Good day, and thank you for standing by. Welcome to the Q3 2023 Overstock.com, Inc. 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. Good morning, and welcome to our third quarter 2023 earnings conference call. Joining me on the call today are CEO Jonathan Johnson; CFO, Adrianne Lee; and President, Dave Nielsen. Today's discussion and our responses to your questions reflect management's view as of today, October 26, 2023, and may include forward-looking statement. 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. 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 remark, we will open the call for questions. A slide presentation with supporting financial data will be available for download on our Investor Relations website after the call had ended. Please review important forward-looking statements disclosure on Slide 2 of that presentation. With that, let me turn the call over to our CEO, Jonathan Johnson.

Thank you, Lavesh, and good morning, everybody. Today is an exciting day as it marks the start of something new. We're pleased to share details about our path forward and how we are capturing the many opportunities we see ahead, while also addressing areas of the business where we need to see improvements. This morning we reported Q3 financial results that included the performance under the Overstock brand through July 31 and performance under the Bed Bath & Beyond brand beginning August 1. While there were many things in the quarter that we felt good about, including the launch of the new Bed Bath & Beyond and the 6% growth in our active customer file, we fell short of our revenue goal. We will discuss what steps we are making to improve revenue growth. Over the last 3 months, we have accelerated our efforts to build a company with a bigger, brighter, bolder future. On June 28, we acquired the Bed Bath & Beyond brand and IP, a brand ranked in the top 5 most recognizable home brands in the United States, alongside titans like Target, Walmart and Home Depot. Within hours of closing the deal, we revived the brand in Canada. And in just 33 days, we launched the brand in the U.S. under our unique asset-light operational model. I'd like to take a step back to provide insight into how we view the deal and discuss how we intend to monetize it going forward. Just a few years ago, when we first considered acquiring the Bed Bath & Beyond business, it would've cost us close to $2 billion. We chose not to pursue a deal at the time and subsequently watched and continued to monitor as it struggled with declining same-store sales and overwhelming debt. We saw 4…

Thank you, Jonathan. In the first 60 days following the Bed Bath & Beyond launch, results largely met internal expectations. That said, we know there are key areas that require improvement. After launching the brand, we quickly went to work to leverage the 100 million-plus customer file we acquired. We executed a 3-pronged launch. First, as a test, we offered an app exclusive 25% off coupon during August to the marketplace and customer file. We wanted to reward loyalty legacy customers and welcome them to the new Bed Bath. The mobile app sales increased by 55% over Q2 and Q4 continues to track strong. Second, to convert the most loyal legacy Bed Bath & Beyond customers, we transferred and honored their previous accounts and reward balances to our platform. We then added an additional $25 bonus reward to their accounts, which expired at the end of September and gave them a free 1-year welcome rewards membership. These actions brought in loyal legacy Bed Bath & Beyond reactivated legacy Overstock customers. Third, we went through a process of warming up these new potential customer e-mail addresses. We began the warm up in mid-August and only recently finished reaching out to the entire file. With the acquisition, our addressable and contactable e-mail population has nearly doubled. And today, our daily e-mail campaigns have increased nearly 3x compared to pre-acquisition since. The size and scale of the upcoming branding campaign in November will be the largest we have ever done. We are working with a top agency that has a track record of executing large campaigns for top consumer brands. We will be running spots on linear and streaming TV, leveraging out-of-home media assets in key traffic areas, and partnering with influencers to create a social media buzz with accounts that have an…

