Who's Minding the Store for Toys 'R' Us

Parents who shop on Toysrus.com this holiday season likely won't know that a company called GSI Commerce (GSIC) is managing the orders behind the scenes. But GSI is ubiquitous: It runs retail Web sites for some 100 brands, including the NFL, Bath & Body Works, Ralph Lauren (RL), Aeropostale (ARO), and Toys "R" Us. All told, the company processes $3 billion in annual sales, from which it takes a commission.

GSI Commerce, based in King of Prussia, Pa., may be invisible to shoppers, but it's attracting attention on Wall Street. Over the past 12 months the company's stock has shot up 236% as its founder and chief executive, Michael G. Rubin, has gone on an acquisitions rampage. GSI, which lost $16.9 million on nearly $967 million in revenue in 2008, now has $242 million in debt. While the company has been profitable in the past, analysts expect it to lose money again this year. But the 37-year-old Rubin, who practically grew up running the place and saw the company through the 2001 dot-com bust, insists he has no choice but to keep growing. His goal is to make GSI one of the biggest Web retailing companies in the world. Skeptics wonder if the bets will pay off.

Many chief executives say they feel personally enmeshed in their company's fate, but few can say they've felt that way since age 12. That's when Rubin started the business that eventually became GSI, adjusting and fitting customers' skis out of his suburban Philadelphia basement. By age 22, he had enough cash to acquire two small shoe brands, which he sold through major sporting goods chains.

It wasn't until 1998, after hearing his sporting goods clients worry about the complexity of selling products online, that Rubin says he recognized his "huge opportunity." While his footwear brands would never rival Reebok or Nike (NKE), e-commerce was still anyone's game. "It was the first time I could be No. 1 in a market," he says. Rubin sold the footwear brands and, under the name Global Sports, persuaded his clients to let him manage their Web stores.

Most of GSI's clients are traditional retailers who ring up only 5% to 10% of their sales online. But Rubin believes that online sales will become a bigger part of their businesses and that retailers will still pay someone else to handle plenty of complex Web tasks. So in addition to opening offices overseas, Rubin has bought an array of Internet service businesses over the past two years, including an e-mail marketing company, an affiliate marketer (it recruits people to drive sales to clients' sites in return for a commission), and a Web design firm, which he uses to bolster an interactive marketing agency. On Oct. 27, GSI agreed to spend up to $350 million in cash and stock to acquire Retail Convergence, which owns the sites Rue La La and SmartBargains.com, giving clients an easy way to liquidate slow-moving inventory.

Customers seem satisfied. Greg Ahearn, e-commerce czar at Toys "R" Us, worries about GSI's expansion plans. But that didn't stop his company from re-upping with GSI through 2019. General Nutrition Centers, Ralph Lauren, and Dick's Sporting Goods have renewed their contracts, too.

All the same, trouble may be brewing on Wall Street. After GSI's heady performance this year, short sellers are gathering: A full 15% of shares available for public trading have been sold short. Rubin is unperturbed. While GSI will continue to lose money, he says, it remains cash-flow positive. "We think of ourselves as the worldwide leader of e-commerce for consumer brands," says Rubin. "And this is just the first quarter of the football game."

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