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CORPORATE FOCUS — Right Start’s Fortunes Took Fall Along With Dot-Coms

Six months ago, the Right Start Inc. was sitting pretty. The company’s retooled retail network was pumping up its sales volume, and the Westlake Village-based retailer of children’s clothing, toys and accessories was expecting to raise $70 million in the initial public offering it planned for its e-commerce division, Rightstart.com. And then, suddenly, e-commerce companies fell out of favor on Wall Street. Since trading at a high of nearly $24 per share in January, Right Start stock has slid south closing at $5.25 per share on June 22, and the company has backed off its IPO plans for the Web spinoff. “It’s pretty much the same as every company that developed in e-commerce,” said Bryant Riley, chief executive of investment house B. Riley & Co. “Investors don’t want to be involved with these companies.” Right Start’s stock price skyrocketed earlier in the year on expectations that its e-commerce division would be spun off. But by the time Right Start began preparing its Securities and Exchange Commission filing for RightStart.com in January, investors had begun to pull out of the IPO market, especially where e-commerce companies were concerned. By May it was evident that the IPO would not fly, and Right Start withdrew its application. “It really had nothing to do with the performance of the company,” said Ray Springer, chief financial officer of RightStart Inc. “Our Internet business was on plan and substantially more robust than quite a few other retailers that got out (with IPOs) late in 1999 or the first month of 2000. It was just a matter that, at some point, the market decided that investing in e-commerce is not where the market wanted to be.” The withdrawal of the IPO was unavoidable given stock market sentiment, analysts say, and it is likely to hamper Right Start’s growth and its future plans. “I think they are in a predicament,” said Tom Taulli, Internet stock analyst for Internet.com, an information technology portal. “They’ve got to make a decision whether to focus on the brick-and-mortar or the online business. I don’t think they have enough money to do a two-front war.” Since acquiring a 60 percent stake in Right Start Inc. in 1995, investment firm Kayne Anderson has worked to re-engineer the retail operation, closing poorly performing stores that were mostly located in shopping malls and adding new units in street-front locations. The company currently operates 54 retail stores. Then, in July 1999, the company raised $15 million in a private placement to launch Rightstart.com, an e-commerce site selling a broad range of products that appeal to kids up to 12 years of age. Though expensive, the moves expanded the company’s sales. For the quarter ended April 29, Right Start posted a net loss of $4.6 million (86 cents per diluted share), compared to net income of $11,000 (a loss of 1 cent) for the comparable period in 1999. (The company had a loss per share despite an income gain that quarter because it had to pay dividends in excess of earnings to preferred shareholders.) Sales for the first quarter rose 38 percent to $15.3 million from $11 million in the comparable quarter of 1999. Springer said the first-quarter loss was largely due to the fact that Right Start, in spite of its store growth, has not yet reached critical mass. “It’s difficult for a chain of 50 stores to make money, especially when you’ve got opening expenses,” he said. “When we open over 70 stores, there’s enough mass there to support the overhead to generate decent profits.” Springer said the company is still on plan to expand its store roster. Right Start expects to open another 20 stores (mostly in Texas, Georgia and Florida) this year. Those stores, with a projected annual revenue of about $750,000 each, will help to fund the expansion. “We expect to open 20 to 30 stores a year over the next few years, and we have a business plan that would show 200 stores and a very profitable business,” Springer said. At the same time, Springer said the company is now hoping to interest private investors in backing its e-commerce operation. Right Start has hired Cappello Corp., a Santa Monica investment bank, to help raise about $12 million through a private placement, Springer added.

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