Overstock.com Inc (OSTK) 2003 Q4 法說會逐字稿

Good morning. My name is Sylvester Carter, and I will be your conference moderator today. I would like to welcome everyone to the Overstock.com's third quarter 2003 financial results conference call. At this time all lines are in a listen only mode.

Later we will announce the opportunity for questions and instructions will be given at that time. If you should need any assistance during this call, please press star 0 and someone will help you.This call is being recorded and will be available for replay beginning today and ending February 4, 2004.

The replay can be accessed by dialing 888-203-1112. Again, that number is 888-203-1112. You may enter the access code of 613313. Again, that access code is 613313.

At this time, I would like to turn the conference over to the treasurer of Overstock.com, Ms. Catherine Long Hadley.Please go ahead, ma'am.

Thank you and welcome to Overstock.com fourth quarter 2003 and fiscal 2003 conference call. Participating in the call today are Dr. Patrick Byrne chairman and president and David Chidester, Vice President of Finance.

Before I turn the call over to Patrick, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, January 29, 2004 only. As you listen to today's call, I encourage you to have our press release in front of you, including our financial results, detailed commentary and the president's letter to shareholders.

It is important to keep in mind that we will make statements in the course of this conference call that state our intentions, hopes, beliefs, expectations, or predictions of the future.These constitute forward-looking statements for the purpose of the Safe Harbor provisions under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 within the meaning of section 27A of the Securities and Act of 1933, and section 21E of the Exchange act of 1934. These forward-looking statements involve risks and uncertainties that could cause Overstock.com results to differ materially from those projected in these forward-looking statements.

Overstock.com disclaims any intention or obligation to revise any forward-looking statements, additional information concerning factors that could cause actual results to differ materially in these forward-looking statements is contained from time to time in documents that the company files with the S.E.C, including but not limited to its most recent report in forms 10K, 10Q, 8K and S1. With that introduction, I will turn the call over to Patrick.

Thank you, Catherine. Thank you, Sylvester. This is Patrick, steady as she goes, Byrne.

I want to go quite quickly to questions. I just want to open with a few comments. One is just, the, I have already outlined the feedback, nicely, from last night. We are old school here, we are as old school as can be. I want to emphasize that when we say, when I say X, I really mean X. I am not -- people are trying to read, people sometimes try to read between the lines in different ways, and it's really, really keep it simple. We are not trying to send subtle messages about anything.

We also have what we call here the grandma test. Which is, we think of the shareholders as grandmothers, and is it fair, what is the right way to treat a grandmother in terms of knowledge of what is going on and so on and so forth.

And lastly the point is we are all about building intrinsic value in the company here. That's all we care about.We don't care about the stock price, we don't care about -- we just don't care about the normal things that lots of people care about in this business, especially, and I mean in this industry. So we are really about intrinsic value. I think we have been focused on building the intrinsic value, and I think this last quarter, we did so successfully. I think this is the intrinsic value of this business is a lot greater than it was a quarter ago or year ago or two-years ago.

I am sitting here with David Chidester, so with all that said, I would like to turn this over to questions, Sylvester.

Thank you, sir.

If you would like to ask a question on today's call, press star 1 on your touchtone phone. Again, that is star 1 to ask a question. If you are on a speaker phone, please make sure your mute function is turned off. Once again, that is star 1 to ask a question.

We will pause a moment to assemble our roster. We will take our first question from Glen Crevlin with Glen Hills Capital.

Good morning, Patrick. Good morning, everyone at Overstock. Fabulous quarter.

Thank you.

Glad to see that sales accelerated here. Just a couple of questions. One is, Patrick, as you are getting scale now, substantial scale in the business, can you talk about the buying opportunities of the company? Because that is really the critical -one of the critical issues here in terms of supply and the breadth and depth that you can buy.

And then secondly I picked up within the press release, you signed it president. Can you walk me through what's on your mind there?

Okay, sure.

On the buying opportunities, they have really never been better. They have never been close to like this. We have established such credibility, both in terms of our ability to move a lot of product. The advertising campaign, the big O, discover the big O, had an unanticipated benefit, which is the vendors really know about us. It is so different for us now, when we go to a trade show or to a convention and computers, electronics, apparel, everybody knows about us on the vendor side, and we are looked at as a really legitimate channel. It's so different. I laugh about, four years ago, I was down at CES in the booth of one of the large electronics dealers and they literally called security on me and rushed me out of the booth. Because, as soon as they saw who I was, they wanted nothing to do with me and I was putting the hard sell on them.

