Overstock.com, Inc.
Q4 2020 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter 2020 Overstock.com Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s call is being recorded. I would now like to hand the conference over to, Alexis Callahan. Please go ahead.
- Alexis Callahan:
- Thank you, Operator. Good morning, and welcome to Overstock's fourth quarter and full year 2020 earnings conference call. Joining me today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Dave Nielsen, President of Overstock will be available for Q&A. Please note that we’re conducting today’s call remotely.
- Jonathan Johnson:
- Thank you, Alexis, and good morning to everybody. Overstock had another impressive quarter rounding out its banner year. I'm excited to share our Q4 and full year 2020 results and provide updates on our business. We will follow the agenda on Slide 3. Next slide, please. I'll start with a few quick corporate updates. In January, we announced a strategic partnership with Pelion Venture Partners for the oversight of the Medici Ventures portfolio companies. This is a great transaction, and I'll cover it in more detail later in our prepared remarks. In November, our board declared an annual cash dividend on our series A1 and Series B preferred shares for the fourth year in a row. In December, we distributed that $0.16 per share dividend to all eligible shareholders. In January, we received a subpoena from the SEC requesting additional information related to the 2019 to 2019 retail guidance. We are complying with the request, we are cooperating fully. We are engaged with the regulators. We continue to operate smoothly and efficiently during COVID-19 pandemic restrictions. We are still working from home. It's going well. Our workforce is engaged and our attrition is low. We're in no rush to get back to the office, particularly with a vaccine rollout proceeding slower than hoped or expected. We're watching to see what happens with the current stimulus bill, knowing that we saw an uptick in sales with the first round of stimulus checks last spring. We're continually monitoring our supply chain, particularly the West Coast shipping ports, both Long Beach and Los Angeles are clogged with shippers have been finding alternatives in Oakland and Seattle. We're in constant communications with our partners and carriers to ensure the best customer experience possible.
- Adrianne Lee:
- Thank you, Jonathan. As a reminder, we manage our business and report our financial results across three segments. Overstock retail, a pure play e-commerce home furnishings retailer, Medici Ventures, a blockchain focused incubator, and tZERO, the largest Medici Ventures business focused on financial innovation and liquidity for private companies. Our consolidated results aggregate these three segments. Post-closing of the Pelion Ventures transaction, it is our belief that we will deconsolidate the Medici Ventures businesses, which is the accounting treatment we are currently seeking SEC preclearance on. I will begin with a summary of our consolidated results followed by a more in-depth review of Overstock retails performance. Next slide. On a consolidated basis, we delivered another strong quarter. Our sales growth momentum continued with Overstock retail revenue increasing 84% compared to a year ago. This growth coupled with continued expense discipline, resulted in adjusted EBITDA of nearly $23 million, an improvement of almost $42 million year-over-year. Diluted earnings per share came in at $0.26, an improvement of almost $1 per share compared to the fourth quarter of 2019. We ended the quarter with a healthy balance sheet, including $517 million in cash, which is an increase of over $400 million versus a year ago. This improvement was driven by our strong operational performance and our successful and oversubscribed follow-on equity offering in August. Next slide. We delivered record results and record profitability in 2020. We recorded $3.2 billion in gross merchandise sales, an increase of 74% year-over-year. Adjusted came in at $88 million, which was an improvement of a $162 million or 220% year-over-year.
- Jonathan Johnson:
- Thanks, Adrian. 2020 was an amazing year for Overstock. For the full year 2020, the retail business delivered $136 million in adjusted EBITDA at a margin of 5.4%. This is incredible performance. It's also within the margin rate guardrails we're targeting in our long-term plan. It sure is a fair prior from our 2019 performance, and I think it's our new normal, profitable growth. Slide 15, please. So I just have to say, I'm so pleased with Overstock's performance. It represents discipline, focus and execution. I thank all of my colleagues at the company for their hard work. This certainly was a team effort. Slide 16, please. I'll now discuss our operations, specifically how we achieve these results. Slide 17, Overstock is a top five company in the fast growing online home furnishings market. A market that is now more relevant than ever, and one that we believe will remain relevant.
