PRICELINE STOCK FALLS ON SHORTFALL FORECAST

ELLIOT ZWIEBACH

NORWALK, Conn. -- Priceline.com here said last week it anticipates a shortfall in anticipated sales for the third quarter ended Sept. 30 -- an announcement that resulted in an immediate 42% drop in the company's stock price last Wednesday.

In the wake of the stock's decline last week, industry analysts told SN they were not sure what the longterm impact would be.

News of the anticipated shoftfall came from Daniel H. Schulman, president and chief executive officer of Priceline.com, who said sales for the quarter will range between $340 million and $345 million -- below industry estimates of $360 million-380 million. He said the company attributes the shoftfall to a drop of $20 million-25 million in revenue from airline tickets, which observers said account for more than 80% of Priceline's sales.

Tim Albright, an analyst with Salamon Smith Barney, New York, said the shortfall was due "entirely to the impact of the fuel surcharge the airlines imposed that Priceline could not pass through to consumers. Its future ability to pass that through or not will dictate the degree of topline growth you will see, and the stock price will reflect that. If this is a longterm increase in airline prices that doesn't disappear, then it will be up to Priceline to figure a way to make consumers pay for the surcharge."

Albright said he does not anticipate the shortfall will have any direct impact on Priceline's grocery segment, Webhouse Club, "which is an independent entity that's independently funded, although it benefits from Priceline's growing customer base."

Andrew Wolf, an analyst with DB&T Capital Markets, Richmond, Va., said the longterm implications of the shortfall are difficult to determine at this point. "But what's happening to Priceline is what happens to a lot of small companies -- they can get squashed by bigger companies like the airlines, in this case."

According to Gary Giblen, director of research for C L King Associates, New York, Priceline's problems with airline prices will probably get worse. "It can't be a good thing to have your core business knocked out, and it's just another cautionary tail for e-tailing."

In explaining the shortfall, Schulman said the total number of customer offers and unit ticket sales will exceed second-quarter levels, but the actual revenue from airline ticket sales will be down because of a decline in the percentage of offers accepted and a lower average offer price.

He said sales from non-airline revenues were up in the quarter by approximately 20% and operating margins also improved, while the net loss for the quarter -- excluding option payroll taxes, non-cash supplier warrant charges and non-cash dividends -- will be about 1 cent, essentially the same as the loss in the second quarter.

Schulman said the company will report full third-quarter results on Nov. 2. He said the sales shortfall was a result of specific events affecting airline ticket sales, including a second $20 fuel surcharge imposed by the airlines in early September due to increased fuel prices; the high level of flight cancellations that negatively affected supply, and the introduction by the airlines of their own sales fares.

"We also believe certain promotional strategies we pursued during August and September negatively impacted sales," he said.