Overstock.com, Inc.
Q1 2021 Earnings Call Transcript

Published: 29 Apr 2021

[Operator:]

Good day and thank you for standing by, and welcome to the Q1 2021 Overstock.com, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Callahan, Director of Investor Relations. Please go ahead.

[Alexis Callahan:]

Thank you, operator. Good morning, and welcome to Overstock's first quarter 2021 earnings conference call. Joining me today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Dave Nielsen, our President of Overstock, will also be available for Q&A. Please note that we are conducting today's call remotely.

[Jonathan Johnson:]

Thank you, Alexis. Good morning, everybody. We had another impressive quarter. Our year is off to a strong start. Let's get right to discussing our business by following the agenda on Slide 3. Next slide, please. I will start with a few corporate updates. As we announced on January 25, we entered a strategic partnership with Pelion Venture Partners for oversight of our Medici Ventures portfolio. We set our goal was to close the transaction in three to six months. I'm pleased to say we closed that transaction last week in less than three months. This should be another clear indicator of what the new Overstock has been all about for the last 18 months. Execution, we do what we say we will do, in this case, ahead of schedule. The closing of this transaction means Overstock is a passive limited partner and Pelion has full oversight of the Medici Ventures portfolio, including sole authority and responsibility regarding the funds investment decisions and in exercising all shareholder rights Medici Ventures holds in the portfolio companies. I think there's real upside for Overstock as these companies are in Pelion’s qualified and capable hands. I look forward to seeing where Pelion takes them. After the announcement of the Pelion transaction, we asked for and received pre-clearance from the SEC to deconsolidate Medici Ventures from Overstock’s financial results. Those results are reflected in with our earnings release published this morning and this presentation. I must say, it's great to have this transaction closed. It allows Pelion to focus on the Medici Ventures portfolio, and it allows Overstock to focus on our core furniture and home furnishings business.

[Adrianne Lee:]

Thank you, Jonathan. As already mentioned, we are pleased to have closed our transaction with Pelion Venture Partners and that we received pre-clearance from the SEC to deconsolidate the Medici Ventures' businesses. Although, the transaction did not close until the second quarter, the Medici Ventures' businesses met the accounting criteria to be treated as held-for-sale assets and discontinued operations as of March 31. As such, we have classified the related assets and liability as held-for-sale in our consolidated balance sheets and the related loss as discontinued operations in our consolidated statements of operations. In conjunction with deconsolidation treatment, Overstock has reorganized its remaining business into a single reportable segment, Retail, the pure-play e-commerce furniture and home furnishings retailer, which is reflected as continuing operations in our first quarter reporting. My remarks today will reflect results relating to our continuing operations. I will begin with a summary of first quarter results followed by a review of our newly disclosed key metrics and performance indicators. Next slide please. We delivered another strong quarter. We outpaced our growth trajectory quarter-over-quarter, posting revenue growth of 94% compared to the same period last year. This growth coupled with our ongoing focus on managing expenses resulted in adjusted EBITDA of nearly $34 million, an improvement of $40 million or 600% compared to the same period last year and a $42 million increase compared to Q1 2019.

[Jonathan Johnson:]

If I may add a little update, Adrianne, these are fantastic results for the quarter we're doing just what we said we would do delivering sustainable profitable growth.

[Adrianne Lee:]

Thank you, Jonathan. Next slide. And now I would like to introduce a few operational metrics that we use internally to manage and assess our business performance. We believe these metrics are solid indicators of sustainable growth, customer behavior and reflect the mix of products purchased by our customers. These metrics require a little explanation as they are standard metrics within the retail and e-commerce landscape. This slide shows active customers and order frequency. We define active customers as the total number of customers who made at least one purchase over the prior 12 month period. As of March 31, our active customer base reached 9.9 million. This is the highest in our operating history and represents an increase of 92% or 4.8 million active customers compared to the first quarter of 2020 and a 60% increase versus 2019. As we have stated before, the online home furnishings penetration rate reached an all-time high in the second quarter of 2020, before landing on the trajectory we've seen in the past three quarters. It is important to note that we anticipate a slight decrease in our active customers as we annualize this high point, followed by sustainable growth, going forward. Order frequency is also measured on a 12 month basis and represents the number of times our customers make purchases over the span of a year. Orders per active customer was 1.66 times in the first quarter, down slightly from a year ago, this metric was strongly influenced by our large influx of new customers in 2020. Many of these new customers have not reached the frequency of purchases that correspond to our more tenured customers.

