I’ve been taking a look at some of the inventory numbers in Overstock’s most recent 10-K. I have plenty to say about the issue, but thought it would be fun to raise just one question for now…
The 2006 Overstock 10-K represents the following:
We ended 2006 with $20 million of inventory, significantly lower than the $93 million we had at the end of 2005. From this lower inventory level, we expect to turn our inventory much more efficiently. We have entered 2007 with more attractive, higher margin inventory, and as a result, we expect our gross margins in 2007 to increase significantly over 2006 levels.
Let me emphasize the assertion of more attractive, higher margin inventory.
Really? That doesn’t compute when you look at the inventory numbers on the balance sheet. There’s a little accounting concept called “reserve for obsolete inventory.” In non-accounting terms, it’s the stuff that the company is willing to admit is junk.
Check out these numbers:
At 12/31/05, Overstock reported $98.5 million of inventory, with a reserve of $5.2 million. The reserve was 5.3% of the total inventory.
At 12/31/06, Overstock reported $26.9 million of inventory, with a reserve of $6.6 million. The reserve was 24.5% of the total inventory.
So let’s get this straight… in terms of raw dollars, the obsolete (junk) inventory was greater at the end of 2006 than it was at the end of 2005. And as a percentage of total inventory, the obsolete (junk) inventory was over 4 times higher than 2005.
How is this inventory more attractive when you’re admitting that 1/4 of it is junk??? Or, was way more junk sitting around in 2005, but the company purposely did not reserve for it? (Which would, oddly enough, probably be a material misstatement in the financial statements.)