Wall St. Non-Sense

**teenvestor2** Tue Jan 22, 2008 10:12 pm

Wall St. Non-Sense
Overstock.com

Overstock has gotten utterly massacred since the last post. Worse maybe it should have fallen a little bit but not near as much as it has Wall St. has taken advantage of an extremely small amount of bad news to shoot it down.

There are two main bits of news here:

Byrne said the Gross Margins would be down

Jason Lindsey resigned

First, while Byrne said gross margins would be down, because of higher ad spending, he also remarked that they were experiencing good growth during the holiday season. That this would send the stock down makes absolutely no sense.

Upon, hearing the gross margin would be down because of higher ad spending, the first thought to enter my head was not, "Oh $#!+ lower gross margins," instead it was, " Oh, thanks captain obvious."

Byrne has repeatedly talked about new commercials they would be airing, including one where they had to close down an entire free-way to record it. Well, doesn't logic tell us that if they would be airing new commercials, then they would probably have to spend more money then they had, which would mean margins would be down.

'Pundits' all over wrote about how Overstock's margins and how it was a step back when all they needed to do was pay attention and this would have come as no surprise. More surprising, however is the fact that these comments alone sent the share price down more than $20 per share.

Secondly, I won't argue that losing Jason Lindsey is bad for the company that would be illogical. Instead I see this as a semi-good sign.

I don't believe Lindsey would leave the company again if it was crap, he knows his stuff - which is obvious from the conference calls - and I think he left this time because he knew Overstock could run well without him now.

Add these two bits together and Overstock trades at just $13.32 per share down from a high over $39 it reached less than a quarter of a year ago. This is a 66% decline in just a few months, and on the news that I addressed in the paragraphs above.

Yes, I do believe its utter non-sense. Overstock now trades at a .35 multiple of sales, which means they earn well more than twice their market price in sales. Sales that Byrne acknowledged had grown well during the holiday season.

They still have an amazing business that doesn't seem to be recognized by anyone other than Arne Alsin.

I'm not recommending anyone do this, but the move I would love to use here is to buy calls on OSTK that way when they report and go up 50% in a week - shorters covering should push it higher. Unfortunately, according to Scottrade a 35 year-old investor with a few months experience can trade options but a 17 year-old investor with four plus years isn't old enough.

Sears Holding

This one will be shorter since I haven't been following it as long, also it will be more of a rant.
Sears has fallen with the rest of the retail industry over the past year or so and also Herb Greenberg named Lampert the worst CEO of the year despite the fact he's not a CEO, and Sears and Kmart are performing a lot better than they would have had Lampert not gotten involved.

In 2003 when Lampert started buying Kmart it was about to file for bankruptcy and Sears was approaching the same fate very quickly.

After Lampert took control of Kmart he sold a bunch of real estate to pay down debt and buy Sears.

Now Sears is making over a billion in operating cash each year, and has ~$1.7 billion in cash compared to no Long-term debt, the only retailer who can claim that.

Still it trades for a fraction of its liquidation value and is run by a guy who Wall St. seems to have forgotten has earned 29% a year and was a huge factor in AutoZone’s turnaround.

K-Swiss

Not a whole lot as changed here, I'll go over the valuation.

K-Swiss has $8.13 in net cash per share - this is helped by the fact they have no long-term debt - which makes their EV/Share $8.82. They made $1.44 in cash flow per share which puts their EV/FCF ratio at 6.125 which is criminal for this company.

Even though K-Swiss's domestic business fell a lot over the past year their operating margins are still around the industry average, and they still earned 15% on capital, which is good for businesses hitting their stride.

Management also proved they are focused on the long-term by not discounting any shoes even though their earnings were falling; though this may have affected short-term growth rates long-term the margins and returns will remain healthy.

**blast_investor** Wed Jan 23, 2008 11:46 am

teenvestor2,

K-Swiss valuation and the high cash level is very compelling story for this stock.

Yet, I noticed that during the whole year 2007, the stock dropped pretty dramatically from the beginning to end.

Are there any negative development specific on this stock in 2007?

