eToys Rockets Past Q2 Estimates

eToys, Inc. (Nasdaq: ETYS) blew past analysts' estimates for the second quarter ended September 30th, and said it expects losses to begin narrowing in future quarters as it aims to break even in fiscal 2002.

The loss before charges for the quarter totaled $41.8 million (US$), or 33 cents per share, 2 cents better than analysts had expected for the Los Angeles-based company. A year earlier, the company lost $32.1 million in the quarter, or 27 cents per share, before charges.

Sales for the quarter rose 95 percent from a year earlier to $26.0 million, with gross margin rising to 22.5 percent from 21.9 percent. Higher-margin specialty products, including those sold by the company's BabyCenter division, drove the gain.

eToys shares gained 3/16 to 3 15/16 in early trading Tuesday. The company issued the report after the close of trading Monday.

Net Loss Widens

The net loss for the quarter amounted to $60.0 million, or 48 cents per share, compared with $44.9 million, or 38 cents, a year ago.

eToys said it gained 223,000 new customers during the quarter, for a total of more than 2.4 million. Repeat customers accounted for 44 percent of total orders, and the average order size reached $61, a record for a non-holiday quarter.

The company said it had $111.4 million in cash and $61 million inventory on hand at the end of the quarter. The cost of obtaining a customer totaled $26 during the quarter, with advertising expense totaling $5.8 million.

Gearing Up for the Holidays

President and chief executive officer Toby Lenk said the company is "well prepared and well positioned" for the all-important holiday season. "Our systems are performing exceedingly well under day-to-day load and stress-testing, and we're seeing consumer enthusiasm build," said Lenk.

For the third quarter, which ends December 31st, eToys expects sales of $210 million to $240 million, gross margin of 22 to 24 percent, and operating losses that total 22 to 28 percent of revenue.

Analysts expect a strong holiday season to power U.S. e-commerce sales . Yankee Group has predicted that fourth-quarter online spending will total $9 billion, up 70 percent from the same period last year. Gartner Group, meanwhile, said it expects worldwide online commerce to reach $19.5 billion in the quarter, with half of all sales coming from North America.

eToys began its holiday marketing push in late September with two new television commercials. A consumer catalog will come out in November.

Spending to Slow

Capital spending on infrastructure will "slow dramatically" in coming quarters, as the company has finished beefing up its capacity for this year and next, said chief financial officer Steve Schoch.

The company, which fills all its own orders, said it expects its warehouses and shipping facilities in Virginia and California to be sufficient through "at least" the next holiday season.

"At the same time, annual cash requirements for operations will continue to decrease through break-even in fiscal 2002," Schoch said.