January 30, 2001, 5:16 PM

eToys' Q3 sales up, but way below Oct. expectations

eToys Inc.'s financial results for the fiscal third quarter ending Dec. 31, 2000, detail company's dire straits. Net sales for the quarter were $131.2 million, a 23% increase over net sales of $106.8 million in the same period a year ago. On Dec. 15, the company had estimated net sales for the quarter between $120 million and $130 million, down from the $210 million to $240 million it had estimated on Oct. 30. The company attributed the decrease to a harsh retail climate and dampened enthusiasm for Internet retailing.

Gross margin for the quarter was 24.3%, up from 22.5% in the previous quarter. On Dec. 15, the company had estimated gross margin for the quarter between 21% and 23%, down from the 22% to 24% it had estimated on Oct. 30.

Excluding non-cash charges for deferred compensation and goodwill amortization and non-cash charges attributable to preferred stock, operating losses for the quarter were $74.5 million, or $0.52 per share, compared with $62.5 million, or $0.52 per share a year ago. These operating losses represented 57% of net sales for the quarter. On Dec. 15, the company had estimated that these operating losses would represent between 55% and 65% of net sales, up from the 22% to 28% of net sales it had estimated on Oct. 30.

Cash and cash equivalents at Dec. 31 were $62.8 million. On Dec. 15, the company estimated that cash and cash equivalents at Dec. 31 would be between $50 million and $60 million, down from the $100 million to $120 million it had estimated on Oct. 30. This compares with a cash and cash equivalents balance of $111.4 million at Sept. 30, 2000.

Customer acquisition cost for the quarter was $40 per customer based on advertising expense of $38.7 million for the quarter. On a rolling 12-month basis ending Dec. 31, the company's customer acquisition cost was $40. The company added nearly 1 million new customers in the quarter, bringing total customer accounts to nearly 3.4 million. While a significant amount of new customers were added in the quarter, existing customers accounted for 45% of orders. Average order size for the quarter was $75.

The company anticipates that its current cash and cash equivalents will be sufficient to meet its anticipated cash needs to approximately March 31. In order to continue operations in 2001, the company will require an additional, substantial capital infusion. In order to preserve cash and reduce eToys' cost structure, the company announced on Jan. 4 a plan to eliminate 700 of 1,000 staff positions by March 31, to close its European operations and to close two warehouses.
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