Overstock.com, Inc.

and thank you for standing by. Welcome to the Q2 2021 Overstock.com 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. At that time, if you have a question, you will need to press star 1 on your telephone. If anyone should require assistance during the conference, please press star 0. Please be advised that today's conference is being recorded. I will now let the hand the conference over to your speaker today, Alexis Callahan, head of IR. Please go ahead.

Thank you, operator. Good morning, and welcome to Overstock's second quarter 2021 earnings conference call. Joining me today are Jonathan Johnson, CEO, and Adrian Lee, CFO. Dave Nielsen, 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, July 29th, 2021, and may include forward-looking statements. Actual results may differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-Q for the first quarter, 2021, in subsequent filings with the SEC and in our press release filed this morning. Please review the forward-looking statements disclosure on slide two 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. And with that, let me turn the call over to you, Jonathan.

Thank you, Alexis, and good morning to everyone. I'm pleased to report that Overstock delivered both growth and profitability in the second quarter, a significant achievement for the company. We beat the year-over-year comp growing revenue 4% against a robust comparable period in our first full quarter lapping the start of the pandemic. We did this by continuing to make foundational operational improvements to our business, executing against a disciplined strategy, and focusing intensely on the things that drive results. During today's call, we'll follow the agenda on slide three. Next slide, please. Nearly two years ago when I took the helm, the business was unfocused. It was less disciplined. It was trying to do too many and often competing projects, and it was experiencing an identity crisis. The e-commerce business wasn't being appropriately tended to as we were spending a lot of time and energy on the blockchain portfolios. I recognized that we were at a real moment for Overstock and we had an opportunity to step back, assess the business, assess our strengths and weaknesses and evaluate the competitive landscape and how it had evolved. The senior team and I made several important strategic decisions that led us to where we are today. First, we decided to focus on our e-commerce business. Second, we decided to lean into our home furnishings categories and decades of expertise there. And third, we decided to outsource the management of the blockchain assets to a capable venture capital firm, enabling all parties to do what they do best. So here we are by design. We're intentionally operating in a large and growing furniture and home furnishings market. That market has increasingly moved online and is supported by favorable long-term macroeconomic trends. The pandemic accelerated this seismic and I think permanent shift in buying home furnishings online. Many current and forecasted economic trends bode well for the future long-term growth and sustained strength of the overall category. The great reshuffling of the American workforce persists. Flexible work, which means people working at home, is here to stay. As a result, people are moving. Houses are being bought and sold at a record pace, aided in part by low mortgage rates, healthy employment levels, and a record high savings rate. And consumers have money to spend. As we think about where that money will be spent, Some have questioned whether trade-off decisions need to be made, whether to spend on experiences or whether to spend on goods. Given the health of the economy and the consumer wallet, we believe sooner than later the answer is an and, not an or. Consumers can do both. They can go on vacation in what may be a post-pandemic environment, and they They can buy that outdoor patio set for their backyard they've been eyeing. And as families and friends begin to gather again, get ready to host the holidays by buying a new dining room set. Yes, there may be a short-term shift, as many act on a pent-up need to get out of their house on vacation. But we believe, and time will tell, that the online home furnishing space, the space we are purposefully in, will continue to grow long-term, and the macroeconomic trends look like they support this, too. Slide five, please. Next, a brief corporate update. There are a couple of major accounting items in the second quarter worth mentioning. First, we released a tax valuation of allowance of $47 million in the quarter. This release was driven by recent actual performance and future expected financial profitability. This is a big deal, indicative of the underlying strength of our business and the new level at which we are operating. Second, in conjunction with the closing of our transaction with Pellion Venture Partners, we deconsolidated the Medici Venture assets from our financial statements and recorded a net $228 million gain when adjusting those assets to fair value. The gain is recorded in discontinued operations, but going forward, quarterly activity of the Medici Ventures Fund will be recorded as part of continuing operations. We're pleased to have that transaction closed and to have Pelley on managing and directing those businesses. I'm also extremely proud that Overstock was named to Parity.org's Best Companies for Women to Advance list for 2021. This is a real honor. The companies on the list are shining examples of businesses that walk the walk and are helping to create equal representation in the workplace. Over the past year, Overstock has increased the diversity of our management team and board. I'll now hand it over to one of those great new female executives as Adrian Lee will review our solid second quarter financial results.

