Overstock.com: Feeling the Need For Speed

By Evan Schuman  |  Posted 08-03-2005 Print Email
Overstock.com and its IT department are growing incredibly fast. The CIO and vendor disagree about how fast, exactly, but a live-at-the-office mentality and pressure to respond to customers in real time keep the joint jumping.
The Overstock.com Web site is all about pricing, as it pitches itself as saving consumers as much as 80 percent compared with other retailers. But in its rapidly growing IT department, the obsession is speed.

How fast? During a recent major deployment of some large Teradata packages—including CRM, profit analytics and an enterprise data warehouse—Teradata bid on the assumption that such large installations typically take between nine and 12 months to deploy. Overstock's IT department finished the deployment in 70 days, said company CIO Shawn Schwegman.

A less dramatic example came with Overstock's deployment of a massive suite of financial and customer service programs from Oracle, for which the database leader allocated 12 to 18 months: Overstock wrapped up deployment in about five-and-a-half months, Schwegman said.

As the six-year-old company looks to become the newest member of the billion-dollar-retailers club—a goal analysts expect it will reach in less than a year—company executives still paint it as still very much of a startup. The similarities include a doubling of its annual revenue and gross profit growth in this year's first quarter soaring 194 percent.

During its most recent quarter, Overstock.com reported $151 million in revenue, but CIO Schwegman says past company growth rates suggest the company's annualized earnings will top $1 billion within a year. Wall Street analysts agree.

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Rebecca Kujawa, with the Stanford Group, said her analysis puts Overstock well over the $1 billion mark during the next year. Asked about the CIO's prediction, she said, "We actually have higher expectations than that. For 2005, we predicted $866 million in revenue and for 2006, we have predicted $1.3 billion."

Derek Brown, an analyst at Pacific Growth Securities, said the billion-dollar prediction "is certainly possible. Our numbers say revenue will actually be greater than $1 billion a year from now."

The number of products being sold has also increased rapidly. Today the company offers 1.2 million SKUs (including about 600,000 active SKUs) compared with 15,000 SKUs (and about 8,000 active SKUs) four years ago.

The company's growth has come due to a business model that benefits both its customers and suppliers, Schwegman says. Customers get discounts on designer merchandise and suppliers get "one avenue to dump excess inventory."

"If you have one channel that you are selling through, that does not destroy your brand," Schwegman said. "We can protect the pricing a bit more. We don't whore it out to the grey market. We save consumers money by allowing them a single place to go to pick up these huge deals."

That kind of growth gets dicey, however, as its technical infrastructure grows to support a vastly larger business, especially when the business is as dependent on IT as is a high-volume retail Web site.

How crucial is IT to Overstock? The company had to delay its earnings announcement this summer partly due to an office move and a corporate acquisition, but also because of the work involved in implementing its new Oracle and Teradata systems.

And when Overstock.com did finally report its quarterly results this month, Wall Street was not thrilled, partly due to Overstock's IT costs.

A report from Pacific Growth Equities, for example, lowered analyst's recommendations of the company's stock and intimated that Overstock is suffering from the same growth-fueled losses as did other dot-com companies during the stock-market bubble of the late '90s.

"It feels like Groundhog Day all over again, with higher revenues driving greater losses," said the Pacific Growth report. "This quarter offers yet another example of Overstock.com's ability to grow revenue rather impressively (albeit not as impressively as we had anticipated), yet lose an ever increasing (and near record) amount of money."

The report criticized higher-than-expected administrative overhead as Overstock "continued to undertake extensive technology infrastructure build-out. Importantly, management made it quite clear that these investments are likely to be ongoing and not one-time in nature." Schwegman says that at least some of the IT projects that are consuming capital will help keep a tighter lid on expenses, which is one reason his crew put so much effort into getting the Oracle and Teradata systems up quickly.

Next Page: Seventy-hour weeks get the job done.



 

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