Good day, and thank you for standing by. Welcome to the Q2 2021 Overstock.com Earnings Conference Call. [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, Alexis Callahan, Head of IR. Please go ahead.

Thank you, operator. Good morning, and welcome to Overstock's Second Quarter 2021 Earnings Conference Call. Joining me today are Jonathan Johnson, CEO; and Adrianne Lee, CFO; Dave Nielsen, President of Overstock will also be available for Q&A. Please note that we are conducting today's call remotely. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, July 29, 2021, and may include forward-looking statements. Actual results may differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-Q for the first quarter 2021 and subsequent filings with the SEC and in our press release filed this morning. Please review the forward-looking statements disclosure on Slide 2 of today's presentation. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. This presentation is available for download on our Investor Relations website, and our summary slide contains instructions for asking questions during our Q&A session. And with that, let me turn the call over to you, Jonathan.

Thank you, Alexis, and good morning to everyone. I'm pleased to report that Overstock delivered both growth and profitability in the second quarter, the significant achievement for the company. We beat the year-over-year comp growing revenue 4% against a robust comparable period in our first full quarter lapping at the start of the pandemic. We did this by continuing to make foundational operational improvements to our business, executing against a disciplined strategy and focusing intensely on the things that drive results. During today's call, we'll follow the agenda on Slide 3. Next slide, please. Nearly 2 years ago, when I took the helm, the business was unfocused, it was less disciplined. It was trying to do too many and often competing projects, and it was experiencing an identity crisis. The e-commerce business wasn't being appropriately tended to as we were spending a lot of time and energy on the blockchain portfolio. I recognize that we were at a real moment for Overstock, and we had an opportunity to step back, assess the business, assess our strengths and weaknesses and evaluate the competitive landscape and how it has evolved. The senior team and I made several important strategic decisions that led us to where we are today. First, we decided to focus on our e-commerce business; second, we decided to lean into our home furnishings categories and decades of expertise there; and third, we decided to outsource the management of the blockchain assets to a capable venture capital firm, enabling all parties to do what they do best. So here we are, by design. We're intentionally operating in a large and growing furniture and home furnishings market. That market has increasingly moved online and is supported by favorable long-term macroeconomic trends. The pandemic accelerated this seismic and I think permanent shift…

Thank you, Jonathan. Slide 6, please. As already mentioned, we are pleased to have closed the transaction with Pelion Venture Partners in the second quarter, allowing us to de-consolidate the Medici Ventures businesses from our financial statements and record a gain net of tax as we recognized an initial upward fair value adjustment on the Medici assets and our direct minority interest in tZERO. Please note, my comments today will reflect results from continuing operations only. I will begin with a high-level summary of our second quarter results, followed by a review of key customer metrics and performance indicators. Next slide, please. We had yet another strong quarter, delivering year-over-year revenue growth while continuing profitability. Adjusted EBITDA was $44 million in the second quarter, a year-over-year decrease of $4.5 million as a result of onetime benefits recognized in 2020 and an improvement of $47 million compared to the second quarter of 2019. We reported diluted earnings per share of $1.72. Excluding the impact of the tax valuation allowance release, diluted earnings per share was $0.73 in the quarter, a decrease of $0.38 versus 2020 and an improvement of $1.10 per share compared to the second quarter of 2019. The year-over-year decline in diluted earnings per share reflects a $0.16 benefit from a nonrecurring legal accrual release in 2020 and a $0.12 impact from increased shares outstanding due to our successful follow-on offering last August and our digital dividend. Consistent with recent performance, our balance sheet remains strong. We ended the second quarter with $536 million in cash. Our cash balance reflects the funding of our capital commitment to the Medici Ventures fund and benefited from standard invoice timing and accounts payable. I will speak to the other financial metrics in greater detail in the following slides. Next slide, please. We…

