Good day, and thank you for standing by. Welcome to the First Quarter of 2023 Overstock.com Incorporated 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 our speaker today, Lavesh Hemnani. Please go ahead.

Thank you, operator. Good morning, and welcome to Overstock's First Quarter 2023 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. Our 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 statements disclosure on Slide 2 of today's presentation. The following discussion and our responses to your questions reflect management's views as of today, April 27, 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, 2022, 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 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.

Thank you, Lavesh. Good morning, everyone. This morning, we reported our first quarter 2023 financial results with revenue in line with the expectations we shared with you in February. For the quarter, revenue declined to 29% year-over-year. On a home-only basis, revenue declined about 27% year-over-year, an improvement in trend. We are encouraged by these results, particularly how we were able to improve results later in the quarter. And look forward to the key spring-summer selling season. I am pleased with the focus of the Overstock team as it has delivered another quarter of positive adjusted EBITDA, our 12th consecutive quarter of positive adjusted EBITDA. That's 3 full years of consistent positive performance. This is a testament to our asset-light business model and the team's disciplined operational approach. Adrianne will discuss these results in more detail later. Next slide. We shared this slide last quarter. It highlights how we continue to expect 2023 to be a tale of 2 halves. This is a year of inventory rationalization for the industry, something that is taking longer than most expected. It is also a year of rebuilding for Overstock as we get back on track to retaking market share profitably. We remain confident in our ability to execute against our plan to turn around top line performance. As a result, we reiterate our current expectations for a better second half compared to the first half of 2023 in terms of both top and bottom line performance. We continue to make meaningful strides in expanding depth and breadth of our home product assortment. More on this later. I will note, while recent volatility in the financial market certainly adds another wrinkle of macro concerns, neither Overstock nor any of the Medici Ventures portfolio companies were directly adversely impacted by the recent regional banking…

Thank you, Jonathan. Slide 10, please. Revenue declined 29% year-over-year in the first quarter, mainly driven by continued pressure across the furniture and home furnishings industry, which is a combination of lower consumer engagement in the category and a weak housing market. Our gross margin performance was solid in the quarter and increased almost 20 basis points year-over-year as merchandising actions and operational efficiencies more than offset increased discounting in a highly competitive landscape. All in for the quarter, we managed to deliver positive adjusted EBITDA of $3 million and generated free cash flow. Our reported EPS loss of $0.23 was primarily driven by operating losses and a noncash nonoperating expense associated with the change in value of our equity securities and the associated tax impact. The change in the value of our equity securities reflects our proportionate share of the Medici Venture Fund performance driven by an updated valuation of the Medici Land Governance investment. Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.10, a decrease of $0.31 versus 2022. Our balance sheet remains strong. We ended the quarter with a cash balance of $375 million, a slight increase from the fourth quarter. Our Q1 ending cash balance includes the $10 million outflow of cash related to our direct investment in GrainChain. Next slide. We posted revenue of $381 million in the first quarter, a decrease of 29% year-over-year. As I mentioned, the consumer continues to prioritize service-related and need-based spending, putting pressure on demand for discretionary home goods. Adjusting for non-home revenue, our home-only revenue declined 27% year-over-year in the first quarter. Performance improved each month in the quarter, with a more meaningful improvement in March as our revenue decline moderated to the low 20% range year-over-year compared to the negative…

Thank you, Adrianne. And thank you for protecting our strong balance sheet, a real differentiator in the market. Next slide. Next, I'll provide some updates on how we are making progress on our strategies to return to gaining market share. Next slide. We regularly share this flywheel both internally and externally as it outlines our key drivers to deliver growth and helps us maintain focus on what matters most, those efforts that are critical to both our short- and long-term goals. While these growth drivers are not new, we are always assessing and evolving their underpinnings to improve performance. As I've noted before, none of these growth drivers is particularly capital intensive. Importantly, all of them fits squarely within our asset-light mindset. They help us increase order frequency, retain and attract customers and gain market share. These are the right growth strategies for us. We are confident we have the right processes and the right people in key positions to lead our growth initiatives. These drivers focus us on being disciplined stewards of our healthy balance sheet and delivering and growing positive adjusted EBITDA. Next slide. As I noted, while our growth drivers have not changed, we are routinely assessing and deploying new tactics to improve our performance. Tactics are guided by our 3 brand pillars: product findability, smart value, and easy delivery and support, each of which are an integral element and differentiator of Overstock's business. Today, I'll share some color on recent wins, starting with loyalty offerings. Following the completion of our transition to a 100% home online retailer last year, we have been focusing our efforts on enhancing our loyalty offerings. In the current environment, where the customer is less engaged in the overall home category, we need to ensure that our loyalty programs are compelling enough…

[Operator Instructions] Our first question comes in from the line of Thomas Forte of DA Davidson. Please go ahead.

