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Overstock.com Reports Q3 2013 Results
Growing Club O rewards program helps drive 18% revenue growth and $3.5 million in net income
  

SALT LAKE CITY, Oct. 17, 2013 /PRNewswire/ -- Overstock.com, Inc. (NASDAQ: OSTK) today reported financial results for the quarter ended September 30, 2013.

(Logo: http://photos.prnewswire.com/prnh/20120110/LA33954LOGO)

Key Q3 2013 metrics (comparison to Q3 2012):

  • Revenue: $301.4M vs. $255.4M (18% increase);
  • Gross margin: 19.6% vs. 18.2% (140 basis point increase);
  • Gross profit: $59.2M vs. $46.5M (27% increase);
  • Sales and marketing expense: $22.5M vs. $14.9M (51% increase);
  • Contribution (non-GAAP measure): $36.7M vs. $31.6M (16% increase);
  • Technology and G&A expense: $33.2M vs. $29.9M (11% increase);
  • Net income: $3.5M vs. $2.7M (31% increase); and
  • Diluted EPS: $0.14/share vs. $0.11/share ($0.03/share improvement; 27% increase).

As previously announced, the Company will hold a conference call and webcast to discuss its Q3 2013 financial results today, Thursday, October 17, 2013, at 11:30 a.m. ET.

Chairman and CEO Patrick Byrne says, "In Club O, we built what we believe is the best, most generous loyalty program on the Internet, with free shipping, 5-25% rewards on products, and books priced at Amazon prices but with 15% rewards, all for $19.95 per year. Our Club O customers are rewarding us with their business. In addition, with the opening of our new warehouse in Pennsylvania, we are now providing even faster delivery to our customers on the east coast."

Webcast information

To access the live webcast and presentation slides, please go to http://investors.overstock.com. To listen to the conference call via telephone, dial (877) 673-5346 and enter conference ID 78576396 when prompted. Participants outside the United States or Canada who do not have Internet access should dial +1 (724) 498-4326 then enter the conference ID provided above.

A replay of the conference call will be available at http://investors.overstock.com starting two hours after the live call has ended. An audio replay of the webcast will be available via telephone starting at 2:30 p.m. ET on Thursday, October 17, 2013, through 11:59 p.m. ET on Thursday, October 31, 2013. To listen to the recorded webcast by phone, please dial (855) 859-2056 then enter the conference ID provided above. Outside the U.S. or Canada please dial +1 (404) 537-3406 and enter the conference ID provided above.

Please email questions to Mark Harden at mharden@overstock.com prior to the conference call.

Key financial and operating metrics:

Investors should review our financial statements and publicly-filed reports in their entirety and not rely on any single financial measure.

Net revenue – Total net revenue for Q3 2013 and 2012 was $301.4 million and $255.4 million, respectively, an 18% increase. The growth in net revenue was primarily due to a 16% increase in average order size, from $147 in Q3 2012 to $170 in Q3 2013, coupled with a 2% increase in orders.

Gross profit – Gross profit for Q3 2013 and 2012 was $59.2 million and $46.5 million, respectively, a 27% increase, representing 19.6% and 18.2% of total net revenue for those respective periods. The increase in gross profit was primarily due to higher revenue and a shift in product sales mix into higher margin home and garden products.

Contribution (a non-GAAP financial measure) and contribution margin (a non-GAAP financial measure) – Contribution for Q3 2013 and 2012 was $36.7 million and $31.6 million, respectively, a 16% increase. Contribution margin was 12.2% and 12.4% for those same periods.

Contribution (a non-GAAP financial measure) (which we reconcile to "gross profit" in our statement of income) consists of gross profit less sales and marketing expense and reflects an additional way of viewing our results. Contribution margin is contribution as a percentage of total net revenue. We believe contribution and contribution margin provides management and users of the financial statements information about our ability to cover our operating costs, such as technology and general and administrative expenses. Contribution and contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of contribution is that it is an incomplete measure of profitability as it does not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. 

