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About the Firm
CAVEAT EMPTOR
Jordan S. Terry
January 6, 2015
©2015 STONE STREET ADVISORS LLC 1PUBLIC
A Different Kind of Research Firm
• Stone Street Advisors LLC (SSA) was founded in 2011 to address problems and gaps
in th...
A Unique Approach Yields Unique Performance
• Without constraints on market cap, geography,
industry, time horizon or styl...
Double Digit Return Exits on ALL Long Ideas
©2015 STONE STREET ADVISORS LLC 4PUBLIC
Ticker Company Industry Date Price LT ...
Double Digit Return Exits on 10/12 Short Ideas
©2015 STONE STREET ADVISORS LLC 5PUBLIC
Ticker Company Industry Date Price ...
Sustained Outperformance – Inception to 12/31/14
©2015 STONE STREET ADVISORS LLC 6PUBLIC
Ticker Company Industry Date Pric...
©2015 STONE STREET ADVISORS LLC
Overstock.com: 10x Upside Potential
Jordan S. Terry
December, 2014
7PUBLIC
An accidental f...
Situation Summary
8PUBLIC
• Overstock.com (OSTK) is a $1.5bn/year consumer e-tailer with large, loyal
customer base, espec...
A Diamond in the Rough
9PUBLIC
• Over the past 15 or so years, most every analyst and investor has given up, moved
on, or ...
Company Background
• Overstock.com (OSTK) is an online retailer primarily selling discount,
replenishable, and closeout me...
Overstock.com
11PUBLIC
A screenshot of the homepage during October, it’s 15th anniversary, allowing founder & CEO Byrne th...
Financial Performance & Investor Returns
• 60% revenue CAGR ’99 -‘13, but:
– Not profitable until 2009
– Only profitable i...
OSTK Stock Performance Since IPO
13PUBLIC ©2015 STONE STREET ADVISORS LLC
OSTK Stock Performance - YTD
14PUBLIC ©2015 STONE STREET ADVISORS LLC
OSTK Income Statement
• Inconsistent revenue
growth
• Is Sales & Marketing
spend driving revenues?
• Where is Tech spend
g...
OSTK Operating Performance
16PUBLIC ©2015 STONE STREET ADVISORS LLC
OSTK Cash Flow
• EBITDA and OCF
positive
• Current liabilities –
payables and accruals
- starting to enter
yellow flag ter...
OSTK Balance Sheet
• Inventory-lite model
• Cash conversion
cycle negative ~10-
15 days
• ~$293mm Fed &
State combined
NOL...
Haste + More Money Than Sense = Waste
• OSTK had >$100mm of “idle” cash…and nothing to do with it
• Decided to spend ~$100...
The “Peace Coliseum”
• Management is not exactly focused on maximizing shareholder value…
– "It's exciting to be at a poin...
OSTK Trades At Significant Discount
• Easily-distracted, litigious, entrenched CEO
– Byrne engaged in ongoing PR and legal...
How Much of a Discount?
• Among peers, OSTK trades at:
– P/E 75% below industry median
– P/S 57% below industry
– P/B 15% ...
Patrick Byrne: Founder & CEO
• Owns ~27% of outstanding shares
• Family owns additional 5.2% last reported
(2010)
• No oth...
Byrne Has Destroyed Institutional Confidence
• In the absence of a responsible board or engaged
investor, Byrne has been h...
Top Institutional Holders
25PUBLIC ©2015 STONE STREET ADVISORS LLC
Top Mutual Fund Holders
26PUBLIC ©2015 STONE STREET ADVISORS LLC
Supply of Friendly Investors Has Dried Up
• Some of OSTK’s largest investors have neither been entirely
objective nor moti...
“Independent” Directors
• Board of directors includes independent directors by
legal/exchange definition only
– Fairfax’s ...
Independent Directors: Asleep at the Wheel
29PUBLIC ©2015 STONE STREET ADVISORS LLC
An Opportunity Seeking An Activist
• We have developed a restructuring plan to
improve the company (and/or return cash to
...
The Approach – Collaboration First
• Since the beginning, Byrne and OSTK have been the subject of varying
degrees of scorn...
Beyond Financial Engineering – Improving the Business
• Buyback would have created shareholder value, but the real value c...
Step 1: Eliminate Distractions – Bitcoin & Beyond
33
• OSTK has an entire new team
dedicated to creating a Bitcoin-
like s...
Rethink Strategy & Operations, Top-to-Bottom
• International expansion
– Currently only pushing into two unnamed countries...
International Expansion – The Catch-Up Game
• Virtually EVERY other e-commerce company, globally, has expanded beyond its ...
Driving Revenue Growth - Market Size + Penetration
• OSTK is a major player in the online furniture & home goods market
• ...
Know Your Customer, Focus On Your Customer
• While OSTK does not provide gender or demographic
stats, Wayfair and other ma...
Rising Avg. Order Size…But Orders Flat or Down
38PUBLIC ©2015 STONE STREET ADVISORS LLC
We Have the Technology, But…
• OSTK Android app is “Editors Choice” in Google Play Store, but little
if any discussion on ...
Top 10 U.S. Retail Websites - No Overstock
40PUBLIC ©2015 STONE STREET ADVISORS LLC
Overstock.com Website Rank
41PUBLIC
Source: alexa.com, 11/16/2014
©2015 STONE STREET ADVISORS LLC
Overstock.com – Competition Approaching
42
Source: sentio.com, 11/16/2014
PUBLIC ©2015 STONE STREET ADVISORS LLC
Overstock.com - Interest Waning
43
Source: Google Trends, 11/16/2014
PUBLIC ©2015 STONE STREET ADVISORS LLC
Rethink, Revamp “Club O” Membership Program
• “Club O” Membership Program
– ~275-300,000 members (mid 2014)
– Costs $19.95...
Employee Productivity & Efficiency
• Corporate Employees increased ~25% 2012q1 to 2013q4
• LinkedIn shows 1,058 employees ...
Does OSTK Have a Headcount Problem?
46PUBLIC ©2015 STONE STREET ADVISORS LLC
Revenue/Employee is Above Industry Average
47PUBLIC ©2015 STONE STREET ADVISORS LLC
EBITDA/Employee is Well Below…
48PUBLIC ©2015 STONE STREET ADVISORS LLC
…and EBIT/Employee is Worse
49PUBLIC ©2015 STONE STREET ADVISORS LLC
Lack of OpEx Discipline & Accountability
• In the past 5 years, OpEx has ranged from 16.1%
to 18.6% of sales
• OpEx up 47%...
5-Year OpEx CAGR: 10.2%
51
• Over same period, Revenue CAGR is only 10.4%
• OpEx management is the key to profitability!
P...
OSTK OpEx vs. Global E-commerce Comps
• OSTK shows adequate, above average Revenue/Employee in
all but one of the past fiv...
Reduce OpEx to Industry-Average Levels = Profit
• If OSTK OpEx was as efficient as that of its peers, the company
would ha...
Financial Model Scenarios & Assumptions
• Four capital structure/capital allocation scenarios
– Management: New $120mm HQ,...
Financial Model Scenarios & Assumptions, II
• Five WC/P&L scenarios
– Base: 10% rev growth, below projected home goods gro...
Valuation & Scenario Analysis
56PUBLIC
• Our bear case subjects OSTK to conditions far more harsh than it’s likely
to face...
