Bidz.com: An Undiscovered Gem

Bidz.com (BIDZ) is a leading online retailer of jewelry, featuring a live auction format. The Company offers its products through a continuous live format, featuring “no reserve” auctions, a $1 minimum opening bid, and a unique 15-second auction extension period that allows its auctions to continue until all bids are received. The majority of its auctions are short-term, often lasting less than one hour, providing immediate gratification to the customers and encouraging frequent visits and active viewing of our website. BIDZ product inventory includes gold, platinum, and silver jewelry set with diamonds, rubies, emeralds, sapphires, and other precious and semi-precious stones; and watches. The Company offers to sell products through their website. In 2006, BIDZ sold over 2.9 million items at an average price of $139. Headquartered in Los Angeles, the company has approximately 200 employees.

Key Highlights

Fragmented market with top 10 jewelry stores controlling less than 20% of the domestic market.

The BIDZ model provides a unique customer experience and value proposition.

Leading online jewelry retailer ranked second by Hitwise behind QVC in the online jewelry category.

BIDZ was ranked 6th amongst auction sites by number of unique visitors according to Ranking.com.

BIDZ is enjoying significantly improved Web site traffic and dramatically better trends than other jewelry oriented web sites such as Blue Nile (NILE), Zales, Tiffany (TIF) and Diamond.com.

BIDZ ranked 85th in the Internet Retailer Top 500 rankings and at par with Blue Nile on customer satisfaction rankings as recently measured by Foresee Results.

BIDZ more than doubled operating profit in 2006 and, with continued good merchandising and effective marketing, should lift sales by about 33% this year, and lift operating profit by 66% this year.

The company says it attracted 240,969 new buyers in 2006, up 50% from the year before.

International markets represent an untapped opportunity for BIDZ, and the Company intends to create a strong presence in English speaking countries, including the United Kingdom, Canada, Australia, Ireland, and New Zealand, and introducing foreign language versions of its website for certain international markets.

Unique Value Proposition to the Customer

BIDZ' auction process differs from other online (and offline) auctions in several important ways.

Auctions continue until bidding ends – much like a process at a traditional auction house. The auction continues for an additional fifteen seconds after the last bid.

Prices determined by customer - Auctions start at $1 no-reserve, assuring buyer-driven pricing and consumer savings. Approximately 15% of items are sold at a loss, so the remaining 85% sell above cost for BIDZ such that the Company is able to generate a healthy margin as evidenced by a 23.7% gross margin for FY 2006

Customers not committed to their bids – Winners are not held to their bids and not penalized if they fail to close the purchase.

Encourage product returns if not satisfied with product – As a result of its returns policy BIDZ aims at encouraging buyer confidence and provides for a stress free shopping experience. Only 4% of items were returned in Q1, 2007.

Broad product selection – BIDZ has over 50,000 SKUs in inventory

Value Proposition to Suppliers

BIDZ purchases closeout inventory directly from manufacturers and liquidators. The Company also closely monitors its sales trends to assess consumer demand for certain jewelry styles and categories and purchases such non-closeout inventory directly from manufacturers. The Company’s sourcing model provides an alternative liquidation channel for manufacturers, for which disposal of closeout inventory represents a significant challenge. BIDZ has the flexibility to purchase a variety of lot sizes, and its centralized warehouse and fulfillment center enables suppliers to ship their products to a single location, easing the burden on their infrastructures.

Sourcing Model

Since most moderate price jewelry is sold promotionally and promotionally priced to yield around a 50% gross margin to the retailer, “original retail” prices are commonly multiples of “normal” wholesale. If an item does not sell, it may be returned to the vendor who now faces a choice, either to return the goods to the factory (usually offshore) to be melted and turned into something else (in which case the retrievable yield is the manufacturer’s gross profit, less the cost of processing and shipping) or, alternatively, to resell the item as a closeout or (less likely, since it didn’t sell), to another retailer. It is usually to the manufacturer’s advantage to liquidate the item as a closeout, if possible, and anything north of that gross profit is desirable. Thus, it is common for BIDZ to acquire merchandise below, sometimes well below, the “normal” wholesale price and sometimes, below the intrinsic value of their materials.

Industry Overview

$160 billion global jewelry market; $57 billion US market.

Highly fragmented market with Top 10 retailers representing <20% of the U.S. market (Zales, Tiffany, Kay, etc).

Online jewelry sales were 3.9 percent of total industry sales.

Online jewelry market expected to grow between 12-15% for the next few years.

While 75 percent of U.S. jewelers have an online presence, only 25 percent engage in online commerce, according to InStore magazine (April 2007).