So Jonathan, it's been more than 1 year now since David Goone became CEO of tZERO. When can investors expect additional details on the strategy for leading tZERO? And then in addition, how should investors think about the current competitive environment for tZERO given some of the challenges large players are facing right now, such as one that's involved in a lawsuit with the SEC?

Tom, thank you. I appreciate that question. The closing of the ICE, investment round was a material event for tZERO. This capital infusion certainly helps -- should help tZERO pursue strategies to accelerate growth. tZERO recently sharpened its focus with the closure of crypto trading to help companies and investors raise and trade capital in primary and secondary markets. Now to your question about when to expect future updates, it's difficult for us to put a time line since Overstock is not involved in the day-to-day operations. To the extent we can, Overstock does provide updates on tZERO and the other companies in the Medici portfolio -- Medici Ventures portfolio. And I would encourage you and everyone else to tune in to the upcoming Medici Ventures Day on May 31 for additional insights into tZERO and the other participating companies. You can also submit questions related to tZERO or anyone else participating in the event by going to our investor website. And I know one other thing, Tom, a lot of people in this space have been, I think, selling what they don't have. David Goone is a trusted operator. He will report on what he's delivered rather than on what he hopes to deliver in an industry full of likes of FTX and [ SBF ], we're glad to have someone who's going to say what he's done rather than promise something that may or may not get done.

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

Jonathan, I wanted to start with the new marketing campaign. So curious if you can expand on how the customer is responding over the recent weeks, right, especially just given the state of promotional activity in the marketplace today? I would love any color on engagement trends.

I'll start and I'll look to Dave to add more explanation. The market right now is frothy with people spending what I would say is from, time to time, irrationally. We've seen that most recently, some of our competitors will spike up marketing spend in a way that just seems -- well, it doesn't fit our can of making money, I'll just say it that way. It doesn't fit our can of making money. We are spending our marketing dollars judiciously on our rebranding spend. Sure, we could spend more and get in front of more people, but to do so and make money is hard. Dave, I think we're -- the market is responding relatively well to first to Get Comfy, and of course, the new treasure -- Your Home, Your Treasure is very, very new. It's hard to have a read on that. What would you say, Dave? You are on mute, Dave. We're still in the pandemic.

The information we received, it's always difficult with television and with the commercials in general. But when you get to YouTube, where you can get some actual click data, it's really interesting to see in the click data from Get Comfy, we over-indexed in the performance on this commercial. It resonated with the customers. We're only a weekend on Your Home, Your Treasure. But we like what we see. It's from the same group that developed Get Comfy with our creative team. We're optimistic. There's some catchiness to it that we think will help really focus on our smart value customer.

Thanks, Dave. And Steven, thanks for the question.

Sure. And just a quick follow-up. You mentioned the 20% assortment expansion during the quarter. Curious if you can comment on whether you saw sort of an immediate impact or whether you expect to see one over the coming weeks here on the back of that assortment expansion. And then if you could just comment on how the assortment is expected to evolve throughout the remainder of 2023?

Sure. How will it evolve the remainder of 2023, we'll continue to expand breadth and depth. I do think there was opportunity in Q4 as we expanded into small appliances with one of our competitors who were on the ropes and many of its suppliers were eager to expand their distribution channel and Overstock was a good partner there. That will continue and on the rocks and [indiscernible]. So we see continued opportunity there. Dave, I know you were at a High Point market this weekend and earlier this week. Anything you want to add to this?