- Alexis Callahan:
- Operator, can you please open up the line for Q&A?
- Operator:
- Our first question comes from Rick Patel with Needham. Your line is open.
- Rick Patel:
- Thank you. Good morning, everyone, and congrats on capping off a strong year. We're about a year into the pandemic and your business continues to thrive. Would you be able to paint a picture of what's selling? When you think about the early days of the pandemic versus more recent trends, what's been strong? What has moderated? And as you look out to how '21 will play out, where are you placing your bets for which product categories will have the most potential?
- Jonathan Johnson:
- Rick, great to hear from you. Thanks for the question. So, I'll let all of the comments are worth selling, specifically, I will tell you this, as I mentioned in the prepared remarks. We are honing in on home, 90% of our sales came from the home furnishings products, that's only going to continue to grow. We expect to get that close to 100% over the next 12 to 18-months. Dave, you on a comment on specifics and trends we've seen that are changed from March to February?
- Dave Nielsen:
- Sure, Jonathan. Thanks for the question, Rick. It's interesting. We've in the prepared remarks, Jonathan mentioned, the home categories. And I will tell you for the specific home categories, it has been our largest, biggest categories that have flourished throughout each of the quarters. There's some seasonality switching between patio and outdoor furniture. But I will tell you, our largest categories of rugs and home furnishings, furniture, patio and outdoor continue to be our largest categories and have been throughout the entire pandemic.
- Rick Patel:
- Got it. Very helpful. And a question on the rate of growth for '21. You noted that Overstock should outpaced the markets growth. Can you help us think about the assumption we should be using for that market growth? I don't think anyone's expecting this strong growth of 2020 to repeat in '21. But just curious how we should be thinking about that trajectory for the industry as comparisons get meaningfully tougher here in about a month?
- Jonathan Johnson:
- Rick, great question. No, we are not a company that gives guidance. But I'll tell you this, as Adrianne mentioned in the remarks, like they were in Q4, Q1 results today, they've continued to be strong. As you know, toward the end of Q1 our year-over-year growth comps get tough. But we are at a new operating level and we expect to continue to grow. We expect to continue to be profitable. And we expect to continue to take market share. Always very other kind of thoughts on how to model things out, we expect our gross margins to remain in the 22% region, and adjusted EBITDA margin to be in the mid-single digits. So, it's hard to predict what 2021 will look like. But that's our best. That's the best we can do right now.
- Rick Patel:
- Thank you very much. All the best this year.
- Jonathan Johnson:
- Thanks, Rick.
- Operator:
- Our next question comes from Peter Keith with Piper Sandler. Your line is open.
- Peter Keith:
- Thank you. Good morning. Congrats on just wrapping up a phenomenal year. I wanted to just parse apart the adjusted EBITDA and margin guide for mid-single digit. It looks like with 2020 your retail EBITDA margin is going to come in at 5.4%, and I think another good quarter with Q1, you'll probably land closer to 6%. So, how do you really think about that going forward? Is the intent that you think you should hold EBITDA margin as kind of flattish going forward to take market share? Or do you want to see some level of normalization and then maybe readdress where that retail EBITDA margin can go over time?
- Jonathan Johnson:
- Peter, thanks for a great question. I'll let Adrianne, give her thoughts on this and I'll add something at the end.
- Adrianne Lee:
- Great. Good morning, Peter. I think about our EBITDA margin, one of the biggest obviously functions of that even a margin is our gross margin, which Jonathan just discussed. So I think for us, we still feel very confident in that 22% range, we think that gives our customers kind of the right value and pricing that those two target segments excuse me, kind of require of us. So that's kind of how I think about the EBITDA margin is really derived from kind of that gross margin performance. And then, as you saw this year, really leveraging our G&A and tech. I think one of the things we have said, right, as is let us deliver those results consistently. Those are our long-term targets. And then if it makes sense, we'll address at some future date anything different than that. Jonathan?
