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Overstock.com, Inc. (NASDAQ:OSTK)

Q4 2008 Earnings Call

January 30, 2009 11:00 am ET

Executives

Jonathan Johnson – President

Patrick Byrne – Chairman and CEO

Steve Chesnut – Senior Vice President of Finance

Analysts

Nat Schindler – Banc of America

Colin Sebastian – Lazard Capital Markets

Operator

Welcome to the Q4 2008 Overstock.com Incorporated conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Jonathan Johnson, President.

Jonathan Johnson

Good morning and welcome to our fourth quarter and fiscal year 2008 conference call. Joining me on the call today are Dr. Patrick Burn, Overstock's Chairman and CEO, and Steve Chesnut, Overstock's newly appointed Senior Vice President of Finance.

Ladies and gentleman, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, January 30, 2009, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today’s press release and our filings with the SEC including our 2007 annual report on form 10-KA and our 2008 Q3 quarterly report on form 10-Q.

As you listen to today’s call, I encourage you to have the press release in front of you since our financial results, detailed commentary, and the CEO's letter to shareholders are included and will correspond to much of the discussion that follows.

During this call, we will share certain non-GAAP financial measures. Our press release, the slides accompanying this webcast, and our filings with the SEC, each of which is posted on our Investor Relations web site contain additional disclosures regarding these non-GAAP measures including reconciliations of each of these measures to the most comparable GAAP measures.

With that let me say that we are very pleased that Steve Chesnut has joined the Overstock team. He brings over 20 years of experience at two of America's pre-eminent retailers, Home Depot and Target, and we are confident that he will do a tremendous job at Overstock. I will now turn the call over to Steve to review our financial results.

Steve Chesnut

I would also like to add that I am pleased to be on board. From my perspective, Overstock is a great company with a bright future. It has got a great management team, and I am looking forward to working with Patrick and Jonathan and the rest of the Overstock team. I would like to quickly review the financial results for the fourth quarter and fiscal year ending December 31, 2008. If I could ask you to please refer to our earnings release for the full financial statements and further details regarding our results and, keep in mind that unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2007.

Now, let's take a look at the revenue line. Q4 revenue declined 13%. The sales mix was 81% fulfillment partner and 19% direct. For the year, revenue was up 9% with a sales mix of 79% of fulfillment partner and 21% direct. Gross profit as a percent of total revenue was 17% in Q4, a 130 basis point improvement over Q4 of 2007. Gross profit dollars were $43.6 million, a 6% decrease. This included a one time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year. Gross profit as a percent of revenue for the year was 17.1%, and let me note, that was an all-time high for the company on an annual basis. Gross profit dollars rose 15% to $142.9 million.

Marketing and sales expense declined significantly in Q4, down 40% over last year to $16.4 million or 6.4% of revenue. While total marketing expense rose 4% for the year to $57.6 million, as a percent of revenue, let me note that that declined 6.9% or a reduction of 33 basis points. As a result of this, contribution expanded 43% in Q4 to $27.2 million and by 23% for the year to $85.3 million, another all time best for the company. Contribution margin was 10.6% and 10.2% for Q4 and fiscal year 2008.

Combined technology and G&A expenses decreased 17% to $21.5 million in Q4 on lower depreciation and compensation credits. The company had accrued profit sharing and executive bonuses throughout 2008. These were reversed in Q4 resulting in a one-time benefit of $3.7 million when the company decided not to make a profit-sharing contribution and the senior executive team requested not to receive a bonus. For the year, tech and G&A expenses fell 5%. Total operating expenses were tracked down 29% for the quarter at 9% for the year. Operating income for the quarter was a positive $5.7 million compared to a loss of $6.8 million in Q4 2007.

For the year, the operation loss was $10.9 million; this was a $33.7 million positive swing over the last year’s $44.6 million loss. Net income for the quarter was $1 million or $0.04 of share. The primary difference between operating and net income was a loss on the settlement of OTravel notes receivable of $3.9 million. Our net loss for the year was $12.7 million or negative $0.55 per share. We generated positive $9.9 million dollars in adjusted EBITDA in Q4 and $15.1 million for the year.

