How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne (Part 4)

SM: Did you go public on the strength of the bankruptcy inventory?

PB: No, that inventory was in 2000 and 2001. By the time we went public, bankruptcy inventories were not carrying us. We had the Safeway deal, and we had stable lines of supply.

SM: What kinds of lines of supply did you have?

PB: At the periphery of retail there are people whom most people never meet. They are called jobbers, and they tend to be badda-bing badda-boom kind of people. They clean up the fringes of retail. We started off buying from jobbers. In time we became a jobber, and ultimately we became an uber-jobber. We began supplying the same people who put us in business.

SM: Does that apply to all of your categories?

PB: I can’t say it applies to all categories, but it is a good general description. It is better than roughly accurate across all of our categories, although I am sure there are some exceptions. We have found brands here and there that were willing to sell to us directly early on.

SM: What was your revenue and profit level when you went public?

PB: We did $2 million in 1999. We did $36 million in 2000. We did $75 million in 2001 although I had been expecting us to do $100 million. In 2002 we did $115 million in gross merchandise sales. We were growing briskly. Over the first three years of our public life we have compounded at 102% growth.

SM: Were you already profitable at that time?

PB: On a quarterly basis, we had operating profit the quarter after we went public. In the fourth quarter we had a net profit. After we went public, the only guidance I tell the Street is to expect growth of 60% to 100% and for us to be breakeven plus or minus 1%. That was the window we painted. We decided it was better to grow quickly and be at breakeven rather than slow down and show significant profit.

We managed to do that for a couple of years. We were right at plus or minus 1% for a couple of years. In 2005 we were minus 3%. In 2006 we were an $800 million company, but our growth rate decelerated dramatically In the fall of 2005, a couple of things happened technologically.

SM: What happened?

PB: Two things. First, we had built this business on a shoestring. In that year the shoestring broke. We had gotten to a bigger size than our systems would allow. We cut over to new systems that were not completely hardened and had a lot of problems. Those problems were internal but temporarily affected our customer base. That coincided with our slowdown. We used to think that those technological problems caused our slowdown.

Metaphorically, I tell people to think of a Marriott with 1,000 guests in 1,000 rooms ordering movies. When they are ordering movies in the basement, there is some kid crazily swapping video tapes in machines. The folks in the rooms would see their movies on time without understanding what was going on in the basement.

That is what was going on in the business. We were still getting good customer satisfaction results. We cut to a new computer system that was not ready, so we had to fight like hell to keep everything working in a timely fashion. That lasted through the fall.

This segment is part 4 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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