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This Christmas Is Not Looking as Merry for E-Tailers

The stocks have seen a run-up in recent weeks, but don't expect a repeat of last year's happy holidays.

Will online retailers get a white Christmas, or a Christmas whitewash?

Last year, shares in

Amazon.com

(AMZN) - Get Report

bottomed out in the late summer before climbing in anticipation of big holiday spending, hitting an all-time high in mid-December. Likewise,

eToys

(ETYS)

started ratcheting up in mid-August before setting an all-time high two months later.

To say there's been a lot of water under the e-tailing bridge since then would be the grossest of understatements. Since investors collectively decided in the spring that e-tailing prospects for profit were cloudy and business models flawed, shares have tanked. Among the classic business-to-consumer pure-play e-tailers, only Amazon trades in the double digits.

But if old patterns hold true, these stocks are likely to get a boost as anticipation over holiday sales begins to build. The big question: Do they deserve to? With investors continuing to hammer away at profitability worries and sales growth looking weaker than it did a year ago, probably not, observers say.

Blue-Gray Game

Even now the happy season may have begun. Amazon has risen 41% since bottoming out in late July. eToys is up 47% since Aug. 10 (though it's still more than 90% off its highs).

Ashford.com

(ASFD)

, trading around $4, is more than 60% above its lows. Even

Fogdog

(FOGD)

has broken the $1 ceiling by 16 cents! There's joy in Mudville!

Rebounding?
Amazon's recent pickup

Source: BigCharts

But are these preholiday warm-and-fuzzies justified? Maybe, if the American consumer was expected to blow the doors off the mall (both actual and virtual) this holiday season. The forecasts are already beginning to trickle out, however, and guess what: They're not great.

In a

Chase Hambrecht & Quist

conference call held earlier this week,

PricewaterhouseCoopers

economist Carl Steidtmann predicted a "mediocre Christmas" thanks to slower employment growth, high oil prices, declining stock-market returns and higher interest rates.

Tapering

And while growth in online spending is still expected to be good, it's leveling off. Gartner Group predicts worldwide online fourth-quarter sales of $19.5 billion, up 86% from 1999's $10.5 billion. (Accountability check: Gartner had predicted 1999 sales of $12.2 billion.) That's a nice little gain. But it's not as good as the 133% increase recorded from 1998 to 1999.

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Land of Misfits?
eToys' slide

Jupiter Communications

won't release its holiday forecast until next week. But on the Chase call, Jupiter e-commerce analyst Ken Cassar said that while the numbers will be "significantly above last year's $7 billion" (Jupiter is referring to U.S. sales in November and December only), the rate of growth won't match last year's more-than-100% jump. That puts the number somewhere south of $14 billion. Cassar blames the slowing growth on the good old-fashioned law of big numbers, as well as the limited marketing efforts undertaken by cash-conscious e-tailers.

He expects companies to focus on so-called "natural markets" -- a technical term for low-hanging fruit. E-tailers aren't going to try to convince your grandmother to buy online this year; they'll settle for wooing that person who used to buy stuff from

Toysmart

until it went under. Moreover, Cassar thinks most online shopping that does go on will happen at sites operated by familiar offline names like

Gap

(GPS) - Get Report

,

Kmart

(KM)

and

Toys R Us

(TOY)

(which recently handed over fulfillment to Amazon), and a handful of pure players like Amazon.

Let the Word Go Forth

"You won't see a rising tide lifting all boats," predicts Lauren Cooks Levitan, analyst at

Robertson Stephens

. "eToys stands to benefit from renewed enthusiasm, as does anyone who can demonstrate profits." (Those are few and far between, but

Alloy Online

(ALOY)

expects to turn a profit in the fourth quarter.) Companies like Fogdog and

Pets.com

(IPET)

, however, aren't likely to see much of a lift, says Levitan. (She rates eToys and Alloy a buy and her firm has done underwriting for both. She doesn't cover Fogdog or Pets.com.)

Of course, there was a lot more risk built into share prices at this time last year. eToys was at $86 in October 1999; there's much more room for error at that level than at $5 and change. Investors may be figuring now: What the heck? Why not buy some e-tail shares on the chance that they'll rally before Christmas?

But remember that these shares are trading low for a reason: Investors still aren't sure that these things can make money. And the problems that plague them -- what about slower sequential revenue growth at Amazon or competitive toy market for eToys? -- won't go away after the holidays.