[Jonathan Johnson:]

Shareholders, we've stabilized the business. Through our operational improvements, we've grown our active customer base throughout the pandemic. As you can see on this chart in 2019, we were continually losing customers from the base. Now we have righted the business. We are thrilled by the number of new customers who discovered Overstock this past year. Because of that surge of new customers, order frequency declined due to the mix effect. Other brands, it didn't experience a similar surge in new customers likely won't experience the same impact. Thus, as Adrianne mentioned, we anticipate reporting a slight decrease in active customers in the coming quarter as we lap the peak of the pandemic. The stay-at-home mandates forced the online penetration rate to an all-time high before settling on a positive, sustainable trajectory. We are focused on continuing to grow our customer base and keep those customers coming back.

[Adrianne Lee:]

Thank you, Jonathan. Next slide, please. This slide illustrates nine quarters of orders delivered an average order value. On a trailing 12-month basis, orders delivered reached a record at 16.5 million as of March 31. This is an increase of 88% compared to the prior year or 7.7 million orders and a 52% increase versus 2019. Like my commentary on active customers. We expect this metric to decrease a bit as we analyze the high point of online penetration followed by sustainable growth. Average order value increased $27 or 17% versus the first quarter of 2020. This is mainly driven by our sales mix shifts into core furniture and home furnishings. There is some seasonality over a 12-month period in this metric driven by category mix and peak gifting times. In summary, we delivered a strong first quarter. We are pleased we were able to provide transparency into our continuing operations in our financial reporting and to provide the investment community with additional operational metrics. With that, back to you, Jonathan.

[Jonathan Johnson:]

Thanks Adrianne. I hope the metrics we shared on these two slides are helpful to our shareholders. We intend to share them quarterly. First quarter results were impressive. We outpaced our revenue growth year-over-year and quarter-over-quarter, we generated operating leverage, delivering nearly $34 million and adjusted EBITDA at a margin rate of 5.1%. This is the fourth consecutive quarter in which we have delivered profitable market share growth. And within the margin rate guardrails we are targeting. I hope you see that this is a new Overstock. It is our new normal, sustainable profitable market share growth.

[Operator:]

Your first question come the line of Seth Sigman from Credit Suisse.

[Seth Sigman:]

Hey everyone. Good morning and thanks for all the info. Congrats on the progress. I wanted to focus, I guess, first on the short-term, Jonathan, obviously providing a very positive message about what you're seeing right now and your ability to navigate the difficult comparisons here. I think we get demand as strong in the industry, but I'm more curious about some of the specific drivers for Overstock to help navigate the short-term. So for example, are there drivers to consider like categories that we're very short on inventory a year ago that are improving or perhaps seasonal categories that you've leaned more into this year or anything else that you would highlight that you feel like will help, I guess stabilize the business and comp the comp over the next few quarters? Thank you.

[Jonathan Johnson:]

Seth, appreciate the question. Let me take an initial answer and then I'll turn it to my colleague, Dave to give a little more color. As far as categories we're leading into, I've emphasized, we're becoming more and more of a home retailer, but within the home category, we're leaning more and we've been leaning into patio furniture and outdoor recreation products. People are trying to expand their living spaces to the four corners of their property, not just the four walls of their home. So we've expanded that inventory, it is a tight market as demand is high. But that's one area we're leading into. Dave, what else would you have for that?

[Dave Nielsen:]

And Jonathan, I'd add that the seasonal categories as we end the first quarter and roll into the second quarter. The category Jonathan mentioned first and foremost, patio furniture. Everyone is interested in expanding their living space. And we are working with vendors with our partners, they are very creative, utilizing different ports to bring in products and get that product to the customer. And one of the things that I think is wonderful about our business model is how resilient it is. Our – we have millions of products, millions of skews, and as Jonathan mentioned earlier, those new skews that we're bringing in are very productive and very targeted to the customers’ needs. Jonathan?

