Overstock (NASDAQ:OSTK) Misses Q3 Revenue Estimates

Full Report / October 27, 2022
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Online home goods retailer Overstock (NASDAQ: OSTK) missed analyst expectations in Q3 FY2022 quarter, with revenue down 33.2% year on year to $460.2 million. Overstock made a GAAP loss of $36.9 million, down on its profit of $30.4 million, in the same quarter last year.

Overstock (OSTK) Q3 FY2022 Highlights:

  • Revenue: $460.2 million vs analyst estimates of $472.8 million (2.66% miss)
  • EPS (non-GAAP): $0.13 vs analyst estimates of $0.05 ($0.08 beat)
  • Free cash flow was negative $7.54 million, compared to negative free cash flow of $14.5 million in previous quarter
  • Gross Margin (GAAP): 23.3%, up from 22.7% same quarter last year
  • Annual Active Customers: 5.8 million, down 2.9 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.

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 strong, averaging 22.2% annually. Unfortunately, the pandemic had a negative impact on Overstock's revenue growth.

Overstock Total Revenue

This quarter, Overstock reported a rather lacklustre 33.2% year on year revenue decline, missing analyst expectations.

Before the earnings results were announced, Wall St analysts covering the company were estimating revenues to decline 5.92% 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.

Over the last two years the number of Overstock's active buyers, a key usage metric for the company, grew 13.5% annually to 5.8 million users. This is a solid growth for a consumer internet company.

Overstock Annual Active Customers

Unfortunately, in Q3 the number of active buyers decreased by 2.9 million, a 33.3% drop year on year.

Revenue Per User

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

Overstock’s ARPU has declined over the last two years, averaging 2.7% annually. While the number of users has been still growing, it is not great to see the company losing pricing power. This quarter, ARPU grew 0.14% year on year, reaching $79.35 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 relatively expensive for Overstock to acquire new users, with the company spending 48.3% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Overstock has to compete for users 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's EBITDA came in at $14.7 million this quarter, which translated to a 3.2% margin. Over the last twelve months Overstock has shown a solid, above-average profitability for a consumer internet business with average EBITDA margins of 3.9%.

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 burned through $7.54 million in Q3,

Overstock Free Cash Flow

Overstock has generated $1.87 million in free cash flow over the last twelve months, a 0.08% of revenues. This FCF margin is a result of Overstock efficient business model, and provides it with the optionality to further invest in the business.

Key Takeaways from Overstock's Q3 Results

With a market capitalization of $1.17 billion Overstock is among smaller companies, but its more than $427.5 million in cash and positive free cash flow over the last twelve months give us confidence that Overstock has the resources it needs to pursue a high growth business strategy.

We struggled to find many strong positives in these results. On the other hand, there was a decline in number of users and the revenue growth was quite weak. Overall, this quarter's results could have been better. The company is flat on the results and currently trades at $24.95 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 decent, though we don't expect it to maintain historical growth rates. But while its user growth has been healthy, the downside is that its ARPU has been declining and its sales and marketing efficiency is sub-average.

At the moment Overstock trades at next twelve months EV/EBITDA 15.9x. 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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