"Super-de-duper." That's how the holiday quarter went for Motley Fool Hidden Gems pick Overstock.com (NASDAQ:OSTK).
Much has been made of the frank shareholder letter Overstock President Patrick Byrne included with the fourth-quarter earnings release. Personally, I was shocked to see Byrne get mauled on CNBC's Kudlow and Cramer over posting a quarterly loss, and am surprised that the letter received so little positive attention.
What's impressive isn't just the amount of information, but also Byrne's dedication to helping shareholders -- the owners -- understand it. This respect for shareholders, already evident in his Berkshire Hathaway-esque (NYSE:BRK.A) Owner's Manual, is fully borne out in the now-infamous "The rhythm of the Dao is like the drawing of a bow" letter.
Fool Bill Mann put it perfectly:
Treat them like owners, give them the information you yourself would want, and you may lose some of them, but the ones you'll lose will either leave for the right reasons, or they will have owned the stock for the wrong ones to start with. Warren Buffett knows this well. So does Patrick's dad, Jack Byrne, who heads up White Mountains Insurance (NYSE:WTM), and so do the folks at an all-too-short list of companies like Fastenal (NASDAQ:FAST), Expeditors International (NASDAQ:EXPD), MacDermid (NYSE:MRD), and Sealed Air (NYSE:SEE). Patrick knows this, too.
And simply put, the quarter was "super-de-duper," as Byrne said.
Gross merchandise sales soared 94% to $130 million. Gross profits, however, grew only 29% to $11.8 million, as the "25% below Amazon.com (NASDAQ:AMZN)" deal that spurred sales of books, music, and videos brought "extremely slim margins." The $0.07-per-share profit in last year's quarter also turned into a $3.1 million, or $0.19-per-share loss, as the company started to spend money on advertising to gain brand recognition.
"Jeff, I can't believe you're buying that spin! The company grew revenues and turned a profit into a loss ... and that's a good thing?"
Overstock could have turned a profit in the fourth quarter. It did last year, but without the extra $5.8 million in marketing expenses. As Byrne explains, the goal is to ramp up revenues as fast as possible -- even if that means sustaining small losses -- and to secure repeat purchases with both competitive prices and strong customer service. For this, he is willing to sacrifice short-term profits to gain bigger profits down the road.
The company, which had previously shunned advertising, found that it could build valuable brand awareness by spending a few dollars. As a result, recent sales and marketing expenses more than doubled those of any previous quarters. Byrne even provided a link to a chart with the earnings release that shows the extent to which the advertising had worked.
Of interest to many investors, Byrne also explained COO James Hyde's exit from the company as the end result of "team benching," an Overstock team "last chance" practice. He also talks about areas where Team Overstock fell short in the quarter and where it could have saved money.
Patrick Byrne's knack for communication helps him make shareholders understand what's happening with their business and how he intends to grow it. The letter reflects a respect for fellow owners that all CEOs should have.
As an investor, you shouldn't have to choose whether to trust your CEO. And with Overstock.com -- as it should be with every company -- you don't have to. You merely have to decide whether or not you agree with Patrick Byrne's strategy, and how much you are willing to pay if you agree.
Jeff Hwang agrees. He owns shares of both Overstock.com and Berkshire Hathaway, and can be reached by clicking here.
