SAN FRANCISCO (CNN/Money) -
A couple of weeks ago, I dismissed pundits who said the Crystal Decisions IPO was a bellwether event for tech observers. Because the company had ties to Seagate, which had earlier gone public, I didn't believe that the filing represented a true test of the market's feelings about Internet businesses.
Well, fasten your seat belts, kids: I think I found one. On June 13, San Francisco-based online retailer RedEnvelope announced plans to go public. RedEnvelope bears all the marks of a pure play circa 1999: It is unprofitable, competes against a host of entrenched online and offline companies, and even has a kind of wacky name.
As such, this is the IPO to watch to get a sense of just how tech-happy the current market really is. If the market responds favorably to this IPO, we'll know that the dotcom stigma has finally faded.
A closer look
Let's take a look at the company on which I've placed so much significance. RedEnvelope is an online seller of high-end gifts (wine picnic kits, leather sunglasses cases) that augments its Web sales with a catalog (70 percent of its fiscal year 2003 sales were through its Web site).
It's never turned a profit in its six years of existence, with losses for FY 2003 coming in at $7.7 million on $70 million in sales. That's down from losses of $14.1 million on sales of $55.8 last year. So, though the company is not profitable, it's at least heading in the right direction.
"It's a better situation than we saw years ago," says Jupiter analyst Robert Leathern. "Back then companies went public even when losses were growing." RedEnvelope hopes to raise $41 million in the IPO, which should help it stay in business.
Signs of the times, but what times?
In another sign of the 1999 times, RedEnvelope will employ W.R. Hambrecht's OpenIPO to bring the shares public. OpenIPO, you may recall, uses a Dutch auction method to establish initial pricing for shares.
This is supposed to prevent the mass-scale IPO "flipping" practice and was used in the past by such companies as Salon.com and Overstock.com. Typically, companies that use this method don't see much movement up or down when their stock debuts, since interested parties have essentially figured out the fair price before the shares go public.
While the company's losses are shrinking and its customer base is growing (from 448,000 customers in 2001 to 1.3 million in 2003), challenges remain that make this a stock for true believers only. RedEnvelope's competition includes such offline stalwarts as Macy's, Tiffany, and Bloomingdale's and online retail giants like Yahoo! (YHOO: Research, Estimates) and Amazon (AMZN: Research, Estimates).
Its growth problem is compounded, according to Jupiter, by the fact that online consumers tend to shop along product categories (electronics, DVDs, ties) as opposed to classification (high-end, boutique), where RedEnvelope has planted its flag.
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Rather than use its IPO to expand into new markets, RedEnvelope appears to be going public to keep itself afloat. With its $77 million in debt and lack of profits, it needs a cash infusion to continue as a going concern.
Looking through its SEC filing, however, I found an interesting tidbit: More than 67 percent of the stock options awarded to all employees in FY 2003 went to the top two executives, Alison May and Hillary Billings. That was May's first full year as CEO, so her 3.5 million shares could have been a one-time allotment, but they and the 1 million shares given to Billings (who has been with the company for four years) are a pretty sweet bonus. (Citing the SEC-mandated quiet period, RedEnvelope wouldn't comment for this column.)
Is the market ready for RedEnvelope, with that kind of top-heavy option allocation, lack of profits, and monied competition? If it is, maybe 1999 isn't so long ago after all.
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