OSTK (2021 - Q1)

Good day and thank you for standing by, and welcome to the Q1 2021 Overstock.com, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Callahan, Director of Investor Relations. Please go ahead. Alexis C

Thank you, operator. Good morning, and welcome to Overstock's first quarter 2021 earnings conference call. Joining me today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Dave Nielsen, our President of Overstock, will also be available for Q&A. Please note that we are conducting today's call remotely. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, April 29, 2021, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our Form 10-K for 2020 in subsequent filings with the SEC and in our press release filed this morning. Please review the forward-looking statements disclosure on Slide 2 of today's presentation. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. This presentation is available for download on our Investor Relations website and our summary slide contains instructions for asking questions during our Q&A session. With that, let me turn the call over to you, Jonathan.

Thank you, Alexis. Good morning, everybody. We had another impressive quarter. Our year is off to a strong start. Let's get right to discussing our business by following the agenda on Slide 3. Next slide, please. I will start with a few corporate updates. As we announced on January 25, we entered a strategic partnership with Pelion Venture Partners for oversight of our Medici Ventures portfolio. We set our goal was to close the transaction in three to six months. I'm pleased to say we closed that transaction last week in less than three months. This should be another clear indicator of what the new Overstock has been all about for the last 18 months. Execution, we do what we say we will do, in this case, ahead of schedule. The closing of this transaction means Overstock is a passive limited partner and Pelion has full oversight of the Medici Ventures portfolio, including sole authority and responsibility regarding the funds investment decisions and in exercising all shareholder rights Medici Ventures holds in the portfolio companies. I think there's real upside for Overstock as these companies are in Pelion’s qualified and capable hands. I look forward to seeing where Pelion takes them. After the announcement of the Pelion transaction, we asked for and received pre-clearance from the SEC to deconsolidate Medici Ventures from Overstock’s financial results. Those results are reflected in with our earnings release published this morning and this presentation. I must say, it's great to have this transaction closed. It allows Pelion to focus on the Medici Ventures portfolio, and it allows Overstock to focus on our core furniture and home furnishings business. We have no regulatory updates. We will keep you apprised of relative developments. I’ll remind you of our annual shareholder meeting on May 13, which like last year we will hold virtually. We continue to work well in our remote first arrangement because we have been able to manage the business working from home so well over the past year, we're in no urgent rush to get back to the office and have postponed our return to being in the office until no sooner than next January. We want to better understand how to best structure our work model going forward. We are monitoring and learning from others, both their successes and their failures. We remain committed to ensuring the safety of our employees and the continuity of our business operations. We will carefully and thoughtfully structure any re-entry plan in the best interests of Overstock. Slide 5, please. Our CFO, Adrianne Lee will now review our great first quarter financial results. Adrianne?