Depreciation and stock-based compensation expense was $4.3 million in Q4 and $26 million for 2008. We ended the year with $110 million in cash. This is down from $147 million at the end of ‘07. The major difference between these is largely the result of $20 million worth of stock buyback and debt retirement, plus $19 million of CapEx expense. We generated $2 million of positive operating cash flow in 2008.

Looking at our inventory levels, these were $17.7 million, and we showed $39.7 million of working capital at the end of the year. This concludes my financial summary. So, Patrick, let me turn the time over to you.

Patrick Byrne

Thank you Steve, and let me echo John and his comments; we certainly welcome Steve Chesnut aboard. If you turn to your slides, I am going to start on page 3 of the slide's table of contents. I will be reviewing Q4 first and then fiscal year 2008.

Slide 4 – I am just going to remind you of something I said over a year and a half ago that we could look for growth to come back. It would first happen to the contribution level, then the gross profit dollars, and then the top line would be the last to begin its growth. I am very pleased that the contribution dollars grew 43% in the fourth quarter, and that is the line we are really focused on in managing our business around.

Turn to slide 5 please. The highlights again; 17% gross margin, 40% decrease in marketing expenses, 10.6% contribution margin, adjusted EBITDA of $10 million and $15 million for the year, and $2 million for positive operating cash flow, seventh quarter in a row we are in that position.

Slide 6 – quarterly revenue growth. Well, we had in the first half of last year, I think we maintained 27% through the year, and it hit us, you can almost pick the day that the bad headlines started showing up in the press in late August 2008, the really bad headlines, and then probably September. It was amazing to me how much our metrics swung at that point around September 19th.

From then on, I will give you just some color on the development of the quarter. The shrink was at its worst in November 2008, bounced back actually considerably in December 2008, and has continued to rebound modestly, but we ended up at minus 13% for the quarter.

Slide 7 – The gross profits ended up down 6% year over year. But slide 8, we have gotten significantly more efficient as mentioned in our marketing dollars. So, first of all, we got more efficient of course on the margin line. We shrunk 13% in revenue, but only 6% in margin dollars, but our marketing is significantly more efficient and so our contribution dollars, or our nectar as we call it, grew at 43%.

Slide 9 – The slide speaks for itself.

Slide10 – Quarterly adjusted EBITDA. It was a nice quarter at $15 million. You see the development. Again, the picture speaks for itself.

Slide 11 – Quarterly cash flows from operations. Again, it is the seventh positive quarter of trailing 12-month cash flow.

Slide 12 – GAAP annualized inventory turns. Now on a GAAP basis, they are at 30, and I think this is about where they will stabilize on an actual basis. It is still interesting to me how we are managing our internal inventory. We are running at 6.7. I think there might be room for a little bit of improvement there.

Slide 13 – Annualized GMROI is 623%. We feel good about that. I would like to see on the direct basis that running at 100 or more.

Slide 14 – Net promoter score. All time high of 73, and again, we get the data on the competitors out of the book by Fred Reichheld, “The Ultimate Question.” He is the inventor, I believe, of this score. Even on the red line, the average American company, according to that book runs at around 8% to 10%. I think it says and we're running at 73% now in the fourth quarter. The red line is the NPS of the people who call our customer service, meaning they have had some kind of problem. They ran at 27%, which is an all time high for the fourth quarter. So, even the people who have some kind of issue and call us gave us a much higher score as a company than the average American company receives, according to Professor Reichheld.

Slide 15 – I can't tell you how proud I am of this. The National Retail Federation and AMEX do a survey of 8000 households, unprompted. They just say who gives you great customer service. We are now the second. This came out a week or two ago. We’re number two on their list, second to L.L. Bean, which is having grown up in New England, and I grew up on the legend of L.L. Bean customer service; this is a huge accomplishment. I congratulate Ms. Stormy Simon on this and also that we passed Amazon. Jonathan or Steve, do you want to say anything about that or this in general?

Jonathan Johnson

We couldn't be more pleased with it. Stormy has done a great job of putting the customer first, tenaciously representing the customer in all of our executive meetings, and the whole team in our customer care department has just done a phenomenal job, and this coming out right after the fourth quarter, which is our busiest time is really a tribute to the great work they do.

