Good day, and thank you for standing by. Welcome to the Overstock.com, Inc. Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Lavesh Hemnani, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to Overstock's Second Quarter 2022 Earnings Conference Call. I am Lavesh Hemnani, Head of Investor Relations. Joining me on the call today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Additionally, Dave Nielsen, President of Overstock, will be available for Q&A. Please note that we are conducting today's call remotely. Next slide, please. Let me remind you the following discussion and our responses to your questions reflect management's views as of today, July 28, 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, 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 statement 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 important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Finally, to participate during our Q&A session, please use the registration link available under the Events section of our Investor Relations website. Next slide, please. During today's call, we will follow the agenda on Slide 3. And with that, let me turn the call over to our first speaker for today, Jonathan Johnson.

Thank you, Lavesh, and good morning, everyone. Let me start by saying how proud I am of the entire Overstock team for achieving our ninth consecutive quarter of profitability, and doing so in a particularly difficult environment. Our second quarter performance reflected the headwinds relating to weak consumer sentiment due in large part the macroeconomic and geopolitical volatility. This week has started to become more pronounced in late Q1 and continues through today. While we cannot control the macro environment and the impact of high gas prices, increasing interest rates, record inflation and uncertainties surrounding geopolitical events has on consumer sentiment and competitors' behavior, we can control and have controlled many elements of our business. In fact, our asset-light business model is highly advantageous during times like these. We don't have expensive logistics operation with high fixed cost base or significantly owned inventory on our balance sheet. We can and do continue to offer smart value to our customers as their wallets are stretched. Nine straight quarters of profitability with varied top line performance is a testament to this team's ability to run a profitable enterprise for our shareholders. While I am not pleased that our top line revenue is down 34% versus the historic high of last year, I am pleased that we were able to stay within the structure of our financial recipe card to deliver adjusted EBITDA margin of 3.9%, near the lower end of our stated targets. We increased share repurchases during the quarter showing further commitment to shareholders. Overstock remains in a favorable cash position with a strong balance sheet, well equipped to navigate through ongoing macro instability. Next slide. Since I became CEO in late 2019, we have operated our business under vastly different macro conditions. During 2020, the world plunged into a pandemic…

Thank you, Jonathan. Slide 7, please. I will begin with a summary of our second quarter financial results, followed by a more detailed review, including our key customer metrics. Next slide, please. Revenue declined by 34% year-over-year. But as Jonathan highlighted, increased nearly 44% on a 3-year basis. Despite our sales performance, we managed our business effectively to deliver adjusted EBITDA margin of 3.9%, a decline of 165 basis points versus 2021, but importantly, remains within our mid-single-digit target range, near the low end. The second quarter of 2022 was our ninth consecutive quarter of profitability. We reported adjusted diluted earnings per share of $0.19, a decrease of $0.54 versus 2021. The EPS decline versus last year was driven by lower pretax income and a higher effective tax rate. Our adjusted EPS excludes the impact from our proportionate share of the Medici Ventures fund performance and a onetime item resulting from our equity conversion. Our effective tax rate was 26.1% for the second quarter compared to a tax benefit during the same period in 2021. Our quarterly tax expense and rate were significantly different versus the same period last year as we released the majority of our valuation allowance in Q2 2021. As I mentioned on the last call, we believe that a tax rate in the mid-20s range would be appropriate for forecasting purposes, noting there can be fluctuations quarter-to-quarter based on discrete items. Our balance sheet remains strong. Even after executing on our share repurchase program in the quarter, we ended with a cash balance of $443 million. I will now speak to these quarterly financial metrics in greater detail in the following slides. Next slide, please. We posted revenue of $528 million in the second quarter, a decrease of 34% year-over-year. The second quarter was impacted by…