The New HQ Destroys Shareholder Value
57PUBLIC
• In base P&L with new HQ, OSTK equity is worth $25.08 ($607mm)
• If OSTK h...
A Solution to “Byrne” CapEx Value Destruction
58PUBLIC
• We estimate the increased tech CapEx we’ve seen in recent years –...
Risk Factors – Patrick Byrne
• Not motivated by profit
• Difficult to predict how he will react when approached,
regardles...
Risk Factors – Margin of Safety?
• ~$1.5bn/year business with installed customer base, well-known
brand, but questionable,...
Risk Factors - Execution
• Execution
– We expect resistance to any suggestions and proposals from
management and board
– T...
Risk Factors – Accounting & Reporting
• OSTK has restated financials more than once
– Restated financials from 2002q1 to 2...
Risk Factors – Accounting & Reporting
• After accounting/reporting/control errors
identified (initially, by shorts, invest...
Risk Factors – More Accounting Errors?
• In the thirteen years since the IPO, seven years
have been found to contain error...
• Co-Founder of OSTK
• Was an auditor with PwC from 1996-1998
• Partnered with Byrne in 1999; COO, President, board
member...
• Most recent SEC Form 4:
– 1/16/08 no longer required to file
– Directly owned 42,238 shares
– Indirectly owned 130,000 s...
Conclusions
• Due to entrenched, distracted, incompetent management and a captured board,
OSTK has failed to produce meani...
The opinions presented herein are solely those of Stone Street
Advisors LLC. Neither Stone Street Advisors LLC nor any of ...
Jordan S. Terry
Founder & Managing Director
Stone Street Advisors LLC
jordan.terry@stonestreetadvisors.com
Contact Informa...
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Overstock.com: A Diamond in the Rough

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Despite several challenges, Overstock.com (OSTK) represents a unique investment opportunity for the patient value investor with 2-3x upside over the next few years.
This is an even better opportunity for a tenacious activist investor to recognize a 5-10x return by implementing our comprehensive restructuring plan, which addresses all of the company's shortfalls in governance, management, strategy, operations, and capital allocation/capital structure.

Published in: Economy & Finance
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Overstock.com: A Diamond in the Rough

  1. 1. About the Firm CAVEAT EMPTOR Jordan S. Terry January 6, 2015 ©2015 STONE STREET ADVISORS LLC 1PUBLIC
  2. 2. A Different Kind of Research Firm • Stone Street Advisors LLC (SSA) was founded in 2011 to address problems and gaps in the fundamental investment research business. As a result, we are: – Independent • We have no outside investors • No predefined or rigid coverage list or areas; “go-anywhere mandate” • We choose which opportunities to pursue and when, whether on our own or for clients; investment funds, family offices, consultants, and HNW individuals – Unbiased • We do not invest in securities or derivatives, nor are members allowed to actively invest. We do not “talk our book;” we talk our research, or rather, let our research do the talking – Long-term, value-oriented • We seek to identify investment opportunities with at least 50% upside (long or short) over the next 1-3 years, sometimes longer for special situations – Accountable for performance • Our reputation is our business • Of 25 ideas (long, short, and L/S special situation) since 2011, all have resulted in profitable exit points; “100% win rate” • 16 are still outperforming the S&P500 • Average outperformance of traditional longs is 42.9%, shorts 69.8% • Special situations longs outperforming by 11.7%, shorts by 28.1% ©2015 STONE STREET ADVISORS LLC 2PUBLIC
  3. 3. A Unique Approach Yields Unique Performance • Without constraints on market cap, geography, industry, time horizon or style, we can identify opportunity where others can not or will not • Without these limitations, we have identified market- beating ideas, such as: – Long: Restructuring of a French waste/water management company – Long: Turnaround of a Taiwanese LCD, OLED display manufacturer – Short: Highly-levered U.S. mid-tier regional gym chain facing increased competition from higher and lower-priced gyms – Short: #1 ranked Chinese internet video/tv site facing far higher CapEx and OpEx than Street, company estimates ©2015 STONE STREET ADVISORS LLC 3PUBLIC
  4. 4. Double Digit Return Exits on ALL Long Ideas ©2015 STONE STREET ADVISORS LLC 4PUBLIC Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long BOFI BOFI Holding, Inc. Savings & Loans 3/20/2012 17.06$ >$30 105.55$ 3/14/2014 518.7% 30.7% 488.0% CDXC ChromaDex Corporation Chemicals - Diversified 9/6/2012 0.70$ n/a 2.09$ 3/18/2014 198.6% 29.9% 168.6% DARA DARA BioSciences, Inc Biotechnology 12/3/2012 4.15$ n/a 5.80$ 2/15/2013 39.8% 7.8% 32.0% PGLC Pershing Gold Corporation Basic Materials - Gold 12/18/2012 0.34$ n/a 0.60$ 1/28/2013 76.5% 7.0% 69.5% NVLX Nuvilex Inc Biotechnology 3/22/2013 0.06$ n/a 0.51$ 2/27/2014 750.0% 19.1% 730.9% TMUS T-Mobile US, Inc. Wireless Technology 10/31/2013 27.70$ $47.50 34.86$ 5/29/2014 25.8% 9.3% 16.5% Average 268.2% 17.3% 250.9% Short YOKU Youku Tudou Inc. Internet Technology/Web Video 5/23/2011 44.23$ <$21 45.04$ 6/2/2011 1.8% -0.3% 2.1% ZAGG ZAGG Inc Consumer Electronics Accessories 7/7/2011 12.83$ $0 16.62$ 8/3/2011 29.5% -6.9% 36.4% TSL Trina Solar Limited Semiconductor - Specialized 8/8/2011 15.00$ n/a 18.34$ 3/7/2014 22.3% 67.8% -45.5% JOSB Jos. A Bank Clothiers Inc. Apparel Stores 12/28/2011 49.55$ n/a 64.98$ 6/10/2014 31.1% 54.5% -23.4% UNIS Unilife Corporation Medical Instruments & Supplies 1/16/2014 4.85$ $0.56 5.74$ 3/19/2014 18.4% 0.8% 17.5% Average 20.6% 23.2% -2.6% Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long ZZ Sealy Corporation Home Furnishings & Fixtures 7/24/2012 1.55$ n/a 2.26$ 11/2/2012 45.8% 5.7% 40.1% DV DeVry, Inc. Education & Training Services 7/24/2012 20.80$ >$60 49.12$ 12/22/2014 136.2% 55.3% 80.9% JSDA Jones Soda Co. Beverages - Soft Drinks 6/7/2013 0.56$ n/a 0.88$ 8/2/2013 57.1% 4.0% 53.1% MSLP MusclePharm Corp. Health & Fitness 7/27/2013 10.86$ n/a 14.04$ 10/9/2014 29.3% 13.98% 15.3% AUO AU Optronics Corp. Semiconductor-Board line 2/10/2014 2.94$ n/a 5.42$ 12/24/2014 84.4% 15.7% 68.7% VE Veolia Environnement S.A. Waste Management 2/10/2014 15.59$ n/a 20.00$ 6/25/2014 28.3% 8.9% 19.4% OSTK Overstock.com Inc. Catalog & Mail Order Houses 9/11/2014 18.25$ >$80 27.06$ 12/9/2014 48.3% 3.1% 45.2% Average 61.3% 15.2% 46.1% Short GM General Motors Company Auto Manufacturers 2/24/2011 32.46$ n/a 40.11$ 12/17/2013 23.6% 36.4% -12.8% CLUB Town Sports International Holdings Sporting Activities 1/4/2012 7.62$ n/a 14.17$ 12/31/2013 86.0% 44.7% 41.2% ETH Ethan Allen Interiors Inc. Home Furnishings 5/8/2013 30.57$ n/a 31.62$ 5/15/2013 3.4% 1.6% 1.8% ROVI Rovi Corporation Multimedia Graphics & Software 9/4/2013 17.62$ n/a 25.20$ 2/25/2014 43.0% 11.6% 31.4% SPR Spirit Aerosystems Holdings Inc Aerospace Products & Services 10/1/2013 24.69$ n/a 45.32$ 12/9/2014 83.6% 21.5% 62.1% LL Lumber Liquidators Holdings, Inc. Home Improvement Stores 10/31/2013 114.19$ n/a 119.44$ 11/15/2013 4.6% 2.4% 2.2% OXFD Oxford Immunotech Global PLC Diagnostic Substances 4/3/2014 19.90$ n/a 19.99$ 5/12/2014 0.5% 1.7% -1.2% Average 34.9% 17.1% 17.8% Data: SEC, company reports, Stone Street Advisors, Seeking Alpha, Forbes, Yahoo! Finance, Finviz, StockTwits Performance Analysis - Special Situations & Unpublished Performance Analysis - Published STONE STREET ADVISORS LLC *Inception is the date of our first definitive opinion. Differences in date/price may depend on: 1. Whether report/idea was published before, during or after market hours, 2. Commentary released over several days, 3. Research never publicly released. Initiated* High Initiated* High