Thank you, Dave. I will begin with an overview of our financial performance during the third quarter. Later, I will share our expectations regarding Q4 and the expected future investments around the acquisition of our Bed Bath & Beyond IP. Revenue declined 19% year-over-year in the third quarter. While this is a slight improvement in the year-over-year trend relative to the second quarter, the composition of our top line results versus our previous performance has changed. AOV declined 21% with mix of orders skewing to lower AUR categories following our brand launch. Orders increased 3%, returning to growth for the first time in several quarters. Underlying results continue to be influenced by macro factors and weakness across the furniture and home furnishings industry, driven by low consumer engagement in the category, a shift in spending preferences and a weak housing market. Our mid-quarter update outlined mid-teens decline in year-over-year revenue, which included performance over the Labor Day weekend. In comparison, we ended the quarter with a decline of 19%, mainly driven by the timing of our customer acquisition strategies. Gross profit was $70 million in the third quarter, a decrease of $37 million versus the prior year. Gross margin came in at 18.7%, a 461 basis point decrease versus the same period last year. The year-over-year decline was primarily driven by 2 factors, higher discounting and promotional activity related to customer acquisition strategies like the app exclusive 25% of coupon and freight cost deleverage driven by orders mixing into lower AUR categories. We expect this dynamic to continue throughout Q4 as we deploy targeted offers to support holiday shopping, focus on new customer acquisition and reengagement efforts. G&A and tech expenses increased $5 million year-over-year, which includes short-term discrete costs associated with the Bed Bath & Beyond brand integration efforts.…

Thank you, Adrianne. Today, we covered a lot. We hope to leave you with the following takeaways. Our rebranding is still in the early days. We are just getting started. Our upcoming top-of-funnel brand campaign is going to amplify our message as a leading online retailer of all things home. We are acquiring customers, the most important early metric of the initial success for this acquisition. Importantly, we are extending our reach within the total addressable market. Over the next 5 years, we plan to exceed 10 million active customers. Again, we covered a lot and provided more color and guidance than we usually do. In that spirit, I want to remind you that we are here today to discuss our financial results and the progress we've made integrating Bed Bath & Beyond. We appreciate you keeping your questions focused on these topics. With that, Gigi, let's take some questions.

[Operator Instructions] Our first question comes from the line of Tom Forte from D.A. Davidson.

I'll just limit myself to one. No need for a follow-up, and I'll focus on what you advised to focus on. So Jonathan, taken as a whole, what 1 or 2 things met or exceeded your expectations on the brand transition and what 1 or 2 things fell short of your internal expectations?

Yes, Tom, thanks. That's an insightful question. I think we did better than expected on our mobile app download. The number of customers that downloaded the mobile app was great, and their usage is great. We saw their usage early in that campaign in August. And then, of course, late as the campaign ended. I would also say on the other side, it's taken longer to warm up the e-mail file than we hoped. We knew it would take some time because we want to make sure that we didn't have any e-mail trapped in spam filters. But at this point, those pipes are warmed up and we're able to send e-mail to anyone and everyone on the customer file. Dave, would you add maybe what we like and one thing that we wish we'd done a little better.

I think one of the things we like was when we changed the site that we acquired this new brand with, Blue, we saw the power of this brand. We saw customers flocking to these softer categories, to the home textiles, to the kitchen. That speaks to the power of this brand. We've been making adjustments in our top NAV, in our mods, in our e-mails to better balance the mix of legacy Overstock and legacy Bed Bath & Beyond products. And we're finding that balance. But that was probably the item that I say was just disappointing. The power of the brand is really strong.

Yes. And it's been strong with suppliers. The suppliers that have come to us that we've quoted for years, but couldn't get. Suppliers that have opened up their full catalog now, where we used to have only a smaller portion, really powerful piece of the Bed Bath & Beyond brand. So I hope we addressed the question, Tom.

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

I guess just thinking about the first 2 months of the brand integration, I just want to talk a bit about the revenue trajectory because you're running negative mid-teens in early September and then it finished down 19 for the quarter. It does suggest quite a bit of step off in the back part of September. So, wondering if you could help us understand what caused that slowdown? Did you pull back on the marketing, on the couponing? And is that kind of a temporary slowdown?

Adrianne, do you want to take that one?

Great. Happy to. Peter, we don't generally discuss kind of our monthly kind of GMS and revenue trends, but I'll tell you a few things. One, as I discussed in my prepared remarks that we had kind of a set of customer acquisition strategy. So, a lot of the monthly cadence was really impacted by when we deployed our customer acquisition strategies, particularly the mobile app versus when we were able to kind of do our e-mail sends for the welcome rewards folks in the balance of that customer file. And you will just kind of note, if we put August and September together, very in line with the Q3 trend.

