Good day, and thank you for standing by. Welcome to the fourth quarter 2021 Overstock.com Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lavesh Hemnani, Head of Investor Relations. Please go ahead. Lavesh Hemnani;Overstock.com, Inc.;Head of Investor Relations: Thank you, Victor. Good morning, and welcome to Overstock's Fourth Quarter and Full Year 2021 Earnings Conference Call. I'm Lavesh Hemnani. Joining me on the call today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Additionally, David Nielsen, President of Overstock will 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, February 23, 2022, 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, 2020, and our Form 10-Qs for the quarters ended March, June and September 2021 and in our subsequent filings with the SEC. A slide presentation accompanying today's webcast has been posted to our Investor Relations website and is available to download. Please review the important 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 contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Finally, instructions to ask questions during our Q&A session are also available in the slide presentation. With that, let me turn over -- the call to the first speaker for today, Jonathan.

Thank you, Lavesh, and good morning, everyone. Overstock delivered its seventh consecutive quarter of profitability, right in line with our stated financial targets or what we internally call our recipe card for the business. This was intentional. We managed our expenses, especially our competitive online marketing spend during a highly competitive quarter to achieve this outcome. Even with the highly competitive ad spend environment and other industry-wide challenges, we delivered on our largest Cyber 5 period in the company's history. All year, we consistently illustrated our [ gained ] ability to provide smart value during key shopping events. I'm pleased with how the team managed to deliver profitability. During today's call, we'll follow the agenda on Slide 3. Next slide, please. This slide provides an overview of our operating and financial performance for the full year. 2021 was our second consecutive year of profitability and market share gains. We grew sales to nearly double our pre-pandemic run rate. Based on metrics we look at, which compares to our top U.S. home furnishing online peers, Overstock added almost 50 basis points of market share in 2021. This is an encouraging result considering the almost 200 basis points of market share we added in 2020. We are proving we can adjust to, execute through and take advantage of both positive and negative jolts to the market. I'm extremely proud of what this Overstock team has accomplished over the last 2.5 years. We refocused our marketing efforts on a target base of customers who have a higher propensity to shop with us and who spend more and at a higher frequency. We have made it easier for our customers to find and purchase great home products from our sites. Our customers can shop our large and growing assortment of quality home products at…

Thank you, Jonathan. Slide 7, please. I will begin with the summary of our fourth quarter financial results, including a review of key customer metrics and performance indicators, then I will summarize our full year 2021 financial results. Next slide. The fourth quarter of 2021 was our seventh consecutive quarter of profitability. We achieved profitability right in line with our stated targets while navigating industry-wide challenges, including a return of foot traffic to brick-and-mortar and a competitive ad spend environment. Revenue declined by 9% year-over-year but increased nearly 70% on a 2-year basis. Adjusted EBITDA margin was 4.5%, flat to 2020 and a 630 basis point improvement versus 2019. We reported diluted earnings per share of $0.68. If we exclude the impact of truing up our tax valuation allowance, which is customary when a release was done during an interim period as opposed to year-end and our proportionate share of the Medici Ventures fund performance, our adjusted diluted earnings per share was $0.36 in the fourth quarter, a decrease of $0.12 versus 2020 and an improvement of $0.81 compared to the fourth quarter of 2019. Our balance sheet remains healthy. We ended the fourth quarter with $503 million in cash and very minimal debt, resulting in a net cash position of over $450 million. As a reminder, our Board authorized a $100 million stock repurchase program in August last year. We have yet to execute against this program. It's important to note that we have been in a blackout period since December 1. I will...

Adrianne, if I may, I'd like to interrupt and go off-script for a moment. You're right to note that we've been in a blackout period since December 1. I expect some of our owners are wondering about our intentions to use the Board authorized $100 million stock repurchase program. While I won't comment on when or how much of the $100 million we may use to repurchase shares, I will say the current stock price does not accurately reflect our view of the current and potential value of the business. Excuse me, Adrianne.

Thank you, Jonathan. I will speak to these quarterly financial metrics in greater detail in the following slides and then provide a summary of our full year results. Next slide, please. We posted revenue of $613 million in the fourth quarter, a decrease of 9% year-over-year and an increase of 68% compared to the same period in 2019. The fourth quarter had industry-wide challenges and was impacted by our strategic actions. We intentionally chose not to chase higher ad spend and deliver on our profitability targets. We realized a negative impact from lapping Customer Day in 2020, which we moved into the third quarter in 2021. And aligned with our broader strategy, continued to remove non-home products from our site, impacting a highly giftable period and recognized an outsized impact compared to prior quarters. Revenue was positively impacted by a 23% year-over-year increase in average order value and a year-over-year improvement in order frequency. Average order value increased versus last year as a result of increased sales in our key furniture categories. I will discuss these metrics in further detail later. Our strategy to exit non-home categories is the right move for our business. It increases Overstock's brand association with home and our home customers spend more and repeat at a higher frequency. Next slide, please. Gross profit came in at $139 million in the fourth quarter, a decrease of $12 million versus the prior year and an increase of $64 million compared to the fourth quarter of 2019. Gross margin was 22.7% in the fourth quarter, which is right in line with our targeted range. This is an almost 20 basis point improvement versus last year and flat to the third quarter of 2021. I will note that we were able to maintain gross margin relatively flat sequentially even…

