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Will Webvan Group’s Stock Deliver?


By Hal Plotkin
Silicon Valley Correspondent

Although there are some skeptics, several analysts think Webvan Group Inc. {WBVN} is succeeding with its ambitious plan to bring the grocery business online, and they say now is the perfect time to buy the company’s beaten down stock.

“If you’re willing to be patient and wait a good year or so, I think you’ll see some pretty good returns,” says Jeetil Patel, an analyst at Deutsche Banc Alex. Brown in San Francisco.

Patel reiterated his firm’s “strong buy” recommendation after Webvan reported its second-quarter earnings earlier this month. The analyst says he is reluctant to put a 12-month price target on the stock, which trades significantly off its post-initial public offering highs. But he says the stock’s fair value next year could be in the $50 range, based on a peer-group comparison and projections of improved earnings for the firm.

Webvan, which currently has operations in California and Georgia, sells groceries and other products online and delivers them within a 30-minute time window selected by the customer. The firm plans to expand into dozens of metropolitan markets in the next few years.


Webvan Post-IPO Stock-Performance Chart

Peter Swan, an analyst at Pacific Growth Equities, also in San Francisco, has a $30 12-month price target on the stock. He initiated his firm’s coverage of Webvan with a “strong buy” rating in March.

Ironically, the analysts who like the stock — and some of those who don’t — both point to the same factor: the company’s numbers.

Webvan’s most-recent quarterly report, which included news of strong sales from repeat customers, was a very good sign, some analysts say. But others fear the company may not be getting costs under control quickly enough.

The more-skeptical analysts note that though Webvan’s sales are clearly mushrooming, the company’s expenses, particularly those associated with its first big test-distribution facility in Oakland, Calif, are running higher than originally projected.

On July 13, Webvan, which recently agreed to acquire Kirkland, Wash.-based rival HomeGrocer.com Inc. {HOMG}, reported a pro-forma second-quarter loss of $57.1 million, or 17 cents a share. The company said revenue grew to $28.3 million from $16.3 million in the year-earlier quarter. The uptick in sales coincided with Webvan’s commencement of operations in its newest markets, Atlanta and Sacramento, Calif.

Losses for the quarter, however, ran a penny higher than First Call Corp.’s consensus estimate, which contributed to the stock’s continued slump.

Webvan’s business plan calls for the company to break even on operations in each market in which it operates during the fifth quarter in that market. The firm’s first such facility, in Oakland, Calif., is now in its fifth quarter of operations.

“There is no doubt the concept has been extremely well received by customers in the San Francisco Bay Area and Atlanta [where Webvan more recently commenced operations],” says John Weiss, an analyst at Thomas Weisel Partners in San Francisco. “But I now believe it is unlikely the company will achieve their goal of breakeven on the Oakland operations in the third quarter [of this year].”

Weiss downgraded the stock to “market perform” from “buy” immediately following Webvan’s July 13 earnings release.

“I would suggest that their San Francisco expenses are already at a level where sales should be much higher,” Weiss says. He adds that the firm’s biggest challenge is to increase the average number of deliveries it makes per truck from its current level, which he estimates at two per hour, to the four or five per hour that was originally targeted.

The Thomas Weisel Partners analyst adds that he isn’t convinced Webvan can reach that level of performance unless it increases its delivery window from 30 minutes to 60 or 90 minutes, which would give the firm’s delivery truck drivers greater flexibility to make more on-time deliveries.

“That’s not something the company wants to hear,” Weiss says. “They’ve put a lot behind their 30-minute delivery promise. But I think they’re going to have to be willing to change it.”

Webvan spokesman Bud Grebey counters by saying the company has no plans to alter the terms of a service that is proving very popular with repeat customers. He notes that repeat orders from existing customers accounted for 76 percent of total orders during the second quarter.

Grebey also says there have been no changes regarding Webvan’s goal of hitting breakeven on the Oakland facility during the current quarter. “That is our goal; that is our focus,” he says.

But Grebey adds that it would be a mistake to place too much emphasis on the Oakland facility’s performance alone. “Oakland was a pilot market in many respects,” he notes.

