EToys to Lay Off 700 as It Begins to Dismantle

Internet seller EToys Inc. began dismantling its once highflying operation Thursday, announcing 700 layoffs from its 1,000-person staff and closure of two warehouses.

EToys was once considered a model for the future of Web retailing. Its apparent end as an independent company is the most dramatic example to date of how far online-only ventures have fallen.

“This is like being a spectator to history,” said Sean McGowan, a toy industry analyst and director of research for Gerard Klauer Mattison in New York. “It seemed like the stars were all aligned--the market ate it up. How fast it all unraveled.”

Santa Monica-based EToys said 380 workers will leave immediately; 320 more will be terminated as of March 31. EToys also closed facilities in Commerce and in North Carolina. The company said Wednesday that it is closing its European operation in Britain, eliminating 78 jobs.

Last month, EToys shocked observers with reports of dramatically poor sales, which the firm said would cause it to miss by half its target of $210 million to $240 million.

At the same time, EToys said it hired investment banking firm Goldman, Sachs & Co. to explore options, including merger possibilities and asset sales.

Analysts had expected EToys’ undoing would be its tremendous cost of doing business, not sales, which had increased steadily since the company’s launch in 1997.

Ironically, EToys’ bad news came the same day once-ailing Toys R Us Inc. announced what one analyst called its best performance in a decade. Toys R Us reported a 3.5% same-store sales gain and a 5% overall sales increase as compared with 1999.

After stumbling with online operations last year, Toys R Us joined last fall with top online seller Amazon.com--and tripled its online sales to $124 million, the company said Thursday.

Last year at this time, the outlook for the two companies was reversed, with investors awarding a sky-high market valuation for EToys even as they fled Toys R Us’ dated stores and seemingly more dated business model.

“A year ago, it was Toys R Us is dead and EToys is the future,” McGowan said. “The mood switch in 18 months is phenomenal.”

Shares of EToys closed Thursday at 16 cents on Nasdaq, down 6 cents. EToys shares had a 1999 high of $86.

Paramus, N.J.-based Toys R Us, on the other hand, watched its shares reach a new 52-week high of $22.63 on the New York Stock Exchange, a gain of $4.13, or 22%.

Toys R Us’ performance mirrors the newest online trend--the come-from-behind attack by traditional retailers, supported by well-known brand names and hefty bank accounts.

As EToys was struggling during the holidays, familiar names, including Eddie Bauer, Radio Shack, Wal-Mart, Kmart, Barnes & Noble and Nordstrom, were among the most-visited sites on the Web, according to research firm Media Metrix. And analysts suggested those sites will be among those most rewarded with customer sales.

EToys said operating losses could be more than double the amount it had anticipated, reaching 55% to 65% of revenue.

Private investors gave EToys a cash infusion in June, which EToys had said would be enough to fund operations through June 2001. Those funds, the company said last month, will dry up far sooner, perhaps as early as March.