Tag Archives: Catherine Skelly

About 4466 days ago E-Commerce

A Closet Full of Cash

realbusiness.com The Conservative In an industry characterized by sloppy spending and business models with as much staying power as last year’s shoes, Fashionmall has stuck to a classic line Company: Fashionmall.com Inc., in New York City What it does: Operates a virtual mall for shoppers with a yen for designer clothing Number of employees: 45 Conventional wisdom: Retail sites can’t build a brand without blowing their cash, nor can they generate enough money to scale up into the big leagues. Unconventional wisdom: There’s money in the minor leagues. Building a brand is a long-term game, and the company has enough cash to keep going for years. Revenue growth: $14,000 in 1995 to $5 million (projected) for 2000 Profit profile: Lost approximately $6 million last year Capital: Less than $100,000 in seed capital; $35 million from a May 1999 IPO If you really want to get Ben Narasin pissed off, ask him why he isn’t spending the $35 million that’s left over from his company’s May 1999 IPO. Tell him that analyst Catherine M. Skelly of investment firm Gruntal & Co. says his company, Fashionmall.com, needs a “catalyst” to scale beyond last year’s projection of $5 million in revenues. Cite other experts who argue that the company’s only path to glory lies in spending big in order to build a brand, increase traffic, and jack up both the top and bottom lines in a hurry. That kind of talk makes Narasin mad. “With all due respect to intelligent analysts, that’s what they said about everybody — and they are all out of business. Look at MotherNature.com. Gone. Pets.com. They scaled, and look at them. They’re all gone! The concept that you have to spend the money is just plain stupid,” says the 35-year-old CEO, pausing for emphasis. “You have to spend the money intelligently.” Intelligently, for Narasin, means for the long term. For the past six years he’s been carefully building branded sites that will steer Web shoppers to the stores and products they seek. Fashionmall consists of a handful of sites, each of which serves as a central site through which visitors can shop for goods. Web surfers who want to shop for Armani ties or Bulova watches can avoid the various search engines by glancing through the main page of Fashionmall or of one of its other portals, Outletmall.com (a discount site) or the trendsetter Boo.com. The bulk of Fashionmall’s revenues derive from the 60 or so tenants that pay the company 70¢ to 98¢ (depending on the length of their lease) for every shopper who clicks through a Fashionmall site to a tenant site. A small number of tenants also pay Fashionmall for every sale. In addition, the company charges advertisers for banner ads and sponsorship spots throughout the sites, garnering slightly less than 40% of its revenues from those sources. For the millions of people still cowed by the Web, Fashionmall sites offer a one-stop-shopping resource. For its retailer tenants, Fashionmall generates traffic. The company carries no inventory; its resources consist of its intellectual property, its computer equipment, the 45 employees who work in roughly 5,300 square feet of Madison Avenue office space, and, of course, more than $35 million in cash. Narasin launched the company in late 1994 with less than $100,000 in funds from Boston Prepatory Co., an Inc. 500 clothing company he founded and which generated enough cash flow to launch Fashionmall. Narasin, the son of a 30-year IBM man, discovered the Internet in 1994 and was instantly hooked on its promise for spreading the fashion word. He took a leave of absence from Boston Prepatory to run Fashionmall full-time, spending most of his energy evangelizing in an industry resistant to both technology and change. Today Fashionmall has an elite board of directors made up of executives with expertise in retailing, fashion, and mall operations, including former Liz Claiborne Inc. chairman Jerome Chazen, former Neiman Marcus CEO Richard Marcus, and mall developer Robert Taubman, CEO of Taubman Centers Inc. And the company has built a base of about a