Thank you, Jonathan. Slide six, please. As already mentioned, we are pleased to have closed the transaction with Pellyanne Venture Partners in the second quarter, allowing us to deconsolidate the Medici Ventures businesses from our financial statements and record a gain net of tax as we recognize an initial upward fair value adjustment on the Medici assets and our direct minority interest in T-zero. Please note my comments today will reflect results from continuing operations only. I will begin with a high-level summary of our second quarter results followed by a review of key customer metrics and performance indicators. Next slide, please. We had yet another strong quarter, delivering year-over-year revenue growth while continuing profitability. Adjusted EBITDA was $44 million in the second quarter, a year-over-year decrease of $4.5 million as a result of one-time benefits recognized in 2020, and an improvement of $47 million compared to the second quarter of 2019. We reported diluted earnings per share of $1.72, excluding the impact of the tax valuation allowance released. Diluted earnings per share was 73 cents in the quarter, a decrease of 38 cents versus 2020, and an improvement of $1.10 per share compared to the second quarter of 2019. The year-over-year decline in diluted earnings per share reflects a 16-cent benefit from a non-recurring legal accrual release in 2020 and a 12-cent impact from increased shares outstanding due to our successful follow-on offering last August and our digital dividend. Consistent with recent performance, our balance sheet remains strong. We ended the second quarter with $536 million in cash. Our cash balance reflects the funding of our capital commitment to the Medici Ventures Fund and benefited from standard invoice timing and accounts payable. I will speak to the other financial metrics in greater detail in the following slides. Next slide, please. We posted revenue of $795 million in the second quarter. an increase of 4% year-over-year and 116% compared to the same period in 2019. This was driven by a 33% increase in average order value and an improvement in order frequency. Average order value increased year-over-year as we continued to lean into home and was sequentially driven by sales mix within home categories. As we continue to lean into home, we expect our business to be less seasonal than it has been historically, but we do expect variability by quarter driven by sales mix within homes. As I have mentioned on previous calls, future trends remain difficult to predict, but we believe that the furniture and home furnishings market will continue to grow and that the shift to online purchasing is a trend that will persist. Our goal remains to take market share in the expanding U.S. online home furnishings market. Next slide. Gross profit came in at $175 million in the second quarter, a decrease of $3 million versus the prior year and an increase of $102 million compared to the second quarter of 2019. Gross margin was 22% for the second quarter, which is right within our targeted range. This represents a decrease of 119 basis points compared to a year ago and an increase of 228 basis points year over two. The year over year margin decline was expected and driven by a few notable non-recurring items from the second quarter of 2020. If you recall, gross margin in the second quarter of 2020 benefited from lower customer care expense as we adjusted to increase sales volumes, fulfillment-related charges to protect the customer experience, and lower discounting activity as we balanced marketing efforts against product availability and stock outs. Next slide, please. This chart illustrates G&A and tech expense over the past nine quarters in both absolute dollars and as a percentage of revenue. Adjusting for one-time G&A expense benefit in 2020, G&A and tech expense declined by $4 million and remained flat sequentially, even as we continued to deliver top-line growth. As a percentage of revenue, G&A and tech expense was 6.7% for the second quarter and created nearly 80 basis points of leverage compared to the second quarter of 2020. Compared to 2019, G&A and tech expense increased by only 3%, while revenue increased by 116%, and improved 738 basis points as a percent of revenue. We have implemented robust expense controls and continue to be measured in our spending. Our business model enables us to scale efficiently without adding significant costs into the business. Next slide, please. We delivered adjusted EBITDA of $44 million in the second quarter, which is down slightly versus a year ago, but up significantly versus the two-year comparable period. Adjusted EBITDA margin was 5.6%. a decrease of 79 basis points compared to 2020, primarily driven by one-time benefits to gross margin realized a year ago, and an increase of 625 basis points versus 2019. This is right in line with our margin target, driven by our focus on market share growth and disciplined expense management. Next slide. Now I will turn to our operating metrics that we use to manage and assess our business performance, in which we began disclosing last quarter. This slide shows active customers and order frequency. As expected, our active customer base declined sequentially to 9.2 million at the end of the second quarter, driven by the significant influx of new customers during the peak of the pandemic restrictions, which caused a high point in online penetration. However, our active customer count increased 31% or by 2.2 million customers compared to the second quarter of 2020 and by 3.4 million customers versus 2019. Orders per active customer was 1.69 times in the second quarter, which improved sequentially and on a year-over-year basis. We anticipate order frequency will increase over time and be influenced by our customer retention efforts on our larger home customer base and as we increase our brand association with home. Next slide. This slide shows orders delivered and average order value. Orders delivered was 15.5 million for the trailing 12-month period. This is an increase of 36% compared to the prior year or 4.1 million orders and an increase of 52% or 5.3 million orders compared to 2019. The sequential decline is attributable to our decline in active customers during the period and is as expected. We more than offset this decline by an increase in average order value and order frequency. AOV improved 33% year-over-year to $213 and 16% sequentially. driven by our continued mix into home and sales shift within home categories. So while the absolute number of orders decreased, the value of each order improved. There is a strong correlation between higher value orders and customer retention. So as we continue to lean into home, we anticipate a positive impact on customer repeat purchase behavior. It's important to note that there may be some near-term noise in our operational metrics as we exit non-home categories and as online penetration stabilizes. But over time, we expect consistent improvement. In summary, we are pleased with our second quarter performance and our ability to continue to deliver solid financial results. With that, back to you, Jonathan.

