The Overstock.com Inventories Bombshell

In previous items I've described how Overstock.com -- the fascinating slo-mo corporate train wreck -- has come under scrutiny from two of the sharpest experts in fraud detection around, forensic accountant Tracy Coenen and Sam Antar, the reformed felon who is an ally of the government in its fight against white collar crime.

Tracy and Sam are both out with blog items overnight that are absolutely devastating. They raise serious questions concerning an issue that has proven lethal for companies in the past -- the possibility that Overstock.com may have misrepresented its inventory numbers.

Tracy's post, entitled "Is Overstock.com misrepresenting inventory?", can be found here. Sam's post provides a thorough analysis of the inventory issues and a number of others. Both analyses should be of great value to the SEC in its ongoing investigation of Overstock.com (or "on Overstock.com." as the company likes to say).

Tracy focuses on just one crucial sentence of the company's 2006 Form 10-K, that "We have entered 2007 with more attractive, higher margin inventory, and as a result, we expect our gross margins in 2007 to increase significantly over 2006 levels."

But after going through the numbers, she says as follows:

So let’s get this straight… in terms of raw dollars, the obsolete (junk) inventory was greater at the end of 2006 than it was at the end of 2005. And as a percentage of total inventory, the obsolete (junk) inventory was over 4 times higher than 2005.

How is this inventory more attractive when you’re admiting that 1/4 of it is junk??? Or, was way more junk sitting around in 2005, but the company purposely did not reserve for it? (Which would, oddly enough, probably be a material misstatement in the financial statements.)

Sam's post provides a detailed analysis on a wide range of accounting and disclosure issues, as indicated by its title: "Is Patrick Byrne, Overstock.com CEO, making false, misleading, and/or deceptive statements about the company’s financial issues?"

He also highlights the absolutely miserable job being done by sell-side analysts -- obviously intimidated by the notoriously vindictive CEO Patrick Byrne -- and points to a number of questions that they did not raise at the company's recent conference call:

Mr. Byrne, if you:

"had your “game plan as of Q1 last year of what was going to have to happen”and

you “knew things were going to get really ugly and the company was going to have take medicine” and

"that medicine was going to be in the form of some expenses”and

“it was going to be in the form of dumping a bunch of inventory”

Why did Overstock.com wait until the 4th quarter of the fiscal year ended December 31, 2006 to take relatively high reserves against its inventory?

Tracy says that she has "plenty to say" about the inventory issue not covered in her item last night, and Sam is also conducting an ongoing probe of this company's public statements and disclosures.

It should be emphasized that neither individual is a short seller of Overstock.com shares, and neither has received any compensation for doing this good work. They are doing it because they are disgusted with this company's loathsome behavior, and fascinated by its slippery approach to public disclosure. Both have the ear of regulators.

Apparently the vicious personal attacks both have received from Overstock.com minions have not had the desired effect.

© 2007 Gary Weiss. All rights reserved.

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