Reflections on Overstock
Originally posted on 11/7/2019 by Patrick Byrne
I have been asked elsewhere on this site why I “abandoned” Overstock and what do I think of its prospects now? I recently replied in a lengthy comment. I think it best if I elevate my answer to a full post, here, now that I am free to do so, and be open with my understanding of the firm’s future.
Leaving Overstock
As far as “abandoning” Overstock, talk to the board. Yes, I had come forward a month earlier about this federal stuff, but I had said what I thought I needed too, and was prepared to ride things out. It was not out of the question that the statements I had made did not hurt sales: in fact, early indications were that traffic picked up (though conversion had not). I gave the board the option of telling me they wanted me to leave: they did not.
However, there was a weird dynamic at work all summer. For 20 years, I was the New England guy come to Utah, the outsider to my own company. Of the 17 years OSTK has been public, for at least 14 of them there has been a relationship between the Board of Directors and some component of the executive team that did not feel appropriate. It was never between the whole board and the whole executive team. It was between board members who had never been executives themselves (and seemed to view this as their opportunity to be “shadow executives”), and executives who fought for things to be “reporting to” them without ever actually being responsible for running anything, or coming up with ideas themselves, or moving the ball forward in any way. In other words, “staff”.
Why did I put up with it? All along I was thinking that I should not be a tyrant, that my goal was to build something that would outlive me for the day I left (and given that I had numerous health problems for a decade, this seemed like the right plan). The reader could have no idea of the political BS that got in the way of running the place, and the number of coups I have had to fight periodically, as a result of letting this persist.
This past summer, executives close to me were warning me of something odd brewing. For one thing, evidently there were hedge funds lobbying the board along the lines of, “With this huge short position, if Patrick only retires, the stock will pop to $50.” As I wrote earlier, it seemed beneath me to lobby against them, to point out (again) all the ways it is dumb to try to manage a firm by listening to things like that. With one exception the board seemed strangely impassive. But I dismissed the warnings as paranoia.
Also all summer, my plan was to sell about 2%-4% of my holdings into the volume in mid-September, and then 10b5-1 the rest over 3-4 years.
But then this D&O insurance thing (which I have explained elsewhere) came along and surprised me. It seemed decisive in my eyes. I thought, “Well, that was an anticlimactic way for 20 years to end,” but being told it was “impossible” to get D&O insurance with me at the firm made it seem like there was nothing left to fight about anymore. So I immediately gave my resignation, announced it internally, made all the preparations.
A couple-few days later, 48 hours before I left, I started smelling skunk. I began digging to get to the bottom of it. 24 hours before I left, I found out the insurance angle was a lie (one in which, incidentally, Marsh played along by doctoring some information they provided the firm: those are the deep pockets to which the lawyers should look). The CFO told someone that the chairwoman put him up to it (in which case she did not act alone, I am confident), but I think it unlikely he was telling the truth about this. He could have been telling the truth about being instructed to do it, but I don’t know.
Yet it was like the day when you wake up after 17 years in a relationship with a narcissist and say to yourself, “You know what? I’ve got better things to do than play these endless games, unraveling this story from that.” Shrinks says that the right way to handle a narcissistic, the only way, is to withdraw. I had announced my departure internally, everything was all set for me to leave, 6 work-hours before I was to leave I found out that it had been based on a lie. I would have been justified to go back and reverse myself… But as I say, it was 17 years of these games. Never from anyone who was involved with running an operating unit and putting points on the board, always with staff guys who spend time with the board lobbying for more to “report to” them (e.g., various CFOs, but never Rob Hughes, who is a gem). They were riveted on this idea the stock would pop to $50 with me gone. I could have done a Batman grappling hook over the transom and tried to save myself, but after 17 years of it, I let them have what they had gone way out of their way to get. They wanted me gone, so I was gone.
I checked and got confirmation: guidance was stable, and the dividend was green-light. I changed my instructions so that I would be selling all my shares in mid-September.
