OSTK - Overstock.com

[alertmeipp]

Well, prepare for the worst now ....

 

I just stepped back into this stock which usually means you should expect a 10-20% swing down anytime!

 

:P

 

I apologize in advance.

 

Truth be told, I have similar super-natural power - stock usually goes up 20%+ AFTER I sold some.

Well, I did sell some today (across the board selling to raise cash), so let the battle begins. 8)

[Parsad]

I'd love a 20% swing down! I've built a sizable position but I'm hesitant to go really heavy with the yoy decline in unique visitors. Another 20% down in the stock price and I would not hesitate!

 

FWIW, here is the traffic data on alexa. No hard numbers, just graphs but it seems to confirm the yoy decline seen on compete.

 

http://www.alexa.com/siteinfo/overstock.com#

 

Actually, go to the "traffic rank" and compare to Zappos.com over the last three months.  They track almost identical.  I think part of it is seasonal decrease in traffic.  Do it for 6 months and max as well...they track closely.  Cheers!

[Eric50]

I'd love a 20% swing down! I've built a sizable position but I'm hesitant to go really heavy with the yoy decline in unique visitors. Another 20% down in the stock price and I would not hesitate!

 

FWIW, here is the traffic data on alexa. No hard numbers, just graphs but it seems to confirm the yoy decline seen on compete.

 

http://www.alexa.com/siteinfo/overstock.com#

 

Actually, go to the "traffic rank" and compare to Zappos.com over the last three months.  They track almost identical.  I think part of it is seasonal decrease in traffic.  Do it for 6 months and max as well...they track closely.  Cheers!

 

Yep, I've seen that. Traffic seems better on alexa. What worries me there is the year over year decline in page views per user and time on site. This might mean a lower conversion rate... Do you know any other source that might give us more reliable/precise data on traffic? (I've tried google trends too but found it quite useless).

[prunes]

In case you haven't seen, there's a new article on Gurufocus about Overstock:

http://www.gurufocus.com/news/168976/overstock-is-unbelievable--in-a-good-way

 

This business is growing at a fair clip. Again, it is a broker. Customers pay for the purchase upfront and Overstock pays the supplier later. This is inherently a negative equity business. The business model is not unlike DELL a decade ago.

 

So now you know why Francis Chou is long Overstock and why Costco is Charles Munger’s favorite company.

 

I'm taking those comments with a grain of salt. Anyway, it seems most people either hate or love Overstock.

 

I still don't understand what durable competitive advantage the company has versus Amazon. Why can't Amazon compete in this space?

[Parsad]

I still don't understand what durable competitive advantage the company has versus Amazon. Why can't Amazon compete in this space?

 

Amazon doesn't have to compete...they could just buy them for $500M or less right now and it would be cheaper than building the business from scratch.  Frankly, I don't know why Amazon just doesn't make an offer and take them out.  Cheers! 

[compoundinglife]

 

Amazon doesn't have to compete...they could just buy them for $500M or less right now and it would be cheaper than building the business from scratch.  Frankly, I don't know why Amazon just doesn't make an offer and take them out.  Cheers!

 

Might be addition for SHLD's online business as well, although I doubt they are entertaining any purchases with the current liquidity exercises they are going through.

 

WRT Amazon and their purchases, this visualization of their investments and purchases is interesting:

 

http://www.businessinsider.com/~~/f?id=4a6daa20c1432863111130b9

 

 

 

 

 

 

[Parsad]

Great chart!  I didn't know Amazon bought Imdb.com.  Cheers!

 

[lessthaniv]

I was intrigued by the analyst questions on the Q42011 conference call referencing internal discussions of stock buybacks using debt. I recognized that nothing is concrete. Just musings at this point. But its interesting to have a closer look at it.

 

I've copied the relevant part of the transcript down below, for reference. The numbers given were $50M-$100M of straight debt at a BBB rate (estimated at 8%).

