Two years ago this month I wrote a scathing article outlining five reasons why investors shouldn't buy the stock of e-commerce specialist GSI Commerce (NYSE:GSIC). I finished the article by suggesting the company would never figure out how to make money consistently and to avoid it. Since then it's been on a run, up 156.8%. Was I wrong about the Pennsylvania-based company? I'll revisit it to determine the answer.
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Current Situation
In its third quarter report October 27, it said revenues for the full-year would be $1.35 billion, a 35% increase from 2009. Revenue's never been a problem for the company. In 2000, its revenues were less than $50 million. Profits, as I wrote in my original article, are an entirely different matter. Between 2005 and 2009, its cumulative income from operations was $16.6 million on $3.8 billion in revenue. That's an operating margin of less than 1%. Grocery stores do better. Supporters of the company will point to the non-GAAP numbers, suggesting the real profit in 2010 will be more like $133 million when you add back depreciation, stock-based compensation, etc.

If you need a PhD in accounting to figure out what the correct numbers for a company are, you shouldn't invest.

E-Commerce Rules
This is the most frustrating thing about the company. It's operating what should be a goldmine of a business. The Cyber-Monday numbers don't lie; people love buying stuff online. But for some reason its business model doesn't allow for profits. Could it be that its clients, which include Ralph Lauren (NYSE:RL), Timberland (NYSE:TBL), Dick's Sporting Goods (NYSE:DKS) and Aeropostale (NYSE:ARO) have cut too good a deal with them? If you can't make money off fulfillment, why bother doing it.

The company has three operating segments with the bulk of the revenue generated from e-commerce services. Unfortunately, those operating margins were 8% in 2009. That doesn't leave much for interest and taxes. On the other hand, its interactive marketing services division, responsible for just 13% of its revenue in 2009, delivered 33% of its operating profits. The third segment is consumer engagement, which helps retailers unload excess inventory and accounted for just 3% of revenues (just one month included in 2009 - see acquisitions) and a small loss. It seems to me it would be far more sensible to keep the two smaller segments and sell the much bigger and unprofitable fulfillment division. The two segments might lose business when breaking the inter-company relationship but the expertise it has should still be marketable without the fulfillment. If not, this is an incredible mess.

Between 2007 and 2009, GSI Commerce made four acquisitions at a cost of $505 million. Of the four, its $186 million purchase of Retail Convergence in November 2009 is the most interesting. It paid $92 million in cash and the rest in stock. Issuing shares when the price is high is a smart move. I'll give them that. In addition, the purchase gave them its third operating segment in one quick move. Also good.

However, the deal calls for performance bonuses totaling $170 million over three years if Retail Convergence's management meet certain conditions, raising the total cost to as much as $350 million. How do you think the company is going to pay for these bonuses? It won't come from profits. Retail Convergence is expected to generate revenue of $230 million in 2010 with non-GAAP income from operations of $15 million. Do the math. It paid $186 million for $15 million in earnings that on a GAAP basis are likely losses. Even if you were to accept the $15 million figure, its return on assets is 4.9%. Amazon's is 8.2%. The math doesn't make sense to me.

Bottom Line
I didn't like this stock at $9 and I certainly don't like it at $22. You can put lipstick on a pig, but it's still a pig. (For related reading, take a look at A Primer On Investing In The Tech Industry.)

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