Letting Overstock Die

TL;DR

- My biz-hunting journey. 4 years in the making

- Overstock wins the gold medal for worst company. We ain’t buyin’.

🧠 The Takeaways

Overstock bought a one way ticket to bankruptcy. We aren’t buying today but analyzing where it went so wrong.

A slow moving Clearance biz with no assets has nothing to sell.

Never acquire assets just because they’re cheap and available.

Acquirers always have to have exit options in mind.

+Why you need to chase without getting paid before you create your masterpiece.

LBAB Community - Biz-Hunting for 4 years

The most important lesson I’ve learned in the last 4 years is that the “follow your passion” advice is nonsense. 

Really, what I’ve learned is that you should work on things that you’re great at, you’re interested in, and that you would work years on without getting paid.

While I went full-time on LBAB! earlier this year and started sharing this journey publicly, I actually started 4 yrs ago during lockdowns.

I completely misread the market at the time. 

I thought:

It was going to be a repeat of ‘08.

It was going to be a great time to scoop up shutdown brands for cheap. 

So, I obsessively learned about scooping up bizs.

There was a solid 4–6 week period from March–May where we were completely unsure if eCom was going to survive. Could we get products out the door? Would consumers have the money to buy without working?

Of course, it ended up being the largest eCom boom. But in that 6 week period, I went super deep.

I was cutting early stage checks through the original version of Because Ventures and running Messenger Mastermind, consulting on 6-fig product launches and SMS management.

I thought it’d be the perfect time to buy an agency or eCom biz. But eCom took off and it was one of the worst times to acquire an eCom asset because valuations went to the moon.

I joined Roland Frazier’s EPIC challenge and founder networks, scoured listing sites during the most expensive (multiples) period in the last 2 decades to acquire eCom bizs. 

Brands were winning from the COVID boom

VC dollars poured into the space

Aggregators bought so many bizs, inflating multiples

PE firms started buying earlier brands because of high valuations

I ultimately decided to partner with David Gitman and rerun his successful playbook with a modern twist:

Acquire an eCom brand as the platform biz. Scale it through other acquisitions.

Build/Acquire SaaS bizs that solve the platform brand’s problems.

We decided to run a Venture fund from 2020-2023. After cutting 10 checks, we started getting calls from PE firms to help them with diligence and sourcing deals as the “eCom guys”. 

Looking through distressed deals or big growth rounds. We realized we weren’t done operating and wanted to run the playbook one more time. 

The 4 year journey taught me this (researching bizs, reading P&Ls, meeting founders, dealflow, creative ways to acquire assets) was something I was great at and wanted to do for free until I mastered it.

This year, I decided it was time to bet the farm on those skills. The dealflow was there. Market timing was there. Investor interest was there. Now, I just need to make it happen.

Toiling for a long time to get great at something maximizes the value you can ultimately extract.

You’ll develop skills that are so valuable you’ll take care of yourself in one way or another.

Let’s Examine This Biz

Overstock, oh sorry… I mean, Beyond 🤢, is in the fast lane to bankruptcy running one of the dumbest plays I’ve ever seen.

I should be more excited about their acquisition spree, but the numbers don’t show the brilliance. 

Trading at $17.97/share with a $821m market cap, it’s +7% L5 but -83% since its Nov ‘21 peak.

Let’s cover the 3 fatal mistakes Overstock made and what we can learn from them.

Financial Summary

TLDR Analysis: Every Trend is the wrong direction

Rev is Falling while COGS, Marketing, SG&A, & Tech are all rising 🤮

3 year Rev growth rate is -43% 🤮

Gross Margin % is falling to 20%.  🤮

This is what the discount death spiral looks like. Once the sales momentum slows, everything implodes because the margin erosion combined with increased OPEX demolishes anything that used to resemble profits.

Let’s Strip This Biz!

Here are the 3 fatal mistakes Overstock made that will be the final nails in its coffin.

1) There’s nothing left to sell

How do you fire sell a biz filled with clearance items?

Let's go back to the beginning of Overstock and Bed Bath & Beyond. Their founding stories determined their doom.

Overstock started in the Dot com bubble as a way for the bankrupt brands to liquidate their inventory at below-market costs, so investors could recoup some of their money.

These companies were literally overstocked. They needed a place to dump their inventory, and there was a new, cheap way to get customers' attention in the early 2000’s: eCommerce.

