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Overstock Is Unbelievable - In a Good Way

March 19, 2012 | About:
Every week, Sam Antar or Gary Weiss will find something amiss with Overstock (OSTK). These two bloggers, combined, must be spending at least 16 hours a week researching and writing about a $125 million stock. According to their disclosures, they have no position.

Since I can’t afford to spend that much time investigating individual trees, I’ll stick to sharing my thoughts on what I perceive to be an extraordinary forest.

A tale of two retailers – part one, the importance of inventory turnover.

The guy selling used cars needs an inventory of, say, 20 cars to sell 1 today. That’s an inventory of $200,000 for $10,000 of revenue. After buying a replacement car to top-up his inventory, paying the rent etc., he takes home $1,000. That’s a 10% margin on an inventory turnover of 5%.

Our guy is married to a baker. She needs an inventory of about $20,000 (flour, yeast, etc.), to sell $10,000 worth of bread today. After buying some new flour and paying for costs, she too takes home $1,000. Her margin too is 10% but the inventory turnover is 50%.

The couple decides it’s time to expand. They need just $1,000 per day to live on. They can invest the other $1,000. The wife tells him she can open an extra bakery within a month without going to the bank for a loan. He just can’t believe it. His dad spent a decade repaying the loan they needed to setup the family business.

Overstock’s numbers are unbelievable

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Overstock’s inventory turnover is better than the other retailers combined. Unbelievable! I'll be writing about it in part two of my "tale of two retailers."

Days payable is an indicator of how quickly a company pays its creditors. Overstock is beaten (just) by Costco (COST). Both companies, on average, pay their creditors within a month. In this business it's not unusual to keep your creditors waiting for two months or more. Overstock and Costco are the exceptions.

Assuming Internet retail is a commodity, it stands to reason that Overstock should be able to raise gross margins to about 20% without losing a lot of market share to Amazon, Blue Nile or for that matter, Bluefly. Overstock has untapped pricing power.

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

A tale of two retailers - part two, Overstock.

Overstock is a couple (pun intended) of retailers.

Fifteen percent of revenue and roughly 100% of the inventory is carried by the direct business, a “classic” retail operation. They buy stuff (mainly closeout lots) and sell it (hopefully) at a profit.

The other 85% of revenue is from the fulfillment partner division. This is not a classic retailer, this is a broker. Overstock sells merchandise of other retailers, cataloguers or manufacturers ("fulfillment partners") through their website. This is a retailer without inventory! Here too, Overstock deals with closeout lots. The original manufacturer (say, Calvin Klein) doesn’t want last year's watch to compete with this year's model. They won’t be touting it on their own website or in their own shop — that’s where Overstock comes in. Calvin Klein will list last years unsold watches on Overstock.com.

This division is growing at a fair clip. Again, this 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.


Are they going bankrupt?

Summary: No.

$100 million of cash on $20 million of debt.

Should they choose to extend their “days payable” from the current 30 to a more normal 60 days, at least 1/12 of annual revenue converts into cash on the balance sheet: 1/12 * 1 billion => $85 million.

The “direct” business is in decline. Assuming it continues down that road, that inventory, at 0% gross margin, converts into $25 million of cash.

Unlike a typical retailer, they don’t need that cash to build seasonal inventory. It’s truly excess cash.

Why is revenue flat? Why aren't they profitable?

As discussed, they don’t need the cash. For now, they are content to invest for growth and kill the competition with low margins. Direct competitors are Bidz.com (toast) and Bluefly (no cash and negative FCF).

Sixty percent of revenue is from "home and garden" and 99% of revenue is from U.S.

Growth is tied to the housing market.


So what is the company worth to me today ?

I would pay $ 160 million ($ 7 per share) for the entire company in an instant. I would defer payment of the creditors for an extra month (that would bring it in line with the competition) and use the $ 85m of cash thus generated plus the $ 100m that's already on the balance sheet to pay myself a $ 180 million dividend next month. I would then distribute ownership of the company to the employees and go fishing.

Prem Watsa says I'm a terrible analyst and a worse LBO artist. He says it's worth more, much more.


Read more:

recent 10k

Sam Antar and Gary Weiss

Gusto Duel submitted OSTK for the value ideas contest

Anh Hoang discussed OSTK

Citron Research covered the space; NOT bearish on Overstock !

Geoff Gannon on Overstock in 2006

Disclosure

This is not a recommendation to buy or sell anything. At the time of writing, I had no position in any of the stocks mentioned. Any and all questions welcome as usual.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 4.3/5 (31 votes)

Comments

ramands123
Ramands123 - 2 years ago


Some other facts -

a) Fulfillment business (85 %) has grown YOY continously including last year

b) Creditor is US Bank which is one of themost conservative lender out there.

c) CEO with his father owns around 35 % of the equity. Bankcruptcy is the last thing in the world he wants to see.

d) Fairfax's investment manager sits on Board of directors.

e) CEO did not take any salary or bonus for last 10 years, reminds me of Richard Handler of Jefferies.

f) Sells at 0.1 times the sales compared with Amazon which sells at 1.8 times. This implies that Amazon sells at almost 18 times more on basis of sales.

g) There sales on percentage basis over last 10 years have actually grown faster than Amazon.

h) CEO is son of the guy who ran Geico and Warren Buffet has very high regards for him.

