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Monday, November 9, 2009

Bidz Posts Mixed Quarter and Light Guidance; Retain Focus on Franchise Value

Bidz (BIDZ, $2.92) reported 3Q09 results after Market close today that were mixed: top-line of $24.8 million versus guidance of $22-24 million and a gross margin of 28.9% versus guidance of 28-30% (24.0% in year ago period), but pre-tax income of $0.07 million compared to guidance for $0.2-$1.0 million ($5.5 million in prior year period) and fully diluted EPS of $0.01-$0.03. Slightly higher than expected expenses, including litigation expense, led to the slight bottom-line miss. Bidz also filed its 10-Q today -- link here. Key operating metrics were as follows:
                  Three Months Ended
September 30,
Auction Metrics 2009 2008 % Change
--------------- ---- ---- --------
Number of new buyers 34,252 54,072 -36.7%
Average selling price per order (gross) $187 $175 6.9%
Average orders per day 1,465 2,453 -40.3%
Average items sold per day 6,899 8,431 -18.2%
Average items sold per transaction 4.7 3.4 37.0%
Acquisition cost per new buyer $65 $43 51.2%
Gross Margin $ per average order $54 $42 28.7%
The 37% decline in new buyers matched a 37.4% Y/Y decline in net revenue excluding B2B sales and is a modest improvement from declines of ~40% in recent quarters. Still, fewer buyers are leading to higher acqusitions costs per new buyer (e.g. costs spread across fewer new purchasers).

Unfortunately, forecasting remains a challenge in a tough consumer environment where discretionary items are increasingly secondary. In addition, Bidz cited recent challenges related to the company's new enterprise resource planning (ERP) software deployment. As a result, 4Q09 guidance came up light relative to both consensus estimates ($34.5 million) and prior management commentary (from 2Q09 report) calling for a return to Y/Y growth in 4Q (i.e. greater than $35.1 million):
  • Guidance for the fourth quarter of 2009 of $28-$32 million, gross profit margin of approximately 28-30%, pre-tax income of approximately $0.4-$1.5 million and expects fully taxed GAAP EPS of $0.01-$0.04.
  • The Company's results will be affected by its ERP conversion in the fourth quarter of 2009, but the Company expects to resume normalized operations in the first quarter of 2010.
In addition, we need to keep waiting with regard to SEC/FTC/legal overhangs as management merely said it's working diligently on all fronts, but alluded to positive progress with respect shareholder litigation suits. Today's 10-Q discloses that the SEC issued a subpoena on 10/27/09 for documents "relating to the Company's co-op marketing contributions and minimum profit guarantees". We are disappointed to see this additional request as we thought the case could be nearing a close. Such hair on the story may continue to weigh on shares even if management "does not believe that the investigation will adversely affect management, our results of operations, cash flows or our financial position".

Further, we are disappointed by weaker than expected bottom-line figures/guidance. The results provide more evidence that Blue Nile's (NILE, $61.24) business model is less sensitive to discretionary spending (see 3Q09 results here - revenue actually increased 2% Y/Y and operating margin increased 80 bps Y/Y to 5.8%). As with any retailer, we need to watch competition, including established, usual suspects and upstarts such as Gilt.com and Net-A-Porter.com.

Still, as noted in our post earlier today -- we believe Bidz remains attractive for a number of reasons, which includes making the necessary investments to achieve a stronger, larger e-commerce business into the future. We're focused on a business model that we believe has enduring franchise value with a margin of safety relative to near- and long-term earnings power. In this case, "near" is pushed into 2010.

The good news is that we continue to believe that risk factors are more than discounted in the current valuation and expect the extreme valuation gap between BIDZ and NILE to narrow over time.

Happy investing,

Jeffrey Walkenhorst

Disclosure: Long BIDZ.

© 2009 Jeffrey Walkenhorst
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