AOL mentioned at the end...
Online retail stocks hot, though profits are not
December 30, 1998 03:08 PM
By Frances Hong
NEW YORK, Dec 30 (Reuters) - The burgeoning promise of Internet shopping is luring more retailers online and fueling stock market mania, but analysts warn profits for online retailers are years away -- if they come at all.
Internet retail stocks, traded mainly on the technology-laden Nasdaq exchange, have sizzled so much following a bountiful Christmas of "e-commerce" that many online retailers now have market capitalizations well above those of many traditional and very profitable retailers.
Retailers said the allure of setting up a Web site is to attract buyers from around the world and cut costs on catalog mailings. And for investors, the potential looms large.
According to New York-based research firm Jupiter Communications, U.S. online retailers in 1998 rang up $7.1 billion in sales, compared with $3 billion in 1997, and is expected to reach $41.1 billion in 2002. A more bullish study by Boston Consulting Group predicts online sales to reach $30 billion to $40 billion next year.
The growth of online retailing, said Jupiter Communications senior analyst Nicole Vanderbilt, will be spurred by women. Women, which make up 34 percent of online shoppers today, and will account for 48 percent of its shoppers by 2002, she said.
Many Internet retailers don't expect to make a profit until 2001, but they are investing 100 percent of their revenues on marketing efforts, said Vanderbilt, citing poster child's Amazon.comAMZN successful strategy for long-term growth.
Amazon.com, which went public in May 1997 soared to a market capitalization of $17 billion this week versus about a $3 billion market capitalization for rival Barnes & Noble. BKS .
To compare online sales contribution to total sales, consider inflight shopping catalog firm Skymall Inc.SKYM . Its 600 percent increase in Internet sales over last year accounted for only 3 percent of its total sales, but news of the increase sent its stock up 250 percent earlier this week.
Vanderbilt warned that the Internet shopping craze does not reflect an expansion in overall shopping, but rather a zero-sum game in which the online sector is currently making gains at the expense of traditional stores.
In the jungle of online retailing, traditional retailers such as Gap Inc. GPS and dELiA*s DLIA , will do well online because of established stores and catalogs, according to analyst Kelly Armstrong of Wheat First Union.
Shares of dELiA*s, a teenage clothing retailer and direct marketer, have soared recently on news of alliances and a possible initial public offering of its growing Internet business. In Nasdaq trading Wednesday, its shares were down down $2.25 at $12.75 in mid-day trading Wednesday on Nasdaq, after doubling last week from about $10 to $21.50 for setting up shop on Yahoo!'s YHOO shopping service.
Another high flying Internet retailer Bluefly.com, which sells off-price brand name merchandise, saw its share price soar following Yahoo! and Lycos LCOS pacts.
"The key to survival is looking for partners that can bring traffic and lend legitimacy," said Jonathan Morris, Bluefly Inc.'s BFLY executive vice president.
According to predictions from research firm International Data Corp., a shakeout and consolidation in the Web portal industry and a "dramatic correction" in Internet stock prices will take place next year.
"Not having an Internet presence and an Internet commerce strategy is a recipe for market share loss," said IDC's Frank Gens. "In the U.S. market, the virtual market is reality."
While profits for retailers may not yet be a reality, quick profits, said analysts, are being realized by investors, particularly small day traders, many of whom are themselves trading on the Internet as they collectively help drive Internet stocks to stratospheric levels.
"People are nuts, it's whacko and there is no rational reason for the shopping-type (Internet) stocks to be up," said Margaret Gilliam, of research firm Gilliam & Co. "Wait until these companies get into the real world of backup orders and controlling the back end. Some Internet retailers might never make a profit."
Some analysts warn that current stock market excitement is not sustainable given the challenges associated with direct marketing, and say a big correction for shares in the sector is inevitable.
"One day, you'll see everyone rushing to the exit doors, and they'll be the greatest losers of 1999," said Rick Berry, director of equity research for J.P. Turner & Co.
But for now, America Online Inc., AOL the world's largest Internet services provider, and now part of the benchmark blue chip Standard & Poor's 500 Index, marches bullishly forward.
"Over 1 million of our members made their first purchases online this holiday season," said Wendy Brown, AOL's vice president of electronic commerce. "From a business perspective, you can communicate a wealth of information online, and that's what makes this medium unique."
((Frances Hong--New York Newsdesk--212-859-1700)) REUTERS
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