Weaker-than-expected results for the current holiday season, dwindling cash levels and analyst downgrades ganged up on eToys today, sending the online toy retailer's stock plunging to as little as 25 cents in early trading.

Goldman Sachs, which has been hired by eToys to explore merger and acquisition opportunities, also downgraded the stock to market perform from outperform. And Robertson Stephens today placed its investment rating and loss estimates for eToys Inc. on review. It had rated the company a buy.

Meanwhile, the research arm of Goldman Sachs also said that overall online holiday e-commerce sales for the week ending Dec. 10 were lower than expected and there exists a "significant risk" that seasonal sales will come in at the low end of the firm's estimate of 50 to 100 percent year-over-year growth.

The firm said sales for Week 6 of its holiday season survey showed a 24 percent year-over-year gain, gain vs. the company's 45 percent estimate. The figures resulted in a holiday season gain of 115 percent vs. 170 percent as of the week before.

"We continue to see a significant deterioration in selected e-commerce companies' trends, but not in all," GS said. Exceptions included Amazon.com and drugstore.com.

eToys late Friday announced weaker-than-expected results for the current holiday season and, amid dwindling cash levels, said it will take "aggressive" measures to continue as a going concern, including the possible sale of the company.

eToys said it anticipates sales for the quarter ending Dec. 31 of between $120 million to $130 million, down from the $210 million to $240 million previously projected.

The company said it believed the revenue shortfall was in large part attributable to a harsh retail climate driven by concerns over the economy, the current disfavor of Internet retailing, and a consumer population meaningfully distracted by the presidential election and its aftermath.

Are there lessons here for other e-tailers? The biggest lesson is that "any pure play ... has challenges that multi channel retailers don't have, the obstacles are bigger" said Christine Loeber, program manager for online retail strategies at market researcher Yankee Group.

"Customers like to have options ... multi channel retailers provide those options ... eToys, I can't touch it, I can't feel it, I can't go into a store to buy it or return it ... there's really a lot of limitations that go along with that avenue of sales."

• Operating losses are expected to be between 55 percent and 65 percent of revenue, rather than the 22 percent to 28 percent of revenue previously estimated (in each case excluding non-cash charges for deferred compensation and goodwill amortization and non-cash charges attributable to preferred stock). This compares with operating losses of 59 percent of revenue during the quarter ended December 31, 1999 (excluding non-cash charges for deferred compensation and goodwill amortization and non-cash charges attributable to preferred stock).

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  Cash and cash equivalents at December 31 are expected to be between $50 million and $60 million, rather than the $100 million to $120 million previously estimated. This compares with a cash and cash equivalents balance of $111.4 million at September 30, 2000.
• Profitability is no longer estimated by its fiscal year ending March 31, 2003. Quarterly loss will no longer narrow year-over-year as of the quarter ending December 31, 2000, as previously stated.

Goldman, Sachs, in its downgrade notice, said that "Strong performance during the holidays was required to obtain additional funding to achieve profitability and those prospects are now diminished."

"The company decided in early 2000 to bring fulfillment in-house because of the poor performance of its fulfillment outsourcing partner last holiday season," GS went on to say. "The cost of this large scale infrastructure, and the need to spread that cost over a large volume of scale, contributed to the company's aggressive revenue targets for this holiday season. Unfortunately, in the current capital constrained environment, the company was unable to invest sufficient marketing dollars to drive the required revenue levels commensurate with the infrastructure costs."


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