 

So, just for shits and giggles;

 

If we take $50M at 9%  then the annual cost of this debt is $4.5M. Let's assume the average cost of the buyback is around $7/share. Those numbers suggest that OSTK could buy in 7M shares representing approximately 30% of the outstanding shares. Assuming those shares are cancelled the share count falls to around 16M. According to the 2011 proxy roughly 15M shares are owned in aggregate by; Chou, Fairfax, Owners & Director's, CMC (according to online posts). 

 

In other words, for the cost of $4.5M in annual interest payments the entire shareholder base can be solidified for the cost of $4.5M annually. Liquidity would drop but the downside seems low relative to the upside.

 

Now, looking at the 2011 numbers I note that a $4.5M increase in gross profit is easily attained by a 40 basis point increase in the current gross margin which declined to 17% from 17.4% one year ago. In addition the G&A expenses where huge in 2011. Largely due to legal costs. The annual expense increased 18% or $21M yoy in 2011. While I expect legal costs to continue I would submit that its not likely to continue at this pace annually. That should allow more funds to be loosened up in the coming year.

 

My point being ... on $1B in revenue - the small margin improvement that I deem possible will easily pay for this and I think it's realistic to be expecting these margin improvements in 2012. I really like this idea.

 

And if FFH/CHOU could be enticed with a 9% bond the capital structure would remain in solid hands; Overstocks partners are rewarded handsomely by holding attractive debt and supporting their equity stakes; And the long term minority shareholder gets rewarded too with a bigger slice of the pie.

 

Remember, Francis has all ready expressed a taste for OSTK debt when he began buying the Converts some time ago.

 

Thoughts?

______________________

 

Excerpt from Transcript:

Unidentified Analyst

 

Hi. A question about a comment Patrick you made a little bit ago that I was hopping you could give more clarification on you said that you are not adverse to flopping equity for debt, I presume that means taking on that and buying back shares, what’s the plan for this. What are the thoughts now, things going in wrong directions kind of levering up, if you could just give more color on that comment and then I have one another question for Jonathan after.

 

Patrick M. Byrne

 

Sure Steve, I’ve – my – you did read me correctly that yes if we could issue debt had an attractive enough price. That wouldn’t be interested in issuing any debt with any warrants, but a piece of straight debt and at 8-ish percent or something which is where we understand the market for BBB as these days. If we could issue debt at that level and buy an equity, I think that that’s something that we would strongly consider.

 

Unidentified Analyst

 

Any thoughts on how much that you would take on, how much stock you would buyback. I know that depends a little bit on the share price but and all for the timing, when you might deal this.

 

Patrick M. Byrne

 

Well I shouldn’t be clear this is I’m just sharing my thoughts not that there is no plan to do this. There is no plan as something we’ve of late discussed, but somewhere north of 50 and less than a 100 would be the appetite. And Jonathan is there anything inappropriate without me, so these are just my I’d say my ruminations rather than any corporate plan at this point.

 

Jonathan E. Johnson III

 

Yeah, we don’t have a corporate plan in this front, we do have an S3 which filed and effective and it allow us to issue debt and if the market conditions are right and we get the right prices, we always consider, we’re always looking to manage our capital structure on our balance sheet the best we can.

 

[Parsad]

I just merged the "long" and "short" Overstock threads, so now you have just one thread...be it long or short.  Cheers!

[lessthaniv]

I just merged the "long" and "short" Overstock threads, so now you have just one thread...be it long or short.  Cheers!

 

sounds good.

 

here is the presser with respect to the new hire as marketing head:

 

Overstock.com Hires Tim Dilworth as SVP, Marketing

 

 

2012-03-21 09:00 ET - News Release

 

 

Seasoned Coldwater Creek executive brings online and brick and mortar experience to Overstock.com

 

SALT LAKE CITY, March 21, 2012 /PRNewswire/ -- Overstock.com, Inc. (NASDAQ: OSTK) today announced it has hired Timothy Dilworth, a former executive of Coldwater Creek, as the company's senior vice president of marketing.

 

(Logo: http://photos.prnewswire.com/prnh/20120110/LA33954LOGO)

 

The company said Dilworth will be responsible for defining and driving all marketing activities across the Overstock.com organization.