Now we are meeting with the executive vice presidents of the company, CES, who know all about us, want us to be, you know, want to give us first crack at their closeout list and move mountains for us. It was such a different world for us than it was four-years ago when we were getting this going.

On the president thing, we had an offsite planning meeting a lavish over stock, off site planning meeting where the executives went away for four days to fabulous Wendover,Nevada, stayed in a $39 a night motel, and we really got our minds around who we are and reemphasized for for ourselves that it is a lot of it, of what we are about, is cost cutting, and just being really -- being the best on cost that there are.

And as part of that, what came out of that was a decision -what we fear is , and we have all seen it here and other companies, you know, where you come back and there's some mediocre, you know, CTO making $250,000 or somebody who is reporting to him as a VP or something, he has to be making making $150,000 and everything is up. So we voluntarily, the executives, have -- did two things.

Everybody cut their pay. So the top pay grade for an executive here is $75,000 to $100,000. Now, there will be bonus pay based on good performance above that. But everybody voluntarily, and I really did leave it up to them, took that deal. So everybody is paid $75,000 to $100,000 and we gave up all C titles. I am not CEO any more, Dave, for some legal reason we will need a CFO, Dave will, but no one is allowed to have a C, no CFO, CTO, or anything. It is all old school, we are president and vice president.

And by doing that, it's not just about the executive pay, it's, by keeping inflation from occurring there, we will keep, I think, we will put a lid on costs bloating up in the rest of the company. So from now on, just see me as president and chairman, David as vice president of finance, former CTO is vice president of technology. It may seem like a small matter but I think small cultural matters like that make a difference.

One last thing, Patrick there was a rumor that you had done a transaction to head some of your securities. Can you just talk about whether that is fact or fiction?

Yes, okay.

We are a little early to get my blood pressure up. I would love -- I will give three pieces of data, and you guys know, anybody, that this is not my strong suit, but I have three pieces of data.

One is there are three investments banks out there that are the back offices of the real short selling, about two-weeks ago, somebody called me to tell me that the shares in our stock had gotten so short, that one of those three companies, those three being Morgan, Goldman and Bear Stearns, that one of those three had gotten so -- that one of those had gone out and loaned out 300,000 shares they didn't have. Somebody told me that two, three weeks ago. I don't really know what it means. Two nights ago somebody called me and said, I just have to check on a rumor, I am hearing that you you traded out a stock using synthetic derivatives, or something like that. It's a large shareholder, the kind of guy who would yank my chain on about that is probably on the call. I thought he was just kidding me.

Last night someone called me and told me in particular, there's a guy out there, there is a guy out there who is spreading this rumor from one of these banks, and spreading this rumor, who knows if it is to help him in his own position or what. You know, A, it is total, B, anybody who even wouldn't know that is on the face of it should sell this stock. If you don't know me me me.That doesn't pass the grandma test, literally, Jason and I were talking about this morning. I literally, if a banker came in here and proposed that I literally would not let him out of the office without slapping him around. So there is no chance that would ever go on. Put me down as undecided.

Operator. Next question.

We will take our next question from Patrick Duff, with Prospects Associates.

Hello, Patrick, good morning.

Good morning, sir.

Congratulations. It has been a choppy period this year, but you guys finished up with stellar success this quarter.

Slow start but fast finish.

Yes. Patrick, do you think, listen, no projections and no guidance or any of that stuff, because no one knows what the future may foretell, but do you think we could spend a minute or two on the road map as we go forward and some of the sign posts, what you have, as you take stock of the year that has just finished and you set your sales for the next the the couple of years, what would be the road map that you think we are looking at?

Great question.

I did say at the end of the year I was going to give, earlier in this call I would give guidance of a short. I don't want to do it in the conventional way. I think that -- I don't think that, yet, we have got a couple of analysts who understand our business. But, not fully. I think that we can take a more aggressive posture than people are planning.

I think that we can -- our road map is basically to be a break even and growing at rates of -- break even on a yearly basis and growing at rates of 100% plus for a couple of years, and then throttle back the growth and have a multibillion dollar company that can make, you know, $50 million, $100 million a share, not share, $50 million, $100 million if everything, you know, works out well.

