Overstock [OSTK] Conference call transcript for 2023 q1
2023-04-27 13:18:05
Fiscal: 2023 q1
Operator: Good day and thank you for standing by. Welcome to the First Quarter of 2023 Overstock.com Incorporated 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. [Operator instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lavesh Hemnani. Please go ahead.
Lavesh Hemnani: Thank you operator. Good morning and welcome to Overstock’s first quarter 2023 earnings conference call. I’m Lavesh Hemnani, head of investor relations. Joining me on the call today are CEO Jonathan Johnson and CFO Adrianne Lee. President Dave Nielsen will be available for Q&A. A slide presentation accompanying today’s webcast has been posted to our investor relations website and is available to download. Next slide, please. Please review the important forward-looking statements disclosure on Slide 2 of today’s presentation. The following discussion and our responses to your questions reflect management’s views as of today, April 27th 2023, and may include forward-looking statements. Actual results could differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2022, and in our subsequent filings with the SEC. During this call, we’ll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following managements’ prepared remarks, we will open the call for questions. To ask a question please use the registration link available under the Event section of our investor relations website. Next slide, please. During today’s call, we will follow the agenda on Slide 3. With that, let me turn the call over to our CEO, Jonathan Johnson.
Jonathan Johnson: Thank you Lavesh. Good morning, everyone. This morning, we reported our first quarter 2023 financial results with revenue in line with the expectations we shared with you in February. For the quarter revenue declined to 29% year-over-year, on a home only basis revenue declined about 27% year-over-year and improvement in trend. We are encouraged by these results, particularly how we were able to improve results later in the quarter and look forward to the key spring summer selling season. I am pleased with the focus of the Overstock team as it has delivered another quarter of positive adjusted EBITDA or 12 consecutive quarter of positive adjustment EBITDA, that’s three full years of consistent, positive performance. This is a testament to our asset light business model and the team’s disciplined operational approach. Adrian will discuss these results in more detail later. Next slide. We shared this slide last quarter. It highlights how we continue to expect 2023 to be a tale of two halves. This is a year of inventory rationalization for the industry, something that is taking longer than most expected. It is also a year of rebuilding for Overstock as we get back on track to retaking market share profitably. We remain confident in our ability to execute against our plan to turnaround top line performance. As a result, we reiterate our current expectations for a better second half compared to the first half of 2023 in terms of both top and bottom line performance. We continue to make meaningful strides in expanding the depth and breadth of our home product assortment. More on this later. We’ll note while recent volatility in the financial market certainly adds another wrinkle of macro concern, neither Overstock nor any of the Medici Ventures portfolio companies were directly adversely impacted by the recent regional banking crisis. Overstock’s healthy balance sheet places us in a strong position to navigate various uncertain macro and industry conditions that exist. When we look out to the remainder of this year it is not clear whether we will face additional headwinds from growing negative consumer sentiment or cutbacks and spending in our category from tighter liquidity or credit availability. However, this uncertainty is not impacting our team’s focus on improving our business performance. We continue to make progress on our strategic growth drivers and maintain our focus on the efficiency. Next slide. On this slide, we provide additional information on our home only active customer base, which we report on a trailing 12-month basis. As a reminder, we fully exited non-home merchandising categories at the end of June 2022. Our strategic focus on home has caused some pain in the short term, we continue to believe it was and is the right decision for our future. On the left, we show our home only active customer base over the last four years. This base peaked at about a million customers at the end of 2020 during the height of the pandemic. The shift in consumer sentiment and consumer spending preferences over the last two years has resulted in a decline in our active customer base. Importantly, even with this decline, we continue to track above pre pandemic levels with about 4.8 million home only active customers at the end of Q1. We have been able to attract new customers and retain many existing customers by executing on strategy to increase our presence in the large and fragmented furniture and home furnishings market. These efforts have been challenged by industry wide limited consumer engagement in the demand within the home category. Even so, we are optimistic