Thanks, Adrianne. Our second quarter results were solid. We beat the comp during a quarter with a high bar. We were measured in our spending and generated operating leverage. We delivered $44 million of adjusted EBITDA at a margin of 5.6%. We again delivered profitable growth and within our target margin guardrails. It should be clear that this is the result of purposeful, meaningful foundational changes. Slide 14, please. Our consistent and solid performance is the result of operational changes and organizational discipline and focus. The Overstock team has embraced the changes and the strategy we've implemented. It's now in our DNA. Slide 15, please. I will now discuss our e-commerce business, including our strategy, operations and growth drivers. As I do, you will see how we are achieving these financial results. Slide 16, please. As we mentioned last quarter, Overstock is now a top 4 brand in the large and growing U.S. online furniture and home furnishings market, moving up from the #5 spot last year. Our long-term goal is to move up this list as we continue to take market share. This market is currently estimated at $325 billion. And if GDP is a proxy as it has been historically, many anticipate industry growth to continue in the single digits, perhaps a bit higher this year. The main shift in this market, however, is not whether consumers will continue to buy furniture and decor for their homes, but instead where they will buy those things online, or in store? It appears that a true secular shift in consumer behavior is underway and sticky, accelerated by the pandemic and aided by technology. While everyone we'll learn as society enters and comes through this post-pandemic transition period. There will be short-term shuffling of consumer spending, we believe most of the…

[Operator Instructions] Your first question comes from the line of Thomas Forte with D.A. Davidson.

Great. First off, congrats on the quarter. Second, 2 quick questions on retail and then one on tZERO. For retail, can you give a little more color on what drove your AOV in the second quarter? And then can you talk about order trends versus sales trends on the assumption you're not recognizing revenue till the actual product is shipped. And if you're so inclined, can you talk about the order trends versus sales trends quarter-to-date?

Thanks, Tom. Great to hear your voice. AOV in Q2. This is what you would expect to see happening as we lean into home. Home furnishings have average -- higher average order volume and non-home furnishing products. And when you think about last Q2 in 2020, we were selling a whole lot of products that weren't home, things like spools of elastic string as people were making their own face masks and things like that. So as we move into home, I think you can expect to see AOV increase. Dave, would you add anything to that? And do you want to comment on orders versus sales trends?

Sure. Hi, Tom, the increased AOV is thoughtful and intentional. As we continue to transition into home and lean into some of those product categories. As you know, we don't share between product categories, how they're performing individually. But we are seeing good signs of that transition, the customer -- our customer is becoming more and more comfortable with buying home. And an interesting metric and exciting metric for us is as that AOV increases, as customers buy larger items, they are more inclined to repeat more frequently as we are seeing. In terms of orders...

Yes.

Go ahead, Jonathan.

Keep going, Dave, Sorry. It's part of the [ comforts ] of being remote.

That is so true. And in terms of our order count, obviously, as we continue to shift out of those non-home categories and into home categories, you will see a transition in the number of orders, but an offsetting increase in AOV. Jonathan, back to you.

And, Tom, I don't think we're going to comment any more on quarter-to-date trends. We've said what we've said, and that's the color we're providing.

So a quick follow-up then on tZERO. At a high level, can you talk about the positive impact, I assume you've seen on trading volume from increasing the crypto tap from $500 a week to $25,000 a day.

Tom, I can't with the Pelion deal closed, we are less involved in the day-to-day of tZERO or any of the portfolio companies. That is a question, I think, is better off of the tZERO management team when they hold their quarterly call next month.

Your next question comes from the line of Anna Andreeva with Needham & Company.

Great. And congrats, great results on top of these tough compares. We had a couple of questions. Of course, I had a couple of questions. One on the near term, if I may, and one on more medium term. So understanding the quarter-to-date choppiness, if you will. Maybe talk about how you feel Overstock is positioned for back-to-school season this year. There are estimates out there for a pretty big back-to-school season for the industry, maybe specific category opportunities that were missed last year with a pandemic, that's one. And secondly, on SKUs, the SKU growth in the business has been pretty impressive, and this is with all the challenges with the supply chain across the industry. Obviously, you guys are taking share. Maybe help us unpack how should we think about the SKU growth next year. Just trying to think through the sales acceleration for '22 as supply chain opens up.

