Negative article from TSC passed on to me.
Onsale's Margins: I Can't Believe It's Not Better
By Suzanne Galante
Staff Reporter
4/5/99 7:14 PM ET
SAN FRANCISCO -- It's been nearly four months since Onsale (ONSL:Nasdaq)
addressed the problem of its incredible shrinking margins and said the worst had
passed.
In December, Onsale told reporters its margins would remain flat for at least the next
three years, due in part to its new wholesale business that incorporates high-margin
revenues like advertising and warranties. Despite that confidence, the computer
goods seller may be seeing further margin deterioration. As evidence, investors point
to fellow online computer-goods wholesaler Cyberian Outpost (COOL:Nasdaq),
which competes with Onsale in its wholesale business.
Cyberian Outpost's CFO Katherine Vick said during a conference call in March that
gross margins dropped to 9.7% in the fourth quarter from 10.1% in the third quarter,
because of a shortfall in advertising revenue. "Growth of advertising revenue didn't
keep pace with our more than 40% growth in Q4," she said, referring to a sequential
increase in net sales to $33.1 million for the quarter ended Feb. 28.
Onsale may face a similar problem when it posts earnings on April 15. Falling
margins have been a trend pinching Onsale for more than two years.
The Internet is turning the sale of some products into a commodity business where
people buy from the company with the lowest prices. That attitude doesn't allow for a
loyal customer base. "People will generally go for the lowest price if there is no value
add," says a hedge fund manager, who declined to be named but who is short both
Onsale and Cyberian, "And a year from now someone will sell (the same products) for
less."
Onsale had hoped to tame its margin problem with the launch of its wholesale
business called atCost. Even though atCost's product sales were expected to
produce lower margins than those from the auction business, Onsale had bet that
strong ad sales on the site would offset them.
But if Onsale is experiencing an ad shortfall like Cyberian Outpost's, that's more bad
news for Onsale's margins. That would mean that the expected
higher-margin-producing revenues weren't coming in. The hedge fund manager called
Cyberian Outpost's numbers "a good early indicator that Onsale is having the same
problems."
"Margins for these guys are a huge issue," says another hedge fund manager who
holds a long position in competitor uBid (UBID:Nasdaq). He sees the rollout of
shopping engines -- such as Inktomi's (INKT:Nasdaq) shopping engine set to launch
in April and CNET's existing Shopper.com site, which allow consumers to search for
products based on price -- as just another "degrader of margins," because companies
will keep lowering prices to gain customers, cutting further into margins.
Onsale is in a quiet period because of its upcoming quarterly earnings and couldn't
comment specifically on its margins or the status of atCost.
CEO Jerry Kaplan did take issue with the comparisons to Cyberian's margins. "It
would be inappropriate to assume that what Cyberian reports relates" to what Onsale
is going to report, Kaplan says. "Just because they had an ad shortfall doesn't mean
we will too."
If more negative margin news emerges, as some suspect it will, the stock will likely
keep falling. On Jan. 19, when Onsale preannounced a decline in fourth-quarter
margins, the stock fell 14% to 50 1/4, and it has yet to recover. It closed Monday at
35 5/16, up 2 9/16. |