Thank you, Jonathan. As already mentioned, we are pleased to have closed our transaction with Pelion Venture Partners and that we received pre-clearance from the SEC to deconsolidate the Medici Ventures' businesses. Although, the transaction did not close until the second quarter, the Medici Ventures' businesses met the accounting criteria to be treated as held-for-sale assets and discontinued operations as of March 31. As such, we have classified the related assets and liability as held-for-sale in our consolidated balance sheets and the related loss as discontinued operations in our consolidated statements of operations. In conjunction with deconsolidation treatment, Overstock has reorganized its remaining business into a single reportable segment, Retail, the pure-play e-commerce furniture and home furnishings retailer, which is reflected as continuing operations in our first quarter reporting. My remarks today will reflect results relating to our continuing operations. I will begin with a summary of first quarter results followed by a review of our newly disclosed key metrics and performance indicators. Next slide please. We delivered another strong quarter. We outpaced our growth trajectory quarter-over-quarter, posting revenue growth of 94% compared to the same period last year. This growth coupled with our ongoing focus on managing expenses resulted in adjusted EBITDA of nearly $34 million, an improvement of $40 million or 600% compared to the same period last year and a $42 million increase compared to Q1 2019. Diluted earnings per share came in at $0.56, an improvement of $0.90 per share compared to the first quarter of 2020 and $1.15 increase compared to the first quarter of 2019. And our balance sheet remains solid. Our strong operational performance resulted in a quarter end cash balance of nearly $535 million, an increase of $39 million compared to the fourth quarter of 2020. Next slide. As a reminder, all financials and metrics in today's remarks and slides reflect results from continuing operations, that of our e-commerce furniture and home furnishings, retail business. We provided nine quarters of financial results on this slide to illustrate the consistently strong performance we have delivered since we began making key operational improvements, roughly 18 months ago. We posted revenue of $660 million in the first quarter, an increase of 94% year-over-year or 82% versus 2019. This increase was primarily driven by a 66% increase in customer orders and a 17% increase in average order size. Increased order activity was largely driven by new customer growth and strong repeat behavior. Average order size increased as we continue to shift our sales mix into our core home categories. As I have mentioned on prior earnings calls, future trends remain difficult to predict, but we believe that the shift to buying furniture and home furnishings online is a trend that will persist. Our goal remains to take market share in the expanding U.S. online home furnishings market. Next slide. Our gross profit came in at $154 million in the first quarter, an increase of $79 million year-over-year and an increase of $82 million versus Q1 of 2019. Gross margin came in at 23.3%, which is an improvement of 141 basis points compared to a year ago and 342 basis points compared to two years ago. The year-over-year margin improvement was driven by shifting our sales mix into higher margin core home categories and reduced discounting as we increased our customer acquisition efforts by one percentage point of spend as a percent of revenue versus 2020. Going forward, we continue to expect gross margins in the 22% range but acknowledge, it may be influenced by balancing discounting and customer acquisition efforts. And our continued transition into core home categories. Our gross margin strategy is intentional and will be influenced by our brand pillar to deliver smart value to our customers and to continue to take market share. Next slide, please. This chart illustrates G&A and tech expense both in absolute dollars and as a percentage of revenue. Adjusting for a one-time expense benefit in the prior year, G&A and tech expense was relatively flat year-over-year while revenue nearly doubled. As a percentage of revenue, G&A and tech expense was 8.1% for the first quarter. 771 basis points lower than the first quarter of 2020 versus 2019 G&A and tech expense declined by 8% and improved by 783 points as a percent of revenue. We have a strong degree of operating leverage inherent in our business. We remain disciplined in our spending and despite our ongoing strategic initiatives, we anticipate our revenue growth to significantly outpace expense growth in 2021. Next slide, please. We delivered $34 million in adjusted EBITDA for the first quarter, which represents an increase of $40 million compared to the first quarter of 2020 and an increase of $42 million compared to the first quarter of 2019. Adjusted EBITDA margin was 5.1%, an increase of 706 basis points compared to the first quarter of 2020 and an increase of 730 basis points versus 2019. This is in line with our long-term targets driven by our focus on market share growth and disciplined expense management.

If I may add a little update, Adrianne, these are fantastic results for the quarter we're doing just what we said we would do delivering sustainable profitable growth.

Thank you, Jonathan. Next slide. And now I would like to introduce a few operational metrics that we use internally to manage and assess our business performance. We believe these metrics are solid indicators of sustainable growth, customer behavior and reflect the mix of products purchased by our customers. These metrics require a little explanation as they are standard metrics within the retail and e-commerce landscape. This slide shows active customers and order frequency. We define active customers as the total number of customers who made at least one purchase over the prior 12 month period. As of March 31, our active customer base reached 9.9 million. This is the highest in our operating history and represents an increase of 92% or 4.8 million active customers compared to the first quarter of 2020 and a 60% increase versus 2019. As we have stated before, the online home furnishings penetration rate reached an all-time high in the second quarter of 2020, before landing on the trajectory we've seen in the past three quarters. It is important to note that we anticipate a slight decrease in our active customers as we annualize this high point, followed by sustainable growth, going forward. Order frequency is also measured on a 12 month basis and represents the number of times our customers make purchases over the span of a year. Orders per active customer was 1.66 times in the first quarter, down slightly from a year ago, this metric was strongly influenced by our large influx of new customers in 2020. Many of these new customers have not reached the frequency of purchases that correspond to our more tenured customers. Our team, including our new CMO, Elizabeth Solomon is focused on growing our active customer base, both through retention and customer acquisition efforts. And as such, we anticipate this metric will increase over time.

Shareholders, we've stabilized the business. Through our operational improvements, we've grown our active customer base throughout the pandemic. As you can see on this chart in 2019, we were continually losing customers from the base. Now we have righted the business. We are thrilled by the number of new customers who discovered Overstock this past year. Because of that surge of new customers, order frequency declined due to the mix effect. Other brands, it didn't experience a similar surge in new customers likely won't experience the same impact. Thus, as Adrianne mentioned, we anticipate reporting a slight decrease in active customers in the coming quarter as we lap the peak of the pandemic. The stay-at-home mandates forced the online penetration rate to an all-time high before settling on a positive, sustainable trajectory. We are focused on continuing to grow our customer base and keep those customers coming back.