So it's not the, it's not the model that says I am going to lose $3 billion as I get there. We have lost 62 million to date, and I am embarrassed about take, although I think about 8 million of that showed up as part of a merger. But, so I am 8 million less embarrassed. I am still embarrassed about that. Any way, I think we can grow very fast at break even, pouring profits back into marketing and into better pricing for customers, and within a short order, have a $2 billion, $3 billion company that is capable of making 3 to 5% when we want to throttle back growth.

One follow up, when I get a detailed question is, you mentioned in the letter about the warehouse and some of the changes that were made here in the last quarter, and I am just wondering, for this year, what are the opportunities, specifically, in the warehouse so that they will be in, you know, the handling costs, as far as product, you are trying to get some more efficiencies efficiencies out?

Okay, I will turn that -- I will let David answer that first, and then I will pile on.

Yes, I think as we, as we went through some challenges as Patrick mentioned in the fourth quarter, and getting through, you know, some constraints we had in the warehouse, I think what it did for us, is it helped us recognize and see some efficiencies that could be gained. And we had a great quarter, as far as gross margins, made a nice improvement, even with some of the inefficiencies that we experience there. And so, I think Patrick, you know, can maybe identify some specific things. But overall, I think we can see some real improvements that can be made this year in the warehouse.

Yes. I will touch, I will throw something on there.

Just in terms of our warehouse handling cost per package, customer service costs, and inbound and outbound freight we see real cost savings opportunity in each area.I see is enough in there, it just kind of breaks my heart that I let it, I let it slip past last year. But I think, out of $12 million that we lost last year, I shudder to tell you you how much I think could have been saved by just just squeezing pennies out of different areas.

But I think there are a couple of few points to be added to gross margin just by, just by squeezing pennies and more than pennies out of operations. I think it can happen quicker than -- there may even be more than that. I think it can happen a bit more quickly. I don't think it will take a year to get them, to get those savings.

Okay, that's great. Thanks a lot. And good luck.

Thank you. And while we are waiting for our next call, I have an idea, if anyone is out there, spreading this rumor, there are probably people on the phone who knows who it is e-mail me at Patrick@.Overstock.com during this phone call, please just email me. Okay, Sylvester, we'll take our next question.

Our next question from Bill Lennon with WR Ambrick.

Okay, I have a laundry list of metrics that I hope you can help me fill in.

First on the business side, can you talk about advertising plans for 2004, you mention in your letter, Patrick, the possibility of up to 50 million in online, the operative word there is online advertising what is the role of the big O campaign, and radio/TV/print advertising in your '04 outlook, that is question number 1.

Okay, do you want to give me question number 2?

Question number 2, for the now defunct COO position, which we won't call COO any more, I guess VP of operations. What are your plans to fill that position? I guess I will leave it at at -- at that.

Okay, let me hit all of those, we will go to metrics and Dave will follow on.

On online, thank you for pointing out, because I got a couple of questions, phone calls last night about 50 million. That 50 million as in online spending. I am not talking about super bowl adds. We are talking about 50 million in online spending. For comparison last year we did 20 million in total marketing and some chunk it out, as you know, the O campaign.

So 50 million would be sort of more than a tripling of what we spent online last year. Looking for the opportunities to do it, but we have this very strict standard, as to what the payback is, that is, you spend a dollar to drive $7 or $8 of sales, which turns into $1.01 of gross profit, and then so the dollar has, on the first buy, basis, I am not talking lifetime value, we are expecting them to come back again. I am talking about pay for performance ads which are self - funding. The dollar that you spend on the ad is paid back the same day from gross profit on the transaction it drives. So if I could spend $50 million within that metric, I will. Truthfully, if I could spend $ $500 million on that metric I will because $500 million would generate $4 billion in sales which would turn in $501 million.

So we are not going to rise above our principles. We will remember the principles that got us here and that is pay real close attention to the to the payback on marketing. In fact, aggregates are misleading. I am sitting here with very smart people who dig into the aggregates from last year. We realize some of our advertising did better than we thought which means that some did a little worse. We just have to get a little more granular about that payback. I think we have really uncovered some opportunities both for savings and for spending extra money.

