The long thesis for Overstock.com Inc. (OSTK, Financial) has generally consisted of a two-fold argument: selling its ailing online retail business and pivoting to a portfolio of blockchain ventures. Legendary short-seller Marc Cohodes, for example, has been bullish on the name and has seen the sale of the retail business as vitally important.
However, despite recently claiming to have two eager suitors waiting in the wings, CEO Patrick Byrne has done a rather shocking about-face. He now says that Overstock plans to hold on to its retail business, possibly forever.
Suitors sighted
For months, it seemed as if the hopes for a sale of the retail business had faded away. In April, Cohodes accused Byrne of failing to execute. Then, on June 20, Byrne declared that efforts to find a suitor were on the cusp of bearing fruit:
"Two very attractive acquirers that I would have put high up on my list have shown up. People have seen that our earnings have turned."
Byrne hinted at the identity of at least one of these suitors, contending that a traditional brick-and-mortar retail business could leverage Overstock’s e-commerce platform and national logistics infrastructure to great effect:
"The holy grail of furniture would be getting next-day delivery on a large assortment of furniture. Some brick-and-mortar companies that have under invested in technology and sat out the internet revolution are now hopelessly behind."
Unsurprisingly, Overstock’s stock soared after Byrne’s comments were reported by CNN, a run that was subsequently bolstered by the summer crypto rally. While it seemed like unambiguously good news for the company on the surface, we were left scratching our heads at the decision to announce the existence of actively interested acquirers.
Generally speaking, firms looking to buy all or part of another business do not like it when the story is leaked by the seller. It launches the share price upward, which throws pricing of the potential deal into chaos. Byrne’s decision to (apparently) spill the beans seemed amateurish -- and made us question how real these offers actually were.
A sudden change of tune
Fast forward to June 15 and suddenly Byrne is singing an entirely different tune. In a letter to shareholders, the mercurial CEO declared that, because the retail business has recovered substantially, and will likely tip back into profitability this year, the imperative to sell is now gone:
“Retail’s recovery in 2019 has been exceeding expectations. I have raised our 2019 Retail Adjusted EBITDA estimate from $10 million to $15 million to (now) $17.5 million to reflect this growing strength...That means that for 2020, Retail should generate enough cash to substantially cover Blockchain’s operating cash burn. Thus, an important strategic consideration to note is that we are not in a place that we have to sell.”Indeed, Byrne now claims that profits from the online retail platform will now be used to offset the cash burn from its expanding blockchain business.”
An adjusted Ebitda fo $17.5 million is hardly peanuts, but it is also nothing like the hundreds of millions of dollars that most Overstock bulls expected to arise from an outright sale. Yet, according to Byrne, Overstock now intends to act as if it plans to run the retail business forever:
“We will sell the Retail business if it makes sense and we get a good offer for a good home for it. Otherwise we will operate the retail business as though we are going to hold it forever. We will run it with a goal to maximize profit, which will fund our world-changing blockchain innovations, while we leverage its significant traffic to introduce our consumer-facing blockchain products to the world.”
Fighting fake news
Byrne’s latest letter to shareholders marks a rather stunning departure from his previous strategy, especially in light of his statements of less than a month ago regarding two seriously interested suitors. Confronted with this fact, Byrne appears to have decided that the best defense is a good offense.
In his letter, Byrne seems to be attempting to throw into doubt the veracity of CNN’s report on his June statements, which had reportedly been made during a talk at the Fortune Brainstorm Finance conference (emphasis Byrne’s):
“Please, shareholders, do not believe anything reported about what I say about Retail unless youhear me say it on a conference call or on TV, or in a printed statement from the firm such as this.”
Evidently, Byrne wants his shareholders to believe that all external reporting amounts to little more than fake news. The market has apparently decided to give the financial media the benefit of the doubt, however, as Overstock’s shares tumbled in the wake of Byrne’s latest bizarre missive to shareholders.
Byrne’s abrupt about-face and increasingly combative tone will do little to reinforce his credibility among shareholders. The attempt to spin his radical strategic shift as fake news peddled by dubious reporters looks rather like desperation. If nothing else, it is clear that any offers from potential suitors were far less firm than Byrne wanted markets to believe.
Verdict
Mere days before the latest shareholder letter was published, Cohodes was calling for Byrne’s ouster:
“Patrick has lost the confidence of the Holders...He is a Fisherman not a Chef of a Seafood Restaurant. He can catch fish but can’t cook.”
This latest episode in the Overstock saga will probably sour shareholders on their CEO even further, and will not likely change the tune of the likes of Cohodes.
Why Byrne would want to keep it forever, rather than sell it for significantly more upfront cash, is beyond us. Fundamentally, the decision to hold onto the retail business makes no sense. It just is not a good business, even if it is no longer burning cash. If there was even a remote hope of selling, one would think Overstock would pursue it. Giving up suggests that there are probably few businesses out there with an interest in acquiring an expensive, low-margin e-commerce and logistics platform.
Ultimately, Byrne has proven that he cannot execute to plan. As a result, the company will continue to operate its barely profitable retail business alongside its blockchain efforts. That does not sound like a coherent strategy.
Disclosure: No positions.
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