Monday, February 8, 2010

An Overstocked cookie jar

There seems to be a trend developing here. Three months ago, Overstock's stock price was still close to $16. By early December it was at $15. By early January, about $13.50. Now, though, it has fallen below $11.50.

There is a lot of news behind that fall, and I've discussed some of it in this blog, as when the company filed an unreviewed 10Q in November entering into a public debate with Grant Thornton about its books in the process.

Things have gotten worse over the winter. Roddy Boyd wrote a fine article for the online magazine SLATE that proved that diamonds aren't necessarily every girl's best friend.

And this past week? Overstock has acknowledged that its accounting can not be relied upon. Part of the mis-counting to which they've admitted involves those "fulfillment partners" we've discussed here before. I'll quote their dry language verbatim: "Operational errors in the amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related to return processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from the vendor. Once discovered, the Company applied “gain contingency” accounting for the recovery of such amounts, which it has now determined was an inappropriate accounting treatment. Correction of these errors is expected to shift approximately $1.7 million of income recognized in fiscal year 2009 back to fiscal year 2008."

Which means ... what? It means that the company inappropriately shifted to 2009 income they should have attributed to 2008, and now has been gently persuaded to shift it back. This admission is intended to "address all outstanding issues raised in the comment letter dated November 3, 2009 that the Company received from the Division of Corporation Finance of the Securities and Exchange Commission." It also confirms the long-standing charge by Sam Antar and others that Overstock set up a cookie jar reserve to inflate future profits (or, more strictly, to minimize future losses and make it appear that the company is on a path-to-profit eventually).

Antar (who would want me to remind you at this time that he is a convicted felon himself in connection with the old "Crazy Eddie" scam) explained what was wrong with Overstock's booking many times, such as here, and has now done a warranted victory lap here.

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