(FORTUNE Magazine) – So long, Santa, read the headline of a recent Salon article about Buy.com, the online superstore. "Santa Claus joined the ranks of high-profile new-economy casualties Tuesday," the story went on to explain. "He was laid off without notice or severance pay as part of the continuing dot-com downturn. A spokesperson for Buy.com, a.k.a. 'the Grinch,' said that the firing of all workers over 40 in the North Pole office was part of its 'path to profitability.'"

Obviously the story was just a joke. For the record, Buy.com hasn't fired a single one of its 260 employees--let alone Santa, whose cooperation, as we shall soon see, is absolutely essential to the e-tailer's survival. Nor is the company located anywhere near the North Pole. It's based in Aliso Viejo, in sunny Orange County, California, about a five-minute drive from the beach.

But if ever there was a company that lent itself to parody, it's Buy.com, the original dot-com enfant terrible. Indeed, the online retailer's flamboyant founder and former CEO, Scott Blum, made even Amazon boss Jeff Bezos seem like a sober, bottom-line-oriented executive. It wasn't just that Buy.com lost money (heck, any dot-com could do that). It was that the business seemed to have been created for the express purpose of losing money.

Today Buy.com, the nation's second-largest online retailer after Amazon, is barely hanging on. Its stock is hovering at $2 per share, down 93% from its high of $27.50 on Feb. 9, the day after its IPO. And as the Internet shakeout continues, the upcoming holiday season may be its last chance to prove that it is a viable business.

Of course, Buy.com isn't the only e-tailer dreaming of (and needing) a green Christmas. Ever since the online crowd burst on the scene five years ago, the holiday season has been make-or-break time for the sector. But given the growing doubts on Wall Street about Internet pure plays, this Christmas has assumed even greater significance as a barometer of health in the dot-com world. And e-tailers have been a sickly lot lately. Amazon is down 63% from its 52-week high; and Egghead.com and Cyberian Outpost, which like Buy.com derive most of their revenues from technology products, are trading at less than $3 a share. "This is a sector that just can't get the time of day from Wall Street," says Rebecca Nidositko, online retail analyst at the Yankee Group. "That's unfortunate for many businesses that have some pretty good strategies and might deserve to be here a year from now."

Happily for the dot-commers, holiday shoppers appear poised to click until they drop. According to Jupiter Research, consumers will spend a record $7 billion online this Christmas--nearly double what they spent in 1999. Even so, Merrill Lynch analyst Henry Blodget estimates that three-quarters of public dot-coms will fold in the next five years. So if Buy.com wants to be one of the last ones standing, it's going to have to grab a good chunk of that Yuletide spending.

As with every dot-com, the key for Buy.com will be execution. But this retailer faces one additional challenge--overcoming its own controversial past. The big question is, Will Buy.com forever pay a price for its youthful indiscretions? (Blum once showed up on the cover of Red Herring wearing nothing but $100 bills.) Or will it be accepted--by both investors and consumers--as the reformed, well-mannered adult it is desperately trying to become? "My biggest frustration by far is that people see this company as the same company it was 18 months ago," vents current CEO Greg Hawkins.

Back then Buy.com's slogan was "The lowest prices on earth." When the site was first launched in late 1997, Blum had a simple if reckless strategy: Undercut competitors' prices by selling boatloads of computers, consumer electronics, books, videos, and music at or below cost. Forsaking profit margins, the company somehow envisioned making its money through advertising. The game plan also called for zero inventory; fulfillment operations would be completely outsourced to distributors.

With such a preposterous business model, it's truly a wonder that investors bought into Buy.com at all. Sure, there were a few skeptics. But most viewed it as a classic Internet fairy tale. Japanese technology powerhouse Softbank, which had made a killing investing in companies like Yahoo and E*Trade, kicked in $20 million in October 1998 and another $40 million a couple of weeks later. Buy.com also landed such reputable partners as Ingram Micro, the world's largest distributor of computer products. And its board of directors included the likes of Don Kendall, founder and former CEO of PepsiCo, and John Sculley, former CEO of Apple.