about the future. We believe our on-going marketing campaign, growth in usage of the mobile app enhanced loyalty efforts and increased product assortment that is growing faster than our internal plan and better website experience should help us gain and retain more customers. Chart on the right shows the sequential change in our trailing 12-month home only active customer base. In the first quarter we lost about 281,000 home only customers on a net basis over the last 12 months. While it certainly does not feel good to talk about a declining customer base, I am encouraged that our losses have been moderating. We think we have the right strategies to put us back on a customer growth path or customer growth path sometime in the second half of the year. While we have seen a decline in the absolute number of active customers, we continue to see higher levels of spending for a home only customer compared to a non-home customer. We see this as a stamp of approval on our purposeful exit of non-home categories. Next slide. I’ll now provide a quick update on the Medici Ventures Fund. Pelion Ventures tie up venture partners the general partner in our Medici Ventures Fund will be hosting the second annual Medici Ventures Day on May 31. Registration details are available on our Investor Relations website. The event will feature interviews with the leaders of T V [Indiscernible]. All these companies received additional capital investments from Overstock and/or the Medici Ventures Fund within the last 18 months. Even in a challenge venture capital environment, these companies were able to access new capital and strengthen their teams. The event should provide helpful information on the markets in which these companies operate and their business models. As we do each quarter I’ll provide some fund updates. First, some of our shareholders have asked that we provide clarity regarding the disclosure related to Medici land governance and financial statement exhibits in our 2022 Form 10-K which we filed in February. MLG had a financing round at the end of 2022 raising capital from a third party investor. Neither Overstock nor the Medici Ventures Fund participated in this down route. This resulted in a reduction of the value of the fund’s holdings to about 2% of MLG. The impact of this is reflected on our Q1 2023 financials, but there was no impact to reported adjusted EBITDA or adjusted EPS. Second, through inclusive blockchain based compliance as a service provider, recently announced a partnership with crossover bank. At a time of increased volatility in the financial markets this partnership emphasizes the importance of the work being done by an inclusive to promote safe and compliant access to financial services. Third, it added two advisors [Indiscernible] to its leadership team as the company seeks to expand its digital currency management system offering to other markets. In my opinion, these advisory appointments and the 2022 edition of the CBDC team from Criteo position debt to capitalize on the research and rollout of digital currencies. Fourth as we shared last quarter, in January Overstock invested $10 million in GrainChain via a promissory note. Medici Ventures Fund also participated in this funding round. GrainChain provides a software suite to Farmer cooperatives that enables farmers to get paid 60% of the value of the commodity upon harvest, and the balance upon successful delivery to the end consumer -- end customer rather than the silo or the gray on there. The follow on investment in GrainChain will enable Overstock and its shareholders to participate in the future success of the company. Next slide. Now, for a brief update on our recent corporate events. In March, the board of directors of Overstock appointed Joanna Burkey as a new independent board member. Joanna currently serves as the Chief Information Security Officer at HP. She brings more than 25 years of experience in cybersecurity, information technology, data privacy, and digital strategy. Her wealth of experience and unique cyber security skill set complement the skills and strength of the current Overstock board members. With the addition of Joanna, the Overstock board now has eight members, seven of whom are independent. At the end of March, we file proxy materials related to our annual meeting of shareholders. The copy of these materials is available on our Investor Relations website. This year, we will be holding the meeting virtually on May 18, and invite all our shareholders to participate. Last week, we launched the next phase of our marketing campaign to improve our brand association with home. This next step builds on the gift company commercials we launched last fall, where we communicated Overstock’s transition to 100% home product online retail. The new your home your treasure commercial specifically focuses on Overstocks brand pillar of smart value, meaning quality on trend products for less, Our smart value brand pillar is a differentiator in the marketplace. This new phase of our marketing campaign highlights the joys of finding your perfect home furnishings or piece of furniture at the best price online. Now, I’ll ask Adrianne to review our first quarter 2023 financial results. Adrianne?
