Overstock.com blames surprise loss on Google

Is the search giant at fault for the online retailer's unexpected quarterly hit?

By Benzinga Mar 2, 2012 8:41PM

Image: Creditcard Computer (© Stockbyte/SuperStock)By Daniel James Hayden IV, Benzinga Staff Writer

Overstock.com (OSTK) shocked investors Friday by announcing an unexpected quarterly loss and plummeting revenue.

The online retailer reported a fourth-quarter loss of $3.4 million, or 15 cents per share, compared with a profit of $14.9 million, or 63 cents per share, a year earlier. More worrying than the unexpected loss was a huge drop in revenue to $314.1 million from $348.9 million. Analysts were expecting earnings of 45 cents per share on revenue of $377.6 million.

The company blamed much of its poor performance on a dispute with Internet search giant Google (GOOG). Last year, Google punished the company for not complying with Google's search guidelines. Overstock.com made changes to conform to Google's rules, and Google let it out of the penalty box last April.

"During this penalty period, we dropped significantly in some Google natural search result rankings," the company said. It was able to offset some -- but not all -- of the revenue hit by spending more in other marketing channels.

That's not all. While Overstock.com was getting less traffic from Google, the company was hurt by an ill-advised attempt to rebrand itself from Overstock.com to O.co. That's not a typo. It actually wanted the name O.co. The company said that it lost revenue because prospective customers had a hard time actually finding the company's website. Imagine that.

Well, those increased marketing costs contributed to the unexpected quarterly loss. Now that Overstock.com is back in Google's good graces, it's possible that revenue and profits could shoot back up. However, there's no way for investors to know how much Overstock.com was profiting by bending Google's rules prior to being penalized. If bending Google's rules was a major factor in Overstock's profitability, the company might not be able to recover.

It's also worth noting that Overstock.com saw sales plummet during a time when the American economy seemed to be recovering and brick-and-mortar rivals like Wal-Mart (WMT) and Target (TGT) have been able to increase sales. Traditional retailers have often complained about the advantages that their online counterparts have, such as not having to collect sales taxes in some states. They have worked hard to fend off competition from the likes of Overstock.com and Amazon (AMZN). If Overstock is unable to earn a profit and its sales plunge while other retailers are thriving, its future could be in peril.

Overstock.com shares plunged after the company released its disappointing earnings results, as investors dumped shares. The stock closed Friday down 11% to $6.11 per share on extremely heavy volume.

Investors might do well to stay away from this stock until the company can prove that its success wasn't dependent on bending Google's rules.

More from Benzinga:
Mar 5, 2012 9:38AM
When another company controls your sales you are doomed.
Mar 5, 2012 9:24AM
Google needs to publish set rules and stick with them. It's hard to play the game when they keep randomly changing them. It takes hard work to get your sites search results up only to see Google change the rules and wipe it all out. Sometimes ( in most cases) the rules are so vague most don't really understand what they are . Maybe it time for internet search engines to adopt a comprehensive set of rules that they all must abide by?
Mar 5, 2012 9:26AM
It's also important to point out that shipping costs are turning off a lot of online shoppers. UPS and FedEx continue to raise prices to ridiculous levels!  
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