[Jonathan Johnson:]

I probably hope, me addressed your questions, Seth.

[Seth Sigman:]

Yes, no, that's perfect. I appreciate that. So maybe just a related follow-up question. The step up in the AOV this quarter up 17% year-over-year as a major change, to what extent does that reflect some of the assortment changes you're making that shift to core home and other efforts to improve the customer experience versus the nature of where consumer demand is just right now and/or same skew inflation?

[Jonathan Johnson:]

So very little of it is same skew inflation. We are working hard to maintain a very competitive price and lean into the smart value brand pillar. It is impacted by leaning into home, our non-home categories, some have a little bit higher price point most have a lower price point. So I think as we lean into home, you'll see that average order size increase. I also think it has to do a little bit with seasonality, patio furniture tends to be a higher price point than some other things that we sell. Certainly patio furniture is more expensive than a throw pillow, and so there we are. Dave or Adrianne, anything to add? Dave, anything to add?

[Dave Nielsen:]

No.

[Adrianne Lee:]

No, Jonathan. Nothing.

[Seth Sigman:]

Okay. Thank you all very much, and congrats.

[Jonathan Johnson:]

Thanks, Seth.

[Operator:]

And your next question is from the line of Thomas Forte from D.A. Davidson.

[Thomas Forte:]

Great. Thanks for taking my questions. Hello, Jonathan, you're going to have to permit me to start with a statement first and then a question second. So as a long-time follower of Overstock and as long-time follower of e-commerce and also blockchain, I was tremendously validating to see the Coinbase direct listing. Congrats in the conversion to Pelion for the venture cap fund and congrats on identifying the potential of blockchain at a very early date. Now the question. So I want to somewhat rephrase Jonathan, the comments you made in your remarks. From my vantage point as a long-time follower of e-commerce, you've been following the home category for a long time. Dave has been following the home category for a long time. It seems to me that we're in the midst of a supercycle. So when you think about the pandemic, when you think about economic stimulus, you think about the comments you talked about with consumers moving to suburban locations from urban locations, this looks to me to be a multi-year event, meaning that the home e-commerce industry is going to have elevated sales, not just in 2020, but 2021, 2022, 2023. And to the extent that you're taking market share, that makes me think that you're also going to have elevated sales not just in 2020, but also 2021, 2022, 2023. So to high level, do you and Dave agree with my session that we're in a home supercycle and that there is potential for the industry – the home e-commerce industry to have elevated sales growth for multiple years, not just one year?

[Jonathan Johnson:]

Tom, first I appreciate your comment upfront and I – both I, Barbadian Gabriel CEO of Bitt are looking forward to participating in the Davidson event on next week, where we'll be talking about cryptocurrencies, digital currencies and that market, there is a lot of room to grow there. As far as being in a supercycle, I think the short answer is yes, I agree with you. We've got positive GDP, we've got shrinking unemployment, we've got record housing starts, is great reshuffling, as we see people move from New York to Florida and Illinois to Texas and California to Oregon or Utah or Idaho. I think this bodes well today, tomorrow and going forward. Dave, the question was addressed to you, so I’ll let you add on.

[Dave Nielsen:]

Just one point I would add on, and that is the penetration rate into online home furnishings. It is still in the beginnings. We are not in a mature market on the online side of things, so there is much room to grow and that excites us.

[Jonathan Johnson:]

Yes. I do think it's important Tom, we are in a supercycle and I think that cycle is magnified by an immature online market maturing, and that's a big deal for us, because we're a pure-play online home furnishings company.

[Thomas Forte:]

Great. Thanks for taking my questions.

[Jonathan Johnson:]

Thanks, Tom.

[Operator:]

And your next question is from the line of Ygal Arounian from Wedbush.