 

"We're very pleased to welcome Tim to the Overstock.com team," said Patrick Byrne, chairman and CEO of Overstock.com.  "Given Tim's background and experience, we expect he will make an enormous contribution to our company."

 

Dilworth has worked for Coldwater Creek since 2000 in various positions within the company's marketing group and last held the position of Coldwater Creek's senior vice president of marketing.  Previously, Dilworth had served as vice president of marketing and ecommerce and held other positions at Coldwater Creek in marketing analytics.

 

Dilworth holds a Business and Information Technology degree from Montana Tech of the University of Montana and a Masters of Business Administration from the University of Idaho.

[alertmeipp]

I expected something better.

[Eric50]

 

Now, looking at the 2011 numbers I note that a $4.5M increase in gross profit is easily attained by a 40 basis point increase in the current gross margin which declined to 17% from 17.4% one year ago. In addition the G&A expenses where huge in 2011. Largely due to legal costs. The annual expense increased 18% or $21M yoy in 2011. While I expect legal costs to continue I would submit that its not likely to continue at this pace annually. That should allow more funds to be loosened up in the coming year.

 

My point being ... on $1B in revenue - the small margin improvement that I deem possible will easily pay for this and I think it's realistic to be expecting these margin improvements in 2012. I really like this idea.

 

 

Overstock is the kind of business that has razor thin margins. To be successful management has to pay permanent attention to details and be relentless in chasing any possible margin improvements. It's a never-ending battle; success is measure by the aggregation of fine tuning all the details. Amazon is doing a great job at that; they are frugal and they keep chasing every single dollar they can on their mature businesses. They have been very consistent in their execution. Had ostk been half that consistent, they would have been very successful...

 

That's why the stock is so cheap. The market thinks it's a horrible business while it's just a poorly managed one. With a little bit of focus and attention to details, margins could quickly improve. Hopefully the new SVP of marketing understands that... :-)

 

[Guest Hester]

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8491369-167470-169748&type=sect&dcn=0001047469-12-002841

 

Here are the outstanding financial results of Coldwater Creek during the last three years that Tim Dilworth helped them achieve.

[lessthaniv]

http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8491369-167470-169748&type=sect&dcn=0001047469-12-002841

 

Here are the outstanding financial results of Coldwater Creek during the last three years that Tim Dilworth helped them achieve.

 

Funny, Sam Antar just tweeted that.

[lessthaniv]

Can't attest to the accuracy but this website seems to suggest that Clearwater suffered from a rapid expansion of bricks and mortar businesses:

 

The store count went from 345 in 2007 to 421 in 2010. Over the same period net sales per store (1000's) fell from $2,517 in 2007 to $1,782 in 2010. A bonehead time to expand storefronts.

 

Now they are in the process of rapidly closing storefronts. The 3rd quarter press release suggest they are back to around 366 storefronts with plans to close more.

 

I find it hard to lay blame on the marketing guy....

 

I also note that over the same timeframe the e-commerce sales only declined 3% while his marketing budget was essentially halved.

 

http://retailsails.com/monthly-sales-summary/cwtr/annual/

 

 

 

 

 

 

[txlaw]

I was intrigued by the analyst questions on the Q42011 conference call referencing internal discussions of stock buybacks using debt. I recognized that nothing is concrete. Just musings at this point. But its interesting to have a closer look at it.

 

I found this intriguing as well, but I hadn't done any calculations of what that might mean in terms of percentage ownership after considering a buyback of shares.

 

This combined with a contribution margin that "wants to be" at 12% could make things interesting.

[Guest Hester]

Can't attest to the accuracy but this website seems to suggest that Clearwater suffered from a rapid expansion of bricks and mortar businesses:

 

The store count went from 345 in 2007 to 421 in 2010. Over the same period net sales per store (1000's) fell from $2,517 in 2007 to $1,782 in 2010. A bonehead time to expand storefronts.

 

Now they are in the process of rapidly closing storefronts. The 3rd quarter press release suggest they are back to around 366 storefronts with plans to close more.

 

I find it hard to lay blame on the marketing guy....

 

I also note that over the same timeframe the e-commerce sales only declined 3% while his marketing budget was essentially halved.

