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Tickers in this Article: OSTK, GS, MS (Nasdaq:OSTK), the online discount retail company, has hit $22.19, a 52-week high, up 66% from it 52-week low. How did the much maligned company and its controversial CEO Patrick Byrne pull this off?

History of Poor Results and Strange Behavior

Overstock was started in 1999 as an online discount retailer. It currently sells about 36,000 individual products on its website. The company ships about 10,000 items a day. Most of what Overstock sells falls in the home furnishing and consumer electronics categories.

From the start, Overstock had a major financial and operations problems. As revenue went up, the company continued to lose money. In 2003, the company had revenue of $238 million and a net loss of $12 million. By 2005, revenue hit $799 million and the lose moved up to $21 million.

Last year, revenue actually dropped a bit to $788 million and the company's net loss rose to $102 million. The biggest problems appeared to be that gross margins were only 11%. That was not much to cover all of the company's operating expenses.

The company's other big problem has been the very odd behavior of CEO Patrick Byrne. In 2005, he accused naked short sellers of taking his company's share price down without borrowing the shares that they were shorting. Byrne claimed that the mastermind of this scheme was an identified person called the Sith Lord.

Earlier this year, Overstock filed a suit against several large investment banks including Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) saying that the firms "have and continue to participate in a massive illegal stock market manipulation scheme." Most investors thought that the claims could not be sustained. Three members of Overstock's board, including Byrne's father, the former head of Geico, left. (For related reading, see Putting Management Under The Microscope.)

To top off all of Byrne's troubles, there is controversy surrounding the delayed disclosure of an SEC subpoena he personally received in 2006. A story by Roddy Boyd of the New York Post points out that in its May 2007, 10-Q, Overstock disclosed that Byrne had been personally served with an SEC subpoena one year earlier. A similar subpoena was received by Overstock in May of 2006, shortly before Byrne's was, but only the Overstock subpoena was initially disclosed in the company's filings. (To read Boyd's full story, see "Company Byrne-D On Probe Report".)

Is All Forgiven?
According to the Overstock proxy, Byrne owns 29% of the company's shares. That does give him some incentive to listen to Wall Street's concerns.

The company has also started to focus on its gross margin. In the first quarter of this year, it rose to 16%. Revenue was still dropping. In the March period, it fell from $178 million last year to $158 million. But, the key measure of where Overstock needs to improve was moving up.

Margin news for the June quarter was even better. Gross profit was now more than 17% of revenue. The top line fell from $159 million in 2006 to $149 million this year, but the company's net loss actually improved from $15.7 million to $13.8 million. With a restructuring cost of $6 million for the 2007 period taken out, operating expenses dropped as well. Wall Street can see that if the margin number can move closer to 20% and revenue stay stable, the company is likely to turn everything around.

Most of the company's stock price move has come since the release of Q2 earnings which outperformed consensus estimates for the period. At about the same time that the company put out results, a California court said that Overstock could proceed with its stock manipulation case against some of Wall Street's largest banks.


Overstock is certainly a company where investors could argue that having a controversial CEO keeps the share price lower than it might be otherwise. But, performance still counts for something.

Over the last two quarters, the company has shown the it can rapidly improve its financial results. And, if Overstock can keep that up, it may not matter who runs the place.

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