In another sign that Internet stocks may be coming back to earth, one of the Web's top retailers--eToys Inc.--saw its stock plunge 20 percent yesterday after it announced that holiday sales quadrupled but that losses rose faster.

EToys shares, already down more than $60 since November, tumbled further to close yesterday at $16.87 1/2. Analysts noted that eToys faces intense competition and spent more than expected to fill its holiday orders. The company also said it will be spending more on warehouses this year as part of its announcement that it will begin handling its own inventory and distribution.

"People are realizing there are no magic business models in e-tailing," said David Simons, manager of Digital Video Investments. "Retailing on the Internet is as difficult as it is on terra firma."

EToys was hardly alone yesterday; technology stocks beat a broad retreat. Internet darling, the company that lets buyers name their price for goods, fell nearly 3 percent even after announcing higher earnings than analysts were expecting.

EToys is the leading children's retailer online and was the second most heavily trafficked Web store during the holidays, after, according to several Web measurement services.

EToys reported revenue of $107 million for the quarter ending Dec. 31, compared with $23 million in the same quarter the previous year. The number of customers more than doubled in 12 weeks, from 611,000 at the end of September to 1.7 million at year-end.

For the quarter, the company lost $62.5 million, or 52 cents per share, up sharply from its $8.2 million loss--9 cents per share--in last year's holiday quarter.

EToys chief executive Toby Lenk touted the company's 19 percent gross profit margin in a telephone briefing with analysts. He said the company had declined to copy competitors, all of whom offered free shipping and deep price discounts during the holidays.

"These are not sustainable business models," Lenk said.

The holiday marketing frenzy amounted to all-out war for online retailers. Some of Lenk's competitors offered free shipping for more than a month. Others e-mailed $10 coupons to prospective toy buyers, trying to build long-term market share. The real results won't be known until after the next holiday season, when most e-tailers hope to see repeat business from their 1999 giveaways.

About 25 million American shoppers spent an estimated $7 billion online during the holiday season, according to Jupiter Communications. More than half of them spent $200 or less, Jupiter found.

EToys spent $36 million on advertising for the quarter, including a $25 million television campaign. Lenk said eToys spent $33 to acquire each new customer, who spent an average of $67 per order. Despite reports that many e-commerce companies had trouble filling orders in time for Christmas, Lenk said eToys shipped 96 percent of its orders on time during November and December.

But he said the costs of filling orders were too high, largely because the company contracts its warehousing and shipping to Fingerhut Cos., a unit of Federated Department Stores Inc. EToys announced it will accelerate plans to move such operations in-house this year. Most leading e-tailers are making the same move as they struggle to contain costs and control the quality of their customer service contacts.

Lenk said eToys will open a 440,000-square-foot distribution center in Danville, Va., this spring and is already considering expanding that center. EToys also will expand its Southern California distribution facility this year.

While analysts knew that eToys was planning to handle more of its own inventory and shipping eventually--as did last year, thanks to its aggressive warehouse expansion plan--the news nevertheless cooled interest in the stock.

"We believe investors could choose to wait until they give greater visibility on the profitability prospects of the company," Lauren Cooks Levitan, an analyst with Robertson Stephens, told investors yesterday.

Like Amazon, which started in books and expanded into music and power tools, eToys is attempting to diversify beyond toys. It has added children's apparel and plans to add more categories this year. Lenk declined to specify them.

EToys also is expanding overseas. After opening a sales operation in Britain last year, it plans to add another country this year, the company said.


Business: Web-based retailer of children's products such as toys, video games, software and videos.

Based: Santa Monica, Calif.

Origins: Former Disney theme-park executive Edward "Toby" Lenk launched the Web site in October 1997. The company went public in May of last year.

Employees: 300

1999 sales: $30 million

1999 net loss: $28.6 million

Ticker symbol: ETYS on the Nasdaq

Web address:

NOTE: Fiscal year ends in March

SOURCES: Hoover's, Bloomberg News


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