  5. 5. Double Digit Return Exits on 10/12 Short Ideas ©2015 STONE STREET ADVISORS LLC 5PUBLIC Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long BOFI BOFI Holding, Inc. Savings & Loans 3/20/2012 17.06$ >$30 16.98$ 3/21/2012 -0.5% -0.4% -0.1% CDXC ChromaDex Corporation Chemicals - Diversified 9/6/2012 0.70$ n/a 0.50$ 1/15/2013 -28.6% 2.8% -31.4% DARA DARA BioSciences, Inc Biotechnology 12/3/2012 4.15$ n/a 0.75$ 11/20/2014 -81.9% 45.6% -127.5% PGLC Pershing Gold Corporation Basic Materials - Gold 12/18/2012 0.34$ n/a 0.27$ 12/29/2014 -20.6% 44.5% -65.1% NVLX Nuvilex Inc Biotechnology 3/22/2013 0.06$ n/a 0.06$ 3/22/2013 0.0% -0.3% 0.3% TMUS T-Mobile US, Inc. Wireless Technology 10/31/2013 27.70$ $47.50 24.57$ 12/16/2014 -11.3% 12.3% -23.6% Average -23.8% 17.4% -41.2% Short YOKU Youku Tudou Inc. Internet Technology/Web Video 5/23/2011 44.23$ <$21 13.94$ 12/7/2012 -68.5% 6.4% -74.8% ZAGG ZAGG Inc Consumer Electronics Accessories 7/7/2011 12.83$ $0 3.67$ 11/7/2013 -71.4% 29.1% -100.5% TSL Trina Solar Limited Semiconductor - Specialized 8/8/2011 15.00$ n/a 2.19$ 11/20/2012 -85.4% 24.0% -109.4% JOSB Jos. A Bank Clothiers Inc. Apparel Stores 12/28/2011 49.55$ n/a 39.01$ 4/1/2013 -21.3% 31.0% -52.3% UNIS Unilife Corporation Medical Instruments & Supplies 1/16/2014 4.85$ $0.56 2.08$ 10/2/2014 -57.1% 5.4% -62.5% Average -60.7% 19.2% -79.9% Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long ZZ Sealy Corporation Home Furnishings & Fixtures 7/24/2012 1.55$ n/a 1.55$ 7/24/2012 0.0% 0.0% 0.0% DV DeVry, Inc. Education & Training Services 7/24/2012 20.80$ >$60 17.90$ 8/3/2012 -13.9% 3.9% -17.9% JSDA Jones Soda Co. Beverages - Soft Drinks 6/7/2013 0.56$ n/a 0.32$ 8/20/2014 -42.9% 0.5% -43.4% MSLP MusclePharm Corp. Health & Fitness 7/27/2013 10.86$ n/a 6.25$ 3/24/2014 -42.4% 9.8% -52.2% AUO AU Optronics Corp. Semiconductor-Board line 2/10/2014 2.94$ n/a 2.94$ 2/19/2014 0.0% 1.6% -1.6% VE Veolia Environnement S.A. Waste Management 2/10/2014 15.59$ n/a 15.59$ 2/10/2014 0.0% 0.0% 0.0% OSTK Overstock.com Inc. Catalog & Mail Order Houses 9/11/2014 18.25$ >$80 15.35$ 10/9/2014 -15.9% -3.5% -12.4% Average -16.4% 1.8% -18.2% Short GM General Motors Company Auto Manufacturers 2/24/2011 32.46$ n/a 18.16$ 7/25/2012 -44.1% 2.4% -46.5% CLUB Town Sports International Holdings Sporting Activities 1/4/2012 7.62$ n/a 4.06$ 8/11/2014 -46.7% 51.2% -97.9% ETH Ethan Allen Interiors Inc. Home Furnishings 5/8/2013 30.57$ n/a 22.33$ 7/17/2014 -27.0% 20.4% -47.4% ROVI Rovi Corporation Multimedia Graphics & Software 9/4/2013 17.62$ n/a 16.47$ 11/8/2013 -6.5% 7.1% -13.6% SPR Spirit Aerosystems Holdings Inc Aerospace Products & Services 10/1/2013 24.69$ n/a 23.54$ 10/9/2013 -4.7% -2.3% -2.4% LL Lumber Liquidators Holdings, Inc. Home Improvement Stores 10/31/2013 114.19$ n/a 48.28$ 10/27/2014 -57.7% 11.7% -69.4% OXFD Oxford Immunotech Global PLC Diagnostic Substances 4/3/2014 19.90$ n/a 10.75$ 12/15/2014 -46.0% 5.3% -51.3% Average -33.2% 13.7% -46.9% Data: SEC, company reports, Stone Street Advisors, Seeking Alpha, Forbes, Yahoo! Finance, Finviz, StockTwits *Inception is the date of our first definitive opinion. Differences in date/price may depend on: 1. Whether report/idea was published before, during or after market hours, 2. Commentary released over several days, 3. Research never publicly released. STONE STREET ADVISORS LLC Performance Analysis - Published Performance Analysis - Special Situations & Unpublished Initiated* Low Initiated* Low
  6. 6. Sustained Outperformance – Inception to 12/31/14 ©2015 STONE STREET ADVISORS LLC 6PUBLIC Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long BOFI BOFI Holding, Inc. Savings & Loans 3/20/2012 17.06$ >$30 77.81$ 12/31/2014 356.1% 46.5% 309.6% CDXC ChromaDex Corporation Chemicals - Diversified 9/6/2012 0.70$ n/a 0.88$ 12/31/2014 25.7% 43.8% -18.1% DARA DARA BioSciences, Inc Biotechnology 12/3/2012 4.15$ n/a 0.88$ 12/31/2014 -78.8% 46.1% -124.9% PGLC Pershing Gold Corporation Basic Materials - Gold 12/18/2012 0.34$ n/a 0.29$ 12/31/2014 -14.7% 42.3% -57.0% NVLX Nuvilex Inc Biotechnology 3/22/2013 0.06$ n/a 0.18$ 12/31/2014 200.0% 32.2% 167.8% TMUS T-Mobile US, Inc. Wireless Technology 10/31/2013 27.70$ $47.50 26.94$ 12/31/2014 -2.7% 17.2% -19.9% Average 80.9% 38.0% 42.9% Short YOKU Youku Tudou Inc. Internet Technology/Web Video 5/23/2011 44.23$ <$21 17.81$ 12/31/2014 -59.7% 56.3% -116.0% ZAGG ZAGG Inc Consumer Electronics Accessories 7/7/2011 12.83$ $0 6.79$ 12/31/2014 -47.1% 52.1% -99.2% TSL Trina Solar Limited Semiconductor - Specialized 8/8/2011 15.00$ n/a 9.26$ 12/31/2014 -38.3% 83.9% -122.2% JOSB Jos. A Bank Clothiers Inc. Apparel Stores 12/28/2011 49.55$ n/a 64.98$ 6/18/2014 31.1% 0.6% 30.6% UNIS Unilife Corporation Medical Instruments & Supplies 1/16/2014 4.85$ $0.56 3.35$ 12/31/2014 -30.9% 11.5% -42.4% Average -29.0% 40.9% -69.8% Ticker Company Industry Date Price LT Target Price Date Return S&P 500 Relative Long ZZ Sealy Corporation Home Furnishings & Fixtures 7/24/2012 1.55$ n/a 2.20$ 3/18/2013 41.9% 15.2% 26.7% DV DeVry, Inc. Education & Training Services 7/24/2012 20.80$ >$60 47.47$ 12/31/2014 128.2% 53.8% 74.4% JSDA Jones Soda Co. Beverages - Soft Drinks 6/7/2013 0.56$ n/a 0.35$ 12/31/2014 -37.5% 25.3% -62.8% MSLP MusclePharm Corp. Health & Fitness 7/27/2013 10.86$ n/a 8.50$ 12/31/2014 -21.7% 21.7% -43.4% AUO AU Optronics Corp. Semiconductor-Board line 2/10/2014 2.94$ n/a 5.09$ 12/31/2014 73.1% 14.4% 58.7% VE Veolia Environnement S.A. Waste Management 2/10/2014 15.59$ n/a 17.58$ 12/31/2014 12.8% 14.4% -1.6% OSTK Overstock.com Inc. Catalog & Mail Order Houses 9/11/2014 18.25$ >$80 24.27$ 12/31/2014 33.0% 3.1% 29.9% Average 32.8% 21.1% 11.7% Short GM General Motors Company Auto Manufacturers 2/24/2011 32.46$ n/a 34.91$ 12/31/2014 7.5% 53.3% -45.8% CLUB Town Sports International