GSI Commerce Reports Record Fiscal 2005 Second Quarter Operating Results; Company Signs Multiyear Agreements with Three New Partners

KING OF PRUSSIA, Pa., July 27, 2005 – GSI Commerce Inc. (Nasdaq: GSIC) today announced results for the second fiscal quarter ended July 2, 2005.

“The second quarter was very exciting for GSI Commerce, highlighted by strong operating results, continued new partner momentum and the addition of international capabilities,” said Michael G. Rubin, chairman and CEO of GSI Commerce. “Our solid top- and bottom-line results reflect the strength of our partner base and platform as well as robust underlying e-commerce trends. The addition of three new partners brings our total for the year to nine new partners and already has us at the high end of our expected range of five to 10 new partners for the year. This reflects what we believe is a growing interest in e-commerce outsourcing and GSI Commerce’s leadership position in the market. Through our agreement to acquire control of Aspherio, we now are able to offer international capabilities to our partners, opening up what we believe could be a significant growth opportunity for GSI Commerce. Overall, GSI Commerce had a strong first half of fiscal 2005 and we believe we are well positioned to deliver solid results for the balance of the year.”

Net Revenues and Merchandise Sales
•Net revenues were $91.7 million for the second quarter of fiscal 2005, a 42 percent increase compared to $64.7 million in the same period in fiscal 2004.
•Merchandise sales were $136.8 million for the second quarter of fiscal 2005, a 53 percent increase compared to $89.6 million in the same period in fiscal 2004. A definition of merchandise sales appears later in this news release under “Non-GAAP Financial Measures.”

Components of Net Revenues and Merchandise Sales
•Net revenues from product sales from the sporting goods category were $41.9 million for the second quarter of fiscal 2005, a 25 percent increase compared to $33.6 million for the same period last year.
•Merchandise sales from the sporting goods category were $51.4 million for the second quarter of fiscal 2005, a 36 percent increase compared to $37.9 million in the same period last year.
•Net revenues from product sales from other categories were $33.3 million for the second quarter of fiscal 2005, a 70 percent increase compared to $19.5 million for the same period last year.
•Merchandise sales from other categories were $85.4 million for the second quarter of fiscal 2005, a 65 percent increase compared to $51.7 million in the same period last year.
•Service fee revenues were $16.5 million in the second quarter of fiscal 2005, a 43 percent increase compared to $11.6 million in the same period last year.

Net Loss, EPS and Adjusted EBITDA
•Net loss was $2.8 million or $0.07 per share for the second quarter of fiscal 2005, compared to a net loss of $3.1 million or $0.08 per share in the same period last year.
•Stock-based compensation expense was $1.7 million in the second quarter of fiscal 2005, compared to $153,000 in the same period last year. The increase in stock-based compensation was primarily due to the impact that the increase in the price of the company’s common stock during the second quarter had on historical stock awards subject to variable accounting and the issuance of restricted stock awards under its new long-term incentive compensation program.
•Adjusted EBITDA was $2.5 million for the second quarter of fiscal 2005, compared to an adjusted EBITDA loss of $535,000 in the same period last year. A definition of adjusted EBITDA appears later in this news release under “Non-GAAP Financial Measures.”

Gross Profit and Operating Expenses
•Gross profit was $34.6 million in the second quarter of fiscal 2005, an increase of 38 percent compared to $25.1 million in the same period last year.
•Gross margin was 37.8 percent in the second quarter of fiscal 2005, a decline of 100 basis points from 38.8 percent in the same period last year. The decline in gross margin was primarily due to product sales from other categories, which carry lower gross margins on a relative basis, growing more rapidly than product sales from sporting goods.
•Total operating expenses were $37.6 million for the second quarter of fiscal 2005, a 32 percent increase compared to $28.5 million for the same period last year.
•Total operating expenses, as a percentage of net revenues, decreased to 41.0 percent in the second quarter of fiscal 2005 compared to 44.0 percent in the second quarter of fiscal 2004.
•Total operating expenses of $37.6 million, as a percentage of merchandise sales of $136.8 million, were 27.5 percent in the second quarter of fiscal 2005. This compared to total operating expenses of $28.5 million in the same period last year, which as a percentage of merchandise sales of $89.6 million, was 31.8 percent.

Balance Sheet
•The company’s cash, cash equivalents, short-term investments and marketable securities at the end of the second fiscal quarter of 2005 were $117.5 million compared to $75.4 million at the end of fiscal year 2004, and $48.2 million at the end of second fiscal quarter of 2004.


