How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne (Part 7)

SM: Let’s talk more about your financials. Overstock.com started slowing down in 2005. In 2008 you went back up to $800 million-plus in revenue but are not very profitable and the market cap is pretty low. What is your take?

PB: We reached $800 million in 2005 and stayed there through 2008. We are starting to grow reasonably again. The first half of 2008 we grew 27%. The downdraft brought us down in the second half of 2008 like everyone else. This year we have not announced everything yet, but people are expecting a mild shrink of 7%.

I am enthusiastic. What happened to us in 2006 was a blessing. It made us focus on our supply chain and expense control. It made us get everything set really tight. When the disaster hit a year ago, we were well prepared. Everyone else started doing what we had already done. We had a two-year head start there.

SM: Is your market cap as low as it is due to profitability?

PB: It could be. I don’t spend a whole lot of time agonizing over the market cap. I figure in the long run it should take care of itself.

SM: You have to deal with it somewhat as the CEO of a public company. You have to talk to Wall Street.

PB: Not really. That is not my attitude. My focus is on building the company and let Wall Street take care of itself. I communicate extensively with shareholders, but I let Wall Street take care of itself. I have become famous or infamous for having extremely informative shareholder letters that explain what is going on deep within the shareholders’ business. Our shareholders can understand what is going on in the business to a very deep degree. I don’t worry about Wall Street.

SM: What have you told shareholders are the top five things you are doing right now that are going to improve their business? These are unusual times, and everybody is hurting very badly. Thirty million unemployed does not look like a healthy picture to me.

PB: That is a fair estimate. I believe that the recovery that we are supposed to be believing in right now is fake. I am sorry to say that I don’t believe in it at all.

We are focusing on expense control at the corporate level and in marketing as well as throughout the supply chain. We have squeezed so many costs out of our supply chain that our margins have gone up to all-time highs of 20%. I think there is a lot more we can still squeeze out.

The cookie is going to crumble from the outside in. If we can be the low-cost operator and keep squeezing pennies out of the supply chain, we can continue to take our pricing to a place nobody else can follow. That is the way to build great value and a great brand as well as a long-lasting company.

SM: There are a lot of retailers and manufacturers stuck with inventory that is not selling. This has to be working to your advantage.

PB: I would say that is a fair description of the first six months. During that time there was a lot of excess inventory for us. Unfortunately for us, manufactures have since emptied their supply chain. They are sitting on their hands. It has actually gotten harder to find excess inventory because manufacturers are so cautious.

SM: Is supply becoming an issue now?

PB: The past four months have been harder than the previous six.

SM: Thanks for the insight into your business. I look forward to following your story.

This segment is part 7 in the series : How A Warren Buffett Protégé Built Overstock.com: CEO Patrick Byrne
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