Disclosure: Author is short BIDZ
Bidz.com (BIDZ) is an online auction provider of off-price jewelry and second tier accessories. Its model is unique in that everything is sold via auction. The auctions are not third party auctions as facilitated by eBay, but rather are controlled by the company.
In this report, we'll expose what we at Citron believe to be many red flags at BIDZ . We will make a few comparisons to previous reports written on other companies, as the issues at BIDZ seem to closely mirror issues we have discussed in the past.
BIDZ most closely reminds us of Medifast (Nasdaq:MED), which is down 70% since we first reported on it. Medifast became a “me too” company to Nutrisystems, which at the time was the darling of the market. Yet the company was not producing the same cash flow as the darling to which it wished to be compared.
This year, Blue Nile (NILE) has become a market darling. We believe that part of the run in BIDZ is due to the “me too” aspect of Blue Nile. Yet, much like Medifast, BIDZ is just not spinning off any cash. Actually their cash balance is the worst we have ever seen for a $500 million listed company. At the end of last quarter, Bidz had a paltry $1.1 million in cash.
This also reminds us of Home Solutions of America (Nasdaq:HSOA). While the company consistently put up revenue growth every quarter, the cash balance never increased. Hence the stock is down 80% since our first publication on it.
Where is all the BIDZ cash going? Inventory Inventory Inventory.
Instead of generating cash, BIDZ seems to be generating a lot of inventory. So instead of investors seeing a higher cash balance, they are seeing warehouses filled with “closeout and distress sale” jewelry.
With regard to inventory, BIDZ has consistently disclosed for over two years that:
If our sales levels increase, we will increase our inventory proportionately.
Most investors would prefer to see efficiencies to kick in with rising revenues, but instead, actual reported inventory levels are instead spiraling at least 300% higher than the run rate of revenue.
(9 months thru Sept)
|Revenues||90.5 m||131.8 m||123.9 m|
|Ending Inventory||9 m||34.3 m||46.3 m|
|Days of revenues in inventory||46||124||140|
Jewelry is notoriously vulnerable to valuation abuses and BIDZ’s closeout and distressed merchandise is even more so.
So what points of reference do we have? Lets compare BIDZ inventory with its competitors. We’ve chosen BlueNile.com,. the market leader in online jewelry sales and Overstock.com, the market leader in closeouts, who is also a major jewelry liquidator.
(9 months thru Sept)
|207.3||468.8 m||123.9 m|
|Ending Inventory||15.3m||22.4m||46.3 m|
|Days of revenues in inventory||34||22||140|
Neither of these mature business models carries more than a quarter of BIDZ' alarming inventory levels. Bidz.com wants you to believe the values it is buying are so fantastic that it can swoop up deals with 50% higher margins than industry competitors can manage for cash. Where do these values come from? And what cash is it using to buy all these goods?
|Cash (Sept 07)||74.3 m||74.1m||1.1m|
So after over two years of public company operation during which BIDZ CEO has generated a total of $1.1 cash, he pays himself 30,000 shares per month and holds 6 million stock options worth $78 million at today’s stock price.
Ironically, BIDZ inventory levels fly in the face of its own disclosures of inventory risks, including which leads them to conclude:
As a result, we may be required to take significant inventory markdowns, which could reduce our gross margin, if we do not accurately predict these trends or if we overstock unpopular merchandise.
That’s all the standard business risk stuff, but now it gets really interesting.
BIDZ's largest supplier for years has been LA Jewelry, owned and operated by Saied Aframian, who also happens to be one of BIDZ largest shareholders. Not surprisingly, LA Jewelry is also BIDZ largest creditor, and a large participant in BIDZ co-op advertising program. These “related party” transactions are all over BIDZ financials including:
- Over $5.3m accounts payables to a related party (nearly 20% of AP)
- Purchase of 11.6% of its merchandise from a related party
- Participation in co-op marketing (12%) by related party
- Guarantee agreement with the same party related for “minimum profit” on inventory purchased from the party.
- The related party owns 1,228,000 shares of BIDZ’s stock.
Saied Aframian is a convicted felon and has served time in the Federal System for fencing stolen goods. Not just petty crime either, but for being the prime fence for a multi-million dollar nationwide ring of stolen watches and jewelry:
We are not suggesting that Bidz sells stolen goods; rather, we are observing the background of some of the individuals behind BIDZ who are most responsible for its reported profits. The question is whether all these related party transactions cast reasonable doubt over BIDZ reported financials as a fair reflection of the health of the business.
Considering the deal to guarantee margins to the company coincided with the public offering of BIDZ, we conclude that Mr. Aframian was well aware that there could be a lot more money made from his stock than from selling jewelry. Any time we have seen a company work on guaranteed margins by a large shareholder, the results have been dismal: i.e. Escala and Syntax Brillian, two stocks we previously covered, now trading 90% and 60% lower respectively from date of our initial report.
Speaking of the public offering, BIDZ filed a registration and began to trade on a public exchange. But Citron notes that in 2006, after paying for the preparations for an IPO, it then cancelled. Their stated reason was because insiders refused to sign lockup agreements. This alone should be a red flag.
What About the Business?
Two years ago we published a series of articles on Housevalues.com (Nasdaq:SOLD). Since time of first publication, Housevalues is down 70%. We noted that Housevalues.com had been the subject of an extraordinary volume of customer complaints posted online — while their product was sold online.
We believes that it is an uphill battle to grow an online business when there is a plethora of negative information and feedback from your customers online. Here is one link of the many (16 pages of complaints on just this site among others) that describe customer dissatisfaction with BIDZ.
The complaints are so rampant that this is the first publicly traded e-commerce site we have ever seen with an “F” rating from the Better Business Bureau.
We believe that the company is not being forthright with their customers when it comes to “retail value” or “appraised value”. All of the jewelry from BIDZ shows an appraisal from AIG Labs. This appraisal makes consumers feel as if they are getting a good deal on a credible piece of jewelry that might have a decent resale value. Going to the website of AIG we see their name on a big building, which conveys an illusion of credibility.
We paid a visit to AIG labs and an illusion it is. There is no name on the building (except in Photoshop…). As a matter of fact, the only signage they have is a white piece of paper on the front door to identify them. It appears to us that AIG is more of an “appraisal mill”, that enables Bidz.com to sell low priced items to an unknowing public.
One common complaint that we see online is “shill bidding”. On Wednesday, November 28, we will expose what we believe to be is some extremely questionable bids and bidding practices that occur on BIDZ.com. This part 2 will have much supporting documentation that the investing public should be made aware of.
Unlike eBay and other well-known auction sites, you cannot even click to contact or check the track record of bidders. And since the company is selling its own goods, rather than conducting auctions for independent sellers, the company is responsible for the legality of all aspects of the conduct of its auctions.
It is the opinion of Citron Research that Bidz.com’s business model is not sustainable. The large related party transactions, and the background of the individuals involved certainly provide plenty of reason for doubt. It is the opinion of Citron that the recent surge in stock price is completely unwarranted and the company is going to have to start generating real cash under a verifiable and transparent inventory valuation discipline before shareholders can take its earnings seriously.
Before buying into this “growth” story when the company has less than .70c per share in net asset value, investors would be advised to look carefully at what this company is really doing on its auction website. Stay tuned for part 2 in order to get more clarity of the business model of BIDZ. If the previous quarter is indicative of future performance, Citron believes that Bidz.com will end up in the same bucket as Medifast (MED), Housevalues (SOLD), Escala (ESCL), and Syntax Brillian (BRLC).
Disclosure: Author is short BIDZ