Thanks, Adrienne. Our second quarter results were solid. We beat the COP during a quarter with a high bar. We were measured in our spending and generated operating leverage. We delivered $44 million of adjusted EBITDA at a margin of 5.6 percent. We again delivered profitable growth and within our target margin guardrails. It should be clear that this is the result of purposeful, meaningful foundational changes. Slide 14, please. Our consistent and solid performance is the result of operational changes and organizational discipline and focus. The Overstock team has embraced the changes and the strategy we've implemented. It's now in our DNA. Slide 15, please. I will now discuss our e-commerce business, including our strategy operations and growth drivers. As I do, you will see how we are achieving these financial results. Slide 16, please. As we mentioned last quarter, Overstock is now a top four brand in the large and growing U.S. online furniture and home furnishings market, moving up from the number five spot last year. Our long-term goal is to move up this list as we continue to take market share. This market is currently estimated at $325 billion, and if GDP is a proxy, as it has been historically, Many anticipate industry growth to continue in the single digits, perhaps a bit higher this year. The main shift in this market, however, is not whether consumers will continue to buy furniture and decor for their homes, but instead where they will buy those things, online or in-store. It appears that a true secular shift in consumer behavior is underway and sticking, accelerated by the pandemic and aided by technology. While everyone will learn as society enters and comes through this post-pandemic transition period, there will be some short-term shuffling of consumer spending. We believe most of the industry growth will be in online as consumers increasingly opt for the selection, value, and convenience of buying online. Overstock is focused on capturing as much of this market share growth as possible. particularly now as this shift is underway. Slide 17, please. Two years ago, when Overstock was at a real inflection point, I mentioned making three key decisions. The first was to focus on our e-commerce business with a singular level of attention we hadn't done in years. The second was to assess where the market and competitive landscapes had evolved and to purposefully determine where we wanted to play. It was time to stop trying to be all things to all people and to get really clear on our strengths. We have strategically carved out a niche within the market with specific targeted customers we feel naturally play to our strengths and in a market quadrant that serves significant customer demand. This slide maps the competitive landscape and our relative positioning. We are exclusively focused on furniture and home furnishings, and we are focused on providing quality goods at great prices. I would also note a third dimension that is a bit more difficult to graphically depict, which are the specific customers we target. In the spirit of playing to our strengths, We target customers who are already seeking the value proposition we provide. These customers seek smart value and a low hassle experience. We believe these customers represent roughly 40% of the market or $130 billion and have a naturally higher propensity to shop with us. You'll notice one other player in our quadrant. That player does not offer the same quality for the price, focused on a different customer and is not focused on being a pure play online retailer. We like where Overstock is positioned. We are focused on taking market share in the ample white space within the market. I will now talk to each of our three brand pillars, each of which help define Overstock's value proposition. Slide 18, please. Our first brand pillar is product findability. As we continue to further lean into home, it's critical that our customers know us for home furnishings offerings and can quickly and easily find the home products they're looking for. Remember that an easy, hassle-free experience is paramount to our target customers. I'll mention two updates regarding this brand pillar. First, Sales of home-related goods in the second quarter reached 94%, up from 91% at the end of 2020, and the highest in our operating history. We continue to phase out of non-home products in a measured way, and as we do, increasing the depth and breadth of assortment within our home furnishings product categories. Our goal is for 100% of sales revenue to be home-related by this time next year. We believe our focus on home attracts loyal customers who will spend more with us and buy more frequently. Second, we're making good progress on our product findability initiative, which involves overhauling our on-site search functionality and navigation to make finding home products easier, faster, and more intuitive. We made great strides in the second quarter by furthering our understanding of our customers' search intent and then providing customers with more relevant and accurate search results based on that intent. Continued progress of this initiative should result in higher conversion and higher customer satisfaction. It's important that we're seen as an online furniture and home furnishings destination and that we make finding our home products easy and fast. Slide 19, please. Our second brand pillar is smart value. This means offering great products at great prices or said differently, the highest quality products for the price. Our promotional model is critical to attracting and retaining our