Patrick Byrne

I can say that over the last couple of years, the actual cost of customer service has more or less halved for us, so they achieved this taking us from not in the top 150 to number two while cutting the cost of customer service basically in half. So that is a great accomplishment for this team. They are now fully housed in our new warehouse that I mentioned in past conference calls. They have a great facility, actually the nicest customer service facility I have ever seen, which they deserve having been sort of tucked away in pretty cramped quarters before.

Slide 16 – We are going to talk about 2008. In 2008, we had 8.9% growth. Gross margin was the highest ever. Contribution margin was the highest ever. Operating expenses shrunk 9%, and as Steve mentioned, the tech of G&A line combined is a good line to look at for us, and we are finally reaching not just leverage and scale, but we have reached a point where that has been declining.

Slide 17 – Annual revenue of $834 million, GAAP, all time high. Slide 18 – Annual gross profit was an all time high at 17.1%.

Contribution, on Slide 19, at $85 million was another all-time high, both at 10.2% and $85 million. I am going to stay on slide 19 for a minute. I am going to start putting behind me the discussion of what happened in 2005 and 2006, but it is interesting to me that we are running our business now about maximizing this contribution dollar number. Everything we do is about maximizing this contribution dollar number, and we have realized that there is so much benefit and improvement we can make here for a comparatively tiny cost down the tech and G&A side of business.

We believe we can still make this substantially better, and oddly enough, many of the things that we are doing to make this better are things we were forced into doing by having hit the speed bump 3 years ago, and so it turned out to have been a mixed blessing. We had a 3-year head start, and those are things that have to be done now given the current economic environment and what other people are doing, and it turned out have been maybe a blessing in disguise that we got a 3-year jump in doing these things.

Slide 20 – Annual operating expenses. In particular, I would like you to look at the orange line and the red line and you actually see that those are modestly coming down. Anything else, Steve or Jonathan, would you like to mention about this?

Steve Chesnut

Yes. To me this is a great performance of effectively managing the business, at the same time maximizing the contribution that every sales dollar is delivering.

Patrick Byrne

Tech and G&A for the year sum to 96, Steve?

Steve Chesnut

Tech and G&A sum to 96. That is correct, Patrick.

Patrick Byrne

In the past, I have said that you might see that even continue to come down for a couple of years as depreciation washed out of our system, and it has come down for a couple of years now, but I would like to change that. I do not think it is going to keep declining. We are making investments and expanding parts of our tech and G&A that offset or more than offset by a small amount our decreases in depreciation we are seeing. Do you want to give an estimate, Steve, on what the combined tech and G&A might be in the coming year?

Jonathan Johnson

I think it is going to be north of 100. Slightly north of 100.

Patrick Byrne

Steve, were you trying to say something to him?

Steve Chestnut

Yes. I think this represents what you were talking about, Patrick, which is we are in this investment cycle of building this business, and so these development dollars or investment dollars really propel this business and build it onto a platform of substantial upside going into the future as this economy spins back.

Patrick Byrne

Yes, what is nice is that the cash for those investments seem to be generated by the business comfortably now.

Slide 21 – Annual adjusted EBITDA, all time high, once again, and I cannot wait till another couple of years tick by. We are not looking at that valley in our rearview mirror.

Slide 22 – Annualized cash flows, and Slide 23, again just some highlights.

Before we go to questions, there are a couple of questions that have been sent in, two from Sam Antar the Crook. I will give him a quick summary on them. One is why is it adjusted EBITDA reconciled not to operating income but to net income, and my answer is net income is net income. It’s the bottomline. The other complaint Sam the felon had was, what was his other issue, Jonathan?

Jonathan Johnson

He has asked a question if we have had any change in accounting for internal software used in development, and I think we ought to let Steve answer that question.

Steve Chesnut

The answer is there has been no change in accounting policy. What we have done is we have shifted who is doing the work. There has been a historical preference to take it and use third party contractors. We are now moving to more of an in-house development process, and so the accounting policy has not changed. We are just now starting to capitalize the development of internal development work.

