STREAMLINE LOOKING FOR FINANCIAL PARTNERS

JON SPRINGER

WESTWOOD, Mass. -- Internet grocer Streamline.com here said it is talking with supermarkets and other potential financial partners in an attempt to raise funds to stay afloat. Streamline, which said in May it had hired an investment bank to seek financing alternatives, had $6.9 million in cash as of July 1, the end of its fiscal second quarter. Streamline spent between $3 million and $4 million during the quarter and has cut back on marketing expenses, founder and president Tim DeMello said in a conference call.

DeMello said a "clicks-and-bricks" deal, such as those made recently between Ahold and Peapod, and Safeway and GroceryWorks, would be attractive to Streamline, especially considering the cool reception toward e-tailers from public markets and private financiers. The company is seeking an investment of $50 million to $75 million.

"We've had a lot of conversations with bricks-and-mortar people about potential partnerships," DeMello said. "Our second option is financial partners, but to be frank, it's very difficult today to convince anyone to invest in what they think of as a B2C retailer."

Streamline hopes to have a financing plan in place within 30 to 45 days, he added. "We press on it every day."

Streamline's dwindling cash supply -- the company had $21 million at the end of the first quarter -- was evident in financial results for the quarter, Greg Griesemer, securities analyst for A. G. Edwards & Sons, St. Louis, told SN.

"The results seem to indicate they are focused on increasing the profitability of sales for customers they already have -- but they're not expanding the top-line business," Greisemer said, referring to improved order size figures and better profit margins, at the cost of new customer growth and capital expenditures.

Streamline said average order size increased to $109.64 during the quarter, compared to $108.11 during the first quarter. Revenue was $8.9 million, up 68% compared to a year ago but up just 4.5% from the first quarter, despite launching a new market in New Jersey in May.

"We are clearly focused on the profitability side and, considering our cash position, it's important to reduce our advertising expenditures," said DeMello. "We're trying to manage our cash position on the customer acquisition front as well as manage the business and drive down our costs."

Streamline has "reduced all media spends across the board" as part of cost-saving measures, Donna Gadomski, Streamline's director of investor relations, told SN. DeMello acknowledged reduced advertising could cost Streamline in customer "churn" -- the percentage of customers the company does not retain month-to-month.

In Boston, Streamline's oldest and largest market, growth has been limited due to the capacity of the company's warehouse there, added Edward Albertian, Streamline's chief executive officer. Streamline has signed a lease for a 147,000-square-foot warehouse and headquarters facility in Norwood, Mass., but it won't be ready for occupancy until the fourth quarter.

The new facility, about twice the size of the company's current warehouse in Westwood, would allow Streamline to serve 50 new communities around Boston, Albertian said.

Elsewhere, Albertian said Streamline's performance in New Jersey has "far exceeded expectations," during its first two months of operations. In Chicago, Streamline is introducing three tiers of service as part of its changeover from the former Scotty's Home Market service. Tiered service in Chicago includes on-demand grocery delivery, scheduled weekly delivery and services via totes, and full-service, including installation of a full-size refrigerator/freezer.

Pending funding, Streamline is also planning to launch in Minneapolis in the fourth quarter, said Gadomski.

DeMello said the company remains focused on attaining "four-wall profitability" -- or profitability including occupancy costs per facility. Streamline hopes to achieve those goals in Chicago and Boston later this year.

Griesemer said he feels a grocery store financial partner would make a good match for Streamline, but that such a deal could cost Streamline control of the company. Chicago-based Internet grocer Peapod faced a similar capital challenge this spring before Dutch supermarket operator Ahold purchased 50% of the company for a fraction of Peapod's trading price months earlier.

"We've known Streamline has needed financing for a long while, but the question is how much the financing will cost them. A partner is going to want a large chunk of the business," said Griesemer.

Ahold, which operates supermarkets in three of Streamline's four markets, could also be a potential fit for Streamline, suggested Gary Giblen, director of research for C.L. King & Associates, New York. Delhaize America, Salisbury, N.C., whose purchase of Hannaford Bros. Co., Scarborough, Maine, is currently pending, and has stores along the East Coast, might also be a fit, he added.

"Streamline's got a business model which is probably more useful to a supermarket than Webvan would be," Giblen told SN. "The question is, at what price. Ahold waited and let Peapod decline on its own before it got involved."

Streamline reported an overall loss of $11.45 million for the quarter, compared to $11.97 million in the first quarter and $5.94 million a year ago. The per-share loss of 51 cents was better than analyst estimates of 52 cents.

Despite flying high for a few years, e-tailing companies including Streamline, Peapod and others have fallen on hard times since the new year. Many, like Streamline, have run low on funds when investors demanding profitability abandoned the sector.

Streamline shares climbed 18% to $3.19 on earnings news. Streamline traded as high as $14.69 during the last year.

"It's a shame Streamline doesn't have the war chest of a Webvan to spend," said Giblen