Overstock.com (OSTK)

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See all Bulls Reasons Bulls: Reasons To Buy IT investments could reduce operating costs 0% agree IT investments could reduce operating costs Overstock’s heavy investments in IT could pay off in, reducing operations costs and providing and opportunity for growth. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Senior management personnel defections 0% agree Senior management personnel defections Senior management personnel defections and CEO Patrick Byrne’s involvement in litigation against investment banks are cause for concern, especially in a company that needs significant management attention and restructuring if it is to eventually turn a profit View or Edit Reason 0 votes 0% agree Revenue falling since 2005 and through first half of 2007 0% agree Revenue falling since 2005 and through first half of 2007 Overstocks’ revenue rvenue has been falling since 2005 and has continued to do so through out the first half of 2007. Although, they have managed to reduce operational costs to some extent, they are still operating in the red. View or Edit Reason 0 votes 0% agree Overstock has faced decreasing conversion rates 0% agree Overstock has faced decreasing conversion rates Overstock has faced decreasing conversion rates (% of Overstock.com visitors who make a purchase) over the last year, and heightened advertising costs have proven ineffective in attracting new customers View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion In addition to being a middle-tier retailer and being negatively impacted by Google and the like,... more [Dismiss] [Done] See All Suggestions

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Overstock.com is an online marketplace that offers discount brand name merchandise purchased from the surplus inventories of manufacturers and retailers. Since its inception in 1999, the company has failed to turn a profit due to high operating costs. During its most recent quarter it swung to a loss, albeit a smaller loss than in previous quarters.

At the heart of Overstock's problems is its difficulty in attracting customers. 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 going directly to sites like Overstock. As a result, Overstock has been forced to spend large sums on search engine acquisition. These increased costs in conjunction with poor conversion rates have resulted in an unfavorable mix of high costs and falling revenue.

[edit] Business Overview

Overstock operates its has two different business lines known as “Direct” business and “Fulfillment partner” business.

Direct business includes sales directly from the Overstock.com owned warehouses in Salt Lake City, UT and Plainfield, Indiana, where purchased surplus inventory is stored and then re-sold at a premium on the website. Direct business is responsible for nearly 40% of the sales at Overstock.com.

Fulfillment partner business, which accounts for the remaining 60% of sales, does not involve storing surplus inventory in the Utah and Indiana warehouses. Instead, Overstock.com acts as a liaison between retailers, cataloguers and manufacturers (“fulfillment partners”) looking to liquidate their surplus inventories and consumers looking for the lowest possible price on surplus products. Such products are listed on the Overstock.com website and then shipped by the third party fulfillment partners. Overstock is not involved in shipping orders from fulfillment partners, but it is obligated to handle returns for these sales. Overstock currently has over 700 third-party partners. From a customer’s standpoint, there is no difference in ordering a product on Overstock.com shipped from the company’s Utah and Indiana warehouses or from third party fulfillment partners.

Today, Overstock lists nearly 1 Million BMV (Books, Music, Video and Interactive Games) items and over 160,000 non-BMV closeout items. Non-BMV items include bed-and-bath goods, home décor, kitchenware, watches, jewelry, electronics and computers, sporting goods, apparel and designer accessories, and more.

Overstock controls a number of peripheral business lines, including auctions, auto sales, and video game rentals, but these ventures have made a negligible impact on the company’s revenue.

[edit] Challenges

[edit] Customer Acquisition

Customer acquisition has become increasingly difficult for Overstock. Customers an ever greater choice of websites from which to search for merchandise for retail purchase. Over the last several years, Overstock has lost a significant amount of its traffic to search sites such as Google. Many costumers prefer to begin their search on Google rather than going directly to Overstock. Overstock has been forced to spend large sums on search engine marketing. New customer acquisition costs rose 25% to $25.66M while the aggregate number of new customers dropped 16% from 1.37M to 1.16M.

[edit] IT Restructuring

Recently Overstock upgraded its IT systems. The company believes that this step was necessary in order to keep up with competition in areas such as inventory management and online marketing initiatives. In 2006 the company pumped $65,158,000 into technology (compare this with $27.9 million in '05, $8.5 million in '04, and $2.5 million in '03). This factored considerably in the net loss they suffered, which can largely be attributed to operating expenses. In fact, the only operating expense to decline in '06 was sales and marketing which dropped from over $77.1 million to under $70.9 million.

[edit] Trends and Forces

[edit] 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. Currently, sales of such hard copies of digital media provide a great deal of Overstock's revenue through its BMV department.

[edit] Internet Purchasing

It is also imperative that customers have the desire to purchase products from the internet. Many factors can influence a consumer’s decision whether to buy online or in-store. These include: price of oil prices, proximity to an outlet (and therefore number of outlets), internet access, shipping rates, shipping times, etc.

Two chief 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.

[edit] Competition

Overstock.com has many competitors in the Internet sales business, including Ebay, Amazon, Buy.com, Shop.com, and Smartbargains.com. It is important to note that of these six companies only Ebay, Amazon, and Overstock are publicly traded.

The following tables show the revenue, and gross profit for the three public companies.

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. The most recent fiscal year (2006) saw a huge drop in net income (partially due to IT changes). Overstock had expected their fourth quarter to salvage an already spiraling year but Q4 2006 proved to be even worse than that of 2005.

It is important to note that Amazon did not turn a profit until 2003, its ninth year. Last year, Overstock’s tenth fiscal year, saw a loss of $102 million, nearly $50 million less than Amazon lost in its ninth year.

Alexa.com provides an analysis of site traffic for the top internet vendors. The following graph shows the world rankings of the top five internet vendors: Ebay is shown in blue, Amazon in red, Overstock in gold, Buy.com in green, and Shop.com in black.

As the graph shows, Shop.com, Smartbargains, Buy.com, and Overstock have lagged far behind both Amazon and Ebay. 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. Ebay here has the clear advantage but Amazon is not far behind. Overstock has, for the most part, been in the top 1,000, even briefly experiencing the top 100 during the 2006 holiday season. 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. Shop.com has seen great increases in traffic and is closing in on Overstock. Buy.com has experienced trends similar to Shop.com, while Smartbargains has yet to see any substantial time in the top 1,000.

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.

This is not a direct comparison as no other sites provide online liquidation to the same extent as Overstock.

[edit] References