Once Red Hot, Retailing IPOs Go Ice Cold

Investor ardor for Internet stocks ran high this spring but faded during the dog days of summer with many initial public offerings (IPOs) falling short of expectations.
      Case in point: 1-800-Flowers.com, widely anticipated to do well, was priced at $21 per share closed at $18.19 on August 3, its first day of trading. Later, the stock slipped even lower, hitting $13.50 at one point. That's quite a shift from iTurf's public debut in April when the online retailer was priced at $22 and more than doubled to $57.44 on its first day of trading. Likewise eToy's initial offering in May almost quadrupled from $20 to close at $76.56.
      Certainly, 1-800-Flowers.com hasn't been the only IPO to get the cold shoulder from investors this summer (the drugstore sector has been the exception), but its lukewarm reception was a wake-up call causing other Internet companies to postpone IPOs. The list includes fellow florist Ftd.com, Garden.com, which sells plants and equipment, and Greatfood.com, a gourmet food site.
      It sounds like a case of the "proverbial October blues" says Bonnie Tonneson, a consumer e-commerce analyst at Hambrecht & Quist LLC in San Francisco. She looks back to Fall 1998 when the technology sector retrenched and many '98 IPOs were delayed. The overall market malaise this summer certainly hasn't helped Internet IPOs. "With so much of market driven by Internet stock, it's hard (for IPOs) to escape that reverberation," says Tonneson. "When the market is down, investor sentiment is not positive which makes it difficult to price a new issue."
      Imbalance in demand and supply was another problem. At one point during the summer there were 106 Internet IPOs in the pipeline, points out Rakesh Sood, vice president of equity research at Goldman Sachs in New York City. "When you have that much supply, it's going to be difficult for investors to digest," says Sood.
      Whether Internet retailer IPOs regain their appeal is up for debate. "There seems to be a shift in investor preference away from the consumer names and toward the e-business enablers" such as software or infrastructure providers, says Karl Haller, a principal consultant at PricewaterhouseCoopers in New York City. He points the summer decline of Internet bellwethers such as Amazon, which hit its high for the year in April at $221, only to plunge to $91 in early August.
      Some observers are downright bearish. David Menlow, president of IPO Financial Network in Millburn, N.J. and editor of IPO Frontline, puts Internet retailers at the bottom rung of the Internet stock ladder. "They just don't have enough sizzle for investors," says Menlow, pointing out that having an Internet strategy is no longer an exception but a necessity for retailers.
      The August coldfront is only the beginning, says Rick Berry, director of equity research at J.P. Turner in Atlanta. "Any one who buys an Internet IPO will make the tulip investors from 17th century look like value investors," he says, predicting Internet stocks would lose up to 80% of their value from mid-August.
      Others are more optimistic. "Investors haven't necessarily lost their appetite for e-tailing IPOs, however, they will have a higher scrutiny," says Tom Ortwein, managing director of equity capital markets at CIBC World Markets, an investment banking and brokerage firm in New York City. "In the current market environment, people aren't going to invest simply on a concept. You have to have more than a dot-com after your name." Though the Internet group in general has shown "extraordinary" performance, he says there needs to be some time of retrenchment before the group will show strong performance again.
      Santa Claus might save the day. The holiday shopping season is fast approaching and "people will see Internet retailing is really going to take off," says Sood at Goldman Sachs, who looks for online shopping to triple during the holidays this year. Although Sood agrees that investors will continue to be selective, IPOs could heat up again in September and October.