Three weeks before the troubled Internet discount retailer Overstock.com informed investors last Friday that computer woes would drive down revenues and profits in the next quarter, the firm’s chief information officer told vendors about the market moving problems.
With warehouses “stuffed to the gills,” Overstock’s shares had their sharpest one-day move in weeks yesterday, falling to $39.87, down $2.98, or 6.95 percent, on news of the computer glitches.
Last month, Overstock’s Chief Information Officer, Shawn Schwegman, wrote a memo to key vendors explaining that the Internet retailer’s problems with updating inventory were due to “a failure” of the company’s computer system.
He apologized profusely “for the number of problems you all have had to deal with and for the length of time you’ve been plagued with (them).”
Schwegman, who sold 2,700 of his 3,700 Overstock shares in September at $41, according to Securities and Exchange Commission filings, described the key inventory system as “horribly architected.” The letter was first reported in August in the trade publication Chief Information Officer Insight.
In the press release, put out after the close of stock and option trading last Friday, Overstock Cief Executive Patrick Byrne said computer woes had prevented the company from listing new merchandise for the last five weeks.
As a result, Byrne said company warehouses were “stuffed to the gills.” He described the errant computer upgrades as a “shock to the system” and the equivalent of a “heart, lung and kidney transplant.”
Overstock is suing a hedge fund and a research firm for allegedly colluding to drive down the price of Overstock’s stock price, and the computer problems have added to its ills.
Analysts at Legg Mason and Stanford Research downgraded Overstock to “Hold” from “Buy.” The Legg Mason analyst lowered his earnings target to a loss of $.61 per share from a loss of $.20.
Hedge fund manager Jeff Matthews, who has owned puts on Overstock and been a frequent and sharp critic of the company and its management, argued in his own Web log that Byrne should have disclosed this at around the time of the lawsuit filing.
Matthews cited a transcript of a Sept. 15 conference call between Stanford Research clients and an Overstock executive as proof the firm frequently minces words. Then, Overstock executive, Tad Martin, said inventory was in good shape and only slightly ahead of last year’s levels. For retailers, increasing inventory levels means that a company will have to cut prices – and thus profits – to move it.
Matthews contrasted this to the Sept. 16 release where Byrne said inventories were “stuffed to the gills” and rhetorically asked, “Is there a disclosure issue here?”
The company insists the Schwegman memo was not designed to illustrate deep problems with the company’s business or revenue model, but rather spoke to complex technological issues.