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Overstock 'staunches bleeding' in 2005 with expanding loss

Patient needs rehabilitation

Bridging the IT gap between rising business demands and ageing tools

Say what you will about Overstock.com's overzealous CEO Patrick Byrne. The man's letters to shareholders are unrivaled.

Byrne's latest missive arrived inside Overstock's fourth quarter and full year 2005 financial results. The data shows that Overstock enjoyed a remarkable surge in revenue and also a dramatic dive deeper into the red. The increasing net loss proves troubling given that Overstock expected to turn a profit during the year.

We've noted that Overstock suffers from serious customer service issues with myriad people complaining about lost items, broken merchandise and a returns system that makes the IRS look like a model of efficiency. Byrne refuses to admit that Overstock has any customer service problems - a stance that seems tough to swallow when you look at his excuse for the company's mounting losses.

"We started with a good set of priorities for the year, and with an aggressive internal plan to cross the $1bn mark at a profit," he wrote in a letter to shareholders. "However, we discovered that some of our systems were more shopworn than we had anticipated, and went on a crash program to replace them. Unfortunately, I underspec'ed them and underestimated the time it would take to complete them by a large factor.

"Meanwhile, the systems they were replacing were increasingly unstable, so that our ships were burned behind us and we had to march forward. As the execution of these projects faltered, we had to shift more and more resources from other groups to support them."

Stick with us here. Byrne is getting to the point.

"This squeezed out projects that our business leaders needed to continue generating and servicing hyper-growth. The result was not only that good things did not happen (lift and functionality within the site), but that a bad thing also happened (while our systems survived, it was with great effort from the entire company). The upshot is that we are slowing down development of any new projects, and will just focus on our basic shopping experience (namely, our outlet shopping) until things are right.

"I am terribly sorry, and disappointed - as are my colleagues. While we have staunched the bleeding, I anticipate it will take six to nine months to rehabilitate the patient and get him running again."

While it's hard to tell what Byrne is talking about, we're pretty sure he's explaining away a host of IT issues that have plagued the company from not being able to track orders, to a failing customer service line that would quite simply hang up on callers. Overstock was a bit ambitious with the IT projects and will now "make limited investments in technology" - a surefire recipe for success in the online seller game.

Moving to the figures, Overstock reported revenue of $318m in the fourth quarter - a 44 per cent year-on-year rise. Full year revenue swelled to $804m - a whopping 63 per cent hike over 2004. As mentioned, however, the 2005 net loss hit $25m, compared to $5m last year.

Investors appeared pleased with Overstock's results, sending shares up close to seven per cent Tuesday. Overstock closed at $24.28 per share. That rise did little to counter a 13-month slide that has seen Overstock fall from close to $80 per share. ®

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