• Jeff Matthews

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.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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