customer targets. They love finding a deal and they want to feel like they're winning. Our goal remains to win on price post promotion, not to be an everyday low price leader. Last year, we made good progress in clarifying our promotional messaging and refining our pricing model. We want to make sure our products are consistently competitively priced. That builds trust in our brand and helps customer loyalty. As we've talked about before, there are really two components of pricing. Finding comparable products to price match against, and then adjusting our price to ensure we are appropriately competitive. The more comparable products we find, the better. We increased that number in the second quarter. We also made good progress over the past few quarters in increasing the percentage of those comparable products on which we are priced competitively. We still have work to do, but we are progressing nicely. I would say this is a work that is never truly done. We will always be working. to price match more of our products and adjusting our pricing to remain appropriately competitive. I should also mention our free shipping policy, a component of SmartValue and a benefit that really matters to our customers. In fact, it's the top purchase driver among our target customers and one of the reasons we made free shipping on everything a permanent customer benefit last year. It should be no surprise then that relative to competition, we continue to compare favorably on our customer's rating of shipping charges. The opportunity for us going forward is to increase awareness of this significant customer benefit. Slide 20, please. Our third brand pillar is easy delivery and support. This includes logistics and delivery, which is getting the right product assortment and then optimizing its journey to the customer. We utilize a partner-based dropship model. We have more than 3,000 partners with over 5,000 fulfillment centers nationwide. This deep partner base allows for high inventory levels and broad product assortment without utilizing our own capital. It enables us to be nimble and efficient with an asset-light business model. Over the past year and a half, we've invested in partner relations in a more meaningful way than we ever have. We're acting like a real partner, collaborating and working together to optimize not only our business, but also theirs. We think this is having a positive impact on our ability to source new product and get higher product allocation at a time when inventory is particularly scarce. From a customer experience standpoint, we know that both delivery speed and on-time accuracy matter. For large parcel products in particular, delivery estimation accuracy matters more, and we improved our estimation capabilities over the past year. We also improved our communications with partners, carriers, and customers. This has allowed us to better navigate supply chain disruptions and other unexpected issues. We have an opportunity to improve on speed with the goal to get small parcel deliveries to customers within two business days. In short, we really like our operating model. It is capital-wide and enables us to scale effectively and efficiently. Slide 21, please. Easy delivery and support also includes customer support. satisfied customers generally become loyal customers. Our mission, therefore, is to deliver predictable, efficient, and effective customer service that results in an easy, hassle-free customer experience. That means preventing issues before they arise and resolving them quickly when they do. We aim to resolve most cases on first contact. We've made significant progress over the past year in issue prevention, which resulted in a 27% decrease in customer contact volume in the second quarter compared to the same period two years ago. This improvement was largely driven by better communications with customers around product tracking, more accurate delivery updates, and increased self-service options. Over the past year, we've added new automation and self-service functionality to the site, which enables customers to do things like request a replacement part or start a return without the need to talk to an agent. In addition to reducing cost, it also results in higher customer satisfaction, which often correlates to higher customer retention. Customers really like being able to help themselves. Self-service as a percentage of total customer service cases increased in the second quarter both sequentially and year over year, and is up four and a half times versus the same period two years ago. We are focused on enhancing our customer service functionality and on increasing customer utilization of this offering. Those are our three brand pillars, which together form our differentiated value proposition and guide our strategy. Slide 22, please. We intend to live by our mantra of sustainable, profitable market share growth. Listed on this slide are some, but certainly not all, of the key drivers that we believe will fuel continued growth. We're improving product findability for a faster, easier customer experience. We're increasing the breadth and depth of our home goods assortment. We're expanding internationally, first into Canada shipping to our Canadian customers from Canada instead of from the U.S. Our new Canadian customer experience site is now live, and over time we expect that our Canadian business will be roughly 10% of the size of our domestic business. We expect to take what we learn from the Canadian expansion and use it as a template for future international expansion efforts. We have a great mobile