Holdings Sporting Activities 1/4/2012 7.62$ n/a 5.95$ 12/31/2014 -21.9% 61.2% -83.1% ETH Ethan Allen Interiors Inc. Home Furnishings 5/8/2013 30.57$ n/a 30.97$ 12/31/2014 1.3% 26.1% -24.8% ROVI Rovi Corporation Multimedia Graphics & Software 9/4/2013 17.62$ n/a 22.59$ 12/31/2014 28.2% 24.5% 3.7% SPR Spirit Aerosystems Holdings Inc Aerospace Products & Services 10/1/2013 24.69$ n/a 43.04$ 12/31/2014 74.3% 21.5% 52.8% LL Lumber Liquidators Holdings, Inc. Home Improvement Stores 10/31/2013 114.19$ n/a 66.31$ 12/31/2014 -41.9% 17.2% -59.1% OXFD Oxford Immunotech Global PLC Diagnostic Substances 4/3/2014 19.90$ n/a 13.62$ 12/31/2014 -31.6% 9.0% -40.6% Average 2.3% 30.4% -28.1% Data: SEC, company reports, Stone Street Advisors, Seeking Alpha, Forbes, Yahoo! Finance, Finviz, StockTwits *Inception is the date of our first definitive opinion. Differences in date/price may depend on: 1. Whether report/idea was published before, during or after market hours, 2. Commentary released over several days, 3. Research never publicly released. STONE STREET ADVISORS LLC Current Performance Analysis - Special Situations & Unpublished Initiated* Performance Analysis - Published Initiated* Current
  7. 7. ©2015 STONE STREET ADVISORS LLC Overstock.com: 10x Upside Potential Jordan S. Terry December, 2014 7PUBLIC An accidental find - a uniquely special situation.
  8. 8. Situation Summary 8PUBLIC • Overstock.com (OSTK) is a $1.5bn/year consumer e-tailer with large, loyal customer base, especially in home goods segment • Ineffective board of enablers and excusers has and continues to allow Founder/CEO to run company without regard for public shareholders • Poorly-defined strategy, lack of accountability has resulted in ballooning OpEx and a surge in vague “technology” spending • Company recently committed to building expensive, unnecessary Apple- esque trophy HQ despite poor current and historical operating performance • In spite of itself and its people, the company is poised for success; we see 200% upside without any changes to board, management or operations, over the next few years • We have developed a comprehensive restructuring plan addressing all of OSTK’s shortfalls in governance, management, strategy, operations, and capital allocation/structure • If our restructuring plan is implemented, we see 300%-800% upside ©2015 STONE STREET ADVISORS LLC
  9. 9. A Diamond in the Rough 9PUBLIC • Over the past 15 or so years, most every analyst and investor has given up, moved on, or otherwise grown tired of Overstock.com for a number of well-known reasons • After four months of analysis, we believe: – A $1.5 billion/year business with an installed customer base riding a large secular growth wave is hard to ruin • Despite a number of ongoing decisions ranging from the naïve to fantastically stupid, OSTK has not only survived, but grown significantly while many of its generation have long-since disappeared – Patrick Byrne may have a history of semi-spectacular hijinks and many a distraction, but Overstock is more than one man and his >25% stake in the company – Despite Byrne and the influence he wields, this is a solid opportunity for a patient, operations- focused activist to push the company to the next level – Absent an activist investor driving the company to restructure, due to the aforementioned secular growth in online shopping, OSTK should be able to grab billions in incremental revenue as the market grows at 10.5% through 2023 (and that’s just in home goods!) • In our conservative base case, with OSTK growing slower than just the overall online home goods market, with no operational improvement whatsoever, OSTK is worth $25/share (almost fairly valued) • In our bull case, with the firm expanding internationally, it’s worth $95/share (+290%) • In our activist/restructuring case, we think the stock is worth $222 (+813%) • Across all 20 scenarios we modeled, including those in which the equity ends up worthless, the average valuation is $82/share (+238% from 11/14/2014 close) ©2015 STONE STREET ADVISORS LLC
  10. 10. Company Background • Overstock.com (OSTK) is an online retailer primarily selling discount, replenishable, and closeout merchandise – Brand name, non-brand name and closeout merchandise, including furniture, home decor, bedding and bath, housewares, jewelry and watches, apparel and designer accessories, electronics and computers, sporting goods, books, CDs, DVDs, video games, cars, and insurance – Inventory “lite” model; 89.8% revenue from fulfillment partner, 10.2% from firm inventory for 9 months 2014 – Launched Supplier Oasis Fulfillment Services 5/2014; similar to Amazon Fulfillment (few details available thus far) – No material revenue outside the United States • Founded 1997, launched website 1999, IPO May, 2002 • Market Cap: ~$580mm, EV ~$470mm • $1.4bn LTM revenue, $11.7mm operating income, 0.8% OM • No long-term debt 10PUBLIC ©2015 STONE STREET ADVISORS LLC
  11. 11. Overstock.com 11PUBLIC A screenshot of the homepage during October, it’s 15th anniversary, allowing founder & CEO Byrne the opportunity to toot his own horn ©2015 STONE STREET ADVISORS LLC
  12. 12. Financial Performance & Investor Returns • 60% revenue CAGR ’99 -‘13, but: – Not profitable until 2009 – Only profitable in 4 of 15 years (‘09, ‘10, ‘12, and ’13) – Rev CAGR ‘99-’05: 175.3%; Rev CAGR ‘06-’13: 7.5% – Majority of cumulative profit is from deferred tax asset valuation allowance release in 2013 – Stock price only appreciated ~39% from 5/30/2002 IPO - 5/2014; ~1.5% annualized • AMZN up ~1,600%; ~27% annualized over same period – Stock down ~21% YTD • Down more than 50% as recently as 10/9 12PUBLIC ©2015 STONE STREET ADVISORS LLC
  13. 13. OSTK Stock Performance Since IPO 13PUBLIC ©2015 STONE STREET ADVISORS LLC
  14. 14. OSTK Stock Performance - YTD 14PUBLIC ©2015 STONE STREET ADVISORS LLC
  15. 15. OSTK Income Statement • Inconsistent revenue growth • Is Sales & Marketing spend driving revenues? • Where is Tech spend going? • Bipolar G&A • Generally poor disclosure, reporting of activities driving OpEx • Very low EBIT and EBITDA per Employee • 2013 Net Income driven by ~$79.7mm DTA valuation allowance release 15PUBLIC ©2015 STONE STREET ADVISORS LLC
  16. 16. OSTK Operating Performance 16PUBLIC ©2015 STONE STREET ADVISORS LLC
  17. 17. OSTK Cash Flow • EBITDA and OCF positive • Current liabilities – payables and accruals - starting to enter yellow flag territory • As co profits NOLs/DTAs become bigger part of CF • CapEx needs much further scrutiny, transparency, accountability (more on this later) • Unclear what impact – if any – Supplier Oasis Fulfillment System has or will have on cash flows • New HQ largest investment to date 17PUBLIC ©2015 STONE STREET ADVISORS LLC
