Daily Double
November 1, 1999

eToys Inc.

(Nasdaq: ETYS)
Phone: 310-664-8100
Website: www.etoys.com
Price (10/29): $59 3/4

By Rick Aristotle Munarriz (TMF Edible)

How Did it Double?

Toys, of course, should be fun. They might educate, enlighten, and inspire along the way, but above all, they should be a whole lot of fun. Investors in online toy retailer eToys are no doubt having a hoot lately. Shares of the Internet darling have been wound up and let go. Watch that stock fly!

It's been a wild five months for a company that came public back in May. As the leading Internet toy seller, it was a hot initial public offering -- the stock price quadrupled at the open. Acquiring the online leader in baby supplies a month later further fueled shareholder enthusiasm. From womb to acne, eToys would have the youngest generation covered.

However, the offline and online Goliaths were arming themselves with slingshots. Toys R Us (NYSE: TOY) announced it was investing $80 million to reestablish its online presence. And just as eToys announced it would be adding children's books and videos, Amazon.com (Nasdaq: AMZN) fired back by announcing it too would begin selling toys.

Over the summer, investor concerns over the competitive onslaught helped cause the stock to sink below $30 a share. While that was still well above the IPO price, it was a game gone awry for those who had bid the stock up as high as $79 1/2 on its first trading day.

Since then, the Webby-award winning site has played to its strength. By hooking up with notable celebrities like Rosie O'Donnell and Noah Wylie and providing rich content and service enhancements, eToys is now on the offensive. The edgy e-tailer has its shareholders happy again. Toys, of course, should be fun.

Business Description

eToys carries more than 100,000 items that can be ordered through its online store. The California company sells specialty toys, software, videos, music, video games, books, and -- after its BabyCenter acquisition -- baby-oriented products.

Financial Facts

Income Statement
12-month sales: $50.3 million
12-month income: ($72.3 million)*
12-month EPS: ($1.23)*
Profit Margin: N/A
Market Cap: $7134.2 million
(*Excludes non-cash charges)

Balance Sheet
Cash: $140.6 million
Current Assets: $210.7 million
Current Liabilities: $76.4 million
Long-term Debt: $6.4 million

Price-to-earnings: N/A
Price-to-sales: 141.8

How Could You Have Found This Double?

The transition from a brick-and-mortar retail world to a wired one became a hot media magnet when eToys went public. It was great publicity for the young toy retailer. Soaring at the open to achieve a market capitalization that was twice that of Toys R Us brought eToys its share of admirers and critics. It also, however, brought on its competition.

Turning the handle of a jack in the box often yields a springing surprise, but there was nothing so shocking about Toys R Us and Amazon.com gearing up for the online toy market. Toys R Us already had an Internet site, but it was mostly informational. Yet it was no jolt that, like mall-based KB Toys and its KBkids.com shopping site, Toys R Us was ready to dive into e-commerce.

Meanwhile, Amazon.com started out by selling books online. Music, videos, and software followed. If it was easy to ship and could be mass-marketed, it was in Amazon's line of fire. Toys were a logical next step.

With the new competition and sticker shock from Wall Street bidding up the relatively unproven newcomer to a more than $8 billion market cap back in May at the heart of the summer decline, the drop was was only temporary. eToys was getting ready to bounce back like a Nerf on pavement.

Where to From Here?

Over last year's holiday season eToys rang up $22.9 million in sales relatively uncontested. The site was one of the five most popular e-tail destinations. This time around, despite the meatier competition, revenues should still more than triple.

eToys realizes that the time to secure its brand name as the online toy specialist is now. Amazon.com claims to be the new leader in online toy sales, but that is mostly the byproduct of its dominance in children's book and video sales.

The trickier competitor appears to be Toys R Us. The Geoffrey mascot-led giant has not only been filling its weekly retail circulars with Internet exclusive deals lately, but it has also just decided to waive all shipping charges through the end of the month.

eToys has tried to dictate its own marketplace. It lined up an exclusive deal with Discovery Toys, and Rosie's Readers was recently launched, where Rosie O'Donnell will select a children's book every month -- and advise her television viewers to purchase the book at eToys.

In September, the Idea Center was introduced. There, personalized toy suggestions are provided under varying criteria. Want to grow up to be a fireman? Read up on what a real fireman thinks are ideal toys. Want to be an actor? Calling ER's Noah Wylie, who shares his thoughts with eToys.

Last week eToys reported that it lost $0.38 a share in its second quarter ended Sept. 30. The company also said that marketing costs for the current quarter would be higher than originally expected as it spends more on advertising and promotion during the important holiday season.

Next year sales for eToys should more than double to a quarter of a billion dollars -- and close in on a half billion dollars the year after that. While that might partly vindicate the company's $7 billion market cap, developing a vibrant online community and entrenching its position in the toy industry will have to run on more than just a fresh pair of batteries.

At this point, with headlines of a banner e-tail season propping up online retailers, there might be more risk in owning eToys than in shopping there. It might be fun, but do handle these shares with kid gloves.

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