app, but it remains under-adopted. We're working to improve that. We're focused on optimizing our marketing channels and increasing direct profit. We are hyper-focused on improving customer retention. Improving the customer experience helps with that. We're establishing our government business. That continues to ramp slowly, but we are adding new products daily, improving the site, and making business development efforts at the state and local level. We think government is a meaningful long-term opportunity. And we think there is a big opportunity to increase Overstack's brand association with home, particularly as these home customers are twice as likely to purchase from us. In short, we feel well-positioned with many levers to pull to continue to grow and to achieve our long-term plan. Slide 23, please. As I've mentioned many times before, we believe we are in the middle of a secular shift in consumer behavior as people are increasingly buying furniture and home furnishings online. We have intentionally set our near to medium-term growth and margin targets accordingly, informed by our desire to take market share while consistently delivering profitability. When we feel the industry has reached a natural maturation point, we may consider revising our targets and establishing a longer-term margin framework. Our targets are as follows, with the goal of achieving these consistently quarter in and quarter out. Top line, outpacing the market, driven by our technology, our customer focus, and our business model. Gross margins in the 22% range, which may fluctuate slightly from quarter to quarter. Discipline spending, particularly in G&A and tech expense, to continue to drive operating lever and adjusted EBITDA margins in the mid-single digits. Overstock is now operating at a new level. The structural changes and improvements we've made and will continue to make will prove out in consistent metrics and performance. Slide 24, please. Next, I'll briefly discuss significant updates on the Medici Ventures Fund. Slide 25. There have been a few updates worth noting to some of the Medici Venture Fund businesses since our April earnings call, all of which were publicly disclosed. TZERO has been busy executing on high-priority items. It has signed several partnership agreements and is working through due diligence to get additional new assets trading on the ATS, including partnering with Wazuzu to bring NFTs to markets. TZERO is encouraged by the SEC rule that heightens OTC eligibility requirements for private companies. TZERO also launched its new crypto app at the end of June, which enables significantly higher trading limits, the trading of additional cryptocurrencies, and instant settlement. As previously announced, TZERO's capital raise is in process. As it has each of the last two quarters, TZERO has will host an investor update call next month. I encourage you to tune in for Key Zero's update. In an effort to keep you apprised of significant progress made by the Medici Venture Fund companies, we plan to continue to provide some updates in our quarterly earnings call aligned to what has been disclosed publicly. Slide 26, please. I'll now briefly recap the quarter and provide some additional color before we move to Q&A. Slide 27, please. In summary, Overstock delivered another quarter of both growth and profitability. Our go-forward outlook is bright enough that we've released a tax valuation allowance this quarter. We also deconsolidated the Medici Ventures businesses and recorded a gain on their adjustment to fair value. Great to have that transaction closed and Pellion managing the portfolio, which frees us up to focus on our e-commerce business. Going forward, we will continue to execute against our focus strategy to deliver sustainable, profitable market share growth. We are now operating at an entirely new level. We do not give guidance, and we typically do not like to comment on our expectations in any given quarter. However, because we know it may be helpful as we lap the pandemic quarters, we will provide additional color today. Do not expect us to continue this practice. The third quarter has started slightly slower. Quarter to date, GMS is down single digits year over year. We've seen what we think is a short-term shift in behavior as consumers have stopped cocooning at least and if only for the summer and have released some pent up demand in areas like travel and entertainment. This is not entirely unexpected. And we've seen some of our competitors significantly, and in my opinion, inefficiently increasing their online ad spend in an effort to make up for losing market share. Time will tell on both these. In the meantime, The Overstock team is focused on driving third quarter sales. The third quarter that has the Labor Day home furnishings event followed by our customer day event still to come. I remain bullish on the health of the large and growing online home furnishing space, a space we're purposefully in and that is supported by favorable long-term macroeconomic trends. We anticipate delivering consistent profitability under our margin framework and continuing to take market share, including in the remainder of 2021. And as I suspect you'll see as our competitors announce their Q2 results in the coming weeks, that Overstock took real market share in Q2. And I'm confident we can continue to do this quarter after quarter. We love our space. and we are confident in our future trajectory. Now, let's take some questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Thomas Forte with D.A. Davidson. Your line is open.

