-tailer ( of name-brand apparel and accessories returned briefly to the azure height of $15 7/8, last seen in late January, before closing at $12 13/16, up $2 9/16 for the day. Not bad considering the shares traded for less than $9 Monday and for less than $2 last summer.

The news today was that Bluefly has signed a marketing deal with the GO Network, the revamped Internet portal site run by Infoseek (Nasdaq: SEEK) and partly owned by Disney (NYSE: DIS), which has been promoting the site heavily on its ABC television network. Bluefly reportedly will be featured on the GO shopping page and will become one of two "Gold Merchants" promoted in the specific apparel & jewelry area. Terms of the deal were not disclosed but probably include some minimum payments by Bluefly plus some revenue sharing.

As e-commerce has exploded in recent months and the major Internet portals race to participate in this money-grab, Bluefly has made a name for itself by securing some prime real estate on these leading websites. The company's stock ran to a high of $23 1/4 in early December after it announced a co-branded version of its online store on Yahoo!'s (Nasdaq: YHOO) shopping site, launched November 17. Bluefly has formed similar "strategic marketing alliances" with @Home (Nasdaq: ATHM), Lycos (Nasdaq: LCOS), and America Online (NYSE: AOL), which features the company in its apparel area on its shopping channel. As Bluefly's executive VP Jonathan Morris said today in the press release, "Bluefly is committed to working with the best portal companies and securing key areas of online real estate in an effort to establish itself as the premier place to shop for name brand apparel, fashion accessories and house and home products at outlet store prices."

The Bluefly value proposition is pretty straightforward. The company wants to become the Web's brand-name apparel outlet store, offering deep discounts of 25% to 75% on end-of-season items and excess inventory from big name designers like Polo Ralph Lauren (NYSE: RL), Tommy Hilfiger (NYSE: TOM), Donna Karan (NYSE: DK), Prada, and Calvin Klein. While apparel retailers like the Gap (NYSE: GPS), J Crew, Federated Department Stores' (NYSE: FD) Macy's, and Intimate Brands' (NYSE: IBI) Victoria Secret have all had recent success selling clothes online, there's not yet any major player offering closeout prices on a wide assortment of leading brands. Bluefly wants to fill that niche.

And it could prove a healthy niche. According to Discount Store News, off-price retailers such as Loehmanns (Nasdaq: LOEH) and TJX Co.'s (NYSE: TJX) T.J. Maxx and Marshalls units sold $18.5 billion worth of goods in 1997, while factory outlet stores sold $8.3 billion worth of apparel and accessories. Such stores function both as alternative outlets for first-run goods as well as a cost-effective means for retailers to clear out unsold merchandise. From a customer's perspective, though, they're less than ideal. Getting to a factory outlet can be a trek since it's not likely to be near your local mall. Also, if you're like me, you can only stand to sift through so many bargain bins, finding mostly lime green shirts or super smalls and extra extra extra larges, before you give up.

Bluefly hopes to solve both of these problems by giving you access to discounted items without the hassle. Better yet, it aims to use data about your personal size and tastes to create what it calls "MyCatalog," a discount store specific to you. As its promotional copy reads, MyCatalog instantly delivers "a personalized, up-to-the-minute catalog of the things you like best and at the prices you want most -- 'printed' fresh every time you log on."

All of this sounds quite compelling. So it's no surprise the company has gotten some positive attention. On November 25, Red Herring's Peter Henig noted that research outfit Jupiter Communications expected online apparel sales to rise from $330 million in 1998 to $2.8 billion in 2002. "Even with the stock now trading at $10 per share, Bluefly's market cap is only $27 million. When was the last time you saw a valuation that low on a rising pure-play Internet stock?"

The stock also jumped last month after Ryan Jacob, portfolio manager of The Internet Fund (the top mutual fund performer of 1998, with a 196% return), posted on the fund's website that Bluefly was the only new entry among the fund's top 25 holdings. Last Sunday's New York Times Style section even gave Bluefly a favorable nod.