- Jonathan Johnson:
- Yes, I think it's really important as we think about how we flow down the P&L. We maintain the 22%-ish gross margins, that's important to our customers. We have to be providing smart value. If we started getting thicker on margin, we lose -- we play on that upper left hand quadrant thing was on one of our slides, when the margins start getting thicker, we're not really in that quadrant, we're not providing that smart value they look for. So, for us, that's the top of the P&L that we got to manage everything else in the P&L to get to the ad down margin. And coming in, in the mid-single digits is where we think is the right place to maintain a proper balance everywhere.
- Peter Keith:
- Okay, helpful. Maybe taking on the gross margin. You had highlighted as one of your goals for 2020 was just to improve the pricing and promotions. It looks like you've had success there. Do you feel though that you've accomplished the lion's share of that work? Or is there still opportunity to get a little bit sharper on pricing and maybe even doing less promotion when you're overly discounting relative to the rest of the market?
- Jonathan Johnson:
- So I'll give an initial answer and then turn to Dave. The answer is there's always more work to do. And just because something was an initiative that we think we performed well on in 2020, we don't put it on the shelf and let it gather dust. There's a pricing team that's looking at this constantly. Dave, why don't you add some more color on this?
- Dave Nielsen:
- Thanks, JJ. As Jonathan said, it is a work in progress always, as we continue to grind down our pricing and understand where we need to be, promotions is key to that. And understanding that our customer that Savvy Shopper that customer expects a promotion. As Jonathan mentioned in the prepared remarks, the customer wants to get the best deal. And we price our products so that we're competitive every day, but our customer can get the best deal on promotion. And running those promotions is key to our customer satisfaction and repeat rates. They like this model, and that's why they come to us. That's why they selected us and we selected them as our primary target customer.
- Jonathan Johnson:
- And I'd just add on. We're not an everyday low price. We're a high level. And frankly, that's what our Savvy Shopper and relative freshers like, and so we catered it to them.
- Peter Keith:
- Okay. Thanks for the feedback, guys. Good luck.
- Jonathan Johnson:
- Thanks.
- Operator:
- Our next question comes from Ryan Gee with Bank of America. Your line is open.
- Ryan Gee:
- Hey, good morning, guys. Great results. Clearly, there's still some tailwinds that you guys continue to benefit from. So one for Jonathan, and then maybe one for Adrian. Jonathan, can you talk high level about how much the past year has impacted some of the mission critical aspects of running a business? For example, marketing strategy or pricing or technology investments, I know you talked about mobile. But maybe put another way, is there one or two things that you thought were maybe temporary changes? You guys are going to have to make more investments during 2020 that you now feel are going to be long-term changes at Overstock how the way you operate? And maybe any observations on buyer behavior that's sustainable?
- Jonathan Johnson:
- Great question, Ryan. There are things that we put into place as part of the pandemic. I think it was going to be parse with the course going forward. In terms of marketing strategy, I talked about how we launched free shipping on all items. And that was initially, in response to the COVID-19 pandemic to support our customers during a challenging time. We saw in August, that it was actually helping our sales without a significant cost. And so we've made free shipping permanent on all items. That's something that, the business turns during the pandemic, it's going to be the same. I think, pricing, it was a time where I think we had to get sharper, because people were shopping online and spending a lot of time comparing. So we did that. And then the only thing I would say that's became kind of -- it was pandemic-driven, but has become normal, and that's more automation in customer service. When you look at what happened in March, in April last year, the flood of sales, not a flood of customer service calls. And we weren't staffed for that. And so, we did a bunch of things. One, we hired more. Two, unfortunately, we turned off the phone for a little bit. But three, and most importantly, we started automating customer service, partner management areas, all different parts of the business, with that as we had great response. And we'll keep doing that. It's facilitated millions of automated response. Our partner base, our customer care, that's going to be normal going forward. And by the product team we have looking at automating things. I think we've just scratched the surface. So, that's where that will go. Hope that addresses the question.