The average online ticket appears to be just over $200 for most specialty jewelers. Despite the dominance of diamond sales online, this is below the average ticket for a mass market jeweler of $300-350 and a guild jeweler of $850-900. Even Tiffany’s average ticket for online sales is $231.

Competition

BIDZ currently competes with a variety of online auction jewelry sellers, such as eBay and uBid; online liquidation companies, such as Overstock; and online jewelry retailers, such as Blue Nile. The Company also competes with traditional offline jewelry retail chains, such as Zales, Finlay Fine Jewelry, and Reed’s Jewelers, as well as with department and discount and other stores that sell jewelry at wholesale prices, such as Wal-Mart, Target, J. C. Penney, and Costco, as well as with QVC and Home Shopping Network.

Key Financial Highlights

Net revenue of $131.7 million, up 46% year over year

Net income of $5.4 million a 104% increase year-over-year.

The Company has grown revenues at a 78% CAGR over the 2002-2006 period.

Q1, 2007 revenue was $44.7 million, up 29% year-over-year

BIDZ’s average selling price per order for Q1 2007 was $154, up 8% from $142 in Q1 2006, and its average number of items sold per day was up 32% from 7,173 to 9,482.

Q1, 2007 net income of $3.4 million represented a 4.3% year-over-year increase (Q1, 2006 had unusually high gross margins hence, year-over-year EPS growth appears constrained)

Annual operating margins have trended nicely over the last three years going from 1.2% in 2004 to 4.2% at the end of 2006

BIDZ management has provided guidance that includes sales increases of 29-37% to $170-180 million and pretax income of $13-14 million for the year, 91-105% above 2006\'s $6.8 million (before special items).

Company has initiated a $5 million buyback or 3% of its total shares outstanding

Significant insider ownership with management owning around 55% of the shares outstanding on a fully diluted basis.

Key Trading Highlights

Market Cap as of 7/7/07 stood at 159 million; Stock price stood at $6.85

The stock has traded in a 52 week range between $4.90 - $10.70

The stock is currently trading at 20.3x FY2007 earnings estimate of $0.33 and $15.2x on an FY2008 estimate. In comparison, Blue Nile trades at 74.2x and 61.4x, 2007 and 2008 earnings estimates respectively

Catalysts

1) Continued top line growth with improving profitability metrics

2) Assumption of sell-side coverage on the story

3) Attractive take-over target for a strategic (eBay (EBAY), Overstock (OSTK), Blue Nile)

Disclosure: Author has no position in BIDZ

BIDZ 2-mo chart

Comments

[primorec:]

How do you see the problem about rescinding the purchases of some investors of around 20 mio $. For now they are just three or four, but in case the stock price declines further...........??

2007 Jul 09 12:24 PM

[david123:]

I don't seem to be able to get to the FY2007 earnings estimate of $0.33 per share. I think it does more like $0.60 per share, making it a very, very rapidly growing online retailer with a P/E of about 12 at $7.20 per share. Here are my arguments:

1: Traffic trends from Ranking.com: Given that it did $0.15 per share in the first quarter and has been having MUCH higher traffic in April, May (and presumably June) than it did in Jan-March, as seen on Ranking.com, BIDZ.com seems to be bucking the trend of a slightly softer second quarter versus the first quarter, the effect of successful new marketing. This relationship between its ranking on Ranking.com was also noticed when traffic picked up from the fourth quarter of last year to the first quarter of FY2007 and sales went from $38MM to $44MM SEQUENTIALLY! when its ranking went from 751 to 515, since then it has gone to 391 in May, the same as Priceline.com.

2. Their estimate for first quarter earnings was lower than for second quarter earnings: "The Company's net income for the first quarter of 2007 was $3.4 million, or $0.14 per fully-diluted share on 23.7 million weighted average shares above the Company's previously given guidance of $2.7-$3.0 million." - "The Company expects revenues for the second quarter of 2007 to be in the range of $38-$40 million, and anticipates income before income tax of $2.8-$3.3 million."

3. CFO has been buying shares in the past month: At times at higher prices than where it trades currently! If anyone knows what they will do next quarter based on traffic trends, he does.

4. The Company is smart, it is lowballing estimates so that they can price their recently awarded options cheaper (I actually don't care) as blowing away their numbers is good for me.

2007 Jul 11 11:40 AM

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2008 Jul 21 10:28 AM

[mens rings:]

as a fellow online retailer of jewelry, I find the concept of an auction interesting. How well is the company doing?

Apr 14 08:21 PM

[Ned danouma:]

Would you consider doing auctions online ?

Apr 17 10:47 AM