Merrill Lynch

expects online retailer

eToys

(ETYS)

to report a narrower third-quarter loss, after a recent regulatory filing indicated that additional preferred shares the company issued in a financing arrangement will be converted into common stock.

In his report, analyst Henry Blodget lowered his loss estimate for the third quarter to 40 cents a share from 45 cents a share, compared with a loss of 52 cents a share in the same period last year. Nine analysts polled by

First Call/Thomson Financial

expect the company to lose 41 cents a share for the third quarter.

Blodget also narrowed his full-year 2001 and 2002 loss estimates. He now expects a loss of $1.33 a share in fiscal 2001, down from $1.45, and a loss of $1.02 a share in fiscal 2002, down from $1.31. Analysts on average expect losses of $1.40 a share in 2001 and $1.08 in 2002.

Merrill Lynch maintained a neutral rating on eToys, citing "near-term pressure on the stock despite the company's operating performance this Christmas."

Shares of eToys recently gained 9 cents, or 7.5%, to $1.38 in trading on the

Nasdaq

.