Thank you, Jonathan. Next slide, please. This slide illustrates nine quarters of orders delivered an average order value. On a trailing 12-month basis, orders delivered reached a record at 16.5 million as of March 31. This is an increase of 88% compared to the prior year or 7.7 million orders and a 52% increase versus 2019. Like my commentary on active customers. We expect this metric to decrease a bit as we analyze the high point of online penetration followed by sustainable growth. Average order value increased $27 or 17% versus the first quarter of 2020. This is mainly driven by our sales mix shifts into core furniture and home furnishings. There is some seasonality over a 12-month period in this metric driven by category mix and peak gifting times. In summary, we delivered a strong first quarter. We are pleased we were able to provide transparency into our continuing operations in our financial reporting and to provide the investment community with additional operational metrics. With that, back to you, Jonathan.

Thanks Adrianne. I hope the metrics we shared on these two slides are helpful to our shareholders. We intend to share them quarterly. First quarter results were impressive. We outpaced our revenue growth year-over-year and quarter-over-quarter, we generated operating leverage, delivering nearly $34 million and adjusted EBITDA at a margin rate of 5.1%. This is the fourth consecutive quarter in which we have delivered profitable market share growth. And within the margin rate guardrails we are targeting. I hope you see that this is a new Overstock. It is our new normal, sustainable profitable market share growth. Slide 13, please. Our performance is a result of discipline, focus and execution. It is an entire company effort. My colleagues work hard. I sincerely appreciate all they do to accomplish the long-term goals of the company. Slide 14, please. I will now discuss our operations, specifically how we are achieving and executing these financial results. Slide 15, please. Overstock is now a top four brand in the large and growing U.S. online home furnishings market. We've moved up from the number five spot. Our goal of course is to continue to move up the ranks. Let me note a couple of things happening in this market. First, it is growing and now estimated at $325 billion, up from $300 billion last year. And second, it appears a true secular shift in consumer behavior is underway and sticking. Permanent move from cities to suburbs feel like a lasting structural shift in American life. One of the impactful themes to come out of the pandemic, market data show online penetration of the category, which ticked at 42% at the height of the shutdown last year, settled around 35% toward the end of 2020, where we feel like it is now stabilized. We think this shift in consumer behavior will continue to grow. Consumers have become accustomed to buying home furnishings online, just like they do so many other products. As we look forward, we don't think it's a question of whether consumers will buy furniture and home furnishings. We think it's a question of where, online or in store. As you know, housing starts surged in March, growing 37% versus March 2020 to the highest levels since June 2006, exceeding economists forecast. As the great reshuffling persists in home buying continues to increase, so too demand for home furnishings. We think consumers will increasingly opt for the selection, value and convenience of buying online. Part of our mantra, market share growth is to make sure we capture this secular shift as consumers increasingly move online. Slide 16, please. We've strategically and purposefully differentiated ourselves from our competitors to attract our target customers and capture market share. We're not trying to be all things to all people. Instead, we offer a value proposition that resonates with a particular subset of the market. This differentiation is twofold. First, we specialize in furniture and home furnishings. We're not a mass merchandiser and we are increasingly leaning into home. Second, we focus on providing smart value, which means offering great products at great prices. Importantly, we are not an everyday low price leader. Our model is promotionally driven because it resonates with our target customers. Our goal is to win on price post-promotion, these differentiators plays in our own unique quadrant, within a competitive landscape. While you see one other player is in our quadrant, that player does not focus on the same customer segments, offer the same quality of goods for the price, we're focused on being a pure-play online retailer. There's a lot of white space in our quadrant and that white space is ours. Slide 17, please. This slide shows the two customer segments that naturally have the highest propensity to shop with Overstock. They are who we focus on serving. These two segments represent 40% or about $130 billion of the large and growing home furnishings market. Our primary customer segment, the Savvy Shopper loves the deal. She wants to feel like she is winning. Our promotional model is critically important to her. Our secondary segment of Reluctant Refresher wants an easy and hassle free experience. Our brand pillars of product findability and easy delivery and support are critically important to her. We continue to focus on improving the customer experience for these two segments and refining our targeting and retention efforts. Slide 18, please. Our brand vision is to make Dream Homes for All a reality. Our focus on home will only increase as we continue to lean into this category. We are focused on and having success with the two customer segments that naturally over indexed to shop with us. We are focused on providing them and of course other shoppers with a great customer experience. We use technology to enable our execution against our forward 2021 initiatives. One reason we are confident, we can do what we say we are going to do is because we remain focused. I think the entire organization now understands the power of focus. We've proven it to ourselves and we've proven it to our investors over the past 18 months. This strategy document is posted all over the company. We intentionally included in every investor presentation, we live by it. In fact, as we were preparing for this call, someone asked whether we should remove this slide. There was a visceral reaction from the executive team to keep it in, because it's woven into our DNA. Our strategy keeps us aligned on delivering what matters most to our customers and in turn is producing sustainable, profitable market share growth. I’ll now talk to each of our brand pillars. Slide 19, please. Our first brand pillar is product findability, making sure our customers can quickly and easily find what they're looking for, as consumers increasingly utilize mobile devices