Online Extra: Alloy Online: Finding Strength in Teen Trends

The e-tailer/cataloger has proven adept at selling to youth markets. Can it keep escaping the fate of so many other dot-coms?

Alloy Online Inc. (ALOY ) seems to be operating in another dimension. While droves of dot-coms shutter and the slowing economy is squeezing earnings of traditional consumer companies, Alloy recently posted profits handily surpassing analysts' expectations.

That's shocking, considering what Alloy does. The company merely runs an eponymous Web site that lures visitors with gossip, contests, and polls, and sells everything adolescent from pink steering-wheel covers to thong bikinis. In other words, Alloy has the same "commerce driven by content" model that has failed on numerous other sites.

So what's Alloy's secret? The company has kept costs low, operating out of grungy offices in midtown Manhattan. And it has proven remarkably adept at spotting cool teen gear. Remarkably, this was the site's strategy from the beginning -- a rare dot-com that has stuck to its business plan. "They're not doing anything different," says Peter Benedict, an analyst with CIBC World Markets. "They are continuing with their business strategy, which combines multichannel commerce through online and offline catalogs."

SOLID DEFENSE. And it should keep on working because Alloy's young clientele, a potential audience of some 56 million between age 10 and 24, tends to spend money in good and bad times. As long as McDonald's doesn't start laying off teenage burger cooks, Alloy has a solid defense against a dreary economy. "This company is shielded from an economic slowdown. Its customers are the fastest-growing demographic, and it's largely unaffected by economic changes," says Derek Brown, an analyst with WR Hambrecht Investors.

Alloy stock is trading around $9, about halfway between a 52-week high of $15.12 and low of $5.75. "I'm constantly amazed that [this] stock remains under the radar screen of most investors," says Brown, who has a price target of $30 in 12 months. Shares are already up about 15% for the year, a huge gain next to the Nasdaq's slide of 17% in 2001. That even compares favorably to the S&P Retail Index, which has managed only a 3.3% increase in the past six months.

The latest quarterly results on Alloy tell a compelling story. While retailers that target teens have mixed results in recent months, on Mar. 15 New York City-based Alloy reported its first profitable quarter since becoming public in May, 1999. For its fiscal fourth-quarter ended January 31, 2001, the company earned $0.04 per share, before goodwill amortization, compensation, and other items. That compared with a loss of $0.27 for the same period last year. Wall Street analysts, on average, had expected a profit of $0.02, before extraordinary items. With the items, Alloy lost $0.32.

"LAST TO GO." Through its two Web sites -- www.alloy.com and www.css.com -- and numerous catalogs and direct-mail publications, Alloy increased commerce revenues to $36.6 million in the fourth quarter, up 198% from $12.2 million last year. "I can tell you that commerce revenues, which is the most direct indication of whether teens are buying, are as strong as ever," says Matt Diamond, Alloy's CEO and co-founder.

Ad revenues were robust too, despite severe ad spending cutbacks. In the fourth quarter, Alloy posted $5.9 million in revenues from ads, a 195% increase over $2 million for the same period the year before. "Teen ad spending is the last to go. They're the future consumers. Advertisers don't want to appear to be a weak company, so most ad execs are hesitant to cut that," Diamond says.

That's likely why 100% of Alloy's advertisers, which include Johnson & Johnson, Nike, and Levi's, have renewed their ad contracts with the company, says Benedict of CIBC. So far, advertising sales make up just 13% of revenues at Alloy, but Benedict sees them being a much bigger part of the company's top line in three years time, making up 40% of total revenues. "You can see how an ad with Alloy actually works. It gets actual access to teens," he says. He rates the stock a strong buy and has a 12-month price target of $18.

SENSIBLE DEAL. Even better, bad times spell acquisition opportunities for Alloy. With $12.7 million in cash and a relatively strong stock price, the company has some buying power. It recently announced plans to buy Carnegie Communications, a publisher of direct-mail catalog that universities use to reach prospective students. Schools pay Carnegie to appear in its online and print publications.

The deal makes sense for both companies. Carnegie would add the 6.6 million teens in Alloy's marketing database to its mailing list. Alloy would gain about $3 million in revenues and $1.4 million of earnings before taxes, interest, depreciation, and amortization, from Carnegie beginning in 2002.

Diamond, who started Alloy in 1996 in a Boston basement apartment, doesn't plan to buy any dot-com assets, even at fire sale prices. But he won't rule anything out. "Any way to reach the teen market en masse in areas we currently aren't in, we have to take a serious look at," says Diamond who plans to expand Alloy gradually and carefully.

HEDGED BETS. Alloy says it's comfortable with its forecast of revenues between $140 million and $145 million in fiscal 2002, ending on January 31, 2002. The company also expects to be cash profitable from this fiscal year forward. Analysts are just as confident. Kathleen Heaney of Bluestone Capital expects Alloy to post earnings per share of $0.02, excluding noncash items, in fiscal 2002 on revenues that exceed the high end of the companyis guidance by close to $2 million. She expects Alloy's net loss to total about $13 million. Heaney forecasts $189 million in fiscal 2003 revenues and earnings per share of $0.58, before items, and a net loss of about $1 million.

All this is hardly guaranteed, and even Diamond is hedging on how the economic slowdown might affect Alloy in the months to come. "I think it would be naive of us to think we were immune if a true recession happens," says Diamond. A bigger concern for Alloy is staying hip enough to keep fickle teenagers spending on its products. As long as Alloy can do that, the company should remain a way-cool buy for investors.

By Amy Tsao

Edited by Alex Salkever

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