My personal assumption is that as they acheive economies of scale thier fixed costs on IT and other areas would become less significant contribute to positive free cash flows and net income. Until then i am hold and long on OSTK
tonysf
Tonysf - 2 years ago
Well, the key questions are

Has OSTK been successfully using a low price/low margin strategy in pushing out competitors?

or

Are its competitors, some are much bigger with solid financial positions, forcing OSTK to compete with low prices, making OSTK a low margin company?
batbeer2
Batbeer2 premium member - 2 years ago
Hi Ramands123, thanks for your contribution.

>> d) Fairfax's investment manager sits on Board of directors.

Who is he ?

>> h) CEO is son of the guy who ran Geico and Warren Buffet has very high regards for him.

CEO himself ran a Berkshire subsidiary (Fechheimer) for a while.
batbeer2
Batbeer2 premium member - 2 years ago
Hi Tonysf, that question more or less sums it up.

I'd say # 2 because:

1) Higher turnover at equal margin will enable you to beat your competitor (better cashflow).

2) OSTK has a superior financial position with $ 100m of excess cash. It's not readily apparent because of the payables on the liability side of the balance sheet.

At $ 1 billion of revenue and a business model where you pay your suppliers after, $ 70m of payables is nothing. They pay their suppliers much quicker than any of the comps (bar Costco).

Think of it this way: they could pay a $ 150m dividend in May without issuing any debt and no impact to the core business. That's a lot for a $ 125m company.
Adib Motiwala
Adib Motiwala - 2 years ago
Batbeer,

I took a few minutes to look at this. Some observations and questions

1) The Direct business that you say is in liquidation. Had sales of $160m last year at 8% Gross margins. I do see inventory is coming down and contributing to cash flow. So will we see only $22m-$25m in sales from this division and then its done/closed down?

2) The fulfillment business which is essentially a broker, records the revenues on a gross basis. Their partners actually do most of the work. From 10-k "_ ; however, we handle returns and customer service related to substantially all orders placed through our Website."

question: Does Amazon also record fulfillment sales on a Gross Basis?

I am not sure we should use the $890 million in sales from FulFillment segment as their sales and value OSTK on a EV/Sales basis.

3) Their Op Expenses have been rising especially technology and G/A spending while marketing was flat over last year. As a result, Op Ex of $196million exceeds Gross Profit $179million. And if the retail business is going to wind down , there will be more pressure on the broker business to offset these expenses. Do you know if these expenses will remain flat now as they have increased from $156m to $174m to $196m from 2009 to 2011.

However, the things to like are the balance sheet in the form of $80million in excess cash (i subtracted the $17m in line of credit that shows up in current liabilities.

For FCF, I am using

Net Income + D/A + Decrease in Inventories - Capex

It was positive in 2009 and 2010 but not so in 2011 using this definition. Ofcourse, if you use all the working capital changes it shows up as positive...(without deeper study I cannot determine whats the right adjustments to use..)

For now, I am on the sidelines. I want to watch if they can achieve scale with their fulfillment business to more than offset the op ex.

batbeer2
Batbeer2 premium member - 2 years ago
Hi Adib,

>> So will we see only $22m-$25m in sales from this division and then its done/closed down?

No. They are slowly running-off that business. They are not simply selling off all the inventory. They're just not taking on as much new inventory as they used to. In time, that inventory will go to 0 and be converted into cash.


>> Does Amazon also record fulfillment sales on a Gross Basis?

No idea. I'll get back to you on that.


>> I am not sure we should use the $890 million in sales from FulFillment segment as their sales and value OSTK on a EV/Sales basis.

I don't think that would be a good way of valuing OSTK.


>> Do you know if these expenses will remain flat now as they have increased from $156m to $174m to $196m from 2009 to 2011.

I don't know and I definitely wouldn't bet on it.


>> For FCF, I am using

Net Income + D/A + Decrease in Inventories - Capex


Capex !? Add up five years of capex and compare that to PP&E. That is not maintenance capex by any stretch of imagination.

- EDIT -

Regarding Amazon, from their 10-k:

Generally, when we are primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross.

We generally record the net amounts as commissions earned if we are not primarily obligated and do not have latitude in establishing prices.

So, Amazon's revenue is probably a bit understated.
ramands123
Ramands123 - 2 years ago
HI Bat Beer2,

#1> He is Mr. Mitchell ( he is a managing director of Hamblin Watsa Investment Counsel which manages investment portfolio of Fairfax. ( Reference Overstock Proxy report 2011)).

#2 > Yes you are right Patrick did run Berkshire unit for some time.

Thanks
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Batbeer,

Hilliarious, are Antar and Weiss really still at it?

Also, I assume OSTK and TJX should be benefitting from recessionary effects upon retail businesses and their suppliers combined with a recovering market driven by very price conscious shoppers. If you agree, do you think the margins can be maintained?

Note: I once wrote to OSTK suggesting that they work a deal with SHLD to be their online service, using the Sears stores as bricks and mortar delivery-pickup sites. Seems that they could also have served as Sears/K-Mart's liquidation service. :-)

Now you've got me thinking that OSTK is a buyout candidate. But by who?

Batbeer, if you like the 'new' OSTK broker business model, take a look at PointsInternational (Points.com). I'd love to hear your thoughts.
batbeer2
Batbeer2 premium member - 2 years ago
Hi AlbertaSunwapta,

>> If you agree, do you think the margins can be maintained?