 

http://retailsails.com/monthly-sales-summary/cwtr/annual/

 

Still, I don't think it is a stretch to say ostk shareholders expected a new marketing guy with more accomplishments than, "He wasn't responsible for his previous employers ugly demise."

[lessthaniv]

Can't attest to the accuracy but this website seems to suggest that Clearwater suffered from a rapid expansion of bricks and mortar businesses:

 

The store count went from 345 in 2007 to 421 in 2010. Over the same period net sales per store (1000's) fell from $2,517 in 2007 to $1,782 in 2010. A bonehead time to expand storefronts.

 

Now they are in the process of rapidly closing storefronts. The 3rd quarter press release suggest they are back to around 366 storefronts with plans to close more.

 

I find it hard to lay blame on the marketing guy....

 

I also note that over the same timeframe the e-commerce sales only declined 3% while his marketing budget was essentially halved.

 

http://retailsails.com/monthly-sales-summary/cwtr/annual/

 

Still, I don't think it is a stretch to say ostk shareholders expected a new marketing guy with more accomplishments than, "He wasn't responsible for his previous employers ugly demise."

 

That is just a ridiculous comment.  You're willing to piss all over the guy within minutes of the press release (a carbon copy of Sam Antar's morning tweets) being issued and you blindly and carelessly attribute his past employers financial performance to his lack of skill ?!? The truth is you have no fricking clue what role his efforts played in the companies recent financial performance. You just saw it as an easy opportunity to take a shot a Overstock. Plain and simple.

 

[Parsad]

The proof is in the pudding.  Let's wait and see what changes happen, and how it drives traffic and sales.  I like where he's from, because they need someone who understands Overstock's demographic.  I'm disappointed, like others, that he came from a business that is struggling and it's hard to decipher his work against the business' results.  Like I said, let's wait and see.  Besides, having marketing out of Patrick's hands is already really good news!  Cheers! 

[alertmeipp]

u guys should listen to what Patrick said about this incoming executive - gave me high hope...

[Guest Hester]

 

That is just a ridiculous comment.  You're willing to piss all over the guy within minutes of the press release (a carbon copy of Sam Antar's morning tweets) being issued and you blindly and carelessly attribute his past employers financial performance to his lack of skill ?!? The truth is you have no fricking clue what role his efforts played in the companies recent financial performance. You just saw it as an easy opportunity to take a shot a Overstock. Plain and simple.

 

lol, calm down.

 

I didn't know Sam Antar patented the act of looking at the past business performance of a company that a new executive came from. WTF. Next time I look at the income statement of a company that a new executive worked at for 10 years and see that they lost $100 million on $775 million in sales last year, I'll be sure to check Sam Antar's twitter to make sure he didn't also mention this blatantly obvious fact.

 

Second, I didn't "blindlessly and carelessly" attribute the past financial performance to his lack of skill. I actually agreed with you in my last post and pointed out not that he has no skill, but rather that he has no noticeable accomplishments.

 

Read my last post closer and take it easy on the caffeine.

 

[Mephistopheles]

The proof is in the pudding.  Let's wait and see what changes happen, and how it drives traffic and sales.  I like where he's from, because they need someone who understands Overstock's demographic.  I'm disappointed, like others, that he came from a business that is struggling and it's hard to decipher his work against the business' results.  Like I said, let's wait and see.  Besides, having marketing out of Patrick's hands is already really good news!  Cheers!

 

Hi Parsad,

 

I've researched quite a bit about this company, and I like many things about it that have been mentioned about it on this thread. But what worries me is the recent drop in yoy sales, customer traffic, and customer orders, given that a major thesis is the sales growth rates, and especially given that in the same periods Amazon fared much, much better. I know that it's such a short period to measure, especially put up against 10 years of immense growth, but the 10% sales drop in the most important quarter of the year raises a red flag. It's hard to blame it on the Google penalty, given that it was resolved last summer.

 

So anyway, I was wondering what your take is on this.

