CEO's Corner: Overstock's Byrne on sales, short selling and his bailout contest

Patrick ByrneOnline retailer (OSTK) reported an eight percent decline in revenue and a 20.1 percent increase in gross margins for the first quarter Wednesday, amid a challenging time for retailers.

Last week, I talked with the company's controversial CEO, Patrick Byrne, about the current environment for e-tailers, its monthly $10,000 bailout contest, and an issue near and dear to his heart: naked short selling. Some have called him crazy for targeting journalists and hedge funds for their alleged role in the illegal stock manipulation practice, but he continues to point fingers and says he has proof.

Q: How would you describe the environment for online retailers, compared to brick-and-mortar stores, during the economic downturn?

A: There are updrafts and downdrafts affecting online retail. First of all, consumers are sitting on their wallets -- that's downdraft. That hurts everybody, but it doesn't hurt everybody the same. The updrafts are that there is a glut of inventory because demand dropped off so sharply. And that's going to go to people with the most agile supply chains, which means not brick-and-mortar, but online. Typically it's going to mean eBay, Amazon, or Overstock.

Q: One of the big draws for me personally, beyond the selection on Overstock, is the $2.95 shipping price. Are there any plans on changing that policy due to the recession?

A: No, we won't change the policy. Most of our shipping costs are just built into the price to begin with, and we've always thought that was a good way of doing business. That way, people don't get sticker shock as they check out.

Q: What are some of the hottest-selling items for Overstock right now? Have you noticed a significant change in consumer behavior over the past year?

A: We're having real success with [women's branded high-end] apparel. We have just fantastic pricing on apparel and shoes, and high-end luxury. What's happening is the middle class is wanting to retain the standard of living that they have achieved, even though now they're having to tighten their belts. And the way to do that is to shift their shopping from the local mall to online. We might not have the full range of purses or shoes that some other player might have, but what we do have is cheaper than anybody else.

Q: Overstock is running a bailout contest that pays off $10,000 of debt each month for a family in need. There are still eight months left to win. Can you explain how it works?

A: We pick 10 people at random and then we interview each one. And from them we pick one who we think exemplifies the values that we want to be associated with. We don't give them 10 grand in cash -- we want to pay off actual debt: credit cards, medical debts, and education debt.

[To enter go to Shoppers also have the choice to opt in to the contest when purchasing items through]

Q: Lastly, let's talk about your award-winning blog Deep Capture, which was recently voted the best business blog on the internet for 2008 by the Weblog Awards. It's pretty controversial.

A: Yes. Deep Capture started off with a concern over a type of (illegal) stock manipulation called naked short selling. But I became convinced about four years ago that there was this deep problem going on in the market, and the more I investigated it, I really became convinced that it was a doorway into seeing a number of other problems.

There seem to be a small pack of well known New-York based financial journalists [Bethany McLean, Joe Nocera, Roddy Boyd, Herb Greenberg, Jim Cramer] who really own the hedge fund beat. They're supposed to be reporting on hedge funds, but like what often happens, they just got too chummy with the people that they were supposed to be reporting on. So they kind of turned a blind eye to this activity and probably didn't understand how serious or significant it was.

And then [Deep Capture] went on to say that the government itself -- the SEC -- seemed to be turning a blind eye to this behavior on Wall Street. A few years ago everybody thought it was crazy to say that the SEC wasn't doing its job and was too close to Wall Street. Although now, after the Madoff affair, it's quite clear to people that the SEC had been captured by the industry that it's supposed to be protecting society from.

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