Value America's IPO Raises $126.5M

By TWICE staff -- TWICE, 4/26/1999

Though a money-losing newcomer specializing in uncharted Internet and direct-retailing waters, Value America had no trouble raising $126.5 million through its recent initial public offering of 5.5 million shares at $23 each.

Launched in 1996, Value America didn't start sales operations until the third quarter of 1997, after lining up suppliers and related support, according to information in its prospectus filed with the SEC. Its promotional activities didn't begin until 1998.

As would be expected from such a start-up, Value America's sales and losses have grown quickly. Its net loss in 1996 was $425,000. That jumped to $1.85 million in 1997 and climbed to $53.6 million last year.

Value America's total revenue was just $134,000 in 1997, but that ballooned to $41.5 million last year, with $40.3 million from product sales and $1.28 million coming from manufacturers that pay to have products showcased in multimedia presentations on the site.

The cause of the company's hefty 1998 loss lies in its margin story. Value America says its gross margin was just 1% for the year, reflecting its "short-term strategy to selectively accept narrow or negative margins in order to attain increased volumes and brand awareness," plus $350,000 in inventory write-downs to actual market value. At the same time, the filing says, the company's credit card fees, charged as a sales expense rather than a cost of goods, represented 2% of sales. So on average, Value America had a negative 1% margin on sales.

The prospectus figures show Value America generated most of its sales, and losses, in the second half last year. It had a loss of $15.6 million on revenue of $15.3 million in the third quarter, and a loss of $24.7 million on revenue of $18.9 million, in the closing period.

The prospectus cautions potential investors not to look for a near-term earnings turnaround. "We expect to continue to incur substantial losses for the foreseeable future," the company says, because of its sales-building marketing activities and investment in expansion. Value America says its ad and promotional outlay was about $33.2 million last year, and it plans to increase that significantly in 1999.

Value America's product catalog boasts a listing of more than 1,000 brands covering a vast range of product categories, including consumer electronics and accessories, major and small appliances, computer and office products and supplies, toys and games, book, sporting goods, and over-counter pharmaceuticals. Even so, as would be expected, PCs and peripherals generate the bulk of its sales. The prospectus says products sourced from IBM represented 58% of its 1998 sales, while goods from Hewlett-Packard accounted for 9% of revenue.

The indication is Value America is counting on its membership club to produce future sales growth and profitability. Members get up to a 5% discount on pricing and onscreen product assistance. (They are greeted by name by an animated "personal shopper" when they sign on, who then guides them through the available merchandise.) Members also have access to receipts and warranties on past purchases.

In addition to discounts, members earn 1% of purchases in "Value Dollars," which can be used to buy products during future visits. They also get 1% of the value of they purchases donated to the charities of their choice.

In June 1998, Value America says, it had some 17,000 members. It then began promoting the advantages of membership, and as of the start of April of this year, the ranks had surged to more than 260,000. Membership is currently free but the company is considering instituting a fee of about $5 per quarter, according to the prospectus.

Value America says it is in the process of establishing a network of affiliated web sites where it will locate promotional banners and links. Affiliates will earn commissions on purchases made by shoppers who link in from those web sites.