I think OSTK will be keeping their margins lower than the others for years to come. I know that wasn't exactly your question.


>> Note: I once wrote to OSTK suggesting that they work a deal with SHLD to be their online service, using the Sears stores as bricks and mortar delivery-pickup sites.

That thought did cross my mind. It would answer your other question.

I'll take a peek at points.com, thanks.
batbeer2
Batbeer2 premium member - 2 years ago
Hi all,

>> 1) The Direct business that you say is in liquidation. Had sales of $160m last year at 8% Gross margins. I do see inventory is coming down and contributing to cash flow. So will we see only $22m-$25m in sales from this division and then its done/closed down?

I was just going over some facts and I've "misplaced" my source for this information. In the 10-k, the company does not state that the direct sales division is in run-off mode. On the contrary. Nevertheless, that division is has been in decline for a few years now. In any case, at the rate the other division is growing it may become immaterial in a few years.

So.... don't expect that division to be liquidated any time soon.

As for finacial strength, the point here is that they could liquidate that division in a matter of months if they wanted to. Revenue of that division alone is 10x inventory. That's on-par with Amazon, arguably an above-average retailer.
ramands123
Ramands123 - 2 years ago


Does anyone know why did the stock price drop so much ?

I know there was some decline in gross revenue ( i think 3 %) but how how did stock ended up being beaten down to one third of the price.

I wasn't able to find anything other than this 3 % decline in revenue. Did this got blown out of proportion due to europen mess Or is it because its very thinly traded ( after you net out Chou + Prem Watsa + CEO's stake i think remianing shares outsatninf are less than 40 %).

Any detail would be appericiated ?
batbeer2
Batbeer2 premium member - 2 years ago
@ Ramands123

Overstock was very recently dropped from an index. This would cause forced selling by some index funds.

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
I hadn't looked at the price since the fall/winter when a quality of service survey trashed OSTK. I just looked and was surprised at how far it had fallen.

Maybe Antar and Weizz, I think I'll call them The A&W BitterRoot Bears, are actually having an impact on the price. :-)

So Batbeer2 - are you buying/buying more? If you are, I may just copycat you on this one, at these prices.
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
...or we could nick name them ALL Tar and Wheeze. A fascinating fascination on their part with OSTK. I don't think they have the temperament to be investors of the Buffett ilk, as they do seem negatively obsessed with this one entity - or its management - never running out of breath it seems. :-)
batbeer2
Batbeer2 premium member - 2 years ago
>> are you buying/buying more?

I am now. I know I'm going to live to regret this but I sold some USG. I also saved up some cash.

You can usually see which US stocks I own on my gurufocus profile (portfolios). There, you can get a sense of what I own and have owned. OSTK is not yet listed there.
batbeer2
Batbeer2 premium member - 2 years ago
>> I don't think they have the temperament to be investors of the Buffett ilk, as they do seem negatively obsessed with this one entity.

Assuming they are being paid would explain a lot. They are certainly not dumb or lazy. IMO it takes some effort and skill to twist (should that be spin ?) the numbers so every bit of news always comes out terrible.

Gary Weiss alone has written 30 articles about OSTK since October. The articles are well written and have unique content. That is a lot of work. I've written about thirty articles in three years ! and I know that content is not all unique.

ramands123
Ramands123 - 2 years ago
Other fact is that Francis Chou has been buying OSTK all the way uptil January 7th with last price on his form 4 as 7.50 $.

His smaller equity fund loaded up OSTK in last 6 months all the way upto 11 % of his portfolio. All his other positions are around 5 % or less. So you can bet he has got a very strong conviction about it.

ramands123
Ramands123 - 2 years ago
Was anyone on thier conference call. I am puzzled by Patricks comment to a question on buyback.

He said if he can issue straight debt of 8 % without any warrent he would love to buyback 50 - 100 million $. How can he buyback that much stock as that is the entire capitalization of the stock ?

May be i should write thier investor relations.

ramands123
Ramands123 - 2 years ago


Steve Lenner: Any thoughts on how much debt you would take on, how much stock you would buy back? I know that depends a little bit on the share price, but – and also the timing of when you might do this?

Dr. Patrick M. Byrne - Chairman and CEO: Well, I should be clear. This is – I'm just sharing my thoughts, not that there is no plan to do this. There is no plan. It's something we've of late discussed, but somewhere north of 50 and less than 100 would be the appetite. Jonathan; is there anything inappropriate, well help me? So these are just my – I'd say my ruminations rather than any corporate plan at this point.

ramands123
Ramands123 - 2 years ago
Above is the transcript from Q&A
batbeer2
Batbeer2 premium member - 2 years ago
>> How can he buyback that much stock as that is the entire capitalization of the stock ?

Simple.... the stock would not stay at current prices. Assuming the P/S stays flat, the last five shares, together, would cost $ 125m.

Patrick Byrne: >> I'm just sharing my thoughts

LOL, I like that line! :o)
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Fairfax and Overstock once had lawsuits out targeting the naked shorting players and or hedge funds. Have those all failed or is there any potential hidden value there?
batbeer2
Batbeer2 premium member - 2 years ago
AFAIK, Overstock has appealed a decision by the California court to dismiss the case because there is no evidence the activity took place in California.