My goal is, my problem really is not having enough places to slide those, that money into. I would love to find some bigger places, I mean, sounds like a high quality problem. We don't have enough places where we can spend that money in a place that meets our standard. But we will never relax that standard. That's a great discipline to have.

Secondly on the big O.We have dramatically scaled back the campaign.I don't want to kill it, because it's kind of wasteful, I think, to have spent X many millions basically in the fourth quarter and then to have it disappear. So we are keeping a low level, but I think we have probably cut back 90 to 95% on the discovery the big O campaign.

But you will see, you will see maybe some opportunity buying, and buying around, about around certain holidays, but it -- we keep -- we will keep that on a shoe string. It does not meet the same mathematical standard, we spend a dollar there, and get $1 of gross profit. I think, you know, from our analysis, it has to be to be cities particularly driven. And then, so there is rubber in this. We think that you spend a dollar there and you get 50 to 70 cents back in gross profit. Now we should maybe dial that in, get 50 to 70 cents in gross profit, but that is not counting that, hey, people who already bought from you, now feel validated, maybe they come back more often or somebody sees a link up on MSN, and they recognize it as the commercial they saw last night. So those kinds of things don't count in the 50 to 70 cents, just on a pure basis.

So, it's better than 50 to 70% and it also has these other benefits. It has benefits of creating goodwill with vendors, and there's some strategic reasons to have done it. This really -- this really was a, I think that there's been, as I said in the last phone call, a blank spot in the public consciousness for the real discount online space. I think Amazon has more of what I think of as Nordstrom in the off line space. And there's ebay, hotels, and people with their own sort of strange niches carved off, not so strange, but there is this blank spot that was waiting to be branded, and we branded, and really moved the needle, I think, when the facts are in some day about what we -- you know, what we spent in order to move that needle to get to 30% plus adult name recognition, it was a very cost-effective spend. But, as I say, we have probably cut back 90 to 95% for now, although I am hoping to -- -- well, if somebody called up with a good price on a super bowl ad, I would be all ears.

Lastly, on the COO, we have filled the COO position, well, not COO, VP OPS, Chad Martin, really, three people who have stepped in. One, in the fall, I had already taken steps to build an internal consulting team, and that is, that I thought would be able to help us go after these pennies and nickels, and I got a terrific fellow, who is an x-army logistics guy, a lot of reverse logistics experience, reverse logistics is really much more costly than intuition.

So, he has a lot of experience there, as well as normal cataloging experience, he has been in private sector, 10 or 15 years. He came in, he is, I assume, 9,000 and Sigma black stuff. And we have developed within our company, two six-Sigma black belts. If you don't know six-Sigma back belt if you read Jack Welch, GE, what they did there it is a technique of statistical control developed by Motorola in the '80s, anyways, it is a school in Arizona. We have run several people through it to get black belts, greenbelts, etc.

The fellow who came to us, he was in OPS, he rose effectively to become our -- about a year and a half ago when I released our former GM, I took over as GM, he became my chief of staff, did a wonderful, he involved into GM. He has now become VP of sourcing and ops, and he is a six Sigma black belt. He has reporting to him, a woman who was a master six Sigma, who probably knows how the piping fits together better in this company better than anyone. She has been here since the beginning, originally was in IT, and really knows how every little pipe that fits together. So she has become director of logistics with this ex - army fellow reporting to her. They have done, in six weeks, I think, made such progress at the warehouse, as well as on cost controls related to customer service, freight, warehouse management. And so I really think that they -- I think that they can make, you will see a difference over the next three to six-months.

Okay. I am going to follow up on advertising.I will get into all the metric questions. So the good news for throttle willing back the big O is for profitability. The possible impact though is you had such ape fantastic growth trajectory in the holiday season. What is going to happen, what do you think will happen to traffic now that you are throttle willing back on the big O. Do you see any material change that is not explained away by seasonality due to the -- you know, all together disappearance of the fact of the of the big O campaign?

Sure. The traffic has definitely dropped. There is a good free source, ALEXA, you can go and see this. You can see the traffic drop. It is not as accurate as other source, but if you go to ALEXA. So we have dropped in ranking. There is a lot of stickiness. There is a lot of stickiness to the traffic we got. We have definitely stayed a couple of ranks, couple hundred rankings before where we were before. Well, that's the short answer to that. Does that answer your question or do you need --

No, that's fine, that's fine. I guess, where do we go from here then if traffic has dropped up. Do you get to the type of break even profitability with 100% growth. Is the traditional online advertising model that you use prior to the big 0 going to get you the type of traffic to sustain 100% growth? Let's say in 2004.

