Overstock's (NASDAQ:OSTK) Q1 Sales Top Estimates But Usage Drops

Full Report / April 27, 2023
Add to Watchlist

Online home goods retailer Overstock (NASDAQ: OSTK) reported Q1 FY2023 results that beat analyst expectations, with revenue down 28.9% year on year to $381.1 million. Overstock made a GAAP loss of $10.3 million, down on its profit of $10.1 million, in the same quarter last year.

Overstock (OSTK) Q1 FY2023 Highlights:

  • Revenue: $381.1 million vs analyst estimates of $361 million (5.58% beat)
  • EPS (non-GAAP): -$0.10 vs analyst estimates of -$0.14
  • Free cash flow of $14.8 million, up from negative free cash flow of $35.3 million in previous quarter
  • Gross Margin (GAAP): 23.5%, in line with same quarter last year
  • Annual Active Customers: 4.8 million, down 2.6 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.

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 growth over the last three years has been solid, averaging 19.1% annually. This quarter, Overstock beat analyst estimates but reported a rather lacklustre 28.9% year on year revenue decline.

Overstock Total Revenue

Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline -7.77% over the next twelve months.

Usage Growth

As an online retailer, Overstock generates revenue growth by growing both the number of buyers, and the average order size.

Overstock has been struggling over the last two years as the number of active buyers, a key usage metric for the company, declined 16.7% annually to 4.8 million. This is one of the lowest levels of growth in the consumer internet sector.

Overstock Annual Active Customers

In the number of active buyers decreased by 2.6 million, a 35.1% drop year on year.

Revenue Per Buyer

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

Overstock’s ARPB has declined over the last two years, averaging 1.41% annually. The fact that not only its active buyers shrunk, but also its revenue per buyer has decreased is suggesting some potential problems in the business. This quarter, ARPB grew 9.62% year on year, reaching $79.40 for each of the active buyers.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Overstock grow by a combination of product virality, paid advertisement or incentives.

It is expensive for Overstock to acquire new users, with the company spending 50.2% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Overstock is not highly differentiated and points to Overstock likely having to continue to invest to maintain growth.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Overstock reported EBITDA of $3.42 million this quarter, which was a 0.9% margin. Over the last twelve months Overstock has shown above-average profitability for a consumer internet business with average EBITDA margins of 2.41%.

Overstock Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Overstock's free cash flow came in at $14.8 million in Q1, down 50.7% year on year.

Overstock Free Cash Flow

Overstock has burned through $42.6 million in cash over the last twelve months, resulting in a mediocre -2.4% free cash flow margin. This below average FCF margin is a result of Overstock's need to heavily invest in the business to continue to penetrate its market.

Key Takeaways from Overstock's Q1 Results

With a market capitalization of $816.6 million Overstock is among smaller companies, but its more than $374.7 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We liked to see that Overstock beat analysts’ revenue expectations pretty strongly this quarter, and EBITDA was also ahead. That feature of these results really stood out as a positive. On the other hand, there was a decline in number of users and the revenue growth was quite weak. Overall, it seems to us that this was a complicated quarter for Overstock. The company is up 2.93% on the results and currently trades at $18.6 per share.

Is Now The Time?

When considering Overstock, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Overstock we will be cheering from the sidelines. Its revenue growth has been a little slower, and analysts expect growth rates to deteriorate from there. And on top of that, unfortunately its user growth has been lackluster, and its ARPU has been declining.

At the moment Overstock trades at next twelve months EV/EBITDA 23.6x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds from the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.