The files will become public though.

http://m.sltrib.com/sltrib/mobile/53683903-79/overstock-public-bank-case.html.csp

There is another case where someone found a cheaper sofa at Walmart and now OSTK is on the hook for $ 15 m. Net, I wouldn't assign any positive value to these cases.
Harish
Harish - 2 years ago
I just started looking up this company. Despite where it comes from what is your take on the charges leveled in the articles by Sam Antar ?

whitecollarfraud.blogspot.com/2012/03/is-overstockcom-in-death-spiral.html

I am esp. interested in

1) the framing of the revenue drop due to google rankings drop. It could easily be the other way (that manipulation of rankings led to a rise in sales ?)

2) the total outstanding shares -- Have increased near 100% in a decade with a decade of losses to show for. Not a good sign?

3) You said " Sixty percent of revenue is from "home and garden" and 99% of revenue is from U.S.

Growth is tied to the housing market." Could you throw some light on whether this poduct mix was there throughout. If so, there must have been an appropriate increase in earnings during the boom times?

4) Is it possible that the vendors want a shorter payable period to do business with overstock. So, rather than being an advantage, days payable is actually a source of stress?

Thanks

traderatwork
Traderatwork - 2 years ago
According to finance.yahoo.com

http://finance.yahoo.com/q/ks?s=OSTK+Key+Statistics

Share outstanding : 23.39M

Insider holding : 34.66%

Institutional holding: 52.9%

So, 87.56% hold by insider+institutional investors. 12.44% float which is = 23.39M * 0.1244 = 2.90M

and get this, shares short (previous 3 months)= 2.89M

Looks like somebody is swimming naked and playing dare with FairFax and Patrick Byrne.

IMHO The game is in 9 inning and will be over soon. $5 a ticket sounds like a good bet to side with FairFax, Frachis Chou and Patrick Byrne.

Arpan
Arpan - 2 years ago
Batbeer, great article, and thanks for sharing the idea with us.

This really drew my attention because of all the wonderful factors involved: management's connection to Berkshire, 35% insider ownership, Watsa and Chou's backing, solid balance sheet, growing business, superior turnovers, and cratered stock price.

I do have some concerns, and am wondering how much weight you would give to each of them.

1) Competitive Advantage: What is keeping, say, Amazon from stealing away market share or completely dominating? I know the revenues are growing in the fulfillment business, but how sustainable is that? What is the fulfillment business's competitive advantage? Low days payable? Network effect?

2) Profitability: I know this has been asked before, but at what point do you see them making consistent profits? How long will it take them to increase sales to a level where the gross profit is greater than the operating expenses. And also, does the 30% increase in SG&A over 2 years concern you at all?
batbeer2
Batbeer2 premium member - 2 years ago
>Hi Harish,

A lot of good questions.

>> what is your take on the charges leveled in the articles by Sam Antar ?

whitecollarfraud.blogspot.com/2012/03/is-overstockcom-in-death-spiral.html


FWIW, I think half of the bear case has some merit. I would like it more if the CEO spent less time with the various litigious issues. Try doing it the Buffett way, let your actions speak.

The other half is "boilerplate" 10-k text that you will find in the SEC filings of any company out there. Sam Antar blows this WAY out of proportion.

As for the "death" spiral, I think Sam Antar must have figured out the business by now and probably understands negative equity is not a problem in this particular business. In fact, as revenue goes up, it is inevitable. That is deliberately misleading.

>> the framing of the revenue drop due to google rankings drop. It could easily be the other way (that manipulation of rankings led to a rise in sales ?)

Yes.

>> the total outstanding shares -- Have increased near 100% in a decade with a decade of losses to show for. Not a good sign?

The number of shares going up is not good but 100% is a bit of a rough number. Even by my standards. Share count has been flat for half a decade now.

>> "Sixty percent of revenue is from "home and garden" and 99% of revenue is from U.S. Growth is tied to the housing market." Could you throw some light on whether this poduct mix was there throughout

"Percentage wise, "home and garden" has gone up in recent years. I would guess it has historically been about 65 % for the fulfillment partner division. That division has grown while the direct division has shrunk. Hence the trend. There was an appropriate increase in revenue in the boom times. I believe earnings are deliberately depressed.

>> Is it possible that the vendors want a shorter payable period to do business with overstock. So, rather than being an advantage, days payable is actually a source of stress?

That could be possible. Think about it, it may take as long as two weeks to finalise a sale. Where I work, we take longer than 50 days to pay creditors due to the paperwork alone. It takes a conscious effort to pay creditors within a month.

Invert, Why would suppliers allow NILE to hold the money for 4 months but require Overstock to pay within 30 days ? Compare NILE's balance sheet to OSTK's. Less cash, more payables against much less revenue... WOW.

Also, with O, the supplier has minimal risk. The inventory is in their warehouse. It's just the items they delivered last month that they need to collect on from Overstock. They sell that stuff through any other retailer, including Costco, and it takes longer.

Other retailers will first take the inventory from you and subsequently have it in their shops for weeks. Then they start thinking about paying you and they'll drag their feet for months. The supplier has less risk with Overstock than say.... Sears.
batbeer2
Batbeer2 premium member - 2 years ago
Hi Arpan,

Thanks for the kind words.

>> What is keeping, say, Amazon from stealing away market share or completely dominating?

Nothing. But if Amazon is rational, they will go after the likes of BKS first. If they like O's business, at these prices, they make a bid for it no ? I would worry more about eBay.

