Good day, and thank you for standing by. Welcome to the Overstock.com Incorporated Fourth Quarter 2022 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, sir.

Thank you. Good morning, and welcome to Overstock's fourth quarter and full year 2022 earnings conference call. I'm Lavesh Hemnani. Joining me on the call today are CEO, Jonathan Johnson, CFO, Adrianne Lee; and 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 statement disclosure on Slide 2 of today's presentation. The following discussion and our responses to your questions reflect management's views as of today, February 22, 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, 2021, 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 management's 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. And with that, let me turn the call over to our CEO, Jonathan Johnson.

Thank you, Lavesh, and good morning, everyone. I'll begin today's call with an overview of the Overstock investment story and our progress since the pandemic began, before asking Adrianne to discuss our Q4 and full year financial results. Next slide, Overstock has been on a 3-year purposeful, strategic and transformational journey since I became CEO. We refocused management on the retail business and transitioned Overstock to a 100% home-only retailer. This transformation coincided with -- a dynamic shift in consumer spending behavior within the furniture and home furnishings category. 2023 will be Overstock's first full year as a home-only retailer in our 20-plus years of being a public company. Consistent on this slide summarize some of the progress we've made over the last 3 years. During that period, we have grown revenue by over 50%, outpaced the expansion in the furniture and home furnishings total addressable market and consumer expenditures and gained market share. Notably, our home product assortment has more than doubled since we began our exit from non-home products in January 2021. From an operational standpoint, our team managed budgets, found efficiencies and automation opportunities and took cost out of the business to ensure we achieve positive adjusted EBITDA for each of the last 11 quarters. We expanded gross margin nearly 300 basis points and adjusted EBITDA margin nearly 500 basis points. Let me be upfront, progress we have made over the last 3 years does not raise the fact that our 2022 performance was below our own expectations. Revenue declined 30% year-over-year, resulting in a loss of market share. While we delivered positive adjusted EBITDA in each quarter of the year, a weaker top line performance drove significant expense deleveraging even with our already lean organizational structure. During today's call, I will share areas of opportunity that…

Thank you, Jonathan. Slide 12, please, revenue declined by 34% year-over-year in the fourth quarter, which was pressured by an intensely competitive landscape and our strategic decision to remove non-home products from our site. Our gross margin performance was impacted by elevated discounting and increased freight costs. Through this challenging time frame, we still managed to deliver positive adjusted EBITDA of $7 million, a margin of 1.6%. Our reported EPS loss of $0.34 was primarily driven by a non-cash non-operating expense associated with the change in value of our equity securities and the associated tax impact. This change primarily reflects our proportionate share of the Medici Venture funds performance, including an updated valuation of the tZERO investment. We will provide an updated summary of our equity securities, including the Medici Venture Fund in our upcoming Form 10-K filing. Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.04, a decrease of $0.40 versus 2021. The decline in adjusted EPS versus last year was driven by lower pretax income. Our balance sheet remains strong. We ended the quarter with the quarter and year with a cash balance of $371 million. The year-over-year decline of $132 million was mainly driven by $119 million of investing and financing activities and a $13 million use of cash in operations. As Jonathan mentioned, we returned $80 million to shareholders via share repurchase and invested $15 million in tZERO. Next slide, please, we posted revenue of $405 million in the fourth quarter, a decrease of $34 million -- excuse me, 34% year-over-year. Weak consumer sentiment and a pressured housing backdrop continued to impact our top line performance. While we also face competitive pressure mainly from increased and earlier discounting activity during the quarter, the absence of non-home assortment following our…

Thank you, Adrianne. And to our shareholders, those are not the type of results we like to report we can and will do better. Next slide. I'd like to provide some thoughts on our outlook for 2023 and our strategic path forward before taking your questions. Next slide. We continue to direct our efforts to drive sustainable, profitable market share growth within our financial recipe card targets. While we did not achieve all the elements of this targeted financial model during 2022, we continue to believe this targeted framework is the right model for our business in the long and even medium term. We have clear focused strategies to deliver performance in line with these targets. Our gross margin performance is a good example of this. Despite the hypercompetitive environment with significant oversupply in the back half of 2022, our merchandising efforts and our asset-light business model enabled us to deliver on our gross margin target. 2022 top line performance was below expectations. Both the team and I know we must turn around performance. I still firmly believe we can expand our presence in the significant white space available to us; take market share while running a profitable business. That is not an easy task and 1 that few in our industry achieved, we believe we can and will over time. Next slide, before I talk about our strategic path forward, I will share some thoughts on our outlook for 2023. I think 2023 will be a tale of 2 halves in a year of rebuilding for Overstock as we get back on track to recover market share. From a broader industry perspective, we expect to see the following: Macro drivers of inflation and rising interest rates and the weak housing market will influence performance through the year. In 2022,…

[Operator Instructions] Our first question comes from the line of Peter Keith with Piper Sandler.

