FOSTER CITY, Calif. -- Webvan Group here and Kirkland Wash.-based HomeGrocer.com both posted heavy losses in the second quarter, but spoke of better times ahead pending their merger.
Webvan lost $57.1 million on sales of $16.3 million for its fiscal second quarter ended June 30, while HomeGrocer lost $50.2 million on sales of $29.8 million in its quarter, also ended June 30. Webvan last month said it would buy HomeGrocer in a stock deal worth around $1 billion. That deal, expected to close in the fourth quarter, would put the combined companies in 13 markets by year-end.
Both companies said they were encouraged by their performance in new markets opened during the quarter -- Webvan in Atlanta and HomeGrocer in San Diego and Dallas.
Webvan's Atlanta warehouse, which opened May 1, is achieving operations goals much faster than the company's first facility in Oakland, Calif., George Shaheen, Webvan's president and chief executive officer said.
Webvan added a second shift of workers in Atlanta after one month of operation, a level of staffing it took the company five months to need in Oakland. Webvan reached 5,000 orders per day in the Atlanta market in one month, while it took four months for Webvan to achieve the same volume in the Bay Area, Shaheen added. "We have been able to use the Bay Area as a learning experience for Atlanta, and we expect to make further improvements when we open in Chicago [on Aug. 1]," he said.
Mary Alice Taylor, HomeGrocer.com's CEO, said initial results from San Diego and Dallas "are by far the strongest we've achieved to date in any of HomeGrocer.com's new facilities." The company has purchased additional trucks and hired more workers to serve both facilities, she added.
Jeetil Patel, senior analyst for Deutsche Banc Alex. Brown, San Francisco, told SN Webvan's early results in Atlanta "alleviated some fears" about the business model.
"They're definitely ramping up in Atlanta faster than they did in San Francisco," Patel said. "There were some doubts they were going to be able to do that."
But analysts are still awaiting distribution centers from both companies to turn "cash-flow positive" or be profitable excluding sales and marketing costs. In a conference call, Bob Swan, Webvan's chief financial officer, said the company plans to achieve profitability at its Oakland facility sometime during this quarter, but added achieving profitability would require improvements in order size, orders per day and orders per hour. The Oakland facility is now in its fifth operating quarter. Webvan has said its centers can be profitable within five quarters.
"I think that's likely to happen late in the third quarter or early in the fourth quarter," Patel said. "As long as the business can obtain it is what's important."
Shaheen reiterated that Webvan's pending merger with HomeGrocer would save both companies on customer acquisition costs, particularly in markets where, were they not merging, they would be competing. He also said the combined companies would mostly likely use Webvan's automated warehouses and technology systems, but perhaps in smaller buildings more closely resembling HomeGrocer's warehouses.
Webvan's warehouses are about three times the size of HomeGrocer.com's 100,000 square-foot facilities and, at a cost of around $35 million, are four to five times more expensive.
"We think we can use a smaller facility with less capital expenditure and serve as many orders as we do today," Shaheen said. "We'll probably move to something not as small as [HomeGrocer's] but not as large as ours."
Swan said Webvan had around $410 million in cash at the end of the quarter, which would cover the cost of opening new facilities in Chicago, Baltimore and Bergen County, N.J. The latter two facilities will open in the fourth quarter. HomeGrocer had around $158.6 million in cash at the end of its quarter, the company said.
Webvan-HomeGrocer would need $250 million to $300 million to meet expansion goals in 2001, Swan said. Unless market conditions improve, financing will be Webvan's biggest challenge, Patel said.
"It's definitely one of the more important considerations," Patel said. "It's going to be very difficult to raise capital in this environment. Nevertheless, by then they could hold back on their expansion plans and reap the benefits of the three or four existing markets they are in."
Shaheen said Webvan has succeeded in diversifying its product offerings and service during the quarter. A five-week promotion with clothing retailer Old Navy sold more than 11,000 Old Navy T-shirts. Alliances with consumer product companies, including Coca-Cola and Kraft Foods, accounted for 18% of Webvan's revenue.
Webvan @ Work, a marketing program targeting small businesses, has also delivered promising results, he added.
"We have found that business customers have a larger order size and order more frequently than our residential customers," he said.
Webvan's revenues were up 74% from its first quarter, while gross margins improved to 28.2% from 25.4% in the first quarter. Webvan said inventory turns improved to 26.1 on an annual basis, compared to 25 times during the first quarter. Average order size was $91, compared to $90.33 in the first quarter.
HomeGrocer's revenues improved by 40% over first quarter sales of $21.2 million. Its per-share loss of 43 cents beat analyst estimates by a penny.
HomeGrocer's gross margins improved to 25.1% as compared to 17.4% in the first quarter. Its average order size was $103, and it averaged 3,200 orders per day.