The Overstock.com house of cards

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Quite a lot happened this past week at Overstock.com. Is the house of cards finally falling down?

Some think so. Gary Weiss even wrote a blog post entitled “Will the Last Overstock.com Director Please Turn Out the Lights.” And Sam Antar is wondering why people are distancing themselves from CEO Patrick Byrne.

The Overstock.com directors are dropping. It’s always a bad sign when one’s daddy is the first to resign from the Board of Directors, don’t you think? The stated reason for the departure of John J. Byrne was:

On July 31, 2006, John J. Byrne announced his retirement from the Board of Directors of the Company due to his new role as Chairman of White Mountains Insurance Group. The resignation did not result from a disagreement with the Company on any matter relating to the Company.s operations, policies or practices.

It is interesting that the resignation supposedly has nothing to do with disagreements, but in an interview with CNet News a few months earlier, Patrick admitted that he and his father disagreed about his “jihad against short sellers”: Continue reading

Why the Overstock Inventory Issue Matters

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It has been suggested that discussing the inventory issues at Overstock.com is a waste of time. Surely there is more interesting stuff going on. like Sith Lords and such.

So I’ll explain why it’s so important.

Inventory is a financial statement line item that is notorious for being abused. Some companies are loath to record proper reserves, and so inventory may be on the balance sheet at too high a value. On the other hand, when a company has a really good quarter, it may be tempting to overstate the reserve to create a little “cookie jar” for later. (The idea is that we recognize additional expense in this good quarter, since we still have “room” for more expenses. Then during a later quarter when numbers aren’t as good, we can dip into that reserve to pump up the earnings.) Continue reading

Is Overstock.com Misrepresenting Inventory?

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Patrick Byrne of O.coI’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. Continue reading