Adrianne Lee: Thank you, Jonathan. Slide 10 please. Revenue declined 29% year-over-year in the first quarter, mainly driven by continued pressure across the furniture and home furnishings industry, which is a combination of lower consumer engagement in the category and a weak housing market. Our gross margin performance was solid in the quarter and increased almost 20 basis points year-over-year as merchandising actions and operational efficiencies more than offset increased discounting in a highly competitive landscape. All-in for the quarter, we managed to deliver positive adjusted EBITDA of $3 million and generated free cash flow. Our reported EPS loss of $0.23 was primarily driven by operating losses and a non-cash, non-operating expense associated with a change in value of our equity securities and the associated tax impact. The change in the value of our equity securities reflects our proportionate share of the Medici Venture Fund performance, driven by an updated valuation of the Medici land governance investment. Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.10 a decrease of $0.31 versus 2022. Our balance sheet remains strong. We ended the quarter with a cash balance of $375 million, a slight increase from the fourth quarter. Our Q1 ending cash balance includes the 10 million outflow of cash related to our direct investment in GrainChain. Next slide. We posted revenue of $381 million in the first quarter, a decrease of 29% year-over-year. As I mentioned, the consumer continues to prioritize service related and need based spending, putting pressure on demand for discretionary home goods. Adjusting for non-home revenue, our home only revenue declined 27% year-over-year in the first quarter. Performance improved each month in the quarter, with a more meaningful improvement in March as our revenue decline moderated to the low 20% range year-over-year, compared to the negative 30 plus percent range we shared with you in February. Revenue performance was driven by fewer orders and a relatively flat average order value compared to last year. I will discuss our key customer metrics in further detail later. Next slide. Gross profit was $90 million in the first quarter, a decrease of $35 million versus the prior year. Gross Margin came in at 23.5% an 18 basis point increase versus the same period last year. The year-over-year increase is driven by merchandising actions and operational improvements partially offset by higher discounting compared to 2022. We continue to believe that the annual 22% ish range is the right range for us for a few reasons. It enables us to gain market share as a category continues to migrate online. We are yet to recognize our seasonal cadence as a home only online retailer and consumer spending in the category is not at a state of normality. Our gross margin performance is a positive proof point of our asset light model. We maintained our competitive pricing KPIs offering quality and sale for less and delivered gross margin in line with our targeted operating model. Next slide. G&A and tech expenses decreased $3 million year-over-year, which includes savings related to our organizational review in 2022 and benefits from efficiencies and automation partially offset by higher stock based compensation. As a percentage of revenue, G&A and tech expense was 13.4% in the first quarter, a deleverage of over 300 basis points compared to the first quarter of 2022 to this week top line results. We are disciplined in managing our expenses and consistently finding efficiencies across the organization even while compensation related pressures persist. On average, our business runs at around 50 million in fixed G&A and tech costs per quarter. That said, we are always looking for efficiencies to match our expense structure with our top line performance. Next slide please. In the first quarter, we delivered adjusted EBITDA of $3 million, a decrease of $80 million versus a year ago. We continue to manage factors within our control to help offset category headwinds and competitive pressures. We remain focused on managing our business profitably and pursuing strategies that will drive market share gains and shareholder value. Next slide. This slide shows active customers and order frequency, we measure active customers on a trailing 12-month basis, our active customer base declined to $4.8 million at the end of the first quarter. This decline in active customers is driven by two key factors; first, a deceleration in spending on home related goods including a shift in spending preferences, as consumers continue to spend on experiences and services, and second, a purposeful shift to transform into a 100% online home retailer. Orders for active customer were 1.57 in the first quarter, a decrease of about 6% versus last year and a decrease sequentially. Order frequency continues to hold up relatively better compared to our decline inactive customers. We expect that over time improving our brands association with home including increasing home assortment, growing mobile app usage and enhanced loyalty Offerings will help improve this metric. Next slide. Average order value was relatively flat year-over-year at $220. It will be improved slightly compared to Q4 as we shifted out of a more giftable assortment into patio furniture and home decor. We have seen some evidence of trade down