Good day, and thank you for standing by. Welcome to the Third Quarter 2022 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, Lavesh Hemnani, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Overstock's Third Quarter 2022 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. Next slide, please. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, October 27, 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 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 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'll follow the agenda on Slide 3. With that, let me turn the call over to our CEO, Jonathan Johnson. Jonathan?

Thank you, Lavesh, and good morning, everyone. Let me begin by saying upfront that I'm not pleased with the top line revenue results in any way or form. I believe we continue to spend amply on marketing and growth efforts. But this is a hard and highly promotional environment, in which many of our competitors continue to liquidate products and/or ignore bottom line losses. We believe that will catch up to them. For some, perhaps sooner than later, as vendors and their financiers worry about payment risk and even longer-term viability. That is not a concern with Overstock. We are profitable for the 10th consecutive quarter, and we are here to stay. In today's environment, profits count. We believe profits are the right measure of the long-term winners versus losers in our industry. I believe that over time, we are well positioned to take market share from competitors, many of which are closing stores and/or are currently struggling with liquidity and distracted by debt management obligations. In the meantime, we will continue to navigate the near term, remaining confident that our longer-term results will be better because of our efforts and our focus on profitability. Since its inception, Overstock has transformed from a small online liquidator to a general merchandiser and more recently, a 100% furniture and home furnishings retailer, with a differentiated asset-light model and targeted customer base. I can confidently say that our updated business model and our disciplined execution over the last 3 years has enabled us to navigate the choppy waters of the pandemic and the difficult current economic challenges. With the economic environment expected to remain uncertain for the foreseeable future, the natural question is, how is Overstock positioned relative to our competition? Let me share some specific thoughts on that. The U.S. economy and…

Thank you, Jonathan. Slide 9, please. Revenue declined by 33% year-over-year in the third quarter. We managed through near-term challenges and delivered an adjusted EBITDA of $15 million at a margin of 3.2%. Our reported EPS loss of $0.81 was driven by a noncash, nonoperating expense associated with the change in value of our equity securities. The change primarily reflects dilution to our direct and indirect ownership interest in tZERO, following the Series B funding round, including the dilutive impact of tZERO-issued equity awards. We now hold approximately 29% direct interest in tZERO and approximately 25% indirect interest in tZERO through the Medici Ventures Fund. We reported adjusted diluted earnings per share of $0.13, a decrease of $0.41 versus 2021. This excludes the impact from our proportionate share of the Medici Ventures Fund performance and changes in value of our direct investment in tZERO, including the change in value of our equity securities that I just referenced. The decline in adjusted EPS versus last year was driven by lower pretax income. Our balance sheet remains strong. We ended with a cash balance of $428 million, even after funding $7.5 million for the second tranche of the tZERO Series B funding round. I will now speak to these quarterly metrics in greater detail in the following slides. Next slide, please. We posted revenue of $460 million in the third quarter, a decrease of 33% year-over-year. The third quarter was impacted by weak consumer sentiment and shifting spending preferences amidst challenging macro dynamics, including high inflation. Additionally, we faced headwinds from our strategic action to remove non-home products from our site. Our business continues to perform well relative to pre-pandemic 2019 levels, illustrating the operational progress we have made. This is evident in the 53% home-only sales growth versus 2019 that Jonathan…

Thanks, Adrianne. Our strong balance sheet certainly gives us more stability and flexibility. I continue to believe our shares are undervalued. However, given the revenue environment over the past 3 months, we conservatively chose to maintain a higher cash balance and positive repurchases. We will be opportunistic in evaluating future share repurchases. In addition, we continuously evaluate strategic M&A opportunities to accelerate growth. During the second quarter, we were in advanced stages of such a deal, the deal that made a lot of business sense in our asset-light business model. However, after thorough due diligence, we ascertain that while the business case was good, the target's operational model and its future investment needs were not currently aligned with our expectations. As a result, we walked away from the transaction. Rest assured, we will diligently scrutinize M&A opportunities to ensure that any potential transaction will be a strategic and operational fit with our long-term business priorities and objectives. Know that we will continue to be prudent in capital deployment to deliver the best outcome for all shareholders. Next slide. Next, I'll provide some key insights into our business and our strategic brand pillars. Next slide, please. We've 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. It is encouraging to see that the projection for 33% of purchases to be transacted online, especially since the categories comparing against some strong growth from the prior 2 years. Longer term, we still believe that as the market matures, there is sufficient room for online penetration to move higher. The furniture and home furnishings market is large and fragmented, with a total addressable market of $419 billion, based on third-party reporting. Large market provides us with additional opportunities to…

[Operator Instructions] Our first question comes from Peter Keith.