- Ryan Gee:
- Yes, that's super helpful color. Thanks, Jonathan. And then, another one is, I know this, you guys mentioned earlier on the prepared remarks, still, your partners are having some constraints getting supplying to the country, and that the given things to adjust. But can you talk about the in-stock rates, which I know were a challenge that you called out kind of in the summer last year. How is that in-stock rate kind of trended since then? And then as you think about the partner, I mean, as you think about the competitors, that maybe you called out on one of the slides in the presentation. Do you guys feel that Overstock is any better or worse positioned? Or your partners are any better or worse positioned to get supply into the country than they are? Or maybe you're in a better position that they're facing -- you're facing challenges your partners -- not your partners, your competitors are facing even greater challenges getting supply? Thanks.
- Jonathan Johnson:
- There's a lot of detail on this, but Dave, why don't you take the first pedal on this one?
- Dave Nielsen:
- Okay. So, let me address first in-stock rates and how we're performing versus our competitors. I think our performance really speaks to that in-stock rate, are we getting our products in. When you look at our growth rate versus what the external markets are, and resources that we use are showing from a market share standpoint, we are getting more than our share of the goods from our partners. We think our partners are doing a fantastic job being creative at switching ports, shifting our supply chains, flying materials in from other countries when needed to get product through. We keep in close contact with them, daily in some cases, weekly basis and provide forecasts for them, they provide forecasts for us. We keep very close with them. So, on that front, I think we are doing a good job managing through this pandemic. On the first question, regarding or part one of the question regarding the supply chain challenges. It's really shifted for us. It's shifted from early on being about quarantining and factories not being able to get labors into manufacture the goods to now being more of an end of the supply chain challenge, where the ports are congested as the brick-and-mortar retailers are now bringing inventory back in at the same time. So, there's an influx going through that will pass through the supply chain. But we're happy to be creative with our partners and our carriers, by bringing that product into the country. The in-stock levels are improving. We're up 20% from our low. And we've got more to go.
- Jonathan Johnson:
- Yes. I would say, we're still below where we want to be. We've improved significantly. We still see trend up sales in higher. So there's work to do. Everything goes so do spot on.
- Ryan Gee:
- Super helpful. Thank you guys.
- Operator:
- Our next question comes from the Ygal Arounian with Wedbush Securities. Your line is open.
- Ygal Arounian:
- Good morning, guys. Thanks for taking the questions. I wanted to dig into the free shipping a little bit more. And at least you can add a little bit more color around when you made that switch to free shipping. You had some strength in purchasing products, your customer growth is strong in the quarter. Can you just talk a little bit more around some of the metrics that changed once you implement that? And then how do you think about free shipping in terms of pricing and margins where you allocate the cost, if you can price differently and promote differently, because you have free shipping there as an offering?
- Jonathan Johnson:
- Great. Adrianne, you want to first answer at this one?
- Adrianne Lee:
- Yes. Thanks, Jonathan. The free shipping, Ygal, thank you for the question. I would say that the best part of that as we talked about is the purchase intent. And this is really a driver for our target customers, and really a big component of their satisfaction. And what we've been fortunate enough to see in the P&L is that that free shipping cost has just been offset by additional sales. So for us, it's been a real win, on obviously, the customer satisfaction side. And we think will be a really good retention component. And we haven't seen kind of any of the negative financial impacts that could come with offering such a great value like that.
- Jonathan Johnson:
- I would also say Ygal, we've had free shipping for orders over $45 for a long time. And so this is really a change just on the smaller. And what we watched carefully was, did it shift basket size other than the fact that there wasn't much of a change, so is a fairly easy decision to go forward and offer wholesale going forward.
- Ygal Arounian:
- Thanks. And then I want to ask also a little bit more about your brand and marketing. You hired Elizabeth, obviously, it's still a little bit early. She's not starting until late March. But kind of to those points also that things that you've seen this year, again, back to the purchase intent and the strong customer growth in 4Q, customers coming more to you guys for the home category and aiming to kind of become fully home as you set up to nearly 100%. How do you think as we kind of work through 2021? And you're trying to continue to take share in the category what your brand the marketing efforts will be? Thanks.
- Jonathan Johnson:
- Dave, you want to take the first answer as branding note.