Thanks, Adrianne. In today's uncertain market -- I like this slide. Having a strong balance sheet certainly gives us more stability and flexibility in a world of uncertainty and rising interest rates. Next slide. Next, I'll provide some key insights into our business, including where our focused home strategy is paying off and where we are targeting and driving growth. Next slide. We shared this slide in the past to illustrate the direction of third-party forecast for online sales in the domestic furniture and home furnishings market. Based on revised third-party data as of June, online penetration in the category is still expected to track around 33% this year. However, this is now expected to be below penetration levels in 2020 and 2021, which were revised higher. These revisions are not surprising. It is encouraging to see the projection for 33% of purchases to be transacted online. Longer term, we still believe that as the market matures, there is sufficient room for online penetration to move higher. What also excites me is that the total addressable market for the -- in the U.S. for furniture and home furnishings continues to grow. It is now estimated at $419 billion, up from $390 billion based on prior third-party reporting. The larger market provides us with additional opportunities to gain market share in a highly fragmented space, even if online penetration declined slightly this year. As the fourth largest online retailer in the home furnishings in the United States our Smart Value brand pillar and strategy, focused on increasing the breadth and depth of our home product assortment, will help us serve this larger and still growing market. Next slide. I love showing this slide to remind investors that Overstock has significant white space available in the quadrant where home goods expertise meet…

[Operator Instructions] Our first question comes from Seth Sigman with Guggenheim Partners.

I'm looking at the EBITDA performance. It's continued to be impressive in this environment. I'm just curious about the sustainability of mid-single digits. If we're thinking about the potential for sales to continue to decline from here, especially in Q3 in a potentially lower volume quarter, could we start to see the operating deleverage get worse, particularly thinking about some of the more fixed expenses like tech and G&A? Or do you feel like you have some levers to continue to offset that?

Seth, thanks for acknowledging our EBITDA performance. Adrianne, I'll ask you to address that first, and I'll add some comments.

Certainly, Jonathan and Seth, I would just say, of course, as you mentioned in the second quarter, with our sales performance, we were able to deliver on our margin targets. And we've been able to do this over the last 4 quarters, where we've seen revenue declines. To your point, and in Jonathan's prepared remarks, we talked about our goal is to continue to deliver results in that mid-single-digit EBITDA margin and manage our expenses effectively. Jonathan?

Yes. Seth, we're always going to look at our expenses carefully. We've proven we can manage them, and we have a model that works that way. we are -- I should address the other part of, I think, your comment, and that's what are we doing to drive sales because top line growth helps all kinds of things. I'll say a few things that we're doing in merchandising and a few things that we're doing in marketing. In merchandising, we've made great strides in adding breadth and depth with SKUs. The team has aggressive plans to have SKUs through the year and is doing well in meeting those plans, adding SKUs from underpenetrated partner that sell through our competitors. So I think that is a big deal. I'll also note, some of the SKUs we're adding, I think, are particularly focused for second half of the year sales as we look for small appliances and things like that to help in the fourth quarter when those -- when people are looking for giftable home appliances. On the marketing front, -- we're working to leverage our app to increase customer engagement. Using our marketing communication, you can expect us to use more marketing communication to amplify our move to 100% home and to reengage with our existing customers and expand our customer base. Now that we're 100% home, that message and that brand association become more important and it's something we'll focus on. So Seth, thanks for the question.

And our next question comes from Rick Patel with Raymond James.

Jonathan, can you share your views on what's going on with pricing in the industry? It seems that companies are trying to take up pricing given inflation, but discounting is also up. So when you think about the bigger picture, do you think this net debt to prices being higher or lower versus last year for the home category? And as it relates to your business, we talked about the importance of having Smart Value. Just given what you're seeing with the pricing in the industry, do you see the potential to tweak your pricing favorably while continuing to remain very competitive versus others?

Rick, really cogent question. Let me provide some initial comments, and then I'll let Dave add some more color. During the second quarter, maintaining our pricing tenant of being the low cost on the Internet post promotion in our high-low model was challenging. As some of our competitors who own their inventory have publicly acknowledged they have too much and are liquidating it, I assume at a loss means that we're competing against people that are behaving, in some sense, irrationally by selling it a lot. We don't have that pressure because we don't own inventory. That said, during the quarter, we worked with our partners to get them to lower their first cost for us so that we could keep their products on our site, have it available to sell at competitive pricing within our pricing tests. We saw that particularly during the second half of the second quarter. We continue to see it some in the third quarter, and I think we'll see it through the third quarter. The good news is our team works with the partners, helps us get cost concessions so that we can keep competing price-wise. Dave, what would you add to that?

