Buy.com Hits the Big Time as Revenue Triples

In a breakthrough year for e-commerce, Internet retailer Buy.com blasted into the big leagues with fourth-quarter revenue of $200.6 million, a more than threefold increase that is likely to spur even more interest in its first sale of stock.

The Internet superstore, which sells everything from computer hardware to books and videos, had a “very strong” quarter compared with its 1998 final quarter and with the industry in general, analysts said.

Buy.com’s revenue growth outpaced holiday Internet sales overall, which doubled to about $7 billion. By comparison, revenue at top seller Amazon.com more than doubled to $650 million for the quarter.

“The performance is very impressive,” said Barry Parr, director of consumer e-commerce research at International Data Corp. in Mountain View. “It’s 3% of the total market and it definitely makes them a significant player.”

The Aliso Viejo company, which had $61.5 million in sales for the last three months of 1998, is the fourth-largest Internet retailer by revenue and the largest that is still privately held.

It is expected to go public this week by raising up to $168 million in a much-anticipated initial public offering. Its quarterly sales could be strong enough to make Wall Street overlook the company’s continued losses and gobble up 14 million shares scheduled to be sold at $10 to $12 a share.

Buy.com lost more than $80 million in the first nine months last year and, even with its big holiday sales tally, incurred $202 million in sales costs--$2 million more than it recorded in revenue, according to a document filed with the Securities and Exchange Commission. The document did not disclose quarterly profits or losses.

Company executives said they could not comment on the sales figures because they are in the so-called quiet period that precedes a public offering.

Founded in 1997, Buy.com made its name by selling products at cost or at a loss with the idea that the discounts would create customer traffic and that advertising it sold for its Web site would provide the profit.

The philosophy has won the company plenty of exposure. Buy.com was ranked the nation’s ninth-most popular shopping Web site for December, said Lisa Strand, an Internet analyst at NetRatings Inc.

But its popularity hasn’t translated into profits.

Though company leaders have tweaked their sales strategy in recent months, using loss leaders to draw in customers and then steering them to higher-profit-margin items, the SEC document acknowledges that Buy.com expects to incur losses “for the foreseeable future.”

That may give pause to some investors. After giddily embracing new dot-coms, Wall Street recently has cooled to companies whose business plans call for them to remain indefinitely in the red, analysts said.

“One thing that really bothers me about the company is that they have negative gross margins,” said Steve Lacey, managing editor of the IPO Reporter. “It’s not unheard of to go public based on that, but it’s not something that the market is after.”

Still, many analysts think the market will approve of the company’s brand-building efforts.

“They have an incredible story to tell for why it makes sense for them to spend more than they bring in,” Parr said. “Having a good brand is really important long term in this medium.”

Analysts pointed to several stabilizing factors in Buy.com’s favor. For instance, Japanese investment giant Softbank Inc., whose other Internet holdings include stakes in Yahoo Inc. and E-Trade Group Inc., bought 31% of the company in September.

New managers also have erased some of the early customer-service problems, Parr said. Customers filed two class-action lawsuits against the company last spring, alleging the retailer intentionally underpriced items to generate orders, then did not fulfill the sales. The suits are pending.

Buy.com founder Scott Blum resigned in September, turning over the reins to former Ingram Micro executive Gregory Hawkins. Blum retains a 54% ownership stake in the company, but the stock is in a voting trust controlled by outside directors. He will not sell his shares in the offering.