Overstock.com, Inc.

Good day and thank you for standing by. Welcome to the Overstock Third Quarter 2021 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. To ask a question during a session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I want to hand the conference over to your speaker today, Alison Fletcher. Please go ahead.

Thank you, Operator. Good morning and welcome to Overstock's third quarter 2021 earnings conference call. I'm Allison Fletcher, Deputy General Counsel and Senior Director of Legal Affairs. Joining me today are Jonathan Johnson, CEO, and Adrian Lee, CFO. Dave Nielsen, President of Overstock, will also be available for Q&A at the end of the call. 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, October 28, 2021, and may include forward-looking statements. Actual results could differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2020, in our Form 10-Qs for the first and second quarters of 2021, in the press release we filed this morning, and in our subsequent filings with the SEC. Please review the important 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. With that, let me turn the call over to you, Jonathan.

Thank you, Allison, and good morning, everyone. Overstock delivered another strong quarter, even as we lapped our highest quarter of revenue growth since 2004 and navigated significant industry-wide supply chain disruptions. As you'll see when Adrian reviews the financial results, we once again exceeded quarterly consensus expectations on both the top and bottom lines. And the metrics we look at indicate Overstock gained about 50 basis points of online market share year over year compared to our top home good retailer peers. I'm eager to see this confirmed as others release results in the coming weeks. Before I jump into the specifics on the quarter, I'm reminded of a Warren Buffett quote. Only when the tide goes out do you discover who's been swimming naked. Well, the pandemic tide that lifted all online home retail, home furnishing companies in 2020 has begun to go out. And Overstock continues to operate at over two times our pre-pandemic sales level and to consistently deliver profits within our stated targets. This is because in the six months that preceded the pandemic and in the months since, this management team made and continues to make foundational improvements to our business operation. The pandemic tide is receding and we are wearing an operational wetsuit, if you will. For the last six quarters, we've consistently delivered results well above our pre-pandemic numbers. During today's call, we'll follow the agenda on slide three. Next slide, please. I'll start with a comment on macroeconomic trends. They remain strong and favorable. We've shown these numbers before, but I'll quickly review them. In 2020, one in 10 Americans moved. When people move, that creates great opportunities for us as a furniture and home furnishings purchases are often move and project-based. Even if customers start with one room and move to the next and then to the next, we have lots of opportunities to support these movers by helping them furnish each room within the four walls of their home and their living spaces that extend to the four corners of their property. U.S. home sales continue to grow year over year, and forecasted consumer spending remains strong. All these macro trends support category growth. Our supply chain is broad and distributed. Our vast partner network reduces single source risks, shipping bottlenecks, and supply chain kinks. In fact, we are proving that our supply chain works well in times of high consumer demand and low supply partially because suppliers don't want to tie up limited inventory in one or two distribution networks. Unlike some of our competitors, we don't pressure our partners to lock up inventory in our distribution centers. As a result, we tend to get favorable priority on inventory. Our asset-like business model aids in reducing gross margin pressures. We own almost no inventory. We continue to expand our extensive partner supplier network. We can flex our distribution center footprint as demand fluctuates. And we work closely with our regional and national contracted carriers, providing them accurate and timely forecasts to improve our delivery accuracy and meet customer expectations. We have a great business model. It is a great business model in periods of high demand and low supply. It is a great business model when there are kinks in the supply chain. And, of course, we think it is a great business model in more normal business circumstances. All this adds up to long-term favorability. Speaking of long-term, rather than opine on what we expect in Q4, let me give some brief comments on what we think we see for 2022. From our current vantage point, including our perspective on the macro environment, we are comfortable with consensus estimates for 2022 revenue growth and adjusted EBITDA margin. In fact, we think the annual estimate for 2022 revenue growth is a bit pessimistic, noting we have beat top-line estimates for seven consecutive quarters. Our goal is to continue to grow our market share and to build the business in 2022 and beyond. Slide five, please. Next, I'll provide a brief corporate update. We announced a $100 million stock repurchase program, something the company has not had in place since 2015. We have a healthy balance sheet and we've proven we can consistently perform within our financial model, so we think this is a strategic way to deploy capital. We have not yet made any stock repurchases under this program, so we have ample dry powder. It's great to note that the Utah District Court once again dismissed the security class action lawsuit against Overstock. The plaintiffs have filed a notice of appeal. We've won this case twice in the lower court, and I believe we will win it again in the appellate court. I'm proud of our announced philanthropic partnership with Mercy Housing, a nonprofit organization dedicated to providing affordable homes nationwide to individuals and families with low incomes. Through this partnership, we help provide one of the most basic and important needs, a comfortable, affordable, and long-term home. This aligns perfectly with Overstock's vision of creating dream homes for all. I'll now hand the call over to Adrienne Lee, who will review our strong third quarter financial results. Adrienne?

