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Shoulda broke even, coulda broke even, woulda broke even.



, the Internet-based delivery service that was going to revolutionize the way we all buy groceries and make investors really rich at the same time, said Wednesday in releasing third-quarter results that its initial Bay Area distribution center failed to break even on a cash-flow basis.

That's important. And it's not good. Webvan's entire model was set up around the idea that each distribution center would break even in the fifth quarter of operations and then begin to generate cash. As


Adam Lashinsky

wrote earlier this month, anyone who still cares about Webvan (and with the stock at $1.56 a share, that's not a huge audience) was looking at whether the company could meet this goal.

Two Reasons

It didn't, for two reasons, according to the company. First, it had difficulty coordinating demand surges with courier capacity. It also didn't achieve the customer frequency of about 3.8 visits a quarter it needed to meet its break-even goal. Instead, the average Bay Area customer visited three times a quarter. To break even in the market, the company would have had to record between 3,300 and 3,500 orders a day at an average of $110 an order. Instead, the company got an average of 2,350 orders a day, at an average size of $105 an order.

Given that the average order size had risen to the $110 goal by quarter's end, Webvan needs to see a 40% increase in orders to break even. It gave no timeline for doing so. Now it's "tweaking the dial" to work on reaching those goals.

"We know exactly what needs to happen, but we're trying to change consumer behavior," said Bob Swan, CFO and COO, referring to the Bay Area failure. Well, duh! Isn't that the whole hurdle posed by the Internet? Consumer behavior isn't so easy to change. If it were,


would be pushing into new categories instead of seeing airline ticket revenues decline. And we'd all be buying everything from



instead of mainly sticking to books and CDs.

In response to a question from an analyst, Webvan said it was pretty sure it could meet the five-quarter target in other, newer markets, though it said that goal was always under review.


The actual numbers were difficult to parse. The company, which bought rival


earlier this year, reported a pro forma net loss for the combined company of $120.2 million, or 26 cents a share. That beat consensus expectations for the combined companies of a 29 cents-per-share loss, according to spokesman Bud Grebey. The official consensus, for Webvan alone, was 21 cents a share, according to

First Call/Thomson Financial

. Those figures exclude $919 million in goodwill related to the acquisition of HomeGrocer and a restructuring charge of $40.8 million.

Pro forma revenue totaled $87.4 million, or $82.3 million stripping out coupons.

Webvan also said it wouldn't need to raise any more capital until the third quarter of 2001, and that it will seek to raise only between $80 million and $100 million, less than the $275 million it had previously estimated. In September, the company scaled back expansion plans in Baltimore/Washington D.C. and New Jersey until it squares away its existing markets.

The company also gave guidance for the fourth quarter. Sales will likely be between $100 million and $105 million, with an expected loss of 25 or 26 cents a share. Revenue for all of 2001 is expected to be $800 million, with an expected loss of 68 cents to 70 cents a share.

Webvan shares are 95% off their 52-week high of $34.