Thanks, Adrianne. The team executed well during the fourth quarter, navigating competitive marketing pressures and industry challenges to deliver profitability for the quarter and the full year. We grew and took market share for the year. Our team is focused on delivering against our targets and committed to continue to drive meaningful, foundational operational changes. Before I proceed to the discussion on our business and brand pillars, I'd like to provide some clarity around recent executive departures and what appeared to me to be some misguided commentary on that. First, these departures were not the result of disagreement regarding our business model or strategy. Second, the current Overstock team is fully equipped with [ required ] decision-makers. I'm confident in Dave Nielsen and the rest of the team. Dave is a master retailer and operator. This team can and is executing on our home focused strategy this year and beyond. And third, as I shared earlier, Overstock is attracting top talent across various levels of -- in the organization. I expect that to continue. Slide 16, please. Next, I'll provide some key insights into our business, including where our focused strategy is paying off and where we're targeting and driving growth. Slide 17, please. Online penetration continued to grow in 2021, even after the large uptick in 2020. It's encouraging to see that about 1/3 of home furniture and furnishings purchases in the U.S. are transacted online. Importantly, third-party forecasts project continued online migration into 2022 and beyond as customers recognize the broad assortment available, the value and the ease of purchasing online. New estimates from our third-party sources now place the total addressable market at roughly $390 billion, up 20% from previous market reporting. As we look ahead, Overstock's business should benefit from the combined tailwinds of a growing…

[Operator Instructions] Our first question will come from the line of Anna Andreeva from Needham.

Great. We have 2 quick questions. First off, congrats on controlling the controllables during a really tough quarter. So this is to Adrianne, I guess, question on OpEx. Sales and marketing dollars were down, I think, first time since '19 during the quarter. How sustainable do you think that is as we look into '22? Does this mean privacy change impacts are now largely behind the company? And then secondly, to Jonathan, you mentioned high single-digit sales growth for the year for Overstock and outpacing the industry. And apologies if we missed it, but curious, what type of growth do you expect to see of the home furnishings category in '22? And for Overstock specifically, should we expect to see sales inflection starting in the back half as the category exit is behind us and some sequential improvement here for now in the first half?

Anna, thank you for those questions. Adrianne, I'll let you first address the question about sales and OpEx.

Yes. And I think we don't tend to give specific color, kind of, on our sales and marketing line, what I will say, as Jonathan mentioned in his scripted remarks, we're committed to our mid-single-digit adjusted EBITDA target. I think as we've discussed before, we balance our marketing spend across various channels and discounting promotional activity and ad spend. And so we look at those all carefully and manage them within the channel, though as targets.

And as you asked about high single-digit growth and outpacing the market, we do think, and as I mentioned in the script, that Q1 has a tough year-over-year comparable. And historically, Q1 revenue has been slightly lower than Q4. So we do see that growth picking up in the latter half of the year as we look to the annual guidance we gave of high single-digit revenue growth.

And our next question will come from the line of Seth Sigman from Guggenheim.

I just want to piggyback on that last question. So Jonathan, how are you thinking about industry growth for the year? So high single digits, are you assuming that online home furnishings grows high single digits? Or I mean, how do you think about that? And then just on the cadence part, I just want to dig into this a little bit more because normal seasonality would suggest that growth in the first half of the year could be down double digits year-over-year. Is that right? Is there a reason why that wouldn't be right? I'm just curious how you're thinking about that.

Seth, good questions. We do think that we're going to outpace the industry with at least high single-digit revenue growth. As I mentioned, Q1 historically has tended to be a little smaller revenue-wise than Q4. But for the last couple of years, Q2 has been our largest quarter of the year from a revenue perspective. So we look at a lot of forecasts. We know unemployment is down. We know housing starts are down a little bit. There's tailwinds, there's headwinds, but we really think that the market, wherever the market grows, we can outpace it, and that's at least high single digits.

And our next question will come from the line of Thomas Forte from D.A. Davidson.

I wanted to ask about tZERO. So for the investments, if you can't -- or can you give incremental details on the terms? How much was invested, at what valuation? And if you can't provide that, can you at least provide some level of directionality versus the last funding for tZERO?

Yes. We can provide some information. ICE has been specific in saying does not want to disclose the amount that it invested. It did lead the round. When Pelion, the Medici Venture or the Medici Fund, general partners at Medici Ventures Fund would participate in a round, it asked overstock That if we wanted to participate too, given our direct holdings already in tZERO. You will see in our 10-K, which we expect to file later this week that following the closing of everything, Overstock will have contributed $15 million in this round, and our direct equity interest in tZERO will be reduced from approximately 40% to approximately 34%. We expect that the Series B -- well, the Series B shares were purchased at a price lower than the fair value per share of the common shares as of December 30 -- 31, 2021. We don't know the impact yet on our financial statements. But let me say this, to have an industry leader, someone that has creates (sic) [created] and does create markets, someone like ICE lead around and be a co-investor, we think is just fantastic for tZERO. That was one of the reasons that we were eager to use some of our capital. People are always asking us what we're going to do with our capital, to use some of our capital to invest in this round alongside ICE. Tom, I hope that addresses your question.