I think so. I can tell you what we are geared for. I don't know if we will have 100%. I don't at all think we will have 100% quarter on quarter growth. In particular, this will be, this quarter, I think, will be significantly lower. What I am really aiming for, what I am doing all of our planning around here for. This may sound like a crazy way to put it. This is really sort of the guidance, to the extent we are giving guidance, is that our goal is by the fourth quarter of this year, or previous quarter, to be 1/10 of the size of Amazon. Now, that's important. Amazon used to be, and Amazon is sort of the gold standard in this industry, of course.

They are now, you know, they were 600 times our size four-years ago, 250. Now, by the fourth quarter, they were 15 times our size, and in North America, they are 9 times our size, 9.2 times our size now if you look at their fourth quarters. So what I am really aiming to do is by the end of the year, planning around is to be 1/10 of their size overall and within 1/6 of their size in North America, and that, that may be a lumpy growth rate. It may be -- there may be more built into the fourth quarter there than in this quarter.

Okay. I wonder if we could quickly run through some metrics. Could you tell us, I will read three or four at a time. Then I have more after that. But could you tell us what conversion was in the quarter, give us an idea of what GMS was by category, and also could you give us books, movies and video units for the quarter, in the press release you gave them November and December, but omitted October. And average order size in a quarter, that is for starters?

Okay, David Chidester. What else, did you have?

Okay. Could you talk about active customers, by my math you have 3 million to date. How many were active in the quarter, what percentage, give some commentary or metric on repeat customers? I would like to know what we should be thinking about as cost per click price, you mentioned Patrick wanted to get 8 to 10%. I am wondering where it is right now. Then on the balance sheet, there are a couple of items, wonder if you could fill in what accounts payable and other current liabilities are?

Okay, I will -- Patrick speaking.I will say that some of that we are not going to release, but some of it we have here, for obviously the great accounts payable, things like that. But the active customers, do you have that active, Dave?

Okay. Total customers active were 971,000 in the quarter. The other stuff, we are getting a lot better at the analysis of repeat. We are getting into the repeat, you know, finding these -- there were wonderful monotonic relationships we are discovering between frequency of buying, length of time between buying, categories that people are buying. Again, we are finding that aggregates are always misleading. You drill in and you find out there are certain categories where people, if they buy there are much more likely to buy again, and there are other categories, like category X, that if somebody buys there they only buy in category X, Y and Z and never in A, B and C so why spend time advertising to them either on e-mails or to the home page.

So we are discovering a lot of relationships. I am not sure we will release that because that is the kernel of the secret recipe. I think we have power about buying. Dave Chidester, do you want to talk about accounts receivable and such?

Yes, just a couple of metrics, Bill, we have about 2.1 million units sold in the quarter, and we have about 16% of the of the revenue through B to C revenue was through BMV to to just give you an idea, about 15% in the third quarter. Just briefly, to talk about accounts payable. As we have talked about before, and Patrick alluded to, you know, the capital needs of the business really come down to our net income and then our change in inventory, and then Cap Ex, and those are offset by the float our partner business generates. So what you will see in the fourth quarter, once again, as we talked about we generate some float through the partner business. And as -- sorry.

No, go ahead.

And, so, once again, as we sell, as we then go through January now, and pay off those partners, you know, in essence, for the year, we were 10.5 million negative cash flow. If you take out the net loss for the year of 12 million, we would actually have generated positive operating cash flow for the year. And so our payables did grow significantly and we will end up the year. We ended up the year 40 million, in the month of January, at about 20 million.

Okay. I am going to add a little bit to that.We had a, the Q4 average on conversion was in the 3.5 to 4% range, and we had days where it actually peaked over 5%, still a long ways to go, I indicated, the bad news and the good news are the same thing. Our search isn't very good. It is a lot better than it was, the tool is terrific but I think it's a 2 on a scale of 1 to 10. I think they let me say that in my letter.

But what that means, there is a lot of quick improvement we can make now that we have some hands to focus on that. There are a couple of other areas much for us, it is not having the ideas, it is trying to sort to the top, the best ideas, and then just hammering away on them. Would you like me to address further, go on the capital rate, because obviously we put on the shelf?

