Alloy's Tarnished Quarter

Alloy (Nasdaq: ALOY  ) , a nontraditional marketing firm focused on the large and promising 10- to 24-year-old age demographic, announced another tough quarter last Friday. Unfortunately, a key effort for its future is struggling as well. The company acquired Sconex, a social-networking site, earlier this year, perhaps in an effort to show clientele that it "gets" social marketing to teens.

That strategy seems to have backfired thus far. According to traffic ranking site Alexa, Sconex's page views have plummeted more than 90% since April, when traffic spiked, presumably based on the acquisition publicity. This puts the site's page views far below even its pre-acquisition levels. Then again, Alloy is no stranger to poor acquisitions, with both Dan's Competition (a bicycle equipment retailer) and the ill-fated dELiA*s left in its wake.

That said, the firm's financial picture seems to be improving, based on the latest quarterly results. The firm paid off convertible debenture holders with a cash premium to induce them to convert to Alloy and dELiA*s stock, removing $56.6 million of debt from Alloy's balance sheet and reducing interest expense by $3 million a year. However, this came with substantial cost -- $15.8 million in cash, which drove the company into an ugly net loss of $7 million this quarter. Unfortunately, the top line doesn't look too impressive, either. Revenues grew only about 1% to $63.7 million in the third quarter, which is usually the company's strongest.

With clients like Qwest (NYSE: Q  ) , Verizon (NYSE: VZ  ) , and Procter & Gamble (NYSE: PG  ) , the firm obviously has a compelling value proposition of sorts, but not enough to capture a more substantial portion of these firms' massive advertising budgets. To me, this shows the clear delineation between the "haves" -- the larger advertising firms like Omnicom Group (NYSE: OMC  ) and WPP Group (Nasdaq: WPPGY  ) , which can present a one-stop solution for clients -- and the "have not's" like Alloy.

With weak growth forecast for next year (high single-digit growth in EBITDA), and a balance sheet that has 55% of its assets in goodwill (higher than the marketing firms mentioned above), I'm not very impressed with this company. With Alloy's incredibly poor prior acquisitions, and the latest one shaping up to be a dud as well, that goodwill is ripe for potential write-downs and further pain for shareholders. Investors would do well to steer clear of this one.

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Fool contributor Stephen Ellis does not own shares in any companies mentioned. You canview the stocks he owns and check out his99th-percentile ranking and CAPS blog in Motley FoolCAPS, the Fool's new stock-rating community. The Motley Fool has adisclosure policy.


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