Thursday, December 15, 2005

The Blame Game: Overstock

Overstock (OSTK) CEO Pat Byrne has spent the majority of 2005 in a catatonic state of corporate paranoia.

He claims that there is a "conspiracy" against him and his company, an online retailer/liquidator mired in operational woes.

When he's not driving his company into the ground, he likes to jump on internet message boards (we didn't know CEOs had time for this), where he spews farfetched narratives that are better left for Hollywood, not Wall Street.

As we've mentioned many times before on this site, managerial eccentricity and oddball behavior should raise red flags.

Pat Byrne seems to be better at scapegoating externalities and dressing his company's shortcomings in convoluted tropes and pop culture innuendo (he says the short sellers are following a mastermind "Sith Lord," a reference to the sci-fi epic, Star Wars) than he is at addressing Overstock's financial health, or lack thereof.

So far this year, Overstock has burned through at least $80 million by our count.

Meanwhile, shopper acquisition costs continue to rise; Overstock is hemorrhaging cash.

The writing is on the wall: Overstock's problem isn't rampant short selling -- it's mismanagement.

Everything from implementation problems to bloated marketing expenses points to management's inefficacy.

And that's just the tip of the iceberg.

OSTK's receivables turnover ratio (total operating revenues divided by average receivables -- used to measure how effectively a firm is managing its accounts receivables) also leaves much to be desired.

Overstock's ratio is lower than it peers, meaning Overstock's collection policy needs some fine-tuning.

Even though Overstock's revenues are climbing (but margins off their 2002 high), we are reiterating our sell rating/$32 price target on shares of Overstock.

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