>> I know the revenues are growing in the fulfillment business, but how sustainable is that? What is the fulfillment business's competitive advantage? Low days payable? Network effect?

Overstock is a (the ?) broker in the close-out space. IMHO the advantages are similar to the advantages of any other broker.

>> I know this has been asked before, but at what point do you see them making consistent profits?

I dont know. At some point, they will be done expanding in North America so they start managing that region for profitability instead of growth. Then they start expanding elsewhere (in Europe ?). Hardly anyone here knows the company. Those that do know it, like it. In any case, I would expect the bottom line to turn black then.

I'll offer my prediction.... OSTK will report positive GAAP earnings if the non-us sales are over 10% (now 1%).

>> How long will it take them to increase sales to a level where the gross profit is greater than the operating expenses.

I don't think that is the right way to look at it. I think they could be profitable at $ 500m of revenue but they choose not to be. NILE has GAAP profits at $ 400m of revenue and that IMHO is an inferior web retailer.

>> And also, does the 30% increase in SG&A over 2 years concern you at all?

No. The number of employees went down as SG&A went up. That supports my thesis that they have a high rate of discretionary (growth related) expenses. Maybe some contracts to further develop the website so it also speaks french and german, some (web)advertising etc. etc.
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Much of europe should be ripe for the picking about now.

Some general thoughts:

Wouldn't an improving american economy make people less cost conscious as well as cut the availability of discounted goods for OSTK?

On the positive side though, I could see future government spending cuts creating a lot of uncertainty in many and varied markets. Also a shrinking government will place more reliance on the private sector and so I'd expect far more market volatility going forward. Such reoccurring fear and suffering plus more frequent boom/bust cycling should periodically renew their business model's prospects. i.e inventory availability and city or state specific market volatility would benefit the online retailers vs the bricks and mortar retailers.

Also possibly positive would be a recession or slowdown in China. Their currency will fall and if need be they will cut margins to maintain or grow sales, plus for political stability, to maintain jobs. However, this might feed lower cost goods to everyone in America and not specifically benefit OSTK.
ramands123
Ramands123 - 2 years ago


Hi Alberta,

One way to look at it is that historically OSTK on fulfillment partner revenue side has gone up through the peak of dof .com, bust of .com , subprime bubble and then bust. It has steadily grown through all cycles. Not to say that it will grow in future but historically it passed business cycles succesfully. Through this period its revenue grown 12 times which is equal to Amazon's. growth

Thanks
batbeer2
Batbeer2 premium member - 2 years ago
>> as well as cut the availability of discounted goods for OSTK?

Overstocking is a verb.

Back to our baker. If our baker thinks she can sell 1000 loaves will she bake 1000 loaves ? Any successful baker (talk to your baker) understands you want to have an oversupply to maximise your revenue and profit.

Calvin Klein knows this too. If they expect to sell more watches in 2013, they will also overstock more watches.

So.... an improving economy is not bad for Overstock.com.
ramands123
Ramands123 - 2 years ago


Overstock made to this weeks Valueline's above average 3-5 year price appericiation list with upside of 205 %
basil2000
Basil2000 - 2 years ago
The numbers are convincing and the article is great. But looking five minutes at this company with the eyes of a costumer, i.e. looking for reviews, I am quite shocked. Actually I would not buy there. There are so many complaints, so low ratings, I would feel stupid to make business with them.

And when I don't even want to buy at a store I would certainly not want to own it. It would be a "scuttlebutt disadvantage", to speak with Phillip Fischer, not to take the view of customers into account.

The value in the numbers could be misleading, because at the end of the day it is the customer who decides what a store is worth in the long run.
batbeer2
Batbeer2 premium member - 2 years ago
Hi Basil2000,

Thanks for your comment and kind words.

>> There are so many complaints, so low ratings,

Where do you get this information from ?
basil2000
Basil2000 - 2 years ago
I am from Germany and never heard of Overstock before, so I just googled "overstock" and "overstock reviews" to get an impression. I found something like this:

http://tinyurl.com/72puzh7

http://tinyurl.com/6s5zost

http://tinyurl.com/78hv4cr

http://tinyurl.com/7dlpb7m

Well, I don't know nothing about the reliability of this forums and gutsto.duel posted here on gurufocus a link to a completely different sounding news release: http://tinyurl.com/76uk6v6 - but after all this is the first impression I get by just using google.

Is the customer satisfaction discussed earlier as an issue?
SapientInvestor
SapientInvestor - 2 years ago
The numbers are impressive and you bring up some very good points. I became very interested in the stock because of your write up despite having a bad experience with buying something way back in 2005. I ordered a remanufactured printer which turned out worse than used and wasnt even the same printer I ordered. I'm not that picky. I could not return without paying some ridiculous fees. I figured that they must have improved a lot since then. However, after reading the recent reviews they sound too similar for me to ignore.

I think part of the problem is as a retail broker they have difficulty in maintaining quality control and will get blamed for anything wrong. It also makes it difficult to service unhappy customers.

It may be fixable so I will keep my eye on this one.

batbeer2
Batbeer2 premium member - 2 years ago
@ Basil2000

I think SapientInvestor has it right. This is a broker. You buy something and there's an 85% chance you're not dealing with Overstock as the supplier. It's like eBay.

So, yes, they will have issues with quality and they will get blamed for everything that goes wrong.

Having said that,

- That was true in the year 2002.

- The competition (like bidz.com) has the same problem.

