The Rise and Fall of eToys

L O S   A N G E L E S, March 5 -- As the calendar flipped over into the year2000, the future looked promising for fledgling Internet retailereToys.

Sure, the company got a load of bad publicity when it failed todeliver some Christmas toys on time, and its stock had fallen 70percent from its peak of $84 a share three months earlier.

But it had quintupled its customer base to 2 million, and hadsold more toys than rival Toys R Us during the all-importantholiday season. And its recently opened British site was successfulbeyond all expectations.

"We believe our largest quarterly loss is behind us," founderand chief executive Toby Lenk wrote to shareholders last March.

Stock Price Measured in Pennies

Lenk turned out to be an optimist. The losses got bigger — somuch bigger, in fact, that they eventually drove eToys out ofbusiness.

The company said last week it will file for bankruptcyprotection within days. Its Web site is scheduled for an imminent shutdown, and its stock price is measured in pennies. Its cash will run out at the end of the month, and shortly after that the remainingemployees will leave their Los Angeles headquarters for the lasttime.

Analysts say eToys' swift demise was the result both of thecompany's ambitious plans and a sour investing climate that beganlast spring and has since buried dozens of dot-com companies.

"What they did right was create a wonderful brand name,increase sales at a phenomenal rate and become the premier onlineresource for people to buy toys," said T.K. MacKay, a stockanalyst with Morningstar Inc.

"What they did wrong was to operate a business without thefinancial capacity to weather a downturn in the retail market.Everyone expected sales to continue to be robust last Christmas andthey weren't. Their balance sheet couldn't handle a hiccup likethat."

Healthy Respect for Bricks and Mortar

When he founded eToys in 1997, Lenk rejected the notion that anonline toy store couldn't compete with traditional outlets. Thatmay yet be true, but for now it seems the physical presence of ToysR Us, Wal-Mart and others are too hard to overcome.