Yes. Just to kind of add to that, Peter, it's a great question. There was a lot of early promotional activity in the first month of the launch. And when we put out our mid-quarter press release, it was post Labor Day. And Labor Day is a big shopping day. So, to see numbers down a little bit after Labor Day, not that surprising, but certainly working to improve that trend right now.

And then unrelated, but just on the role of Chief Marketing Officer in the company, could you just bring us up to speed? I'm not sure if you've hired anyone, or are you looking to hire someone? And it seems like that would be a pretty important role with this rebranding effort. If you are looking for someone, what are some of the characteristics you'd like to find?

Yes. So, I'll begin the answer and turn it to Dave, who is leading that search. We've not yet hired someone. We do have great candidates, and we have great vice presidents that will report to the Chief Marketing Officer and are currently reporting to Dave as he fills -- temporarily fills that role. We want to find a great one. We're taking our time. I think the team we have in place is doing a nice job during the rebrand, but it is a hole that we'll need to and are working to fill. Dave?

Yes. Thanks, Jonathan. From a timing standpoint, this is obviously the best of the CMOs are -- up to their eyeballs and fourth quarter execution for the holidays. And so we're talking with them. I've had several phone calls with some top-notch candidates. We'll start post ground shipping time frame. We'll probably start in on real panel interviews with our executive team and evaluating the candidates. I anticipate we'll have a candidate in place the end of January or mid-February.

Yes. And in the meantime, I'm really excited for our top-of-funnel marketing campaign that's launching next week. Even without a sitting CMO, we've done a really neat job and a good job with this campaign. It's going to be broad, and you'll see us far and wide. So, thanks for that question, Peter.

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

One question and one follow-up from us. I appreciate you providing us color on how to think about revenues in the fourth quarter. But could you talk about the trends that you're seeing in the business quarter-to-date? Just curious what are you seeing from the core Overstock consumer so far? And if you feel there is a need to promote even more this quarter to make sure this customer stays with the platform? And then secondly, as a follow-up to Jonathan, really interesting to hear about the Overstock site coming back as a liquidation site. Just big picture, how do you guys think about ensuring there's no cannibalization between the value Bed Bath and what will be, no doubt, sharp prices at Overstock?

Great question. I'll turn to Adrianne to ask to answer the first one, and then we'll go -- I'll discuss our thoughts about Overstock as a liquidation site.

And so I think trends continue to kind of perform in line with our expectation and kind of as we discussed with our fourth quarter, we talked about trends -- excuse me, we talked about the fourth quarter having a very similar year-over-year decline from the third quarter. And that's -- we feel confident saying and that's what we're experiencing and that's what we expect.

We are excited about taking Overstock back to its with being a clearance liquidation site. And anyone who's been in the clearance and liquidation business like the long timers at Overstock, like we have been, know that retailers are always trying to avoid channel pollution. They don't want their clearance product next to their current product. That's why we couldn't be a general retailer and a liquidator at the same time. No one can be. When we stand up, we stand up the Overstock site as a clearance site, it will be very different. There will be no similar product. That's how you avoid channel pollution. The pricing will be true clearance liquidation pricing. There will be some hurdles to get over there. But by having none of the similar product on site, we think we can avoid the cannibalization that your question was concerned with. I hope that addresses the question, Anna.

Our next question comes from the line of Seth Sigman from Barclays.

I wanted to talk about the $175 million of investments. Can you frame for us how much has been spent to date? And then where do you plan to deploy that? Is that pricing? Is that marketing? Do you need to do more hiring? I guess that's the first part. And then you did say that would occur over the next 15 months. Is there a cadence to think about just so that we can appropriately manage expectations?

Yes, Seth, a great question. And this is part of the more color that we wanted to provide. I'll turn to Adrianne to address it and then look to Dave to maybe add some color. But as I noted, we spent about $25 million on the deal between buying it and acquisition-related. We've spent some in this quarter. You can see that in our results. Adrianne, do you want to talk about kind of the cadence of what's the remainder?