Let me take first kind of stab then pass both those questions for a little more color to Dave. First, quarter-to-date and what possibilities we have in the rest of the quarter. Certainly, the summer is generally starts a little slower. And I think we've seen that impacted this year as people are just vacation starved, travel starved. But when kids go back to school, parents go back to work, we think they'll be kind of return to what feels more normal in the shopping space. We have 2 big events coming up in the third quarter. Labor Day is a significant furniture purchasing holiday historically and our customer days, which follow that later in September are big deals. So we think some of that will be back-to-school. I'll let Dave comment more on that in a minute. As far as SKU growth, we are focused on building home inventory. We'll have some see shrinkage as we move out of non-home, but we think that can be more than offset by getting into new categories. There are some categories where we're market leaders, some where we are market competitors and some where we're just not there yet. And we are focused on remaining leaders, becoming leaders and getting into categories where we're not. So I think there's a lot of potential SKU growth is still there. Dave, you'd like more color would you get to that?

Honestly, on the back-to-school question, I would add that our back to school, back to dorm room. There's some pent-up demand there in terms of -- it's been a couple of years. A lot of the universities were closed last year. And as the college age students are headed back to dorm rooms, we have a strong bedding category and are poised and ready to take advantage of that in back-to-school advertising and promotions. On the SKU count, would love just to add to Jonathan's comments. We continue to add and lean into product categories and have a very data-driven approach on that. It's not just willy-nilly additions. But with 3,000 partners, we have partners all over the globe that are working to source and develop products for us to fit those areas where we see opportunity from search words and click-through rates on search words. So it's a very data-driven approach and confident in how we're attacking that.

Okay. That's super helpful. I appreciate that. But just on that, if I may add another one, just on the vendor checks. Our checks have been very constructive on Overstock. And I know a lot of things are being done very differently with this new overstock. Can you maybe, Jonathan, speak to some of the examples of how you guys view vendor relationships now versus several years ago.

Well, I mean, one of the things we're doing is we're focused on being an online home furnishings retailers. We talk to our partners frequently. We've got teams that talk to them every day. But even at the senior management level, the frequency of discussions and saying, what can we do for them? What can they do for us with specific ask as there's different partners. [indiscernible] this is -- it's turned into a real partnership. We help them with product design and where they can go next. We give them lots of analytics to see where the market is going and what they can do to be in front of the market. We pay on time, and we pay more quickly than any of our competitors. And I think that's important. The other thing that I think is treating them like a partner is we force no one into our fulfillment centers. We encourage them but we try and do in a way it makes sense for them. If it makes economic sense for them to be in 1 of our 3 fulfillment centers, that's where they come. They appreciate not having their arm twisted, to be forced to be somewhere they shouldn't be. So I think candidly, none of that is rocket science. Most of it is standard best business practice blocking and tackling. But that's what we do, and we do it every day.

Your next question comes from the line of Ygal Arounian with Wedbush Securities.

I have 2 -- I think one for Jonathan, one for Adrianne. Jonathan, on -- I want to go back to your comments about competitors in the ad market. Clearly, ad prices have gone up materially. I just wanted to see if we could expand on that a little bit. Are you saying that you're not stepping in as aggressively on the advertising side as some of your competitors? Are you kind of waiting for the market to normalize a little bit more. Maybe just talk about your ad strategy here. And then for Adrianne, I guess, I want to understand the comment around less seasonality given the fact that your 2Q kind of sequential growth was, if I'm looking backwards, and I know things have changed, but by far, as strong as it's ever been. So what drove that? And how does that fit into the comments around seasonality?

I'll start, turn to Adrianne and then maybe give to Dave has anything he wants to add to either both of them are. I think he's got relevant thoughts. On ad pricing being up, but I think there's a couple of things to think about here. One, Q2 2020 ad prices went down. And so the year-over-year comparable is skewed. Online advertising got cheap in 2020. It got more normal in 2021. And then I think as people tried to keep up with last year's growth, it got out of whack. It got expensive. Now we spent online. We spent more than we had probably thought we would, but we did not chase it all the way to the top. And some of our competitors got what I think into the inefficient ad spend areas, we didn't follow. But we did spend, and I think that's part of what helps us, we were very nimble and that's part of what helped us comp the comp and grow top line 4%. So we're going to be competitive. We're going to make sure that we're doing the best we can under our rubric of sustainable, profitable market share growth, but we're not going to be irrational in our spending. Adrianne, why don't you talk about seasonality and then we'll let Dave layer on top.