Good morning, everyone, and thank you for all the detail on the call. I know it's a challenging environment out there with a lot of excess inventory and price competition. I wonder, Jonathan, if you could just comment on kind of what you're seeing in terms of the intensity. You mentioned that the pricing environment is still tough. Has it gotten worse versus Q2, and maybe even getting worse as we're entering the holiday season? How is it shaping up for you overall?

Peter, the promotional activity is fierce. It stayed fierce through Q3. And you can see in Q4, we've already seen our competition have special promotional days. There were a second [ Time Day ], a second Way Day. We had our Overstock Day. Targets had a -- Target, Walmart had special promotional days. The holiday promotions aren't waiting for Black Friday and Cyber Monday, they're happening now. So promotion is tough and fierce, but we're playing in this space, and we'll play well, and we'll play it within the balance of profitability.

We have a question from Tom Forte with D.A. Davidson.

Great. Real impressive job on the profitability. The question I have is the good news or the silver lining in a dark cloud is that you've seen material improvements in supply chain, including the related costs, how is that showing up in your results? Is it having a positive impact on your gross margin as an example?

Let me talk briefly about supply chain, and then Adrianne can talk to how and if it's impacting gross margin. The supply chain is different than it was during different times of the pandemic. The cost in containers has come way down to pre-pandemic levels and even less. Factory usage in Asia is low, and that could turn to be of concern in the future because I think factory workers are going home and sometimes in factory workers go home, they don't come back. The ports are clear because there's not a lot of product on the water. So there's not the backlog there were in the past. Domestically, it's still tough with high fuel rates. There's accessorial surcharges to get product to warehouses and to get products from distribution centers to customers. So parts of the supply chain of these definitely has become less expensive, parts of them are still expensive. Adrianne, do you want to comment at all on what that means for what we're doing on gross margins, which I should say, we've continued to maintain at a good rate?

Yes. Jonathan, I'll just add our gross margin improvement year-over-year. Generally, Tom, driven by those operational efficiencies which we've seen, things like efficiencies in our customer care organization, returns, handling, merchant activities with our partners and negotiations. And these have really helped us offset this increased kind of highly promotional time.

We have a question from Anna Andreeva with Needham.

Great. Thank you so much, and good morning, everyone. We had two questions. You guys have done a really good job managing the expense base. Should we expect EBITDA margins still maintained at that mid-single-digit level next year if sales declined double digits again for the business? And then secondly, you mentioned sales trends improved in late third quarter. Can you talk about what drove that? And what are you seeing in the business quarter to date?

Yes. Anna, thanks. I'll pack into those questions. We're still in the planning phase for 2023, and it's in this highly promotional market with weird, tough macro times, it's tough to predict where we'll be 2023. I think you can -- we're in the planning process. I think you can expect us to give some more color on how we think 2023 to be when we announce our Q4 results. I will say, well, I've said that our aim for the annual adjusted EBITDA is mid-single digits for the year. That won't be the case this year because we're not quite there now [ and ] the fourth quarter is [ dealt ]. So I mean that's the thought on EBITDA. Adrianne, do you want to answer anything more on this? And then Dave, I'll look to you to maybe add some color. Dave?

Yes. On the sales trends, as we transition from the third to the fourth quarter, as Jonathan mentioned earlier, it is extremely promotional, highly promotional. And we've got a full lineup ready. We have some new and exciting types of promotions. It's just time to pull out all the stops right now. We're competing for a customer out there. Nothing further to add on that, JJ.

Yes. Fourth quarter has started [ tough ], just like the second and third quarters were. There's still a lot of fourth quarter in front of us, and there's still a lot of time when shoppers shop in front of us. So it's hard to know how the fourth quarter is going to come. You mentioned what happens if we continue to experience the whole business [ strength ] next year. That's certainly not the intention. The goal is to get back to growth. Like I said, we're in our planning process. We're seeing where things are. More color on that in the future.

We have a question from Steven Forbes with Guggenheim.

Jonathan, Adrianne, I wanted to explore customer demographic and engagement trends, given your commentary about the higher income customers. So curious if you can break down the customer base by household income level, just general percentages. And discuss if you're seeing any difference, right, in loyalty engagement and/or just what the conversion drivers are right among those different income levels.