[Ygal Arounian:]

Hey, good morning guys. I have a couple of questions. May I first start on retail, and then I'll – I’m going to ask something – a few things on Medici. Jonathan, you – I think it was Jonathan or Adrianne highlighted revenues growing faster than expenses this year. Your gross margins are – were again this quarter above your 22% target and yet we're still – we're already at the mid-single digit EBITDA margin target that you guys have set. It sounds like there is room for that, especially if OpEx is growing slower than revenue. So can you just highlight how are you thinking about the margin story over the next couple of quarters and couple of years?

[Jonathan Johnson:]

Yes. Adrianne, why don't you go first and then I'll add to it, because I definitely have an opinion on where the right place for gross margins is.

[Adrianne Lee:]

Perfect. Good morning, Ygal. I think as you know and Jonathan said, our mantra is sustainable profitable market share growth and we've been really focused on the sustainable part of this as well as the growing. So I think for us consistently producing targets in line with these expectations is our goal and focus over time, we'll look at this one to again we kind of create this multi quarter trend. But as you can see, this is our focus and it's deliberate and strategic. Jonathan?

[Jonathan Johnson:]

Yes. This is a question we get asked a lot and because there is this secular shift online, we feel like it's in a really important time to take market share. Keeping our prices low, particularly for our customer segment, that's savvy shopper, that's our primary customer, she needs a deal. If we start tickling up the gross margin, I think it slows our growth, and now is not the time to slow growth. This is like the Oklahoma Land Rush. There are – we are waiting in a covered wagon at the border and the whistle was blown and it is time to run those horses hard and fast to get as much of the land grab as we can. So sustainable profitable, profitable is important market share growth, but the market share, I think is where we're looking at right now. I hope that address the question.

[Ygal Arounian:]

Got it. It's helpful. But just to be clear, you did say that revenues will outpace OpEx this year, right?

[Jonathan Johnson:]

We have a very scalable model. We don't have a lot of – we don't have stores. We don't have dead-end, we don't have inventory. Our model, I think is this great opportunity to make sure there is operating leverage in the business every quarter.

[Ygal Arounian:]

Okay, excellent. Very helpful there. So on Medici side, get a lot of investor focus here. Not surprisingly with the changes you're making and investors really trying to understand the full value that might flow through to Overstock. I know there's a lot of moving pieces, but as some crypto and blockchain related assets go public and there's some public comps out there now. Anyway, you view those as comps and can help investors think through that. And then the second piece is how much of a potential, scale or spin or however you begin to access these businesses translates into Overstock – profit for Overstock. So in the press release, you highlighted the return of invested capital on Medici. Can you just walk through how that works? And I know there's the scale on the profit share, but is there an easy way to kind of summarize and help people think through what percentage of potential gains could flow through to Overstock? Thanks.

[Jonathan Johnson:]

Adrianne, why don’t you talk about the economics and then I'll try to address some of the other things, maybe I’ll answer those great questions.

[Adrianne Lee:]

Sure. I'll go the technical side. So Ygal, as you mentioned, the setup of the fund is that the fund will return invested capital first to Overstock. That's generally measured as the net asset value. And then the remaining profits will be split for the economics as specified in the LPA. So I think there's a couple points there that are important. One is, we did disclose the NAVs within the LPA, and then second, all the economics are included within that agreement. The other thing to note from kind of an accounting expectation is that we will – we do expect to realize an initial upward fair value, excuse me, adjustment to the carry value of these businesses as they're transferred into the fund. And then on a quarterly basis, we will record our pro-rata share of the funds performance. So those are kind of three of the technical pieces. Jonathan?

[Jonathan Johnson:]

So I think very simply as our money back to us first, then we split on anything on top of that. And each is a little different, but I – finger in the wind kind of say, 70/30 split, 70 to us, 30 to Pelion. So I think there's real upside there. As far as comps and what else is out there, the analysts are graded, I think are better than I am in figuring out how those comps translate to those businesses. This is certainly a hot area. The enthusiasm around NFTs, I think is meaningful. It won't surprise me. In fact, I think the SEC should deem a lot of these NFTs and securities, those that have fractional ownership or pad a loyalty to the owners, those feel like securities to me. And yes, and I think it's more of when the SEC says that. tZERO is in the catbird seat, because it knows how to do digital securities. So we'll let Pelion manage the exits, manage the fundraising. We've hired a good headmaster to take care of our children as they go off to school. That's kind of the metaphor I look at.

