Patrick Byrne does not waste words on corporate blather. There are no pretexts, even when situations turn ugly or an error in judgment is his. Shareholders, he believes, deserve the same respect as Mom. Mom would never accept unanswered questions or watered-down truths.
"I used to work for Warren Buffet," says the founder, chairman and CEO of Overstock.com, Inc. "He said, 'Think of shareholders as your Mom and what she is owed in terms of information.'"
Byrne takes this advice to heart. In a January 30 conference call, he blatantly told the financial community that his rapidly growing e-commerce company "screwed up" big time in the mid-2000s. Overstock's near collapse and successful two-year rebuilding period were largely his responsibility.
A few years ago, he believed he could run a $769 million company like a "lemonade stand with computers," relying on just $400,000 worth of equipment from three developers. "We had the pleasure of building a near $1 billion business, me screwing up a near $1 billion business and my colleagues fixing a nearly $1 billion business," said Byrne during the conference call.
Overstock has radically changed its tune. Since 2005, it has been steadily upgrading with ERP and data products from Oracle, Teradata and other companies. In fiscal 2007, it saw positive financial results for the first time in several years. Now, it has been expanding its site to include discount travel, auto buying and social components. It also runs auctions and is expanding into Canada.
"2007 was a turnaround year and we think we're back in the groove," says Byrne. "But it was quite the drama. 2006 was horrible. We ended up in the ditch, but we lived. Now, the wheels are back on and we're regaining momentum. We want to substitute information for capital. We did that last year. We have learned it is a part of the chain we can work in well."
For fiscal 2007, operating cash flow was $10.1 million, compared to losses of $49.6 million in 2006 and $50.8 million in 2005. Direct margins went from 13.2 percent to 16 percent during 2007. Total operating expenses declined 10 percent, a figure that equals 22 percent of sales and represents a 200 basis point improvement for the online retailer.
Byrne, who spent time in the apparel industry before launching Salt Lake City-based Overstock, is credited with creating a distinctive online business. Overstock has enjoyed steady sales growth.
The eight-year-old core retail segment of Over-stock involves purchasing closeout apparel, home and other products in lots that are smaller than what TJX, Ross Stores and other brick and mortar offpricers can generally handle. Unlike these retailers, Overstock is not prohibited from selling certain brands in high profile, competitive markets. Sans store overhead, Overstock works on slim margins.
Products are truly closeouts. Most brick and mortar closeout chains must round out assortments with other merchandise. Overstock's average individual customer income is around $80,000.
But prior to 2005, Overstock would shut down part of its site when systems became overloaded. Employees worked during the middle of the night to avoid taxing systems.
"We were probably very technology averse," says Byrne. "[At that point], we had grown into a $400 million company. We prided ourselves on doing everything on a shoe string. But the shoe string wasn't just fraying, it was breaking. I waited too long to install Oracle ERP and Teradata's Data Warehouse and Enterprise Class Hardware. But people finally got through to me."
By this time, crucial financial indicators like earnings before interest, tax, debt and amortization (EBITDA) and cash flow were hitting the wall. A chart plotting Overstock's EBITDA performance since 2001 bears close resemblance to an inverted food pyramid. EBITDA declined (-7.1) percent in 2006, followed by a more modest drop of (-0.5) percent in 2007. Overstock's cash flow has been negative almost every other year since 2001.
SUPER CHARGING LEMONS
While it was implementing new technologies, Overstock continued to suffer from growth fallout. Just before Christmas 2005, Byrne was praying Santa would not fly by him. The company also was being pressured to shut down the auction part of its site, which was added four years ago. "Now it is fixed and making money. But it was a struggle."
Overstock rushed its technology implementation. It did hit some bumps. "We did three things [with Oracle and Teradata]," says Byrne. "Any one of these projects should have taken 12 to 18 months. We tried to do all three in nine. It was quite the drama."
The eventual outcome was dramatic. Since 2006, Teradata's Enterprise Data Warehouse (EDW) has helped move turns from six to 32. Byrne's goal is to exceed 40. Overstock began its liaison with Teradata in April 2005.