for their shopping needs findability is critical. It's why improving mobile was one of our four strategic initiatives in 2020. We made good progress in terms of upgrading our mobile web experience. Mobile sales remain above 50% is up and so as conversion year-over-year. That said, we still have work to do and we will continue to iterate and make improvements. We are shifting our mobile focus this year to our award-winning app, which is something we've historically not emphasized enough. It's a great retention tool and a channel that naturally achieves higher conversion. Increasingly adoption of our mobile app is a 2021 focus. Our new Chief Marketing Officer, Elizabeth Solomon, who has hit the ground running and thus far as everything we have hoped for and more is helping us in that effort. Slide 20, please. Another component of product findability is providing the products our customers want. Over the years, we've purposely become a furniture and home furnishings retailer. We continue to lean into home over the past year. Home furnishing is our core products, where 93% of sales in the first quarter, higher than they've ever been. Focusing on home is increasing the Overstock brand association with home, an area of significant opportunity as our customers who may come furnishing purchases have a higher repeat rates. So you will see us continue to lean even further into home, gradually phasing out our non-home categories over the next 12, 18 months. As we do, we will simultaneously replace non-home categories with more home products in existing categories and expand our home product categories, which should result in a net increase to our breadth and depth of assortment. Slide 21, please. I just mentioned breadth and depth of our home furnishings assortment. This chart demonstrates the progress we made in increasing both over the last two years, despite the challenges in the supply chain during the pandemic and today's backup at the ports. We increased our skew count and productivity per skew, even though the pandemic has made it difficult to add new skews, the number of skews sold is up 24% year-over-year, and the units sold per skew is up 36% year-over-year. The skews we have for sale are the right skews. Our customer's purchasing behavior makes that clear. We're thoughtfully and carefully increasing our breadth of assortment so that we carry the products most relevant to and sought after by our target customers. Slide 22, please. Our second brand pillar is Smart Value, which again means providing great products and great prices and employing an effective promotional model. Free shipping is a key component of Smart Value. It also happens to be a top purchase driver particularly for our target customers. That's one reason we permanently launched free shipping on everything in 2020. The word is out at least with our existing customer base, which continue to rate us favorably on shipping charges. You can see our quarterly progression and you can see we continue to compare 12% favorable relative to our competitors. We expect to remain near current levels. Our existing customers are aware of and appreciate our free shipping offering. The opportunity is to increase awareness of this offering much more broadly, including to those discovering Overstock for the first time. Slide 23, please. Another key component of Smart Value is of course our pricing because savvy shoppers seek value, our product pricing must be right. One of our 2020 strategic initiatives was to clarify our promotional messaging and refine our pricing model. This ensuring our products are optimally priced compared to our competition. Now, too well and post promotions, certainly not higher. This chart shows the significant progress we made over the past year and a half in tightening up our pricing model. When we priced somewhere between 80% to 85% of our comparable skews competitively pre-coupon, that is exactly where we want to be. Of course, we're continually monitoring the competitive environment to ensure our pricing remains within these target fans. Slide 24, please. Our third brand teller is Easy Delivery and Support, providing an easy and hassle-free customer experience. What does this experience is deliberately did is delivery and importantly expectations around delivery. We know that both speed and accuracy of delivery matter, but if the large parcels in particular, accuracy and estimation matters more. So delivery estimation is something we have put significant effort into improving over the past year. In the first quarter, despite port congestion, carrier capacity constraints and Texas storms in February which impacted the entire supply chain, we were largely able to protect the customer experience and deliver on expectations. Through improved estimation and customer communication, the percentage of our – of on-time or early deliveries increased significantly in the first quarter over the fourth quarter, although we did experience a dip with the height of the Texas storms. Through improved planning and carrier communication, the time it takes from correct to actual delivery remains stable through most of the first quarter and has begun to trend downward, which is good. Slide 25, please. Part two of our third brand pillar is customer support. Satisfied customers translate into repeat customers. We're always focused on improving the customer support experience. We can improve communication and order tracking and increased self-service, customer contact volume as a percentage of orders was down 16% year-over-year in the first quarter and down 29% compared to 2019. We've also found that self-service functionality not only reduces customer costs, it also improves customer satisfaction. Our customers appreciate being able to solve issues on their own without getting an agent involved. As we continue to enhance and augment our self-service customer support, most recently adding new and increased functionality for ports request. As a result, self-service cases are up 2.5 times compared to last year and 4.4 times compared to 2019. Customers who use self-service have a significantly higher repeat purchase rate, so of course this remains an area of focus for us. Slide 26, please. As we announced on our last earnings call, these are the four strategic 2021 initiatives. They are improving onsite search and taxonomy, which means improving product findability. Expansion into Canada, serving our Canadian customers from Canada rather than to Canada, establishing our government business, our federal GSA pilot serves as the foundation for this business. We're expanding it from there by reaching out to state and local entities, adding new partners and expanding the product offering, and the fourth, improving the enterprise platform, which means increasing cloud adoption and ever modernizing our systems. We are squarely