  18. 18. OSTK Balance Sheet • Inventory-lite model • Cash conversion cycle negative ~10- 15 days • ~$293mm Fed & State combined NOLs available • Precious metal foray • Payables & accrued liabilities growth • PV Operating leases ~$44mm with >50% of payments due 5+ years out • Unused debt capacity even with new HQ loans 18PUBLIC ©2015 STONE STREET ADVISORS LLC
  19. 19. Haste + More Money Than Sense = Waste • OSTK had >$100mm of “idle” cash…and nothing to do with it • Decided to spend ~$100mm on a new 230,000 sqft corporate HQ - in the shape of a peace sign - utilizing cash and ~$55mm in new debt – OSTK currently leases ~150,000 sqft – What will additional 80,000 sqft be used for? • OSTK purchased the land for new HQ in September for $10.8mm • OSTK entered into a Construction Agreement on 10/13 • OSTK entered into convertible construction/term loan and RC facility 10/24 – Project estimated cost ~$96mm; we estimate $120mm • There is absolutely no reason to build this HQ – Would eliminate ~$5-10mm/yr of lease expense, making “profitability” easier… • This is one of the most egregious examples of corporate largess and tone-deafness we have ever seen, particularly because: – No indications that board or management have considered any alternative uses of capital – Directors and management blissfully unaware they’re violating their duties to ALL shareholders and/or simply do not care 19PUBLIC ©2015 STONE STREET ADVISORS LLC
  20. 20. The “Peace Coliseum” • Management is not exactly focused on maximizing shareholder value… – "It's exciting to be at a point where we can build the Peace Coliseum to unite our employees," added Overstock President Stormy Simon. "It will be the coolest place to work ever." 20PUBLIC ©2015 STONE STREET ADVISORS LLC
  21. 21. OSTK Trades At Significant Discount • Easily-distracted, litigious, entrenched CEO – Byrne engaged in ongoing PR and legal vendetta against “evil short sellers,” brokerages, “journalist shills,” “captured regulators,” other critics – Newest distraction – Bitcoin-based stock market (Wired, 10/2014) • Ineffective corporate governance - complicit board of enablers and excusers – Fairfax/Watsa – largest public shareholder – passive, even with board seat • Small capitalization, thinly traded, high insider ownership • No vision/market not buying management vision • Inconsistent/poor execution and performance • Lack of public comps – Only good US comp, Wayfair, went public on 10/2/2014 • Obnoxiously clear disregard for the interests of public shareholders • Suboptimal capital allocation/capital structure • No clear catalyst 21PUBLIC ©2015 STONE STREET ADVISORS LLC
  22. 22. How Much of a Discount? • Among peers, OSTK trades at: – P/E 75% below industry median – P/S 57% below industry – P/B 15% below industry – P/C 55% below industry • Some numbers behind the discount: – GM 49% below industry median – OM 60% below industry – Trailing 5-year revenue growth 37% below industry Source: Finviz 22PUBLIC ©2015 STONE STREET ADVISORS LLC
  23. 23. Patrick Byrne: Founder & CEO • Owns ~27% of outstanding shares • Family owns additional 5.2% last reported (2010) • No other 1% owners among board or named executives 23PUBLIC ©2015 STONE STREET ADVISORS LLC
  24. 24. Byrne Has Destroyed Institutional Confidence • In the absence of a responsible board or engaged investor, Byrne has been held unaccountable for his actions, hurting the business and the stock • Due to Byrne’s sometimes spectacular hijinks, no one wants to go near him or OSTK – Fairfax only investor with >3% – No single mutual fund owns >1% • “Ample investment opportunities may exist in the securities that are excluded from consideration by most institutional investors. Picking through the crumbs left by the investment elephants can be rewarding.” – Seth Klarman, Margin of Safety 24PUBLIC ©2015 STONE STREET ADVISORS LLC
  25. 25. Top Institutional Holders 25PUBLIC ©2015 STONE STREET ADVISORS LLC
  26. 26. Top Mutual Fund Holders 26PUBLIC ©2015 STONE STREET ADVISORS LLC
  27. 27. Supply of Friendly Investors Has Dried Up • Some of OSTK’s largest investors have neither been entirely objective nor motivated purely by economic return… – Patrick Byrne->John J. Byrne->Warren Buffett->Prem Watsa/Fairfax: John Byrne rebuilt & sold GEICO to Buffett, Watsa “the Canadian Buffett” – Prem Watsa/Fairfax<->Francis Chou: Worked together – John J. Byrne->White Mountain Insurance->Scion Capital/Michael Burry: John Byrne-led White Mountain was an early Scion investor • …yet still doubt OSTK’s value – Chou: 3.1mm shares 2/2013; 0.6mm shares 2/2014 • “We first invested in OSTK in 2006 and since then, the results have been positive but sub-par to say the least. Looking back, we paid too much for it and the intrinsic value that we estimated seven years ago was too high.” (Chou Funds Semi-Annual Letter, 2013 • Sold covered calls against position (now expired) • Fairfax is the sole management-friendly investor left 27PUBLIC ©2015 STONE STREET ADVISORS LLC
  28. 28. “Independent” Directors • Board of directors includes independent directors by legal/exchange definition only – Fairfax’s Samuel A. Mitchell an accomplished value investor, but Byrne supporter; director since 2010 – Barclay F. Corbus also technically independent, but as CEO of WR Hambrecht, which brought OSTK public, questionably independent; director since 2007 – Joseph J. Tabacco, Jr. - class action securities lawyer helped with various legal challenges; director since 2007 – Jonathan E. Johnson III – Chairman since 4/2014, former President of OSTK 2009-2014, and employee since 2002 – Allison H. Abraham – Independent; director since 2002 IPO 28PUBLIC ©2015 STONE STREET ADVISORS LLC
  29. 29. Independent Directors: Asleep at the Wheel 29PUBLIC ©2015 STONE STREET ADVISORS LLC
  30. 30. An Opportunity Seeking An Activist • We have developed a restructuring plan to improve the company (and/or return cash to shareholders) – Would boost valuation multiples, set/raise floor on stock price, wake-up sell-side analysts (no real coverage since 2009), and signal other institutions it’s safe to test the waters again • We project significant returns - up to 10x - with manageable downside 30PUBLIC ©2015 STONE STREET ADVISORS LLC
  31. 31. The Approach – Collaboration First • Since the beginning, Byrne and OSTK have been the subject of varying degrees of scorn from Wall Street and the financial media (rightfully and wrongly so) • No investor that we know of has attempted to engage the board or management in a positive manner ( i.e. long the stock) • We believe the optimal strategy is to make it very clear to management and the board that the investor seeks to work with, not against them • Must convince board that focusing on core growth and profitability now will allow management time to work on ‘pet projects’ later • We do not believe any management changes are necessarily critical to turning around the company (but more on this later), nor do we believe executive comp should be reevaluated • Emphasize investor and management/board want the same thing - to return the company to double-digit revenue growth and ensure consistent profitability • Investor(s) should try to engage Fairfax/Watsa 31PUBLIC ©2015 STONE STREET ADVISORS LLC