I told every senior executive with the exception of JJ that I would be selling all my stock: five of them individually, then those five in a room together (witnessed by two more people), then 8-9 together in a lunchroom, and then four more on my way out the door (but there is overlap among all those groups, so you cannot just add them up). I did that so they would know that, while our projections showed Retail would cover Medici’s cash needs in 2020, they had a safety net to the tune of $30-$40 million from me if they needed it. I also instructed all of them not to share any inside information with me from that moment forward.
Incidentally, I am confident that of the N people I told, N – 1 of them (as well as a stack of emails) will confirm that series of events. The -1 is a two-faced suck-butt guy who (I have been told) has recently been going around anxiously to the others saying nervously , “Ah, you don’t remember Patrick getting us in a meeting room and telling us XYZ, do you? Do you?!?!” (In other words, trying to get them to change their memory: I do not know why.) Given that the others are people of character, he has been looking more and more foolish to them, and it sickens them (I’ve been told) that they have to work with a political half-man like he.
I did not tell JJ directly because I did not know what legal obligations it put him under if he knew that his largest shareholder was about to sell everything. He did ask, however, and my response was, “Do not give me any inside information.” Later, a day or two after I left, he texted me to ask whether I was selling or not (he had a putative buyer for my shares: Mrc Cohodes). I refused to answer his texted question. From responding to his question the first time, “Do not give me any inside information,” and from refusing to answer when he contacted me a few days after I left, and from the possibility that at least 1-2 of the other 9 executives would have mentioned it to him, I would assume he had inferred or learned that I was planning on selling my shares, but I cannot be sure of that (and he says otherwise). In any case, I was shocked when I saw him tell the public later that I was not selling: I did not know that it was the prerogative of CEOs to comment on the intentions of shareholders. However, this was also the period where he made a comment about the SEC investigation being “dormant” (which is precisely the kind of slip that, had I made it, would send him through the roof). I think he had nervous jitters, and after years of being in the navigator’s seat calling out errors of mine, discovered how easy it is to make slips when one is in the pilot’s seat. I do not think he had any ill intent or desire to mislead. I think it more likely he has learned that one can give a nuanced answer to a journalist, and see it come out in print in black & white with no nuance. That is a guess only.
After those days August 17-22, I had 0 information about the Retail business. In late September, around the 23 or 24, after the dramatic events of mid-September and a week after all my shares were sold, I had my only substantive conversations with anyone about the Retail business since I left. JJ and two others. What I gleaned was this: around September 10 when they closed the August books they learned that freight had slipped in a way that may cost $2 million per year; the D&O insurance had come in at a few million dollars more than had been expected (the difficulty had turned out not to be about me, but about blockchain: that is what the CFO had been lying about that, again, whether or not at the direction of any board members is unclear); tariffs had started to bite; but most importantly, starting around Labor Day there had been a weakening in the furniture business across the nation, and OSTK partners were letting the firm know it had suddenly happened across our entire industry, including to our competition (e.g., Wayfair).
That last point matched something I heard from the real estate world as well. I have spoken with a real estate agent in the Bay Area who said that on Labor Day of this year the real estate market downshifted a full gear. In the Bay Area, houses come on the market and normally sell in 5 days, she said. But over the Labor Day weekend the market died. Between one week and the next, the whole real estate market shifted. More on this below.
Anyway, back to the D&O insurance trick. Some board members and executives just acted weirder and weirder around me all summer, and others warned me something was in the works. Then the D&O insurance thing caught me by surprise. I jiu-jitsued four of these coups in the past. The fifth time, I said, “The hell with it, if they want me out this much, I’m out. I cannot wait to see all the great innovations they come up with when it comes time to roll with the punches.”
Around the time I left, in the days and three weeks after, I was told that my invitation to show up at tZERO’s ribbon-cutting on October 10 and speak, had been changed to, “Show up and do not speak, but just be there.” Then it became, “Show up if you want, but don’t speak and stand in the back.” Then it became, “We’d prefer you do not show up at all, the Board is concerned with the optics of being associated with you” (the language of Steve Hopkins, tZERO President, who, if he ever had an idea of his own, would see it die of loneliness). Never was it communicated , “We do not want any association with you, but we want you to stay our largest shareholder.” Just, “We want no association with you, because we are worried about the optics of any association with you, Patrick.” I would not say that this is why I went ahead and sold all my stock (as I had decided that as soon as I learned about the D&O hoax), but it certainly made it easy to refrain from reconsidering my decision. They wanted “no association” and no “optics” problem of any association with me: OK, I resigned the CEO position, the director position, and after waiting until volume picked up, sold every last share of my stock. Problem solved. Any shareholder perturbed about my actions should take it up with the Board: I gave them exactly what they sent word they wanted.