in build mode on most of these. So there is not a lot to report on right now. We are focused and executing. We will report on progress as trends emerge and materiality warrants. We know these are the right 2021 initiatives for us. Slide 27, please. Overstock is well positioned for continued growth. Our revenue growth is outpacing the industry driven by our technology our customer focus and our business model. We have improved and maintained our normalized gross margins. Our target remains in the 22% range. We continue to exercise discipline in our spending. Our expenses are growing slower than revenue, driving operating leverage. This flows through to produce long-term adjusted EBITDA margins in the mid-single digits. Anyone knows who has ever listened to our earnings calls, who are participated in an investor event, which we do many of these days. Our mantra is sustainable, profitable, market share growth. On sometimes asked one why this mantra, and two, what gives me confidence in our ability to achieve it? Let me answer those questions and then provide some commentary on our forward-looking trajectory. First, is sustainable profitable market share growth, the right goal? Without question for Overstock, yes, it's important to grow market share. Anything else is shrinking, growth begets growth and size has its advantages. It's equally important to be profitable, it's the sustainable way to grow. And as far as timing goes now is the opportune time to be focused on market share growth as we are in the middle of a secular shift in consumer behavior to online home furnishings purchases. Second, what is our confidence level in achieving this? High, for both the short and long-term. In fact, I'm going to depart slightly from my typical narrative. Under my tenure Overstock has not and does not provide guidance. However, given the unusual situation in which we find ourselves meaning up against a difficult year-over-year second quarter comparison, I will provide a little more commentary than usual. Well, we are less than one month into Q2 and it is hard to know what May and June will bring. Our current business trends are good as we hold our own against the toughest month of the quarter. We believe we can maintain the absolute sales levels we achieved last year. The key performance metrics we have shared with you today show we have a strong foundation on which to build. Importantly, we believe the structural changes and improvements we've been making for the last year and a half, the new Overstock, if you will, will continue to prove out inconsistent metrics and performance which is perhaps not yet reflected in investors’ current outlook or expectations for Overstock or the Medici Ventures fund assets. We will remain focused, disciplined and committed to delivering on our long-term plan. And I think the results from those efforts will become more apparent over time. Slide 28, please. Next I'll briefly discuss the Medici Ventures fund and significant updates on a few of its businesses. Slide 29, please. As previously mentioned, we closed our strategic partnership with Pelion n last week. This slide summarizes the key terms of Pelion arrangement. We converted Medici Ventures into a fund that is now managed by Pelion, which has the sole authority and responsibility regarding all investment and management decisions, Pelion has the rights. The fund has an eight year life, Overstock has committed approximately $45 million to the fund. Pelion’s annual management fees are paid by the fund. We are thrilled, the deal is closed, Pelion is the right firm to take these companies like tZERO, Bitt, Voatz, GrainChain, Medici land governance, PeerNova, Vincent to the next level. Slide 30, please. Let me provide a handful of exciting updates on some of the fund companies. Bitt launched the cash on March 31, which is the world's first central bank digital currency. This was a much awaited event and we hope the first of many significant achievements by Bitt as the world moves closer to embracing central bank digital currencies. tZERO has officially launched its strategic capital race. tZERO will also be hosting its quarterly update call in May, rather than speak for the tZERO management team, I encourage you to listen in to that call for an update on the tZERO business. Given the recent Coinbase direct listing and a red hot interest in non-fungible tokens or NFTs, I would be remissed if I didn't say at least a few words on these topics. First, the success in the Coinbase direct listing shows that crypto is real and here to stay. What we saw – saw that when we became the first major retailer to accept Bitcoin over seven years ago in January, 2014. Second, the next step is a digital wall that lets users hold and trade crypto and FTEs digitize securities, stocks, et cetera. Think Coinbase meets Robin Hood meets tZERO. I think it feels like tZERO has the regulatory and technology lead to get their first. GrainChain was recently selected by SAP as one of eight startups to be part of its global accelerator program. This means SAP will be selling GrainChain and at that store to all its customers, a major tailwind and a huge win for GrainChain. Voatz and PeerNova have closed first tranches of new funding rounds, both of which are up rounds for each. Voatz is targeting a $10 million round, there is a lot going on in the voting space right now, which makes it a great time for Voatz to be in the market. PeerNova is targeting a $25 million round. I should note that today's update is the degree of detail, investors should expect to receive from Overstock going forward about the Medici Ventures fund. Overstock is no longer involved in the day-to-day operations or maintaining board seats on these portfolio companies. We will provide updates on material and publicly disclosed progress, such as acquisitions, capital raises, strategic partnerships and exit events. Slide 31, please. I'll briefly recap before we move to Q&A. Slide 32, please. We are doing what we told you, we would do. We entered a strategic partnership on Overstock of the Medici Ventures portfolio and close the deal quickly. We have deconsolidated the assets post close. We provided you with more information of detailed disclosures about new customer metrics. We are focused and executing on the right strategic initiatives. Those we believe will have the most positive impact on our business. We still have lots of opportunities to improve mostly of the blocking and tackling variety. This includes further leaning into hall and increasing the Overstock brand association with home. Further cementing our competitive position and further improving adoption of our mobile app. Market share growth remains our key objective. We are confident, we will continue to move to deliver sustainable, profitable market share growth. Now let's take some questions.