Bed Bath & Beyond, on the other hand, was playing the opposite game. 

In the 1980’s, when big box retailers could amass huge product assortments to get cheap foot traffic + high cart values, they used aggressive discounting to incentivize customers to come back more frequently (Recency & Frequency).

The high repeat customer rate + big cart value made the classic Retail razor thin margins math work.

But the last 30 years have destroyed both of these biz models. 

Between Amazon and Chinese Powerhouse dropshippers like Teemu, Shein, and others, the American Clearance model doesn’t math anymore.

It’s impossible for an American biz to clearance an item for cheaper than a Chinese manufacturer can ship it directly to a customer.

And Amazon has decimated the in-person retail experience.

There's no real assets left in this biz.

They're buying products that people don't want and can't sell them for cheaper than alternatives directly from Chinese manufacturers.

It’s a losing game.

They’ve already re-platformed to Shopify, which was a brilliant cost saving strategy, but they don’t have any Tech assets here to sell off either.

(Although they clearly aren’t leveraging the migration well since they are still spending $117m/yr on technology. Such an easy place to cut.)

The model doesn’t work, and there are no assets left for us to strip here.

Takeaway: Should have gotten out when the getting was good.

2)  Just because something is cheap doesn’t mean you should buy it.

Overstock went on an acquisition spree in ‘23, snapping up Bed Bath & Beyond’s digital assets +  Zulily (another clearance style biz).

You can even see from Google Search who the competition is. Hint: Zulily went bankrupt because they couldn’t compete on price.

My greatest question: why buy either?

This is such a common mistake I see successful founders make. 

“I could buy it. It’s cheap!”

It’s easy when a competitor or brand you’ve been tracking comes inbound saying they're interested in selling. But who cares that they want to sell to you? Is it really valuable enough for you to go through the M&A headache?

Answer: no.

Don’t add more of the same to your biz.

The biggest mistake Overstock made was—in years of declining sales and margins in a struggling clearance eCom biz—buying the digital assets of struggling/bankrupt brands selling low quality goods that customers weren’t buying.

They didn't diversify their product mix.

They didn't diversify their channel mix 

They didn’t diversify their customer segment.

They bought more of what wasn’t working!

You have to buy an asset that’s additive to your biz. You always need to think:

What's that next thing?

What's that big unlock that you haven't been able to do yourself that this acquisition can?

Takeaway: Don’t buy just because it’s cheap.

3) There’s no acquirer left for this biz.

The real reason that I wouldn't touch Overstock while wearing a biohazard suit is there's no acquirer left to buy this biz after us.

If you look at all the big players who could afford Billions to acquire it after we fix it up... 

No PE firm is gonna touch this until it's got years of positive cash flow.

There’s no 1+1 = 3 value for strategics. They already made these investments.

Overstock is no longer working in a new/innovative space.

All the bigger players who could afford them already have solutions in place.

Walmart internalized Jet’s major findings on Walmart.com.

TJ Maxx has a better bargain hunting CX on TJMaxx.com.

Wayfair is dying in the same death spiral, selling Home Goods/Outdoor product customers don’t want.

Maybe you could expand the product mix to other categories that are doing better, dump it to Wayfair, and let them be the 5th owner of this terrible biz model.

But to acquire it at this point for that play is like running into a burning building to make a quesadilla. Could be fun, but the risk-reward ratio doesn’t register.

Takeaway: Exit options define your playbook.

Final Thought

I’ve gone on this rant before, but this is another example of why race-to-the-bottom bizs are terrible ideas. Once you get past the growth phase and to the profit extraction phase of a biz, someone will always come in and race to the bottom below you, toppling the biz model.

The problem that all of these bizs face(d) is they never matured out of their original arbitrage. 

Most incredible bizs start as some sort of cost saving arbitrage, but over time, they mature out of them and create something of true value, not related to pricing that is why customers buy from them over the long run. Services, Curation, Exclusivity, etc..

The other reason I hate these bizs is there's no real exit play here. Bankruptcy is typically the outcome. No one wants to buy these bizs because in acquisitions you are acquiring Gross Margins. These bizs don’t have any.

Investing more money to generate more Gross Margin $$ (Product + Marketing) and spending less below the line is how to create the most value in a biz. It’s what is rewarded most in an exit.

For a biz model that is entirely built on reducing Gross Margins via offering the cheapest products, it’s hard for acquirers to get excited about it.