EDW, in short, puts all of Overstock's data into a single repository. This creates a 360 degree view of the business. "It's a big data warehouse," says Byrne. "Instead of us building a new data base under each selling area, such as cars, auctions or whatever, all information is dumped into Teradata, which does all kinds of analysis and creates relationships. If each system ran independently, we would have to build all kinds of links and constantly change them." Overstock also uses Teradata's analytic application, e-business suite and logical data models.
Last year, Overstock added an algorithmic component. Now, when a customer pulls up a lamp description, the site shows other similarly priced, similarly styled furnishings. Since last year, Byrne says the average order climbed from $103 to $120. Repeat traffic is up. "All clicks are recorded and associated with the customer. The next time the customer comes to the site, certain products are recommended."
The technology is helping Overstock better manage inventory by calculating where demand is coming from and for what. Other retailers rely on psychographic data, which incorporates demographics and other information. By being an online retailer, Overstock has far more information on actual customer behavior-including their browsing patterns. Its next step will be to track demographic patterns across sections of the site by price tier. A person researching homes through the real estate part of Overstock, for example, can be shown furniture that fits his/her pricing and geographic profile.
"We don't have to deal with aggregates," says Byrne. "We can deal with individual information. If you were marketing golf clubs, for example, you might try to find upper middle class white males. But there may be an African-American female golfer coming to the site. We have a better way of knowing who she is, even if she's not a classic demographic."
Overstock is even shrinking the "back room" of its online store. "By having this information, we can buy the right merchandise," says Byrne. "That means less capital and inventory." This year, Overstock is working with Teradata on forecasting.
EXTINGUISHING MIDNIGHT OIL
With Oracle ERP, employees can stay home in bed at night. Oracle's Fusion Middleware integrates business applications. CRM also lets Overstock standardize service applications for support staff. In the past, Overstock operated four front end systems. Each contained customer data captured from different areas of Overstock's site. Thus, Overstock had limited cross-sell and up-sell opportunities.
Oracle's ERP technologies let Overstock consolidate siloed data. They also allow the company to process far more orders. By using Oracle TeleService, a contact application, Overstock can route all customer inquiries to the most qualified service representative. Representatives can immediately access customer histories regardless of whether previous transactions were conducted via phone or Internet. Overstock began deploying Oracle systems in August 2005.
"Oracle is a big enterprise class engine that can pump out 100,000 plus orders daily and up to 14,000 an hour," says Byrne. In dollars, daily capacity is $30 to $40 million. "We couldn't do that on the home grown stuff we were using." Byrne says Overstock has gradually reduced its reliance on proprietary technologies. Today, home made products represent 25 percent of technologies.
Two years after it began working with Teradata and Oracle, Overstock added a guided navigation feature to its site. The product is supplied by Mercado Software via a partnership with Bazaarvoice. The ratings and reviews solution allows customers to refine product selections based on buying decision criteria rather than key words alone. A search for "red tables," for example, could be narrowed to tables for a bar or living room.
In March 2007, Overstock deployed ChannelAdvisor to implement a channel management solution. The solution lets Overstock offer merchandise from other wholesalers on its site. Since components are integrated, third party resources are invisible to shoppers. Orders are processed through a single interface.
LESS OVERSTOCK
Later this year, Overstock plans to move to a just in time inventory system. The goal is to reduce inventory levels from $26 million to $15 million through forecasting at SKU level. "Accuracy is not where we want it," says Byrne. "We are still at the category level."
He also has accepted that Overstock has "become" a technology company that melds merchandising and e-commerce. "We now view it from two poles. Belatedly, we realized there is a mid-point that involves being an informational hybrid."
But Byrne still refuses to hide or soften the truth from investors. During the conference call, his enthusiasm for the new technologies was clear. At the same time, he unabashedly answered analysts' questions about some unresolved legal issues. He also cast aside the typical CEO's never-wavering optimism and said he is "really quite pessimistic about the state of the American economy." Warren Buffet, along with Byrne's mother, should be very proud.
Patrick Byrne does not waste words on corporate blather. There are no pretexts, even when situations turn ugly or an error in judgment is his. Shareholders, he believes, deserve the same respect as Mom. Mom would never accept unanswered questions or watered-down truths.