Just that we're seeing the product additions. These partners of ours in our asset-light model, while they have been strapped, as Jonathan mentioned, with the inventory glut, their cash being tied up in their current inventory assortment, they are product generating, product creation powerhouses and all of our partner base are looking for ways to innovate, adjust to the cost pressures and many different things going on. And altering packaging and the way things are shipped to cut costs. So there's a lot of different ways to innovate and add new products that our partners are very involved in and our merchandising teams are very involved in that with those partners.

And those ways will always include and are particularly focused right now on good, better best. We're in the right categories. It's just expanding the offering in that way. I'll also tell you, Steven, our partners like that we treat them as partners. We're not there to squeeze them. I mean, yes, we always want the best price. There's some of that back and forth as there is in any business. But we pay them quickly. We're not in the business of disintermediating them and treating them unfairly. We win, our customers win, and they win. This is a 3-leg tripod where everyone wins. And our partners get that. And it's why we're -- it's why we think we're growing our breadth and depth of SKUs faster than our plan. And by the way, it wasn't a sandbagging plan, it was a push-to-grow plan.

And our next question comes from the line of Seth Sigman of Barclays.

Great. My question is really around the improvement that you saw throughout the quarter. It does seem contrary to what other companies have been discussing. Can you just comment on that? Do you think it's more specific to Overstock, maybe something you're doing with discounting or marketing? Or do you think it reflects, I guess, a broader stabilization or improvement in consumer demand? And then I have one follow-up.

Yes. I'll comment, and I'd love to get Dave's thoughts on this one, too. I don't think our improvement represents a broader stabilization of consumer demand. I think the customer -- the consumer is still under tremendous pressure, and has become very much a savvy shopper, a smart value seeker. And when she shops, she's looking for a good deal, one that we provide. I do think our team took extraordinary efforts in -- towards the -- in the last third -- last month of the first quarter, spent a lot of time together, improving our collaborations. So I think there was some better execution than we've had. And so I think for us, it came to really strong execution. Maybe, Dave, you can talk to some of those specifics?

Yes. Thanks for the question, Seth. It's interesting. I just can't put an emphasis enough on Jonathan's comments around the pressures in the market by the consumer, and we see it every day. We watch our competitive pricing and our competitive KPIs like a hawk and compare them to several of our peers in the industry. And there's been a lot of focus, I'll just put it at that. I won't get into detailed specific product strategies, but I will tell you a lot of focus around the discounting of the right products make a difference. Jonathan?

Yes, Dave, great color. I think the consumers are going to continue to be under pressure. And I think that's why smart value makes a difference. I think about the looming -- its -- student debt holders have to start repaying of loans that have been on a kind of 24-month hiatus. That will be pressure on the economy. I think the Fed seems bound and determined to keep raising the rate. That will be pressure on mortgage rates, which are -- impact our industry. So being able to run a business leanly offer smart value and turn a profit is crucial to getting through whatever canyon of recession or pullback we're in and I think will be in for a while. And that's why we run the business the way we do, profitable, or positive adjusted EBITDA right now.

Right. I'd love to follow up on pricing in AOV. AOV was down this quarter. I'm curious, is that related to discounting? Are you actually rolling back prices? And I guess, in general, I'm curious if you could discuss the tools in place today, maybe what's different versus the past to effectively manage pricing and maintain that value proposition in this environment where prices do seem to be coming down across the industry. I assume that's different than the last 2 or 3 years when everything was just going up. So I guess like what's changed in your process and the tools that you have to more effectively manage that value proposition?

Yes. Adrianne, do you want to make an additional comment on that? And maybe, Dave, you can add to that?

Sure. Seth, I can kind of discuss the AOV kind of year-over-year, which was, I think, relatively flat, slightly down. I would say there's kind of 3 main things that's attributable to all of which we mentioned in our prepared remarks. Clearly, discounting did increase year-over-year, so that impacted our gross margin and AOV. We did say, kind of in my remarks too, we have seen some trade down. Now for us, that's not a bad thing. We want to make sure that we meet the consumer where they are and the price points they need. And then third is we have kind of seen some cost deflation. And as we've talked about that, it's really important for us to pass that on to customers so they can realize that smart value tenant. So I would say those are about the 3 things, primary impacts of our AOV year-over-year. Dave?