- Why would it stop them from becoming in Europe what they are in the US ?
bohara14
Bohara14 - 2 years ago
Your analysis is so full of flaws it's hard to decide where to start. I don't have a lot of time for this so we'll just go over some of the basics.

How ridiculous is your inventory turns analysis? This is one of your main points and it is completely and utterly off-base. Overstock has a fulfillment biz which runs gross sales through the top line. They have a much smaller direct business which carries some inventory. You're taking sales from the fulfillment business (and direct business) to measure turnover of the direct inventory! C'mon man! Furthermore, who cares? Overstock is essentially just a big referral engine for manufacturers and other retailers who actually make or sell stuff. What happens with Overstock's inventory is not at all meaningful to the story.

You claim that the fulfillment business is growing at a "fair" clip. Check your facts brother. The fulfillment business shrank by 4.60% in the most recent quarter and only grew at 1.19% for the entire year, vastly underperforming the growth of ecommerce (somewhere near 14%) and the growth of Amazon and other rivals. It's also notable that Overstock's revenue shrunk by over 3% in 2011 while Patrick Byrne told investors that his business would outgrow ecommerce by ten percentage points on a conference call. Ooops! Overstock is being driven into the ground by larger competitors. The impact is notable on the top line, in the margins, and on the balance sheet.

Are they going bankrupt? Your negligence in this "analysis" is stunning. The company has a negative working capital balance of $14mn, a Z-score of -7.3, and just completed a year where they lost almost $20mn, yet you indicate the company is in rosy shape from a liquidity perspective. Some respected accountants have a much different take ( http://goingconcern.com/post/confirmed-overstockcom-doomed ).

Your analysis borders on criminal. To back up your claim you assume the company can balloon payables and run its direct business into the ground. Look, they've already made the moves with payables, in fact that and the ballooning of accrued liabilities provided approx $37mn of cash in the 4th quarter. Yes, without that impact the company would have been cashflow negative for the year and had they just increased these accounts inline with the increases of 2010 (appropriate given the similar business levels) they would have been cashflow negative for the year. The real point is this: they can't push out payables like NILE because they have a much different business than NILE and they have different agreements with their "suppliers" or fulfillment partners than does NILE. They can not pay their suppliers for awhile, sure. But what will happen is that those suppliers will slow or stop their business with OSTK in preference for those partners who pay in a timely fashion. The reason that Amazon's payables look like they take longer is that they have a vastly different mix of business.

This is a business in decline in a highly competitive market with a combative CEO who isn't going to go down without fighting (using shareholder dollars to wage that battle). If you are truly willing to buy the stock at $7, please contact me directly. I will take you up on that offer immediately and in size. And for your brainy idea of stealing partner money to pay yourself a big fat dividend, give that a go. I'm sure you won't find any lawsuits waiting for you on the other end when you leave employees and fulfillment partners holding the bag! I also wish to thank you for your opinions. Analyses like this help create opportunities for the sober-minded amongst us.
batbeer2
Batbeer2 premium member - 2 years ago
Hi bohara14,

Thanks for your comments.

>> How ridiculous is your inventory turns analysis? This is one of your main points and it is completely and utterly off-base.....

Yes, for the fullfilment business alone, the inventory turnover is mathematically infinite. Like the baker, that business does not require a lot of capital (debt) to grow.

Your opinion that it is off-base does not make it so.


>> You claim that the fulfillment business is growing at a "fair" clip. Check your facts brother.

Fair point. We may be looking at different time frames though.


>> The company has a negative working capital balance of $14mn, a Z-score of -7.3, and just completed a year where they lost almost $20mn, yet you indicate the company is in rosy shape from a liquidity perspective.

Yes.


>> The real point is this: they can't push out payables like NILE because they have a much different business than NILE and they have different agreements with their "suppliers" or fulfillment partners than does NILE.

Wow ! You know these agreements ?! If so, please share.

Or..... Do you just find it hard to believe a company pays its bills within a month just because it can ?

The real point is: Overstock could put NILE's gems on their site tomorrow and take market share. NILE couldn't hope to take on Overstock. That simple.


>> .... you assume the company can balloon payables and run its direct business into the ground. Look, they've already made the moves with payables, in fact that and the ballooning of accrued liabilities provided approx $37mn of cash in the 4th quarter.

I assume nothing. I just use this scenario to point out how Amazon, eBay, NILE or fr that matter myself could pay hundreds of millions to acquire Overstock and get their money back in mere months.

>> This is a business in decline in a highly competitive market with a combative CEO...

Yes, being combative doesn't help.


>> If you are truly willing to buy the stock at $7, please contact me directly. I will take you up on that offer immediately and in size.

Thanks ! I'll do that the moment I run out of offers at lower prices. I now have some at $ 5.3.


>> I also wish to thank you for your opinions. Analyses like this help create opportunities for the sober-minded amongst us.

My pleasure.
ramands123
Ramands123 - 2 years ago
OSTK is out with latest 8 K on thier website . SEC has completed 2.5 year investigation of Overstock and came back with no wrong doing. Great day for Overstock.

AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Great discussion all. Thanks. Passionately negative sentiments with a sense of certain calamity are what creates value opportunities. Now assuming Bohara14's comments are fairly accurate and possibly predictive in terms of the near term future but not wholly predictive, what would one watch for in terms of identifying a turnaround of fortunes (and sentiment).