Great. First off, congratulations, quarter. Second, two quick questions on retail and then one on T-Zero. For retail, can you give a little more color on what drove your AOV in the second quarter? And then can you talk about order trends versus sales trends? On the assumption you're not recognizing your revenue until the actual product is shipped, And if you're so inclined, can you talk about the order trends versus sales trends quarter to date? Thank you.

Thanks, Tom. Great to hear your voice. AOV in Q2. This is what you would expect to see happening as we lean into home. Home furnishings have an average, a higher average order volume. than non-home furnishing products. And when you think about last Q2 in 2020, we were selling a whole lot of products that weren't home, things like spools of elastic string as people were making their own face masks and things like that. So as we move into home, I think you can expect to see AOV increase. Dave, would you add anything to that? And do you want to comment on orders versus sales trends?

Sure. Hi, Tom. You know, the increased AOV is thoughtful and intentional. As we continue to transition into home and lean into some of those product categories, as you know, we don't share between product categories how they're performing individually. But we are seeing... good signs of that transition. The customer, our customer, is becoming more and more comfortable with buying home. And an interesting metric, an exciting metric for us is as that AOV increases, as customers buy larger items, they are more inclined to repeat more frequently, as we are seeing. In terms of orders... Oh, go ahead, Jonathan.

Keep going, Dave.

Sorry.

It's part of the toughness of being remote.

That is so true. And in terms of our order count, obviously, as we continue to shift out of those non-home categories and into home categories, you will see a transition in the number of orders, but an offsetting increase in ALV. Jonathan, back to you.

And, Tom, I don't think we're going to comment anymore on quarter-to-date trends. We've said what we've said, and that's the color we're providing.

Great. Thank you, Jonathan. So a quick follow-up then on T0. At a high level, can you talk about the positive impact, I assume, you've seen on trading volume from increasing the crypto cap from 500 a week to 25,000 a day? Tom, frankly, I can't.

With the Pellion deal closed, we are less involved in the day-to-day of T-Zero or any of the portfolio companies. That is a question I think is better asked of the T-Zero management team when they hold their quarterly call next month.

Great. I look forward to asking them then. Thanks, Jonathan. Great.

Your next question comes from the line of Anna Anadriva with Needham and Company. Your line is open.

Great. Thank you so much. Good morning, guys, and congrats. Great results on top of these tough comparisons. We had a couple of questions. Of course. We had a couple of questions, one on the near term, if I may, and one on a more medium term. So understanding the quarter-to-date choppiness, if you will, maybe talk about how you feel Overstock is positioned for back-to-school season this year. There are estimates out there calling for a pretty big back-to-school season for the industry. Maybe specific category opportunities that were missed last year with the pandemic, that's one. And secondly, on SKUs, the SKU growth in the business has been pretty impressive, and this is with all the challenges with the supply chain across the industry. Obviously, you guys are taking share. Maybe help us unpack how should we think about the SQ growth next year, just trying to think through the sales acceleration for 22 as the supply chain opens up.

Let me take a first cut at that and then pass both those questions for a little more color to Dave. First, quarter to date and what possibilities we have in the rest of the quarter certainly the summer generally starts a little slower and I think we've seen that impacted this year as people are just vacation starved travel starved but when kids go back to school parents go back to work We think they'll be kind of returned to what feels more normal in the shopping space. We have two big events coming up in the third quarter. Labor Day is a significant furniture purchasing holiday historically, and our customer days, which follow that later in September, are big deals. So, you know, we think some of that will be back to school. I'll let Dave comment more on that in a minute. As far as skew growth, we are focused on building home inventory. We'll have some skew shrinkage as we move out of non-home, but we think that can be more than offset by getting into new categories. There are some categories where we're market leaders, some where we are market competitors, and some where we're just not there yet, and we are focused on remaining leaders and becoming leaders and getting into categories where we're not. So I think there's a lot of potential skew growth still there. Dave, what more color would you give to that?