And the next question comes from the line of Peter Keith from Piper Sandler.

I guess I just want to reflect back on Q4 because you guys were expecting growth for the quarter, came in down negative high single digit. You understand the environment maybe got a little bit tough industry-wide, but anything company specific that happened either operationally or within the forecasting? And then I guess just playing that forward, that you get confidence around the high single-digit sales growth guide off of the Q4 guidance miss. What gives you confidence in this type of growth?

Sure. Let me address that initially. And then I'll turn to Dave to add some color about Q4. We did pull our Customer Day event, which historically has been in Q4 to Q3. Even with that, we still thought we would have a higher revenue growth in Q4 than we did. It was a competitive market. There were -- people were spending more online than we thought was for their advertising -- online advertising than we thought was appropriate. There were -- there was some, I think, fear among consumers that if they didn't purchase early enough in the quarter online, it wouldn't get to them as it relates to Overstock that fear was unfounded, but it still met some traffic moved to brick-and-mortar that we weren't expecting. But I will tell you this, the team adjusted quickly. We delivered our best Cyber 5 ever. And I think despite some of the challenges we did well. Dave, what would you add to that?

Well, in terms of the confidence moving forward, when you think of some of the product categories and the mix shifts that occur in them over time, Jonathan mentioned, as we move into the second quarter, for the last couple of years, it's been one of our biggest quarters. It's also one of the quarters in which one of our power categories is most exposed in outdoor patio furniture, and an area that's already performing for us, and we're very excited to see the next couple of quarters and how that translates. Back to you, Jonathan.

Thanks, Dave. Look, the future is always hard to predict. And it's one of the reasons we're -- we've been hesitant to give guidance and why we're not talking about quarterly guidance. But we do think for the year that we're well positioned to beat the market and deliver high single digits and deliver at least high single-digit growth.

Our next question will come from the line of Curtis Nagle from Bank of America.

Thanks very much. So yes, as we've been kind of talking about pretty significant news on tZERO. I guess for some of those who are retail analysts and a little less familiar, maybe just a refresher or just, Jonathan, some comments in terms of like, as you said, the endorsements, investments, right, for ICE is pretty significant. What do they find to be the most attractive assets here? The biggest growth opportunities? And then I guess, as a related point, what are, I guess, the capabilities, the strategic prowess, what does David bring here in terms of his new role here? Yes. Color to that would be...

Great questions. Let me jump in and I'll answer the second first and then the first second. David is a 20-plus year senior executive at ICE. He's a named executive officer. He's Chief Strategy Officer. He has helped build exchanges and markets for ICE. When we look -- I know when the tZERO Board looked to find an industry expert, it couldn't have hoped to find anyone better than David. I won't comment on what ICE sees because I think that's for ICE to comment on. But let me tell you what I see at tZERO. tZERO, has an exchange, it's ATS, which is allowed to use blockchain. Blockchain holds the promise for the trade being the settlement. We're taking the swap out of the settlement system. Currently, trades settle at trade plus 2 or T+2, tZERO offers the ability for trade plus zero or tZERO. And also, I think there's great opportunity with NFTs, non-fungible tokens, great opportunities with crypto. To me, tZERO can be a crypto wallet, an exchange for NMS securities, an exchange for security tokens, an exchange for NFTs. To me, it's -- welcome to the 21st century of trading, or tZERO. And I think it holds a lot of promise. I think it holds even more promise with a partner like ICE and its ability to partner with its sister companies in the ICE umbrella and a leader like David who has built and done this before.

Our last question will come from the line of Brad Safalow from PAA Research.

Can you just parse out maybe a little more specifically because you've mentioned that maybe half a dozen times. What was the actual numerical drag from exiting non-home categories on your revenues? I have it is like a 450 to 500 basis point drag in terms of revenue growth in the quarter -- in the fourth quarter?

We've not provided that. We know roughly what it is, but that's not something we're talking to. Like I said, we started what we're calling [ Nexit ], non-home exit, non-home good exit in Q2 of 2021. It will continue through the end of -- excuse me, Q2 2022. We think we are adequately offsetting it with new home SKU growth. We expect new home SKU growth to continue, both in breadth and depth, particularly the supply chain challenges loosen and ease, we think that's the time where SKU growth could really increase and do that. So there is some short-term headwind, but we think the long-term tailwind of being in home, being more associated with home where shoppers purchase more frequently, bigger order size or just better customers is worth -- the long-term gain is worth the short-term pain isn't that what people say, and that's what we believe here. Let me thank everybody for participating in today's call. We like our business. Our strategy is aimed at increasing Overstock's brand association with home. Our business model is advantageous and resilient within economic cycles, especially with the foundational operational improvements we've made and are continuing to make. We remain in a favorable position to deliver market share growth and profits to the bottom line. And we have exciting things happening in our blockchain portfolio, especially and most recently at tZERO. We appreciate your interest in and ownership of Overstock. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.