across our primary categories and signs of deflation and product costs. To support our smart value brand pillar, we continue to offer compelling value to our customers and pass on cost reductions. Our competitive pricing continues to align with our internal KPIs even as we navigate a highly promotional environment. Orders delivered were 7.5 million for the trailing 12-month period. This is a decrease of 39% compared to the prior year, or 4.8 million orders. As I discussed earlier, the decline was primarily driven by weak consumer sentiments and a shift in their spending priorities along with the cumulative impact of non-home product removal from our site. Our AOV and revenue practice, customer metrics continue to support our future of being a home only online retailer. Next slide please. This slide provides a recasted view of our business excluding non-home revenue, which allows for a more direct comparison to our peers. As you can see on the chart on the left at the end of the first quarter, our comparable home related active customer base declined 29% versus the reported 35%. The chart on the right illustrates that our comparable home only revenue declined 27% year-over-year versus the reported 29%. On a sequential basis, the impact of the non-home category removal has moderated as we near the completion of lapping online home sales over the last 12 months. Next slide please. I will wrap up my financial discussion highlighting our strong balance sheet and minimal debt obligations, each of which continues to be a highlight and differentiator for Overstock. Our strong balance sheet gives us the opportunity to focus on executing against our key growth drivers and being opportunistic on capital deployment. It’s important to note that our cash balance increased quarter over quarter, even after directly investing $10 million in GrainChain and investments that we believe has promised a healthy return. We generated positive free cash flow in the quarter maintained a laser focus on expense management and realized operational efficiencies while slightly improving our top line trend. All of this enabled us to maintain a solid balance sheet, weather uncertain market conditions, and invest for market share growth. With that back to you, Jonathan.
Jonathan Johnson: Thank you, Adrianne. Thank you for protecting our strong balance sheet, a real differentiator in the market. Next slide. Next, I’ll provide some updates on how we are making progress on our strategies to return to gaining market share. Next slide. We regularly share this flywheel both internally and externally, as it outlines our key drivers to deliver growth, and helps us maintain focus on what matters most, those efforts that are critical to both our short and long-term goals. While these growth drivers are not new, we are always assessing and evolving their underpinnings to improve performance. As I’ve noted before, none of these growth drivers is particularly capital intensive. Importantly, all of them fit squarely within our asset light mind set to help us increase order frequency, retain and attract customers and gain market share. These are the right growth strategies for us. We are confident we have the right processes and the right people in key positions to lead our growth initiatives. These drivers focus us on being disciplined stewards of our healthy balance sheet and delivering and growing positive adjusted EBITDA. Next slide. As I noted, while our growth drivers have not changed, we are routinely assessing and deploying new tactics to improve our performance. Tactics are guided by our three brand pillars, accountability, smart value, easy delivery and support, each of which are an integral element and differentiator of Overstocks business. Today, I’ll share some color on recent wins, starting with loyalty offerings. Following the completion of our transition to 100% home online retailer last year, we have been focusing our efforts on enhancing our loyalty offerings. In the current environment, where the customer is less engaged in the overall home category, we need to ensure that our loyalty programs are compelling enough to attract new customers to our site by providing such benefits and special finance offerings or exciting in app deals and exclusives. Our newly launched co-branded credit card with Citi retail services is progressing well. It has been just over two months since the launch and the number of sales from these card owners is still small, but signups have been as we generally expected and order values and conversion rates are higher than the company average. We continue to believe these co-branded cards will help us to better market directly to these card holders and personalize our offerings to that, something we’ve not done particularly well in the past. As a next step in our loyalty efforts, we will be refreshing our private label store card later this year. Combination of these two cards, our Club O program and strong engagement through the mobile app should help Overstock attract new customers and win repeat business more frequently. On the important topic of SKU expansion, during the first quarter, we expanded our home product assortment by nearly 20%. This SKU growth is ahead of our internal plan and comes on the heels of doubling our home assortment over the past two years. While we continue to grow the depth