This is Matt Egger on for Peter. I guess, first in 2022, you highlighted how your pricing algorithms would remove items from the site if competitors took a markdown on that same item. The feedback we've received from suppliers is that, that was highly disruptive to their sales through Overstock? So I guess maybe 2 quick questions. Would you agree that the competitor markdowns were disruptive to your 2022 sales? And then, I guess secondly, are you contemplating an adjustment to your pricing algo to reduce the number of items getting pulled off the site when that happens?

Great question on the, I can just response and then look to Dave for any more color. It's important, given our smart value proposition that we went on pricing post promotion. Well suppliers may like to have little thicker margins we need their first cost to be low. And we approach them frequently to ask them to lower prices when it's important when they're not competitive. Most of the time, they make these adjustments. And so, there's no disruption in sales on the site or customer experience on the site. Some of the time, they choose not to make this adjustment, and we remove the products from the site to ensure that we have our smart value proposition being met. When we do this, partners frequently come back to us quickly, lowering their costs and coming back to the site. When partners behave the second way, it is slightly disruptive. But it's important that we do this so that we will maintain our smart value proposition. Dave, anything you want to add on that?

No, I think you answered that perfectly, Jonathan.

Our next question comes from Jonathan Matuszewski with Jefferies.

A lot of discussion this morning around the highly competitive, highly promotional industry backdrop Jonathan, I think you outlined an expectation for industry inventory rationalization to continue into at least the first half of this year. So in light of this expectation, do you think it's reasonable to expect gross margins to trend maybe south of that 22% at least for the first 6 months and recover thereafter. Any thoughts on kind of the cadence of how gross margin may trend this year would be helpful?

Yes, Jonathan, great question, and I think it relates to that last question we had. Our asset-light business model, even during a period of highly promotional liquidation sales by competitors allowed us to keep our gross margins at their levels in Q3 and Q4 last year. We don't own inventory. We haven't made bad buys. That's why we are always working with our partners to lower their first cost so that we can keep our -- gross margins at the level they have. So part of our differentiated asset-light business model lets us keep gross margins more consistently at the level we shoot for in some of our competitors. You saw that in the third and fourth quarter of last year. I think you'll continue to see it all throughout 2023. Adrianne, anything you want to add on that?

Nothing further to add, Jonathan.

Our next question comes from the line of Thomas Forte with D.A. Davidson.

One question and I'll get back in the queue. So Jonathan, can you compare and contrast today's home e-commerce market with a few prior notable periods, dot-bomb where a number of players exited the market, you took significant share in the Great Recession, a period of weak consumer spending where you generated your first profits?

Yes, I think there's a lot of similarities, Tom. I mean yes, at times where consumers look to stretch their, stretch their wallet and they become more thoughtful or the term I heard yesterday is more choiceful in their purchasing. Overstock has historically done well. Turning to Century, dot-bomb was your word, an Overstock went public and with the unique position, and we were strong during the Great Recession. We as we saw in the home furnishing and furniture, in particular, strong growth in our business now. So as customers look to stretch their dollars, they're more thoughtful in purchasing smart value resonates more and more of them become savvy shoppers. So it's hard to predict what the economy looks like in 2023, as I noted in my remarks. But I think we are well positioned for it and the strategies we're employing and deploying, I think, are good for growing in any kind of environment, but particularly a tough economic environment.

Our next question comes from the line of Anna Andreeva with Needham.

You guys have been helpful in the past in providing KPIs for the business and AOV slowed a bit this past quarter. Just any color you could provide on how we should think about that as we go through '23. Should AOV be still positive for the year? And secondly, I was just curious, performance of Overstock Day Event that you ran in October. Any learnings from that, that could be applied to events going forward and anything to call out about the new customer demo from this event?

Adrianne, why don't you talk to AOV and what we saw in Q4, like we usually do and then Dave, maybe you could talk to customer day and then I'll add some color at the end.