Just one additional point, John, I think well covered. We've increased our match rate percentage, if you will. It's a very, very challenging time for pricing, and we want to make sure that we know exactly where we are in the industry. And we feel confident that by hitting that 80% competitive rate, plus then take into consideration our coupons or discounts, it makes us the best deal out there. And as we've increased that match rate, we feel even more confident that all of those actions that Jonathan just talked about are resonating with customers and will continue to as we move through the fall. Jonathan, back to you.

Rick, let me add one thing. You asked will prices come down or will they continue to rise? Here's my guess. For products where our competitors and/or our partners have ample inventory, even over inventory, they'll come down. The areas where they're still waiting for product to get through the ports, they'll rise. So I mean, it's ECON 101, where supply is higher than demand, prices are going to come down. Where supply is less, then demand will go up. And I think there are categories like home -- like a patio outdoor furniture, where supply is ample right now, and there are a lot of deals to be had and we've got deals on Overstock. We're competing at the price level we want to compete. I hope that addresses your question, Rick?

Our next question comes from Peter Keith with Piper Sandler.

So the expense management is very impressive, and you have a lot of things going on. But I did want to focus on the order growth. You talked about the home sales growth of 60% from 2019. At the same time, your AOV is up, I'm calculating, 49%. So it does look like about 11% home order growth, which is about a 3.5% CAGR over the last 3 years. It seems a little low given all the goodness that's going on. So the heart of the question is, is that math about right? And are you potentially not advertising enough to drive your Smart Home value proposition?

Adrianne, I'll let you comment on the math, and then I'll talk through marketing efforts to emphasize the home.

Thanks, Jonathan. And yes, math directionally correct, Peter. I would just also include kind of that order frequency component as well, just looking at that kind of consistency and some uptick there. But yes, generally, your math is in line. Jonathan?

So on emphasizing our brand, associating our brand better with home. As I mentioned in past quarters, we felt like doing that, while we still had a good number of non-home SKUs on the site was premature. When you emphasize home and then people see jewelry or watches, we felt like we weren't getting the maximum bang for the buck. Now that we're 100% home, you can expect to see different branding campaigns being rolled out that show that we are a home. I think they're going to be exciting. I think they're catchy. I think the consumer is going to understand them. And as I've said many times, Overstock name recognition is very high. Our association with home is not where it needs to be. I think that will change over the coming quarters as you see more, better and more focused branding bringing out there. Dave, I know you're working closely with the marketing team. Anything you'd add there?

No, nothing to add. Excited for what's coming in at end of the third quarter.

Peter, hopefully, I addressed your question?

Yes, very helpful.

And the next question comes from Anna Andreeva with Needham & Company.

One quick one for us. You guys mentioned you saw a record high Memorial Day weekend, but then I think trends slowed towards the end of the quarter. Could you provide more color on that? I think June was good for the home industry overall. And curious what are you seeing in the business quarter to date?

Yes, Anna, thanks. Memorial Day was good. It was more than very good. It wasn't quite as good as last year, better than President Day this year, which I think is saying something given where the market was going. June was a little worse than May. July is a little bit better than June. I'll emphasize a little bit in that sentence. It's tough to know how the summer is going to play. And then what will happen when summer ends and people get back to work into shopping. We think we're in a good place. We continue to offer smart value. We continue with our high low promotional event. I do think that as a high loan retailer. The days when people are shopping at the holidays are important days for us to win. And we're getting better and better at it. And I'm looking forward to Labor Day, our Customer Day, Black Friday, Cyber Monday. The second half of the year has got some good events days that we think we can capitalize on.

Okay. That's super helpful. And if I could follow up, this is actually a follow-up on the previous question. Just considering the new marketing campaigns coming out in the back half to drive that home association for Overstock. Should we expect some step-up in marketing expenses as a result? You guys have managed that line item really well.

