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WIKI ANALYSIS
Overstock.com (NYSE:OSTK) is an online marketplace that offers discounted brand name merchandise purchased from the surplus inventories of manufacturers and retailers. Although its been able to cut costs effectively since its inception in 1997, the company has incurred yearly net losses due to high operating expenses[1]. For the fist nine months of FY2009, it witnessed a net loss of $2.5 million, an 82% decrease from its $13.7 million loss for the first nine months of FY2008[2]. Nonetheless, it has climbed to 2nd in retail customer services nationwide[3].
At the heart of Overstock's problems is its difficulty in attracting customers. It operates in a very competitive market and as search engines such as Google have become more popular, customers have opted to begin their search for online merchandise through general search rather than through the established platforms of Overstock or competitors Amazon and Ebay. As a result, Overstock has been forced to spend large sums on search engine acquisition; in 2008 the company spent $57.6 million in marketing and customer acquisition.[4] These increased costs in conjunction with poor conversion rates have resulted in an unfavorable mix of high costs. Additionally, poor global economic conditions have affected consumer demand for the kind of goods that Overstock sells.
Company Overview
Business and Financial Metrics
In 3Q09, Overstock's total net revenue increased 4% to $195.1 million from 3Q08's $186.9 million. Revenue for its direct revenue decreased 5% to $32.4 million from 3Q08's $34.2 million, while its fulfillment partner segment saw revenue increase 7% to $162.7 million from $152.7 million[5].
| Annual Financial Data, in Millions | FY2005 | FY2006 | FY2007 | FY2008 |
| Revenue | $803.8 | $788.2 | $760.2 | $834.4 |
| Gross Profit | $120.6 | $94.8 | $127.6 | $142.9 |
| Operating Income | $(23.8) | $(93.8) | $(41.6) | $(10.9) |
| Net Income | $25.1 | $101.9 | $45.0 | $12.7 |
Business Segments
Overstock’s shopping business has two different business lines: Direct Segment and Fulfillment Partner Segment.
Fulfillment Partner Business (81.7% of 3Q09 total revenue)
The Fulfillment Partners segment does not ship excess inventory from its leased warehouses; instead, it acts as a liaison between consumers in search of the low prices and retailers, cataloguers, and manufacturers looking to liquidate surplus inventory. Such products are listed on the Overstock.com website and then shipped by the third party "fulfillment partners". In 3Q09, Overstock reported roughly 1,180 partnerships with third parties who post approximately 163,000 products on the Overstock.com website. This segment, as well as the Direct segment, are highly seasonal, with sales historically peaking in its fourth fiscal quarter[5]. Overstock also controls a number of peripheral business lines that are based on the same concept of using the Internet to facilitate consumer access to discount merchandise. These including auctions, auto sale listings, and real estate sale listings, all of which contribute negligibly to the company’s revenue[5]
Direct Segment (18.3% of 3Q09 total revenue)
Direct revenue includes sales directly to individual consumers from certain offline channels and Overstock.com's leased warehouses, where purchased surplus inventory is stored and then re-sold at a premium on the website. Direct business was responsible for nearly 21% and 18% of total revenues in FY2008 and 3Q09, respectively[4][5].
Trends and Forces
Difficulty in Attracting Customers
Customer acquisition and retention has become increasingly difficult for Overstock. Customers have an ever greater choice of websites from which to search for merchandise for retail purchase. Over the last several years, Overstock has been competing for traffic with search sites such as Google, forcing Overstock to spend large sums on search engine marketing. For 2008, new customer acquisition costs rose 4% to $57.6 million, the aggregate number of new customers increased 5.1% from 2.4 billion to 2.5 billion, and the average customer acquisition cost (total shopping sales and marketing expense divided by the number of new customers) increased 4.7% to $92.3 thousand.[6] However, the fact that Overstock is ranked 2nd in retail customer services nationwide, may help abet this problem.[3]
Internet Purchasing
Many factors can influence a consumer’s decision whether to buy online or in-store. One of the most prominent advantages of purchasing goods on the internet was the lack of sales taxes. However, to combat soaring budget deficits, states such as North Carolina and Rhode Island are now requiring sales tax to be paid on goods sold on the internet[7]. This makes internet shopping much less attractive to those buyers trying to find a bargain from internet sites such as Overstock, and the company has had to cut ties with 3,400 online affiliates in 2009 in response to tax changes. Other factors which play a role in willingness to purchase online are secure credit card payments and broadband internet access. As buying online becomes more secure with the likes of PayPal and the rates of broadband internet penetration rise, consumers should be more likely to purchase from the web.
Downloadable Media
The use of downloadable media programs such as iTunes, Kazaa, Morpheus, Bittorrent, and Napster has had a negative impact on the CD/DVD industry. As these downloading systems become more established, hard copies of music and movies have become increasingly obsolete. Considering digital media has historically contributed greatly to Overstock's revenue, this could have a negative impact on Overstock's top line.
Competition
The industry has minimal and low cost barriers to entry and therefore it is a very competitive market. Overstock.com has many competitors in the Internet sales business, including Ebay, Amazon, Buy.com, Shop.com, and Smartbargains.com.
Overstock is dwarfed by Amazon and Ebay in terms of revenue and gross profit. The issue of concern for Overstock lies in the company's inability to turn a profit since its inception. In 2008, the company lost $12.6 million where as Ebay had a net income of $1.7billion and Amazon a net income of $645 million. It is important to note that Amazon did not turn a profit until 2003, its ninth year.
Since 2002, Ebay and Amazon have both been well within the top 100 sites in terms of traffic, with each breaking into the top ten at some point. Overstock has, for the most part, been in the top 1,000, even briefly experiencing the top 100 during the 2006 holiday season. Overstock has a traffic rank of 753.[8] Recently, though, its internet rank has fallen, like its revenue, and is now outside of the top 1,000. This can be seen as the result of the advent of alternative retail search venues and the tendency of potential customers to choose alternatives such as Google.
Traffic levels for online merchants declined steadily in the recent past, with all five merchants witnessing significant drops since the beginning of 2006. The following figure breaks down the top internet vendors in terms of their US traffic levels. Overstock is apparently in the middle of the pack but this says little when considering the lead which both Ebay and Amazon have gained on the others.
| Company | Percent of Users in the USA (as of January 2010) | Overall Traffic Rank in the USA (as of January 2010) | FY2009 Revenue (in millions) | FY2009 Net Income (in millions) |
|---|---|---|---|---|
| EBay | 70.4% | 8 | ||
| Amazon | 66.3% | 6 | ||
| Overstock.com | 84.8% | 117 |
References
- ↑ OSTK 2008 10-K pg. 5,45
- ↑ "Overstock.com Reports Q3 2009 Results" Overstock.com Investor Relations, 11/03/09
- ↑ 3.0 3.1 National Retail Federation, January 13, 2009
- ↑ 4.0 4.1 Overstock.com 2008 10-K, Pg. 45
- ↑ 5.0 5.1 5.2 5.3
- ↑ Overstock.com 2008 10-K, Pg. 78
- ↑ Our View: Online sales tax a web of trouble. Appeal Democrat (July 13, 2009).
- ↑ Alexa on Overstock.com
- ↑ Alexa
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