Still, executing on a good idea is ultimately far more difficult than finding one. In that regard, the jury is still out on Bluefly. On the positive side, CFO Patrick Barry, who joined the firm in July, was formerly CFO at Warner Music Enterprises and Controller of Book-of-the-Month Club, both direct response companies. Bluefly also recently added Martin Keane, formerly design director at online music vendor N2K (Nasdaq: NTKI). The company's board includes figures like Cris Popenoe, formerly president of Putnam New Media, an interactive media publisher, and Goldie Burns, NYU faculty member and head of New York governor Pataki's Task Force on New Media and the Internet.

However, trying to log onto its website today was, well, like trying to place an online stock order through E*Trade (Nasdaq: EGRP) or even Schwab (NYSE: SCH): frustrating and even impossible. I got just far enough to know I might as well turn off the computer and head to the nearest outlet store instead. Sure, today's publicity probably led to a spike in traffic, but getting the technology in place to handle site traffic is harder than it seems. Plus, Onsale (Nasdaq: ONSL) recently veered away from its focus on sales of closeout computer gear because it simply couldn't get enough merchandise to scale its business, especially in the heavy holiday buying season. Will Bluefly experience the same problem?

With Bluefly's short track record (the site launched September 8), it's hard to say much of anything about its actual business. As the company announced January 28, Q4 gross sales before returns and allowances topped $300,000, a tiny figure but "well ahead" of management's expectations. Its online store saw 664,230 unique visitors (average spending, then, was 50 cents a visitor), and the total number of registered users rose from 1,573 at the end of September to 26,048. The average visitor spent 11 minutes on the site and clicked 18 pages per visit. It's a start, right?

Though Bluefly seems like a start-up company, it isn't. Yet, there's little in its past to inspire real confidence. From 1991 until last summer, this company, formerly known at Pivot Rules, Inc. (old ticker: PVTR), was in the business of designing, sourcing, and marketing golf sportswear for men. Although this now discontinued operation saw sales rise from $8.6 million in FY96 to $10.7 million in FY97, net income dipped from $0.61 million to $0.09 million. The accumulated deficit stood at $0.38 million by the end of 1997. The business was going nowhere, so last May, the board established the Internet division and the company has completely refocused since then.

Also, founder Kenneth Seiff, 33 years old, has been Chair/CEO of the company since its inception. That means he oversaw the selection of GKN Securities as underwriter for the firm's May 1997 initial public offering. That New York investment bank is part of what used to be known as GKN Holdings but, last year, changed its name to Research Partners International (Nasdaq: RPII). The name change may have had something to do with the fact that back in January 1997, GKN was fined $725,0000 as part of a settlement with the Securities and Exchange Commission (SEC) and NASD Regulation (NASDR). GKN and 29 of its supervisors and brokers were also forced to repay a total of $1.4 million to some 1,300 investors "who were overcharged as the result of a two year-long program of excessive markups in eight securities" underwritten by GKN, according to an NASDR press release in August 1997. The NASD charged that GKN had "dominated and controlled the immediate after-market trading" in these securities from December 1993 through April 1996.

Small companies are often hard-pressed to find an underwriter, but Seiff must have known about GKN's history. Of course, what's past is not necessarily prologue. Yet, Bluefly will almost certainly be looking to raise more money in the next year or so. By recently calling for the redemption of outstanding warrants, the company did manage to raise some $10.2 million, trading warrants for common stock at $5 a share. However, that money probably won't last long given the need for heavy advertising and marketing to build a brand name. Still, even with the 4.85 million fully diluted shares now outstanding, according to CFO Barry, Bluefly's market cap is just $62.1 million. That's a lot for an outfit with virtually no sales and a spotty track record. But for an e-tailer building some brand recognition, it's low enough to make the Bluefly story worth following.

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