Overstock's Overstocked

If the saying "a business that does not make money is not a business" holds any water, then Overstock (OSTK - commentary - Cramer's Take) is not a business.

In fact, the results of Overstock's recently released first-quarter earnings indicate that Overstock may be a socialist venture existing solely to provide jobs and cheap furniture to Americans, rather than make money.

First, let's take a look at Overstock's first-quarter earnings results. The company delivered 9% year-over-year revenue growth to $180.2 million. The company lost $15.9 million, or 82 cents a share, which was nearly four times worse than year-ago levels when the company lost 22 cents a share. Analysts had been looking for the company to deliver revenue of $185 million and a net loss of 63 cents a share, so Overstock clearly disappointed the Street, and shares fell 10% to $25.88 in Friday's session.

Once again, these results prove that Overstock is nowhere close to delivering a consistent profit to shareholders, and most metrics reveal further deterioration of its core liquidation business.

Let's start with revenue. When it reported fourth-quarter earnings results earlier this year, Overstock said it expected to increase its revenue at an industry rate for the first nine months of the year. However, comments by the company at an investor conference in February were more cautious, prompting a number of revenue cuts by analysts. Even so, these revised estimates proved optimistic. The company's 9% year-over-year revenue growth fell short of those of competitors and peers such as eBay (EBAY - commentary - Cramer's Take) and Amazon (AMZN - commentary - Cramer's Take), which delivered 35% and 19% first-quarter revenue growth, respectively.

This disappointing revenue growth relative to analyst expectations and company comments reinforces my view that Overstock will suffer greatly from its planned cutbacks in advertising spending.

In the first quarter, Overstock spent just 7% of its revenue, or $13.177 million, on sales and marketing, vs. about 10% of revenue in each of the prior four quarters. According to data from Alexa.com, Amazon's Web traffic monitor, traffic to its site declined at a much greater rate than in comparable periods in prior years.

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William Gabrielski is a research analyst at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback; click here to send him an email.

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