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Stock Analyst Update

WebHouse Club Failure a Bad Blow for Priceline

Planned retrenchment could be too little, too late.

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What Happened?
Privately held Priceline WebHouse Club, which licenses Priceline.com's (PCLN) name-your-own-price model for gasoline and groceries, announced that it will shut down over the next 90 days because it won't be able to get the funding it needs to continue. Perfect Yardsale, another privately held Priceline licensee, also announced that it is shutting its doors. Priceline will take a noncash charge against third-quarter earnings for the value of the warrants it held in WebHouse Club, and will also revamp its Web site in response to persistent customer complaints.

What It Means for Investors
This doesn't do much to repair Priceline's battered public image, which--as we warned in a recent analysis--is one of its major obstacles with investors. We think the failure of WebHouse Club is further evidence that investors should stay far away from Priceline stock until the company shows signs of extricating itself from the quagmire it's gotten itself into.  Although Priceline is a separate company from WebHouse Club, both use the same business model and are majority owned by founder Jay Walker. And WebHouse Club was seen by Priceline supporters as a big potential source of growth--if Priceline had exercised the warrants that would have given it a majority stake. WebHouse's failure also casts doubt on the future of Priceline Europe, another privately held company that Priceline has a similar relationship with.

Priceline's announcement that it will revamp its Web site and improve its customer service is welcome, but hardly surprising since the company had to do something to combat the recent barrage of negative publicity. We think that Priceline needs to make some fundamental changes in its business model to ease restrictions, and give its customers more choice, if it wants to survive. But even if it does that, we're still skeptical about Priceline's ability to expand beyond a niche audience that values price over customer service.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.