6350 South 3000 East
Company Perspectives:
Closeout merchandise is typically available in inconsistent quantitie s and prices and often is only available to consumers after it has be en purchased and resold by disparate liquidation wholesalers. We beli eve that the traditional liquidation market is therefore characterize d by fragmented supply and fragmented demand. Overstock utilizes the Internet to aggregate both supply and demand and create a more effici ent market for liquidation merchandise. We provide consumers and busi nesses with quick and convenient access to high-quality, brand-name m erchandise at discount prices.
Overstock.com, Inc. is an online retailer that sells excess inventory at discounted prices. The company, akin to an outlet store that sell s the closeout merchandise of manufacturers, distributors, and other retailers, offers brand name bed-and-bath goods, home décor, f urniture, kitchenware, watches, jewelry, computers and electronics, s porting goods, and apparel. Overstock.com also sells books, magazines , CDs, DVDs, videocassettes, and video games, items that are classifi ed as "BMV" products. The company sells approximately 500,000 BMV pro ducts and 50,000 non-BMV products. Merchandise is obtained either by buying excess inventory, referred to as the company's "direct" busine ss, or by selling the merchandise of other retailers, catalogue compa nies, and manufacturers on a commission basis, referred to as its "fu lfillment partner" business. Overstock.com has fulfillment partner re lationships with roughly 380 clients, who supply nearly all of the BM V products and 80 percent of the non-BMV products sold on the company 's web site. Overstock.com also maintains an online auction site that allows consumers to buy and sell merchandise, and it operates an onl ine travel store, which sells cruise vacations.
Origins
Overstock.com did not assume a recognizable national profile until th e company's path crossed with that of a dynamic and gifted businessma n named Patrick Byrne. The company was founded in May 1997 as D2-Disc ounts Direct, a limited liability company that became a C Corporation at the end of 1998. Byrne first learned of the company's existence i n the spring of 1999 when its founder approached him, asking for capi tal. The company, which had generated slightly more than $500,000 in revenue the previous year by liquidating excess inventory online, was struggling, forcing its founder to ask for Byrne's help. The mee ting introduced Byrne to a business idea he would make his own, inspi ring him to bring a massive outlet-store concept to the burgeoning wo rld of e-tailing.
Byrne was 36 years old when he became aware of D2-Discounts Direct, h aving spent the first three decades of his life developing into a sin gularly accomplished person. His father, Jack Byrne, was an executive of note, serving as chief executive officer of GEICO, Fireman's Fund Insurance, and Fund America, distinguishing himself sufficiently to earn the trust and friendship of the legendary investor from Omaha, N ebraska, Warren Buffett. Buffett met Jack Byrne not long after he bec ame chief executive officer of GEICO, which at the time was a trouble d company. Buffett was impressed by Byrne, impressed to the point tha t he soon bought 500,000 shares in GEICO, and the two became friends. Buffett met Patrick Byrne when he was 13 years old and offered busin ess advice to the teenager in the form of a baseball analogy. "There was no one calling balls and strikes," Byrne recounted in a February 7, 2000 interview with Fortune, "and I could take as many pitc hes as I wanted." Buffett's advice followed: "Every year or two, the perfect pitch comes along and you swing from the heels."
In the years after meeting Buffett, Byrne established a record of exc ellence, compiling a lengthy list of accomplishments. He received his undergraduate degree from Dartmouth College, translating Lao Tse's Way of Virtue during his senior year. He earned a master's degr ee at Cambridge University as a Marshall Scholar, where he studied mo ral philosophy, and he received a doctorate in philosophy from Stanfo rd University. Byrne spoke four foreign languages, including Mandarin , earned black belts in hapkido and tae kwon do, and bicycled across the United States three times. He successfully battled cancer, surviv ing three appearances of seminoma and 20 surgeries between 1985 and 1 988, an ordeal that left the six-foot-five-inch, 240-pound Byrne weig hing only 164 pounds. He also possessed an impressive memory, a skill he demonstrated with a deck of cards. After several minutes of study ing the cards, he could remember their sequence, one by one, in eithe r direction. Remarkably, Byrne could recall the precise order of the deck six months after performing the trick.