You can expect us to continue to manage it well. Dave, do you want to address how we -- how we're going to do brand launch and manage return on ad spend?

Sure. So as we look to some of the comments Jonathan mentioned about our upcoming home campaigns, we'll be shifting dollars between the channels, and we're always doing that. And we don't ever really reveal or provide specific details around each individual channel, but we will be increasing in some of our channels to broadly distribute our brand recognition of home and home furnishings. And as we do that, we'll be increasing in our influencer campaigns and rest of the brand ambassadors. Some very exciting things that we have coming that we're looking forward to. So as Jonathan mentioned, we will always watch the bottom line expenses. From a channel spend on our return on ad spend, the models are built to efficiencies and to a return level. And you could spend more and lose a lot of money doing it and grab a customer. But it's such a cost that it is -- the future value is not worth it. So we continue to balance those and watch our expenses as we do it.

Yes. I didn't know that we're committed to profitability. With our Smart Value, which means 22%-ish for the gross margin, there is some fixed expenses. We're going to be really careful in making sure that how we advertise, how we brand just within the return on ad spend metrics that we have and we're committed to.

And the next question comes from Victoria James from D.A. Davidson.

It's Tom Forte at Davidson. So can you talk about your Club O program? How are sales trending there versus trends overall? And do you have any plans to make any changes to Club O?

Tom, thanks for bringing up Club O. Year-over-year, it continues to grow. It remains strong. It's something we focus on. Those customers have a higher AOV and shop more frequently. We are working on some things to expand and improve our loyalty program. I don't want to go too under the covers on those. More to come. We think it's exciting and will help us grow when those are launched. But Club O continues to grow year-over-year and an exciting part of our business.

And our final question comes from the line of Curtis Nagle of Bank of America.

I guess the first one was focusing on mobile, right? So I think you guys have done a lot to increase the functionality and improving the experience, right? Downloads have been increasing all that. But if you just look at the percent of orders going through mobile, hasn't really budged? I think $5 rate quite might actually be higher than what we're seeing for the business as a whole. So I guess just why is that? Is it just going to take a little more time for it to catch up? How should we expect that channel to grow in terms of total sales going through it?

Yes. So Curtis, thanks for asking about mobile. It gives us a chance to highlight it some more and actually correct some assumptions, some flat assumptions in your question. Dave, why don't you give a little bit of color about what's coming through mobile, what we see and why we're so excited about it?

In the mobile app, business for us, that channel is, as mentioned in the remarks, it's our highest repeat rate and our highest conversion and our highest AOV. These are loyal customers. And once we acquire them and get them in the ecosystem, it is less expensive for us to advertise to them, to market to them and interact with them. So this is a channel, and it is growing and growing significantly for us. We don't reveal the individual channels growth publicly, but I will tell you this one is on a terrific trajectory. And we are continuing to invest in the capabilities and the marketing capabilities of remarketing efforts with the mobile app.

Yes. Thanks, Dave. And the other thing I would mention, Curtis, is with the mobile app, we're reaching a little bit different demographic -- not different in that it's not a savvy shopper and reluctant repressions, but a younger demographic. And it's important for us to pick that up to communicate actively with them. So mobile continues to grow, and we're excited about it. And more and more of our sales are coming through it. Did I address the question?

And I would now like to turn the conference back over to Mr. Jonathan Johnson for any closing remarks.

Thank you, operator, and I want to thank everyone for participating in today's call. I like our business. We have the right asset-light business model. We're focused on the right market in the furniture and home furnishings market. We're focused on the right customer segments, savvy shoppers and reluctant repression. Customers would have a natural tendency to shop with Overstock. We have the right team to execute and deliver both market share growth and profits. At the same time, even with steady macro and competitive headwinds, we have dry powder for strategic opportunities. And we have a portfolio of blockchain assets being well managed by Pelion that I believe has huge potential to drive value for our shareholders. Again, I like our business and I like our future. We appreciate your interest in Overstock [Indiscernible].

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