Yes, if you could talk about that, and then I will be quiet for a while, let somebody else jump in. If there is time, I will come If there is time, I will come back with more.

Okay.

But, yes, if you could address the capital issue, I think, obviously, people care about that.

Okay. I mentioned we have the grandma test, which is, you know, can you sleep at night knowing that some grandmother is out there buying or selling the stock based on the information they had? I am sort of slip back to my philosophy days.You know, there's a -- you can pick a certain, I am looking at a color of orange on a jacket in front of me, not really orange, not quite clear if it is orange or red. You know, one could say one or the other, but that doesn't mean there's not a difference between orange and red.There is a difference, there is a very blurred area between them.

Beginning in there sometimes, when, when we are thinking about capital raising, and when, you know, the moment it occurs to you, possibly file a shelf. Do you have to tell the public? Not the first time you have the thought, but, at some point, when you become confident that you are likely to go ahead and in this case, to file the shelf, we basically decided, really in the last 24 hours, or maybe even the last 12 hours, we have enough confidence that we are instructing the lawyers to go ahead and research it and do the preparation to file a shelf.

That doesn't mean anything close to what we decided to sell stock. And so a shelf is a shelf, and that's an example of sort of. We really just mean what we say. We are going to file within our next. We decided, probably, you know, short of, I don't know what, to file within the next month or two, a shelf offering. I think that's up on the shelf for two or three-years. I am not clear we need it, not clear we need to raise capital. Not -- we may not even need to draw down on a line of credit that's being sort of offered to us on very nice terms. So we may not need any capital.

If we do need it, get it from a line of credit. Beyond that, but beyond that, nothing is wrong with having, I I think, a shelf offering up there. So, in the right conditions or opportunities come, we are ready to go. There's a guy, a fellow in the Grand Dodge circle named Sandy in New York that I used to work for. He used to have a saying, when you go duck hunting, you have to shoot when the ducks are in the air. Too many think they have to shoot when their gun is clean, polished and checked in. You have to have that ready so when the ducks fly, you are ready to shoot. And if the right opportunities came, and there are theoretically some opportunities opportunities in which we would issue stock. I don't want to at that point be scrambling saying all right let's stay up for nights for two months so we can get stock registered and sell. So we are putting something on the shelf. Sorry, you now know know everything I know about our capital raising plans.

Okay, thanks for a patient and colorful responses to my questions. I will let somebody else jump in.

Okay, thanks, Bill. Again, that's sort of the grandma test, based on our conversation last night. Do we feel comfortable with grandmothers buying and selling the stock today, not knowing last night. I will add to that. I don't have any of the same can connotations that other people do with, with, about things like shelf offerings. To me, I am a total value guy, if I have, I am sure, what sounds like a continue ear, a continue ear -- when it comes to certain messaging. To me, value guy, putting stock on the shelf, when the right opportunity comes, you will sell some stock.

I am you told by my colleagues who have a much better ear for Wall Street, there are all of these implications and overs, hidden, meaning, putting on the shelf. So I will confess I have a total TIN ear when it comes to that. I am just a value guy. Next question.We have about 20 minutes left.

Once again, that is star 1 to ask a question. We will take our next question from Derrick Brown with Pacific Growth Equity.

Hi, thanks. Couple of different things. First of all, could you walk us through what led to the separation from you and the CLO. Obviously, Q4 seemed to be a very good quarter. So, at what point did you kind of look at it and say, something wasn't working out with this relationship? And what led to that?

The second thing is, I know Bill had just asked about accounts payable, and I may have missed it, but I am wondering if you have that number, and, also, what else was included in the total liabilities number that jumped pretty significantly? And I guess, additional followup. How much of the cash increase, quarter to quarter, will be paid out to partners over the next several days or weeks?

Okay.Fair question. First, on Jim Hyde, I will not go into that. He is a terrific guy, terrific individual. Anyone would be lucky to have him. On payables and liabilities. David Chidester.

Yes. We ended with about 30 million in payables. You know, the growth overall in liabilities. Probably about 15 million of that is purely flow from the partners. So that will be paid back in the next, during January, and you have four or five million other accruals for our big online portable deals and that type of thing will also be paid down. So payables will drop probably in half by the end of January.

