Overstock (NASDAQ:OSTK) Misses Q1 Sales Targets

Full Report / June 29, 2022
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Online home goods retailer Overstock (NASDAQ: OSTK) fell short of analyst expectations in Q1 FY2022 quarter, with revenue down 18.7% year on year to $536 million. Overstock made a GAAP profit of $10.1 million, down on its profit of $16 million, in the same quarter last year.

Overstock (OSTK) Q1 FY2022 Highlights:

  • Revenue: $536 million vs analyst estimates of $573.2 million (6.49% miss)
  • EPS (non-GAAP): $0.21 vs analyst expectations of $0.23 (8.69% miss)
  • Free cash flow of $29.9 million, up from negative free cash flow of $5.99 million in previous quarter
  • Gross Margin (GAAP): 23.3%, in line with same quarter last year
  • Annual Active Customers: 7.4 million, down 2.5 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 24.1% annually. The initial impact of the pandemic was positive for Overstock's revenue, pulling forward sales, but quarterly revenue subsequently normalized, year over year.

Overstock Total Revenue

This quarter, Overstock reported a rather lacklustre 18.7% year on year revenue decline, missing analyst expectations.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 11.8% 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 30.4% annually to 7.4 million users. This is among the fastest growth of any consumer internet company, indicating that users are excited about the offering.

Overstock Annual Active Customers

Unfortunately, in Q1 the number of active buyers decreased by 2.5 million, a 25.2% 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 growth has been decent over the last two years, averaging 11.2%. The ability to increase price while still growing its user base shows the value of Overstock’s platform. This quarter, ARPU grew 8.67% year on year, reaching $72.43 for each of the active buyers.

User Acquisition Efficiency

Consumer internet businesses like Overstock grow by a combination of product virality, paid advertisement and occasional incentives, unlike enterprise products that are typically sold by sales teams.

It is relatively expensive for Overstock to acquire new users, with the company spending 48.1% 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 reported EBITDA of $21.4 million this quarter, which was a 4% margin. Over the last twelve months Overstock has shown a solid, above-average profitability for a consumer internet business with average EBITDA margins of 4.82%.

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 $29.9 million in Q1, down 58.2% year on year.

Overstock Free Cash Flow

Overstock has generated $42.6 million in free cash flow over the last twelve months, a 1.62% 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 Q1 Results

With a market capitalization of $1.35 billion Overstock is among smaller companies, but its more than $493.2 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

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, it seems to us that this was a complicated quarter for Overstock. The company currently trades at $28.7 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. Although Overstock is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its user growth has been strong, unfortunately its sales and marketing efficiency is sub-average.

The market is certainly expecting long term growth from Overstock given its EV/EBITDA ratio based on the next twelve months of 8.8x is higher than many other consumer internet companies. We can find things to like about Overstock and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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