Overstock (NASDAQ:OSTK) Misses Q3 Revenue Estimates

Full Report / October 26, 2023

Online home goods retailer Overstock (NASDAQ: OSTK) fell short of analysts' expectations in Q3 FY2023, with revenue down 18.9% year on year to $373.3 million. Turning to EPS, Overstock made a GAAP loss of $1.39 per share, down from its loss of $0.81 per share in the same quarter last year.

Overstock (OSTK) Q3 FY2023 Highlights:

  • Revenue: $373.3 million vs analyst estimates of $396.1 million (5.76% miss)
  • EPS (non-GAAP): $0.61 vs analyst estimates of -$0.72 ($1.33 beat)
  • Free Cash Flow was -$14.1 million compared to -$8.03 million in the previous quarter
  • Gross Margin (GAAP): 18.7%, down from 23.3% in the same quarter last year
  • Annual Active Customers: 4.9 million, down 0.9 million year on year

Originally launched as a website focusing on selling clearance sale electronics and home goods merchandise, Overstock (NASDAQ: OSTK) is a leading online retailer of home goods, primarily furniture.

Overstock has been in the online home goods space for over 20 years, but from 2014 to 2021 a lot of the company’s focus was on developing blockchain technologies through its Medici Ventures and tZero subsidiaries that focused on cryptocurrencies. In January 2021, under new CEO Jonathan Johnson, the blockchain businesses were spun out, allowing Overstock to focus again purely on selling home goods online, while still retaining a chance for an upside from the blockchain ventures.

For consumers, Overstock offers a wide range of low priced home goods from thousands of suppliers to its millions of customers. Traditionally focused on heavy discounting and promotional advertising, Overstock has relied on a wide network of over 4,000 fulfillment centers to offer speedy delivery.

Online Retail

Consumers ever rising demand for convenience, selection, and speed are secular engines underpinning ecommerce adoption. For years prior to Covid, ecommerce penetration as a percentage of overall retail would grow 1-2% annually, but in 2020 adoption accelerated by 5%, reaching 25%, as increased emphasis on convenience drove consumers to structurally buy more online. The surge in buying caused many online retailers to rapidly grow their logistics infrastructures, preparing them for further growth in the years ahead as consumer shopping habits continue to shift online.

Overstock (NASDAQ: OSTK) competes with Amazon (NASDAQ:AMZN), Wayfair (NYSE: W), Bed Bath and Beyond (NYSE:BBBY), RH (NYSE:RH), Williams Sonoma (NYSE:WSM), Target (NYSE:TGT), Macy’s (NYSE:M), and privately held Ikea.

Sales Growth

Overstock's revenue has been declining over the last three years, dropping on average by 1.77% annually. This quarter, Overstock reported a year on year revenue decline of 18.9%, missing analysts' expectations.

Overstock Total Revenue

Ahead of the earnings results, analysts covering the company were projecting sales to grow 3.98% over the next 12 months.

Usage Growth

As an online retailer, Overstock generates revenue growth by expanding its number of buyers and the average order size in dollars.

Overstock has been struggling to grow its active buyers, a key performance metric for the company. Over the last two years, its buyers have declined 26.9% annually to 4.9 million. This is one of the lowest rates of growth in the consumer internet sector.

Overstock Annual Active Customers

In Q3, Overstock's active buyers decreased by 0.9 million, a 15.5% drop since last year.

Revenue Per Buyer

Average revenue per buyer (ARPB) is a critical metric to track for consumer internet businesses like Overstock because it measures how much customers spend per order.Overstock ARPB

Overstock's ARPB growth has been mediocre over the last two years, averaging 3.54%. Although its active buyers have shrunk during this time, the company's ability to increase prices shows that existing buyers still value its platform. This quarter, ARPB declined 4% year on year to $76.19 per buyer.

Pricing Power

A company's gross profit margin has a major impact on its ability to extert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Overstock's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 18.7% this quarter, down 4.6 percentage points year on year.

For online retail (separate from online marketplaces) businesses like Overstock, these aforementioned costs typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure expenses. After paying for these expenses, Overstock had $0.19 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.

Overstock Gross Margin (GAAP)

Overstock's gross margins have been trending down over the last 12 months, averaging 21.7%. This weakness isn't great as Overstock's margins are already far below other consumer internet companies and suggest shrinking pricing power and loose cost controls.

User Acquisition Efficiency

Consumer internet businesses like Overstock grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It's expensive for Overstock to acquire new users as the company has spent 59.4% of its gross profit on sales and marketing expenses over the last year. This relative inefficiency indicates that Overstock's product offering can be easily replicated and that it must continue investing to maintain its growth trajectory.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, Overstock's EBITDA came in at negative $23.9 million, resulting in a -6.41% margin. The company has also shown rather mediocre profitability for a consumer internet business over the last four quarters, with average EBITDA margins of -0.49%.

Overstock Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Overstock burned through $14.1 million in Q3, increasing the cash burn by 87.4% year on year.

Overstock Free Cash Flow

Overstock has burned through $42.7 million of cash over the last 12 months, resulting in a negative 2.63% free cash flow margin. This below-average FCF margin stems from Overstock's continuous need to reinvest in its business to penetrate the market.

Key Takeaways from Overstock's Q3 Results

With a market capitalization of $691.6 million, Overstock is among smaller companies, but its more than $325.4 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

We struggled to find many strong positives in these results. Its user base fell and its revenue growth was quite weak. Overall, the results could have been better. The company is down 1.96% on the results and currently trades at $15 per share.

Is Now The Time?

When considering an investment in Overstock, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for everyone who's making the lives of others easier through technology, but in the case of Overstock, we'll be cheering from the sidelines. Its revenue growth has been weak over the last three years, and analysts expect growth to deteriorate from here. On top of that, its growth in active buyers has been lackluster and its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses.

Overstock's price/gross profit ratio based on the next 12 months is 1.9x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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