million unique visitors a month — not enough to rank among Media Metrix’s top 50 Web sites but sufficient to keep its gross margins for last year at more than 80%. Despite having a high-caliber board and a heavily trafficked mall, the company was projecting a 2000 loss of more than $6 million on revenues of roughly $5 million — hardly pretty by conventional accounting standards. Yet Narasin says that the loss, about the same as the previous year’s, is a result of trying to build the company’s brand at a sustainable pace. With its multimillion-dollar stash and its low burn rate, the company could survive for years without any revenue growth. Moreover, Narasin appears to know how to operate the company in the black. For its first four years of operation the company funded its own growth, and for the two years prior to its public offering it turned a small profit. Analyst Heather Dougherty of Jupiter Research respects the company’s prudent financial course and says that Fashionmall has succeeded as a “niche aggregator” that delivers traffic to its tenants without spending itself out of existence. The key to Fashionmall’s long-term success rests in its ability to stick to the plan of building the brand without burning the cash. As a brand builder — and in many other respects — Fashionmall has trod a different path from the one taken by the scores of now-dead players in the fashion and retailing space. When most online retailers were building inventory and reinventing the logistics of home delivery, Fashionmall was eschewing such costs, cutting revenue-generating deals with the likes of Brooks Brothers, Gap, and Lands’ End. And when other dot-coms were spending cash on television and magazine advertising, Fashionmall was swapping space on its sites for valuable ads in magazines like Modern Bride and Civilization. The most spectacular failure in the Web-based fashion industry to date has been Boo.com, which spent $135 million attempting to build its brand before folding. Narasin swooped in and purchased the brand for a figure between $500,000 and $1 million — and got a ton of free publicity to boot. Since purchasing the site, Fashionmall has transformed Boo.com from a high-profile, high-burn-rate, inventory-burdened retailer into a lean portal. At its core, Fashionmall will rise or fall on the notion that established retailers will continue using the Web as a natural extension of their existing businesses. Board member Marcus believes that as more traditional brands use the Web, they will rely on portals like Fashionmall to help shoppers find them in cyberspace. Still, the major challenges for Fashionmall will be holding on to retailers — and to shoppers (who may increasingly skip portals by going directly to their preferred sites) — and finding a way to crack the growth challenge. Skelly, who rates the company as a “market performer” in the intermediate term and a “market outperformer” in the long term, says its key strengths are its available cash balance, slow burn rate, and prudent strategy. “Ben was very forward-looking in predicting that all those dot-coms would go out of business — and he was committed to hanging on to his capital for dear life,” says Skelly, who then falls back on conventional wisdom by adding, “But he sacrificed a great company.” In other words, Narasin could have built a far bigger, fashionably unprofitable Wall Street darling if he had grown the company beyond its modest model. Narasin insists, however, that growth at any cost has already caused the demise of far too many companies. He believes the key to Fashionmall’s long-term success rests in its ability to stick to the plan of wisely investing in personnel and technology, expanding partnerships with blue-chip fashion players, keeping margins fat, and building the brand without burning the cash. “People think there is no barrier to entry on the Web,” he says. “They are wrong. It is just like the fashion business. There is no barrier to getting in, but there is a huge barrier to lasting.” Tom Ehrenfeld is a freelance writer in Cambridge, Mass. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.