Batbeer, Bohara14 and others, fyi I'm now out of Points International but would love to hear opinions as particularly both Batbeer and Bohara have their opinions on low cap. req. agency models.) I see a lot of potential parallels with Overstock. Here's a teaser... :-)

http://www.stockhouse.com/Bullboards/MessageDetailThread.aspx?sv=2&p=0&m=23119209&r=0&s=PTS&t=LIST

"it as a kind of value arbitrager in loyalty points"


Now if one would buy the other!!! :-)
batbeer2
Batbeer2 premium member - 2 years ago
Hi AlbertaSunwapta

Points is interesting. It reminds me of an old Buffett stock. They generated enough cash to buy Sees which in turn generated a heap of excess cash.

Blue Chip stamps ran into trouble when the credit card companies started offering similar services as an add-on to their core transaction and credit business.

For Points.... what happens if say.... Paypal decides to add some features/services and morphs into a third-party loyalty program ?

I need time to read and think. I'll be back.

batbeer2
Batbeer2 premium member - 2 years ago
Overstock has reported the results for the quarter ending March 31.

- Direct business declined.

- Fulfillment business grew.

- A GAAP profit of $ 12c per share.

What I did not expect to see is that they have further reduced their payables. "Days Payable" now comes in at three weeks. That's unbelievable ! I haven't seen a retailer do that. This move was a drain on cash though. That is now down to $ 70m (on 0 debt).

Here's a transcript of the earnings call.
batbeer2
Batbeer2 premium member - 2 years ago
>> Batbeer, Bohara14 and others, fyi I'm now out of Points International but would love to hear opinions

Hi AlbertaSunwapta,

I've been thinking about Points.

1) I thought Paypal was a threat. It turns out they are now a partner. Good !

2) I think of Points as a broker. Brokers have important first-mover advantages and barriers to entry. Points has that. Good !

3) One way brokers generate cash without taking on risk is to get the buyer to pay in advance. The seller gets the money later. As a going concern, a good broker has a significant, continuous and interest free "float". They collect an interest on that. That's just another reason why a dominant broker has pricing power. The best brokers can generate cash on negative margins due to the interest on the float. Rising interest rates would have a serious impact on GAAP earnings and FCF of many brokers out there (the reverse too is true).

Unfortunately for Points, it seems the sellers (airlines etc.) are in a position to force the broker to buy the assets (airmiles) in advance. So Points, today, is a broker with a significant inventory of the assets it deals in. That is not what I like to see.

So here's my opinion: To date, Points hasn't shown it has any power over the sellers (airlines). That is very bad if you're a broker. If more individuals start swapping airmiles, that changes their postion. That is precisely where they are trying to go. But they aren't there.

I would be more interested if the volume of individuals swapping airmiles etc. becomes multiples of the volume they're now buying off the airlines. That IMO would be the key metric to watch.

I hope any of this makes sense to you.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Any thoughts on Overstock.com's now much higher valuation?


Thanks for the thoughts on Points. If I revisit Points I'll sure maintain that perspective on assessing their moat. Much appreciated.

I'm adding a couple loosely related articles below on the real or fictional battle over naked shorting that Overstock is a key player in.

Quite interesting about GS's "House Calls" in second article

http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515

Accidentally Released - and Incredibly Embarrassing - Documents Show How Goldman et al Engaged in 'Naked Short Selling' | Matt Taibbi | Rolling Stone

Excerpt:

"“We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”

Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled."


http://seekingalpha.com/article/457911-strange-bedfellows-gretchen-morgenson-and-patrick-byrne

Strange Bedfellows: Gretchen Morgenson And Patrick Byrne

excerpt:

"Here’s Cohodes’s deposition:



[quote]A. I can remember Goldman closing us out of American Capital Strategies at $33 on that Monday, and when they stopped doing whatever they had to do, when the smoke cleared, we finished covering the thing four weeks later at 2, something like that. We finished covering it at 2 but they took us out of eighty percent of our position in the thirties, and when they were done, we covered at 2. They took us out of Tempur-Pedic at 16, covered that, the rest of it four weeks later, at 3. I mean, it was insane.

So it’s kind of like I played the entire thing for a complete collapse, got the collapse and was closed out, closed out right before and during.

Q. If Goldman Sachs & Co. had not made these house calls and had extended you more credit during this time period –

A. We didn’t need more credit. All they had to do was not make the house calls."

[/quote]
batbeer2
Batbeer2 premium member - 1 year ago
>> Any thoughts on Overstock.com's now much higher valuation?

1) If I'm right, it has a very long way to run. Obviously it can get a lot cheaper. I could just as well have written this @ 14 and got hammered. Some smart writers/investors did just that.

2) I find some comfort in the fact the hard working and very smart guys at citron research covered the space but never wrote negatively about OSTK. When I do work on a stock I always check that site (and footnoted.com) to see if the company or any of its competitors have been covered there.

3) I've done some work on Amazon and IMHO it's not a threat. No one wants their latest greatest product competing with last years model on Amazon. At half the price. That's what you have Overstock for; to get rid of your ehm.... overstock. eBay may be more of a threat.

4) I wonder if the offer @ $7 is still open ;-)

In short,

As far as I'm concerned, there is no news. The price has come up a bit and as a result the bit I wrote about how you could buy this and get your money back in months no longer holds. Other than that, I could have written this today.