Yes. Thanks, Adrianne. In terms of our pricing mechanisms and how that's changed, again, we're asset light. This is not internally built. So we use external resources, who call the different markets with bots to understand where we sit versus our competitors on light products. I won't get more into the details than that other than to say it's just a maniacal focus on being that smart value offering to our customer.

Thanks, Dave. I understand we got a number of people in the queue and about 15 minutes, so we'll get a little crisper on our answers. I will get crisper on my answers. I know I'm the main offender. Operator?

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

Can you talk about the potential to gain share from the developments at Bed Bath & Beyond? Anything you can share about what you could do differently to go after those customers since I think they would also be pretty heavily focused on smart value?

Yes. Right. Great question. It's -- we operate in a large and fragmented marketplace. So whenever there is white space created by any struggling competitor, we view it as an opportunity to capture market share. We viewed it that way in the third and fourth quarter. And you saw we got into small appliances in a bigger way and did well there. We are well aware that Bed Bath & Beyond has filed for bankruptcy. And our suppliers are well aware that they've filed for bankruptcy. When Dave was in High Point this week, suppliers that have supplied to Bed & Beyond are looking for expanded distribution channels, even ones that have been with us want to use us more. So we think there's some real opportunity to take market share, of course with partners. And perhaps, otherwise, but I don't want to comment specifically on the steps we may or may not take to maximize our ability in the situation.

And then a question on gross margin. You had a year-over-year increase despite pretty widespread promotional activity in the marketplace. And you touched on merchandise actions and operating efficiency. Can you provide additional color on those areas that are offsetting the higher discounts? And as a follow-up, I think you touched on gross margins being -- 22% gross margin level being the right level going forward. It did a little bit better in the first quarter, and it would suggest a year-over-year decline as 2023 moves forward. Any thoughts on that would be great. Let me comment briefly and then go to Adrianne. We always see 22%-ish. We know there's issues and a little wiggle room. I think one of the reasons we're able to maintain consistent gross margins in a time of inventory glut and liquidation is our asset-light business model. We did not buy and own that inventory that we had to liquidate. And we work closely with our partners to help them move their inventory, that hit our gross margins. I can't say enough how much I like our asset-light business model, particularly when you're talking about the ability to maintain gross margin. We don't make that inventory buys. And we kind of control that, and we like the number 22%-ish well. Adrianne, Rick asked about promotions and other things, any comment on that piece?

Rick, like you said, we mentioned merchandising actions and operational efficiencies. These kind of happen quarter in, quarter out at different magnitudes, just things like negotiating with partners, things like kind of sponsored product opportunities, customer care efficiencies, warehousing improvements. So we're always looking kind of in those buckets and quarter in, quarter out, trying to improve our results there.

Our next question comes from the line of Anna Andreeva.

Great. We had a question on OpEx. I guess that's to Adrianne. You guys have managed the P&L very well for a number of quarters now. Expense deleverage widened, though, a little bit in 1Q, on a smaller sales decline. So could you provide some color on how we should think about expenses as we go through the year? Can you still manage dollars down double digits even on top of the pretty significant declines from last year, especially as we lap the back half? And secondly, to Jonathan, apologies if I missed this, is Bitt expected to be speaking at the Investor Day coming up? And just any color on performance there?

Sure. Let me address the second piece first, and then turn it to Adrianne to address the first. Bitt will not be participating in Medici Ventures Day. It's for companies that are listed on the slides that will be there. And Anna, I hope you submit some questions on our Investor Relations website. Do so this week, so we can get it into the -- into head of time. I think it's going to be enlightening day. Just before I turn it to Adrianne on OpEx expenses, can we continue to deleverage down to 0? Of course, not. Of course, not. But you've seen as we've come out of the pandemic and the consumer trends have changed and our sales have declined, we've been able, for now 12 consecutive quarters to have positive adjusted EBITDA. We're maniacal about expense control. Now we can't be maniacal down to 0. That's why we're very focused on improving top line sales. We like the fact that the trend is reversing. It seems to be -- I mean, like it's still down, I'm first to admit it, but it's getting better, and that's the beginning of the getting effect. Adrianne, I probably stole your thunder, but if you want to add anything?

