Geoff Gannon April 27, 2006

Overstock’s First Quarter Results

For the quarter ended March 31st, (OSTK) reported a net loss of $15.9 million or ($0.82) per share. Total revenue increased by 8.62% to $180.2 million from $165.9 million. The company reported gross profit of $25.2 million; gross profit had been $24.8 million in the year ago period. Gross margins dropped from 14.9% in the year ago period to 14.0% in the first quarter of 2006.

Analysts had much higher expectations. As a result, shares of OSTK are down a little over 7% today. I had expected slightly higher revenue growth coupled with slightly lower gross margins. Overstock’s gross profit for the quarter exceeded my expectations, but not by a meaningful amount. More importantly, gross margins held up well, and are still in the high range of the 12-15% range I believe represents the company’s highest sustainable gross margins.

Overstock consumed a fair amount of cash during the quarter. Cash and securities fell from $112 million to $52 million during the period. Meanwhile, current liabilities were at $94 million at the end of the first quarter. Overstock had current liabilities of $155 million at the end of 2005.

The difference between Overstock’s performance in the first quarter of this year and its performance in the first quarter of last year was primarily attributable to higher technology expenses.

Patrick Byrne wrote:

We lost $15.9 million in Q1. I anticipate Q2 will look about the same, before we start climbing out of this hole in the second half of 2006. Our theme for this year is to slow growth during the first half of the year so we can work on improving internal business processes in preparation for stronger performance in Q4 and beyond. We continue to anticipate things will look better in Q3, and to be out of the ditch by Q4. Nothing that has happened recently suggests to me that we should change course.

We ended Q1 with $52 million in cash and marketable securities, including $20 million of borrowings on our inventory lines. We have an additional $30 million of availability on our lines, and are continuing to reduce inventory to turn it back into cash.

In summary, I’m committed to stay the course: slowing growth while we improve our systems and enhance the service we provide to our customers. Unfortunately, Q2 will be another disappointing quarter at the bottom line; then the tide should start coming back in by Q3 and we should be afloat in Q4.

Related Reading (OSTK)

An Analysis of (OSTK)

On the Rationale for the Overstock Post

On Overstock (Again)

On Overstock’s Fourth Quarter

Suggested Link: Overstock Sell Rationale