[Ygal Arounian:]

Great. That's a helpful metaphor and a very helpful color. Thanks so much.

[Jonathan Johnson:]

Thank you, Ygal.

[Operator:]

Your next question from the line of Peter Keith from Piper Sandler.

[Peter Keith:]

Good morning guys, great results. And great to see a lot of the KPIs that being disclosed this morning, look forward to seeing them progress going forward. I guess, a fairly simplistic question though, is if someone was just listening to this call on Overstock for the very first time and maybe has a memory from the 2018, 2019 days, what KPIs do you think are most important to reflect ongoing progress and turn around in the business. That's going to allow you to hold sales at least flat with Q2.

[Jonathan Johnson:]

Let me take your initial answer. I know Dave will have more because Dave is running that business. And boy, I don't know anyone who looks at KPIs more than Dave does and manages that. I think first and foremost, we have customer retention. 2020 was the year of customer acquisition because customers were in the market. And boy, do we acquire a lot of them. We are focused on customer repeat rate, customer retention, it doesn't mean we're not acquiring new customers. We're always doing that. But for me, that is KPI number one. And that's what I asked Dave about every time every week, we're in a one-on-one, how are we doing on retention because that's what's important. Dave, what you add to that.

[Dave Nielsen:]

Well, first, I can attest, Peter. Jonathan asked me about retention every time we meet. It is critical to us. We garnered so many – acquired so many new customers in 2020. And we have over 30 different OKRs. You've heard us talk about OKRs in previous earnings calls. OKRs is a way that we focus and align throughout our business. And from that single objective of building retention on those customers, we acquired in 2020. There are, like I say, over 30 key results and objectives fettered out throughout the organization for us to be able to focus in each of the areas, whether it's merchandising, whether it's supply chain and ensuring that that delivery is met in a way that the customer repeats again. From a marketing standpoint and the channels that it matters most to get that customer back to Overstock and buying and culture that relationship. So those are some of the key metrics, but I won't take it beyond retention. That is our primary focus.

[Peter Keith:]

Okay.

[Jonathan Johnson:]

Peter, I hope we address the question?

[Peter Keith:]

Yes. You did it. Maybe I'll try to unpack a little bit further. I think you were saying new customer count is probably going to be sort of turning down year-on-year. So that's going to be a bit of a headwind to revenue, but your AOV is moving up a lot, like orders per customer moving up. Are those going to be powerful enough to kind of offset? What probably will be a drop in new customer adds?

[Jonathan Johnson:]

Yes, I think so. For us, we're looking at customers and new customers and repeat customers when they make a purchase, it's the same purchase. And so as we probably won't add new customers at the same rate we did in 2020, although we’ll ensure to continue to add new customers, we have a bigger base to get repeat customers from. And so our goal is every day more sales, more customers. That's what we're working on.

[Peter Keith:]

Okay. Sounds great, guys. Good luck.

[Jonathan Johnson:]

Go ahead, operator. I’m sorry.

[Operator:]

I’d now like to turn the call back over to Mr. Johnson for closing remarks.

[Jonathan Johnson:]

Thank you. I know we didn't get to everyone in the queue. Thank you all for participating in today's call. If there's one thing you should take away from this call is we are better positioned than ever to continue to take market share and deliver profitability. We're focused and executing on our plans. Add in the favorable macroeconomic conditions, things like positive GDP, shrinking unemployment, economic growth, record housing starts, and the lasting shift of the great reshuffle of the American workforce, permanently migrates from cities to suburbs. And you can see why we feel poised to continue to outperform. We appreciate your interest and ownership in Overstock. Until we talk again, we'll keep working diligently to deliver on our 2021 plan. Thanks everybody.

[Operator:]

This concludes today's conference call. Thank you for participating. You may now disconnect.