Odimo (ODMO), grey market online watch retailer with soaring marketing costs, prices IPO at low-end of range

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Includes: NILE, ODMO
by: David Jackson

Luxury goods retailer Odimo (ticker: ODMO) raised $28 million in an IPO led by CIBC World Markets, but the offering priced at the low end of the range. Odimo had lowered the range to $9-10 on Friday, and the offering priced on Monday at $9. Odimo runs Diamond.com, Ashford.com and WorldofWatches.com. Here are some stats about the company's business, some quick comments, and key extracts from the S-1:


Key stats:

  • Revenues: 2003 $41.7 million, 2002 $27.5 million.
  • 2004 (first nine months) revenue growth: 31%.
  • 2003 gross margin: 28% ($11.7 million).
  • 2003 operating expenses: 43% of revenue, $17.8 million.
  • Spending on marketing: 9% ($3.8 million) of revenues in 2003, 12% (also $3.8 million) in the first nine months of 2004.
  • Number of orders: 2003 116,440, first nine months of 2004 85,155.
  • Average order size: 2003 $402, first nine months of 2004 $413.
  • Product mix (first nine months of 2004): watches 41%, diamonds 29%, jewelry 15%, luxury goods 16%.

Quick comments:

  • Odimo operates Diamond.com; but note that it doesn't own the domain name Diamonds.com or Diamond-USA.com.
  • How comfortable will investors be holding stock in a company that sells grey imports (see quotes from the S-1 below)?
  • Note that marketing costs rose from 9% of revs in 2003 to 12% in 2004. The S-1 comments: "Marketing expenses for the nine months ended September 30, 2004 increased 100.8% to $3.8 million from $1.9 million for the nine months ended September 30, 2003. The increase was primarily due to increased online advertising costs." But it gets worse: for the September 2004 quarter alone, marketing costs increased 247%!
  • Note that Odimo has a very different supply chain in the diamond market than Blue Nile (NASDAQ:NILE). Odimo is closely partnered with a De Beers siteholder, whereas NILE relies on external vendors to provide its inventory. Hopefully Odimo's IPO will trigger an intelligent debate about which model is superior.
  • Odimo's IPO is a net negative for NILE. Greater capital means that Odimo can bid more aggressively for diamond-related ad key words.

Key quotes from the S-1:

Supplier Relationships

Brand Name Watches and Luxury Goods

We purchase the majority of our brand name watches and luxury goods through distribution channels outside the control of brand owners, generally referred to as the parallel market. This market often develops as a result of global differences in the price or supply of products. Our senior management team has worked together for over 10 years and has extensive experience in the retailing of luxury goods purchased in the parallel market.

The benefits of sourcing from the parallel markets include our ability to:

  • acquire genuine, current season merchandise at  lower prices than we could through brand owners’ authorized  distribution channels;
  • offer goods below suggested retail prices by  avoiding brand owner pricing restrictions; and
  • provide value to our customers while maintaining  favorable margins.

The risks of sourcing from the parallel markets include the absence of a guaranteed supply of our products, potential claims against us relating to infringement of brand owners’ intellectual property rights and the increased likelihood of purchasing counterfeit goods.
 

Diamonds

We carry our best selling diamonds in inventory to provide our customers guaranteed availability and expedited delivery. We purchase the majority of these diamonds from The Steinmetz Diamond Group, an affiliate of several of our stockholders. Steinmetz is one of 84 sightholders that purchase diamonds directly from De Beers S.A. A sightholder is a diamond dealer that has been selected by and extended the right to buy diamonds directly from De Beers. De Beers supplies an estimated two-thirds of the world’s diamonds by value and is the world’s largest diamond mining company, which provides Steinmetz with access to a broad selection of diamonds.

Our supply arrangement with Steinmetz has several benefits, including our ability to:
access Steinmetz’s wide selection of  diamonds;

  • avoid several layers of supply chain  intermediaries;
  • receive “cash market pricing