How Significant Are Overstock’s Bitcoin Sales?
Overstock.com CEO Patrick Byrne announced this week that the company expects bitcoin sales to add $.04 per share to earnings for 2014. How significant is that? Unfortunately, not as significant as one might think.
Background
If you aren’t familiar with the company, Overstock is an online retailer of non-branded and excess merchandise at discount prices. About 85% of its revenue comes from items that are supplied and fulfilled by other companies, while the other 15% comes from direct sales from Overstock’s own warehouses. The company also has a handful of other niche offerings, including sections of its website that focus on fair trade products, “small business” products, and live pets.
Overstock announced in January of 2014 that it would accept bitcoin in payment for sales through its website. At present, the company collects bitcoin payments through Coinbase. Overstock is known to convert its holdings to cash right away, but has publicly stated its intent to hold and spend bitcoins when the economy is mature enough that it makes sense to do so.
Bitcoin is believed to reduce expenses for retailers in several different ways. First, bitcoin transactions are irreversible and cannot be disputed by the purchaser, essentially eliminating the cost of fraud when bitcoin is used as a means of payment. Second, bitcoin processing is cheap. Coinbase says that Overstock pays on average “less than 1%” for the privilege of accepting bitcoin, compared to 2-3% for credit cards. Finally, retailers save a small amount on overhead associated with handling cash, though Overstock’s policy of converting to fiat right away essentially wipes out any cost reduction that could be realized there.
Bitcoin’s Role In 2014 Sales
Overstock expects to earn $.75 to $.80 per share in total for 2014 (some analysts think the amount will be in the $.50 range). If it hits that target, then bitcoin will have added between 5.3% and 5.6% to sales for 2014 at $.04 per share.
Overstock attributes much of its bitcoin business to new customers. That is, the company believes that most of the customers who have chosen to pay in bitcoin would not have otherwise made their purchase at Overstock. However, retailers frequently see a pop in sales associated with adopting bitcoin, but not necessarily a lasting gain. Overstock’s bitcoin sales, which peaked at $500,000 in the first week, have fallen since then to just over $100,000 per week.
To put bitcoin’s impact at Overstock in context, the gains associated with bitcoin could be compared to the savings that might be realized by a reorganization of the back office. In its 2013 Annual Report filed with the SEC, Overstock disclosed that it spent 7.0% of revenue on marketing expenses, 5.5% of revenue on technology and 5.2% of revenue on general and administrative costs. In fairness, if earnings are lower in 2014, then these percentages will likely be higher since they represent costs that are not entirely flexible.
Now What?
Bitcoin’s impact on Overstock is distorted somewhat by falling revenues. So far this year, Overstock has missed its earnings projections for the first and second quarters by 36% and 20%, respectively. Earnings are down significantly from 2013 and so is Overstock’s share price. In response, the company has done a variety of things to reorganize itself to better compete with other online retailers. Thus, bitcoin might be better described as a tactical move to grab more business, rather than a major shift in the company’s strategy.
Overstock is still one of the only major retailers out there that will accept bitcoin. Its sales problems didn’t start with payment processing, so they won’t be solved by it. Nevertheless, the company’s experience could provide some valuable lessons about what bitcoin can and cannot do for other online retailers looking to adopt cryptocurrencies in the future.
