eBay's Q2 brightens as consumers opt out of retail

As consumers' retail spending declines, eBay's (EBAY) prospects brighten. At least that's one possible story to be told by eBay's second quarter 2009 results, beating analyst expectations at 25 cents a share -- $327.3 million -- or 37 cents a share excluding one-time charges. Analysts thought the company would earn 36 cents a share; last year eBay recorded 35 cents per share. Revenue, mirroring a story across the retail sector, fell, but only four percent, to $2.1 billion. Analysts expected a much sharper drop, nine percent, to $1.99 billion for the quarter.

Shares were up today in anticipation of results, 2.75 percent to $19.45, and they were up still more in after hours trading to above $20, another four percent thanks to the surprise. The story is told in the divisions; eBay's Marketplace segment, comprising auctions, classified listings, and stores, fell 14 percent from the year-earlier quarter, whereas money-mover PayPal grew 11 percent since second quarter 2008.

Though investors seemed roundly pleased with the surprise, sentiment among the smattering of analysts writing tonight was less than enthusiastic. "Feedback for eBay: Lousy seller. Would not buy from again," was one unglamorous headline. And that story is based on the crunching decline of auction sales, down a bit both quarter-over-quarter and year-over-year compared to fixed price sales, which increased nicely. What's the reason? All eBay management can point to is a soft retail climate and a strong dollar impacting foreign exchange rates. Management believes the growth in Payments is a great selling point; critics abound.

I believe that this is the story: consumers are opting out of bricks and mortar and full-price online retail, choosing instead the refurbished, used, and one-of-a-kind products often available on eBay. Auction revenue is down as consumers buy less; but will have a nice staying power as other retail outlets -- the kind with inventory and fixed costs and a bunch of new stuff that consumers are wanting less and less -- flounder and fail.

What's more, PayPal is uniquely positioned to slice a nice percentage off the top of a changing economy. Consumers buying in co-ops and in one-to-one relationships with farmers, crafters, and other value-added members of the resurgent goods economy will often utilize PayPal for their transactions. The onus will be on the company to overcome continued disgruntlement with the often-clunky customer service provided to its many buyers, sellers, and money-movers. Consumers socked with lower credit limits and, in some cases, a credit freeze, will be more likely to use PayPal as "put it on plastic" lessens its weight in the common vernacular.

eBay's prospects are brightening, a bit, but for now, retail investors should just be happy, if they are not invested in Circuit City. In this economy, that may be all they need.

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