E-tailers Not Likely To Beat Q2 Projections

According to Goldman Sachs analyst Anthony Noto, a number of limiting factors will likely prevent most e-tailers from surprising investors with reports of stronger-than-expected revenue in the second quarter. These factors include scaled-back marketing budgets, slower retail sales and a cooling economy.

Many companies have cut back on marketing spending this year, Noto said in a research note Thursday. “These companies do not have enough history to accurately project the counter-effects that lower spending might have on revenue growth,” he wrote.

Slower Spending

A slowdown in consumer spending and a cooler market for e-commerce stocks will also prevent most companies from outperforming, Noto said. As the quarter nears an end, “I don’t think there’s significant opportunity for broad revenue revisions,” he told the E-Commerce Times.

Retail sales slipped 0.3 percent in May from a month earlier, the U.S. Department of Commerce said in its latest report. Home sales have also slowed, and many analysts say recent Federal Reserve interest rate moves have caused the economy to cool a bit.

Few Exceptions

Not all e-tailers will feel the pinch, according to Noto. “A few select companies” — notably Priceline.com (Nasdaq: PCLN) and Webvan Group, Inc. (Nasdaq: WBVN) — may surprise the Street, he said. “Companies that have lower levels of scale and that have aggressively entered new growth areas such as new geographies and new product lines compared to a year ago can continue to beat,” he said.

Last month, Priceline announced plans to expand into the business-to-business (B2B) market, signing American Express (NYSE: AXP) as an anchor for a new portal aimed at small businesses. The name-your-price e-tailer is also getting into the long distance telephone market, with three telecom companies offering their services to businesses and consumers through the company’s Web site.

Additionally, Priceline is expanding its geographic reach. In March, the company said it would offer its services in Australia and New Zealand.

Online grocer Webvan in recent weeks has expanded its offerings to include books, CDs and DVDs, putting it in competition with Amazon.com (Nasdaq: AMZN). Webvan is also committed to invest up to $1 billion (US$) to build a network of 26 warehouses around the country.

Bad Press a Factor

The overall combination of limiting factors has resulted in a less than favorable environment for e-tailers, Noto said. Moreover, he commented, negative media coverage is not helping the situation.

“A year ago, companies benefited from a significant level of positive press to consumers centered around the enthusiasm for IPOs and e-commerce in general,” he said. “The free incremental impressions helped to drive awareness and traffic above and beyond the companies’ efforts. Today’s environment is extremely different.”

Six months of negative press with articles about poor customer service, security issues and dot-com death watches are likely to take a toll, according to Noto.