Thank you, Jonathan. Slide six, please. As announced on last quarter's earnings call, the MediChief Ventures businesses are deconsolidated from our financial statements, and the MediChief Fund is recorded as an asset on our balance sheet. On a quarterly basis, we record our proportionate share of the funds reported net income or loss. I will begin with a high level summary of our third quarter results, followed by a review of key customer metrics and performance indicators. Next slide, please. The third quarter of 2021 was another strong quarter and in line with our near to midterm financial targets. We are maintaining the significant sales gains from the pandemic and delivering financial results in line with what we committed to deliver. market share growth, and profitability. Revenue declined by 4% year-over-year, but more than doubled versus the third quarter of 2019. Adjusted EBITDA was $36 million in the third quarter, a year-over-year decrease of $10 million driven by lower sales and one-time gross margin benefits recognized in 2020. Adjusted EBITDA improved $41 million compared to the third quarter of 2019. We reported diluted earnings per share of 63 cents. including the impact of truing up our tax valuation allowance, which is customary when a release is done during an interim period as opposed to year-end, diluted earnings per share with 54 cents in the quarter, a decrease of 27 cents versus 2020, and an improvement of 94 cents per share compared to the third quarter of 2019. We ended the third quarter with a healthy balance sheet and $512 million in cash. As Jonathan discussed, Our board authorized a $100 million stock repurchase program that we have yet to execute against. I will speak to these financial metrics in greater detail in the following slides. Next slide, please. We posted revenue of $689 million in the third quarter, a decrease of 4% year-over-year and an increase of 102% compared to the same period in 2019. This quarter maintains our trend of essentially doubling our pre-pandemic sales run rate, of which we have done so for the past six quarters. Revenue performance was driven by a 24% year-over-year increase in average order value and a year-over-year improvement in order frequency. We continue to believe there's opportunity in the growing furniture and home furnishings market and that the shift to online purchasing will persist. Our revenue trend over the last two quarters, while we lap peak pandemic restrictions, supports our business's sustainability, profitability, and illustrates the foundational improvements we have made and continue to make in the business. Next slide. Gross profit came in at $157 million in the third quarter, a decrease of $12 million versus the prior year, and an increase of $88 million compared to the third quarter of 2019. Gross margin was 22.7% for the third quarter, which is right within our targeted range, and a 70 basis point improvement versus the second quarter of 2021, an achievement during significant industry-wide supply chain challenges. The year-over-year margin decline of 78 basis points was expected and driven by a few notable non-recurring items from the third quarter of 2020. If you recall, gross margin in the second and third quarter of 2020 benefited from lower discounting activity as we balanced marketing efforts against product availability and stockouts and fulfillment-related charges to protect the customer experience. Notably, gross margin improved 270 basis points year-over-two, in other words, versus our pre-pandemic run rate. 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. G&A and tech expense declined by $7 million year over year and remained relatively flat sequentially, illustrating we are running the business efficiently. As a percentage of revenue, G&A and tech expense was 7.6% for the third quarter and created nearly 60 basis points of leverage compared to the third quarter of 2020. Compared to 2019, G&A and tech expense increased by only 9%, while revenue increased by 102% and improved 653 basis points as a percent of revenue. Our absolute G&A and tech spend is in line with pre-pandemic levels. We continue to be measured in our spending and have operated within a consistent tech and G&A spend profile over the last several quarters. Next slide, please. In the third quarter, we delivered adjusted EBITDA of $36 million. which is down versus a year ago, but up significantly versus the two-year comparable period. Adjusted EBITDA margin was 5.2% and right in line with our stated targets. Adjusted EBITDA margin decreased year over year, mainly driven by one-time gross margin benefits in 2020, but an increase of 660 basis points versus 2019. This was a well-managed outcome, driven by our focus on market share growth and disciplined expense management. Next slide. Now I will turn to our operational metrics that we use to manage and assess our business performance in which we began disclosing at the beginning of this year. This slide shows active customers and order