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Technology Stocks : OnSale Inc. -- Ignore unavailable to you. Want to Upgrade?

To: TokyoMex who wrote (3134)	1/4/1999 8:06:00 PM
From: neverenough	Read Replies (3) \| Respond to of 4903

Caught in a Squeeze Wall Street has been busily bidding up Internet auction stocks. But Onsale, the industry pioneer, finds itself battling shrinking profit margins. By Suzanne Galante and Cory Johnson Something disturbing has been happening at Onsale, and investors in auction stocks should pay attention. At the precise moment in time when Wall Street has gone ga-ga about Net auction companies like eBay and uBid, the pioneer in the field is seeking out ways to stop its profit margins from eroding. Onsale was built on a simple concept: provide computer makers and electronics companies with a way to sell excess merchandise. Over time, Onsale expanded from laptops, desktops and digital cameras to vacation time shares, frozen steaks and myriad other things. The company didn't initially receive the warm reception investors now routinely provide Internet IPOs. Onsale, based in Menlo Park, Calif., went public in April 1997 at $6 a share, and get this: on the first day of trading, the shares finished a fraction lower. The stock meandered gradually higher in late 1997 and early 1998, but really took off last fall, as it became clear that e-commerce would be the retailing story of Christmas 1998. The stock surged from $15 to $108, plunged back under $40, and then surged again, settling last week a little north of $50. Although that's a hefty return for people who bought the stock early on, OnSale lacks the kind of wildly enthusiastic fans possessed by eBay and Amazon.com. And for good reason: Cracks are emerging in Onsale's business strategy. One concern is that the supply of leftover computers is something less than infinite. PC manufacturers like Compaq are using their own Web sites to work down their leftovers, potentially shrinking the supply of excess goods available for auction. "Suppliers want to sell less, rather than more," says a hedge fund manager who holds a short position in Onsale's shares. "There is less around and more players trying to buy." The company also faces growing competition: Egghead.com's Surplus Direct, Auction Warehouse and Affiliated Computer Auction, among others, are fighting over a diminishing supply of refurbished and close-out goods. And they're all after the same customers. "More people are competing for a slice of the pie," says Philip Leigh, an analyst at Raymond James, a Tampa, Fla.-based brokerage firm. "It's getting more competitive to buy the merchandise. And the pie is going to shrink as PC makers take steps to construct business models that result in less inventory. [Auctioneers] are being pressured from both sides." Onsale, which gets about 80 percent of its revenue from computers and related goods, acknowledged the problem in recent SEC filings. The company admitted to "lower margins on purchased inventory sales," meaning its gross profit per sale has shrunk. At the same time, Onsale has cut its shipping and handling rates "to be competitive with similar companies in the industry," a move that has further eaten into margins. To combat the problem, the company set up its Quick Buy program, offering goods at fixed prices, and thus fixed profits. Leigh sees the move as a desperate measure to bandage an out-of-control problem. "You don't change things," says Leigh, "unless you're dissatisfied with the way things are going." What's clear is that Onsale is rethinking its focus. "The business model is in flux," says Steven Frankel, an analyst at Adams, Harkness & Hill, a Boston-based investment firm. "I thought they had an edge in the auction format, but they seem to be going away from that." Some analysts think Onsale will start selling new goods to boost margins. But that space is crowded, too. "If they do that, then they go against a whole new breed of competitors," Frankel says. "It's a tough battle. [Selling] new goods is a very risky business change." Suzanne Galante is a staff reporter, and Cory Johnson is the West Coast bureau chief, at TheStreet.com. thestandard.net