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OSTK AT A GLANCE

P/E ► -116   EV/EBITDA ► 10.5 AVG ROA ► 0.7% AVG ROE ► -108.9% VERY LOW Debt to Equity ► -33.0   Current Ratio ► 1.48 AVG Interest Coverage Ratio ► 6.06 AVG

 

 

 

 

 

 

Overstock.com (NYSE:OSTK) is an online marketplace that offers discounted brand name merchandise purchased from the surplus inventories of manufacturers and retailers. Since its inception in 1997, the company has incurred yearly net losses due to high operating costs.^[1] In 2008, the company had a loss of $12.66 million, which was small in comparison to the $44.11 million loss in 2007.^[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 going directly to sites like 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.

Business Overview

Business Financials

Overstock.com has a history of losses since it launched its website in 1999. For the 1st half of 2009, OSTK's gross profit increased 9.55% over the same time in 2008.^[5] OSTK expressed a desire to cut costs as a way to increase profits and did so successfully by reducing total operating expenses and cost of goods sold and increasing gross margin from 17.6% to 20.4%. While this cost cutting was helpful in increasing net income, it can only do so much. Revenues were down 7.2% in the first half of 2009 compared to 2008. While the economic slowdown has had a lot to do with that reduction, OSTK needs to grow its revenues as the economy recovers, while still maintaining its recent cost cutting measures.

Operating Segments

Overstock’s shopping business has two different business lines known as “Direct” business and “Fulfillment partner” business.

Overstock's 2008 Sales Breakdown ^[4]

====Direct Business (16% of 2Q09 revenue^[6] of sales at Overstock.com in 2008.

====Fulfillment Partner Business (84% of 2Q09 revenue^[7]. 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 196,000 non-BMV closeout items.^[8] 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.

Trends and Forces

Difficult to attract customers

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. 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.^[9] However, the fact that Overstock is ranked 2nd in retail customer services nationwide, may help abet this problem.^[3]

Poor market conditions

The global economic crises will affect Overstock. Demand for products which Overstock sells are not a necessity and consumers tend to postpone their purchase in times of recessions. As unemployment increases and corporate taxes increases, more pressure in put on the company’s profit margin.

This is also a seasonal market, with the largest revenues being produced during the last couple of months of the year, during holiday season.

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. 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.^[10] This makes internet shopping much less attractive to those buyers trying to find a bargain from internet sites such as OSTK. OSTK has already cut ties with 3,400 online affiliates in response to tax changes there. Other influential factors 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.

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.

IT Restructuring

One of Overstocks largest expenditure is upgrading its IT systems. The company believes that this is necessary in order to keep up with competition in areas such as inventory management and online marketing initiatives. In 2006 the company pumped $65.1 million into technology (compare this with $27.9 million in '05, $8.5 million in '04, and $2.5 million in '03). 2007 and 2008 did not fall far behind with $59.4 million and $57.8 million, respectively.^[4] This factored considerably in the net loss they suffered, which can largely be attributed to high operating expenses.

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.

Net Income Comparison^[11]

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.^[12] 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.

Website Traffick ^[13]

References

1. ↑ OSTK 2008 10-K pg. 5,45  
2. ↑ OSTK 2008 10-K pg. 45  
3. ↑ ^{3.0 3.1} National Retail Federation, January 13, 2009
4. ↑ ^{4.0 4.1 4.2}
5. ↑ 2009 Q2 Earnings Release (July 22, 2009).
6. ↑ Overstock.com 2Q09 10-Q pg. 4<ref></ref>)==== Direct business includes sales directly from the Overstock.com owned warehouses in Salt Lake City, Utah where purchased surplus inventory is stored and then re-sold at a premium on the website. Direct business was responsible for nearly 21% <ref>[http://media.corporate-ir.net/media_files/irol/13/131091/OSTK_2008_10K_A.pdf Overstock.com 2008 10-K, Pg. 45]</li> <li id="_note-1">[[#_ref-1|↑]] [http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=6723235-920-241081&type=sect&dcn=0001104659-09-046345 Overstock.com 2Q09 10-Q pg. 4]<ref/>)==== Fulfillment partner business, which accounted for the remaining 79%<ref name=ostkyear /> 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 about 1,200 third-party partners <ref name=ostks >[http://media.corporate-ir.net/media_files/irol/13/131091/OSTK_2008_10K_A.pdf Overstock.com 2008 10-K, Pg. 8]</li> <li id="_note-ostks">[[#_ref-ostks_0|↑]] </li> <li id="_note-2">[[#_ref-2|↑]] [http://media.corporate-ir.net/media_files/irol/13/131091/OSTK_2008_10K_A.pdf Overstock.com 2008 10-K, Pg. 78]</li> <li id="_note-OnlineSalesTax">[[#_ref-OnlineSalesTax_0|↑]] {{cite web|url=http://www.appeal-democrat.com/articles/web-84355-sales-affiliate.html|title=Our View: Online sales tax a web of trouble|date=July 13, 2009|publisher=Appeal Democrat}}</li> <li id="_note-3">[[#_ref-3|↑]] [http://finance.yahoo.comYahoo Finance]</li> <li id="_note-4">[[#_ref-4|↑]] [http://www.alexa.com/siteinfo/overstock.com Alexa on Overstock.com]</li> <li id="_note-5">[[#_ref-5|↑]] [http://www.alexa.com/siteinfo/overstock.com+amazon.com+ebay.com Website Traffic]</li> <li id="_note-6">[[#_ref-6|↑]] [http://www.alexa.com/siteinfo/overstock.com Alexa]</li></ol></ref>