No. Not at all, Jonathan. I just think, Anna, as we mentioned, kind of that $50 million per quarter is about where we run on average. And I think when you think about our kind of revenue and expense, I don't think the kind of declines, as you mentioned, will match, right? Just because as Jonathan mentioned, we can't go down so far on that fixed base cost. But we're always looking for efficiencies and ways to make that number as small and efficient as possible while delivering a profit.

I will say, Adrianne has done a very nice job in managing expenses. The extra expenses we've been able to wring out of the rag quarter after quarter. This is a team that knows how to run efficiently and Adrianne is helping us do that even better.

Our next question comes from the line of Curtis Nagle of BofA.

Great. Just a quick one on EBITDA. Jonathan, I appreciate the color for the rest of the year. Just parsing a little bit more. I think on the prior call, you had mentioned that not every quarter would be profitable. Should we now expect that -- so we've got 2Q profitable, same for 3Q and 4Q? Or is there some potential variability there?

Curtis, you do well to remember my words from February. Good for you. Glad someone is listening. Look, we're pretty clear. We expect to have a positive adjusted EBITDA in the second quarter, and we expect to have for the year. And I talked about a tale of 2 halves, with the first half being probably the hardest out of the year. So that -- take that it for what it's worth, but we feel like we -- I can think of a word in Japanese, but I can't think of in English. We feel like we kind of kept going through Q1, did it well, eked out a $3 million adjusted EBITDA and Q2 is generally bigger than Q1 on the revenue side. So here we are.

Okay. Fair enough. And I guess just sticking on the topic in terms of sales progression and, like you said, a tale of 2 halves, 2Q -- it should be better. In terms of just, I guess, ranking sort of what the most important drivers would be, I would assume, just compares to some degree, more inventory, marketing, all that, how does the macro or just guess consumer fit into that?

So the growth drivers are on that flywheel slide we show. They haven't changed. There's -- those are the things going to drive our business. And they're pretty standard, running the business the way we're supposed to run. The macro will impact. The macro has impacted it. I mean in the last 2 years is -- people's sentiments have changed. Folks aren't buying as much patio furniture when they're spending hundreds of thousands of dollars to go to Taylor Swift. It's just people are doing different things today than they were doing during the pandemic. As I mentioned, if the Fed continues to raise rates and mortgage rates go up, that's hard. So macro is what makes us the most cautious. We control the controllables really well. It's the bigger environment that we react to, and we think our asset-light business model means we're fairly nimble reactors and do so better than others. I hope that answers the question. We'll take one more, operator. I know we're coming up on the bottom of the hour.

Our last question will be coming from the line of Peter Keith of Piper Sandler.

Jonathan, for what's it worth, I'd rather buy patio furniture than go see Taylor Swift. But...

You and me, both. You and me, both. That's good.

The one thing I wanted to ask, we get a question a lot about the cash position. So any evolution your thinking around capital allocation? You've got 40% of the market cap in cash, stock price below $20. But industry backup stuff, so what are you guys thinking here?

Well, I won't comment -- my comment on 40% of the market cap in cash makes me like our market cap is too low. That would be my first comment there. We think, in difficult economic times, the term we try and use internally is fortress balance sheet. We think it's important to have cash. We think opportunities are and will arise, and it lets us look at things in a way that our competitors can't or may not be able to. And so although we did not buy stock back in the first quarter, we think having a little bit of extra cash, given the current environment, is right. We'll continue to look at M&A. We look at it really carefully. It's -- I think the worst thing a company can do is done M&A because you get excited about a deal. We're going to do something that enhances our home brand, is consistent with our asset-light business model. Something that moves us forward even with all the difficult synergies or putting things together that M&A involved. So I know we've got more cash than maybe 40%, the margin cash, probably a ratio -- most people think it's too much. But we think it's -- rather have it than not have, I guess that's what I'd say, Peter. All right. Well, everyone, thank you for joining our call. Even in a tough macro and industry environment, I'm bullish on the Overstock business. We're arresting our top line slide. We live by our profitability tenet, and these allow us to maintain our strong balance sheet, is that last question you want to. Thank you for participating in today's call. We appreciate your interest in and ownership of Overstock. We're going to keep doing the best we can to make that a good investment for everybody. Thanks.

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