But Buy.com's greatest asset--and later, its biggest liability--was Blum, a charismatic young entrepreneur who aggressively peddled his vision to investors, partners, and consumers. Lured by its super-deep discounts, shoppers flocked to the site; in its first full year of operation, Buy.com racked up $125 million in sales, handily beating Compaq's record as the fastest-growing company in history. Blum boasted that the site would soon surpass Amazon as the nation's top e-tailer. With typical hubris, he spent a ton for domain names like "buymusic.com," "buycars.com," even "tenpercentoffwalmart.com." If there was one thing that epitomized Blum's bad-boy persona, it was the commercial he aired during the 1999 Super Bowl. It featured a man on all fours crawling up to a yellow Labrador, sniffing its butt, and following it off the screen. The tag line: "Buy.com. Check us out."

If only investors had followed that advice. In its haste to burnish the brand and boost revenues, Buy.com neglected to take care of the people it needed the most--consumers. In one famous example, in February 1999 a Hitachi monitor that sold for $565 was mispriced on the Website at $165. Rob Cole, then 19, made his purchase and waited while his credit card was charged the lower price. Three weeks later he received a generic e-mail telling him that Buy.com would not be able to honor his order. After numerous attempts to talk to someone who could help, the frustrated University of Washington student created a complaint Website called boycottbuy.com. "They never made any effort to find out what was going on,'' he says. Within a week he received more than 1,000 e-mails from other Buy.com customers voicing similar complaints about pricing errors and shipping problems; before long, anti-Buy.com Websites were popping up all over the Internet.

Around that time Blum decided to hire a CEO to run the day-to-day operations, enabling him to spend more time on strategic matters. He turned to Greg Hawkins, a laid-back Southern Californian who had previously headed worldwide sales at Ingram Micro. One of the first things Hawkins did after taking the job was contact Cole and other anti-Buy.com Website creators, inviting them down to headquarters to talk about their beefs. Cole initially thought it was a joke. But after meeting with Hawkins, he changed his mind about the company. Among other things, he learned that Buy.com had altered its policy of charging credit cards before shipping products. Satisfied, he took down his Website. "Customer service is where we had the greatest need to improve," Hawkins says. "You can bring somebody in the door, but you don't want to alienate him."

Hawkins also had to make amends to Buy.com's vendor partners, many of whom had been put off by Blum's brash style. "Greg really restored relations and legitimized the company in the eyes of key vendors," says Jeff Sheahan, CEO of Egghead.com, who knew Hawkins when he was at Ingram. "Coming in behind Blum, he had a lot of cleaning up to do. He had to move the company away from a cult of personality. It's a tough challenge."

Next Hawkins set about overhauling Buy.com's business model. Wall Street was starting to demand that companies demonstrate how they were going to be profitable; obviously, selling products below cost wasn't going to cut it any longer. "We had to start migrating toward positive gross margins," he says. "We still needed to be the low-price guys, but not by 30%." In the spring the company quietly dropped its "Lowest prices on earth" slogan and began raising prices on its products a few months later.

In September, shortly before Buy.com filed its S-1 to go public, Blum stepped off the board, placing his remaining shares in a voting trust. It was then that Softbank stepped up its involvement, sinking in another $90 million in venture capital. Blum, who owned 80% of Buy.com, sold a 31% stake (worth $75 million) to Softbank in October. "That made me refocus on what I wanted to do, because it gave me the amount of money that I was going to be happy with the rest of my life," he says.

Blum's exit couldn't have been better timed. Buy.com had originally intended to hold its IPO in the summer, but the company was having a tough time finding an investment bank willing to take it public. Rumor had it that the main obstacle was--surprise!--Blum himself. Blum had had a run-in with the folks at the Securities and Exchange Commission in the mid-'90s when he was the executive vice president of Pinnacle Micro, a startup he founded with his father in 1987 to sell optical disk drives. Blum came under investigation by the SEC for questionable accounting practices. In 1995 he resigned and later settled with the government, neither admitting nor denying guilt.

Blum disputes that his history with the SEC had anything to do with his departure from Buy.com. But others, like Scott Russell, a Softbank partner and a member of Buy.com's board, beg to differ. "Because of a history of SEC scrutiny, everyone was concerned that future investors might be nervous that Scott, as the founder and largest shareholder, might sell his shares all at once and not act responsibly."

Whatever the circumstances of his departure, Blum was now out of the picture. That freed up Hawkins to position the company for its upcoming IPO. He hired 41-year-old Mitch Hill away from Disney to serve as CFO and whip the new business plan into shape. Throughout the winter Hill hustled to make sure that the holiday season would go off without a hitch and continued raising prices on products.

