Novice Investing - Overstock with Report

Date: Tuesday 07th 2008f October 2008 01:52:35 AM

Overstock with Report - 11/19/2006

By: Hari Wibowo

Overstock.com Inc. (OSTK) interested us for the reason that it is similar to Amazon.com (AMZN) during its early days. While Amazon never produce negative year over year revenue growth, Overstock did that with its 3rd quarter earning announcement this past month. As a result, share price has been hammered 65% during the past year. To evaluate Overstock as a potential investment, we dig further into Overstock's annual report to garner insights regarding this company

Overstock described on its 2005 annual report as an online closeout retailer, offering discount brand name merchandise. This ranges from magazines, DVDs, VCDs, video games, kitchenware, watches, jewelry, bed & bath, electronics, computers, apparels and limited travel services. Overstock has also branched into online auction site, which is a marketplace for its customers to buy and sell goods. Seems familiar? Yes, these are the things that Amazon offered online too. You can say Overstock as the mini Amazon.

Closeout merchandise is very inconsistent in natures ( in term of quantities). Therefore, merchandise will be available to customers during short period of time. As a result, the market for this liquidated merchandise is very fragmented. Overstock is the facilitator between buyers and sellers of this fragmented market by utilizing the internet. Overstock can participate in this liquidation business in two ways. First, it can take possession and resale these closeout merchandise to its customers. Overstock can also take part of assisting retailers & manufacturers to sell this merchandise. This is called "fulfillment partner" business.

In its annual report, Overstock believes that the balance of retail industry moves the risk towards manufacturers rather than retailers. Several reasons for this trend which is described as follows: Dominant retailers insisting on just in-time deliveries from producers Dominant retailers cancel orders and return unsold merchandise The swift pace of change, resulting in turning inventory quickly into closeout merchandise Incorrect estimates of customer demand

When one of the above occurs, manufacturers have to dispose these excess inventory, or overstock. Most manufacturers avoid liquidating excess inventory alongside their full-price products through traditional channel. This will decreases brand value and weaker pricing down the road. As a result, more and more manufacturers are turning to liquidation wholesalers. At this point of time, however, most liquidation wholesalers are located at remote suburbs which makes shopping burdensome to customers. Thus, Overstock believes that they can grab this opportunity by being the online wholesale liquidator, which is in development stage. What differentiates Overstock from other online wholesale liquidator is that Overstock offers a more diverse selection of goods, instead of concentrating on a single niche.

Overstock stated the reason why it should exist in this annual report, including how manufacturers can utilize them. Key advantages of using Overstock to dispose excess inventory are:

Resolution of conflict channel. By using Overstock, manufacturer will maintain its pricing strength on its traditional retail channel. This retains their brand value and the retailer's image as the provider of excellent goods.
Single point of distribution. With the internet, manufacturers do not have to dispose their inventory at multiple locations around the country. This gives them a better logistics arrangements and lower cost.
Improved control of distribution. Overstock will provide manufacturer with the data regarding their customers' profile. This will let manufacturer understand why customers bought their products at Overstock. It will also help manufacturers to focus on distribution channel that works best to dispose their excess inventory.
Improved transaction experience. With Overstock, manufacturer can dispose their excess inventory quickly, just like Amazon speeds up distribution channel for manufacturers. Everyone who reside from Arizona or Alaska can know quickly when there is new clearance on Overstock and ultimately purchase it at Overstock when they want one.

Overstock also gave reasons on why customers should shop at Overstock, as opposed to shopping at traditional retailers. The key reasons are:

High Quality and Broad product selection. Much of Overstock's wide selection of merchandise are from well-known brand-name manufacturers. As of 2005, Overstock has approximately 62,000 non BMV (Book, Music, Video) products and 725,000 BMV products. You would have to scour through a large acres of land if you would want to find that kind of selection in traditional retailers.
Convenient Access on a secure site. You do not have to worry if you only have time to shop at Overstock at 12.00 AM Saturday morning. Overstock's online presence enables anyone with a computer to shop merchandise 24 hours a day. Furthermore, Overstock assures customers that they will not sell any personal information given to its site by customers.
Responsive customer service and positive shopping experience. While customers have to experience this themselves, Overstock mentioned that customer service staff assists customers by telephone, online chat and email. Further, they answer 85% of phone calls within 30 seconds and 98% of email within one business day. On top of that, customers can return any purchased merchandise within 20 days of the date of purchase. To facilitate this issue, a return shipment label is already provided in every customers' shipment.

Having explained why Overstock is the right choice for both manufacturers and customers, the annual report elaborated further about the company's visions. Overstock would like to become the one-stop internet based destination for discount shopping. Several strategies employed to reach this goal are:

Establish strong relationships with manufacturers. This is a given. They had tried hard in preceding section to persuade manufacturers to utilize Overstock to dispose excess merchandise. As Overstock grows, the company stated that it can buy more in volume and absorb manufacturers' excess merchandise.
Optimize inventory management through the use of technology. Sounds similar to Amazon. In brief, Overstock will use its proprietary technology to extract information regarding product sales, margins and inventory levels. This will enable them to maximize return on invested capital.
Optimize online marketing initiatives through the use of technology. With the information from inventory management, marketing team can gather better information on the effectiveness of various marketing initiatives and maximize their marketing expenditures.
Maintain low customer acquisition costs. This is the goal of every company in general. However, the company believes that by using direct email campaigns (which is quantifiable), national television and radio campaign, they will keep customer acquisition cost low. While the explanation is vague, this goal is admirable.
Loyalty programs. Any kind of loyalty programs will keep customers coming back, if done correctly. For Overstock, it launches Club O which has the benefits of getting a 5% discount on all non-travel, non BMV products plus a $ 1 shipping per order. Club O members will also has an access to special customer service hotline.

Overstock believes that competition on the online liquidation market is based on these several key factors; price, product quality & selection, shopping convenience, order processing and fulfillment, customer service and brand recognition. As for competitors, Overstock recognizes three kinds of competitors which include:

liquidation e-tailers such as SmartBargains
online retailers such as Amazon.com, eBay Inc. and Buy.com, Inc.
traditional retailers and liquidators such as Ross Stores, TJX Companies and even Best Buy.

There are many other useful points contained on Overstock annual report. While Overstock has yet to prove that it is an e-commerce survivor, their vision and information regarding online liquidator industry is easy to comprehend to a novice like myself. Generally, companies which have a defined goal and business model are more likely to succeed. While Overstock reported an underwhelming result for the 3rd quarter of 2006, if they stay true to their plan, I believe that Overstock can be the next Amazon.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Overstock.com Inc. (OSTK) or any other securities.

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