(from the Wall Street Journal Interactive Edition, December 29, 1999)

Toy Retailers Find Investors Unforgiving on Blunders

By Jason Anders

Investors generally are forgiving when it comes to Internet companies. Quirky business models, bloated advertising budgets and rivers of red ink aren't enough to deter them.

But when Barbie doesn't arrive in time for Christmas, watch out. Message-board participants have been slamming online toy retailers following a holiday season plagued by customer-service headaches and orders that arrived late -- or not at all.

"I never short stocks, but for eToys I made an exception," says Peg Coleman, a Clive, Iowa, consultant who soured on the toy retailer after running into problems on an order for her four-year-old grandson. (Short sellers profit by betting a stock's price will fall.)

Ms. Coleman placed her order the day after Thanksgiving, but some items didn't arrive until 3 p.m. on Christmas Eve -- long after she had repurchased the late gifts at a local store. What's more, she says she's still waiting on an art-supplies kit that hasn't shown up. "I figured if it happened to me, it had to be happening to a lot of people."

Message boards have been clogged with stories like Ms. Coleman's, and analysts say the companies are paying for their customer-service blunders on the stock market.

eToys shares, already down 51% for the month, came under additional selling pressure this week after Lauren Levitan, an analyst with BancBoston Robertson Stephens, downgraded the stock to "long-term attractive" from "buy" amid concerns that it could cost the company dearly to fix its order problems and win back customers.

Toys "R" Us shares have slumped in December, a month in which it abruptly announced that many holiday orders placed on its Web site likely wouldn't arrive by Christmas. (Some on the message boards seemed appeased by the company's offer of a $100 gift certificate, but many others say they'll take their business elsewhere.)

"You just don't mess with Christmas," says Ms. Levitan. "In the past, online retailers have benefited from all the positive buzz their customers have given them. But now this cadre of unhappy customers can do some damage to their brands."

Indeed, some would-be online investors say they'll stay away from the toy stocks after reading about all the problems customers have been having. "I definitely wouldn't invest in eToys. I've just heard too many stories," says David Gladstein, who works as an operations manager for an equipment finance company. Mr. Gladstein soured on eToys after a co-worker told him about an order for Christmas presents that still hasn't arrived. After Mr. Gladstein relayed the story on a Silicon Investor (www.siliconinvestor.com) message board dedicated to eToys, others began posting similar stories.

"In the context of the significant volume we did, we feel we did a pretty darn good job," says Toby Lenk, chief executive of eToys. "We're seeing a tendency of people to be overly anecdotal," he says of the publicity surrounding the customer complaints. Mr. Lenk says that of the one million orders handled by eToys during the holiday season, more than 90% of customers were satisfied. As for Ms. Coleman's experience, an eToys spokesman says she was given a credit for about half of her $42.67 order on Dec. 21 during a review of orders that were delayed for Christmas. An eToys representative contacted Ms. Coleman Tuesday evening and refunded the balance of the order, and apologized for the problems.

For its part, a spokeswoman for Toys "R" Us says its online woes were due to "unanticipated success."

"We tried to be up front with customers about the delays. We will continue to do everything we can to keep customers happy," says Leann Lavin, a spokeswoman for the Paramus, N.J., retailer.

The company is already looking at ways to make next Christmas run more smoothly, including giving customers the option of placing orders online and picking up merchandise at one of its more than 700 retail stores.

Ms. Levitan, the Robertson Stephens analyst, says investors can be quick to take out frustrations on a stock like eToys, since many of them have probably shopped at the store, or know someone who has. The Internet, and in particular stock-chat message boards, make it even easier for investors to share horror stories.

"In many ways, all the typical hassles have just been transferred online. Instead of standing in a store pulling your hair out, you're doing it in front of your computer," says Ms. Levitan. "But there is a silver lining to this cloud, and that is that demand has been phenomenal. We're seeing these problems because so many people wanted to buy toys online."

Ms. Levitan says despite the problems, she doesn't think eToys will have any trouble exceeding the $78.5 million in sales she predicts for the quarter.

Indeed, consumers went online for shopping in droves this year. Market-research firm Forrester Research predicts that about $4 billion will be spent online between Thanksgiving and the end of the year, and some analysts say that estimate should be easily surpassed.

What's more, analysts say given all the publicity their stumbles are receiving this year, online toy retailers are likely to spend the coming months making sure Christmas 2000 runs much more smoothly.

"I think these problems will be remedied in time for the next holiday season," says Liz Leonard, a senior analyst with Lincoln, Mass., research firm Gomez Advisors. "This wasn't that catastrophic. Overall, I think the value inherent to buying toys online, particularly on price, far outweigh the weaknesses we experienced this year."