Conference call participants:
David Chidester – Overstock.com, Inc. SVP Finance
Dr. Patrick Byrne – Overstock.com, Inc. Chairman, CEO
Jason Lindsey – Overstock.com, Inc. President, COO

Translator:
Tracy Coenen – Fraud Investigator

On with the show…

David Chidester: Total revenue for the quarter was down 6% to $149 million. This was an improvement in growth from the first quarter when sales were down 11%.

Translation: We did badly. But less badly than last quarter. Better badly, if you will.

David Chidester: Gross margin expanded to an all-time high of 17.7%, up 370 basis points over last year. The gains in gross margin are due to significant improvement in our direct margins, which are up 610 basis points year-over-year to 16.7%, and an additional 150 basis point improvement in our fulfillment partner margins to 18.1%, both all-time highs. This is also a 170 basis point sequential improvement.

Translation: Catch us if you can! Was it a real improvement? Or did we dip into our reserves for a fake improvement? You’ll never know!

David Chidester: Our total operating loss is $13.5 million, including $6.2 million of restructuring charges.

Translation: Still no profits!!! Not even close!

Patrick Byrne: I never thought I would say I feel good about a quarter with a GAAP loss of $13.8 million. But Jason, David and I feel great about this quarter. It is not just because of the $13.8 million.

Translation: I’m making it up as I go along and I’m hoping the analysts don’t ask any real questions.

Patrick Byrne: I think that we’re going to see starting within a couple of quarters a dramatic increase in inventory turns and gross margin.

Translation: Still no profits in sight, but who’s counting?

Jason Lindsey: However, if our mix changes in over time and we have incremental sales that produce sales we otherwise wouldn’t get, albeit at a lower margin, it should add incremental gross profit dollars.

Translation: If we sell what we sell in a way that it is sold, it will be sold.

Jason Lindsey: Obviously, the combination of much more efficient marketing and much higher margins than we have ever had, this is where the real driver in the business is.

Translation: Please do not ask us if we’ve manipulated the margins.

Patrick Byrne: We have a fanatic — whenever we do customer satisfaction research we just have this fanatic following now. And people love us.

Translation: *trying to not giggle audibly*

Patrick Byrne: Now I’m going to preempt the knuckleheads who go out there and find quotes from the — oh, Byrne has said in the past he doesn’t like EBITDA. Well, yes, I have said that over and over. I have also said there’s only two times EBITDA matters. And it is — one is one when cash is real tight, which — we were low on cash, but we have come back very nicely. And that doesn’t seem to be an issue.

Translation: Earnings? No! We don’t like earnings!

Jason Lindsey: I think it is great. I think it is nice to be generating again, I guess excluding restructuring, to be generating cash again.

Translation: I just made it sound like we’ve got positive cash flow, but we don’t. ($52.1 million decrease in cash year-to-date.)

Patrick Byrne: Okay. If what you’re asking about — I would usually — I don’t know if I have ever talked about the mitzvah on this call. The mitzvah being my efforts against some quirks on Wall Street. But if what — and normally I don’t really bother answering any questions. If you are involved in this story at all, you know how much of a media circus it is. And how much — I assume you know, how
much mud just gets thrown. If I sit there answering all the asinine incorrect spurious allegations then it is just a vicious circle. And I don’t want to get into that too much.

Translation: Sith Lords. Sith Lordsssssssssss!!!!!

Patrick Byrne: For example, if you look back last May I put out a press release saying we celebrate we received an Overstock subpoena — an SEC subpoena an Overstock. I got trashed though. How could you say that, etc., etc.? And then the party line a month ago became — or two months ago — oh, Byrne hated the SEC investigation. Well, I guess they think that just by lying and lying and repeating the lie loudly and often enough, they can make — and they just hope nobody checks that not only did we disclose that, I put out a press release about it. It is allegation after allegation like that.

Translation: *hoping they don’t get the distinction between the corporate subpoena we celebrated and the personal subpoena we concealed for almost a year*

Patrick Byrne: There is — because this fellow from Whole Foods was commenting anonymously on message boards. The New York Times interviewed me. I pointed out all the — well, I commented on Overstock and Fool and Investor Village. And I have dozens of times identified myself and made clear who I was. But they managed to sort of carve their language very carefully to omit that in their stories.

Translation: *hoping no one goes and reads O-Smear or Gary Weiss or Sam Antar to see the proof of all the times I didn’t identify myself on message boards*

What you might have missed: An even bigger operating loss for the first six months of the year ($31.2 million) than last year ($29.7 million). Overstock hopes you disregard the $12.4 million spent on restructuring costs this year. Why should we ignore it? Poor management is poor management, and it shows up somewhere in the costs. In this case it is in restructuring charges and operating losses.