Yes. So, I think Seth, kind of in total, as Jonathan outlined those buckets, let's just say we've spent around $50 million thus far with third quarter and kind of the acquisition activities. I talked about in my prepared remarks that we expect to see this over the next 12 months or so, likely more heavily weighted in the next 3 quarters. That's starting with fourth quarter, so fourth, first and second. And I would say we're going to deploy kind of those investments opportunistically. Some of them may hit gross margin for discounting and promotional activity. Some will hit sales and marketing as we launch our branding campaign and various other items. And certainly, we'll continue to be really sharp on our pricing. As I said in my remarks, as well, offering our customers the best value.

Dave, what'd you add?

So on the marketing front, we've got a really exciting brand campaign that's launching here, the 1st of November, that we're really excited about. That triggers a couple of thoughts. It's about a bigger, better Beyond, which pushes our legacy Overstock product and our Bed Bath & Beyond products. So, customer understands the wide, the broad, the bigger, bolder assortment that we have. Second, it features a coupon. And I will tell you this, single item, 20% off coupon, it is money. It is money to this customer. It is a trigger for them, and we are using that to reactivate those customers. And we're really encouraged by what that will do for us. We're also standing up, Jonathan mentioned this, our wedding registry, our emerging trade business. These are areas with this brand, we have real permission to go grab market share in. And so, we're spending some money in those areas as well.

And Seth, just now you asked about hiring. Yes, we've done some incremental hiring, particularly around standing up the registry and some other things. I don't think of hiring is being in that bucket. When we talk about that approximately $150 million of additional investment, it's to launch the brand, it's to reignite the customer file and it's to expand and create new categories. So, it's more marketing. It's not the kind of G&A headcount piece. We're always careful hiring there. We're hire when we need and there's a few we need. And so we've done that, and we're moving forward.

I'll just ask a related follow-up. In the past, you've targeted, I think, that mid-single-digit type of EBITDA margin. Is that still the expectation? And then if so, is that really a feeling that investments are going to roll off at some point? Or is it more about driving incremental sales, incremental volume to ultimately leverage the fixed cost in the business?

So let me talk first to the mid-single digits. As I've noted before, we are taking a purposefully taking a pause as we -- for the next few quarters. And I think as Adrianne guided to Q4, we're going to continue to spend during this unique time to grow this customer file. Growing this customer file is really important. It will help us grow top line, will help us have information about the customers we can use, as we think about how we live up to the promise of our new corporate name, Beyond and expand elsewhere. So, the goal is to grow the customer file, so the top line grows, and that's how we get back to mid-single digits after this. And that's why we're spending marketing, this additional investment that we're making now is really to increase the customer file.

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

Jonathan, maybe just a follow-up on the last question from Seth. Obviously, active customer growth is a key focus. But I was curious if you can maybe expand on how you're thinking about the importance of repeat behavior over the next 12 months and how that sort of is part of the ROI threshold you're spending against today?

Yes, for sure. And I mentioned in my prepared remarks, improving our CRM capabilities. I think that lets us personalize and send our messages in a meaningful way for repeat. But Dave, do you want to talk about how repeat is so important because if we acquire through a buy versus an earn, it's not what we're going to be doing.

Yes. The first step, Steve, in our branding launch was acquiring mobile app customers and getting them to download that mobile app. That customer is our -- one of our most valuable customers. They have the highest average order size. They have, by far, the highest repeat rate. They are the least expensive for us to communicate with, send offers to and drive business with. So, we'll continue staying focused on that group. Our mobile -- total mobile percent of the business was the largest it's ever been this quarter. We're seeing real success there, and we're counting on that mobile app, and experiential work that we're doing on our website to improve that funnel shopping experience. But that mobile app is where we are placing the majority of our retention efforts.

When you look at how we started our brand campaign or started this rebranding launch, it was mobile app and welcome rewards loyalty program. Those have the highest repeat rate. That's what we're trying to drive the customer, by showing the customer the value of those 2 programs.

And then maybe just a quick follow-up. I think Adrianne mentioned 5.2 million active customers by year-end. And you guys spent some time on the call talking about the 3 customer groups. Any way to frame how you think those 3 groups are as a percentage of the customer base by year-end or how you're sort of expecting that to evolve here?

