Overstock.com CEO On Waiting For The Right Pitch

[Parsad]

Terrific little interview with Patrick Byrne on investing.  Cheers!

 

http://www.forbes.com/2010/09/03/risktaking-deals-patience-intelligent-technology-overstockcom.html?boxes=techchannelsections

[premfan]

great post!

[rick_v]

Alright guys, OSTK may be the first idea I have gotten on this board, why don't you all load me up on your research...

 

It appears to be moderately priced but I also believe it could be a value trap just on first sight....

 

 

[opihiman2]

Alright guys, OSTK may be the first idea I have gotten on this board, why don't you all load me up on your research...

 

It appears to be moderately priced but I also believe it could be a value trap just on first sight....

 

 

 

A value trap?  In what way?  Price to book?

[stahleyp]

wasn't this guy going on and on a couple years back about the sith lord trying to bring down his company or something?

[link01]

Alright guys, OSTK may be the first idea I have gotten on this board, why don't you all load me up on your research...

 

It appears to be moderately priced but I also believe it could be a value trap just on first sight....

 

 

 

A value trap?  In what way?  Price to book?

 

price to sales, maybe.

 

 

but imo byrne has so far not yet demonstrated the ability to methodically build a value-creating business, one sustainable incremental brick & click at a time. their efforts have always been sabotaged by some festering problem or other that suddenly rises to the surface & causes them to have to back pedal & regroup.

 

that said, i continue to believe patrick has the stuff to eventually right the ship. or, at least, overstock may be trading at a level where i feel i can afford to believe. 2 of overstocks biggest problems in the past seem like they have finally been addressed: their IT systems, which was a farce of spaghetti-western proportions (tho not nearly as entertaining unless you were short), & their earlier propensity to hire people based on a particular skill set they needed, with character taking a back seat to that need. cant build an ideal business culture making that compromise.

 

as an investor i've had a rocky past with overstock. subsequently, as a trader willing to hold his nose & buy when pessisim was thick enough to cut with a knife i've fared a little better. but generally, trading for a pop back to some notion a fair value doesnt excite me. investing in something i can believe in for long term compounded gains does. and if i get the sense that byrne & co will resist going for the home run with the bases loaded at the bottom of the 9nth, as they have tended to do in the past, when a single or double will win them the game, i'll once more be an investor in overstock & hang on for the ride rather than an opportunistic trader waiting for price & pessimism to lift.

 

here's another good interview, in video:

 

http://blogs.forbes.com/kymmcnicholas/2010/08/19/overstock-coms-hiring-lesson/

[Parsad]

wasn't this guy going on and on a couple years back about the sith lord trying to bring down his company or something?

 

The Sith Lord definitely exists.  Whether you believe it to be one of the individuals Byrne has mentioned, or what I believe to be multiple hedge fund managers working together is another matter.  I think there will be more visibility on this issue as the cases for Overstock.com and Fairfax against the hedgies hit the courts.  

 

but imo byrne has so far not yet demonstrated the ability to methodically build a value-creating business, one sustainable incremental brick & click at a time. their efforts have always been sabotaged by some festering problem or other that suddenly rises to the surface & causes them to have to back pedal & regroup.

 

I would pay more attention to this business as we hit the 3rd and 4th quarters.  You'll have a clearer picture of what is happening there soon enough.  While the investment at the moment is relatively small for Fairfax shareholders and Chou unitholders, I expect Overstock.com to be a significant contributor to the net worth of both.  The "three lean years" for Overstock.com are now as over as the "seven lean years" are for Fairfax!  Cheers!

 

 

[Josh4580]

3 lean years for OSTK?  The stock has gone no where for 8 years according to the chart and its not like theres a dividend either.

[rick_v]

Josh thats why I am only getting interested in it NOW and not 8 years ago.

 

My theory on this is probably going to revolve around one of my favourite themes when valuing a business. The replacement value IE: how much would it cost me to setup an OSTK.

 

Further I am envisioning a world where you have AMZN , EBAY, as the leaders with OSTK serving a niche not different from Costco!?

 

Has OSTK been carving  a moat all these years? Is Mr. Byrne just good at repeating value investing quotes in interviews or is he actually able to take this thing to the next level?

 

Still thinking about this one...

 

 

[opihiman2]

 

Further I am envisioning a world where you have AMZN , EBAY, as the leaders with OSTK serving a niche not different from Costco!?

 

 

Costco??? In what way?  I'm thinking more like Ross. 