On the back-to-school question, I would add that our, you know, back-to-school, back-to-dorm room, there's some, you know, some pent-up demand there in terms of it's been a couple of years. A lot of the universities were closed last year. And as the college-age students are headed back to dorm rooms, we have a strong betting category and are poised and ready to take advantage of that in back-to-school advertising and promotions. On the SKU count, just to add to Jonathan's comments, we continue to add and lean into product categories and have a very data-driven approach on that. It's not just willy-nilly additions, but with 3,000 partners, we have partners all over the globe. that are working to source and develop products for us to fit those areas where we see opportunity from search words and click-through rates of search words. So it's a very data-driven approach and confident in how we're attacking that.

Okay, that's super helpful. I appreciate that. But just on that, if I may add another one, just on the vendor checks. Our checks have been very constructive on Overstock. and I know a lot of things are being done very differently with this new overstock. Can you maybe, Jonathan, speak to some of the examples of how you guys view vendor relationships now versus several years ago?

Well, I mean, one of the things we're doing is we've focused on being an online home furnishings retailer. We talk to our partner's frequently. We've got teams that talk to them every day. But even at the senior management level, the frequency of discussions and seeing what can we do for them, what can they do for us, with specific asks of different partners, you know, this is – it's turned into a real partnership. We help them with product design and where they can go next. We give them lots of analytics. to see where the market is going and what they can do to be in front of the market. We pay on time, and we pay more quickly than any of our competitors. And I think that's important. The other thing, and I think it's treating them like a partner, is we force no one into our fulfillment centers. We encourage them, but we try and do it in a way that makes sense for them. If it makes economic sense for them to be in one of our three fulfillment centers, that's where they come. They appreciate not having their arm twisted to be forced to be somewhere they shouldn't be. So, candidly, none of that is rocket science. Most of it is standard best business practice blogging and tackling, but that's what we do, and we do it every day.

Well, thanks so much, guys, for taking our questions, and best of luck for the third quarter.

Thanks, Anna.

Your next question comes from a line of Eagle Arunian with wet Bush securities.

Hey, good morning guys. Thanks for taking the questions. I have two, I think one for Jonathan, one for Adrian. Um, Jonathan on, uh, I want to go back to your comments about competitors and the ad market. Um, uh, you know, clearly ad prices have gone up materially. And I just wanted to see if we could expand on that a little bit. Um, Are you saying that you're not stepping in as aggressively on the advertising side as some of your competitors? Are you kind of waiting for the markets to normalize a little bit more? Maybe just talk about your ad strategy here. And then for Adrian, I guess I want to understand the comment around less seasonality, given the fact that your 2Q kind of sequential growth was, If I'm looking backwards, and I know things have changed, but by far as strong as it's ever been. So what drove that, and how does that fit into the comments around less seasonality? Thanks.

I'll start, turn to Adrian, and then maybe if Dave has anything he wants to add to either. Both of them are, I think, he's got relevant thoughts on ad pricing being up. I think there's a couple things to think about here. One, Q2 2020, ad prices went down. And so... The year-over-year comparable is skewed. Online advertising got cheap in 2020. It got more normal in 2021. And then I think as people tried to keep up with last year's growth, it got out of whack. It got expensive. Now, we spent online. We spent more than we had probably expected. thought we would, but we did not chase it all the way to the top. And some of our competitors got what I think into the inefficient ad spend areas. We didn't follow. But we did spend, and I think that's part of what helped us. We were very nimble, and that's part of what helped us comp the comp and grow top line 4%. So we're going to be competitive here. We're going to make sure that we're doing the best we can under our rubric of sustainable, profitable market share growth. But we're not going to be irrational in our spending. Adrienne, why don't you talk about seasonality, and then we'll let Dave layer on top.

Certainly. I think my comments is just generally around as we lean into home and continue to lean into home, we expect to just see less seasonality volatility quarter in, quarter out. That's more around kind of being less giftable or left in those kind of niche areas where people aren't buying home furnishing all year. I would say within that, though, we do expect some variability by quarter depending on what categories of home people are purchasing. So there's heights where people are purchasing increased patio. There's heights where people are purchasing maybe a bit more of the giftable type home products. So generally, we're expecting to see less seasonality than we have historically because we're leaning into home furnishings. But quarter in, quarter out, there might be a slight sales mix within home. Dave?