Steven, hard to give exact numbers. I'll tell you the group I expect to grow the most, and that's the legacy Bed Bath & Beyond customer because during that first 2 months of the launch, we were still warming up that massive e-mail file that we purchased. And when I say warming up, it's really keeping them and all of our other customers out of spam filters by doing this in a very measured and programmatic way. That's now -- those files are warmed up. That's a group we can talk to in the total. So that should be the group that's percentage increases the most. Dave?

I think that's right, Jonathan. And the second group would be that TAM New group. And what's encouraging about that, I just -- I have to go back to this. Again, I mentioned it in the remarks, this group had the highest average order size, and they have found us in the initial stages of the brand launch. They found us through searching on Google. We have not had the brand campaign, the national brand campaigns that are going to be launching here in the coming days. So that group is very encouraging to us because as they grow, that will grow that legacy Overstock business as well. They were very high in furniture ranking. And you'll see that on the schedules that we've provided after the call. We've laid that out. So you can see the top product categories and performance based on each of those segments I talked about.

Our next question comes from the line of Jonathan Matuszewski from Jefferies.

My first one is a follow-up on the financial recipe after this initial period of ad spend and discounting. I think the last plan communicated was returning to kind of that pre-deal financial recipe or something close to it by the end of 2024. It looks like the street modeling gross margins shy of that 22% range and negative EBITDA margins versus positive. A lot has changed, obviously, over the last couple of months in terms of rates and housing. So just curious, is that plan still intact? And if so, what's the biggest disconnect you see with the street numbers in terms of the second half of next year?

Adrianne, do you want to answer Jonathan's question, please?

I do think, Jonathan, I know that probably expectations are a bit across the board. And right now, we really haven't given any 2024 guidance or thoughts. I think our general goal is we think our business can operate within the parameters of the recipe card, and that's kind of our north star by which we will run the business and perform post these acquisition activities, but we haven't given a time line. In fact, today, I think it's the first time we talked about this 12 to 15-month investment period of about $175 million.

And Jon, I'll just note in our prepared remarks, we talked about the importance growing the active customer file. We're seeing great success on that. We talked about our goals of growing AOV. I think fourth quarter, AOV tends to always be a little lower because of giftables. But with our marketing campaign and then moving into 2024, we think we can take aspirationally looking to take AOV back to where it's been in the past. And then the other thing I mentioned is we have a goal of increasing that average orders per customer, which runs kind of the 1.5 area. The goal is to get that to 2 over time, and we're laser-focused on working that. I don't think that happens in 2024. But over time, those are the 3 metrics that we're working on because we think those will drive top line and bottom line.

And just a quick follow-up question on kind of going back to your roots with the clearance liquidation site. Any kind of big picture thoughts in terms of how that will influence the P&L, in terms of average order value or order frequency or gross margins, any additional tech spend related to setting that up?

Yes. So let me give some initial thoughts and turn to Dave. It will be a different site. And probably too early to comment on what AOV looks like, maybe it'll look more like the historical AOV we had when we were a general retailer, because there will be product on there that is very different than what we're selling today. As I noted, we intend for that to be a general cross-category, Overstock branded liquidation site. And so, I don't think modeling it as a furniture or home furnishing site is the right thing to do. We think we can do this in an asset-light way. There may be some additional tech spend but not very much. We think our systems are evolving to get there so that we can run multiple sites well for the cost that we haven't. Dave, anything else you'd add?

No, I think you covered it. It's all about the mix, and that depends on the Overstock at the time.

Yes. One thing about the liquidation business is you can't predict what you're going to be selling because the vendors couldn't predict -- couldn't predict what they overbought in.

Thank you. I would now like to turn the conference back over to Jonathan Johnson for closing remarks.

Thank you, Gigi, and thanks for everyone who joined the call. I appreciate your time. I appreciate your interest. I love to say, and I really believe that at the company, the best is yet to come. I think with our new name, we intend to live up to the promise of being bigger, better, bolder Beyond. Thank you for your ownership in our company. I wish you well as we enter the upcoming holiday season, and we look forward to speaking with you in the new year.

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