I will add one thing. I think I caused some confusion in the last conference call about Safeway. Our relationship with Safeway, you know, is fine, businesslike. They are gentlemen. We actually like dealing with them but -- no buts. On top of that, we have effectively, just because of the nature of closeouts, and it's a mistake in the way we have structured our deal. We have acted as Safeway's banker.

That means theoretically that if all this business goes away, once all the inventory moves around and all the payments are made, invoices paid off, etc, it will actually generate about $5 million of float for us. Now why are we acting as Safeway's banker? Because your chairman made a mistake, we acted as banker, that eats up 5 million of cash. All things being equal, it should roll out this quarter and flush itself out of the system. So there should be, about a $5 million gain there. Just to echo what Dave said, I think our NADIR now, when we we fell from 40 down into the high 20 millions, I think that will bottom out somewhere between 20, 25 million, David?

Okay.

And I guess just as a follow-on related to Safeway, you had indicated, I think, in the last call, that you were expecting that relationship to essentially end in Q1, and I am wondering if you can give us your current thoughts on that?

Sure. Well, I wouldn't, I said for planning purposes and for modeling, you should, people should assume that it goes away. I am hoping that it doesn't go away. There are -- I don't think it will go away completely. I hope they continue to place orders with us. But -- under the current contract, it runs out quite soon. I just think in people's models they should remember that 10 to 15% of our sales were to Safeway, at least -- and it did not, probably a little less than that this year, 5%.

So if it does giving us room, there are opportunities for us, so, take it out of your models, but, you know, it's not like there is any incriminating, and we may be selling to -- who knows, it may even go up. Thank you.

Oh, what else, did you ask about Safeway, Derrick?

That's it. Thank you.

We will take our next next question with Tom Underwood with Legg Mason.

Yes, couple of questions, Patrick. One, wondering if you could comment either qualitatively or quantitatively, preferably both on the effectiveness of the media campaign in terms of driving intrinsic value. I guess qualitative or quantitatively that would be what portion of historic media buyers are turning around and buying something else on the side?

Well, by media, you mean, books, music, video?

Yes.

I can't give you, well, I can give you a percentage, I am not sure I want to. Stand by just a second. They do come back and buy more frequently than people who have not bought at BMV as the first buy. What they buy is not necessarily as profitable, somewhat less profitable than people whose first buy have been nonBMV.

The other thing that you find out, there is a lot of good psycho graphics. And it makes our data richer. If I know that somebody bought a down comforter, I know one thing about them. If I know they bought a down comforter and a lamp, I know a little bit more. But if the data, the value of the data gets a lot richer when you start knowing they bought a down comforter & Hilary Clinton's book and, you know, some book on the American revolution. It gets -- it gets more sticky and meaningful.

So we are getting some good psych oh graphic information about who those people are, even based on where they click and finding interesting patterns there. So I think that is a nice rich vein to exploit. Along with, you know, about 25% of the time they actually buy something else in the same, in the same visit that they make their first BMV purchase. Arguably you could say, they may have made that anyway. But when they do that, incidentally, they buy a lot.25% of the time somebody buys BMV in their first purchase, they buy nonBMV. When they buy nonBMV it's usually good, disproportionately valuable product. Kind of interesting and frank relationships.

Okay, thanks. But then, regarding, I guess, near term, the first quarter, you said you were targeting 100% growth for the year. Are you seeing that thus far this year?

Not seeing, first of all, I just think, I am going to have the -- I can't say what is going on in this quarter. But I don't think that you will really see 100% growth in this quarter. I think you will see substantially less, and the 100% per year, I should emphasize is stretch goal. I am not planning in the normal Wall Street game of, you know, promise, I know I can do X so I will tell people I can do 70% of X and then over deliver by a penny, you know, we are not playing that. I think we can do X and I am telling you, you know, 1.4 X or something.S o, that's a stretch goal, but it is what everybody around here is organized for all of our, logistic, marketing and so forth. I don't think you will see it through the year. My goal is to have a fourth quarter that is 100% of last year's fourth quarter. Will the entire year be 100%? Yes, if we are lucky, maybe somewhat less than that.In the 500s, mid 500s, I would still be, in revenue, I would still be quite pleased.

Great.Thank you a lot.

Thank you.

