E-Toys faces cash shortage

EToys is facing lower-than-expected sales that will be likely force it to lay off workers and that could cause the company to run out of money by next March.

          The holiday season isn't bringing much joy to eToys. Instead, the financially troubled online retailer is getting the business equivalent of a big lump of coal: lower-than-expected sales that will likely force it to lay off workers and that could cause the company to run out of money by next March.

          Los Angeles-based eToys warned late last Friday that financial results in its third fiscal quarter, which ends this month, are expected to be significantly below plan, with sales only about half of what company officials had previously predicted. Revenue for the quarter is now expected to come in at $US120 million to $US130 million, compared with earlier expectations that business could reach the $US240 million mark.

          "We are disappointed that sales have not materialised to the degree we had expected," says Toby Lenk, the online retailer's president and CEO, in a statement. "Going forward, and based on current operating realities, we will take aggressive steps to reshape the company's cost structure and to best position the company for the future."

          EToys projects that it only has enough cash on hand to meet its needs through the end of March, three months earlier of a previous estimate that it would need more financing by the middle of next year. The company says it needs a "substantial cash infusion" in order to keep operating and adds that it can't even assure it will be able to hold out until March without new funding or a possible sale.

          In response to the cash crunch, eToys says, a workforce cut and other reductions in operating costs are due to be announced next month. The retailer also says it has hired investment banking firm Goldman, Sachs & Co to act as a financial adviser and to help explore options such as a financial restructuring, a new round of financing or a sale to another company.

          In addition, eToys says it's now reviewing its financial projections for the fiscal year as a whole and beyond. Because of the lower-than-expected sales, it adds, previous business projections "should not be relied upon" -- including an estimate that the company's losses would narrow on a quarterly basis starting with the current quarter.

          EToys beefed up its website, database server, call centres and product distribution capabilities to prepare for this year's anticipated holiday shopping rush. But Kevin Silverman, an analyst at ABN Amro in New York, says sales figures through the end of last week just weren't good enough for the company.

          "They had to start coming to grips [with the fact] that the sales weren't going to materialise," Silverman says. "The surprising thing was how few additional sales dollars eToys was able to generate when the overall channel is very successful."

          One big problem for eToys, Silverman says, is that well-known retailers such as Toys R Us, Wal-Mart Stores and Target have launched improved websites from which toys can be bought. For example, the Toysrus.com unit of Toys R Us teamed up last summer with Amazon.com to develop a co-branded website that sells toys online.

          According to eToys, operating losses for the current quarter will likely total as much as 65% of the company's revenue for the period -- putting the deficit at a potential level of about $US84.5 million. Cash and cash equivalents as of December 31 are expected to be between $US50 million and $US60 million, half the range that the retailer had previously estimated.

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