It was IBM.;)
Btw
I thought this might interest you.
>>Last Update: 12:12 AM ET July 22, 2002
SALT LAKE CITY, Utah (CBS.MW) -- There are three reasons why online liquidators, like Overstock.com, are intriguing investment propositions.
First, Christmas always comes. Second, in this sluggish economic environment, consumers like discounts. And third, there is always an online retail store near you.
Overstock (OSTK: news, chart, profile), which is riding the favorable trends for discount retailers, went public on May 30 at $13 through an offering led by W.R. Hambrecht. Shares have traded south of that level ever since.
But for Overstock to attract investors, it seems it may need to use the same tactic it uses to lure consumers: Offer a steep discount.
Even at the $170 million in market cap, or $12.50 per share, this company's stock carries a hefty premium.
Overstock.com's revenue hit $35 million last year and it lost $13.8 million in the same period. Assuming that Overstock can replicate the sales generated in the first three months of this year, it should conservatively generate $40 million in 2002. But sales are ramping up nicely. Overstock.com CEO Patrick Byrne said the company could conservatively generate a 60-percent increase in annual sales.
Assuming Overstock grows annual sales by 60 percent this year to $56 million, it would still be trading at 3 times this year's sales, a hefty premium compared to the established e-tailer, Amazon.com and established discounters, such as CostCo (COST: news, chart, profile).
Amazon.com's (AMZN: news, chart, profile) market cap plus debt trades at 2.2 times this year's sales. Closeout retailer Big Lots (BLI: news, chart, profile) trades at 2 times this year's sales. Membership warehouse-club operators, CostCo and BJ's Wholesale Club (BJ: news, chart, profile), trade at half their sales projections for the year. Even Wal-Mart (WMT: news, chart, profile), the leading discounter which also owns a warehouse membership-club Sam's Clubs, trades at 1 time its projected $220 billion in sales.
Of course, comparisons of price-to-sales multiples don't provide a complete picture. If investors have learned anything during the past few years, it's that profits matter most. That's why EBay (EBAY: news, chart, profile), which consistently delivers profits, is one of the few online companies that is valued highly.
Unfortunately, Overstock doesn't have profits. This shouldn't come as a surprise as most start-ups don't have earnings. What's been surprising to most investors, however, is that it takes a long time for a start-up company to turn profitable.
Even Amazon.com's $3.7 billion in expected sales this year isn't going to produce a profit just yet. The latest update from Amazon is due when it reports results after the close Tuesday, July 24.
On the other hand, companies like CostCo can easily flip on an online operation and make a profit. Todd Slater, an analyst at Lazard Freres, estimates that CostCo generates about $200 million in sales online and is profitable.
Its plan?
One advantage Overstock does hold it that it isn't burdened with a tremendous cost structure like Amazon.com. It can achieve economies of scale on significantly less revenue. Byrne expects to reach profitability this year.
Nonetheless, ramping up sales the way Wall Street expects it too, will be challenging.
Here's why. Overstock essentially has two businesses. It sells to consumers through its online site and it sells wholesale to small- and medium-sized retailers.
It's hardly worth mentioning that you can't push volume from an online site by selling onesies and twosies from an online retail store. Significant marketing is needed and the company doesn't have the money it takes to get the word out. Fortunately, it had its IPO debut to take care of some of that.
Even selling wholesale to retailers -- which should enable Overstock to move volume -- requires marketing and advertising. Byrne said he is increasing marketing costs this year. But will it be enough? It seems doubtful. Enough online operations -- need we recall the list -- have died trying.
What's more, there is competition, ranging from the best online commerce company, EBay, to start-ups, like Liquidxcess, to the leading traditional closeout retailers, such as Big Lots.
But the wholesale business generates less than $100 million a year for Big Lots, a sliver of its Big Lots' total sales. According to Kent Larsson, executive VP of merchandising and sales promotion at Big Lots.
Big Lots makes more money selling retail to consumers through its 1,350 stores. The problem for Big Lots, besides the fact that it could cannibalize its retail business by selling to retailers, is that the number of retailers appears to be diminishing.
"It's a shrinking world of retailers," Larson said.
Indeed, analysts believe the world is shifting towards the mega-store.
"The big [Wal-Mart and Target] have gotten bigger," said Sally Wallick, a retail analyst at Legg Mason. "And, warehouse clubs have gained market share."
Obviously, these big stores don't need to buy from Overstock.com. So, what's Byrne's competitive advantage?
Byrne believes it's the low costs in buying his supply and having relationships with the vendors who are trying to get rid of their products.
Even so, experts don't believe retailers can survive by just offering steep discounts.
"Retailers can't make money being purely in the business of selling only sale items," said Mark Goldstein, founder of Bluelight.com, the former online site of K-Mart. "They have to play it both ways. They need a discounted product as their loss leaders and they need higher-margin products to make money."
Byrne aggress, but also believes his low-cost structure and his ability to buy 50-percent below wholesale will enable him to sell products at 5-percent below wholesale to consumers and 30-percent below wholesale to retailers. To this end, he has margins to play with.
Other considerations
At first blush, one would think that Overstock.com could be a nice ancillary business to a traditional liquidator, like Big Lots, which doesn't have an online retail presence.
But Big Lots doesn't have one for a reason: Shipping one item at a time isn't its business. And even if Big Lots does decide to open an online retail presence, paying $200 million to buy it, isn't likely.
"If we decided to start selling to either customer, we could do that for not the kind of money you're talking about," said Larsson.
Of course, one could argue that Overstock might fare well if the overall discount-retailing sector does well. Discounters in general are turning in relatively better comparable store sales than the average retailer. The stock prices are under pressure now, which could mean, they're due to recover over the next six months, said Todd Slater, an analyst at Lazard Freres.
But here's the rub. Profit expectations may be too optimistic. According to the S&P Retail Index, retailers are expected to grow earnings by 22 percent in the third quarter and 16.3 percent in the fourth quarter. This is on top of the year-over-year growth the group achieved in the third and fourth quarters of last year. This means that investors expect retailers to achieve earnings growth of 15 percent annually over the past two years, and that may be optimistic, given declining consumer confidence levels and a less robust economic recovery in the second half, said Slater.
Why is it a concern? For one, with unemployment running apace, consumer credit remains a wild card.
In the end, if it's a difficult problem for established big retailers, it's even more so for an unproven and unprofitable start-up.
cbs.marketwatch.com |
