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CEO Owner's Guide
CEO Owner’s Guide
Since Overstock went public in 2002 we have sought to set a gold standard in candidly communicating your firm's results to you.
As teenagers my brothers and I ran a Christmas tree lot. We cared about reality, not cosmetics, and wanted an accounting system to help us understand and run our business. We devised a system we called, "cigar-box accounting," because at day's end, standing by the trashcan fire, we counted bills in a cigar box and knew what we had made or lost. It was simple, foolproof, and we made good decisions using it.
GAAP METRICS - see SEC filings for greater detail
Revenue is comprised of direct revenue, and partner revenue. All revenue amounts are net of returns, chargebacks and fraud, Club O rewards earned (our loyalty program), and sales discounts, primarily coupons.
Direct revenue consists of merchandise sales made to individual consumers and businesses, from inventory we own and fulfill from our warehouses.
Partner revenue consists of merchandise sales made to individual consumers and businesses, from inventory owned by other retailers, distributors or manufacturers, fulfilled either by such suppliers directly or in some cases fulfilled by us from warehouses we operate as a service for our partners. We do not own the merchandise for these transactions unless the product is returned.
Cost of Goods Sold consists primarily of the costs of merchandise sold to customers, fixed warehouse costs, warehouse handling costs, inbound and outbound shipping costs, credit card fees and customer service costs.
Sales and Marketing consists primarily of online and offline advertising, public relations, as well as the costs of our staff engaged in marketing and selling activities.
Technology Expense consist of the costs of our technology staff, technology vendor costs such as licenses, support and maintenance, and depreciation and amortization related to software, computer equipment, and web development projects.
General and Administrative consist of the costs of our merchandising team, analytics, human resources, accounting, legal, and other support staff, audit and legal fees, insurance, rents and utilities, and other general corporate expenses.
Gross Merchandise Sales
Cost of Goods Sold
Economic Cost of Returns - In our early history returns costs fluctuated widely. Stuffing them into a contra against sales both introduced too much noise into many metrics we wished to track as a percent of sales (e.g., “outbound freight as a percent of sales”), and this noise masked them so that sometimes they did not get managed with discipline. As an antidote to this we started thinking in terms of the "economic cost of returns." This calculation, which varies by product, is a function of the percentage of units sold that are returned, the percentage of these that are restocked and resold, the percent that are damaged and so cannot be resold but for which we are reimbursed by either the vendor (for having sent us damaged product) or the freight company (for damaging our product in shipping), handling fees etc. In this fashion we arrive at a "handicap" for each product with which to burden its COGS.
Marketing and Customer Acquisition
Marketing Coupons - There was a day when an Internet company would repeatedly give the same customer $5 coupons to buy $15 bags of dog food, and then book the $15 as revenue. Eventually the Financial Accounting Standards Board ("FASB") stopped this practice, opining that a firm could only book as revenue the amount the customer actually paid ($10 in the above example). I agree that the FASB's decision was a step forward, that if I give a $5 discount coupon to the same customer over and over to make such purchases, then she is not really "spending" $15 each time she comes.
Yet there is a different way to look at some coupons: we are sending a check to Yahoo! this month so that they will generate new customers for us, we are sending checks to MSN and Google this month so that they will generate new customers for us, and we are sending a check (in the form of a $5 discount coupon) this month to someone in Peoria in order to be a new customer for us. I agree that at some point if I send the same "check" over and over to the same woman in Peoria to get repeat business from her then ultimately this "check" (i.e., discount coupon) is just revenue I am not collecting. But in general, I think I should treat such cases as marketing checks, just like the checks going to Yahoo!, MSN, and Google, and then calculate the efficacy of such checks, doubling up on winners and cutting losers. Our management accounting therefore does not net them against gross bookings, but instead, treats them as an element of marketing spending.
Management Operating Income
What matters in accounting is not always how it is being done, but that the rules by which it is being done are made explicit. As required by law I present our financial results according to GAAP. Beyond that, however, I wish to open our cigar box to you in order to communicate with unprecedented candidness the economics of the business you bought. The system explained above is designed to that end.