French courts have ruled that EBay (Nasdaq:EBAY) will have to pay more than $60 million to LVMH (OTC:LVMHF), maker of luxury brand Louis Vuitton, for profiting from the sale of fake merchandise. EBay is appealing the courts decision, and for now the ruling's effects on the sales of the luxury maker and the profits of EBay are still uncertain.
EBay could lose business to smaller niche luxury goods players like Portero.com, a company that does the expensive job of verifying the authenticity of each item sold on its site. EBay's other competitors in the on-line retail arena include Amazon (Nasdaq:AMZN) and smaller but well known Overstock.com (Nasdaq:OSTK).
EBay's stock has fallen 20% since the beginning of the year. Revenue did increase 29% to $7.7 billion in 2007, but operating income fell more than 50%. Operating income was up 18% to $552 million for the first quarter of 2008 over the same period a year ago on $2.2 billion in revenue.
EBay's operating margin was down only slightly for the period from a year ago due to slower growth in its Marketplace business segment. (Find out how to put this important component of equity analysis to work for you in our related article Analyzing Operating Margins.)
Good and Bad News
EBay does have an attractive price-to-earnings growth ratio of 0.90 and a broad geographic distribution of revenues with 53% for the first quarter coming from overseas. It also has more than $4 billion in cash, which is a nice buffer to have just in case it has to take on the additional expense of validating the authenticity of luxury goods exchanged on its website.
A win for LVMH could also lead to additional lawsuits from other brands who feel their merchandise is under protected.
Verified Rights Owners Program
EBay enables companies like Tiffany & Co. (NYSE:TIF), Apple (Nasdaq:AAPL) and Coach (NYSE:COH) to search the site for counterfeit goods and request immediate removal with the use of its VeRO program. EBay also has its own counterfeit surveillance team that scours the website to block and remove fraudulent merchandise sellers.
EBay's Loss could be a Win
EBay claims to take swift action to remove counterfeit items from its website, but this is not the first case it has lost. The impact of another loss could put additional pressure on the stock price, but it may also have the added benefit of forcing EBay to make its sales practices more secure. This could ultimately attract more brand names than its pushes away.