[omagh]

Valuation of Overstock is ultimately about determining the return on invested capital and finding a reasonable method for valuing the cash flows on that invested capital.  Byrne has focused on building free cash flow in the last 3 years and is now self-financing.  Further, he has built a commerce platform that can scale up significantly.  This paper is a bit dated but has the core valuation model necessary to understand where Overstock will go.  It also provides a mental model for understanding the key performance metrics in the cashflow statement and balance sheet.  There are enough pieces in the paper to reproduce your own spreadsheet model -- it's worth the effort and it might even make you some cash for your efforts at current market prices.

http://www.capatcolumbia.com/Articles/FoFinance/Fof9.pdf

 

-O

but imo byrne has so far not yet demonstrated the ability to methodically build a value-creating business, one sustainable incremental brick & click at a time. their efforts have always been sabotaged by some festering problem or other that suddenly rises to the surface & causes them to have to back pedal & regroup.

[stahleyp]

wasn't this guy going on and on a couple years back about the sith lord trying to bring down his company or something?

 

The Sith Lord definitely exists.  Whether you believe it to be one of the individuals Byrne has mentioned, or what I believe to be multiple hedge fund managers working together is another matter.  I think there will be more visibility on this issue as the cases for Overstock.com and Fairfax against the hedgies hit the courts.  

 

 

I thought the guy was a loon when I first read about that a few years ago, but I think you're right. I shouldn't have been so judgmental. Thanks for the insight! :)

 

 

[link01]

I would pay more attention to this business as we hit the 3rd and 4th quarters.  You'll have a clearer picture of what is happening there soon enough.  While the investment at the moment is relatively small for Fairfax shareholders and Chou unitholders, I expect Overstock.com to be a significant contributor to the net worth of both.  The "three lean years" for Overstock.com are now as over as the "seven lean years" are for Fairfax!  Cheers!

 

if you believe that a substantial part of overstocks past problems stemmed from its IT "spaghetti-gate" issues, & to a lesser but still important degree, their misguided propensity to turn a blind eye to instances of character definciency when that person otherwise filled a critical job function, then, yes, there's a very good chance you are right. i think so too.

 

and there have also been some upfront costs incurred this year from new initiatives like eziba, their new private sale venture (which btw, interestingly is outside of overstocks flagship site because of percieved negative connotations of the name "overstock" in the eyes of its partners). and there's at least 1 more to be announced soon, i think.

[Guest ValueCarl]

For what it's worth, Joe Frazier is happy he knocked the brains out of Ali and states unequivocally today, "I did that to him." While understanding the history between these two boxing titans, it's sort of poetic justice that Ali suffers today. God has a funny sense of humor.

 

Dr. Byrne, a highly intelligent being in spite of having had his brains boxed around during a portion of his life, might be difficult to criticize or question, so who am I to make such an attempt except for the opportunity to learn from such a success story.

 

 

I seem to have missed the connection that somebody was attempting to make, while feeling certain contradictions existed in this article being cited.

 

How does an almost unlimited "waiting game" for fat pitches(time measured in many years, whole biz cycles even) tie into a business that can't wait indefinitely while its more limited resources and viciously competitive landscape requires that it act now?

 

How does any business requiring a focus as well as meaningful investment in "technology" even get mentioned in the same breath with a Mr. Buffett fat pitch?

 

On a side note, did that dirt cheap commercial real estate he scoffed up at $3.00 per sq. ft. require additional capital improvements after the original purchase price, as seemed to be alluded to? It was described as a state of the art building, but I guess some modifications were required to be made in order to accommodate certain tenants' needs notwithstanding.   

 

   

[Parsad]

3 lean years for OSTK?  The stock has gone no where for 8 years according to the chart and its not like theres a dividend either.

 

Don't look at the stock price - that's not going to tell you anything!  Fairfax's stock price went nowhere from late 1998 to 2010!  That didn't mean there weren't times in that period when you could have made a killing in the stock based on improving financials.

 

Focus on the numbers...the cash flows...the improving margins...the balance sheet...the escalation in revenues in both the direct and affiliate businesses...customer service rankings and website profile.  Cheers!

 

 

[Parsad]

Here's an interesting interview with Stormy Simon, who is VP of marketing and sales for Overstock.  She talks about their "Main Street" department, which allows small entrepreneurs around the US to market their goods professionally and sell through Overstock's website.  Cheers!

 

http://finance.yahoo.com/news/Senior-Vice-President-twst-1110341942.html?x=0&.v=1

[omagh]

Also, there is a small cash boost from the balance sheet which effectively reduces its invested capital.  OSTK is starting to generate cash from its payables as it matures into an established commerce platform.  As revenues ramp up, this will become a larger factor in how OSTK is capitalized.  Expect CFROIC to increase, hopefully, into 100+% range, along with a swift debt paydown.