Patrick Byrne

When we bought it from third parties, we capitalized it back then too.

Steve Chesnut

That's correct.

Patrick Byrne

So that is the difference, and Steve or Jonathan, do you want to comment on the first question of the reconciliation of EBITDA or adjusted EBITDA?

Jonathan Johnson

We did that thoughtfully. We consulted with our auditors and outside counsel, and it was fully disclosed how we have done in our recent filings with the SEC, and we think it has been completely transparent.

Patrick Byrne

The complaint that we reconcile it to net income, Is that as nonsensical as it sounds is I guess what I am trying to ask.

Jonathan Johnson

I would say yes. Net income is the bottomline performance. It seems like a very good number to reconcile to.

Patrick Byrne

I echo Steve's comments on the capitalization of software. We went from buying outside software and capitalizing it to building it in-house and capitalizing it. We have a mild preference within. I am at least desirous of expensing, but our policy hasn't changed, and we have the same policy we did before. Is that enough time we’ve spent on Sam Antar the Crook's questions, Jonathan?

Jonathan Johnson

Absolutely. I know we’ve got some folks queued up questions to ask.

Patrick Byrne

I have one more, one from Craig Bidd. He asked if we are going to declare chapter 11 this year. Well, Mr. Bidd, sorry to disappoint you, but you are going to have to make your own determination on that. Best of luck with that though!

Question-and-Answer Session

Operator

(Operator Instructions). Our question comes from the lines of Nat Schindler from Banc of America

Nat Schindler – Banc of America

A couple of things you mentioned on the call here. You talked about November being quite down and then December upticking nicely. How much of that downturn and then following uptick is due to the shift of Cyber Week from November to December this year and just to help us figure out where to go from. If it is December, then is it more of a blended average between the two of the really sustainable growth level or should we look at this uptick in December as more of the situation improving?

Patrick Byrne

First of all, I should be clear that the uptick still was negative, and I am taking about minus 20% for November versus minus 10% for December or something like that. So that is the rough magnitude; I could be a few percentage points off. Something you’ve to factor into that was, yes absolutely, the Cyber Monday falling in December. Also, the previous November, we had an unusually strong November, and so it gave us a tougher comp, and so there were some elephants moving under the table that way. I do not see any reason, Jonathan, that I can't say how bookings are running in January. Are we just to help them frame things?

Jonathan Johnson

Please go ahead.

Patrick Byrne

We are running at about minus 3% for January. Now that is based on when people order of course. When they go to GAAP, you go from ordering to not only when we ship it but when they actually receive it, so there may be some things moving back and forth there. If you just count sales as when people are putting in their credit card and buying something, and all the other things balance out over time, we are running at minus 3 for January.

Nat Schindler – Banc of America

That helps a lot. It leads into another question. As you look at relatively difficult comparisons in the next 3 quarters versus relatively easy comparison against 4Q ’07, looking at it running at negative 3 versus your negative 12 you did for the quarter and against a much harder comparison in 1Q 2008, it sounds like something fundamentally improved on the consumer side. Is that something you did or is that something you are seeing in the market or is this too little to extrapolate from?

Patrick Byrne

No, it is not too little. You're on the right track. I am wondering if there is choice, all of the above. There are a lot of factors going on. One, we've got great customer service, we have good prices, we have good products, and we have figured out aspects of the marketing game. Every month, we are just getting better and better at that. Another thing you should know is January happens to be, this month was a very tough comp for us. Last year, we had a very good January. So, we are kind of surprised at this. I guess there is another set of factors that neither of us has mentioned yet, Nat, that probably are as big collectively as the ones we just talked about, and that is what is going on in the retail world. Starting in November, we basically were up against industries going out of business sale. When Neiman Marcus is running 70% off sales, it is tough to be a discounter. On the other hand, that is not a sustainable business model for them. However, not only was there margin pressure for us. I think that our margins would have been much better if it were not for this exceptional margin pressure from the brick and mortar competition this year. Everybody knew in the fourth quarter, the scuttle that I got around the country was people understood and for the first time in years they were saying that if you want the good deals, you do not go online, you go to the brick and mortar stores, and we are still up against that. Their selection is getting smaller and smaller. You probably have a better idea than I do. I get a lot from the suppliers. My sense is there are a lot of folks who are just cleaning out their supply chain right now in anticipation of closing doors or closing 30% of their doors. On the one hand, it gives us a downdraft as we’ve got much more tougher pricing competition from brick and mortar. On the other hand, it gives us an updraft because we get suppliers and retailers calling us with goods and dumping goods to us at a great price. On the other hand, it gives us a downdraft because the consumers are sitting on their wallets. So, there are a lot of elephants bumping around under the table. Some of them are going away, I think, February 1st, over the next few weeks, because that is just not sustainable for other people. I am not sure that is much of answer, Nat, but you now know everything I know. I think that the picture will become clear for us both over the next few months.