Certainly. Ygal, I think my comments is just generally around as we lean into continue to lean into home, we expect to just see less season or less volatility quarter in, quarter out. That's more around kind of being less giftable or left in those kind of niche areas where people aren't buying home furnishing all year. I would say within that, though, we do expect some variability by quarter depending on what categories of home people are purchasing. So there's hypes where people are purchasing increased patio. There's hypes where people are purchasing maybe a bit more of the giftable type home products generally, we're expecting to see less seasonality than we have historically because we're leaning into home furnishings. But quarter in, quarter out, there might be a slight sales mix within home. Dave?

Dave. Anything you'd add to either of those answers?

No, both very accurate. Spot on.

Your next question comes from the line Peter Keith with Piper Sandler.

Nice Q2 results here. Circling back on the large AOV increase. I think the shift to home makes a lot of sense. But you didn't mention price inflation. We know that there's price increases flowing through the channel, given elevated freight costs and the like. So I guess the core of my question is, what are you seeing there? I don't know if you want to quantify it is the price increases from your suppliers causing any gross margin pressure in the near term as you try to remain price competitive.

Yes. Peter, great question. Everyone knows that raw material costs are up, the labor costs are up, shipping costs are up. And so there is a lot of price pressure. Some of the costs we ask our partners to bear, some of the costs we bear and some we pass along to the customer. But we are always doing it within the constraints of having a very competitive price for our savvy shopper and reluctant refresher. It needs to be an easy experience for them. And when we take a piece of it, again, it has to fit our margin rubric it has to fit in our financial recipe card. And so some products, we wind up taking outside if that's necessary. So pressure is there thus far, particularly with our large distributed partner network of more than 3,000 partners, we've been able deploy in this space without having too much price inflation.

Okay. That's helpful. And secondly, I guess I hate to ask a short-term question. It seems like your stock has reversed this morning with the discussion around Q3. Would there be a potential you can quantify a little more detail of what negative single-digit means? And I guess, is the view without guiding that maybe the quarter could get better as we progress just based on perhaps easier compares and some of the major selling events that you've called out?

Yes, Peter, thank you. The color we give is what we're going to give. We're only 1/3 of the way through the quarter. And that first 1/3 is the hype of vacation time for most Americans. We're hyper focused on market share growth, and that means no matter what the market is doing, whether it's expanding, stagnating or even contracting we're going to do better than how the market performs. And we're going to keep doing that. So do I think we can have a better second 2/3 of the quarter than the first 2 thirds, of course, I do. That's what we drive for every day. Where I promise that. It's hard to promise what the future holds until I won't. But I'm very confident that we will outperform our competitors in the market. That's what we're about sustainable, profitable market share growth.

Okay. Very good. If I could ask one last question, too. You've talked about your 3 distribution centers, you're not forcing suppliers into them. Could you quantify where you are today in terms of the percent of sales flowing through your own DCs? And then secondarily, you talked about trying to move small parcel to guarantee 2-day shipping, which seems like it could be kind of expensive. You have to take up that flow through to your DC network in order to achieve that goal?

Let me start and if I get it correct or Dave wants to add, please do. [indiscernible] the 2 or 3 fulfillment centers is still relatively small. It's single-digit piece of our revenue. We think that will grow over time. But it needs to grow organically because it makes economic sense for us and for them. And we've got a plan to do that. As far as getting small parcels to 2 days, that is a 2-day delivery, that is a goal. We're not going to do it at the risk of hurting sales on 2-day delivery. So if it costs more that is competitive, we won't go there on those products. Part of it is just -- it is getting our partners to have their product located, whether it's in their fulfillment centers or our fulfillment centers closer to the customer and convincing them then that makes sense for them and for us. Dave, what would you add anything?

Nothing to add. Accurate spot on.

I would now like to turn the call back over to Jonathan Johnson for closing remarks.

Thank you. Thanks for participating in today's call. What you should take away from this second quarter report. First, that we've made and continue to make foundational operational improvements to the business. This has been the result of a lot of hard work and focused strategy. We still have plenty of more work to do, much of the blocking and tackling variety, and we will continue to execute and deliver. Second, but our market is large and growing and supported by favorable long-term macroeconomic trends that should enable sustained growth for years to come. We feel well positioned to continue to outperform and take market share. We appreciate your interest in ownership and Overstock. Until next time, we'll keep working hard to consistently deliver on our long-term plan. Thanks so much.

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