Monday, September 19, 2005

Is There A Disclosure Issue Here?


On Friday at 4:01 PM, Overstock.com issued the following press release, in bold italics, with commentary from the author of this blog.

Overstock.com Overstocked With Bargains
Friday September 16, 4:01 pm ET

Interesting timing—4:01 Eastern Standard Time on the Friday of September options expiration. Did the facts really not come to light sooner than the market close at 4:00 PM on option expiration day?

Is there a disclosure here?


SALT LAKE CITY, Sept. 16 /PRNewswire-FirstCall/ -- Popular online retailer Overstock.com® (Nasdaq: OSTK - News) today announced a mass upload of new inventory for sale on its website.

Quite a bland way to begin a press release that announces (later in the text) “sharply” slowed sales, “inefficiencies” and “downward pressure on gross margins.”

Is there a disclosure issue here?

The $30 million (retail value) upload of jewelry, apparel, home, electronic and other products far exceeds any single upload in Overstock.com's corporate history (by a large multiple). As always, these products will be priced to move and will sell out on a first-come first-serve basis.


Inventory glitches are, generally speaking, not a good thing for a retailer.

Indeed, just the day before this release, Tad Martin (Overstock’s own SVP of Merchandising) noted on a conference call with investors that “Inventory is not like wine—it does not get better with age.”

Martin made no reference to the $30 million “mass upload” of inventory that would be announced on September 16th, the very next day.

Is there a disclosure issue here?

As previously announced, Overstock.com is completing a massive upgrade to its IT infrastructure. In working through the implementation of these new systems, the company has not loaded new products from its warehouse and fulfillment partners onto the website for nearly five weeks, several weeks longer than the company had anticipated.

On conference calls and in shareholder letters, Overstock CEO Patrick Byrne has given the impression—at least to Wall Street’s Finest, none of whom raised any red flags—that the IT upgrade was largely complete.

But don't take my word for it. This is the way Byrne describes the situation to shareholders in his August 3rd letter to investors:

I believe we have found a healthy balance among the three (growth, infrastructure, and new programs), and am particularly glad that we have super-sized our systems over the last three quarters, as it gives them a quarter to harden before the next holiday wave hits.

No word about the problems that stopped five weeks worth of inventory from being “uploaded.”

Is there a disclosure issue here?

"This upgrade was the equivalent of a heart, lung and kidney transplant," said Patrick Byrne, president of Overstock.com. "The replacement of the core technology infrastructure, which I have discussed at length in my quarterly letters, prevented us from uploading new items to the website for the past five weeks.”

Patrick did indeed discuss “at length” the infrastructure replacement, especially in the second quarter letter. Here’s a sample:

Oracle 10g -- Over the course of May and June, all components with the exception of the B2C shopping site itself rolled from Oracle 9i to 10g running on our new IBM P5's AIX. We expect to do this last piece in August (and will be down for 30-120 minutes some night as we do it).

This transition has been remarkably smooth.

From a “remarkably smooth” transition on August 3rd to a five week inventory “uploading” disruption disclosed on September 16th.

Is there a disclosure issue here?

However, while the operation was going on, our buyers, copywriters and warehouse staff continued to make purchases, prepare postings and stock our warehouse -- which is now stuffed to the gills. This presents our customers with a huge opportunity to find great selection and bargains, but when they're gone they're gone."

Disregarding, for the moment, the question of why "copywriters" and "warehouse staff" are making inventory purchases, the day before this press release—September 15th—Overstock's Tad Martin had the following conversation with Stanford Group analyst Rebecca Jones Kujawa on her conference call with clients:

Rebecca: “What’s going on with the holiday season?”

Tad Martin: “We’re ready for the holidays. We made a decision earlier this year that with the amount of cash we had in the bank and the direction we were heading we’d rather be a little over-inventoried going into the Christmas season than under-inventoried, which all it means is we’re building inventory a little ahead of where we had the previous year. And what that allows us to do is to find some greater marketing opportunities—if the opportunity of a lifetime came in marketing, we’re not gonna be inventory constrained.”

Rebecca: “Is that inventory already up on the web site or are you kind of holding that back…”

Tad Martin: “No, no, no. As much as possible we try and flow our inventories through to the web site at the time [emphasis added]. There’s no reason to hold inventory in your warehouse. Inventory is not like wine—it does not get better with age.”


From "we're building inventory a little ahead of where we had the previous year" and “there's no reason to hold inventory in your warehouse” on September 15th to “our warehouse…is now stuffed to he gills” on September 16th.

From "we try and flow our inventories through to the web site at the time" on September 15th to "the replacement...prevented us from uploading new items to the website for the past five weeks" on September 16th.

Are there disclosure issues here?

"These investments in technology, while incredibly expensive, are providing a foundation for the next five years, and will, I believe, generate huge dividends in customer satisfaction and loyalty. However, by preventing the posting of fresh inventory since early August, this transplant did shock our system."