For further details on contribution and contribution margin, see the calculation of these non-GAAP financial measures and the reconciliation of contribution to gross profit below (in thousands):


Three months ended



September 30,



2013



2012


Total net revenue

$

301,426



100.0

%


$

255,352



100.0

%

Cost of goods sold

242,276



80.4

%


208,810



81.8

%

Gross profit

59,150



19.6

%


46,542



18.2

%

Less: Sales and marketing expense

22,463



7.5

%


14,899



5.8

%

Contribution and contribution margin

$

36,687



12.2

%


$

31,643



12.4

%

Sales and marketing expenses – Sales and marketing expenses totaled $22.5 million and $14.9 million for Q3 2013 and 2012, respectively, a 51% increase, and representing 7.5% and 5.8% of total net revenue for those respective periods. The increase was primarily due to increased spending in the sponsored search marketing channel due to a higher proportion of our revenue coming through that channel.

During Q3 2013, Google, Inc. ("Google") tested and later implemented changes to its search engine algorithms which reduced our ranking in certain Google search results and slowed our revenue growth in the natural search channel. While we worked on adapting to Google's changes, we emphasized other marketing channels such as sponsored search which experienced higher revenue growth but with higher marketing expenses as a percentage of revenue than for natural search.

Technology expenses – Technology expenses totaled $17.3 million and $16.1 million for Q3 2013 and 2012, respectively, a 7% increase, and representing 5.7% and 6.3% of total net revenue for those respective periods. The $1.2 million increase is primarily due to an increase in staff-related costs.

General and administrative ("G&A") expenses – G&A expenses totaled $16.0 million and $13.8 million for Q3 2013 and 2012, respectively, a 15% increase, and representing 5.3% and 5.4% of total net revenue for those respective periods. The $2.1 million increase is primarily due to increased legal fees.

Legal fees increased during Q3 2013 due to increased activity on legal matters, including our defense of the case brought by district attorneys in eight California counties. We completed preparation for and the bench trial in this case during Q3 2013. We do not expect a verdict in this case for several months.

Restructuring – Restructuring was zero and a credit of $45,000 for Q3 2013 and 2012, respectively. The credit in Q3 2012 is related to subleasing our IT development office in Provo, Utah.

Operating income – Operating income was $3.5 million and $1.8 million for Q3 2013 and 2012, respectively, a $1.7 million increase.

Interest income – Interest income was $34,000 and $30,000 for Q3 2013 and 2012, respectively.

Interest expense – Interest expense totaled $33,000 and $194,000 for Q3 2013 and 2012, respectively. The decrease is primarily due to our repayment of the $17.0 million in advances under the U.S. Bank Financing Agreement in November 2012.

Other income, net – Other income, net totaled $165,000 and $1.2 million for Q3 2013 and 2012, respectively. The $1.0 million decrease is primarily related to a decrease in Club O rewards breakage.

Income taxes – Income tax expense totaled $91,000 and $131,000 for Q3 2013 and 2012, respectively.

Net income – Net income was $3.5 million and $2.7 million for Q3 2013 and 2012, respectively, an increase of $800,000. Q3 2013 diluted earnings per share were $0.14, compared to $0.11 for Q3 2012.

Free cash flow (a non-GAAP financial measure) – Free cash flow totaled $39.4 million and $15.7 million for the twelve months ended September 30, 2013 and 2012, respectively. The $23.7 million increase was due to a $26.6 million increase in operating cash flows, partially offset by a $2.9 million increase in capital expenditures.

Free cash flow reflects an additional way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends affecting our cash flows and liquidity. Free cash flow, which we reconcile to "net cash provided by (used in) operating activities," is cash flow from operations reduced by "expenditures for fixed assets, including internal-use software and website development." We believe that cash flows from operating activities is an important measure, since it includes both the cash impact of the continuing operations of the business and changes in the balance sheet that impact cash. However, we believe free cash flow is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations and free cash flow measures the amount of cash we have available for mandatory debt service and financing obligations, changes in our capital structure, and future investments, after we have paid our operating expenses. Therefore, we believe it is important to view free cash flow as a complement to our entire consolidated statements of cash flows. 

