In tough economy, shoppers turn to eBay

As many retailers reel from the slowdown in consumer spending, eBay Inc., remarkably, continues to thrive. Now it appears the company could actually benefit if retailers have a crummy Christmas.

The San Jose, Calif., company has long enjoyed one of the Internet's most profitable and efficient businesses, operating the online world's largest marketplace for connecting buyers and sellers of collectibles, computers and almost everything else.

Now, most retailers online and off-line are facing the specter of weak holiday sales as shoppers cope with the uncertainties set in motion by September's terrorist attacks and by the deteriorating economy.

EBay is largely defying the trend. Late last week, the company said third-quarter revenue rose 71% and profit jumped 24% from a year earlier, and modestly raised its financial forecasts for the holiday season. It wasn't enough, though, to overcome some skeptics: The company's stock fell 12% Friday as some analysts said they were concerned the Sept. 11 attacks and the weakening economy will continue to sap some of eBay's sales growth. But almost no one disputes that eBay is showing exceptional strength at a turbulent time.

EBay may actually benefit this Christmas if shoppers, tightening their belts, focus on finding bargain purchases. EBay is increasingly being used by traditional retailers, manufacturers and liquidators seeking to reduce inventories and sell refurbished or returned goods, though the bulk of its sales still come from individual sellers and small businesses.

If holiday sales are disappointing at the malls, eBay could become an efficient online channel for moving unsold stock. The big question then is whether demand from buyers will remain strong on the site.

So far, it looks like eBay has been successful positioning itself as a discounter, a category that typically does well during economic down times. For instance, Andrew Waites says sales have never been stronger for eValueville LLC, a company he owns that sells skirts, suits and other apparel on eBay at discount prices for Federated Department Stores Inc.'s Bloomingdales and others.

Waites, who expects to sell about $6 million of goods on eBay this year, says he recently moved eValueville into an 80,000-square-foot warehouse in Hattiesburg, Miss., that is more than 11 times as big as his previous facility, largely because of an expected increase in supply stemming from the retail slowdown.

Waites says he is getting calls from retailers and manufacturers that wouldn't have approached him in boom times. Consumer demand on eBay still is strong enough that the average selling price of its auctions increased 33% during the past couple of months.

EBay, of course, depends on sellers for its own prosperity. The company charges sellers a listing fee and a commission if a sale is successfully concluded on the site. Revenue in the third quarter was $194.4 million. After the Sept. 11 attacks, trading activity plummeted on the site as people were glued to their television sets, causing eBay to lose an estimated $5 million in sales. But eBay says trading activity has bounced back to where it was before the attacks.

High expectations
Expectations are higher for eBay than for many companies. The company commands a rich stock value of about 75 times projected earnings for next year, leaving little margin for error in its financial performance. Some analysts were disappointed that eBay last week didn't raise its financial forecasts more. There also is concern that the growth of eBay's domestic auction business is slowing and that the company made up for it with advertising revenue.

"We believe the previous assumption that eBay was generally immune from the weakening economy is no longer valid," US Bancorp Piper Jaffray analyst Safa Rashtchy wrote in a research note.

Still, the company's supporters say it is hard to find a company growing as quickly as eBay and doing so profitably. Many active sellers say business in October has been good, which bodes well for eBay's holiday quarter.

That is the case at Second Wind PCs in Troy, Mich., a company that auctions used computers from corporate-leasing programs. Second Wind PC Executive Vice President Bob Amori charts the progress of his post-terror eBay sales as follows: On Sept. 11, sales were $3,300; on Sept. 12, $19,000; and on Sept. 13, $31,700. Sales for all of September were $150,000. For October, he expects to "do a couple hundred thousand on eBay," a strong month for him.

EBay executives say more large companies have begun selling on the site, and they expect the pace of brand-name sellers to pick up in the coming months. Home Depot Inc. and hand-held-computer maker Palm Inc. recently began selling merchandise on the site.

Century 21, the Manhattan discount store whose flagship outlet, located directly across the street from the World Trade Center, was heavily damaged in September's terrorist attacks, is considering using eBay to sell merchandise, too, according to the company.

EBay Vice President Bob Hebeler says the slowing economy has caused companies, especially in apparel, computers, toys and sporting goods, to accelerate their plans to put merchandise on the site. "There's much more urgency now," Mr. Hebeler says "Anybody who says, 'We're going to have an easy Christmas' probably is not being realistic."