We will take a followup from Glen.

Hello, Glen.

It was actually answered.Thank you.

Okay. Boy, you guys are letting me off easy today.Any other questions?

We will take a followup from Bill Lennon.

Yes. Patrick, hi, thanks a lot. You refer in the press release your letter to ideas that you have for catalogs, book and videos during the year. Could you elaborate what those ideas are?

Sure, one is working very hard on our search begin. I have one person working on, her job is dependent upon, fixing the search begin, getting it much better on BMV. I think that will make quite a big difference there. We are 25 points off of Amazon. We may go deeper. We may go deeper. We have learned only where we can advertise books, DVDs and stuff. We are cost-effective where it is or where it is most cost-effective.That will all be helped by search.

Search is a great, big part of it. I really hope I am sitting here next quarter, in three months, you know, telling you we have made big improvements in search. Then I have a couple of idea, that we are not, we are not sharing yet. It has to do -- well, we have a couple of other ideas but we are really going to start on pounding, getting the search results accurate.

Okay. And I guess the final question for the morning, at least from me. What, any material changes on the competitive fronts, smart bargins, in particular, and I am really interested in, on the supply side relationships with vendors. Do you see any advances or declines in your competitors, with particular emphasize on smart bargains?

Well, I don't want to, smart bargains are owned by or have a connection with Gordon brothers, the guys there are my friends in a friendly competitive sort of way. So I don't have a -- I don't have a whole lot of informed opinions one way or another. I can say that this is just a big, big leak, has it ever happened that swimming around in this lake that we bumped into this other guy, I honest to God don't remember. I don't remember a time when he bumped into them. It is a God dammed big lake. It is so big. But they are out there swimming around and, you know, more power to them.

Thanks.

Okay. Perfect.I guess it's 9:21 for you guys back east, we will get off the call. Any more questions queued?

Yes, sir.We will take a question, well a followup from Patrick DUFF.

Hi, I will make it quick. The fourth initiative which you said how to be delayed. I just wanted to make sure it is still, you know, active, and still a potential announcement coming forth, and wondering whether or not you have any major initiative, not that you would announce today but at least on the drawing board?

We have, yes, Project Rocket. I am really sorry about this. We thought we would be in the third quarter. All I can tell you, whenever it's announced, it's going to be on a Tuesday. That's a constraint set by a different company. Why Tuesday? I don't know. But it's a Tuesday, we have got the press release written. We have our side of the technology done.

I think it has real charm. It's a business that no one else is in, and may -- it's a business that no one else has ever done. Could you not have done it. The technology was not available until recently, so, I don't know if it is going to give us, you know, $5 a year or $5 billion a year. It's like saying -- I don't know, but I am excited.I get excited easily. But it is going ahead. It actually, believe it or not, went live. This company went live. I am just teasing, but the company went live on December 23 without he have been telling anybody, it got turned on and it got a whole bunch of activity and then they turned it off for some legal reasons, our legal is doing different things and going to get it all cleaned up nice, I guess. It could go live any Tuesday. But I don't -- you know, there is this whole question of materiality. I don't have any idea if it is material, it could be a big flop. But it's a business.

We have two other ideas behind that and I hope both of them are done by our July call, and then I am sort of out of ideas. But we have two other two other nice projects, and then after that we are going to be refining, taking out the sand paper, sanding things down. As Jason would say, putting the hatchet way, and the chisel away and getting out the number 6 sand paper.

Thank you, sounds good.

Thank you all.

And that does conclude today's portion of the question and answer session. At this time I would like to turn the call back over to Mr. Byrne.

Thank you, Sylvester for and thank you all for indulge us. My e-mail remains open if you want to tell me who started that rumor. I think we covered all the subjects we had. David, do you have anything you want to add?

No, I think, you negotiation we made great progress in the fourth quarter.We sort of got back on track.And we just see a lot of areas that we can improve. That is what is exciting, as margins increase, up close to 10% now, and we can see, you know, a lot of opportunity.

I have to just echo that.It is so exciting to see that there's at least two to three points I think we can ring out of the system pretty quickly a quarter or two, call it two quarters and maybe even somewhat more than that, and that's, you know, that's exciting to me. So, I will look forward to speaking to you in the next few months and anybody who wants to come out to Utah come turn some boards. Goodbye.

That concludes today's conference.