Great. So on -- as we mentioned, not giving kind of top line guidance, I'll share a little bit about AOV, you mentioned it didn't kind of grow as much as we have seen, that 4%, again, mainly driven by mix. But I would say, as I talked about gross margin, highly promotional discounting environment. Clearly, that impacts your AOV. So we have pretty sizable impact to that. I would also say that, as Jonathan mentioned, we increased our assortment and different offerings. We should see potentially some different seasonality of items of which we sell and then consumer sentiment, what people are buying, if they're buying the actual patio furniture or kind of patio refresh items. So I think those are some things that -- we'll expect to still see some potential variances in AOV pending those type of items.

And I would just add regarding Overstock Day or Customer Day as you refer to it, Anna. We continue to lean in to being a mobile-first retailer. And our mobile app was where we leaned, in heavily here. As you heard in the remarks, Jonathan mentioned, we had an increase of 500 basis points in the percentage of our 2022 mobile app purchases to our sales. That was directly influenced by the ambassador campaign, the brand ambassadors as we continue to push on our social media front, an area where we know we have opportunity to grow. Jonathan?

Yes, thank you, both Adrianne and Dave. Look, fourth quarter AOV is usually lower than the rest of the year because of giftables. People tend to spend more on themselves than they do on others. And fourth quarter is a gifting period. Customer Day was a win for us. We saw nice sales and we saw great mobile app adoption. I do think we'll see people in the good, better, best category, trading down this year. We've seen it already in the first quarter and some of our President's Day sales looking out for that best product, but for the product that they -- the best product they can afford for the money they're willing to spend a day, which appears to be a little bit less than they were willing to spend in the past.

Our next question comes from Seth Sigman with Barclays.

My main question is around profitability. I'm just wondering how you think about this and potentially a scenario where sales are down again this year. How do we think about the, deleverage in the model given that a lot of tech and G&A expense has been fixed in the past? Obviously, Q4 is really well managed, but just trying to understand sort of the breakeven points and how to think about that?

Yes Seth, I appreciate the question. As I noted in my prepared remarks, we are committed to and think we can be profitable for the year. Given seasonality and other things, there may be a time during the year when we're not. But we are always looking at our expense, G&A and tech expenses and how we spend marketing. We did some rightsizing in late Q3 that I think helped us and have us in a better place today. We're maniacal about expense control. And that's why I think that we can be confident and they will be profitable in the year. But you're right, you can't deleverage to 0, and we've got to get sales back to grow. And that's why we have this go-forward strategy we talked about. We're excited about that, and we think it will make a difference. And while the first quarter sales are still shrinking. We're confident that by the end of the year, we can get back to a place where it all makes sense. Adrianne, anything you want to talk about deleveraging is always a comfortable topic, the one worth discussing.

No, Jonathan, I think that was well said. Thank you.

Our next question comes from the line of Steven Forbes with Guggenheim Partners.

I wanted to focus on the active customer base given the first quarter-to-date net sales trend. It appears, Jonathan, correct me if I'm wrong here, that the expected quarter-over-quarter net customer loss remains elevated. So I would love if you could sort of take a step back and maybe talk again about the initiatives that you have planned here to drive engagement and loyalty among the current base? And then also comment on your reactivation strategy, right? When you think about just how many lapsed customers there are over the past couple of years here. Any comment on how you're thinking about reactivation opportunity in 2023?

Yes, Steven good question, let me make an initial comment, and then I'll ask Dave to add some more color. I'm really excited about our new co-branded credit card with Citi. It allows us to treat more customers like Club O customers and really super Club O customers because they earn points they can spend -- on Overstock purchases lots of places, not just Overstock. So I think that's going to clear more loyal customer better repeat rates. It will also let us go out and engage with new customers who haven't been with us before. A lot of efforts we're making on retention and reactivation. Dave, do you want to provide any more color?

Sure, Jonathan, Jonathan mentioned earlier in his remarks in his prepared remarks, the excitement over some of the leveling up we've done with our management team and our marketing team, in particular, I am really excited about. We've brought in some industry experts from several areas. And we're really looking forward to, as you think about some of those key growth drivers. Increasing our brand association with the home is really critical to getting that message out there and doing it through our brand ambassador program through some of our new television commercials. We're investing heavily there. That marketing team has yet to lap a year and will do so this year, gets a little bit of time for them to get up to speed and get a feel for all of the levers and opportunities and where they go with that. But we're seeing good adoption into our mobile app and with the younger demographic, and we're excited about that and think that, that is going to also pay us dividends as we move throughout this year and continue to drive our mobile-first presence.