 

-O

 

3 lean years for OSTK?  The stock has gone no where for 8 years according to the chart and its not like theres a dividend either.

 

Don't look at the stock price - that's not going to tell you anything!  Fairfax's stock price went nowhere from late 1998 to 2010!  That didn't mean there weren't times in that period when you could have made a killing in the stock based on improving financials.

 

Focus on the numbers...the cash flows...the improving margins...the balance sheet...the escalation in revenues in both the direct and affiliate businesses...customer service rankings and website profile.  Cheers!

 

   

[Guest ValueCarl]

Ah, there is nothing like the advantage of "float" while using OPM.  ;D  

 

<there is a small cash boost from the balance sheet which effectively reduces its invested capital.  OSTK is starting to generate cash from its payables as it matures into an established commerce platform.>

 

I want a Byrne answer on any connection or lack thereof to "fat pitches" in the article, otherwise, I will consider this a Cialdini exercise, one where the board host says, "Buy OSTK," and the Turkeys bob their heads up and down while doing so! Gobble, gobble, gobble.  ;D

 

After all, there is much RISK for online retailers heading into a "DEPRESSION, double dip" or whatever the hell else "pundits" care to declare it as.  >:(

[link01]

After all, there is much RISK for online retailers heading into a "DEPRESSION, double dip" or whatever the hell else "pundits" care to declare it as.  >:(

 

well, we've been in the worst recession of my lifetime already. but i get your point. if there's another leg down it aint gonna be pretty.

 

in a double dip we'll probably see a repeat of late 2008 early 2009 where ALL risk assets suddenly become ultra correlated to the downside. like then, only cash & short hedges will provide refuge from the storm, & maybe treasuries or gold again.

 

online retail will probably fare better than brick & mortar, continuing to take market share, for what that will be worth in a depression.

 

i like ostk's avowed strategy of capping their margins & passing any gains back to the customer. its a strategy that's works best for the lowest cost providers, tho. and i confess i dont know where ostk sits in that regard currently. but if they can continue to win market share from their competitors & drive sales gains i'm confident they'll sit somewhere near the top. i remember how well this strategy worked for sardar at sns. he was both focused & fanatic about cutting more & more costs out of the system & passing the savings back to the customer. and sales & traffic reversed their multiple years long decline in a dramatic way, not only snatching victory from the jaws of defeat, but revitalizing the brand. i wish his subsequent personal greed hadnt reared its ugly head, causing me to sell.

 

i'm not sure yet if overstock can acheive sustained business & value creating shareholder gains. in the past they've always found a way to go off the rails. but i have a strong sense that their IT fiasco a couple of years back, & the responsible head that rolled, was a big part of their woes in recent years. this time could truly (hides head) be different.

 

 

 

[Guest ValueCarl]

Nice post, and I can't say I disagree. As a matter of fact, I usually agree with Dr. Byrne's methods for driving his business to success.

 

However, I continue to fail at seeing any connections to fat pitches tied to Overstock which were referenced in that article. Is Byrne ready to take out AMZN in one fall swoop because it has been pummeled to the ground, for example?

 

Here's some good news for OSTK bulls, on the other hand. I am acting like Sam Antar versus "ValueCarl" in the subject of Overstock.com today! This is a first in recorded history!

 

Rise Overstock, rise!  ;D 

[Parsad]

Is Byrne ready to take out AMZN in one fall swoop because it has been pummeled to the ground, for example?

 

No need to take out Amazon, nor any hope of doing so.  Did Costco take out Walmart?  And Sam's Club is not having any luck taking out Costco either.

 

You can build a niche and focus on your core market...in other words build a moat.  If you can do that, and you are a low-cost provider, you can build a substantial business.  Overstock needs to focus their energy on that niche, and they will do perfectly fine long-term.  Cheers!

[beerbaron]

I like the CEO, but to me OSTK seems like a high risk/reward situation. Right now the stock is priced for somewhat 10-15% growth and we are currently at the breakeven point where fixed costs can be paid by profits. But it all depends on Q4, if there is 15% sales growth between Q42009 and Q42010 then we are talking about a huge quaterly profit (around 100M from my estimates). But assume there is no growth for whatever reason then we see a negligible profit and we are back to a 150M valuation.

 

Under the optimist scenario the possible stock price should lie around 700-1000M

Under the pessimist scenario the possible stock price should lie around 100-200M

 

We are a the inflection point, take your bets because there won't be much more roulette plays for this one.