- Dave Nielsen:
- Yes, our vision is Dream Homes For All, and we're going to lean into it heavily. We want to continue to grow our portion of the home business. That's our vision and our mission. Jonathan?
- Jonathan Johnson:
- I think you can see on that slide, where we listed the top 10, which historically versus the top five. But the reason why those other five below us is those are people that everyone associates with homes. We will continue to push so that everyone associate us with help. And when we look and we see what Elizabeth has done at the companies she's been, she's been great at repositioning and building brands. And that's why we're satisfy to have her joined.
- Ygal Arounian:
- All right. Appreciate it. Thank you.
- Jonathan Johnson:
- Great. Why don't we take one more set of questions from another person and then wrap it up?
- Operator:
- Our next question comes from Brad Safalow with PAA Research. Your line is open.
- Brad Safalow:
- Thanks for taking my questions. First, I was wondering if you could dimensionalize where you stand with your vendor partners, let's say at this point this year, relative to a year ago? And what I'm thinking about is, A, what kind of allegations you're getting from your existing vendors? B, how many new vendors have you been able to add to the ecosystem in the past 12-months?
- Jonathan Johnson:
- So where do we stand, we stand in a better place. They love our forecasting, that helps them run their businesses. They love our growth; that helps them be successful in their businesses. They love our level of communication. We've been very, very communicative during the pandemic. One thing they don't always love is our customer-centric approach, always wanting to do right by the customer, which sometimes means pushing them harder to get deliveries. In the end, they know that's better for them. As Dave mentioned, with our market share growth, we're getting more and more allocation from them. They're going to allocate to where they see growth. Dave, would you add anything to that?
- Dave Nielsen:
- No, agreed.
- Brad Safalow:
- Okay. And I know you guys are trying to separate from the discussion around tZERO, Medici to let's just say other platforms, which is on the tZERO front with coin basis value at $75 billion to $100 billion. And many people on this call think that tZERO has similar potential. Can you at least give us an update on some of the things that we're having discussed for tZERO? Notably, what are the prospects for new tokens trading in the next three, four months? Where do you guys stand on getting the self-custody issue resolved or the self-clearing issue resolved? And then when can we expect integration of tZERO crypto in tZERO markets?
- Jonathan Johnson:
- Great questions. Self-custody, I think they hopefully by the end of Q3. We're self-clearing rather by the end of Q3. One of the differences between coin base and the tZERO crypto app, is self-custody of the token, or the coin, and is important just kind of hardcore crypto folks find that, most people in crypto today don't think that's important. And so, tZERO is moving and I think in the next quarter, we'll have someone else cut through that and will feel more like coin base. And I think it'd be a much easier user experience. As far as getting new tokens, I think the recent announcements with Bartolo, Family Office Networks and the third company, which is escaping my name right now, those will help drive the biz dev for tokens. I suspect, we'll see doubling or tripling in tokens by the end of the year for tZERO. A lot of good progress is being made. As Saum has mentioned in his gallery report, tZERO is working to raise money. I think you will find that strategic partner and a money raise. It will see its token growth, its ability to market and do biz dev go way up. So, I do think it has enormous potential. I think really, it needs a strategic partner different than Overstock that is more Wall Street focused, that can really take off and that's where it’s focusing now.
- Brad Safalow:
- Thank you.
- Jonathan Johnson:
- Well, I want to thank you everyone for participating on today's call. If there's one thing that everyone should take away from the call is that Overstock is taking market share in the online home furnishing space. We grew 2.3 times the pace of online home furnishings market in general, and we took market share among those in the top 10. Sustainable, profitable market share growth. One other nugget to chew on. New home starts are expected to reach 14-year high in 2021, driven by record low interest rates and higher household saving rate. This macro environment bodes well for home projects overall and the related benefits in the home furnishing market throughout 2021, a market that we continue to grow in. I appreciate your interest and ownership in Overstock. Until we talk again, we'll be working diligently to deliver our 2021 plan. Thanks, everybody.
- Operator:
- Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone, have a great day.
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