Dave, any of you have either of those answers?

No, both. Both very accurate.

Spot on. Thank you, y'all. Thank you. Appreciate the answers.

Your next question comes from the line of Peter Keith with Piper Sandler. Your line is open.

Thanks. Good morning, guys. Nice Q2 results here. Circling back on the large AOV increase, I think the shift to home makes a lot of sense. But you didn't mention price inflation. We know that there's large price increases flowing through the channel given elevated freight costs and the like. So I guess the core of my question is, what are you seeing there? I don't know if you want to quantify it. And is that the price increases from your supplier's causing any gross margin pressure in the near term as you try to remain price competitive?

Peter, great question. Everyone knows that raw material costs are up, that labor costs are up, that shipping costs are up, and so there is a lot of price pressure. Some of the costs we ask our partners to bear. Some of the costs we bear. and some we pass along to the customer. But we're always doing it within the constraints of having a very competitive price for our savvy shopper and reluctant refresher. It needs to be an easy experience for them. And when we take a piece of it, again, it has to fit our margin rubric. It has to fit in our financial recipe card. And so some product, you know, we wind up taking off site if that's necessary. So pressure's there. Thus far, particularly with our large distributed partner network of more than 3,000 partners, we've been able to play in this space without having too much price inflation.

Okay, that's helpful. Secondly, and I guess I hate to ask a short-term question, it seems like your stock has reversed this morning with the discussion around Q3. Would there be a potential you could quantify a little more detail of what negative single-digit means? And I guess is the view without guiding that – Maybe the quarter could get better as we progress just based on perhaps easier compares and then some of the major selling events that you've called out.

Yeah, Peter, thanks. You know, the call we give is what we're going to give. You know, we're only one-third of the way through the quarter, and that first third is the height of vacation time for most Americans. We're hyper-focused on market share growth. And that means no matter what the market is doing, whether it's expanding, stagnating, or even contracting, we're going to do better than how the market performs. And we're going to keep doing that. So do I think we can have a better second two-thirds of the quarter than the first two-thirds? Of course I do. That's what we drive for every day. Will I promise that? It's hard to promise what the future holds until I won't, but I'm very confident that we will outperform our competitors in the market. That's what we're about, sustainable, profitable market share growth.

Okay, very good. If I could ask one last question, too. You've talked about your three distribution centers. You're not forcing suppliers into them. Could you quantify where you are today in terms of the percent of sales flowing through your own DCs? And then secondarily, you talked about trying to move small parcel to guaranteed two-day shipping, which seems like it could be kind of expensive. Do you have to take up that flow through to your DC network in order to achieve that goal?

Let me start, and if any of you are correct or Dave wants to add, please do. The amount that's through our three fulfillment centers is still relatively small. It's a single-digit piece of our revenue. We think that will grow over time, but it needs to grow organically because it makes economic sense for us and for them. And we've got a plan to do that. As far as getting small partials for two-day delivery, that is a goal. We're not going to do it at the risk of hurting sales on two-day delivery. So if it costs more than is competitive, we won't go there on those products. Part of it is just getting our partners to have their product located whether it's in their fulfillment centers or our fulfillment centers closer to the customer and convincing them that that makes sense for them and for us. Dave, what would you add, if any?

Nothing to that. Accurate. Spot on. Okay, thanks so much for all the feedback, guys.

Good luck.

Thanks, Peter.

I would now like to turn the call back over to Jonathan Johnson for closing remarks.

Thank you. Thanks for participating in today's call. What you should take away from this second quarter report. First, that we've made and continue to make foundational operational improvements to the business. This has been the result of a lot of hard work and focused strategy. We still have plenty more work to do, much of it blocking and tackling variety, and we will continue to execute and deliver. that our market is large and growing and supported by favorable long-term macroeconomic trends that should enable sustained growth for years to come. We feel well-positioned to continue to outperform and take market share. We appreciate your interest in ownership and overstock. Until next time, we'll keep working hard to consistently deliver on our long-term plan. Thanks so much.

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