Nat Schindler – Banc of America

That goes into the next question. How long does it take a retail supply chain to rationalize its inventory levels? We had a step function down. A lot of people are calling it September 15th, but sometime around then. Has the industry, with huge promotional discounts, I am not seeing as you mentioned, you are not seeing that much selection anymore in the stores and these ridiculous clearance sales? How long does it take for that to happen, and the liquidators, have they just done the liquidation through the normal stores and through the normal channels, and then the supply chains rationalized, or is there going to be a lot of inventory that have to come your way at good prices?

Patrick Byrne

A lot of good questions there. First of all, the normal supply chain for a retail store is about 80 to 90 days for a large retailer. They are running at 4 or 5 turns. Secondly, the general rule of thumb is if the goods are in their retail store already, it is more costly to box them up and reverse logistic them out to a DC and send them to us than it is just for them to liquidate them within the store. On the other hand, if goods are still in the distribution center or back in the warehouse on the West Coast or they’re on the high seas or they are back in China, it’s easier to make a deal with us. It’s easier and they get more money out it, so I think and I want to give you a straight answer without sounding like I’m dissing anybody in the industry, which I’m not, but I think that a lot of these folks have a January 31st end of year, which is smart incidentally, and amongst my mistakes here was when we set up the company, we should have made it January 31st calendar year. My sense is that there is a bunch of people who are flushing out their supply chains for January 31st, and then with the anticipation of shrinking their number of stores or even doing something more drastic.

Jonathan Johnson

Patrick, we can have maybe Steve give a little color on that since he is the retail guy.

Steve Chesnut

Everything you’re spot on with, Patrick. The other dimension I would add in is that some of these retailers also have reaches back into China and foreign markets, and so some of that inventory they ordered 4 or 5 months is going to still flow in, so whether it’s soft lines or whether they are over in China sourcing some of that, we are going to still feel a little bit of impact coming in Q1 as they try and liquidate through what they placed on orders 4 or 5 months ago.

Patrick Byrne

Yes, I think that pressure was already lifting. In another words, the dynamic of being up against guys who are effectively running a going out of business sale was a very powerful dynamic in Q4, and I think it is a dynamic still. I expect it to decrease modestly after February 1st, but I could be wrong, but I expected that kind of pressure starts lifting. In fact, it already has started lifting, but I expect it to lift more after February 1st, but it still will be a factor in Q1.

Nat Schindler – Banc of America

In the past you’ve said that marketing spend is at least partially related to the following quarters. It’s not all direct marketing; you have some brand marketing that affects the next quarter’s revenue or maybe the next two quarters. You had pretty controlled marketing spending in 3Q and 4Q. Do you see its effect on 1Q and 2Q because of that or have you switched to a more direct marketing model?

Patrick Byrne

We’ve generally been 70 to 80% direct. In the early days, we were 100% direct. We are still staying within that range, but we think we’ve learned just how to dial in and measure better than we ever did before. This improvement is not driven from having just cut branding spend. This is more to me an equilibrium where we are now, where we are reporting. We could have, of course, you can make any quarter look good by just cutting your branding spend and surfing the wave for a few months, but then it’s going to drop out beneath you. That’s not what’s happened here. We’ve reached, in my view an equilibrium marketing spend. I still think there’s another 15 or 20% we can improve it, but we were past the point of making dramatic adjustments one way or the other.

