Bear of the Day: Overstock.com (OSTK)

Overstock.com (OSTK), a Zacks Rank #5 (Strong Sell) is an online closeout retailer offering discount, brand-name merchandise for sale over the Internet. Their merchandise offerings include bed-and-bath goods, kitchenware, watches, jewelry, electronics, sporting goods and designer accessories.

Recent Earnings Data

The company reported earnings on March 15th, where they significantly missed both the Zacks consensus earnings and revenue estimates.  On the earnings front, the company posted a loss of -$2.71 per share compared to the estimate of -$0.03.  Revenues also came in way below expectations at $456 million vs. the consensus estimate of $526 million.  On a year over year basis, OSTK saw declines in both revenues -13%, and gross profit -12%.  To add to the bad news, sales and marketing expenses grew by +13%, and G&A/Technology expenses rose by +8%.  

Management stated that the losses in its ecommerce business was due to increased competition from Wayfair.

Management’s Take

According to Patrick Byrne, CEO, “We announced on our last earnings call that we had engaged Guggenheim to consider strategic alternatives, one of them being a sale of our ecommerce assets. This work is ongoing and we will provide an update when appropriate. That said, our philosophy has always been to run every asset like we intend to own it forever and our strategy discussion will be framed in that mindset. Our ecommerce business had its second annual pre-tax loss ($25 million) in nine years faced with a competitor called Wayfair running a pre-tax loss of $244 million for 2017. In fact, in the last four years, while our retail business has had pre-tax income of $30 million, Wayfair has lost $663 million: this is creating no small amount of margin compression. Because I do not want to watch this play out over years, I believe it is time for us to respond in kind. Thus, I am announcing that we are for the first time adopting the classic internet "growth strategy" I have previously eschewed: high growth, negative GAAP net income, funded out of our negative cash conversion cycle. We have already turned on the jets, and will demonstrate this year that our growth engine is far more efficient.”

Price and Earnings Consensus Graph

As you can see in the graph below, the company had an amazing second half of 2017, but recent issues, and competitive headwinds have caused both the stock price and future earnings estimates to decline significantly.

Overstock.com, Inc. Price and Consensus

Overstock.com, Inc. Price and Consensus | Overstock.com, Inc. Quote

Declining Earnings Estimates

Over the past 7 days, earnings estimates for Q1 18, Q2 18, FY 18, and FY 19 have all been drastically cut; Q1 18 fell from -$0.14 to -$0.87, Q2 18 dropped from -$0.22 to -$1.02, FY 18 plummeted from -$0.51 to -$4.58, and FY 19 collapsed from -$0.20 to -$2.78.

If you are inclined to invest in the Internet Commerce segment, you would be best served by looking into Stamps.com (STMP) who currently carries a Zacks Rank #1 (Strong Buy), or PetMed Express (PETS) who holds a Zacks Rank #2 (Buy) rating.

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