Key Events Since April 27, 2005
•The company signed a multiyear agreement to provide a comprehensive e-commerce solution for General Nutrition Corporation (GNC), the largest global specialty retailer of nutritional supplements. The agreement calls for GSI Commerce to provide GNC with an e-commerce solution that includes core technology, fulfillment and customer care operations. GNC’s new e-commerce business is expected to launch in the fourth quarter of this year.
•The company signed a multiyear agreement with Zale Corporation (NYSE: ZLC) to provide North America’s largest specialty retailer of fine jewelry with multichannel e-commerce solutions for each of its brands – Zales Jewelers, Zales Outlet, Gordon’s Jewelers, Bailey Banks & Biddle Fine Jewelers and Piercing Pagoda in the United States as well as Peoples Jewellers and Mappins Jewellers in Canada. The e-commerce solution includes the core technology platform, customer care operations and multichannel initiatives.
•In addition, the company signed multiyear agreements with three new partners. All three partners are expected to launch their new e-commerce operations during the third and fourth quarters of this year. Revenues from all three new partners will be recorded as service fees. GSI Commerce will provide its core technology platform and fulfillment services to all three new partners and customer care operations for two of the new partners.
•The company announced it had entered into a definitive agreement pursuant to which it would acquire control of privately-held Aspherio, S.L., a Barcelona, Spain-based provider of outsourced e-commerce solutions (http://www.aspherio.com). Subject to the satisfaction of certain conditions, the acquisition is expected to close in late 2005 or early 2006.
•The company successfully raised approximately $80 million of net proceeds through the concurrent sale of 1.8 million common shares and $57.5 million aggregate principal amount of 3 percent convertible notes due 2025. The company will use the net proceeds for working capital and general corporate purposes, including possible acquisitions.


Fiscal 2005 Third Quarter and Annual Financial Guidance
The following forward-looking statements reflect GSI Commerce’s expectations as of July 27, 2005. GSI Commerce provides guidance for its business based only on signed partner agreements. Given the potential changes in general economic conditions and consumer spending, the emerging nature of e-commerce and various other risk factors discussed below and in our public reports, actual results may differ materially. At this time, GSI Commerce has decided not to early adopt FASB 123(R) and, accordingly, the company’s guidance does not include any impact from this accounting provision. In calculating stock-based compensation expense, which is included in the company’s financial guidance, it is assumed the company’s stock price will remain unchanged from period to period for future quarters.

The company provides the following guidance for the fiscal 2005 third quarter:
•Net revenues are expected to be in the range of $79.0 million to $84.0 million.
•Merchandise sales are expected to be in the range of $122.0 million to $132.0 million.
•Net loss is expected to be in the range of $2.5 million to $3.0 million.
•Adjusted EBITDA is expected to be in the range of $1.5 million to $2.0 million.

The company provides the following updated guidance for fiscal year 2005:
•Net revenues are expected to be in the range of $430.0 million to $445.0 million.
•Merchandise sales are expected to be in the range of $675.0 million to $695.0 million.
•Net income is expected to be in the range of $9.5 million to $10.5 million.
•Adjusted EBITDA is expected to be in the range of $28.0 million to $29.0 million.

“Our updated guidance reflects higher net revenue and merchandise sales expectations compared to our previous guidance primarily due to the addition of five new partners. Our third quarter guidance reflects the normal seasonality of our business. In fiscal 2004, launch activity in the second fiscal quarter drove higher sequential net revenue in the third fiscal quarter, whereas, in fiscal 2005, launch activity is expected to be concentrated late in the fiscal third quarter and early in the fiscal fourth quarter,” commented Jordan Copland, executive vice president and chief financial officer. “We have raised the low end of our adjusted EBITDA guidance, but kept the top end the same due to higher expected volume, offset to a large extent by higher launch costs attributable to the addition of new partners more quickly than expected during the year. While we are incurring the launch expenses for these new partners in 2005, we expect the principal benefit to be realized in 2006 and beyond. Our expected net income range has been adjusted primarily to take into consideration higher anticipated stock-based compensation expense. The expected increase in stock-based compensation expense for 2005 is due to the increase in our stock price in the second quarter of fiscal 2005 and the issuance or expected issuance of restricted common stock awards as a portion of compensation for certain employees. Historically, GSI Commerce issued stock options to employees, for which there was no required earnings charge. In anticipation of adopting FASB 123(R) (Share-Based Payments), the company instituted a revised long-term incentive compensation program that emphasizes restricted stock awards and which required the expensing of certain grants beginning in the second quarter of fiscal 2005.”