[Operator Instructions] Your first question come the line of Seth Sigman from Credit Suisse.

Hey everyone. Good morning and thanks for all the info. Congrats on the progress. I wanted to focus, I guess, first on the short-term, Jonathan, obviously providing a very positive message about what you're seeing right now and your ability to navigate the difficult comparisons here. I think we get demand as strong in the industry, but I'm more curious about some of the specific drivers for Overstock to help navigate the short-term. So for example, are there drivers to consider like categories that we're very short on inventory a year ago that are improving or perhaps seasonal categories that you've leaned more into this year or anything else that you would highlight that you feel like will help, I guess stabilize the business and comp the comp over the next few quarters? Thank you.

Seth, appreciate the question. Let me take an initial answer and then I'll turn it to my colleague, Dave to give a little more color. As far as categories we're leading into, I've emphasized, we're becoming more and more of a home retailer, but within the home category, we're leaning more and we've been leaning into patio furniture and outdoor recreation products. People are trying to expand their living spaces to the four corners of their property, not just the four walls of their home. So we've expanded that inventory, it is a tight market as demand is high. But that's one area we're leading into. Dave, what else would you have for that?

And Jonathan, I'd add that the seasonal categories as we end the first quarter and roll into the second quarter. The category Jonathan mentioned first and foremost, patio furniture. Everyone is interested in expanding their living space. And we are working with vendors with our partners, they are very creative, utilizing different ports to bring in products and get that product to the customer. And one of the things that I think is wonderful about our business model is how resilient it is. Our – we have millions of products, millions of skews, and as Jonathan mentioned earlier, those new skews that we're bringing in are very productive and very targeted to the customers’ needs. Jonathan?

I probably hope, me addressed your questions, Seth.

Yes, no, that's perfect. I appreciate that. So maybe just a related follow-up question. The step up in the AOV this quarter up 17% year-over-year as a major change, to what extent does that reflect some of the assortment changes you're making that shift to core home and other efforts to improve the customer experience versus the nature of where consumer demand is just right now and/or same skew inflation?

So very little of it is same skew inflation. We are working hard to maintain a very competitive price and lean into the smart value brand pillar. It is impacted by leaning into home, our non-home categories, some have a little bit higher price point most have a lower price point. So I think as we lean into home, you'll see that average order size increase. I also think it has to do a little bit with seasonality, patio furniture tends to be a higher price point than some other things that we sell. Certainly patio furniture is more expensive than a throw pillow, and so there we are. Dave or Adrianne, anything to add? Dave, anything to add?

No.

No, Jonathan. Nothing.

Okay. Thank you all very much, and congrats.

Thanks, Seth.

And your next question is from the line of Thomas Forte from D.A. Davidson.

