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News > Companies
Internet toy story
January 27, 2000: 5:09 p.m. ET

As competition heats up for market position, online toy game is no child's play
By Staff Writer Michele Masterson
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NEW YORK (CNNfn) - This is no time for investors to "play" around -- KBKids.com filed for an initial public offering Thursday, shares of eToys fell 20 percent after the company reported quarterly results and new Internet toy retailers continue to proliferate.
    Investors are paying close attention to determine which players will be able to carve out a profitable niche in the highly charged online toy market.
    Many toy-related companies are taking a breather after the close of their busiest time, the all-important Christmas season. The Toy Manufacturers Association of America, an industry trade group, on Thursday released 1999 figures of traditional toy shipments that totaled $17 billion, a 9 percent gain over last year. 
    But there is no rest for Internet toy sellers. According to Internet research firm Jupiter Communications, 1999 Internet toy sales in the U.S. reached $310 million. Forrester Research places 1999 Web toy sales at $253 million, rising to $3.7 billion by 2004, which would represent 10 percent of the overall market.
    "The online toy market is as competitive as they come," said Ken Cassar, e-commerce analyst at Jupiter. "There are several well-capitalized players and they're all vying for online customers." 
    
eToys sinks on results

    According to industry watchers, eToys is the clear leader of the pack, with analysts estimating the company controlling one-third of the market.
    However, after reporting third fiscal quarter results Thursday, which included wider losses, shares of the stock plunged below its May 1999 IPO pricing of $20. The stock sank 21 percent Thursday, falling 4-3/8 to 16-7/8.
    The Santa Monica, Calif.-based company reported losses before charges of $62.5 million, or 52 cents a diluted share, compared to a loss of $8.2 million, or 9 cents, a year earlier. The results were in line with the consensus of analysts surveyed by First Call. 
    "This was an extremely significant and successful quarter for eToys," said eToys CEO Toby Lenk.  "Our rapid growth in customers and sales demonstrated the power of our core business proposition and the eToys' brand."
    eToys did report positive news: Sales grew fivefold for the quarter, customer accounts tripled to 1.7 million, the average customer order was $67, and it was the second busiest e-tail site during the holiday period.
    "Last year was a big year for eToys," said Jupiter's Cassar. "In its 1998 first quarter, they had sales of just $2 million. By fourth quarter that year it reached $20 million." And eToys said 1999's fourth quarter sales were $106.8 million.
    Cassar said the toy pioneer may have been hit hard in advertising costs. CEO Toby Lenk said in a conference call that eToys spent $36 million in
    advertising, achieving $107 million in revenue.
    "In 1998 eToys had essentially a free advertising campaign under a deal with Visa," the big credit card issuer, Cassar said. "It didn't cost them anything and their profits looked good last year."
    
New kids on the block

    While eToys enjoys its leader position, analysts are paying attention to relative newcomers, including big guns such as e-tailing giant Amazon.com, which launched a toys and video section, ToysRUs and KB Toys' KBKids.com, in addition to a slew of smaller outlets.
    The migration of brick-and-mortar retailers to the Internet is seriously shaking up the toy sector. While relative Internet newcomer ToysRUs doesn't yet match eToys' figures and suffered back-end and fulfillment glitches over the Christmas period, it does have the all-important name recognition.
    "Toys R Us is showing up on the top 10 lists," said Forrester Research e-commerce analyst Seema Williams. "Toys R Us' site is not exactly up to par, whereas eToys has worked really hard. Right now eToys is ahead of them, but doesn't have the lead it should."
    Another serious contender in the Web toy story is Wal-Mart (WMT), which unveiled its revamped site earlier this month.
    "There is a huge amount of toy sales that doesn't come from toy stores," said Williams. "So far, their site still isn't great, but investors are wondering what will happen when they get it right."
    KBKids.com has had to become more aggressive, analysts said, and Thursday announced an IPO filing of 210 million shares, underwritten by Credit Suisse First Boston.
    The Denver, Colo., company had a net loss in 1999 of $4.8 million on revenues of $596,000. While that's not on par with eToys, it still is viewed as a serious contender.
    "KB has not shown up as aggressively as the eToys play, but they're planning a huge expansion," Williams said. "And they're doing everything right."
    The bottom line? Online toy retailers may be in for the fight of their business lives.
    "The serious competition here seems to be working in this Internet sector," Williams said. "We've had Barnes & Noble (BNBN) vs. Amazon.com (AMZN), which didn't really work. But these toy brick-and-mortars make compelling valuation propositions." Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.