In the months before Byrne first became involved in D2-Discounts Dire ct, he divided his time between running an investment firm and lendin g his talents to Buffett. Buffett's Berkshire Hathaway controlled sco res of companies, including a uniform manufacturer in Cincinnati name d Fechheimer Brothers. The company was struggling, and Buffett asked Byrne to step in as temporary chief executive officer in 1998. Byrne led Fechheimer Brothers for 18 months, gaining admirers who described him as "the greatest motivator ever" and critics who accused him of being "too quick on the trigger," according to reports in the Februar y 7, 2000 issue of Fortune. Byrne primarily occupied himself p rofessionally by operating a personal investment company called High Plains Investments, the entity D2-Discounts Direct's founder approach ed for money. Through High Plains, Byrne had amassed a $100 milli on portfolio, which gave him more than ample resources to invest in D 2-Discounts Direct. "The financials were a joke," High Plains' chief financial officer said in a February 7, 2000 interview with Fortun e, referring to his initial assessment of D2-Discounts Direct. "B ut buried in all that was this billion-dollar idea." Byrne was entran ced by the potential for an online "closeout" retailer and invested & #36;7 million for a 60 percent stake in the company in the spring of 1999. By September, his faith in the management team had faded, and h e stepped in to take over as chief executive officer, renaming the co mpany Overstock.com the following month. Byrne's active presence deli vered immediate results, triggering sales growth that saw the company 's monthly revenue volume swell from $70,000 in August to $1 million by December.
Liquidated Inventories Giving Overstock.com Its Initial Merchandis e Base
Once at the helm, Byrne's principal objective was to expand Overstock .com. At the end of 1999, a year in which the company generated $ 1.8 million in gross merchandise sales, Overstock.com offered fewer t han 100 items, a selection that needed to become exponentially larger if Byrne was to succeed in his goal of making the company larger tha n Amazon.com, Inc. within five years. The company added to its mercha ndise selection in two ways, either by acquiring excess inventory for resale, its "direct" business, or by selling other parties' excess i nventory for a commission, its "commission" business (later renamed " fulfillment partner"). Overstock.com dealt with manufacturers, distri butors, importers, retailers, catalog companies, and e-tailers, givin g each type of company a way to get rid of its excess inventory. Init ially, Byrne acquired the inventories of failing dot-com companies, w hich were in great supply during Overstock .com's first years in busi ness. The struggling companies were in desperate need of cash, enabli ng Byrne to acquire merchandise at heavily discounted prices. During his first two-and-a-half years in charge, Byrne liquidated 18 moribun d dot-com companies, giving Overstock.com a product selection that su pported its claim of being an outlet store for the nation. In a two-m onth period in 2000, for instance, Byrne acquired inventories valued at $44 million retail for prices far below retail. (Typically, Ov erstock .com customers paid wholesale prices.) He paid $860,000 f or Adornis.com's jewelry inventory, gaining merchandise that had a re tail value of $5 million and a wholesale value of $2.2 millio n. He paid $50,000 for the inventory of BabyStripes.com, gaining a selection of 500 baby-related products that retailed for $450,0 00 and had a wholesale value of $180,000. He purchased more than 2,000 hats from eHats.com, paying $70,000 for $550,000 worth of hats.
The liquidation of failing or failed dot-coms provided Byrne with a m erchandise selection large enough to justify Overstock.com's debut on Wall Street. The company completed its initial public offering (IPO) of stock at the end of May 2002, when Overstock.com shares debuted a t $13 per share, raising $39 million. With the proceeds obtai ned from the IPO, Byrne continued to broaden the company's offerings, sending representatives to search for bargain buys to build Overstoc k.com's direct business. He recruited former catalog buyers, traditio nal retail buyers, and, on some occasions, he hired ticket scalpers h e met at rock concerts. "It's people who can think on their feet," By rne said, referring to the company's buyers in a July 17, 2003 interv iew with Investor's Business Daily. Each purchase completed by a buyer gave the company greater revenue-generating potential, fueli ng the company's sales growth. Between 2000 and 2003, Overstock.com's revenues increased from $25.5 million to $91.7 million. Prof its, however, proved harder to come by. The company lost nearly $ 40 million between 2000 and 2002, despite generating net income in it s first two fiscal quarters as a publicly traded company. Some analys ts blamed Overstock.com's profitability problems on Byrne's reliance on a word-of-mouth marketing strategy, but he was not to be swayed. " We're betting the ranch on that," he stated in a July 17, 2003 interv iew with Investor's Business Daily. "We can price cheaper and count on customers to spread the word," he added. "I don't want to sp end $200 million on advertising and price it into the products." He later changed his mind about the company's marketing tactics, at l east as demonstrated by the enormous attention the company was attrac ting midway through the decade by turning to expensive television com mercials, but before the company hit the airwaves it began to record surging revenue growth.
