E-tailers lose ... and Overstock.com wins

Overstock.com buys close-out inventory and resells it cheap. The demise of e-tailers has helped fuel Overstock.com's growth. The more e-tailers go bankrupt, the more Overstock.com can buy inventory for pennies on the dollar.

So far, the strategy has worked well. In an interview, Overstock.com CEO Patrick Byrne didn't disclose the size of the profit, but just the fact that the company is in the black says a lot. In the last month, Overstock.com's sales have jumped from $4 million to $9 million a month and early indicators show the company's sales are growing exponentially. The company said it can stay at break-even with $4 million in sales.

Byrne also noted that Overstock.com took $27 million to turn a profit. Of that sum, Byrne, who ran uniform company Fechheimer Brothers for Warren Buffett's Berkshire Hathaway, put up $20 million through his personal investment fund. Byrne owns 60 percent of Overstock.com, which hasn't taken any venture capital handouts, he said.

For perspective, Amazon.com (amzn) has an accumulated deficit of $1.75 billion through Sept. 30 without a profit. eToys Inc. (etys) has a $339.9 million deficit through Sept. 30 without a profit, according to the companies' Securities and Exchange Commission filings.

Overstock.com's strategy is simple -- take a small slice of the $50 billion close-out business. In retail, goods that don't sell get pushed by "jobbers" and other parties, who then sell them to bargain basement stores. It's a fragmented market that Overstock.com could consolidate.

And the dot-com implosion has only helped the company. Overstock.com has purchased e-tailer inventories worth more than $44 million at retail value from the likes of Adornis.com, BabyStripes.com, eHats.com, jewelry.com, Miadora.com and ToyTime.com. The company also bought Gear.com, a sporting goods e-tailer, in an all-stock transaction.

Overstock.com's purchase of ToyTime.com's inventory illustrates how the company makes money. ToyTime.com had $8 million in inventory based on wholesale prices that could have been sold for $10 million to $11 million retail. Byrne said Overstock.com got ToyTime's inventory for $3.7 million. The margin gives Overstock.com "a lot of room to play," and to throw in perks like free shipping, said Byrne.

The company also partners with e-tailers and retailers to move goods anonymously. Retailers often don't want to upset suppliers by cutting prices just to clear out inventory. Under that scenario, Overstock.com takes a commission, said Byrne.

Overstock.com has kept its expenses low. The company's Utah warehouse cost $2.5 million to build. Byrne shunned the automation other e-tailers crave because it doesn't make sense for moving close-out inventory.

Byrne isn't shy about the company's ambition. "The pure play e-tailers won't last," he said.

"We'll be opportunistic," he said. "Closeout buying has been around a long time."

Byrne admitted that he keeps tabs of publicly-traded e-tailers such as eToys, Ashford.com, Buy.com (buyx), and their financial prospects. If Byrne's forecast that these e-tailers won't last is correct, Overstock.com could swoop in and buy their inventory in bankruptcy court.

But there's a catch.

Overstock.com would need a lot of capital to buy out the inventory of a big e-tailer, and that may dictate an initial public offering in 2001. Byrne said there's a 50-50 chance of an IPO, but for now he doesn't want to talk about offerings. Employees that yap too much about IPOs face grounds for dismissal, said Byrne.

"You run a company like the stock market doesn't exist," he said. "Running a company for market hype is fatalistic."