The new strategy paid immediate dividends. In the fourth quarter of 1999, revenues more than tripled, to $201 million. More important, around the end of last year Buy.com stopped losing money on every product it sold. Gross margins, which were negative in 1999, flipped into positive territory, hitting 4.3% in the first quarter of 2000.

On Feb. 8, Buy.com, priced at $13 a share, finally went public. In a freaky coincidence, it was the same day that several major Websites, including Buy.com, Amazon, and Yahoo, were hit in a massive denial-of-service attack. Buy.com's site was down for only a couple of hours, and the stock closed at a respectable $25. But it was all downhill from there. "We got out, we went public, and then the door just slammed shut," says Hawkins. "I can still feel it almost hitting me."

The CEO had hoped that a successful IPO would allow him to take Buy.com to the next level. But Wall Street had other ideas. "The reality was that we still had a lot of storytelling to do,'' he sighs. Hawkins put his nose to the grindstone. He started by beefing up customer service. In the Blum days, shoppers calling an 800-number complaint line would have to go through four or five layers of automated attendants before being connected with a human, who would then have to call Buy.com headquarters to approve a refund. Under the new system, customer relations specialist Client Logic has two call centers dedicated to Buy.com. The returns system is also more customer-friendly. A year ago shoppers had to e-mail Buy.com with a return request and then wait for the arrival in the mail of a handwritten shipping label to slap on the product box. The process took two weeks, an eternity in Internet time. But now customers can request a return online and instantly print out the shipping label from a downloaded link. Processing time? Two minutes.

Buy.com then streamlined its supply chain and doubled the number of fulfillment and distribution partners from five to ten. The company still eschews the idea of inventory. But Tom Wright, the vice president of fulfillment, who spent ten years at Ingram Micro, says that he has integrated Buy.com more closely with its suppliers. "We run these distribution networks as if we own them. A year ago--uh, how do I say this without sounding too awful?--we didn't even have a system for pre-orders and back orders."

Buy.com has also figured out who its customers are. For a long time Blum's be-everything-to-everyone game plan prevented the company from zeroing in on the people who actually shopped at the site: males, ages 18 to 49, who are educated and technologically savvy. They know what toys they want, and they want them fast. To appeal to its demographic, Buy.com streamlined its Website in July for quicker and easier shopping. It has added products like the Sony PlayStation 2 and jettisoned marginal categories like travel services.

Meanwhile, CFO Mitch Hill continues to tweak the business model, trying to achieve the right balance between revenues and margins without sacrificing too much growth. In the third-quarter earnings report, Buy.com's gross margins reached 6.7%, up from -0.01% a year ago. Hill expects that the company will break even sometime in the first half of 2002, a full 18 months earlier than most analysts originally anticipated.

That's not to say that Buy.com is home free. The company posted $190 million in revenues this past quarter, slightly better than last year but not as good as any of the previous three quarters. By contrast, Amazon.com's third-quarter revenues were up 79% from last year. By the end of this year Buy.com expects to have $80 million left in cash, which at the present burn rate will keep it in business for roughly another year. Still, Softbank venture capitalist and board member Bill Burnham remains confident: Buy.com "will be a survivor," he says. "It won't be voted off the island."

As other dot-coms inevitably fall by the wayside, Hill thinks that partnership opportunities, like the major agreement recently inked between Amazon and Toys "R" Us, will increase. "Our silver lining is that e-commerce is so out of favor that instead of people opening their own stores, they want to partner,'' he says. So far Buy.com has linked up only with other pure-play Internet companies. The company recently opened a joint auto site with CarsDirect.com, and in late October it hooked up with eBay to share a site with its subsidiary Half.com, which sells used CDs, DVDs, and videos. Buy.com also hopes to increase revenues from sources other than computer equipment--such as digital cameras, cell phones, and golf clubs, which tend to yield higher margins than high-tech gizmos.

Will Wall Street buy it? When asked about the company's prospects, C.E. Unterberg, Towbin analyst Dan Ries cracks, "What, you mean Sell.com?" Ries' neutral rating on the stock reflects his pessimism. "Anybody can raise their prices. What's difficult is to maintain your growth rate while doing it." Still, it's hard to count out a company that's pulling in more than $800 million in revenues a year, all from the Internet. Which brings us back to the importance of Christmas. The challenge for Buy.com is getting through the holiday season without a major glitch, satisfying and retaining its customers, and fending off online competition from established brands like Circuit City and Best Buy. If it succeeds, Santa may get to keep his job at Buy.com a little bit longer.

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