  32. 32. Beyond Financial Engineering – Improving the Business • Buyback would have created shareholder value, but the real value creation will come from strategic, operational, and governance improvements: – Eliminate/minimize distractions – especially Bitcoin – Design and begin implementation of major international expansion to drive significant revenue growth, whether organic, JV, or M&A – Improve each vertical and overall website, exit non-core verticals – Push mobile platform; little mention of mobile specifics on recent CC’s – Improve/revamp “Club O” rewards program – Supplier Oasis program analysis, oversight, execution – Optimize inventory management, product mix; improve GM – Improve Sales & Marketing strategy/spend – Get G&A expenses under control – Better CapEx/Capital allocation decision making and efficiency – Add three truly independent directors with significant experience in each of: e-commerce, accounting/audit, and governance – Incentivize board to be accountable to ALL shareholders 32PUBLIC ©2015 STONE STREET ADVISORS LLC
  33. 33. Step 1: Eliminate Distractions – Bitcoin & Beyond 33 • OSTK has an entire new team dedicated to creating a Bitcoin- like stock market • Committing between 5-10% of OSTK cash flow – “single-digit millions” – to company’s cryptosecurity project • OSTK has naming rights through 2016 to Oakland A’s & Raiders stadium – Why? Why still using abandoned O.co name? • New television commerce campaign • Precious Metals – Why? • Ancillary business lines (Autos, insurance, O.biz, etc) PUBLIC ©2015 STONE STREET ADVISORS LLC
  34. 34. Rethink Strategy & Operations, Top-to-Bottom • International expansion – Currently only pushing into two unnamed countries (2013FY call) – Larger international expansion plan would drive significant double-digit revenue growth • Vertical-specific strategies – Ranked #7 of 10 online furniture retailers in est. $220bn furnishings market with <=10% online penetration (Wells Fargo, “Home (.com) Is Where the Heart Is” 8/2014) • Improve brand perception, understand customer base/demographics • Inventory management – Bring COGS down from 81-83% to 78-80% by shifting totally away from direct business • Improve effectiveness of Sales & Marketing spend/strategy – Drive web/mobile traffic and revenues with data-driven targeted marketing • Utilize existing tech and incremental spending to drive international expansion – Repurpose existing tech and tech headcount for international expansion & SOFS project • Streamline HQ operations to minimize G&A expenses – OpEx efficiency and accountability can be significantly improved • Restrict CapEx to core business maintenance and growth – International expansion and Supplier Oasis get a pass; other should be eliminated/spun-out 34PUBLIC ©2015 STONE STREET ADVISORS LLC
  35. 35. International Expansion – The Catch-Up Game • Virtually EVERY other e-commerce company, globally, has expanded beyond its home market organically, via JV, and/or through M&A: • Rakuten (Japan): – Founded 1997 – Began expansion in 2005 primarily via M&A with Buy.com (US, 2010), Priceminister (France), Ikeda (Brasil), etc. – 9/2014 purchased Ebates.com for ~$1bn • MercadoLibre (Argentina) – Founded 1999; eBay ~20% shareholder since 2001 – Acquired DeRemate’s operations in 8 countries in 2005; in 13 other Latin American countries and USA by 2014 • Asos (UK) – Founded 2000, profitable by 2003/4 and every year since – Launched French, German, and US websites in 2010; Australian, Italian, Spanish in 2011 – Opened Sydney office in 2012; USA, France, Germany, China offices in 2013 • Wayfair (U.S) – Founded 2002; consolidated >200 individual websites into one 2011, public 2014 – Launched in UK, France, Germany in 2014; Offices in Ireland, Sydney, London, and Berlin – Net revenue outside North America $41.5mm or 4.5% total net revenue • Zalando (Germany) – Founded 2008 – Expanded internationally in 2009; in 13 other European countries by 2014 35PUBLIC ©2015 STONE STREET ADVISORS LLC
  36. 36. Driving Revenue Growth - Market Size + Penetration • OSTK is a major player in the online furniture & home goods market • U.S. furniture and home décor was a $233bn market in 2013 (Euromonitor, 2013) – Projected 2.5% CAGR through 2023 to $297bn – Western Europe home goods market was $292bn in 2013 • Home goods online penetration is lower than other categories (comScore, 2013) – U.S. home goods market 7% – U.S. apparel market 15% – U.S. consumer electronics 54% • 2013 U.S. online home goods market: $16.3bn • If 2023 home goods penetration reaches current apparel level: – U.S. online home goods market grows 173% to $44.5bn – U.S. online home goods market CAGR 10.5% 2013-2023 • Opportunity for OSTK to grab billions in new revenue in just one vertical! 36PUBLIC ©2015 STONE STREET ADVISORS LLC
  37. 37. Know Your Customer, Focus On Your Customer • While OSTK does not provide gender or demographic stats, Wayfair and other market research firms tell us: – Customers are primarily female (Wayfair’s were 70% in 2013) – OSTK shows similar gender skew (Alexa, 9/2014) – As millennials grow older and incomes rise, more and more purchases of higher-ticket items will be made online • OSTK sales/marketing strategy should focus on attracting and retaining influential millennial females • With female Bitcoin adoption around 5%, all Bitcoin initiatives should be delayed or cancelled 37PUBLIC ©2015 STONE STREET ADVISORS LLC
  38. 38. Rising Avg. Order Size…But Orders Flat or Down 38PUBLIC ©2015 STONE STREET ADVISORS LLC
  39. 39. We Have the Technology, But… • OSTK Android app is “Editors Choice” in Google Play Store, but little if any discussion on calls and SEC filings – Vague mentions, e.g: “over 50% of our traffic is now mobile” (2014q3 call) – No mention of purchases in, or revenue from mobile apps • OSTK not in top 10 retail websites in the U.S; Etsy ranks higher! (comScore, 2014) • National Retail Federation Favorite 50 Retailers Rank has declined from #9 in 2009 and 2010, #12 in 2011 and 2012, to #15 in 2013 • Overstock.com is the 647th most popular website globally (Alexa, 11/2014) – Asos #577, Wayfair #1,245, Walmart #156, Bestbuy #266, Target #286 • Overstock.com estimated monthly visitors 14.82 million 10/2014 (sentio.com) 39PUBLIC ©2015 STONE STREET ADVISORS LLC
  40. 40. Top 10 U.S. Retail Websites - No Overstock 40PUBLIC ©2015 STONE STREET ADVISORS LLC
