Overstock.com: Investors Burned by Byrne (Again)

Overstock.com (OSTK) CEO Patrick Byrne is lucky because an investment firm he controls is his company's largest shareholder. If it weren't, and he were a mere employee (as are most CEOs), he would've been fired long ago for incompetence.

The fourth quarter, which should be any retailer's best, wasn't just bad; it was a disaster, with the worst losses of the year. (So much for an earlier theory he floated that suggested profits would grow as sales slowed.) Quarter after quarter Byrne confesses his sins, yet keeps his job, thanks largely (it would appear) to a board of friends instead of fiduciaries.

Who else would put up with such poor performance?

Here's Patrick, in the first quarter, saying,

"Our theme for this year is to slow growth during the first half of the year so we can work on improving internal business processes in preparation for stronger performance in Q4 and beyond. We continue to anticipate things will look better in Q3, and to be out of the ditch by Q4."

Second quarter:

"...this work has proceeded at a slightly faster pace than I had expected." He later said in the same earnings release, "I believe that the internal health of the business has never been better.

Third quarter:

"The Q3 financial results were poor." He added, "I have been unsuccessful at predicting the future for awhile..."

Fourth quarter:

"The fourth quarter was a difficult end to a tough rebuilding year." But then, with zero credibility at forecasting, goes on to say, "I believe the company has fixed the problems that began in Q4 2005, and we are entering 2007 with a fresh start."

Right, the "fresh start" that Byrne says should cause "results to improve" comes from lower spending on sales and marketing as a percent of revenue, fewer employees and closing "an expensive computer facility co-location lease" along with lowering other lease costs. In other words, any improvement is likely to come from lower costs, not better sales.

So much for the theory of riding the coat-tails of a manager who has skin in the game; i.e. whose interests are aligned with shareholders. (I guess the caveat there is that the manager should be spending full time running his business, rather than looking under rocks for conspiracies.)

About the only good thing Byrne has done is allow himself not to be paid a salary. And in the unlikely event he gets fired, according to the proxy, he won't get any severance beyond possibly an accelerated vesting of options.

OSTK 1-yr chart:

Comments

[Philip Davis:]

Hey Herb - great take on Byrne!

I caught a typo while quoting you - "It it weren't, and he were a mere employee..."

Probably too late now but I know I prefer someone tells me than I just watch the mistake fly around the web!

Have a good one,

- Phil

2007 Feb 05 10:39 PM

[SA Editor A...:]

Thanks for the heads up Phil, I changed it.

Abbi (SA Editor)

Update: Upon further investigation, Herb's original construction is a correct form of the past subjunctive: en.wikipedia.org/wiki/...

2007 Feb 06 02:36 AM

[Saul Sterman:]

Phil,

I sent Herb a message before the markets opened on Monday – before earnings. I knew that the earnings were going to be bad and that Herb was going to pounce on this. Herb never replied so I couldn’t warn him about the implications of the 3.5B lawsuit. Now it’s too late, OSTK up 22%. I hope you didn’t act on this article.

As of Monday, brokers will not accept a short order unless they can deliver. I don’t know how long this will last, but in the meantime this puts upward pressure on the stock.

The timing of the filing was a dead give-a-way as to how bad the Q4 numbers were. Also notice the wording in the writ (pun intended as in; ‘order to brokers to stop naked shorts immediately’). It talks about constant revenue growth YOY through 2005. This had to be filed before Q4 numbers were released as 2006 is the first down year. Had they filed afterwards this would be a false statement.

Herb,

Did you get my message?

Saul Sterman
Faq [at] crossprofit com

2007 Feb 07 07:07 AM

[Saul Sterman:]

Phil,
If your'e looking for a short, AMZN riding tail winds of OSTK. At 39.17 looks like good short. Notice time stamp.

2007 Feb 07 10:45 AM