Holiday Hangover Hammers Online Retail Stocks

Perhaps growth prospects aren't as strong as once hoped, investors seem to be saying.
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E-customers are running from their mice as the holiday season wraps up.

Online sales for the week ended Dec. 19 fell 30% to $884 million from $1.3 billion a week earlier, according to a

Goldman Sachs

/

PC Data Online

survey released Monday. The same report showed declining customer satisfaction in some areas.

Growing evidence of a cooling trend raises the prospect that online retailers won't hit the ambitious sales-growth targets that Wall Street has set for the once red-hot sector. That could pressure the stocks, which have already slid from their highs of a month or so ago. As a result, the red ink was flowing Monday.

Red Scare

The biggest victim of investors' reduced confidence in e-tailers Monday was

eToys

(ETYS)

, which saw its stock drop 15% following a downgrade by underwriter

Robertson Stephens

. Shares of

Amazon

(AMZN) - Get Report

dropped 8%,

eBay

(EBAY) - Get Report

tumbled 7% and

Value America

(VUSA)

slipped 5%. Meanwhile, bricks-and-mortar retailers rallied, led by a 3.5% gain in

Wal-Mart

(WMT) - Get Report

.

Stories in the papers and on TV depicting e-tailing chaos -- sites down, orders delayed -- may have contributed to a last-minute shift toward bricks-and-mortar shopping, analysts say. And this cooling trend raises the question of how much e-tailers will have to change to maintain customer and investor loyalty.

"The popular press scare story became so pervasive that it may have influenced shoppers in the week before Christmas," says Rick Miller, senior Internet analyst at

Cahners In-Stat Group

, a Newton, Mass.-based market research firm.

Blue in the Face

But make no mistake: Online retailers are seeing real weakness. Add to that shrinking pie the sky-high growth expectations on Wall Street, and you have the recipe for a headache. "Expectations that the Street put on these e-tailers may have been too high," says Miller, who doesn't rate individual stocks. "It's hard to be held to a growth rate that strong."

eToys, for instance, is expected to report $77.8 million in revenue in its fourth quarter, up from $22 million a year ago, according to Robertson Stephens e-tail analyst Lauren Cooks Levitan. But while eToys may very well hit this revenue number, Levitan says the company may come under gross margin pressure in its pursuit to hit the revenue number. eToys, which is still valued at more than $3 billion in the market, didn't return calls seeking comment; its corporate offices are closed this week.

"Revenue volumes are up big, but the market is now starting to be more discerning about e-tailers' quality of earnings," says David Readerman, an analyst with

Thomas Weisel Partners

. Readerman says that before this, it was only a matter of will customers come. But "now a lot of analysts are looking at each company's return on invested capital and gross margins as well."

In the Mix

Looking beyond what is now expected to be a weaker-than-expected holiday season, analysts say the stock moves could force e-tailers to rethink their business models.

Customer service issues, for one, could hurt e-tailers beyond the Christmas season. Levitan at Robertson Stephens notes that 10.9% of respondents of the firm's weekly survey said they wouldn't shop at a Web site again due to poor service, up from 8.8% the week earlier.

Levitan cut her rating on eToys Monday to long-term attractive from buy. Since it hit 61 on Dec. 1, eToys is down some 57%. Over the past week, Amazon is off 20% and

CDnow

(CDNW)

is down 18%.

One positive to all this is that the just-before Christmas slowdown will no longer be such a surprise next year. "Once analysts and investors understand that the week or two before Christmas will always be slower, then e-tailers won't get banged around so much," says Miller at Cahners In-Stat Group. E-tailers, unfortunately, can't roll the clock ahead a year.