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Anh Hoang
Anh Hoang
Articles (264)  | Author's Website |

A Closer Look at Overstock.com's Frequent Earning Restatements

January 11, 2012 | About:

There are a lot of arguments relating to the company Overstock.com (NASDAQ:OSTK), and conflicting signals in terms of guru buys, its management, and business and financial performance. Any investors would be scared of the company which has issues with auditors concerning the misrepresentation of financial statement numbers, leading to the restatement of the past reporting figures or to legal disputes with its shareholders. I have briefly looked at the overall performance of the company in the 10-year historical period in my previous post. And today I would like to dig deeper into the restatement of financial figures of the company.

Looking back the recent history of OSTK, it started in October 2008, when OSTK restated its financial reports for five years, from 2003 to 2008. It had to do this because of errors relating to accounting of customer refunds and credits. The restatement led to the reduction of $12.9 million in revenue and $10.3 million in operating loss, along with nearly $1 million in net loss from continuing operations for the whole five-year period. The restatement just affected the income statement, as it stated in its SEC filings: “The estimated cumulative impact of these adjustments increases the accumulated deficit by $10.3 million as of June 30, 2008. The adjustments for the fiscal years ended December 31, 2007, 2006, 2005, 2004 and 2003 and the quarterly periods ended June 30, 2008 and March 31, 2008 have no cash flow impact.”

Then, in the beginning of 2010, on the recommendation of the management, the company’s consolidated financial statements for the year ended 2008 and interim for the next three quarters should be restated in the following points:

· The income of $1.7 million recorded in 2009 was shifted back to fiscal year 2008, due to errors in reporting on what the company paid to its partners and to freight vendors based in “incorrect invoices from the vendor.”

· It decreased income for fiscal year in 2008 by $350,000, and nine months in 2009 by around $900,000, because of company’s share-based compensation plans. In its 8-K SEC filings, it was reported to incorrectly amortize the expense related to restricted stock on a three-year vesting schedule rather than a three-year straight-line amortization and applied outdated forfeiture rate in calculating its expense.

Right before that, there were arguments back and forth between Grant Thornton and OSTK regarding the responsibilities on restatement figures. Thornton issued a letter saying that it “did not take a position as to whether the Company’s financial statements for the year ending December 31, 2008 should be restated.”

Patrick Byrne, replied that “Grant Thornton recently told us that we needed to amend our Q1 and Q2 2009 Form 10-Q’s to remove a $785,000 partner overpayment recovery from our Q1 financial statements. Such amendments would have required that we restate our 2008 Form 10-K: After all, a recovery of a $785,000 partner overpayment can’t just disappear from our financial statements. It has to go somewhere. Despite the words Grant Thornton used in its letter to the SEC, I am confident it understood that its position was, in fact, advice to restate our 2008 financials. Grant Thornton’s response on this point is a distinction without a difference and misleading because we could not move the $785,000 from our Q1 2009 financial statements without restating 2008.”

Patrick mentioned that the decision to restate financial statements must ultimately made by the company. He also said, “However, Grant Thornton’s refusal to complete its Q3 2009 review unless we amended our Q1 and Q2 2009 financial statements necessitated either restating our 2008 Form 10-K or dismissing Grant Thornton. We chose to dismiss Grant Thornton.” Afterward, it hired KPMG to do the auditing.

Coming back to the five-year restatement, the company has confirmed that it was the decision made by the management of the company, and it resulted from problems arising from Oracle ERP system implementation. However, the company did not blame Oracle for the damage. It said the accounting errors arising from implementation were a result of its own mishandling of the implementation. Patrick Byrne commented: “The short version is: When we upgraded our system, we didn’t hook up some of the accounting writing, however, we thought we had manual fixes in place. We’ve seen found that these manual fixes missed a few of the unhooked wires.”

The CFO at that time, David Chidester, gave an explanation for the errors: ”As part of accounting system upgrade we changed from recording refunds to customers in batches to recording them transaction-by-transaction. When we issue a customer refund, the refund reduces the amount of cash we received from our credit card processors and, as a result, our financial system should reduce our accounts receivable balance. After the implementation, in the instance of some customer refunds, this reduction wasn’t happening and we didn’t catch it."

In February 2008, the CFO issued a letter in response to an SEC investigation in terms of accounting standards, detailing answers for each question that the SEC asked. The letter was aggressively attacked by one blogger named Sam, blaming many errors in the submissions to the SEC by OSTK and PricewaterhouseCoopers. In the beginning of 2009, David resigned after 11 years with the company.

To put it in a broader sense, the restatement for the company to adjust nearly $13 million in revenue in the period that the company generated $3.5 billion revenue is very insignificant. However, the restatement of earnings, the arguments and changing of the auditors, and the leave of the CFO should be very questionable. Who knows that in the future, OSTK might experience many more significant restatements which haven’t been visible. Francis Chou and Prem Watsa, each own more than 10% of the company, and might buy more to influence the corporate actions of OSTK. If it is the case, then again, individual small investors should be patient and rely on the actions of Patrick Byrne, Francis Chou and Prem Watsa with their board influence to position the company to the sustainable growth and profitability.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk

About the author:

Anh Hoang
Money manager in global equities, especially in U.S. and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam.

Visit Anh Hoang's Website

Rating: 3.3/5 (16 votes)


Ramands123 - 5 years ago    Report SPAM

Good artical.
Batbeer2 premium member - 5 years ago
Thanks for an article worth reading.

>> Any investors would be scared of the company which has issues with auditors concerning the misrepresentation of financial statement numbers, leading to the restatement of the past reporting figures or to legal disputes with its shareholders.

Ehm.... that is not strictly true. There are market participants who are (rightly or wrongly) able to hold such stocks and sleep well.

Buffetteer17 and myself weren't scared of Wellcare. Overstock seems, to me, eerily similar of Wellcare in 2009. In both cases, dumb GAAP and lots of SEC letters drove the market cap far below the amount of cash that could be taken out of the business.

Wellcare was mentioned here by Buffeteer17: http://www.gurufocus.com/forum/read.php?5,56218,56794#msg-56794

I was saying nice things about Wellcare in january of 2009 when it was trading at $ 12. Naturally, it dropped to $7 within weeks.

You may find it interesting to search for threads discussing WCG in 2009 (here at gurufocus but also at seekingalpha). Back then it was Berkowitz and Pabrai that were long.
Ramands123 - 5 years ago    Report SPAM

I am not able to find any solid resoan why did overstock's market cap dropped from close to 400 m to 135 m in 2012. Yes there is a small drop in sales i think around 3 % but does anyone really think's that it deserves this kind of drop in market cap.

This is a business that on revenue side has grown as fast as Amazon on percentage basis over last 10 years.

Yes i aggree with author above that there has been re-statments but they have been pretty insignifcant.

On CFO side i wish there was more clarity on why did he depart. Maybe we need to check proxy or 8k for that.

I would bet on Francis Chou , Prem Watsa and Patrick. They have so much invested in Overstock, that they cannot afford to be wrong. Plus above all business has done extra-ordinary well over last 10 years.

Long OSTK.

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