  41. 41. Overstock.com Website Rank 41PUBLIC Source: alexa.com, 11/16/2014 ©2015 STONE STREET ADVISORS LLC
  42. 42. Overstock.com – Competition Approaching 42 Source: sentio.com, 11/16/2014 PUBLIC ©2015 STONE STREET ADVISORS LLC
  43. 43. Overstock.com - Interest Waning 43 Source: Google Trends, 11/16/2014 PUBLIC ©2015 STONE STREET ADVISORS LLC
  44. 44. Rethink, Revamp “Club O” Membership Program • “Club O” Membership Program – ~275-300,000 members (mid 2014) – Costs $19.95/year – Member Benefits include • 5% Club O Rewards on every order • “Up to 40% off select items, • Free “standard” shipping – Relatively high breakage from expiring promotional memberships – Order size growing “more than twice as fast as rest of site” • Compare to Amazon Prime – 20 million+ members – Costs $99/year – No rewards or special discounts – Free two-day shipping – Unlimited access to Amazon video, music, e-books – Members spend about twice as much as non-members 44PUBLIC ©2015 STONE STREET ADVISORS LLC
  45. 45. Employee Productivity & Efficiency • Corporate Employees increased ~25% 2012q1 to 2013q4 • LinkedIn shows 1,058 employees with Overstock.com as current employer v. reported 885 corporate employees at 12/31/2013 – 19% increase in 9 months? – OSTK website shows 1,500 total employees, q3 slides only count “corporate employees” – No explanation, no further details given on total headcount • OSTK employees appear efficient and productive on revenue generated basis, ranking 6 out of 14 among online retailers, between AMZN and Wayfair • On EBITDA/Employee, and EBIT/Employee, OSTK drops to 11 out of 14, barely above much younger Wayfair 45PUBLIC ©2015 STONE STREET ADVISORS LLC
  46. 46. Does OSTK Have a Headcount Problem? 46PUBLIC ©2015 STONE STREET ADVISORS LLC
  47. 47. Revenue/Employee is Above Industry Average 47PUBLIC ©2015 STONE STREET ADVISORS LLC
  48. 48. EBITDA/Employee is Well Below… 48PUBLIC ©2015 STONE STREET ADVISORS LLC
  49. 49. …and EBIT/Employee is Worse 49PUBLIC ©2015 STONE STREET ADVISORS LLC
  50. 50. Lack of OpEx Discipline & Accountability • In the past 5 years, OpEx has ranged from 16.1% to 18.6% of sales • OpEx up 47% 2009-2013 – Decreased sequentially only from 2011-2012 after attempted rebranding to O.co failed • Little if any disclosure or discussion of where the money is going, what it’s being used for • OSTK’s poor OpEx discipline creates opportunity to cut costs and increase efficiency • Need to tie spending to results (and lack thereof); hold departments and managers accountable 50PUBLIC ©2015 STONE STREET ADVISORS LLC
  51. 51. 5-Year OpEx CAGR: 10.2% 51 • Over same period, Revenue CAGR is only 10.4% • OpEx management is the key to profitability! PUBLIC ©2015 STONE STREET ADVISORS LLC
  52. 52. OSTK OpEx vs. Global E-commerce Comps • OSTK shows adequate, above average Revenue/Employee in all but one of the past five years among global peer group, but: • EBITDA/Employee is, on average, 77% below its peers • EBIT/Employee is, on average, 89% below its peers 52PUBLIC ©2015 STONE STREET ADVISORS LLC
  53. 53. Reduce OpEx to Industry-Average Levels = Profit • If OSTK OpEx was as efficient as that of its peers, the company would have been significantly more profitable in each of past five years: • EBITDA would have been 259% higher, on average • EBIT would have been 445% higher, on average 53PUBLIC ©2015 STONE STREET ADVISORS LLC
  54. 54. Financial Model Scenarios & Assumptions • Four capital structure/capital allocation scenarios – Management: New $120mm HQ, $46mm mortgage – Special dividend: $100mm (2015q2), $40mm new debt – Base: No HQ, no new debt, no return of capital – Buyback: $100mm buyback (2015q2), buy 20.5% of shares out/33.2% of float at 15% premium, $40mm new debt • New debt assumptions: – Assumed closing at 6/30/2015 – $32mm TL, $15mm RC, $8mm drawn at closing – No TL cash sweep – 100% RC repayment – Rate driven by FY2015 coverage ratio 54PUBLIC ©2015 STONE STREET ADVISORS LLC
  55. 55. Financial Model Scenarios & Assumptions, II • Five WC/P&L scenarios – Base: 10% rev growth, below projected home goods growth of 10.5% annually; WC days/% rev across, flat margins – Management: From conference calls, etc; unrealistically optimistic, more “Byrne” CapEx and technology OpEx – Bear: Lower and negative rev growth, margins at bottom of historical range, ballooning OpEx, CapEx, poor WC management – Bull: Slightly higher rev growth than management, better margins and WC management – Activist: Changes identified in pervious slides addressed, e.g. international expansion, “Byrne” CapEx spun-out or eliminated • WACC – Cost of equity using levered beta, cost of debt from implied rating spread – Equity capitalization recalculated based on sharecount and target P/S each period, set to 0.4x (approximate current multiple) • 55% discount on cash – Reflects OSTK P/C valuation 55% below industry average 55PUBLIC ©2015 STONE STREET ADVISORS LLC
  56. 56. Valuation & Scenario Analysis 56PUBLIC • Our bear case subjects OSTK to conditions far more harsh than it’s likely to face, thus we view the risk of permanent loss of capital to be remote • A more realistic bear case would have the stock in the $10-$15 range ©2015 STONE STREET ADVISORS LLC
  57. 57. The New HQ Destroys Shareholder Value 57PUBLIC • In base P&L with new HQ, OSTK equity is worth $25.08 ($607mm) • If OSTK had abandoned the new HQ and changed nothing else, it would have been worth 43% more ($866mm) – The new HQ alone destroys $260mm of shareholder value versus doing nothing • If OSTK had abandoned the new HQ and done a buyback instead, it would have been worth 36% more ($823mm) – Doing a buyback instead of building the new HQ would have created $215mm of shareholder value • The Board needs to be held accountable for not only allowing this to happen, but for giving it their blessing • All efforts should be made to delay/cancel the new HQ, but if, as we expect, it gets built, our work shows the operational and strategic initiatives alone will more than offset damage done by the endeavor ©2015 STONE STREET ADVISORS LLC
  58. 58. A Solution to “Byrne” CapEx Value Destruction 58PUBLIC • We estimate the increased tech CapEx we’ve seen in recent years – which we expect to continue – destroys ~$380mm of shareholder value – Increased tech OpEx over maintenance & core growth adds to the destruction, but is difficult to quantify due to opaque reporting • Byrne appears extremely passionate about, and interested in bitcoin and other technology development; less so running OSTK’s e-tailing business • We suggest OSTK spin-out its non-core tech operations into a new entity to be acquired and controlled solely by Byrne to do with as he pleases • Reflecting his interests, Byrne should step down as CEO of OSTK and sell part of his OSTK holdings to finance the acquisition of the spun-out tech operation • Shares can be sold publicly and/or OSTK can buy (some of) them back • Spin-out immediately value-creating/enhancing for OSTK • Byrne departure from C-suite sends strong signal to markets that management is finally focused on running the core business ©2015 STONE STREET ADVISORS LLC
