Overstock.com CEO Speaks Out

Overstock.com (OSTK) CEO Patrick Byrne thinks he's building a much better business than that of e-commerce rival Amazon.com (AMZN) -- and his company should be valued with that in mind.

But many investors have their doubts, as detailed here. As recently as last month, 44% of the company's float was being shorted while some of the company's biggest investors have recently sold part of their stakes.

TheStreet.com's Troy Wolverton recently spoke with Byrne about investors' concerns and his company's direction.

Q: Why'd you buy 620,000 shares last month?

I bought the stock because I think it is and thought it was very attractive. I have big hopes for this company.

Q: The rumor on Wall Street is that you bought the shares in an effort to squeeze short-sellers.

I don't pay a whole lot of attention to the dynamics about the shorts.

We're really simple guys. We're value guys. I focus on buying toasters and selling toasters. If we do that, the stock will take care of itself. People are trying to read far more Machiavellian intentions into this.

I was not trying to squeeze the shorts. I don't lose sleep over whether people are shorting the stock. It seemed like a good time to buy the stock.

I am aware of how short some people have gotten. I can't say they are wrong. They've got their opportunity. Reality is going tell us who's right and who's wrong.

Q: Some of your biggest investors have been selling shares, including Ashford Capital Management, Krevlin Advisors and Tiger Technology Management. Why shouldn't other investors see that as a warning sign?

It doesn't surprise me. I got email from two of them saying that they were going to take some profits. Some of those guys were coming in at $5 or $6. Two of the firms you mentioned were lightening their positions, but were not getting out of it.

Overstock CEO
Patrick Byrne

You do like to have smart owners. But it doesn't bother me if they sell it, and it doesn't make me happy if they keep it. I'm working for shareholders as a group.

Q: The skeptics out there say that your business model is broken. What's wrong with that picture?

Ask the same investors what they think of Amazon. When they were the same size we are, they lost $1 billion that year. If at each stage of the game we're making more money than Amazon, I think we'll ultimately have a more valuable franchise than Amazon.

Q: So what happened to your company last year? Your revenue jumped, but so did your losses.

I fly seaplanes, flying boats. You've got to get them up on the step. You've got to gun it to get enough power to get up on the wave.

We were on the step. We were growing nicely. We had an operating profit and a GAAP net profit in the fourth quarter of 2002. Then what happened just about this month last year is that we came off the step.

I made the mistake of running our inventory way too low in the first quarter last year. Suddenly we hit a wall. Our sales died. I just ran our inventory way too low. And then there was the whole war-jitters thing.

We lost momentum. What that meant was that we had to spend a lot more marketing dollars to get back up on it. Our growth had come to a halt.

We were running at a 2.2% negative net margin. That was bad. But we got our growth going nicely again.

This year, if everything works out, we will be somewhere between a positive 0.5% and a negative 0.5% net margin -- call that roughly breakeven.

Q: Do you need to raise money soon to keep your operations going?

We did file a shelf offering. But I'm not in any real hurry to pull the trigger. I know that Wall Street is always trying to read between the lines when we've done things like that. It's a really funny dynamic.

We really are simple. We say that we're putting this up on the shelf to use at some point. We really mean just that. We don't have a secret agenda.

To be honest, I get quite a bit of people pointing out to me that it's just not prudent to run a company of this size on just $20 million to $30 million cash in the bank. It doesn't take much to go wrong to be in trouble. A lot of shareholders are saying we should be selling more shares and putting more in the bank.

But the Byrne family is a two-trick pony. And one trick is to have as few shares in the denominator as you can.

Come August, September, October, as we build inventories for Christmas, we will need more cash. But we have had a nice, attractive line of credit offered to us from a bank that we would draw down just for the Christmas season.

Q: Overstock seemed to have a lot of success buying up the remains of dying dot-coms. But the impression I get is that the established liquidation business is harder to crack, that it's harder to find great deals. Is there anything to that?

When we started off, we were buying from some of the top liquidators. We're now one of the top liquidators in the country. We can do multimillion-dollar deals. We can take these huge deals because we know how to work them.

We've become a supplier to some of our original liquidator partners. I don't think it's hard for us to break in. We've become one of the main players, to be honest.

Q: Overstock added media products to its inventory about 18 months ago, touting its discounts to Amazon's already low prices. If you make a name for yourself selling deeply discounted books, CDs and DVDs, won't you have a tough time later on raising your prices to make those sales more profitable?

We don't need to. We're basically selling those at cost. We're just moving electrons. It doesn't really cost us anything. It doesn't tie up any capital to speak of.

It's a high-converting category. It's the perfect category to brand ourselves with. Ultimately, we don't need to raise prices. We view it as somewhere between our marketing and buying departments. It's a great customer acquisition tool.

Q: There's been quite a shake-up in your executive ranks over the last year or so. Shouldn't investors be concerned about that?

It's less of a shake-up than it looks to the public.

Jason Lindsey, who was our CFO and president, is still very much involved. He still comes in one day a week. He's my main sounding board. He provides a great element of prudence and thoughtfulness. The only thing different about his week is that he was spending 40 hours a week talking to investors.

The CTO, people think he's gone, but he's not gone. He went from being CTO to being our Webmaster and director of skunkworks. We replaced him with a terrific fellow who has been with the company for years and been with me for longer, Shawn Schwegman.

We did lose our COO. That's the only real shake-up. In terms of swapping titles, it looks like there's been more of a shake-up than there has been.

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