Thanks Dave. On that marketing team, I love what they've done with our company ad, that's had really nice residents. And I think as they rollout more on our kind of brand transition to associate the owner stock name with home. That will pay dividends in this area, too, Steve.

Our next question comes from the line of Curtis Nagle with Bank of America.

Great, so just for the first one, Jonathan, you described this year as a tale 2 halves. I guess what do you think the likelihood or do you think you can return to revenue growth in the second part of the year or no?

In general, I think to the guidance, because I think the macro economy is tough, but I think with the efforts that we're taking internally, that's our expectation because you see assortment continue to grow with a larger and larger operating product, more new product as many of our -- partner suppliers get through their old inventory, can invest in new product. It's going to be an exciting time. So I want to be a little squishy, Curtis on my answer to that because we're -- it's an uncertain time in giving traditional guidance is not, but we are doing everything we can, and we plan -- to get back to growth in the second half, but not going to give guidance, say, for sure on that yet.

Okay, fair enough. And just as a follow-up. So I mean, in terms of thinking about marketing spend, you guys have been very, very disciplined. I guess would there be any willingness to pick that up, maybe trying to get customer acquisition going in or I guess, in the context of still pretty promotional competitive environment, maybe that doesn't make sense. How are you thinking through that?

Well, we think through that every day. I mean that's, it's kind of top of mind all the time. And you'll note that on our financial recipe card we're trying to get. We like marketing spend to be somewhere between 9% and 10% of revenue. We have picked that up. And we will continue to look at that to try and reignite growth, while maintaining profitability. But you can see, as we kicked it up even as we manage expense as well, that impacted where we came in with adjusted EBITDA percentage at the end of the year, a little bit outside of our mid-single-digit growth that we like to have on -- our adjusted EBITDA percentage. So we look at it. We'll continue to look at it. Dave, I know you're Adrianne -- is it was her team all the time. Anything else will comment on there.

I couldn't emphasize enough what Jonathan just said, it is a daily activity and discussion at Overstock. We understand deleveraging the top line is problematic, and we are working feverishly to prevent that.

Our last question comes from the line of Rick Patel with Raymond James.

And squeezing me in here. In terms of expanding the assortment in the home category, you touched on better performance of newer areas like giftables and national brands. Can you talk about the opportunity to lean into categories that are working well intra-quarter. So giftables may not be strong year round, but given high inventories in the industry, I'm assuming product is available? So how quickly can you chase into some of the stuff that's working. And on the flip side, with such a broad assortment, how do you ensure that consumers don't get overwhelmed by all the options they have?

I'll make 2 comments. I turn to Dave. 1, I think our balance sheet gives us great ability to add quickly inventory quickly. We did in the fourth quarter, we actually took some inventory like I mentioned, sold through it quickly. Our balance sheet means that partners, suppliers are assured they're going to be paid and paid on time. And that's been helpful as we've added new home partners, and we've done well adding new home partners. So those are important things. Dave, what would you add to this?

Yes, I would say that additional inventory we took on in the fourth quarter was a strategic move for us. As we've transitioned to a home and home furnishings retailer, -- some of those brands that we're seeing during the fourth quarter on Overstock ignited a whole group of small appliances, national brands who haven't necessarily been interested in doing business with Overstock that now are. As we mentioned, with the competitor -- a formidable competitor that is struggling considerably, there's an interest in replacing those sales, and we've had several national brands and retailers in the hundreds that are very interested in joining Overstock. So that's 1 component of it. The other component I would add is the findability of that product. And Jonathan mentioned in the prepared remarks, our improvements in search that are undergoing. We think that gives us the opportunity for customers to find that incremental additional assortment that we're adding, easier, quicker for an overall better customer experience. Jonathan?

Yes then David I'm glad you mentioned that because we [indiscernible] product findability has some gaps, and we're working through it. And we think when we do that, it's going to be a much better site experience and shopping experience for our customers. So I appreciate the question. Look, I'm pleased 2022 is in the review mirror. This year we will not forget nor repeat. The projects that this management team is diligently working on to improve oversight trajectory are exciting. I believe they will bear fruits. I believe they will. So I continue to be bullish about Overstock's future. Thank you, everyone, for participating on today's call. We appreciate your interest in ownership in Overstock and mind you, we are working the best we can to be good stewards of your capital. Thanks, everybody.

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