Our calculation of free cash flow is set forth below (in thousands):


Nine months ended September 30,


Twelve months ended September 30,


2013


2012


2013


2012

Net cash provided by (used in) operating activities

$

13,784



$

(13,337)


$

55,266



$

28,626

Expenditures for fixed assets, including internal-use software and website development

(13,970)



(10,563)


(15,896)



(12,960)

Free cash flow

$

(186)



$

(23,900)


$

39,370



$

15,666

Cash and working capital - We had cash and cash equivalents of $84.9 million and $93.5 million and working capital of $9.1 million and $7.5 million at September 30, 2013 and December 31, 2012, respectively.

About Overstock.com Overstock.com (NASDAQ: OSTK) is an online discount retailer based in Salt Lake City, Utah that sells a broad range of products including furniture, rugs, bedding, electronics, clothing, jewelry and cars. Worldstock.com, a fair trade department dedicated to selling artisan-crafted products from around the world offers additional unique items. Main Street Revolution supports small businesses across the United States by providing them a national customer base. The Nielsen State of the Media: Consumer Usage Report placed Overstock.com among the top five most visited mass merchandiser websites in 2011. The NRF Foundation/American Express 2011 Customer Choice Awards ranked Overstock.com #4 in customer service among all U.S. retailers. Overstock.com sells internationally under the name O.co. Overstock.com (http://www.overstock.com and http://www.o.co) regularly posts information about the company and other related matters under Investor Relations on its website.

Overstock.com®, O.co®, Worldstock Fair Trade® and Club O Rewards® are registered trademarks of Overstock.com, Inc.  O.info™, Club O™, Club O Dollars™ and Your Savings Engine™ are trademarks of Overstock.com, Inc.

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include all statements other than statements of historical fact. Our Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission on February 21, 2013, our Form 10-Q which was filed with the Securities and Exchange Commission on April 25, 2013, our Form 10-Q which was filed with the Securities and Exchange Commission on July 25, 2013 and our other subsequent filings with the Securities and Exchange Commission identify important factors that could cause our actual results to differ materially from those contained in our projections, estimates or forward-looking statements.

 

Overstock.com, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands)



September 30,

2013


December 31,

2012

Assets




Current assets:




Cash and cash equivalents

$

84,862


$

93,547

Restricted cash

1,780


1,905

Accounts receivable, net

14,672


19,273

Inventories, net

22,733


26,464

Prepaid inventories, net

1,926


1,912

Prepaids and other assets

13,062


12,897

Total current assets

139,035


155,998

Fixed assets, net

26,892


21,037

Precious metals

8,560


Goodwill

2,784


2,784

Other long-term assets, net

2,167


2,166

Total assets

$

179,438


$

181,985

Liabilities and Stockholders' Equity




Current liabilities:




Accounts payable

$

54,685


$

62,416

Accrued liabilities

45,412


47,674

Deferred revenue

29,858


38,411

Total current liabilities

129,955


148,501

Other long-term liabilities

1,147


2,522

Total liabilities

131,102


151,023





Stockholders' equity:




Common stock

2


2

Additional paid-in capital

360,730


356,895

Accumulated deficit

(232,168)


(247,096)

Treasury stock

(80,228)


(78,839)

Total stockholders' equity

48,336


30,962

Total liabilities and stockholders' equity

$

179,438


$

181,985

 

Overstock.com, Inc.

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(in thousands, except per share data)



Three months ended  

 September 30,


Nine Months Ended 

 September 30,


2013


2012


2013


2012

Revenue, net








Direct

$

35,681


$

34,215


$

113,873


$

109,048

Fulfillment partner

265,745


221,137


792,751


648,207

Total net revenue

301,426


255,352


906,624


757,255

Cost of goods sold








Direct

30,777


30,684


99,768


99,422

Fulfillment partner

211,499


178,126


630,931


520,614

Total cost of goods sold

242,276


208,810


730,699


620,036

Gross profit

59,150


46,542


175,925


137,219

Operating expenses:








Sales and marketing

22,463


14,899


60,376


42,886

Technology

17,259


16,085


53,339


46,845

General and administrative

15,970


13,828


47,643


43,166

Restructuring


(45)


(471)


53

Total operating expenses

55,692


44,767


160,887


132,950

Operating income

3,458


1,775


15,038


4,269

Interest income

34


30


100


86

Interest expense

(33)


