GOLDMAN SACHS research report on eTOYS is below. READ IT! You have to be crazy not to see the value in this company at 17 $!
Goldman, Sachs & Co. Investment Research
eToys Inc. (Noto)
* * Very Strong Results, Increasing 2000 Rev & EPS; TB * *
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* eToys reported FY 3Q results that exceeded expectations w/ sales of *
* $107m (up 336% YOY, 703% seq) & LPS of ($0.52) vs. our $81.9m & *
* consensus LPS of ($0.50), respectively. Risk/reward over 6-12 months *
* attractive; Reit TB. Importantly, gross margins were strong at 19%, in *
* line w/ our ests. Customers grew 178% sequentially to 1.7m, & CAC was *
* low at $33, reflecting strong brand and value proposition. Cust svc was *
* strong w/ 99% of orders placed before Dec.18 were delivered by X-mas. We*
* are raising FY00 rev/LPS to $303m/($1.22) from $254m/($1.23). Revising *
* FY99 rev/LPS est's to $153m/($1.32) from $126.8m/($1.27) reflecting 2 *
* cents diff from our Dec qtr est and $3m in Q4 operating expenses. *
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Anthony Noto (New York) 1 212-357-1849 - Investment Research
=================== NOTE 12:55 PM January 27, 2000 ====================
Stk Latest 52 Week Mkt Cap YTD Pr Cur
Rtg Close Range (mm US$) Change Yield
--- ------ ------- ------- ------ -----
eToys Inc. TB 21.25 85-19 2562.8 -19% 0.0%
--------------Earnings Per Share---------------
ETYS Jun Sep Dec Mar FY CY
2001 FY
2000 FY -0.29A -0.30A -0.32 A -0.31 -1.22 -1.22
1999 FY(A) -0.17 -0.27 0.52 -0.30 -1.32 -1.12
-Abs P/E on- -Rel P/E on-- EV/NxtFY LT EPS
Cur Nxt Cur Nxt EBITDA Growth
----- ----- ----- ----- -------- ------
ETYS FY -17.4X NMX -0.6X NMX NA 50%
CY -17.4 -0.6
===========================================================================
* DETAILED REVIEW OF THE QUARTER: eToys delivered sales of $106.8 million
(4.6 times more than last year, it's first holiday selling season), well
ahead of our estimates of $81.9 million by attracting 900,000+ new
customers at very low customer acquisition costs ($33 vs. our $40
estimate - shows strength of brand) and average U.S. order size of $67
with good expense control. Gross margins were in line with expectations
at 19%, and EPS was in line with consensus at ($0.52), though shy of our
($0.50). Inventory stands at $62 million, a little higher than we
expected, but consists of fast-moving traditional products, not trendy
hot products that can be at risk for obsolesence write-offs.
* STOCK REACTION: The stock is trading down after the earnings call
potentially due to investor concerns regarding the accelerated build-out
of the Virginia distribution center (operational this spring) and
continued build-out of the existing California buildup. We believe
eToys will only incur an additional $3 million in expenses during the
quarter. The company has been building out the Danville, VA
distribution center since mid-1999 and was expected to be opening by
2000. This is just happening sooner. The commerce facility will incur
limited costs in expansion. Furthermore, these investments will
ultimately result in operating expense savings on fulfillment (recorded
in the s&m line) and better service to customers.
* GREAT BRAND AWARENESS AND LEADERSHIP CHARACTERISTICS: Quarterly results
reinforce our belief that eToys remains the category killer. They
delivered more than 2x the sales of the nearest competitor with cost
controls and high customer service. The company has built a great brand
name with high recognition which should provide marketing efficiency
over time (as seen by low customer acquisition cost). The brand has more
than 90% aided awareness (online users asked: do you recognize/know
eToys?) and more than 50% unaided awareness (online users asked to name
a children's product company). This is extremely high for a 15-month
old company with no physical stores.