Great. Thanks for taking my questions. Hello, Jonathan, you're going to have to permit me to start with a statement first and then a question second. So as a long-time follower of Overstock and as long-time follower of e-commerce and also blockchain, I was tremendously validating to see the Coinbase direct listing. Congrats in the conversion to Pelion for the venture cap fund and congrats on identifying the potential of blockchain at a very early date. Now the question. So I want to somewhat rephrase Jonathan, the comments you made in your remarks. From my vantage point as a long-time follower of e-commerce, you've been following the home category for a long time. Dave has been following the home category for a long time. It seems to me that we're in the midst of a supercycle. So when you think about the pandemic, when you think about economic stimulus, you think about the comments you talked about with consumers moving to suburban locations from urban locations, this looks to me to be a multi-year event, meaning that the home e-commerce industry is going to have elevated sales, not just in 2020, but 2021, 2022, 2023. And to the extent that you're taking market share, that makes me think that you're also going to have elevated sales not just in 2020, but also 2021, 2022, 2023. So to high level, do you and Dave agree with my session that we're in a home supercycle and that there is potential for the industry – the home e-commerce industry to have elevated sales growth for multiple years, not just one year?

Tom, first I appreciate your comment upfront and I – both I, Barbadian Gabriel CEO of Bitt are looking forward to participating in the Davidson event on next week, where we'll be talking about cryptocurrencies, digital currencies and that market, there is a lot of room to grow there. As far as being in a supercycle, I think the short answer is yes, I agree with you. We've got positive GDP, we've got shrinking unemployment, we've got record housing starts, is great reshuffling, as we see people move from New York to Florida and Illinois to Texas and California to Oregon or Utah or Idaho. I think this bodes well today, tomorrow and going forward. Dave, the question was addressed to you, so I’ll let you add on.

Just one point I would add on, and that is the penetration rate into online home furnishings. It is still in the beginnings. We are not in a mature market on the online side of things, so there is much room to grow and that excites us.

Yes. I do think it's important Tom, we are in a supercycle and I think that cycle is magnified by an immature online market maturing, and that's a big deal for us, because we're a pure-play online home furnishings company.

Great. Thanks for taking my questions.

Thanks, Tom.

And your next question is from the line of Ygal Arounian from Wedbush.

Hey, good morning guys. I have a couple of questions. May I first start on retail, and then I'll – I’m going to ask something – a few things on Medici. Jonathan, you – I think it was Jonathan or Adrianne highlighted revenues growing faster than expenses this year. Your gross margins are – were again this quarter above your 22% target and yet we're still – we're already at the mid-single digit EBITDA margin target that you guys have set. It sounds like there is room for that, especially if OpEx is growing slower than revenue. So can you just highlight how are you thinking about the margin story over the next couple of quarters and couple of years?

Yes. Adrianne, why don't you go first and then I'll add to it, because I definitely have an opinion on where the right place for gross margins is.

Perfect. Good morning, Ygal. I think as you know and Jonathan said, our mantra is sustainable profitable market share growth and we've been really focused on the sustainable part of this as well as the growing. So I think for us consistently producing targets in line with these expectations is our goal and focus over time, we'll look at this one to again we kind of create this multi quarter trend. But as you can see, this is our focus and it's deliberate and strategic. Jonathan?

Yes. This is a question we get asked a lot and because there is this secular shift online, we feel like it's in a really important time to take market share. Keeping our prices low, particularly for our customer segment, that's savvy shopper, that's our primary customer, she needs a deal. If we start tickling up the gross margin, I think it slows our growth, and now is not the time to slow growth. This is like the Oklahoma Land Rush. There are – we are waiting in a covered wagon at the border and the whistle was blown and it is time to run those horses hard and fast to get as much of the land grab as we can. So sustainable profitable, profitable is important market share growth, but the market share, I think is where we're looking at right now. I hope that address the question.

Got it. It's helpful. But just to be clear, you did say that revenues will outpace OpEx this year, right?

We have a very scalable model. We don't have a lot of – we don't have stores. We don't have dead-end, we don't have inventory. Our model, I think is this great opportunity to make sure there is operating leverage in the business every quarter.

Okay, excellent. Very helpful there. So on Medici side, get a lot of investor focus here. Not surprisingly with the changes you're making and investors really trying to understand the full value that might flow through to Overstock. I know there's a lot of moving pieces, but as some crypto and blockchain related assets go public and there's some public comps out there now. Anyway, you view those as comps and can help investors think through that. And then the second piece is how much of a potential, scale or spin or however you begin to access these businesses translates into Overstock – profit for Overstock. So in the press release, you highlighted the return of invested capital on Medici. Can you just walk through how that works? And I know there's the scale on the profit share, but is there an easy way to kind of summarize and help people think through what percentage of potential gains could flow through to Overstock? Thanks.

Adrianne, why don’t you talk about the economics and then I'll try to address some of the other things, maybe I’ll answer those great questions.