 

Thanks

[Parsad]

The proof is in the pudding.  Let's wait and see what changes happen, and how it drives traffic and sales.  I like where he's from, because they need someone who understands Overstock's demographic.  I'm disappointed, like others, that he came from a business that is struggling and it's hard to decipher his work against the business' results.  Like I said, let's wait and see.  Besides, having marketing out of Patrick's hands is already really good news!  Cheers!

 

Hi Parsad,

 

I've researched quite a bit about this company, and I like many things about it that have been mentioned about it on this thread. But what worries me is the recent drop in yoy sales, customer traffic, and customer orders, given that a major thesis is the sales growth rates, and especially given that in the same periods Amazon fared much, much better. I know that it's such a short period to measure, especially put up against 10 years of immense growth, but the 10% sales drop in the most important quarter of the year raises a red flag. It's hard to blame it on the Google penalty, given that it was resolved last summer.

 

So anyway, I was wondering what your take is on this.

 

Thanks

 

I agree...it is a concern.  Unfortunately, you cannot do anything unless you are actually running the company.  You are going to have to factor the risk into your analysis. 

 

Our contention is that someone who grows a company from zero to $1.1B in revenue in ten years didn't suddenly become stupid.  They still had $1.07B in sales over the last 4 quarters and nearly 25m customers...so it's either an operational miscalculation (inventory selection, pricing, service) or a marketing mistake (O.co, Google penalty, online and offline advertising).  I think it was a little of both, but more on the marketing side.  We'll have to see how they do quarter after quarter going forward, and if there is any improvement with the addtion of Tim Dilworth.  Cheers!

[Guest valueInv]

Our contention is that someone who grows a company from zero to $1.1B in revenue in ten years didn't suddenly become stupid. 

Careful with that reasoning. Taking a company from $1B to $2B may require a very different managerial skillset than taking a company from 0 to $1B.

They may also be operating in very different environment. This same reasoning was applied to RIMs previous management. The problem is they kept doing what made them successful in the first place when they needed to do something completely different. I have seen companies fail because of this.

Compare how Nokia has responded to the iPhone/Android threat to how RIM has responded to a good case study on this.

 

Its not that management suddenly turned stupid. They did what was logical - relied on methods that were "tried and true".

[Parsad]

Our contention is that someone who grows a company from zero to $1.1B in revenue in ten years didn't suddenly become stupid. 

Careful with that reasoning. Taking a company from $1B to $2B may require a very different managerial skillset than taking a company from 0 to $1B.

They may also be operating in very different environment. This same reasoning was applied to RIMs previous management. The problem is they kept doing what made them successful in the first place when they needed to do something completely different. I have seen companies fail because of this.

Compare how Nokia has responded to the iPhone/Android threat to how RIM has responded to a good case study on this.

 

Its not that management suddenly turned stupid. They did what was logical - relied on methods that were "tried and true".

 

Of course. 

 

I think you have to take a look and examine what aspects of the business or environment has changed?  Has Overstock's customer base or demographics changed?  Has their retail niche of excess or closeout inventory changed?  Has their competition changed?  Are their competitors using a completely different form of sales?  Does the existing management team have the skills to grow the business further?  Are they still competitive on price, service, execution and shipping?  Are they spending advertising dollars wisely, and with very specific targets in mind?  Are general operating costs adequate...or are they too high?  Is their inventory selection meeting the demands of their customer base?  Is their core customer base growing?  Do they have adequate independent oversight on the board?  Are compensation incentives aligned with operational and shareholder interests? 

 

These are just a fraction of the questions you ask and run through to determine the strengthes and weaknesses of a business.  And they change based on economic conditions, the competitive environment and simply over the passage of time.  Evaluating a business is never static. 

 

What Prem may have seen in RIMM 2 years ago, could have changed far more rapidly than he ever expected.  Or even what Steve Jobs saw in Apple ten years ago when he returned, could never have been imagined in less than a decade by virtually anyone else...maybe not even Jobs!  That's why investing is as much art as science.  You calculate risk to the best of your abilities...both tangible and intangible...and then you make your bet and analyze quarter by quarter, year by year to see what portion of your theories have changed.  Cheers!