* VALUATION: Trading at 7.2x 2000 calendar revenues, a 45% discount to
leading eTailers' multiple of 13.2x, eToys presents an attractive
risk/reward ratio over the next 6-12 months. Our 6-12 month price
target of $65 (likley closer to 12mths at these levels) is the mid-point
of three DCF scenarios, a conservative -- $41 (15% market share, 3rd or
4th player in Kids online sector), moderate -- 65 (18% market share, 1st
or 2nd player), and aggressive -- $80 (22% market share, clear category
leader) scenarios. Each scenario varies operating margins, growth
rates, and market shares. Our worst case scenario values the company at
$41.
* OUTLOOK AND CATALYSTS: We are increasing our fiscal 1999 (ending March
2000) rev estimates to $153 million from $126.8m and decreasing EPS to
($1.32) from ($1.27), reflecting 2 cents difference from our Dec qtr
estimates and $3m in Q4 (March) operating expenses. We are increasing
fiscal 2000 revenue/LPS estimates to $303m/($1.22) from $254.4m/($1.23).
Non-holiday catalysts in 2000 include continued international expansion
(primarily Europe), expansion into other kids categories (apparel,
sporting goods, hobbies, etc), acquisitions, and strategic alliances.
* INVESTMENT OPINION: eToys is The Leading Kids/toy e-Tailing Category
Killer. With superior online merchandising techniques, a broad array of
kids products from mass merchandise to hard-to-find niche products, and
a complete focus on kids, eToys in our view has the real option to
become a destination for family solutions for every major event in their
children's lives: summer camp, Christmas, vacations, Halloween,
birthdays, back-to-school, and so on. Increasingly, while the company
has not stated this, eToys as a destination for family solutions could
also monetize its customer base as well as drive additional revenue from
advertising/sponsorship, and services.
===========================================================================
REVIEW OF FOURTH QUARTER
eToys delivered sales of $106.8 million (4.6 times more than last year,
it's first holiday selling season), well ahead of our estimates of $81.9
million by attracting a 900,000+ new customers without having to drive
sales with excessive coupons, discounting or any free shipping, leading to
solid in-line gross margins of 19%. Good inventory management also
contributed to solid gross margins, as eToys did not have inventory
obsolesce or shrinkage issues. While the company has $62 million in
inventory on its balance sheet at the end of the December, the inventory in
stock is primarily high-velocity traditional items (i.e. Barbie/Matchbox)
rather than trendy hot products (i.e. Pokemon) and will likely not pose
inventory charge issues. The company accounted for reasonable accruals,
and return rates are in line with historical rates and expectations of low
single digits.
EToys broke out average order size for the first time, with U.S. average
order size of $67. Customer acquisition costs at $33 were very low, which
shows the strength of the eToys brand and the effective of the advertising
spending done, including the highly differentiated TV advertisements.
REVIEW OF KEY FINANCIALS:
Dec-99E Dec-99A
(in $M, except EPS) Estimates Actuals Comments
Total Revenues $81.9 $106.8 30% higher than our ests, 366% YOY
Cost of Revenues 66.3 86.5 In line as a %
Gross Profit $15.6 $20.3
Gross Margin 19.0% 19.0% Good inv mgmt + no excessive
discounts/couponing/free shipping
Sales and Marketing $54.7 $66.0 Efficient CAC; $36m in advertising
Product Dev. 16.7 13.6
G&A 4.4 4.0
Operating Expenses $75.8 $83.6 Expenses 78% of rev; better than
Operating Income ($60.2) ($63.3) ests of expenses at 93% of rev
Operating Margin -73.5% -59.3%
Interest Income $0.9 $0.9
Net Inc (ex. non-cash) ($59.3) ($62.5)
EPS (ex. non-cash) ($0.50) ($0.52) In line with consensus ests
Average shares 119.6 119.7
Goodwill 9.5 9.5
Cheap stock 3.6 3.5
Net Inc. (as reported) ($72.4) $75.5)
EPS (as reported) ($0.61) ($0.63)
01:03pm EST 27-Jan-00 Goldman Sachs (NOTO) ETYS
eToys Inc. (Noto) (2 of 3) : Very Strong Results, Increasing 2000 Rev & EPS; TB
GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS
Goldman, Sachs & Co. Investment Research
eToys Inc. (Noto)
* * Very Strong Results, Increasing 2000 Rev & EPS; TB * *
Anthony Noto (New York) 1 212-357-1849 - Investment Research
=================== NOTE 12:56 PM January 27, 2000 ====================
KEY METRICS:
Q4'99 Q3'99 COMMENTS
Total customers (000) 1,700 611 up 78% sequentially, up 6x YOY
Avg # of customers 1,156 539
New customers 1,089 144 Strong momentum
Average Order Size (US) $67 $55* Holiday-driven
Repeat Cust Purchases 34% NA Strong in the face
Revenue Per Account $62.79 $21.78
Customer Acq Cost* $45.00 $104.23 TV/Branding effort driving efficient
cust acq. Note: CAC* estimated as 75% of Sales & Mkting
for standardization/comparison purposes (ETYS's CAC for
Q4 is $33 based on $36mn of S&M for advertising.
