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Updated from 9:17 a.m. EST


, the online closeout retailer, found profitability in its fourth-quarter, but said that gross margins were unlikely to rise above 15% and that any future savings would not be passed on to investors.

The stock was down $9.89, or 15%, to $56.05 Friday morning. Overstock closed Thursday at $65.94.

The company posted a profit of $2.48 million, or 12 cents a share, and saw revenue rise 80% to $221.3 million in the quarter from the year-ago quarter. Analysts had been forecasting a profit of 5 cents a share on revenue of $212 million, according to Thomson First Call.

For the full year,'s revenue rose 107% to $494.6 million for a loss of $5 million, or 29 cents a share. That compared with a 2003 loss of 75 cents a share. Analysts had been calling for a loss of 37 cents a share and revenue of $486 million.

Patrick Byrne, the charismatic Overstock CEO with a flair for biblical metaphors, said in a chatty letter to shareholders that was issued by way of an earnings release, "For several quarters my letters and conference calls have described at length our internal work building an Ark: the waters came, and our ark floated magnificently," Byrne wrote.

"We made $2.5 million in Q4. That is a nice, nearly forgotten feeling. We lost $5.0 million in GAAP net income in 2004. I apologize for that, he wrote."

Byrne noted that gross margins had risen steadily over the past year to 15.2% in the fourth quarter of 2004 from 9.6% in the year-ago quarter. But he warned that any future savings from lower logistics costs would not go to investors but go into undercutting rival


on price.

"Here is the punch-line: I now see another 250 basis points we can squeeze out of logistics, but these are, I fear, the last," Byrne's statement said. "Furthermore, shareholders are not going to see them: as in the coming quarters we scrape these savings out of the system, we will in one way or another pass them on to the consumer. Thus you are unlikely to see our margins rise above 15%."

That wasn't what investors were hoping to hear.

But's announcement on margins hardly spells doom for the company. To build up its market share, Overstock needs to offer the lowest prices it can and lure customers away from Amazon or other online retail sites.

But the other side of that strategy is that Overstock is sacrificing short-term earnings growth. And investors are tired of hearing stories about e-tailers losing short-term earnings growth for long-term prosperity.



stock fell 19% last Wednesday after it warned that near-term growth slow down to clear up money for investments in China and its PayPal service -- arguably a sane strategy. And Amazon has been pouring resources into its A9 search technology, including today's announcement of video shoots of thousands of storefronts. But it's not yet clear to many investors exactly how or when this will translate into future growth.

Overstock's stock price has risen 20% in the past two weeks amid expectations that the company's passage to profitability would herald the arrival of an e-commerce play capable of generating high earnings growth. Byrne finally delivered on that promise, but at the same time took some wind out of it. Investors may be unhappy today, but if Overstock can eat into Amazon's revenues, they may be more forgiving later on.