and breadth of our product assortment, we are still well below some of our competitors. We know we have work to do and we are doing that work. Our merchandising organization is focused on expanding the breadth of SKUs across the good better best spectrum always adhering to our smart value brand pellet. As an example, within our rugs business, we have great relations with our partners and always have access to new and exciting products. However, as we have seen increased demand from the home customer for additional differentiated options, we see a growth opportunity to expand our rug assortment. We expect to see more new products available during the second half of 2023 as our partners redeploy cash that has been stuck in the industry wide inventory glut. We have also been improving our post purchase customer experience. Last year we talked about how we are diversifying our freight carrier now. This has contributed to an improvement in our less than truckload or LTL delivery timelines, easing what can sometimes be a pain point for our customers and negatively impact our NPS scores. We’ve made significant progress in improving delivery times during the first quarter of 2023. Our customers are now receiving LTL shipments two days faster. We also continue to make improvements in delivery times for our small parcel deliveries, and have done so without investing in expensive logistics infrastructure. Another key delivery metric that is improved is our accuracy of delivery time messaging, or the estimated delivery date shown when a customer places an order. Our on time accuracy improved nearly 500 basis points in Q1 compared to Q4. It is important that our customers receive their products on the estimated delivery date. Not a day earlier, not a day later. And that is happening more often. You can see that the entire Overstock team is focused on our brand pillars and growth drivers. Next slide. We continue to direct our efforts to get back to delivering sustainable profitable market share growth within our financial recipe card. We have clear and focused strategies to deliver performance in line with these targets. This financial framework is the right operating model for us in the medium to long-term. While achieving these metrics continues to remain difficult in 2023, I am encouraged that we performed in line with our gross margin and free cash flow targets during the first quarter. Before we take your questions, I will provide some color on quarters as a trend and our expectations for Q2 and beyond. As I indicated previously, we saw an improvement in our revenue trend in late Q1 which improved to the negative low 20s range in March. This negative low 20s performance is continued in April thus far. We are being cautious in our expectations for the rest of the quarter with a big portion of the spring summer sales still ahead of us. And while I’m hopeful for continued improving trends. It’s just too early to know how the quarter will go. There remains uncertainty around consumers spending. Housing market remains under pressure. Consumers continue to allocate dollars to services such as travel and recreation. As a result, the demand environment for discretionary home related purchases remains unpredictable. For one more quarter, we are still comparing against non-home sales, which impacts our year-over-year revenue trends. Regarding profitability, we expect to deliver positive adjusted EBITDA for Q2. As I indicated previously, getting back to our mid-single digit adjusted EBITDA margin goal is going to be difficult this year. However, we want to reiterate that we expect to deliver positive adjusted EBITDA for the quarter, and the year. Our ability to live by our profitability tenant and our strong balance sheet differentiate us among peers. This will continue in 2023. Now, operator, let’s take some questions.
Operator: [Operator Instructions].Our first question comes in from the line of Thomas Forte of D. A. Davidson. Please go ahead.
Operator: One moment for our next question. Our next question comes from the line of Steven Forbes of Guggenheim Securities. Please go ahead.
Operator: Okay, our next question one moment, please. And our next question comes from the line of Seth Sigmund of Barclays. Please go ahead.
Operator: One moment for our next question. Our next question comes from the line of Rick Patel of Raymond James. Please proceed with your question.
Operator: One moment for our next question. Our next question, it comes from the line of Anna Andreeva. Please go ahead.
Operator: Getting our next question. Our next question comes from the line of Curtis Nagle of BOFA. Please proceed with your question.
Operator: All right. Our last question will be coming from the line of Peter Keith of Piper Sandler. Please go ahead.
Jonathan Johnson: Alright. Well everyone thank you for joining our call. You are going to need a tough macro and industry environment and bullish on the over side business. We’re resting our topline slide. We live by our profitability tenant, and these allow us to maintain our strong balance sheet. With that last question want to. Thank you for participating in today’s call. We appreciate your interest and ownership of Overstock. We’re going to keep doing invest we can and make that a good investment for everybody. Thanks.
Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.