Let’s consider the public appearances Patrick Byrne made, beginning in “early August” when, according to Byrne, the “transplant” began to “shock” the Overstock inventory system:

On August 3rd, Patrick Byrne holds an 85 minute earnings conference call with investors. He says “we should be able to do somewhere around 1.5 billion or more [sales] next year.”

On August 12th, Patrick Byrne holds a one hour “Sith Lord” conspiracy conference call with investors. He does not discuss revenue or earnings, but does mention Al Qaeda, cocaine, and Wayne and Garth.

On August 12th, Patrick Byrne appears for 15 minutes on CNBC discussing his “naked short-selling” conspiracy theory. In response to a question about Overstock’s profitability, he says “…what you’re gonna see us do is basically double on the top line…”

On August 16th, Patrick Byrne appears for 18 minutes on CNBC to debate his “Sith Lord” conspiracy theory and says “Somehow, in the face of all this poor performance we’ve grown from $2 million to basically a billion [in sales] this year…”

According to Friday’s press release, however, Overstock’s sales slowed “sharply” as a result
of the failure to “upload” inventory starting in “early August.”

Yet even on August 16th Byrne was telling CNBC viewers Overstock was growing to "basically a billion" in sales in 2005.

Is there a disclosure issue here?

"Investors should note that our restricted ability to post fresh inventory slowed sales sharply, a caesura from which we are now rebounding. In addition, the upgrade also caused inefficiencies that, when combined with our extended dollar shipping promotion, has put downward pressure on gross margins this quarter. However, my goal of growing 60% to 100% for the year at break even GAAP, +/- 1%, stands."

Fancy Latin words aside, the fact that “the upgrade also caused inefficiencies” had not, to my knowledge, been previously disclosed—either on the August 3rd call, the August 12th call, the August 12th CNBC appearance, or the August 16th CNBC appearance.

Not even on Tad Martin's September 15th conference call.

One more time: is there a disclosure issue here?


Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.




20 comments:

tahoe kid said...

Re: "....the heart,lung and kidney transplant..." sounds as if OSTK could use a brain transplant starting at the top.

Mithrophon said...

I love it. Great work, Jeff.

credibility said...

Yes, I believe there are disclosure issues here.
Doesn't Management need to be accountable to the public? Who is responsible for enforcing the laws if the laws have been violated? (specifically lack of disclosure.)
How does his Father feel about his son's lack of disclosure? Is the Board of the Company equally responsible for the CEOs actions?

MS said...

Jeff I agree 100% that there is a disclosure problem, and OSTK will probably be sued if it has not been already. However, isn't this a sideshow, just like Byrne's wild conspiracy talk? Isn't the real story with OSTK that it is just a mediocre ecommerce company facing the same enormous hurdles as all its competitors: rising fuel and delivery costs, low margins, a walmart that has declared war for the consumer this holiday season, and a consumer that is pretty much spent out.

DaleW said...

heart,lung and kidney transplant

Throw in some oatmeal and OSTK becomes Haggis. This thing is bloody offal.

Its_strange said...

trouble is nobody cares , not even Jack

Sith Lord said...

There is no disclosure issue at Overstock.

I am omnipotent. I control the press.

Patrick tries to disclose and I muffle.

This is just another part of the Sith Lord conspiracy.

Voldemort

Sith Lord said...

Jeff Matthews is WRONG! There is NO disclosure issue at Overstock.
There is no disclosure issue at Overstock.Com.

Patrick is the most transparent CEO in North America.

You can see right through him.

Sith

market crasher said...

Dr. B rest easy tonight... here's one hedge fund trader who couldn't borrow your stock this morning. Gotta pass on shorting OSTK. I am a spectator on this one. If I could I would short 1m shares and add 100k every point down. I do believe this stock will find itself in the drill bit portfolio.

SECFOInfo said...

Jeff or the your minions,

How many securities do you think the 129,000,000 ftd's reside in?

Toss out a number. Lets discuss.

Aaron Koral said...

Guess who manages an investment firm that on 09-12-2005 "exercsied a warrant dated 9-21-2000 to purchase an aggregate of 330,396 shares of common stock of Overstock.com, Inc. for an aggregate cash exercise price of $1,404,512."?

Here's a hint - his initials are PB (and it's not Peanut Butter). This comes directly from the 8-K SEC filing for OSTK dated 09-13-2005, just six days ago.

As Jeff would say, Is there a disclosure issue here?

k9thunder said...

Aaron,

Could that org of High Plains controlled by Patty?

What's the deal with double dipping as Patty also got cheap options too.

12-Sep-05 HIGH PLAINS INVESTMENTS
Beneficial Owner (10% or more) 330,396 Indirect Option Exercise at $4.26 per share. $1,407,486

12-Sep-05 BYRNE, PATRICK MICHAEL
President 330,396 Indirect Option Exercise at $4.26 per share. $1,407,486

So does this "Dr" deserve this kind of option?