  59. 59. Risk Factors – Patrick Byrne • Not motivated by profit • Difficult to predict how he will react when approached, regardless of the tone and/or factual evidence presented • Utah and Salt Lake City media will take his side, as will Utah government and other officials • We expect entire board, including “independent” directors, to fully support him to their last breaths • Fairfax likely to defend him, despite interests being better aligned with active investors • It is critical that new investors emphasize desire to work with management for the benefit of all 59PUBLIC ©2015 STONE STREET ADVISORS LLC
  60. 60. Risk Factors – Margin of Safety? • ~$1.5bn/year business with installed customer base, well-known brand, but questionable, due to: – Minimal hard assets – Value of IP/intangibles? – Unpredictable cashflow – No moat or structural barriers to entry – (In)ability to realize value of $293mm in NOLs – No institutional support (besides Fairfax) • Litigation: – Currently fighting various patent/IP infringement claims – California County District Attorneys suit for violations of consumer protection laws still under appeal – Deepcapture.com defamation, etc. suits – Still pursuing lawsuit(s) against brokers (e.g. Merrill Lynch) 60PUBLIC ©2015 STONE STREET ADVISORS LLC
  61. 61. Risk Factors - Execution • Execution – We expect resistance to any suggestions and proposals from management and board – Timing • OSTK has already completed purchase of land for new HQ, signed construction agreement, and secured construction loan – If management/board is not receptive to investor suggestions, proxy fight may become inevitable • Proxy fight proposals/nominations must be received between 1/7/2015 and 2/6/2015 • Shareholders cannot call special meetings – Many fund managers/analysts critical of Byrne/OSTK unlikely to participate this time around – Many, if not most journalists critical of Byrne/OSTK unlikely to pick up pen after being personally assaulted by Byrne 61PUBLIC ©2015 STONE STREET ADVISORS LLC
  62. 62. Risk Factors – Accounting & Reporting • OSTK has restated financials more than once – Restated financials from 2002q1 to 2005q3 due to inventory accounting errors – 2008 10K/A: “(OSTK is) restating its consolidated financial statements…for the years ended December 31, 2007, 2006, and 2005” – Errors were regarding refunds and credits to customers. – Affected accounts include revenue (net of returns expense), accounts receivables, and deferred revenue – Impact of restatements: • 2007: Increase net loss by $4.4mm • 2006: Increase net loss by $5.8mm • 2005: Decrease net loss by $440,000 62PUBLIC ©2015 STONE STREET ADVISORS LLC
  63. 63. Risk Factors – Accounting & Reporting • After accounting/reporting/control errors identified (initially, by shorts, investigative journalists, and fraud experts): – OSTK fired Grant Thornton after being asked to restate 2008 10K – Grant Thornton replaced by PwC as PwC did not believe it was necessary to restate 2008 10K 63PUBLIC ©2015 STONE STREET ADVISORS LLC
  64. 64. Risk Factors – More Accounting Errors? • In the thirteen years since the IPO, seven years have been found to contain errors • When challenged on accounting – especially by outside parties - Byrne is quick to not only dismiss issues but replace auditor • Will OSTK face further accounting/reporting/internal control issues? • History may not repeat, but it certainly rhymes… 64PUBLIC ©2015 STONE STREET ADVISORS LLC
  65. 65. • Co-Founder of OSTK • Was an auditor with PwC from 1996-1998 • Partnered with Byrne in 1999; COO, President, board member • Retired in August 2003 • “When I screwed it up a couple years ago, he came out of retirement and has played a decisive role getting it back on track.” -Byrne (on Lindsey’s return in 2006) • Resigned year end 2007 to “spend time on outside ventures” • Stock Price $27.40 when Lindsey came back VS $13.72 when he left again, right before OSTK ran into aforementioned accounting issues… Jason Lindsey - The Vanishing Act 65PUBLIC ©2015 STONE STREET ADVISORS LLC
  66. 66. • Most recent SEC Form 4: – 1/16/08 no longer required to file – Directly owned 42,238 shares – Indirectly owned 130,000 shares through Team Lindsey, LLC • Why would the ex-President, COO, and board member suddenly leave a company he started and built, and reduce his holdings like this? Jason Lindsey’s Stake in OSTK 66PUBLIC ©2015 STONE STREET ADVISORS LLC
  67. 67. Conclusions • Due to entrenched, distracted, incompetent management and a captured board, OSTK has failed to produce meaningful profit or shareholder return since 2002 IPO • Company is largely wasting ~1/5th of the firm’s market cap, >100% of cash, on building a ridiculous, unnecessary new HQ • The new HQ should be put on hold, if not scrapped entirely, so management can focus on turning around the core business • Even if the company goes through with the new HQ, the stock is still undervalued relative to enormous growth opportunities • Opportunity in search of an activist: By engaging the board and management, an investor can push for strategic and operational change, help management refocus, improve OSTK’s financial performance and stock price • Addition of new, truly independent directors with experience in e-commerce, audit, and governance will improve decision making & shareholder accountability • With management refocused on improving and growing the business, we forecast triple-digit stock price appreciation with minimal/manageable downside 67PUBLIC ©2015 STONE STREET ADVISORS LLC
  68. 68. The opinions presented herein are solely those of Stone Street Advisors LLC. Neither Stone Street Advisors LLC nor any of its members has a position in OSTK or OSTK derivatives, nor any plans to initiate a position. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Stone Street Advisors LLC makes no representation or warranty as to the accuracy, completeness or timeliness of the information contained herein, and disclaims all liability arising from errors or omissions contained in this presentation. This material is presented for informational purposes only and does not constitute investment advice. Stone Street Advisors LLC is not an Investment Advisor. Disclosure 68PUBLIC ©2015 STONE STREET ADVISORS LLC
  69. 69. Jordan S. Terry Founder & Managing Director Stone Street Advisors LLC jordan.terry@stonestreetadvisors.com Contact Information 69PUBLIC ©2015 STONE STREET ADVISORS LLC

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