Have the virtual shelves of Overstock.com (NASDAQ:OSTK) seemed a little bare lately? Perhaps it's because the company just completed an IT makeover that rendered the closeout specialist powerless to add new merchandise for five weeks. The company had expected that its infrastructure upgrade would limit its ability to upload new wares. It just didn't bank on the process taking so long.
It was almost like the dot-com version of Tuesday Morning (NASDAQ:TUES), where the stores shut down eight times a year to load up the home-decor shops with new arrivals. Of course, in Overstock's case, it was business as usual in terms of the checkout process. Orders were executed on the existing wares, but Overstock lacked fresh products to woo shoppers.
The company is sticking to its annual goal of coming within 1% of the break-even mark, with sales soaring 60% to 100% higher. However, its inability to load up its site with new closeouts led to a temporary slowdown in sales.
"The upgrade also caused inefficiencies that, when combined with our extended dollar shipping promotion, has put downward pressure on gross margins this quarter," CEO Patrick Byrne explained in the weekend press release.
That statement provided a glimpse into the current state at Overstock. For starters, it seems to imply that the "dollar shipping promotion" is now history. In fact, it is. The company is back to its $2.95 everyday shipping policy, though paying members of its Club O buyers club still get the $1 option.
Byrne's warning that gross margins would contract during the period is also interesting. Given the fixed overhead in any retail operation, it's a no-brainer that net margins will take a dip when sales run soft, but gross margins? That is usually the result of one of three things: the company had to lower its selling prices; the costs for acquiring its wares had gone up; or it had an unfavorable revenue mix. Given Overstock's unique circumstances, it's clear that it's the third option.
The inability to load up the site with new, higher-margin merchandise for five weeks clearly created a problem. The company either quickly ran out of its existing wares at higher markups or the lack of fresh offerings sent folks gravitating to the better deals on the site.
Online discount retailers don't have it any easier than their brick-and-mortar rivals. It may even be worse in cyberspace because checking out what bargain-pumping rivals like eCost (NASDAQ:ECST) or Amazon's (NASDAQ:AMZN) Outlet have going is just a click away.
Still, Byrne's vision and the company's top-line spurts were enough to make Overstock one of the first recommendations of the Motley Fool Rule Breakers newsletter service. The company claims that sales are back on track, so the technological growing pains appear to have been temporary. If so, an overreaction to the company's current quarter may create a bargain worthy of Overstock's own online catalog.
Amazon is a Motley Fool Stock Advisor pick.
Longtime Fool contributor Rick Munarriz has been a shopper at Overstock.com a few times in the past -- and will likely shop there even more in the future. He does not own shares in any of the companies mentioned in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
