“There are a number of retailers that are investing heavily in promotion and discounting at the expense of their gross margin and order size. In the long term that results in a price-sensitive customer who will leave when you try to recapture the profit margin. However, that’s not in my view what’s driving the unprofitability of many pure-play retailers.
“The long-term vision of building a dominant market share in a large industry segment is what has led these companies to invest very heavily in branding and marketing to create the most defensible barrier to entry that a business can have: a powerful brand. As the businesses grow into their larger shells, their marketing budgets will stabilize at around 5% of sales, down from more than 100%.
“For the first time in recent history, Wall Street has displayed some patience with this long-term strategic approach. What Wall Street is now beginning to question is whether the model will be an inherently profitable one when the business stabilizes. In our case, we’re confident that our approximately $100 average order size and 25%-and-improving gross margins will serve as a platform for very signifiant profitability when our business grows into its larger size.”