Overstock.com Blames Surprise Loss On Google Penalty

Online retailer Overstock.com OSTK shocked its investors today when the company announced an unexpected quarterly loss and plummeting revenue. Overstock.com 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 down to $314.1 million from $348.9 million a year earlier. According to a survey of analysts by Thomson Reuters, the consensus Wall Street estimate for earnings was 45 cents per share, on expected revenue of $377.6 million. The company blamed much of its poor performance on a dispute with Internet search giant Google GOOG, saying that "we believe our revenues were adversely impacted during the first and second quarters when Google Inc. notified us that it was penalizing us in natural search results for noncompliance with some of Google's natural search guidelines. During this penalty period, we dropped significantly in some Google natural search result rankings. We made changes to conform to Google's guidelines and on April 21, 2011 Google ended its penalization of our natural search results. We were able to offset some of the negative impact to revenue by increasing expenditures in other marketing channels." While Overstock.com was getting less traffic from Google, the company also saw revenues hurt by an ill advised attempt to rebrand itself from Overstock.com to O.co. The company said that it lost revenue because prospective customers had a hard time actually finding the company's website. Overstock.com went on to say that the increased sales and marketing costs stemming from the loss of traffic from Google contributed to its unexpected quarterly loss. The company noted that Google has finally let it out of the penalty box, so it's possible that its 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 its sales plummet during a time when the American economy seems to be recovering and brick and mortar rivals like Wal-Mart Stores WMT and Target TGT have been able to increase sales. Brick and mortar companies have often complained about the advantages that online retailers have over them, such as not having to collect sales taxes in most states, and have faced increasing competition from the likes of Overstock.com and Amazon.com AMZN. If Overstock is unable to earn a profit and its sales are plunging while other retailers are thriving, the online retailer's future could be in peril. Overstock.com shares plunged after the company released its disappointing earnings results, as investors dumped the stock. The stock price was down nearly 13 percent at $6.00 per share on extremely heavy volume at the time that this article was published. 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.