So that is precisely how things played out.
The Future of OSTK
I wish to emphasize that I really do not have knowledge beyond what I am sharing here, and can comment on the Big Picture only. In fact, I only have this knowledge from late September because when the firm came out with significant news in mid-September, given that after I sold all my shares a week earlier I was more than a little surprised they did not make it clear to the market that those events had been unknown to me when I left in August. So I called, and JJ was good enough to share with me what had happened. So look to the firm for much better and up-to-date information.
One thing I do not think the public is sufficiently attuned is the way in which the housing market drives firms like Overstock and Wayfair. Perhaps 40% (+/- 10%) of Overstock’s business is tied to people moving: as the home industry heats up and cools down, Overstock gets whipsawed around. Thus, if (as the Bay Area real estate agent told me) somewhere around Labor Day the real estate market downshifted, that is going to have more of an impact on Overstock (and Wayfair) than any new AI endeavor.
It was no surprise at all to me to learn last week that Wayfair came out with its numbers and shit the bed. That graph I have put up repeatedly over the last year (“Wayfair’s March to Profitability”) is going to mean a lot more than what people have been giving it credit for:
I am confident that graph will only look worse as time goes on. Wayfair’s fixed costs (blue line) are roughly 2X what they generate (black line) to pay their fixed costs: nectar$ (= gross profit minus marketing). Wayfair can either goose marketing (which will still leave their nectar$ line flat), or try cutting expenses 50% without seeing a deterioration in nectar$ (fat chance). They have driven down a cul-de-sac. There is no way out for them. Anyone buying their recently-announced debt offering is nuts.
Overstock definitely has a manageable path forward. Never again should they repeat the mistake I made in 2017-2018, and worry about growth: there is no point in fighting for market share against firms like Wayfair in the process of self-immolation (as the graph above demonstrates).
* Retail – As I left, nectar$ was going to be ≈ $190 million (up over $100 million from 2018). That more than covered expenses for Retail. Also, there were a couple new and excellent AI-driven initiatives kicking in (though I have 0 information on how they are faring): they should increase nectar$ by $20-$40 million in 2020, or (in the face of an economic downturn) hold nectar$ stable. There probably are another $20 million in expense reduction they could achieve through manged-attrition (without layoffs) as well. Thus, Retail should be able to pump out several tens of millions of dollars in 2020.
* Medici – I expected the Medici cash burn to be < $65 million in 2019, and to drop to roughly half of that in 2020. Some Medici properties such as MLG could start attracting capital on their own (tZERO recently made an announcement regarding a real estate tokenization that is a harbinger of things to come: it is looking like the commercial real estate industry is the first one turning to security tokens ). Beyond that, I am waiting in the wings with $30 – $40 million, if needed (and if the terms are appropriate).
I should say clearly that I do think the board, as led by Allison, is trying hard to do the right thing for the firm. It is 100% clear there was some mischief regarding Marsh and the D&O insurance, but I think the odds are less than 50% the board had anything to do with that (which means, the CFO would have acted alone). Between the 90% negative rebate on OSTK this summer, and the dividend, there were billions of dollars at stake, and trying to get to the bottom of everyone’s motivations for me at his point is like unscrambling an egg. It feels great to be out of that bad craziness after two decades of it, of this I am sure. They are trying their best.
You see as well as I do how everything should fit together. And if things do not quite play out like that, then they change their flight plan and adjust, as we did for 20 years. Jonathan is an able executive. He needs to be careful not to let the staff guys and the board start thinking they are in charge, but he can make this all work.
You truly know everything I know. Best of luck with your investments.