In February, Forrester Research predicted that online retail sales in the U.S. would grow between $20-30 billion annually until 2012 when sales should reach $335 billion. Shopping online makes abundant sense in today's time-starved world. It's a demographic home run. That's why it comes as a complete surprise that I find myself writing an article about all the reasons not to buy GSI Commerce (Nasdaq:GSIC), a leader in ecommerce solutions. I've followed it since the 1990s when it was a women's athletic shoe manufacturer through its transition to ecommerce in 1999 and up to the present. To say it's an underachiever is an understatement.

Here are five reasons why investors should avoid this stock.

Reason No. 1 Great Revenue, Little Profit
GSI has an enviable list of clients from Aeropostale (NYSE:ARO) to Ralph Lauren (NYSE:RL) to Dick's Sporting Goods (NYSE:DKS). Even the NFL, NASCAR and the NBA use its services. The fact that these organizations choose GSI means that it gets the job done in ecommerce. There's no denying this fact. Revenue has grown from $5.5 million in 1999 to $750 million in 2007 and should reach $985 million in 2008. That's impressive growth. Unfortunately, the same can't be said for profit. From 1999 to 2007 it lost $147.6 million before taxes and in its best year (2006) it made $9.7 million, a 1.6% margin, less than half Amazon's (Nasdaq:AMZN) return of 3.5%. (Read more in Choosing The Winners In The Click-And-Mortar Game.)

Reason No. 2. Online Sales Actually Slowing
Cyber Monday saw online sales rise by 15% to $846 million over the same day last year according to a ComScore report. On the surface, this is great news for retail, which is struggling under this poor economy, but it could be an aberration. November's online sales actually dropped 2%, the first decline ever. A new report by Forrester shows an expected 12% rise in online sales for November and December to $44 billion over the same period in 2007. This would mean holiday sales are below previous expectations by about 4% or $1.5 billion. If GSI has trouble making money when online sales are booming, how will it do it when sales are flat?

Reason No. 3. YTD Profit Awful
Its third-quarter results were terrible. Sales increased by 36%, yet it lost $19.4 million before taxes. For the nine months ended September 30, it lost $58.1 million before tax on revenue of $575.5 million. Based on revenue projections of $985 million for the entire year, you're looking at pre-tax losses of $27 million. That would mean $175 million in losses for its first 10 years as an ecommerce business. I don't know about you, but I like to see my investments making money over 10-year periods.

Reason No. 4. Short Ratio
How is it that a company that hasn't made money over a 10-year period has a short ratio of just 13%, yet a company like Buckle (NYSE:BKE), possessing industry-leading profit margins, has a short ratio of 63%. I'm not sure who's dumber, those that short Buckle or those that go long on GSI Commerce. (Find out how this figure can be a real eye-opener on market sentiment of a given stock, check out Short Interest: What It Tells Us.)

Reason No. 5. Executive Stock Compensation
Founder and CEO Michael Rubin received $2.1 million in compensation in 2007, 75% of this was stock based. Rubin owns 15.6% of the stock. Granted, some of the options are currently out-of-the-money, but how much incentive does a person need who already owns a good chunk of the company. Personally, I think a little profit would be nice before awarding stock options.

Bottom Line
GSI's income was down regardless of online sales figures. Quite simply this is a company that will never figure out how to make money consistently. There are plenty of good buys out there right now; I just don't think GSI Commerce is one of them.



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Tickers in this Article: GSIC, ARO, RL, DKS, BKE

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