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.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center