About 4466 days ago E-Commerce

The Theory Economy

realbusiness.com Commentary: The Markets How could a company like Fashionmall.com sit on more than $35 million in cash and be valued at only $11 million? Here’s how In late December 2000, the value players started to show up at the Internet table. In the last week of the year, Fashionmall.com received not one but two takeover bids as its stock wallowed below $2 a share. The sudden surge in potential takeover activity drove Fashionmall’s stock up to more than $4 a share before it settled at about $3 in January. But the stock-price fluctuation wasn’t the big news about the company. The salient fact was that people were beginning to realize that Fashionmall, like many other Internet companies, was a legitimate bargain. As with other such well-known players as Stamps.com and eToys, the company was trading at a substantial discount to its balance-sheet cash. Until the recent activity, Ben Narasin, Fashionmall’s CEO, might have justly asked of Wall Street, “What’s the big idea?” As of mid-December 2000, Fashionmall had more than $35 million in cash and marketable securities on hand, yet it sported a market value of roughly $11 million, based on its price of $1.50 a share. That share price seemed to defy the company’s potential to operate as a profitable portal delivering traffic to its customers. “Our business didn’t change at all the day we went public, but our stock did,” says Narasin. “There were no significant changes in anything we said we would do and what we have done. It’s absolutely fascinating to me that you can tell the market that you are going to do x, and then when you do x, the market doesn’t care.” Narasin said he would build the customer base of retailers and advertisers without threatening the long-term health of the company. And according to Catherine M. Skelly, an analyst at investment firm Gruntal & Co., Narasin has done just that. “The company is living up to the expectations Narasin laid out when he was going public,” she says. “He said he would drive traffic cost-effectively to the site, and he has.” How could such a company be so undervalued? How could conventional wisdom seem so unwise? The prevailing logic behind much of the Internet economy has been a set of nifty syllogisms in which everything that was once solid wisdom was replaced with an alternate universe of business value. Amazon.com’s cyberpresence gave it the potential for nearly infinite inventory turnover, a prospect that dazzled analysts and gave the company the financial assets to go out and open a real-world set of distribution centers. At the same time, qualities that once counted for something shifted to the negative side of the ledger. While dot-coms enjoyed a huge run-up in the stock market, old-fashioned companies with real products and real assets had to sit on their hands and watch the stock market pass them by. Part of that shift could be attributed to a new role in the market for idea-based companies selling the promise of profits in the new world. Consider such high-profile players as Priceline.com or any of the E-tailers that claimed they would reinvent the world of shopping. Time was when conceptual companies had to show sustained profits before seeking the financial validation of public markets. Losses were considered a definite drawback. The 2000 markets, however, proved the opposite. The speculative shakeout that usually took place before companies went public was now happening in the public markets, says Amar V. BhidÉ, a professor of business management at Columbia Business School. BhidÉ believes that the pack mentality among investors — as demonstrated by a clustering of public offerings by profitless companies — was spawned by a market that increasingly valued companies on intangibles rather than on profit. He cites the Netscape IPO, in August 1995, as a watershed event on Wall Street. At that time, the nascent software maker, which had just booked all of $12 million in revenues for its last quarter, went public at $28 a share and saw that price peak at $75 on the first day before closing at about $58, for a market cap of $2.2 billion. BhidÉ notes that in valuing a business that has an online presence, many investors have based their assumptions on the theory that underlies a company’s model rather than on the profits it churns out. “I don’t know how a market could value companies under these circumstances,” he says. Dot-coms are still being valued on the perception of what their business models can produce. The only difference now is that conventional wisdom has swung around 180 degrees to completely devalue the promise of what these businesses might deliver. So a company like Fashionmall, which, based on its early history, has the ability to operate profitably, is now being valued at less than the sum of its parts. That’s because when companies go public based on the power of ideas — rather than on profits and cash flow and other such quaint figures — the market for their business becomes that much more volatile. Business ideas are and will always be far more subject to the rules of fad and fashion than plain old-fashioned income statements are. In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself. In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself. The Internet promised to customize information for individual users, but Wall Street analysts are hardly analyzing Internet companies individually. Rather, most are assuming that one Internet company is the same as the next. James Whitehurst, a vice-president at the Boston Consulting Group, recently completed a study on how to value Internet companies. He concludes, among other points, that for now the whole process remains a conundrum. “It will be 25 years before we really understand whether the value one puts on a bookmark on Internet Explorer should be more than what one puts on the corner hardware store,” says Whitehurst. “A year ago the market said that the bookmark was worth a ton, and today it says that the same company is worth almost nothing. And that pendulum will continue to swing.” Inevitably, when the theory market ricochets so wildly, companies like Fashionmall will get hammered along with every other company that has a similar business model. When every other online retailer and portal sinks with the weight of perceived carnage, then so too must Fashionmall sink. Pegasus Research, an independent New York City­based research firm, has come up with a list of 20 companies that, at press time, were trading at a significant discount to their cash on hand. Among them were dot-com players such as Mortgage.com, Quepasa.com, NetRadio.com, and Ventro Corp. No matter. In order for Fashionmall to earn a stock price higher than its cash per share, it would have to cater to the prevailing theory on the street — which is that both size and profits matter. Says analyst Skelly, “Scaling up is the only thing that would get investors excited.” (That is, it’s the only thing that Fashionmall could do on its own; the December takeover bids spurred a temporary increase in its stock price.) But guess what? The only way to realize a big bump in visitor traffic would be to squander the cash that’s keeping the company going. And so Fashionmall finds itself in stock-market cloud-cuckoo-land. Prior to the takeover attempts, Narasin announced a stock-buyback program of up to 1 million of the 7.5 million outstanding shares. Not surprisingly, he saw a bargain in the cheap price. Now, with 46% of the common stock in hand, Narasin has the power to reject virtually any offer, though as CEO he has a fiduciary responsibility to consider an offer that puts a premium on the company. He hasn’t seen such a bid yet. With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any “new rules,” but there are rules, and we suspect every one of them will look familiar. DVD Empire: The Bootstrapper SitStay.com: The Mom-and-Pop Shoebuy.com: The Scorekeepers Accuship.com: The Traditionalist Fashionmall.com: The Conservative Healthcommunities.com: The Underwriter Commentary E-tailing Intermediaries The Markets Please e-mail your comments to editors@inc.com.