Non-GAAP Financial Measures
This news release contains the non-GAAP measures merchandise sales, certain ratios that use merchandise sales and adjusted EBITDA. Merchandise sales represent the retail value of all sales transactions, inclusive of freight charges and net of allowances for returns and discounts, which flow through the GSI Commerce platform, whether or not the company is the seller of the merchandise, or records the full amount of such sales on its financial statements. GSI Commerce uses merchandise sales as a metric for operating its business. Variable costs such as fulfillment and customer service labor expense, order processing costs such as credit card and bank processing fees and business management costs such as department staffing levels in partner services are related to the amount of sales made through GSI Commerce’s platform, whether or not GSI Commerce records the revenue from such sales. GSI Commerce believes that investors will have a more thorough understanding of its historical expenses and expense trends if they have visibility to both GAAP net revenue as well as the non-GAAP financial measure merchandise sales and the percentages that such expenses bear to net revenues and merchandise sales.

GSI Commerce also uses adjusted EBITDA, which represents earnings (or losses) before interest income/expense, taxes, depreciation, amortization, and stock-based compensation. GSI Commerce uses adjusted EBITDA as a means to evaluate its performance period to period without taking into account certain expenses, particularly stock-based compensation expense, which may fluctuate materially due to fluctuations in the price of GSI Commerce’s common stock both on a quarterly and annual basis, and does not consistently reflect GSI Commerce’s results from its core business activities.

These financial measures should be considered in addition to, and not as a substitute for, or superior to, other measures of financial performance prepared in accordance with GAAP. The non-GAAP financial measures included in this press release have been reconciled to the nearest GAAP measures as required under Securities and Exchange Commission rules and are contained later in this release.

Second Quarter 2005 Conference Call
GSI Commerce has scheduled a conference call on July 27, at 4:45 p.m. EDT to discuss the company’s fiscal 2005 second quarter results and expectations for future performance. For access to the conference call, please call the toll-free conference number, 1-800-591-6923, by 4:30 p.m. EDT on July 27. The conference passcode is “38701957.” Alternatively, to listen to the call live on the Web, go to the GSI Commerce Web site, www.gsicommerce.com, and click on the link provided on the home page. Please do this at least 15 minutes prior to the call (4:30 p.m. EDT) to register, download and install any necessary audio software. The conference call also will be broadcast live on the Web through CCBN StreetEvents (www.streetevents.com). For those who cannot listen to the live Webcast, a telephone replay of the conference call will be available one hour after the completion of the call and remain available through Aug 29. Access to a recording of the conference call can be made by calling toll-free, 1-888-286-8010. The telephone replay passcode is “54171910.” In addition, access to a replay of the conference call’s Webcast can be found on the home page of the GSI Commerce Web site. Access to the Webcast replay also will remain available through Aug. 29.

About GSI Commerce
GSI Commerce is a leading provider of e-commerce solutions that enable retailers, branded manufacturers, entertainment companies and professional sports organizations to operate e-commerce businesses. We provide solutions for our partners through our integrated e-commerce platform, which is comprised of three components: core technology, supporting infrastructure and partner services. We either operate, or will operate pursuant to signed agreements, all or portions of the e-commerce businesses for approximately 50 partners.

Forward-Looking Statements
All statements made in this release and to be made in GSI Commerce’s fiscal 2005 second quarter conference call, including those in the tape recording, live audio and live Webcast of the call, other than statements of historical fact, are or will be forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” “would,” “should,” “guidance,” “potential,” “continue,” “project,” “forecast,” “confident,” “prospects,” and similar expressions typically are used to identify forward-looking statements. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about the business of GSI Commerce and the industries and markets in which GSI Commerce operates. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Factors which may affect GSI Commerce’s business, financial condition and operating results include the effects of changes in the economy, the impact of FASB 123(R), consumer spending, the financial markets and the industries in which GSI Commerce and its partners operate, changes affecting the Internet and e-commerce, the ability of GSI Commerce to develop and maintain relationships with strategic partners and suppliers and the timing of its establishment, extension or termination of its relationships with strategic partners, the ability of GSI Commerce to timely and successfully develop, maintain and protect its technology and product and service offerings and execute operationally, the ability of GSI Commerce to attract and retain qualified personnel, the ability of GSI Commerce to successfully integrate its acquisitions of other businesses, if any, and the performance of acquired businesses. More information about potential factors that could affect GSI Commerce can be found in its most recent Form 10-K, Form 10-Q and other reports and statements filed by GSI Commerce with the SEC. GSI Commerce expressly disclaims any intent or obligation to update these forward-looking statements, except as otherwise specifically stated by GSI Commerce.

Click here for Second Quarter 2005 Financial Statements

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