Yes. I appreciate the question. We typically haven't, and we won't provide detail on customer demographics on a more granular level. We are seeing more 100,000-plus income demographic shop at us. We don't think that's a trade down because we don't think we're a trade down. We think it's a trade to value. We have that quality product. And customers at all income levels are looking for it. We think upper income -- the upper income demographic is becoming more value-conscious but not necessarily trade down at this point. Dave, anything you'd add on customers?

I would just add that as our mobile app continues to grow in the mix of our total business, that is a customer base that is in that category that Jonathan mentioned, the 100,000-plus, that is also driving that. And they proved to be a more loyal customer on the app.

Yes. I would say mobile brings 2 customers, these are higher-income demographic, and [ it brings ] a younger demographic. And those are not necessarily overlapping, but those are 2 demographics that come through mobile. . And I'm excited about this brand ambassador campaign. I think they're going to help our mobile app continue to be strong, and it's already our fastest-growing channel. So very exciting, I think.

Maybe just a quick follow-up on the brand ambassadors as it relates to the customers you're targeting. Curious if you can comment -- if you have any insight into their follower base in terms of who they are, right, their income levels? I mean, do the brand ambassadors have reach across a broad demographic profile? Or are you sort of targeting some subset of the U.S. consumer?

We do have a pretty broad reach. These were carefully selected ambassadors. We think they appeal especially to the savvy shopper, who we go after. But there, the focus in choosing them was more to get home-centric ambassadors that would appeal to folks that are already in the home shopping market, the decorating market, the home improvement market. That was the focus in picking these 6. I got to tell you, as I've met with them individually, they are -- not only are they just good, good people. They know their stuff, and their followers love them. And I'm a fanboy now. I'm really excited to have them on our team.

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

Just a follow-up on the gross margin question. Great to see the continued expansion there despite the elevated inventory and discounting pressure. Can you talk about your confidence in continuing to realize operating efficiencies as we think about the fourth quarter in 2023? I guess, I'm curious, to what extent you expect this progress to be sticky and perhaps create a stronger foundation for gross margin to expand from once the discounting normalizes? Because it seems like the 22% long-range target could have some upside potential in a more normal environment.

Yes, Rick, that's a great question. One thing that I think helps us maintain these gross margins even in a highly promotional period is our asset-light model. We own almost no inventory. And so we are not liquidating our own products. And when our partners have excess inventory, they're able to take the cost down that we pay them, and that allows us to keep this same gross margin. So while some of our competition that owns inventory, when they liquidate, it impacts their gross margin, we're able to compete at the same gross margin level. We've been asked a lot about where gross margins go in the future. How we've always answered and how we still answer is, as the market continues to penetrate until penetrating the online [ migrate ] into online, we think it's important to keep our gross margins roughly where they are, so that we get these new customers that are becoming online purchasers. We also think it's important to keep gross margins roughly where they are to provide smart value. When the market matures, that online penetration matures, we think that will be the time to take a look to determine whether it's time to do something with the gross margins. But don't expect that post this highly promotional period, we're going to start jacking up gross margins. The 22%, 23% range is really what helps us with our customer base. In that one chart where we're in the quadrant with lots of white space, there's a lot of room to grow there. And that gross margin helps us do that.

The c’mon get comfy campaign looks really great. I know it's only been a short period since it launched, but any initial read on the uptick in demand since it went live? And I know you have some really big hitters among the brand ambassadors. Along those lines, I guess, what's the right way to think about the outlook for sales and marketing expense, going forward?

Yes. So the c'mon get comfy ad has been out less than a month. It's hard to have super reliable numbers on it. But I will say, the initial numbers are good. And the traction it's getting, particularly where it's a little easier to track, YouTube and other online channels, have been really encouraging, pretty exciting. Second part of the question?

Yes, just the brand ambassadors. You have some pretty big names. So I'm just curious, how to think about the sales and marketing line?

Sales and marketing spend. Yes. So our goal is to keep our sales and marketing spend where it is, and it's moving marketing dollars from one channel to another and monitoring that carefully. Now I will note when the fourth quarter gets highly promotional, sometimes our marketing percentage ticks up just a bit. But we monitor that carefully because we don't have a lot of points in gross margin to spend more in marketing to gain profitability. So our marketing spend is about as high as a percentage of sales as I'd like to see it. And that's kind of what we're trying to maintain right now. Thank you, Rick, and thanks to everyone who participated in today's call. We appreciate your interest in and ownership of Overstock. We are in an industry that is going through a rough patch, but we believe we are navigating it well. We believe our strategy of spending for growth while focusing on profits with the right long-term and winning strategy. I wish all of you and your families a happy holiday season and remind you to shop early and often on Overstock if deals are great. We'll talk to you next quarter.

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