frequency. Active customers is measured on a trailing 12-month basis. So as online penetration has receded from the all-time highs experienced during peak pandemic restrictions, this metric has somewhat a trend. Active customer base declined to 8.7 million at the end of the third quarter. but represents an increase of 5% compared to the third quarter of 2020 and an increase of 60% or 3.2 million customers versus 2019. Orders per active customers was 1.68 times in the third quarter, essentially flat, sequentially, and an improvement of 3% year over year. We anticipate order frequency will increase over time and be influenced by our customer retention efforts on our larger home customer base as we continue to increase Overstock's brand association with home. It's important to point out that while active customers has declined, we have been able to strategically offset this decline with an increased average order value. An average order value more aligned with the home category and which I will discuss in greater detail on the next slide. Next slide. This slide shows average order value and orders delivered. Average order value improved 24% year-over-year to $214 and remained relatively flat sequentially. The year-over-year improvement was primarily driven by our continued sales mix into home categories. Orders delivered was $14.5 million for the trailing 12-month period. This is an increase of 8% compared to the prior year or 1.1 million orders and an increase of 51% or 4.9 million orders compared to 2019. The sequential decline is attributable to our decline in active customers during the period and is as expected. As we lean into home, we are maintaining our elevated quarterly sales trends that began during the pandemic last year with a different dynamic than we have historically had. The value of each order or AOV is improving while the absolute number of orders has declined. It's a strategic trade-off and reflects the purchase behavior of the customers we are targeting. Home customers that trust us with higher value items and who have a higher propensity to make a repeat purchase. It's important to remember 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. We do expect a decline in average order value in the fourth quarter, consistent with a seasonal sales mix shift within our home and home furnishing categories. In summary, we are pleased with how we executed in the third quarter and our ability to continue to deliver solid financial results. in line with our stated targets. With that, back to you, Jonathan.

Thanks, Adrienne. The team again executed well during the third quarter, navigating competitive pressure, IOS privacy changes, and pervasive supply chain kinks to deliver solid financial results, profitable results that are in line with our targeted margin guardrails. Our team is focused and committed in proving that we have implemented and continue to implement meaningful foundational operational changes. Slide 14, please. We've had 20 months of sales performance that has been double or nearly double our pre-pandemic run rate, despite numerous and varying supply chain challenges. I'm eager to see what we can do when the bottlenecks in the supply chain subside. I suspect we will be able to significantly grow the number of SKUs we offer as we increase the breadth and depth of our home products. Slide 15. Next, I'll provide some additional insights into our e-commerce business, including where our focus strategy is paying off, our agile operations that are key in today's environment, and where we are targeting and driving growth. Slide 16, please. We believe online penetration continues to grow and will finish the year at a pre-pandemic growth rate. It's nice to again see nice growth in that penetration in 2021, even after the large surge we saw last year. Importantly, third-party forecasts project continued migration in 2022 and beyond, as customers recognize the broad assortment available, value, and ease of purchasing furniture and home furnishings online. Add to this online migration The growth in the home market PAM and overstock has two nice tailwind factors. Slide 17, please. We've shared this slide for several quarters and continue to believe it illustrates well where overstock fits in the overall market and the significant white space available in the quadrant where home goods expertise meets smart value. This quadrant is the right place for overstock. And we have been strategic about choosing to focus on it. Our targeted customers already have a propensity to shop with us. So we purposefully play to our natural strengths. And these customers represent roughly 40% of the market. So Overstock has ample growth opportunity in this space and with these target customers. We'll now talk to each of our three brand colors. each of which help define Overstock's value proposition. Slide 18. Our first brand pillar is product findability. As we continue to lean into home, it's critical that our customers know us for our home furnishings offerings