(194)


(121)


(655)

Other income, net

165


1,213


360


2,364

Income before income taxes

3,624


2,824


15,377


6,064

Provision for income taxes

91


131


449


182

Net income

$

3,533


$

2,693


$

14,928


$

5,882

Net income per common share—basic:








Net income attributable to common shares—basic

$

0.15


$

0.11


$

0.63


$

0.25

Weighted average common shares outstanding—basic

23,766


23,447


23,692


23,382

Net income per common share—diluted:








Net income attributable to common shares—diluted

$

0.14


$

0.11


$

0.61


$

0.25

Weighted average common shares outstanding—diluted

24,446


23,754


24,297


23,511









Comprehensive income

$

3,533


$

2,693


$

14,928


$

5,882

 

Overstock.com, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)



Nine Months Ended 

 September 30,


Twelve months ended

September 30,


2013


2012


2013


2012

Cash flows from operating activities:








Net income

$

14,928



$

5,882


$

23,715


$

2,473

Adjustments to reconcile net income to net cash provided by (used in) operating activities:










Depreciation and amortization

10,833


11,935


14,907


15,813

Realized gain from sale of marketable securities

(28)


(8)


(29)


(8)

Loss on disposition of fixed assets


72



72

Stock-based compensation to employees and directors

2,377


2,624


3,280


3,264

Amortization of debt discount and deferred loan costs

14


55


32


105

Loss on investment in precious metals

475



475


Loss from early extinguishment of debt




1,199

Restructuring charges (reversals)

(471)


53


(448)


53

Changes in operating assets and liabilities:









Restricted cash

125


(24)


280


323

Accounts receivable, net

4,601


(519)


(652)


(5,575)

Inventories, net

3,731


1,603


(1,343)


(2,180)

Prepaid inventories, net

(14)


(641)


(258)


(253)

Prepaids and other assets

(2,995)


(314)


(1,387)


2,448

Other long-term assets, net

(445)


(1,160)


448


(1,332)

Accounts payable

(7,779)


(26,958)


11,277


761

Accrued liabilities

(2,308)


(7,478)


4,711


2,981

Deferred revenue

(8,553)


836


1,044


7,634

Other long-term liabilities

(707)


705


(786)


848

Net cash provided by (used in) operating activities

13,784


(13,337)


55,266


28,626

Cash flows from investing activities:









Purchases of marketable securities

(111)


(69)


(124)


(110)

Purchases of intangible assets

(13)


(6)


(13)


(3)

Sales of marketable securities

291


154


291


154

Investment in precious metals

(5,980)



(7,377)


Expenditures for fixed assets, including internal-use software and website development

(13,970)


(10,563)


(15,896)


(12,960)

Proceeds from sale of fixed assets


56



56

Net cash used in investing activities

(19,783)


(10,428)


(23,119)


(12,863)

Cash flows from financing activities:









Payments on capital lease obligations

(2,563)


(112)


(2,563)


(188)

Payments on line of credit



(17,000)


Capitalized financing costs




(19)

Payments on finance obligations




(21,528)

Paydown on direct financing arrangement

(192)


(175)


(253)


(231)

Proceeds from exercise of stock options

1,458



1,458


Purchase of treasury stock

(1,389)


(464)


(1,396)


(466)

Net cash used in financing activities

(2,686)


(751)


(19,754)


(22,432)

Net increase (decrease) in cash and cash equivalents

(8,685)


(24,516)


12,393


(6,669)

Cash and cash equivalents, beginning of period

93,547


96,985


72,469


79,138

Cash and cash equivalents, end of period

$

84,862


$

72,469


$

84,862


$

72,469

Supplemental disclosures of cash flow information:









Cash paid during the period:









Interest paid

$

56


$

436


$

202


$

991

Taxes paid

598


139


758


139

Non-cash investing and financing activities:







Fixed assets, including internal-use software and website development, costs financed through accounts payable and accrued liabilities

$

89


$

581


$

10


$

278

Equipment acquired under capital lease obligations

2,563



2,563


 

SOURCE Overstock.com