Grebey adds that in Atlanta, where the company has applied many of the hard-learned lessons it obtained in Oakland, early performance metrics are decidedly more positive.

After two months of operations in Atlanta, for example, average order size is 33 percent higher than it was after two months of operations in the San Francisco Bay Area. Webvan is also getting 23 percent more orders from repeat customers in Atlanta, as compared with the number of repeat orders during the firm’s start-up quarter in the San Francisco Bay Area.

“The gross margins in Atlanta are two times better after two months [as compared to San Francisco],” Grebey says. “We’re doing better there because of what we have learned, and we plan to apply those lessons when we launch in Chicago on Aug. 1.”

Grebey says some analysts don’t understand how popular the service is with users, particularly the fact that Webvan drivers bring the groceries right into each customer’s kitchen, including taking them out of their delivery containers and placing individual items on a counter or table top.

“That’s really the special sauce of our home delivery,” Grebey adds. “Customer response has been very positive.”

The analysts who like the stock are less worried about the slightly higher than expected start-up expenses. Instead, they say the number of repeat orders is the single most-important success metric.

Patel says the high number of orders from repeat customers shows that Webvan is succeeding with its No. 1 goal, which is to change long-standing grocery-shopping habits.

“That’s the whole key to making this work,” Patel says. “It’s an absolutely critical success factor.”

Peter Swan, of Pacific Growth Equities, agrees.

Swan says he was a skeptic about Webvan’s service — until he tried it.

“When I moved out here from Michigan I thought this was insane,” Swan says. “Then I signed up myself, and I was very pleased with the price, quality and level of service.”

Swan adds that Webvan has something many online operations don’t have: a product that customers are willing and eager to pay real money for.

Swan also notes that, after some rough early days, Webvan is acquiring a reputation for almost always delivering everything that has been ordered right on time. He says the loyalty of many Webvan customers bodes very well for the company.

“People tell me they give them their business because they don’t want the service to fail,” Swan says. “The personal stories I hear from Webvan customers are very reassuring.”

Charles King, senior industry analyst at Zona Research in Redwood City, Calif., says that Webvan’s business model is viable but that investors should maintain a cautious stance.

“We definitely feel there is a market for this sort of thing,” King says. “But groceries have the slimmest profit margin out there. If they can get a handle on that, though, and continue to add other items, they could be around for a long, long, time.”

King adds that Webvan’s purchase of a majority stake in HomeGrocer.com, which is 20 percent-owned by Amazon.com Inc. {AMZN}, was a smart move that simultaneously eliminated a competitor and opened up a new geographic market for the company.

“The combination of Amazon, which wants to be the leading retailer, and Webvan, which wants to operate the delivery service, is a very interesting pairing,” King says.

Jim Williamson, an analyst with International Data Corp. in Framingham, Mass., says he is generally optimistic about the future of the online-grocery business. But he isn’t yet convinced that Webvan will be a part of that future.

“Webvan is burning through cash at a rate that is very troubling,” Williamson says. “They spent $90 million bucks last quarter building an [automated] warehouse.”

Williamson adds that Webvan will be facing a capital shortage next year, a fact that has been acknowledged by company president George Shaheen, who has said he expects to seek a cash infusion during the second quarter of 2001. Shaheen hasn’t, however, indicated whether the cash will come in the form of a private or public equity placement, loan or some other corporate-debt vehicle.

A secondary offering could be difficult, Williamson notes, if the company’s stock stays in the cellar.

“That’s why it is vital they do it [breakeven] in 5 quarters in each market,” Williamson says. “It’s important for them to get to breakeven as quickly as possible. Otherwise, each new facility they add is like adding a money losing stock to your portfolio.”

Grebey doesn’t minimize the concern.

“In the [San Francisco] Bay Area, the challenge is to increase the average order size and customer acquisition,” Grebey says. “But if you look at Atlanta, we’re seeing a much more-rapid ramp up in volume. We’ve already added a second shift.”

Grebey says he understands analyst concerns about expenses associated with the Oakland facility. But he expressed strong confidence the company will be able to execute on its plan.

“We’re very comfortable with what the majority of our users say,” Grebey says. “The majority of them are very bullish.”

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