 

BeerBaron

 

 

[lessthaniv]

http://finance.yahoo.com/news/Online-Holiday-Sales-Surge-In-ibd-2268996624.html?x=0&.v=1

 

 

On Friday November 26, 2010, 7:14 pm EST

Online retailers won't have to eat any crow with their leftover turkey this year.

 

Consumers didn't wait for Thanksgiving dinner before logging on to get an early start on what's expected to be a record year for online holiday spending.

 

U.S. online sales on Thanksgiving jumped 33% over last Turkey Day, says John Squire, chief strategy officer for Coremetrics, a Web analytics, research and consulting firm.

 

"This year's buying started much earlier in the day, and it came back really strong later in the afternoon," he said. "It tells us that consumers are responding to the deals that retailers have put out there, and they are open to buying and shopping on Thanksgiving."

 

With retailers aggressively pushing Black Friday discounts for nearly a week before the actual day, online holiday buying is picking back up after two years of slower-than-normal single-digit growth, says Fiona Dias, executive vice president for strategy and marketing at GSI Commerce (NMS:GSIC), which powers the Web sites of more than 100 retailers.

 

Easy To Compare Prices

 

Consumers "want to price-shop and reduce their impulse buys, and the best way to do that is to come online because there are plenty of avenues where you can compare prices," Dias said.

 

Coremetrics says the average U.S. order on Thanksgiving Day rose 14%, from $159.81 to $182.74, in 2009.

 

"It tells you people are willing to spend this holiday season," Squire said. "The $64 billion question for retailers: Will this sustain itself?"

 

Black Friday U.S. online spending, however, was flat through 10 a.m. EST compared with the year-earlier period, according to Coremetrics.

 

Global payment volume on Pay-Pal, a leading online payment service, increased 25% both on Thanksgiving Day vs. the same day a year ago, and on Black Friday through 2 p.m. EST. Thursday's figure is up from 15% growth on Thanksgiving Day 2008, but down from 42% growth last year.

 

Amanda Pires, a spokeswoman for eBay-owned (NMS:EBAY) PayPal, couldn't explain last year's big jump, other than to note that its 90 million active accounts include much of the world, so other factors could have been in play.

 

As for customers in countries that do celebrate the holiday, "Thanksgiving Day is becoming a mainstream shopping day," Pires said. "Everybody is off work and there is only so much turkey you can eat and football you can watch."

 

PriceGrabber.com would agree. U.S. traffic to the online comparison-shopping site jumped 24% on Thanksgiving vs. a year ago, as consumers sought the best deals among the 11,000 retailers on the site, says PriceGrabber President Laura Conrad.

 

Friday Promos Aided Thursday

 

"All of the big promotions that the online retailers are doing and the money being spent on promotions for Black Friday were definitely having an effect on Thanksgiving Day," Conrad said.

 

Overstock.com (NMS:OSTK) hit a record $1 billion in gross sales for 2010 as of early Wednesday, "even before Thanksgiving," said President Jonathan Johnson. The online seller recorded gross sales of $967 million for all of 2009 and $914 million in 2008.

 

Sales and traffic for Thanksgiving and early Black Friday exceeded last year's numbers, Johnson says, though he wouldn't reveal specific numbers. The site sells excess and overstocked inventory from retailers and manufacturers.

 

"People have been looking all year for ways to stretch their nickels in this economy, and Overstock is a great place to discount-shop," Johnson said.Analysts are bullish about this year's yuletide online shopping season. U.S. online sales in November through December will rise 16% from the year-ago period to $51.7 billion, says Forrester Research. That's up from 8% growth in 2009 and 5% in 2008.

 

Many shoppers prefer online to offline, says Forester analyst Sucharita Mulpuru.

 

"More people know they can shop online and get great deals and not have to fight the crowds to get them," she said.

 

Consumers also seem willing to shell out for more expensive items.

 

In the second week of November, U.S. online jewelry sales doubled from the year-earlier week, and they rose 260% for the first week of November, says Coremetrics, which didn't yet have more recent figures.

 

It seems sales of other luxury items, such as designer clothes and handbags, are also up this year.

 

It's a behavioral shift from last year, says Ed Foy Jr., CEO of eFashionSolutions, which manages Web sites for 30 fashion brand companies.

 

"The consumer is really going after high-quality, durable, long-lasting products, so it's a greater spend than last year," he said.

 

 

[Parsad]

I expected them to do a little better than $1.1B for the year, and they look like they are well on target.  Cheers!