Overstock Hits Bankruptcy Watch List

Happy Labor Day!

Re-inviting your to brunch

Saving Overstock from Bankruptcy

A Brunch Re-Invite

Due to some scheduling changes we need to move brunch. All the details here.

We have some incredible questions for Matt already like: When is the right time to sell? What KPIs are acquirers looking for when buying your Biz?

The quick refresher:

• Date: Wednesday 9/27 9am ET

• Audience: 15 other eCom Brand leaders

• Location: NYC. Have to RSVP to find out

If you know anyone in NYC who should come forward them the info here.

Now let’s dive into the worst acquisition of 2023. Overstock buying Bed Bath & Beyond.

Overstock Hits my Bankruptcy List

Overstock wins worst acquisition of 2023 for acquiring Bed Bath & Beyond (BB&B) for $21m and is landing Overstock on the Bankruptcy Watch List.

Down -13% since Aug ‘18, trading at $24.73/share with a $1.1B market cap. Overstock took the worst part of BB&B and made it the star of the show.

It doesn’t look that bad for Overstock, but they made a critical error here and are going to be paying for this acquisition for a long time. This is such a bad decision I wouldn’t acquire this biz, but let’s dive into what they got wrong on this acquisition and how we can salvage this biz.

The Financial TLDR:

This marketing is dying in the discount death spiral.

• The company is disciplined but aggressively shrinking.

• Active Customers are down -36% YoY.

• Crushing already thin margins.

The market completely whiffed this acquisition analysis. Bed Bath & Beyond was an incredible brand that will turn into lipstick on a pig.

First let’s cover why Overstock would even make this deal. Then what to do about this calamity.

Overstock was born when it acquired D2Direct out of Bankruptcy in ‘99. They started liquidating inventory of 18 failed dot-com busts. Since then it’s known as the online bargain destination.

Liquidating other brands products that don’t sell at below wholesale prices has always been a razor thin biz model. But there are massive brands that crush in this category.

Overstock had a brutal 2022 Getting hit hard by the Post-Covid reset.

• Active Customers fell 36% YoY.

• Causing Rev to fall 30%.

• COGS + Sales & MKT decreased in line 29%

• Flipping a ‘21 Net Income of $171m to a ‘22 Net Loss of -$35m.

A brutal narrative of unprofitability in this market. So the natural question to solve:

How do we increase Customers → Get back to profitability?

Right problem.

BB&B is the wrong answer.

Here are 3 mistakes Overstock made + it’s 1 potential savior

Mistake #1 Completely missed the brand value of BB&B

This acquisition is spreadsheet smart, but a terrible biz decision, and Overstock won’t realize how it until it’s too late.

Customers rated BB&B a Top 5 Retailer because of their incredible (and sometimes overwhelming) selection. Not because of the constant discounts.

Discounts were a ploy increase customer visits and the reason why they ended up bankrupt. The entire value of acquiring a Top 5 Retail brand like BB&B is to take the best parts of the original shopping experience and graft it into your specialty.

If you look at BB&B Homepage now. Everything on the site is SALE SALE SALE.

That doesn’t solve either companies’ core problem, and keeps Overstock at crushingly thin, eroding margins. They just carved out the cancerous part of BB&B and made it their main biz model.

Takeaway: A new face on a bad model doesn’t fix it.

Mistake #2 The brand arbitrage will backfire

I’ll give Overstock 2 points of credit:

1. The convinced ‘the street’ to an expensive rebrand.

2. Inherited BB&B Sales

An est 25% out of BB&B’s $6B sales were online = ~$1.5B. Even if Overstock can retain 10% of that they just inherited $150m in sales. Roughly 7.1x ROAS.

Genius right?

Probably for 6-12mos, but the problem is the shoppers that stay aren’t the shoppers you want.

• They’ll tear through the deepest deals

• Wear the company’s margin down

• And defect when they can’t catch the ‘deal high’ anymore.

Aka vampire customers.

Overstock is stuck with the same problem that lead BB&B to bankruptcy, but at smaller scale.

Takeaway: Merchandise wins Customers. Not discounts.

Mistake 3) Completely missed the market

I have no idea who’s on their strategic merchandising team but I have so many questions. Overstock is struggling because the ‘Pimp Yo Crib’ trend is over. Aka people aren’t buying as much Furniture, Home goods etc.

So what do they do?

Acquire one of the most well known brands in the home goods spaces. They saw the cards stacked against them in their biz and decided to double down.

Plus they even didn’t acquire any of BB&B’s inventory. Their literal biz model. So they’re just selling the same Overstock merch that they had trouble selling under a new logo.

The obvious move here is DIVERSIFY merchandising categories. They need to think like an investor. If the home vertical just had record profits but demand is falling off a cliff. Diversify into new categories that match your sweet sales spot.

Overstock’s model is liquidating over extended eCommerce bizs. There are plenty of those on the market. Some in verticals where demand isn’t plummeting. One that should have been staring at them right in the face.

Takeaway: Analyze sales trends. Skate to where the puck is going.

Final Thought: The Turnaround

How I’d save Overstock from bankruptcy.

I’d flip the whole to TJ Maxx ($100B Market cap) for Overstock’s Tech + digital expertise.

TJ Maxx is what Overstock aspire to be. A biz that successfully liquidates unsellable inventory to discount shoppers. The difference: TJ Maxx crushed this model in retail, which is better suited to this buying behavior and has the immense economies of scale to make the math work.

How strong TJ Maxx is in retail is how terrible their web experience is. If I was working at Overstock I’d be hunting down TJ Maxx’s Corporate Development team day and night to get this deal done while the Press is still hot.

At 0.8% of TJ’s market cap this would be modern online buying experience injection into a Retail behemoth. There isn’t much that’s novel to this strategy. Retailer modernizes their online experience through the DTC channel while supercharging the Retail channel:

• Make the online shopping experience engaging and enjoyable.

• Unlock digital ads and CRM advertising to build your brand.

• Launch Buy Online Pick Up in store

• Sell ads on the ‘digital marketplace’

Target, Nordstrom, and a ton of other traditional Retailers have already done this. It’s really a catch up game for TJ Maxx.

Or they could follow the Walmart playbook:

1. Acquire Overstock/BB&B for the learnings & internalize the processes

2. Strip it to pieces

3. Divest it once they’ve adapted the best practices.

Either scenario TJ Maxx can acquire this biz for a fraction of their worth and roll it into what’s already working. At a minimum if they see a 1% lift on their current biz it pays for itself.

🧠 The Takeaways

Smart business decisions can still be incredibly bad moves for a company.

1. Merchandising is the key to a successful biz. Not discounting.

2. Certain models need certain scale to work. Overstock isn’t aligning there’s well.

3. Markets make brands. Don’t think you can swim against the tide and win.

👷 What can you do about this?

1. Rethink your discount strategy. How can you run less discounts and sell more products that don’t require them?

2. Split your killer inventory from your inventory that needs to be killed.

3. Always have the right mix of hit products today and what will be hits tomorrow.