*GS estimates.
Source: Goldman Sachs research & company reports.
NEW INTIATIVES EXPECTED:
We continue to expect eToys to layer on new revenue streams with continued
international expansion, primarily in Europe, and kids category expansion.
EToys stated they would definitely enter one new market in Europe in
addition to its presence in the U.K during 2000, and we think they could
enter more than one.
REVIEW OF RECENT INITIATIVES:
*Nov. 9: eToys and Visa partnered, for the second year in a row, to
create a convenient online location where consumers may contribute a toy to
the Marine Corps Toys for Tots national holiday toy drive.
*Nov 8: Began shipping products to Canada as part of international
expansion using its U.S.-based distribution and fulfillment.
*Nov. 2: eToys launched a marketing initiative with GapKids and
babyGap that ran nationwide during the holiday season. The cross-promotion
was featured both online and in-store at GapKids and babyGap, as well as at
eToys.com. The promotion offers GapKids and babyGap customers a $10 eToys
gift certificate with any purchase of $75 or more. Similarly, customers who
spend $75 or more at eToys.com will receive a $10 gift certificate good at
GapKids and babyGap (online or in-store).
*Oct 24: eToys announced a marketing program with FreeServe, the
leading 'free' ISP in the UK (with over 1.5 million active registered
subscribers) to promote its UK eToys site (launched on Oct. 20).
www.eToys.uk will be a anchor tenant on FreeServe's shopping channel in
addition to the promotions. eToys' entry into the UK expands its
addressable market to include the $125 billion European, thereby expanding
its total addressable market to $200 billion.
LOCK-UP EXPIRATION DETAILS: eToys' 180 lock-up expiration date occurred on
November 15, 1999. However, employees and directors' shares were not able
to sell shares as they are restricted on selling until February, 3 days
after the January 27 earnings date. We estimate approximately 20 million
shares that will be available for sale with 10 million shares being held by
Toby Lenk and Frank Han.
POTENTIAL NEAR-TERM CATALYSTS: Catalysts in 2000 include continued
international expansion (primarily Europe - management stated on the
earnings call they would definitely enter one European market in 2000),
expansion into other kids categories (apparel, sporting goods, hobbies,
etc), acquisitions, and strategic alliances. eToys maintains its strong
lead through superior online merchandising techniques, a broad array of
kids products from mass merchandise to hard-to-find niche products, and
good customer service (greater than 90% on-time deliveries for Christmas).
eToys in our view has the real option to become a destination for family
solutions for every major event in their children's lives: summer camp,
Christmas, vacations, Halloween, birthdays, back-to-school, and so on.
--------------------------------------------------------------------------
INVESTMENT SUMMARY
eToys has established itself as a top tier business-to-consumer e-Tailer
with a proven concept, and is the category killer for the kids/toy market
with superior online merchandising techniques, a broad array of kids
products from mass merchandise to hard-to-find niche products, good
customer service, and a solid consumer-centric management team. eToys, in
our view, has the real option to become a destination for family solutions
for every major event in their children's lives: summer camp, Christmas,
vacations, Halloween, birthdays, back-to-school, and so on. Accordingly, we
view eToys as a leading core Internet franchise holding and the leading
kids e-tailing Category Killer.
