eToys Beats Estimates by a Penny

Like many Internet retailers, the company is spending more on advertising alone than it makes in total sales. But the ratio has shrunk as sales surged.
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Even

eToys

(ETYS)

, a nascent Internet company still hemorrhaging money, knows how to play the Wall Street game.

Shares of the company's stock fell 2 9/16, or 4%, to 70 5/8 during regular trading Tuesday. After the bell, though, the company had good news to offer: It posted big losses in its second quarter, but slightly less than analysts had predicted. The stock lost only 1/16 in after-hours trading, according to

Instinet

.

For the second fiscal quarter ending Sept. 30, the Santa Monica, Calif.-based company reported a loss of $32.1 million, or 27 cents a diluted share, compared with a loss of $3.2 million, or 4 cents a share, in last year's period. Analysts surveyed by

First Call/Thomson Financial

expected the company to lose 28 cents a share in the latest quarter.

As such, eToys finds itself in good company. Of the 99 corporations listed in the

Standard & Poor's 500 Index

that reported earnings this week, 19 beat expectations by exactly a penny, according to First Call.

Including noncash charges for deferred compensation and amortization, eToys posted a net loss of $44.9 million, or 38 cents a diluted share, in its third quarter.

The company's sales rose to $13.3 million from $600,000.

Like many Internet retailers, the company is spending more on advertising alone than it makes in total sales. But the ratio has shrunk as sales surged. In the year-ago quarter, when the company spent $2.3 million on advertising for a 3.8-1 ratio of advertising spending to sales. This quarter, it spent a little more than $20 million for a 1.5-1 ratio.

In a conference call with analysts, the company said it plans to launch a variety of marketing efforts in the next few weeks. Company officials said they are comfortable with analysts' projections for the next quarter, when the holiday season should spur enough sales that the company can easily lose 35 cents a share.

"We're very, very confident that we're as ready as can be for the peak season coming at us," said Toby Lenk, president and CEO of the firm.

eToys started a British site last week. During the quarter, it signed a three-year $18 million marketing deal with

America Online

(AOL)

and began a collaboration with talk show host

Rosie O'Donnell

to sell children's books. A Happy Meal promotion with

McDonald's

(MCD) - Get Report

will begin Friday and a new national ad campaign is launching this month, the company said in a news release.

It was not clear whether the new ad campaign, which the company said would drive holiday sales, was paid for in full or in part in the second quarter. The company didn't return calls for comment.

Analysts repeatedly asked how much inventory the company plans to stock up for the holiday season and whether backlogs are expected.

"We're going to err a bit on being a bit long to serve our customers well," a company official told them in the conference call. "If we're doing worse than expected we'll try to chase back. If we're doing better than expected, we'll try to chase forward."