RETAILING—Right Start Slows Down its Pace

The warning came on Jan. 4. With a decline in The Right Start’s stock price, the market value of its public float had fallen below the minimums required for listing on Nasdaq. If the situation continued, The Right Start would risk getting booted from the exchange. The Right Start, a retailer of upscale baby and children’s products and toys based in Westlake Village, has since rebounded somewhat, trading recently between $2.25 and $2.50, providing a little breathing room. But the near-crisis drove home a dilemma shared by many companies in the aftermath of last spring’s tech wreck. The rush to go public has left them with little to trade on. “I don’t think a lot of these small companies should be public,” said Bryant Riley, chief executive officer of the investment house B. Riley & Co., which nonetheless holds a position with the company. “For every one that goes into the limelight and a big brokerage picks it up, there are 10 that get no exposure from Wall Street, and there’s no benefit from it.” The Right Start was already a publicly held company when its major investors, Kayne Anderson, acquired their stake in 1995. But many founder/owners took their companies public well before they were ready. With prices on Nasdaq soaring, even a market valuation of $150 million could win a listing on the exchange. Public status promised not only the potential for personal wealth but also the chance to expand at breakneck speed by using the stock shares for acquisitions. Investors bought into the promise until last spring. When the bottom dropped out of Nasdaq, investors turned a cold shoulder to promises and began trading exclusively on performance. Shares in Right Start plummeted from a high of about $25 to a 52-week low of 88 cents. The Right Start was not alone. “A lot of companies went public before their business models were proven, and once the Internet bubble popped, a lot of these companies saw their stock prices crash and they’re trading in the $1 range,” said Bob Walberg, chief equity analyst at Briefing.com, who pointed out that he was unfamiliar with Right Start because its trading price was so low. “It’s happening on a regular basis.” Nasdaq nightmares In the last three months of 2000 alone, 11 companies were delisted by Nasdaq because the market value of their public float, the number of shares outstanding, fell below the exchange’s minimum, $5 million. Many more were delisted for other reasons related to the their financial performance. A publicly held company relegated to Nasdaq’s bulletin board listing, the SmallCap Market, faces a host of problems. “No one really wants to deal with a bulletin board stock,” said Tom Taulli, Internet stock analyst for Internet.com. “It could be a great company with money in the bank, but they just lose credibility.” The situation isn’t much better for those companies that manage to stay just above Nasdaq’s required minimums, they face almost as many problems as those delisted. With their stocks languishing in the $1 and $2 range, these companies face hurdles raising capital, attracting employees and acquiring other companies to expand. Some amble along, but others are trapped in a public no-man’s land with little chance of escape. “There are a lot of companies out there that sort of move along at low stock prices and some are reasonably successful,” said David Thompson, partner for e-business services for the Pacific Southwest region of Deloitte & Touche. “Others are going to be down there like the living dead. They’ll float along and have a low stock price and they won’t have sufficient cash flow and whoever their stockholders are have suffered.” To escape the spiral, analysts say, these companies will have to show the kind of profit and revenue growth that will restore investor confidence. “You need to grow fast,” said Taulli. “You have to ramp it up and be very profitable and stand out. Just growing at a plodding rate won’t do it. You really have to prove that the company works.” Right Start officials readily admit that won’t be easy. “We’re an Internet retailer, we’re a (bricks-and-mortar) retailer and we’re a small-cap stock, and the world hates all three of those,” said Jerry Welch, chairman and chief executive officer. The company’s recent performance hasn’t provided any boost either. In the most recent quarter ended Oct. 28, 2000, the company’s losses from its retail store operations totaled $466,000, compared to a loss of $406,000 for the comparable period in 1999. Retail store sales rose 11.7 percent to nearly $10 million for the period. RightStart.com reported net income of just over $1 million, or 15 cents per diluted share, although it remained in the red for the nine-month period, recording a net loss of $7.2 million, or $1.35 per diluted share. Maybe the right stuff But Right Start recently completed a private placement that will allow the company to continue its aggressive store expansion plans, a move that could pay off down the road. “We’ll end the (fiscal) year with 62 stores,” said Welch. “Our plans for next year, conservatively, we’ll open 20 to 25 stores, maybe more.” Welch points out that there is little the company can do at this point to directly affect its stock price. “We just have to do our business,” he said. Indeed, others say that the company’s listing is less important than its ability to show solid performance gains, in part because Right Start has never had a large enough number of outstanding shares to attract high trading volumes. “With Right Start, if you’re buying it, you’re not buying it for a pop, because it doesn’t trade enough,” said Riley. “You have to buy it because you’ve done your homework, and you believe in the concept.”