COMPELLING CONSUMER SOLUTION. eToys provides consumers with an attractive
alternative to the traditional brick and mortar retail experience through
its increased convenience, service, selection, and content. eToys is
revolutionizing the kids retail category market by delivering increased
value to the consumer.
FIRST GOOD MOVER. We believe eToys is the leading kids category e-Tailer
based on its superior brand awareness, leading market share of revenue and
online visitors per month. It continues to exploit its significant lead
versus all other competitors. We believe its strong continued execution
and exploitation of the gap created by being a first mover is a significant
barrier.
LARGE VISIBLE MARKET. As the first kids e-Tailer to market, eToys is
poised to capitalize on the enormous growth opportunity of online selling
and the $75-billion U.S. kids target market. Online toy category sales are
estimated to grow at a 129% compound annual growth rate (CAGR) from $20
million in 1998 to $555 million in 2002 (Jupiter Communications estimate
for Toys only). eToys currently operates in kid categories that account for
$55 billion (toys, baby store, books, software, video, music, video games)
of the $75-billion market and plans to expand into new categories
representing an additional $20-billion untapped market opportunity (kids
apparel, sporting goods, back-to-school, party supplies).
INTERNATIONAL EXPANSION. eToys has a scalable/exportable market and plans
to replicate eToys overseas. On October 18, 1999 eToys opened its UK store
(www.entoys.co.uk), thereby entering the $125 billion European market and
expanding its total market opportunity to $200 billion. The company's
ability to clone its operating functions and systems into the European
market has enabled it to enter its first international market in less than
six months. We believe the U.K. will serve as a foothold for eToys to
expand into other European countries at an accelerated pace in FY 2000.
We believe the company will also look to enter the Asian market as Japan
represents the second largest stand-alone market. eToys will likely
leverage joint venture opportunities to source and distribute product when
complete ownership of the its supply chain is not appropriate.
Important Disclosures (code definitions attached or available upon request)
ETYS : CS, M
01:03pm EST 27-Jan-00 Goldman Sachs (NOTO) ETYS
eToys Inc. (Noto) (3 of 3) : Very Strong Results, Increasing 2000 Rev & EPS; TB
GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS
Goldman, Sachs & Co. Investment Research
eToys Inc. (Noto)
* * Very Strong Results, Increasing 2000 Rev & EPS; TB * *
Anthony Noto (New York) 1 212-357-1849 - Investment Research
=================== NOTE 12:56 PM January 27, 2000 ====================
ETOYS RISES ABOVE OTHER TOY E-TAILERS. While all online toy shopping
experiences offer an attractive alternative to shopping in stores, we
believe eToys stands out from the pack through its first mover advantage,
broad selection and in-depth content, sophisticated merchandising
techniques, focus on the kids category (beyond toys) and early entry into
international markets. eToys continues to improve the consumer experience
on its easy-to-use website. Key new marketing and merchandising initiatives
include a strategic relationship with Rosie's (O'Donnell) Readers, the
launch of a new TV campaign, Idea Center (thematic destination), and Hobby
Shops.
KIDS SOLUTION. While today eToys is just an e-Tailer, we believe its deep-
rooted understanding of parental needs for family solutions combined with
its growing relationships with families gives eToys license to become a
family solutions destination. In our view, eToys can provide via solutions
for every major event in a family's life beyond products products to
include services.
DEPTH OF CONSUMER-CENTRIC MANAGEMENT TEAM. eToys' management team is
comprised of experienced, consumer-centric individuals, who bring a breadth
of experience working for some of the most well-known brand names,
including Disney, Pepsi, L.L. Bean, and Procter and Gamble.
RISKS/ISSUES. Competition and transfer and expansion of fulfillment
capabilities to eToys' new Danville, Virginia facility. |
