February 5, 2007, 12:00 AM

Technology woes hurt Overstock’s financial performance

A significant but troubled investment in e-commerce technology came back to haunt Overstock.com in 2006. The company posted a wider net loss in both Q4 and for the full year, while revenue for the quarter dropped 6% and for the year, 1%.

A significant, but troubled investment in new e-commerce and fulfillment technology came back to haunt Overstock.com in Q4 and for all of 2006.

In 2005, Overstock invested $28.1 million, or about 3.5% of total revenue, on new technology aimed at helping the online retailer of discount merchandise keep up with significant growth.

But a hastily executed implementation plan resulted in Overstock, No. 18 in the Internet Retailer Top 500 Guide to Retail Web Sites, posting a wider net loss in both the fourth quarter and for the full year. In Q4 Overstock recorded a net loss of $40.7 million on revenue of $297.5 million, compared with a net loss of $6.2 million on sales of $317.9 million in Q4 2005.

For 2006 Overstock posted a net loss of $96.8 million on sales of $796.3 million vs. 2005 when Overstock had a net loss of $24.9 million on revenue of $803.8 million. “We lost $41 million for the quarter and $97 million for the year and we paid the price for hastily implemented system upgrades of 2005 and the subsequent troubles caused by them,” says Overstock president Patrick Byrne. “Q4 sales declined 6%, the same percentage decline we experienced in Q3 and lower traffic was partly to blame and we didn`t improve conversion enough to achieve positive growth.”

To achieve better operating margins, Overstock is working to overcome its implementation difficulties, consolidate operations and reduce the amount of unwanted inventory, he says. “We recognize that the days of hyper-growth are behind us and that our poor execution of the building of our infrastructure contributed to the end of that hyper-growth,” Byrne says. “Our expense structure is higher than it should be and because of that, we have had to right-size our expense structure for our current sales level.”

He adds: “We`ve reduced our headcount and we`ve terminated an expensive computer facility co-location lease and we are in the process of significantly reducing additional facilities lease costs and other expenses.”

In 2007, Overstock will concentrate on achieving immediate and substantial gross margin improvements, reducing sales and marketing as a percentage of revenue and reduce technology and general administrative expenses from 2006 levels, the company says.

In 2006, Overstock spent $70.2 million – 9% of total revenue – on technology.

Overstock’s director of e-mail and web site marketing Geoff Atkinson is speaking at the Internet Retailer Conference & Exhibition, June 4-7 in San Jose, in workshop June 4, 10:45 a.m. to 12:15 p.m., in the session E-mail Marketing: Being Persuasive, Not Offensive.

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