Glenn, an obscure e-tailer/catalog company who seems to have promise.
Btw
Now I understand why Blue-nile got Kleiners money and you didn't. You weren't a pure-play.<vbg>
>December 24, 2000
NEW YORK -- On an unfashionable block in the garment district of Manhattan, an obscure e-tailer has managed to do something even more unfashionable -- make money.
Remarkably, while other Internet businesses, especially retailers, are running out of cash and struggling to survive, Alloy Online, an Internet and catalog company, expects -- with a little help from fans in Generation Y -- to turn a profit in the current quarter.
Alloy is not accomplishing that feat through any one-time gains or accounting acrobatics. Instead, it is creating what its executives and many analysts call a "convergence media company," where content and commerce coexist to serve a specialized audience that buys its products.
Alloy operates both online and offline -- through an old-fashioned catalog that comes in the mail. Other, more established Web retailers, including big names like Amazon.com and eToys, have only recently begun to emulate a strategy that Alloy has used since it started four years ago.
Alloy's audience of 13-to-19-year-olds is particularly attractive to online merchants, because it is part of the so-called Generation Y -- the people between 10 and 24 who are the children of baby boomers. It's a group that understands the Internet -- and spends money.
Teen-age Research Unlimited, a market research firm in Skokie, Ill., estimates that 31.6 million Generation Y teen-agers in this country will spend $155 billion in 2000.
What makes Alloy even more of a contrarian tale is that its founders found this lucrative audience almost by accident.
During the company's infancy, they posted a snowboarding Web site timed to the 1996 Winter Olympics in Nagano, Japan. "We started asking questions on the Web site: 'How old are you?' and 'Do you snowboard?' And the answer was '15' and 'no,'" says Matthew Diamond, 31, the chief executive and one of the founders.
"That's when we realized that our target demographic was much, much larger than we ever anticipated. It wasn't niche snowboarding; it was this massive teen market."
Now, Alloy.com attracts 1.3 million teen-agers a month, who can take quizzes ("How great was your date?" and "Are you a Spaz?"), win prizes ("Win a trip for two to a recording session with Christina Aguilera!" and "Want 3LW to Rock Your School?") or chat with other members.
More important for Alloy's bottom line: the teens also can buy the latest must-haves for their wardrobe, from $29 Urban Pleather skirts and $12 Split V tank tops for girls to $29 Suburban Roam cargo pants and $46 Billabong Dragon Hoodie sweatshirts for boys.
The hybrid strategy of online and offline sales through the catalog, which Alloy sends every three to five weeks, is working surprisingly well.
Last month, Alloy reported record third-quarter results that surpassed expectations, nearly tripling revenue to $28.1 million, from the same quarter last year, and a smaller-than-expected net loss of $6.3 million, or 30 cents a share.
For the fourth quarter, the company projected that it would have $35 million in revenue and earn 2 cents a share, double the estimate by First Call. Diamond also told a conference call of Wall Street analysts that Alloy would be profitable over all next year, after a quarter or two in the red during the slow retail season.
"We are more than ever bullish on our business model," Diamond says.
Alloy's success story is most striking when set against the background of the suffering of many other Internet companies. The collapse in Internet stock prices this year, which has choked off the flow of capital to start-ups, has accelerated the pace of failures of former Wall Street darlings from Pets.com to Furniture.com.
Webmergers.com, a firm in San Francisco that tracks trends in Internet acquisitions, reported in November that 130 Internet companies had closed this year -- 21 in the first half of November alone. Three-quarters of the failures have been e-tailers.
Diamond acknowledged the dead and dying in the earnings release, noting that "we are especially pleased with our ability to maintain consistently strong operating momentum in light of the difficulties being experienced in the online sector."
Alloy's revenue more than doubled from the second to third quarters, a time when many competitors were not growing at all.
"They're not just talking about a path to profits," says Lauren Cooks Levitan, senior Internet analyst for Robertson Stephens. "They're actually showing it."
Of the nearly $84 million in revenue that Alloy expects this year, more than three-fourths comes from selling merchandise, with orders split evenly between a toll-free number and the Web site. The remainder comes from sponsorships and advertising, which appear in the catalog and on the site.
While having multiple revenue sources sounds logical now, the strategy appeared to hinder Alloy in the past, when investors favored pure Internet ventures over a start-up that seemed to be more of a hybrid business.
"We had trouble getting money from venture capitalists and then going public, because we weren't a pure play," Diamond says. "Everybody said, 'Well, you have way too much revenue offline.' We actually had people suggest taking the '800' number out of the catalog so that we would have 100 percent revenue online."
Alloy's other not-so-secret weapon for success is its frugality. Unlike the leaders of spendthrift Internet flameouts, Alloy's founders -- including Diamond; Sam Gradess, 35, chief financial officer; and Jim Johnson, 33, chief operating officer -- have tightly controlled expenses.
In the New York office, employees work under fluorescent lights in rows separated by partitions. The executive offices are cubicles with doors -- and a view of the brick wall opposite. With the free sodas in the kitchen, blond-wood furniture and rows of computers, the workplace resembles an Internet company before the days of initial public offering riches.
The thrifty mentality also extends to Alloy's partnerships and acquisitions.
"Everything has to pay for itself, or we don't do it," Diamond says. For that reason, Alloy has avoided high-priced deals with portals like America Online and expensive Super Bowl advertisements; it has pursued strategic partnerships and acquisitions in lieu of building new services from scratch.
In July, Alloy acquired CCS, a catalog company that sells apparel and sports equipment to teen-age boys, a group that Alloy needed to help balance its previous slant toward girls.
Through a partnership with Penguin Books, Alloy started a book series in August that uses content from the Web site. One title, "Slam," features poems submitted by Alloy.com users and works by well-known poets and songwriters.
Contests -- particularly those involving popular bands -- have also helped Alloy attract users.
Sarah Dohl, 17, of Fairfax, Va., first visited Alloy.com in October and entered a contest to win a trip to Chicago to see the band Wheatus in concert. "By some twist of fate, I won," she says. "I got to hang backstage with my favorite band, so that was definitely cool."
These days, Dohl says, she visits Alloy's Web site about three times a week, and although she hasn't bought many clothes from the company -- describing herself as "a little too preppy" for Alloy's fashions -- she has bought jewelry, sheets and bedroom decorations.
Despite high ratings from teen-agers -- as well as analysts who cover the company -- Alloy has not escaped the recent stock-market damage to the industry.
Alloy's stock is trading at $7.88 a share, about half the initial offering price of $15 a share in May 1999, and about one-third of its 52-week high of $21.75, reached Jan. 20.
Derek Brown, managing director at W.R. Hambrecht & Co., rates Alloy a "strong buy." One reason the stock is not doing better, he said, is that the company's business model may leave it off the radar of some investors. |