Nat Schindler – Banc of America

Trying to get to that $100 million plus in G&A and tech for next year. Tech is at least somewhat modellable and it has its lines. I can see where they are probably going if depreciation turns the other way on you as you’ve increased CapEx spend, but G&A is a little harder for me because it seems like you took out a lot of bonuses from this year. I think that is what you said at the beginning of the call or in 4Q. Is it going to pop back up or is it going to...

Patrick Byrne

Not pop, but if it was 96 this year, I would expect 100 to 105 next year, maybe 106 or 107, and the reason is we now see a lot of things that the really advanced retailers. The things they have done, we are now doing. A lot of it takes development. Development used to be the bane of my existence. We would line up 28 projects to do for the year and look at our resources and figure out the three we could get done. We now have a strong development staff that’s not spread too thin, and they are very strong technically. We’ve really gotten a much stronger team than we had 2 or 3 years ago or before. I’m reminded Bill Gates said something about one great engineer is worth a thousand good engineers. We’ve gotten some really top quality software engineers from very well-known firms, and we just have a very strong development team now. There are 10 times as many as there were 2 or 3 years ago, so there is that cost, and the kinds of things we are doing with our Teradata system are pretty advanced. There is only a few people who we believe have done these things before, and so we think it’s very well worth spending $10 million on this stuff to really get ourselves to the leading edge of retail sophistication, but I’ll stop there and toss it to Steve Chesnut who might want to put some color on that.

Jonathan Johnson

I do want to comment that G&A in Q4 versus G&A in Q1 ’09, Q1 ’09 is going to be up. Because Q4 retail was tough, our bonuses across the company were smaller, and we weren’t accruing for a bonus in Q4, so there may be some comp issues that make G&A, I don’t want to say, pop but increase in Q1.

Steve Chesnut

That’s absolutely correct, and I think it just goes back what you said, Patrick, which is we are in a strong development, build the business cycle, make smart investments, and part of that is on the expense line to do that.

Patrick Byrne

Yes, but unlike in the past when the airplane was in a shallow descent, or even at one point a tailspin, it was a risk to make these investments. We did it hoping that we could get it out of the tailspin or out the glide. We now have the nose above the horizon. We’re gaining altitude. We are generating cash, and we are investing a portion of that cash back into these investments.

Operator

(Operator instructions). Our next question comes from the line of Colin Sebastian with Lazard Capital Markets.

Colin Sebastian – Lazard Capital Markets

Related to the conversation on bring back the consignment model, I’m curious for a little more detail on the profile of your potential partners here if you’re seeing some interest from some of the retail survivors as well which could become longer term relationships, and then also related to that the incremental investments or human resources, the stuff that might require upfront, particularly if this is more of a Q1 opportunity and certainly stores have been ordering much more conservatively over the past several weeks to months to reduce inventory levels.

Patrick Byrne

There is not an increase in manpower associated with this. We had figured out it was time to go into this, and we’ve gotten the development done. Somebody showed up on our doorstep with a very attractive deal, and they sounded us out about could we do this on consignment, and we were able to say it just so happens, yes. We’ve have taken down this big warehouse space in Salt Lake. We are sort of folding ourselves into it one piece at a time. We had a few warehouses and we’d been migrating inventory to there or selling out of one warehouse and re-supplying into the other, and gradually phoning operations into it, and somebody came along with an attractive deal, and they brought up consignment, and we had actually just finished the development that would let us do it, so we think that the world is right for this. We can do it pretty efficiently. It doesn’t require any new manpower. We’re set up to do it, and I think it’s very attractive for our partners as well as people in the distribution business, as well as people who want to do business with us, it gives us one more card to play on how we can work with them, and it seems to be very attractive to them that we can offer this, so they can sort of focus on what they do best. I don’t know how to estimate how well it’s going to do. It doesn’t represent any new cost to us, and we do have the development software engineering done that let’s us handle this now.

Colin Sebastian – Lazard Capital Markets

And you will be selling into our marketing this year to your existing customer base as opposed to looking for a new set of customers, I presume?