Now in 2008, every body is talking about recession, which is bad for retail stock. However, the recession news did not kick in until 2008, and should not be the reason for the drop in 2007.

**teenvestor2** Thu Jan 24, 2008 12:06 am

The stock dropped dramatically because of its falling domestic business, but it is still getting strong growth internatinally.

**goog** Thu Jan 24, 2008 2:42 pm

OSTK: We should forget about how much OSTK was trading and just focus on how much it worth. OSTK never made a penny for many years, so what will change that in the coming years? We need to understand the business deeply for a strong argument, either it worth $100 or $0.

SHLD: Read lots of article about SHLD. The negative part is the retailer isn't doing well and the worst is yet to come (I am not saying the stock price). Looks like a good long term holding if we believe in Lampert. I don't think Lampert is going to liquidate the company, so shareholders will only benefit if there is a turnaround.

KSWS: current valuation looks very attractive. But in current market, what do you think make KSWS different with other cheap stocks? Do you think the problem with KSWS is temporary? Well, we can see lots of leading companies is still growing healthy even in this tough market. I believe good business is better than cheap business in the long term.

**teenvestor2** Wed Jan 30, 2008 12:36 am

Overstock has used a lot of tech and marketing expenses to build its brand name since it was started. Right now it's close to having the best customer service of the retail industry and has great brand recognition, so when it stops with the variable expenses - marketing and tech - a lot more of the revenue will fall to the bottom line.

Also, Overstock is gravitating toward having most of its revenbue come from the partner business where other comapnies sell their overstock on the website and overstock takes a commision. In this business they get the money for the item in less than a week and don't have to pay back the other business for a month this is the same working capital management that makes Dell and Costco great businesses and will power excellent returns on capital on Overstock when it becomes profitable.

Finally, Amazon lost a helluva lot more money to get to the equivalent amount of revenue OSTK and OSTK has a better business return on capital wise, yet Amazon neever traded below 1x sales and Overstock trades for less than a third of its.

K-Swiss is by no stretches of the imagination a cheap business, it has had higher margins and higher returns on capital - with absolutely no debt - than the rest of the shoe industry for the past five years. Managment made mistakes the first time around in US not setting itself up for better LT growth, but now as it expands quickly in the rest fo the World management knows what its doing and how to make the good returns stay high there for a long time.

**goog** Wed Jan 30, 2008 12:51 pm

I am not convinced by OSTK. AMZN didn't have a strong competitor at earlier stage. OSTK is now very naturally falls into second tier. AMZN have grown revenue much faster than OSTK for a decade even AMZN is much bigger. The years even earlier than a decade? Yes, people didn't do much online shopping at that time. Now you can easily setup an online store and surpass Amazon's first couple of years record. So far I didn't see any return for OSTK's investment.

For the overstock stores (partner business), I don't' see much chance to compete with EBay and even AMZN.

**zhang242463** Mon Feb 04, 2008 12:08 pm

k-swiss is really cheap, what is the reason it is worse than stocks in your portfolio?

**Bernard2222** Sun Feb 10, 2008 1:09 pm

Re: KSWS
Here is my take on KSWS. Sales have been slowing down this past year due to the increasing popularity in cheaper footwear (Crocs, flip-flops) and the athletic shoe industry has taken a hit as a result of this. K-Swiss hasn't really reacted aggressively to this slow down which is probably a good thing as recession fears are increasing and sales could suffer even more.

What the company has done however is hire a new design team which will launch its first line during Q3 of '08. I believe that once the management considers its product to be competitive enough, it will go back to rebuilding its brand image through ads and the flagship stores they started opening. What I like here is that this is a very well run company with a straight-forward mngt team that has a long-term perspective. They take their time with every decision they make and it has definitely paid off. They have gone through difficult downturns twice over the last 12 years and have come out of them fairly quickly.

This time around, they have a lot more resources with all the cash on the balance sheet and will have many more options to get things back on track than in the past. I expect a lot of good things from this company even though investors will probably have to wait 1-2 more years. The upcoming quarterly results will probably be pretty bad and it could make for a nice buying opportunity.