Sure. I'll go the technical side. So Ygal, as you mentioned, the setup of the fund is that the fund will return invested capital first to Overstock. That's generally measured as the net asset value. And then the remaining profits will be split for the economics as specified in the LPA. So I think there's a couple points there that are important. One is, we did disclose the NAVs within the LPA, and then second, all the economics are included within that agreement. The other thing to note from kind of an accounting expectation is that we will – we do expect to realize an initial upward fair value, excuse me, adjustment to the carry value of these businesses as they're transferred into the fund. And then on a quarterly basis, we will record our pro-rata share of the funds performance. So those are kind of three of the technical pieces. Jonathan?

So I think very simply as our money back to us first, then we split on anything on top of that. And each is a little different, but I – finger in the wind kind of say, 70/30 split, 70 to us, 30 to Pelion. So I think there's real upside there. As far as comps and what else is out there, the analysts are graded, I think are better than I am in figuring out how those comps translate to those businesses. This is certainly a hot area. The enthusiasm around NFTs, I think is meaningful. It won't surprise me. In fact, I think the SEC should deem a lot of these NFTs and securities, those that have fractional ownership or pad a loyalty to the owners, those feel like securities to me. And yes, and I think it's more of when the SEC says that. tZERO is in the catbird seat, because it knows how to do digital securities. So we'll let Pelion manage the exits, manage the fundraising. We've hired a good headmaster to take care of our children as they go off to school. That's kind of the metaphor I look at.

Great. That's a helpful metaphor and a very helpful color. Thanks so much.

Thank you, Ygal.

Your next question from the line of Peter Keith from Piper Sandler.

Good morning guys, great results. And great to see a lot of the KPIs that being disclosed this morning, look forward to seeing them progress going forward. I guess, a fairly simplistic question though, is if someone was just listening to this call on Overstock for the very first time and maybe has a memory from the 2018, 2019 days, what KPIs do you think are most important to reflect ongoing progress and turn around in the business. That's going to allow you to hold sales at least flat with Q2.

Let me take your initial answer. I know Dave will have more because Dave is running that business. And boy, I don't know anyone who looks at KPIs more than Dave does and manages that. I think first and foremost, we have customer retention. 2020 was the year of customer acquisition because customers were in the market. And boy, do we acquire a lot of them. We are focused on customer repeat rate, customer retention, it doesn't mean we're not acquiring new customers. We're always doing that. But for me, that is KPI number one. And that's what I asked Dave about every time every week, we're in a one-on-one, how are we doing on retention because that's what's important. Dave, what you add to that.

Well, first, I can attest, Peter. Jonathan asked me about retention every time we meet. It is critical to us. We garnered so many – acquired so many new customers in 2020. And we have over 30 different OKRs. You've heard us talk about OKRs in previous earnings calls. OKRs is a way that we focus and align throughout our business. And from that single objective of building retention on those customers, we acquired in 2020. There are, like I say, over 30 key results and objectives fettered out throughout the organization for us to be able to focus in each of the areas, whether it's merchandising, whether it's supply chain and ensuring that that delivery is met in a way that the customer repeats again. From a marketing standpoint and the channels that it matters most to get that customer back to Overstock and buying and culture that relationship. So those are some of the key metrics, but I won't take it beyond retention. That is our primary focus.

Okay.

Peter, I hope we address the question?

Yes. You did it. Maybe I'll try to unpack a little bit further. I think you were saying new customer count is probably going to be sort of turning down year-on-year. So that's going to be a bit of a headwind to revenue, but your AOV is moving up a lot, like orders per customer moving up. Are those going to be powerful enough to kind of offset? What probably will be a drop in new customer adds?

Yes, I think so. For us, we're looking at customers and new customers and repeat customers when they make a purchase, it's the same purchase. And so as we probably won't add new customers at the same rate we did in 2020, although we’ll ensure to continue to add new customers, we have a bigger base to get repeat customers from. And so our goal is every day more sales, more customers. That's what we're working on.

Okay. Sounds great, guys. Good luck.

Go ahead, operator. I’m sorry.

I’d now like to turn the call back over to Mr. Johnson for closing remarks.

Thank you. I know we didn't get to everyone in the queue. Thank you all for participating in today's call. If there's one thing you should take away from this call is we are better positioned than ever to continue to take market share and deliver profitability. We're focused and executing on our plans. Add in the favorable macroeconomic conditions, things like positive GDP, shrinking unemployment, economic growth, record housing starts, and the lasting shift of the great reshuffle of the American workforce, permanently migrates from cities to suburbs. And you can see why we feel poised to continue to outperform. We appreciate your interest and ownership in Overstock. Until we talk again, we'll keep working diligently to deliver on our 2021 plan. Thanks everybody.

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