Overstock: What About That Conspiracy?

Nov. 6.06 | About: Overstock.com, Inc. (OSTK)

Shortly after I started writing about Overstock.com (NASDAQ:OSTK) in the fall of 2004, focusing on a few off-the-baseline emails CEO Patrick Byrne sent to the guy who runs Gradient Analytics, Byrne started lashing out by rolling out his now-infamous "Sith Lord" conspiracy theory. That was the theory that there was a conspiracy linking short-sellers, the press, the government and others to drive down the price of his company’s stock and others.

It was obvious, however, that the only conspiracy was Byrne’s against his own shareholders as he diverted attention away from what was really happening: The slow-but-sure implosion of his company’s business model by a CEO who was too busy running his mouth to run his business.

That was never more obvious than in the company’s just-reported third quarter, which was reported this morning. If nothing else this quarter, and Byrne’s comments in a letter to shareholders, shows just how little control he has of his company.

Consider that in his first quarter letter to holders in April, Byrne predicted the company would “start climbing out of this hole” by the second half of the year. “We continue to anticipate things will look better in Q3, and to be out of the ditch by Q4,” he said.

As it turns out, rather than digging out, the hole is deeper with Byrne conceding that “the Q3 financial results were poor.”

What’s more, the fourth quarter “continues to lag slightly behind last year’s revenue.” Despite a 36% increase from the prior quarter and year-earlier in customer acquisition costs, Byrne added, the conversion of visitors to customers was “weak, too weak, in fact to over come marketing.”

The kicker, though, is when he said: “In the past we ran at an A- and regularly generated 100% growth: now I think we are running at an A+ but seeing no growth. I am not entirely sure what to make of that.”

When the CEO admits to being clueless, investors shouldn’t be. Such a confession may be his ultimate holiday gift to those willing to heed the warning.

UPDATE: Overstock CEO Patrick Byrne, speaking on his company’s earnings call, used the word “distressing” to describe the quarter several times.

He said he has taken over the company’s internal marketing (his reward for doing such a good job as CEO, no doubt) and has stopped focusing on “the jihad,” which he said “is a snowball inside its own momentum.”

He further said the company will no longer offer guidance (which is actually a good thing; I have no idea why any company gives guidance considering that nobody is capable of seeing the future) but then went on to say he thought it would take until March or June for him to get the marketing on track. Turns out part of the problem, Byrne said, is slow-moving inventory -- otherwise known as products nobody wants. (Reminder: Slow-moving inventory has been a problem on the verge of being fixed for several quarters, now, according to prior earnings releases.)

At several points during the call, Byrne asked President Jason Lindsey to answer several questions. Regarding the slide in revenues, for example, Lindsey (who at times sounded exhausted or defeated) said “there’s so much to be done we’re overwhelmed…” Byrne added, “I’m surprised there’s so much low-hanging fruit” – in terms of problems – “that escaped our attention.”

I’m not. That's what happens when you have an absentee landlord.

Related: Overstock Hammered On Bad Quarter; Company Gets Weirder By the Minute