Sure when board consists of rubber stampling crowd with Patty, his daddy and couple of associates from H & Q who brought Patty public. Uh forgot to mention another warm body, a woman with quesitonable qualification. Forgot to mention Macklin also exercised cheap $4.26 options.

But let's give Patty credit for doing the IPO via dutch auction few years before google.

Its_strange said...

Jeff and ostk in the NY Post today. This story just gets more strange by the day , by the hour. I gotta figure the SEC has to start a formal investigation soon .

Its 4 days since ostk warned and from what i can tell not one word from Bob O'Brien ..Well, at least Mary Helburn sold before Fridays warning

Its_strange said...

So Schwegman sold shares before Fridays warning ?? He can't be that dumb . Nope . After the high profile Martha Stewart ( recall Patrick said the SEC was up to that kind of investigation but not a Sith Lord investigation ) incident officers ain't doing that UNLESS !!! they want the street to think a possible future SEC investigation is about that and nothing more....Plain and simple , this makes no sense. I wish i knew whats really going on but my gut tells me this lawsuit, those insider buys and sells and just about everthing in the past 6 months is a head fake

kevinmr said...

Has anyone seen the HBO show called "The Comeback"? The uncomfortable feeling I have watching the vain and arrogant Valerie Cherish embarass herself is what I feel when Jeff posts about OSTK. I just want someone to put that thing out of it's misery.

On another note: Best line in this thread has to be dalew's haggis analogy. Truly inspired!

Greg Buchholz said...

I know this concept escapes Dr. Byrne, but what does the balance sheet look like now. Going to lose money in the quarter, uploading $30 million of new inventory with 10 days to go. Is cash going below $50 million? Not sure all those stock repurchases were such a smart move other than to antagonize the short sellers.

k9thunder said...

Greg,

Some financial review from Q2. Boy can't wait for earning to be released in late Oct!

Key take aways:
1. Cash shrunk by $6 mil to $31.3 mil. Neg
2. Short term investment shrunk almost by half to $88.6 mil. Where did it go? Stupid buyback? Neg
3. Receivable almost doulbed (ouch!) to $13.6 mil. What's the matter? Can't collect from customer or too many request by customers to their credit card companies to dispute? Neg
4. Inventory rises by $21 mil to $70.2 mil. What's the matter? Can't sell CRAPs you peddle? Can't be for stocking up for x-mas could it? Neg
5. Other assests shrink over half/big time to $8 mil. Neg
6. Total current assets shrinks by, gasp, $56 mil to $212 mil. Neg
7. Total assests shrinks by, gasp, $48 mil to $268 mil. Neg

Sounds like it's time to raise more DINERO VIA yet ANOTHER 2NDARY OFFERING!

Its_strange said...

Patrick has told us a number of times OSTK's stock price doesn't concern him. He has said he wants to build a first class operation with first class people. Well why hasn't he fired this Shawn guy by now ? I mean 5 weeks without the ability to upload inventory ! For a internet company thats as bad as having the local power company turn off the electricity cause you didn't pay the bill. ...Yet Patrick didn't fire this guy ? ....Where is the Board of Directors ? Why didn't they call a meeting to find out whats going on and why Patrick didn't can this guy ? This whole thing is not reasonable . The Sith Lord suit . The diamond deal . The creation of NCANS . This recent warning and the explanation for it . The video Patrick made with Mary and Bob . Patricks willingness to turn over the conference call to O'Brien. The CNBC face time . ...Why havn't i read that the analysts have suspended coverage until these basic questions are answered ? ...And while Patrick hasn't had much to say since his last CNBC appearence the street , the public deserves answers NOW. Not after the lawsuits or year long investigations, now. They deserves answers now. Where is the press ? NASDAQ ? The regulators ? Where is the auditor ? Where is ANYBODY !!

Never forget it Mr and Mrs. Public. You are just a irritation, a annoyance. Even after ERON and all the scams you are just a pain in the ass. ....

Its_strange said...

OSTK in the NY Post today. The affidavit Patrick has discussed comes from 3 fired Gradient people. I wonder who they contacted first, Bob or Patrick ?

Big_D said...

Disclosure 'issue'? Puh-leeze! I am a vendor partner for OSTK and problems began OCT 04. vCommerce sold OSTK an offsite partner management system that to date does not work properly! I can no longer see how many click/buy-through ratios I have on my stock, nor can I properly update inventories! With the introduction of Oracle, it has now been since August since new inventory has been able to get on-site. And all this because OSTK didn't make vCommerce fix its wretched program at least 11 months ago. Last year, my sales for the first half of November were $4800. This year, $370.

Great concept, and previously a great company with which to do business. This last year has been an absolute nightmare. Oracle was supposed to do all the payments for sales and they have yet (in 7 pay dates) to be on time or accurate!