Talk is Cheap, Unless You’re a Shareholder

On July 1, 2005, we acquired all the outstanding capital stock of Ski West, Inc. (“Ski West”), an on-line travel company whose proprietary technology provides easy consumer access to a large, fragmented, hard-to-find inventory of lodging, vacation, cruise and transportation bargains…. We paid an aggregate of $25.1 million (including $111,000 of capitalized acquisition related costs) for Ski West, and we may be subject to additional earn-out payment… As part of this program to reduce our expense structure and sell non-core businesses, we decided during the fourth quarter of 2006 to sell the Company’s travel subsidiary (“OTravel”)…. As a result, OTravel’s operations have been classified as a discontinued operation and therefore are not included in the results of continuing operations.

—Overstock.com 2006 10K

Well that was fast.

Seems Our Man in Salt Lake City, a self-described “value investor” and Warren Buffett disciple, decided to hit the bid on Ski West, a business he’d bought a mere 18 months before the decision to sell.

And to sell at a discount to his cost basis, no less.

Just a year ago, Our Man in Salt Lake City was talking up the operating trends at that operation, as follows:

Ski West did okay. The business we bought made money through the second half of the year. We, on top of that, we already had started development of a travel business that we sort of integrated — we spent six months integrating into Ski West and writing off, we wrote off all the development costs of code and different things we have done, we wrote to zero. So travel as a whole showed a loss for the second half of the year but the business we bought made money, made a nice little chunk of money. And then on top of that, we have gotten everything we think fixed and together in travel, so even in January, the whole business made money not just the business we bought but now everything worked together is making money. It made a nice little sum in January.

The only problem with that statement, which occurred on the February 7, 2006 conference call, is that Our Man in Salt Lake had hinted at far greater things on an earlier call, from August 2005.

Specifically:

SkiWest. I’ll give you some numbers on SkiWest and let me walk through the numbers and then I’ll give you sort of the footnote at the end. Last year Ski West revenue was $30 million. And that means from April 1 until March 31 was $30 million. And then for this year they plan to do at least $60 million. Last year on 30 million of revenue they made a $1 million. This year, meaning from April 2005 to March of 2006, they figure that they would be able to do 2 million, 2.5 million of income operating profit. A few footnotes on that. If a company is growing that fast, and its April to March number is 60 million, then its July number will be higher. It will be 70 million, 75 million. In addition, they’re growing now at faster than 100% pace. So it’s possible to be talking about maybe 80 to 90 million in the July to June period, July of this year to June of next year period, 80 to 90 million. In which case, it looks more like something that could make 3.5, 4, something like that. It looks like Ski West came nothing close to “something like that,” at least according to the following disclosure in the latest 10K.

The loss from discontinued operations for OTravel was $6.9 million for the year ended December 31, 2006, including a goodwill impairment charge of $4.5 million. The lesson?

Talk is cheap—although it can be very expensive for shareholders.

Jeff Matthews I Am Not Making This Up

© 2007 Jeff Matthews

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. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.