and can quickly and easily find the home products they're looking for. One of the critical strategic moves we've made has been to focus on homes. Our home good expertise gives us significant white space opportunity I just discussed. And it's important to know that customers who purchase home products from us have a better experience, a two times higher basket value, and are more likely to make a repeat purchase. We've made good progress to associate the Overstock brand with home. For example, we have increased our brand association with home by 11 percentage points since December 2020. We've expanded our new home SKUs by 150% year over year, including showcasing exciting home brands like Casper and KitchenAid. Once supply chain kinks moderate, we expect significant new SKU growth as we add even more partners and our existing partners bring new SKUs on site. We held the number one traffic share in outdoor furniture during the summer months. That's a big deal. 94% of our sales were in home categories, a slight improvement from last year. As we continue to strategically remove non-home products from our site, our goal is 100% of sales to be home related by this time next year. Even with these wins, Overstock still does not have enough brand association with home. It's paramount that Overstock is seen as an online furniture and home furnishings destination, and that we make finding our home products easy and fast. We know there is room for improvement, and our team is eager to continue to execute against this strategy. Slide 19. The second brand pillar is smart value. Smart value means offering great products at great prices, or said differently, the highest quality products for the price. Our promotional model is intentional and critical to attracting and retaining our customers. They love finding a deal and want to feel like they're winning. Our competitive pricing tenor remains to offer a winning price post-promotion. We continue to see progress in our smart value pillar. I'll mention three areas of improvement. First, our promotional model, especially around holidays and special events, is resonating with customers. We have the largest 4th of July and Labor Day sales results in company history. Second, our competitive pricing strategy was again within our targeted range. We increased our comparable set from last year by 14 percentage points, and kept 80% priced within the competitive range. Third, roughly 60% of our new customers were within our targeted segments, significantly higher than the 40% of the population these customers represent. We know how to reach these customers, and we are meeting one of their top purchase drivers, value. And of course, our free shipping on everything policy is an important component of smart value, and a benefit that really matters to our customers and differentiates us from our competitors. Slide 20. Our third brand pillar is easy delivery and support. This includes getting the right product assortment and then optimizing its journey to the customer. We have a distributed supply chain with our partner-based dropship model that includes more than 3,000 partners with more than 5,000 fulfillment centers nationwide. This is an advantage when navigating industry-wide supply chain disruptions and allows us to flex quickly for changes in demand. Our carrier network is diverse, both regionally and nationally. Where we have seen challenges is mainly in highly populated metropolitan areas and areas close to ports. To navigate these challenges, we continue to provide timely forecasting and communicate frequently, allowing us to meet customer expectations. A proof point of our advantageous business model and robust analytics was our ability to capitalize on the demand for outdoor furniture. Since we are not limited by shelf space and we have a wide network of products, we were able to meet this significant demand and were, in fact, number one in traffic share for outdoor furniture this summer. besting everyone, including our largest pair. In short, our operating model provides a significant advantage, especially during times of high demand and low supply, economic uncertainty, and industry-wide supply chain disruptions. It has been working well for us, especially over the last 20 months. It's distributed and flexible, allowing us to scale effectively and efficiently. Slide 21. Usually when we talk about support, we talk about customer support. In this time of increased supply chain constraints, I will focus on how we support our partner suppliers. We believe our superior partner relations and support gives us priority on inventory and increased insurmountability. In fact, our inventory levels have significantly improved versus last year, although they are not yet back to our pre-pandemic levels. Importantly, as our partner suppliers are more efficient and effective, this benefits our customers by providing greater assortment, higher end stock, improved speed of delivery, and overall customer service. Part of the support we