I know what you're thinking: Overstock.com
For the scorekeepers, I might add that Overstock's $2.5 million, $0.12-per-share profit came in ahead of the $0.08-per-share analyst estimate. Or that revenues jumped 80% to $221.3 million, also trumping the $212.4 million analyst estimate. But that's not even really what matters.
This is about the big picture.
Gross margins jumped to 15.2% in the fourth quarter, up from 9.6% last year. In his quarterly letter to shareholders, CEO Patrick Byrne said that of the improvement of 560 basis points, less than 100 were due to returns on scale and more than 460 basis points were gained by tightening logistics costs. Byrne then said that another 250 basis points could be gained through logistics, but then came one of the most interesting things I've heard all year: Those gains won't be returned to investors.
Byrne said that it was unlikely that we'd see margins above 15%. But this isn't a warning; it's a statement of strategy. Rather than grace shareholders with a smaller profit in the near term, the cost savings will instead go toward dropping prices for consumers.
This is about developing a long-term competitive advantage and growing the brand.
In stark contrast to powerfully branded companies such as Coca-Cola
Byrne has long suggested that the company would be happy to operate at near breakeven, so long as revenues are climbing at hyper-growth rates. Basically, with its 15% gross margins, Overstock has reached a point where it will focus any operational gains squarely on attacking its competition and expanding its customer base. The profits will eventually come from returns on scale.
In the shareholder letter, Byrne also suggested that eBay's
No more capital requirements?
Earlier this week, Motley Fool Rule Breakers selection Overstock announced a $50 million share buyback program good for the next three years. What I find interesting about that is not that Overstock necessarily thinks its stock is cheap (there's no indication that that's even the case), but that it may be an indication that the company believes its business is now self-funding and won't require additional capital.
That's an important point. If a company doesn't need any more capital to grow its business, then that minimizes the chance of future share dilution beyond stock options.
Overstock finished the year with $287.5 million in cash and marketable securities on its balance sheet, $191.5 million of which came from a convertible debt offering and another share offering completed in the fourth quarter. The company also generated $24.7 million in cash flow from operations during the year.
Overstock is a difficult company to place an exact value on, and the stock doesn't strike me as obviously cheap. But while I don't necessarily buy more stock here myself (I own some already), I do buy into the company's management. And if you, too, buy into its strategy, the probability that there won't be significant share dilution, and that there will be a future beyond marginal profits for the next few years, then Overstock offers at least three compelling reasons to take a long, hard look at its stock.
For more Fool coverage on Overstock.com, check out:
- Overstock Overtaking eBay?
- It's All About the 'O'
- Overstock's Loaded for Holidays
- The Overstock Rocket
- Overstock Channels Mao
Fool contributor Jeff Hwang owns shares of Overstock.com, eBay, and Starbucks.