FWIW, I think the tax thing is a non-issue. Brick and mortar retail is not going to claw back market share if the online guys have to start paying 2% more tax.... nonsense.

kfh227
Kfh227 premium member - 1 year ago
Wow, good call

batbeer2
Batbeer2 premium member - 1 year ago
....and there goes overstock.

Up 35% or so today.




http://www.prnewswire.com/news-releases/overstockcom-reports-q1-2013-results-203583351.html


Net revenue — Total net revenue for Q1 2013 and 2012 was $312.0 million and $262.4 million, respectively, a 19% increase. The growth in net revenue was primarily due to a 21% increase in average order size, partially offset by a small decrease in the number of customer orders.

Net income — Net income was $7.7 million and $2.7 million for Q1 2013 and 2012, respectively, an increase of $5.0 million. Q1 2013 diluted earnings per share were $0.32, compared to $0.12 for Q1 2012.

swnyc2
Swnyc2 - 1 year ago
Batbeer2,

I wish I had read your thoughts on OSTK when they first came out. Great call!

BTW, I saw you recent fair value price for AMZN of $75.

I would LOVE to short it - just don't have the courage.

Part of my problem is coming up with a catalyst, otherwise the crazy valuation will just continue at it has for years.

Any thoughts on this?

Regards,

batbeer2
Batbeer2 premium member - 1 year ago
I think OSTK still has a long way to go.... as a business. The stock is not as cheap as it was though. Expectations are now somewhat higher. You may get another chance to own this one.

I don't short (unless it's a pair-trade) and I certainly wouldn't go shorting Amazon. Indeed, no catalyst. Maybe someday they'll do an " Apple" at which point I may become interested on the long side. It's not a bad business, it's just WAY overpriced.
swnyc2
Swnyc2 - 1 year ago
Agreed.

Since you brought it up, you must have some interesting thoughts on AAPL.

AAPL was one that got away from me.

I was thinking of buying it in 2003-2004, but investing wasn't much of a priority for me back then.

I casually kept waiting for a dip to buy in. It never happened - at least not until now, perhaps....

It seems like AAPL shares are reasonably priced, if you assume slow growth going forward - with substantial upside if they can develop a new hit product like iTV without Steve Jobs.

Your thoughts?

batbeer2
Batbeer2 premium member - 1 year ago
AAPL looks interesting now but IMO it is not yet absurdly cheap. I can see how they could have a bad year and earn "just" $25B. Adjusting a bit for the balance sheet, I'd be willing to pay $200 or so. That seems absurdly cheap today and that is precisely how I like em.

Also, I hate the fact that they're always issuing shares for management. If the stock really tanks, they may stop doing that.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
^As I said I'm out of Points International but still curious on your thoughts on it. It's managed another double. Shows what a successful pick can potentially do

So it's up near six fold from its '08 or '09 low. That's not my return though but i did average down in the crisis. Can it continue?

OSTK now? I've had it indirectly and I hope it continues to show promise.


Also mentioned pts couple years ago here.

Http://www.gurufocus.com/news/112546/thinking-about-pni-digital-media


batbeer2
Batbeer2 premium member - 1 year ago
PTS.... nothing to add for now.

OSTK:

The original value thesis no longer holds.

On the other hand, the original bear thesis has been disproved as well. Reasonable people were expecting the company to go bankrupt. They were wrong because this is one of the few companies that runs on negative equity as a result of the ordinary course of its business. They sell first and pay later.

You had to recognise that to understand why this was not in distress even though the standard tests (Altman-Z) indicated it was going bust. There are a lot of stocks out there. Even the fans of Altman (that doesn't include me) have to concede there must be hundreds of false positives. You correctly identify a dozen of them and you should do well.

In any case, the value/distress paradigm is gone now. I need a solid growth thesis to reasobaly argue why this is cheap today. For that, I would need to see see them expand either their scope or geographic presence. They start selling diamonds, then they have a fair chance of putting NILE out of business (that is quantifiable).

Or they start selling stuff in Brazil (that too could be quantifiable). Either way, you can get an idea of where increments revenue and profits could come from. If you got that picture, you could track that over time to see if they are executing it right.

I can't reasonably (reason as in using your head) argue why it's a bargain without a clear idea of where the growth is likely to come from. If I get that "picture", I may be back with a thesis for growth.

Till then, it's an interesting movie to watch.
batbeer2
Batbeer2 premium member - 11 months ago
Francis Chou writes about Overstock in his semi-annual report:

..... Overstock.com (OSTK) was the largest contributor to the positive performance of the Fund. The stock increased in value to $28.20 as at June 30, 2013, up from $13.95 as at December 31, 2012. It is interesting to note that a year ago, on June 29, 2012, it was trading as low as $6.91 per share.

Generally, when prices hit a new low, our reaction is to check whether our evaluation of the company's intrinsic value is accurate enough. If it is accurate enough, we either sit put or buy more. Since we already had a fair amount of OSTK in the portfolio, we did not add any more but were comfortable with our investment in the company.

There are many ways of evaluating a company and one of them is to check recent transactions within its industry which may provide a sense of its intrinsic value. For example, in 2009 Amazon bought Zappos, a company that is similar to OSTK but different in many ways, at close to one times revenue. At one times revenue, OSTK’s intrinsic value is more than $40 per share whereas its stock price closed on December 31, 2012 at $13.95 per share. ....

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