Make 178% on this online discounter: It makes money when shoppers avoid the mall!

by Ian Cooper

Finding cheap stocks with monumental growth prospects amid a sea of dot-com failures isn’t the easiest thing to do. But we’ve uncovered a stock that insiders like George Soros have been buying like it’s going out of style.

More than 8.4 million shares have passed through many hands in the last 10 months. Add to this that the company plans on turning a profit by next year, and you could be sitting on a fat gain in the next few months.

Bluefly.com

How can I say this and still be able to look my wife in the face:

I’m a guy. I don’t get much thrill out of shopping for clothes. My wife has to drag me into department stores to rid my closet of my precious holey jeans.

But if my wife is willing to help me shop for clothes on the Net, that won’t be a problem—especially at the prices I just found. There’s a silk twill tie for US$64.95. That’s 48% less that the regular price of US$125. Not bad at all. Kids’ clothes, which usually cost a small fortune, can be bought at 90% discounts.

I’m talking about Bluefly.com (BFLY:NASDAQ).

Created by founder and CEO E. Kenneth Seiff, Bluefly.com is an Internet retailer of designer fashion labels. It sells over 450 brands of designer apparel, fashion accessories, and home products at discounts that range between 25% and 75% off comparable retail prices.

In 2000 alone, BFLY offered over 55,000 different items for sale… in categories such as men’s, women’s and children’s clothing and accessories, as well as household goods and supplies.

It is open 24 hours a day, 365 days a year. And if you don’t really like what you ordered, you have 90 days to return it. The best part: BFLY includes a pre-addressed, postage-paid merchandise return label in every box.

Check out those figures!

Unlike many retailers, Bluefly has actually profited from the U.S. economic downturn. The weakened retail environment has actually allowed Bluefly to acquire top designer merchandise at an even lower cost. This, in turn, brings in more customers eager to buy products at bigger discounts.

While top-of-the-line retailers like Saks Fifth Avenue were canceling fall shipments and scaling back new orders, Bluefly, which sells apparel by the likes of Prada and Calvin Klein for up to 75% off, was snatching up a lot of the unwanted merchandise.

As a result, Bluefly reported that its loss for Q3 narrowed by about 49% from a year ago, making it the fourth consecutive quarter of lower losses. That’s impressive for any dot-com that has withstood the shakeout of the past two years.

Net loss for the quarter ended September 30 dropped to US$2.4 million, or 33 cents a share, from US$4.9 million, or US$1.01 a share in the year-ago quarter. Sales increased 48% to US$5.1 million from US$3.5 million a year ago, driven in part by rising sales to repeat customers and growth in average order size to US$144 from US$108. Not too shabby for an online retailer!

The cost of acquiring new customers fell 59% to US$23.73 from US$57.45 in the third quarter of 2000. Also contributing to the loss reduction was a 30% drop in sales, marketing and fulfillment expenses, and an 11% decrease in general and administrative expenses.

But wait, there’s more. In its effort to reach profitability by the end of 2002, Bluefly has been splitting the savings between its customers and itself. The plan is expected to give the company an additional 104% increase in gross profit, a 20% reduction in operating losses, and a 14% increase in gross margin.

Strength in numbers

Bluefly’s competitors, including Big Dog Holdings (BDOG:NASDAQ), Fashionmall.com (FASH:NASDAQ), and Cache Inc. (CACH:NASDAQ), trade at much higher valuations. Compare BDOG’s market cap of US$27.5 million, FASH’s US$15.6 million and CACH’s US$31.8 million to BFLY’s US$6.9 million, and the growth opportunities seem endless.

Weak economic growth, coupled with layoffs and higher levels of consumer debt, should help Bluefly in the long term. Even in this tough economic environment, BFLY is still acquiring the top designer brands at lower costs.

In the longer term, the demographics for apparel sales should be strong. Younger populations entering high school, college and the work force are always looking for bargains.

What, you think Mom and Dad are going to keep buying clothes for them their whole lives? As if. Bluefly has already tuned in to those spoiled kids with top-of-the-line merchandise and accessories.

Bluefly is a strong buy under US$2.00—it’s trading at US$1.77 as I write this—with a long-term price target of US$5. Contact: 42 West 39th Street, New York, NY 10018, tel. 212-944-8000, fax 212-354-3400.