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Overstock Finds a Pile of Potential in Buying Up Unsold Merchandise

E-commerce: The firm offers many name-brand goods that others haven't been able to sell at deep discounts on the Internet.


SALT LAKE CITY —'s business plan isn't complicated. When it hears the thud of another dead e-tailer hitting the ground, it tries to drag the body away and rifle the pockets for valuables.

The Salt Lake City-based online retailer has embraced an idea that brick-and-mortar types have long known, but never bragged about--there's lots of money to be made relieving manufacturers of inventory that, for one reason or another, just hasn't moved.

Discount chains such as Tuesday Morning and MacFrugal's do it in the traditional way. says it's a couple of months away from turning a profit doing it online.

Among its bottom-feeding successes is, a Web toy site that went under in June. Now ToyTime's entire inventory is on its way to Overstock's cavernous warehouse near Salt Lake City International Airport. Overstock even bought the shelves from ToyTime's storage center.

The deal brought in about $12 million in merchandise at retail prices. Overstock paid $3.75 million for the toys.

Overstock also buys inventory from viable manufacturers that can't sell their stuff.

Maybe a new model of VCR is replacing an old one; Overstock will scoop up the dated models and put them on its Web site. Maybe a big retailer has told an appliance maker that it doesn't want the last 1,000 Mickey Mouse waffle makers; Overstock buys them.

The company offers the name-brand goods at deep discounts, usually even below wholesale, said Patrick Byrne, chief executive and majority owner of the privately held company.

It's the simplicity, and the apparent lack of competition, that has analysts thinking Overstock may have hit on a winning formula.

While the real world has yet to supply a competitor to run Overstock off the road, the comic strip "Doonesbury" came close this spring.

A series of strips detailed the exploits of two college students who wanted to create, a site that would--surprise, surprise--liquidate the assets of belly-up e-tailers.

There's a subtler point working in Overstock's favor, says Tom Wyman, an analyst with J.P. Morgan. Manufacturers don't want anyone to know that they have products they can't sell through normal channels. It's like admitting defeat.

So what they need, and what Overstock provides, is a way for that stuff to disappear into the marketplace.

"The reason you don't read much about it, and why we don't have the figures for this business, is that the manufacturers want it that way," Wyman said.

Karla Bourland, Overstock's president and chief operating officer, is all nervous energy as she shows visitors around the warehouse.

The company's operations now occupy 100,000 square feet, but it soon could fill the entire warehouse, she says.

All depends on how the Christmas season goes. But mentioning Christmas to an online retailer is like discussing the bar exam with a law student--they get all nervous thinking about the repercussions if they fail.

Last Christmas season was generally good for e-tailers, but when they failed to please customers it was usually because they couldn't deliver goods on time or couldn't handle returns.

Bourland hopes to avoid that trouble and is planning to use the 60 employees in the downtown headquarters to augment a warehouse staff of about 45.

"If copy writers have to come down here and pack boxes, then they will," she said.

The company moved its warehouse operation from Portland, Ore., to Salt Lake City in July so it could better manage growth. It is struggling to set up its operation even while it continues to grow.

Byrne, 37, says weekly sales have gone from a few thousand dollars a year ago to about $600,000 now.

Byrne bought a majority stake in Overstock a year ago through his personal investment fund, High Plains. Published reports have estimated his net worth at more than $100 million, but Byrne declines to discuss his wealth.

He says he jumped at the chance to buy Overstock because he saw a company with a pile of potential that needed a new direction.

He credits his business vision, in part, to a friendship with famed investor Warren Buffett that began when he was 13 and his father was running Geico insurance company. Buffett bought a chunk of Geico after meeting Byrne's dad, the younger Byrne says.

In its August report, the online ranking service Media Metrix puts Overstock at 25th on its list of the most visited retail sites, with 2.6 million "unique" visitors, a measurement that does not include repeat visits.

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