Overstock - Bear Of The Day

Overstock (OSTK) is an online closeout retailer, offering discount, brand-name merchandise for sale primarily over the Internet. Its merchandise offerings include: CDs, DVDs, magazines, and books, music, videos and games (BMV); as well as bed and bath goods, kitchenware, watches, jewelry, electronics, sporting goods, and designer accessories.

We remain negative on OSTK shares. The company’s business model is flawed. Its gross margin is not large enough to support its operating cost structure. What’s more, competitive pressures are increasing in the e-commerce space, and Overstock.com doesn’t stack up to larger and better-run companies in online retail.

And with the economy weakening further, consumers are becoming increasingly reluctant to spend money on discretionary purchases. As a result, we are reducing estimates for 2008 and 2009.

We believe it is likely that the company will report disappointing results for the third quarter and warn that the fourth quarter will also fall short of market expectations. We reiterate our Sell rating and $7.50 target price.

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