Patrick Byrne

Yes, although we have the flexibility to take 4000 lamps, put them in, and sell 3600 of them to our customer base, pick back, and ship one at a time, and the last 400 bulk ship out to a store somewhere. We have the flexibility to be B to B or B to C out of this.

Jonathan Johnson

I think as we’ve improved our warehouse operations, we’ve become a very attractive consignment supplier, providing the consignment operations to partners and other vendors. We pick, pack, and ship extremely efficiently, and I think others should look at this and will find it very attractive.

Patrick Byrne

Our cost now of pick, pack, and shipping are on equilibrium basis significantly below, 15% below, the very best we used to think we could do at the height of the Christmas season, so when we used to do our planning and stuff, it was around at the height of the Christmas season, we could with all the efficiencies of huge volumes, we could run it at a cost of X. We’re now running it 85% of X just on a normalized basis. The fellows running the warehouse and Steve Tryon have really leaned that out, although they believe there is even more to take out of it.

Colin Sebastian – Lazard Capital Market

That’s good to hear, and lastly I’m not sure if you mentioned this already, but if you have any comments on top line trends for the month compared to the fourth quarter growth particularly, that will be helpful.

Patrick Byrne

Yes, and you probably want to review the transcript because I did speak about this extensively at the beginning, but yes, this month is showing up at minus 3% so far month to date, and basically November was the nadir. November was about a shrink of 20%. We had a very tough comp from November of the previous year. December came back to about minus 10, and January is running at minus 3, and we had a very good January last year too, so you know now all I know.

Operator

Your next question comes from the line of Craig Bibb.

Craig Bibb

Let’s get back to my question. You guys generated negative free cash flow in a way. You have negative equity. You had $110 million of cash at 12/31, but you haven’t paid your suppliers yet, so to me it looks like it’s starting to become tight and revenues are declining as we enter ’09.

Patrick Byrne

Well, what matters in my view is contribution dollars, not revenues, and the contribution dollars are growing nicely, but you are entitled to your opinion. I hope you act on it. The market is just a big prediction machine, so place your bet and take your chances.

Craig Bibb

Are you guys looking at raising capital?

Patrick Byrne

Not at all. Well, Jonathan, do you want to give a legal answer to that? Let me guess, we are at all times evaluating the capital market?

Jonathan Johnson

We have a shelf out there that we filed and went effective in December. When we issued the press release around it, we said we have no current intentions to raise money, and I think it is prudent capital management to have a shelf registered, but my answer is just like yours, Patrick. Right now, no, not at all.

Craig Bibb

In the fourth quarter you were able to create cash flow by slamming down marketing. Is that likely to continue in ’09?

Patrick Byrne

Well, as I just mentioned to Colin before, although marketing has gotten much more efficient, it’s not a fact that we slammed it down into some non-equilibrium position just to make the quarter look better. We’ve just gotten it significantly more efficient, so I think you can model it at about where it is now. I should think we can improve modestly from here, but Steve Chesnut, I want to hear your thoughts as the new CFO. Would like to answer Mr. Bibb?

Steve Chesnut

One, I think this is a very viable model, and I think it’s got great long-term perspectives on it, and I think we are continuing as we go through and look at the model to find efficiencies in it. Marketing is merely one leg. I think Steve Tryon’s work out there in the warehouse is another, and to me this is a very viable long-term model. I don’t see short-term liquidity issues.

Patrick Byrne

Craig, did I understand that you asked about the bond as well that you send an email about the bond?

Craig Bibb

The convertibles?

Patrick Byrne

Yes.

Craig Bibb

No, I don’t think I had a specific question on that.

Patrick Byrne

We are interested in possibly buying some of that in.

Operator

At this time, there are no further questions. Do you have any closing remarks?

Patrick Byrne

I do not. Chop wood, carry water. Jonathan?

Jonathan Johnson

Chop wood, carry water. I think we are working hard in ’09, and we expect to keep working hard through all of it.

Patrick Byrne

Steven, welcome aboard. Do you have any last comments?

Steve Chesnut

This is going to be a great 2009.

Patrick Byrne

Thank you shareholders who stayed with us through the dark ages, and I hope to reward you for your patience and confidence.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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