The merchandise foundation supporting Overstock.com had been establis hed almost exclusively through direct acquisition deals. In the years immediately following its IPO, the company recorded its greatest fin ancial growth by forging commissioned- based deals with manufacturers , other retailers, catalogue companies, distributors, and importers. Overstock.com, once it established itself as a legitimate, trustworth y player in the e-commerce sector, was able to form partnerships with companies such as Hewlett-Packard, Kenneth Cole, Simon & Schuste r, Samsonite, and Cuisinart. These fulfillment partners, constituting the former commission side of Overstock.com's business, drove the co mpany's revenue growth following its IPO. In 2000, fulfillment partne r agreements accounted for $867,000 of the company's $25.5 mi llion in revenue. In 2002, fulfillment partner agreements accounted f or $12.3 million of the company's $91.7 million in revenue. I n 2003, fulfillment partner revenue skyrocketed to $100.8 million , pushing overall revenue to $238.9 million, before eclipsing the direct side of the company's business in 2004, when partnership agre ements generated $281.4 million of the company's $494.6 milli on in revenue collected during the year.
Post-IPO Diversification
Against the backdrop of energetic revenue growth, the company added n ew dimensions to its business during the period immediately following its IPO. In July 2003, Overstock Mexico, S. de R.L. de C.V. was form ed, a wholly owned subsidiary created to distribute products in Mexic o. Several months later, a discount travel store was added to the Ove rstock.com web site, part of Byrne's plan to provide a one-stop desti nation for discount shopping for products and services. The travel st ore was shut down in May 2004, but after improvements were made in th e types of services offered, it returned in January 2005, enabling us ers to book reservations for flights, hotels, cars, and cruises. In S eptember 2004, the company launched a bold bid to take away some of e Bay Inc.'s business by adding an online auction function to its web s ite. Like eBay, Overstock.com operated the site strictly as a consume r-to-consumer marketplace.
As Overstock.com prepared for the second half of the decade, several positive developments mitigated the company's problems with profitabi lity. The company lost $11.8 million in 2003 and $5 million i n 2004, but investors hardly seemed to care. During the fourth fiscal quarter of 2004, the company's stock reached a record high of $7 6.05 per share, an enormous increase from the debut price of $13 per share. Part of the confidence expressed by Wall Street stemmed fr om the success of the company's marketing campaign midway through the decade, one that strayed far from Byrne's commitment to word-of-mout h advertising. The campaign featured a 41-year-old model, Sabine Ehre nfeld, dressed in white and surrounded by white consumer items and th e tagline, "Have you discovered the secret of the Big O?" The televis ion and radio commercials proved to be surprisingly successful, excee ding the hopes of Overstock.com executives. In a market survey conduc ted in November 2004, brand awareness of the Overstock.com name reach ed 46 percent, up substantially from the 12 percent recorded in 2003. "We never expected this kind of interest," the company's vice-presid ent of branding said in a March 5, 2005 interview with the Salt La ke Tribune. "This is just bizarre--in a good way," he added.
With public interest stirred and its revenue increasing robustly, Ove rstock.com stood poised to clear the one hurdle it had been unable to clear during its first six years in business: consistent profitabili ty. Byrne maintained that the company's failure to record steady prof its was based in large part on his emphasis on expansion, suggesting that if he ratcheted back growth plans Overstock.com would soon becom e profitable. Byrne, however, was committed to expansion for the near -term, as he pressed forward with acquiring inventories and forming f ulfillment partner agreements, seeking to make Overstock.com the domi nant player in re-selling closeout merchandise online.
Principal Subsidiaries: Overstock Mexico, S. de R.L. de C.V.
Principal Competitors: Amazon.com, Inc.; Buy.com Inc.; SmartBa rgains, Inc.
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