provide partners is through our proprietary software, Overstock Supplier Oasis, which provides real-time sales data, pricing opportunities, operational and fulfillment metrics, and all at a skew level. It also provides business development analytics, data to support manufacturing and new assortment opportunities. This is a very real way for our partners to grow their business with us. As we add value to our partner suppliers, it benefits us through increased assortment of home products, both breadth and depth. In fact, the number of home-related SKUs with sales has increased from pre-pandemic levels in both 2020 and 2021. Customers are finding smart value across a large product pool. And when they can't find the exact product they want, they are finding natural replacement products. Those are our three brand pillars. Together they form our differentiated value propositions and guide our strategy. Slide 22, please. As you've heard me say so many times, our mantra is sustainable, profitable market share growth. Growth is a key component of our mantra and one that we spend a significant amount of time strategizing on. We've gained great momentum and have included on this slide several key drivers to support growth. As I've already noted, even with our recent wins, There continues to be a big opportunity to increase Overstock's brand association with home. We're continually increasing the breadth and depth of our home good assortment. As I noted earlier, adding great brand products like Casper and KitchenAid help our customers associate Overstock with quality. We're expanding internationally, focusing first on Canada by shipping to our Canadian customers from Canada instead of from the U.S.A. While investment in the Canadian customer experience is progressing nicely, we expect to take what we learned from Canada from the Canadian experience and use it as a template for future international expansion efforts. We are establishing our government business. As I've consistently said for the past few quarters, the government business is a longer-term growth strategy for us and one we think will help open other business-to-business opportunities. We have a great mobile app, but it remains under-adopted. We did some effective app-only promotions for our 2021 customer day, and we're pleased by the outcome. In fact, mobile app revenue in Q3 was at its highest percentage of revenue We still need to better focus on optimizing our market channels with the goal of increasing direct traffic. A brand association with home will certainly aid in that effort. We feel well-positioned, poised with a great business model and many levers to pull to continue to gain market share while delivering profitability. Slide 23. Slide 24. As I've mentioned several times before, we believe we are in the middle of a secular shift where consumers are increasingly buying furniture and home furnishings online. We have intentionally set our near and midterm growth and margin targets with the desire to take market share during this secular shift while delivering profitability. When we feel the industry has reached its natural maturation point, we may consider revising our targets, and establishing a different longer-term margin framework. We have consistently delivered against our financial targets, which are as follows. 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, G&A and tech spending, to continue to drive operating leverage and adjusted EBITDA margins in the mid-single digits. Overstock has been operating within this framework for six consecutive quarters, and with the operational changes we continue to make in the business, we expect to continue to do this. Slide 24, please. Next, I'll briefly discuss significant updates on the Medici Ventures Fund. Slide 25. I will provide some updates to the two biggest holdings in the Medici Ventures Fund, starting with T-Zero. The T-Zero board is engaged in an active search for a new CEO. It is focused on hiring the right person rather than making a quick and hasty decision. In the meantime, acting CEO Alan Konefsky has been doing a great job leading the T-Zero operations. In the past few months, T-Zero has initiated trading of the Exodus Digital Security, announced new digital securities that plan to trade on the T-Zero ATS, partnered with WealthBlock for private companies seeking continuous secondary liquidity, launched support for eight more cryptocurrencies on the T-Zero crypto app, and received FINRA approval to sell clear trades. In my mind, T-Zero is seeking to provide the thing that has won the day in tech from time immemorial, the suite. T-Zero's goal is to create a suite so that the customer will have one place to buy and sell unique private securities, public securities, crypto, and NFTs, among other things. When I'm asked how T-Zero will compete with Robinhood or Coinbase, That feels to me like being asked how Microsoft competes with a single spreadsheet solution. And remember, the T0 capital market suite and the capabilities behind it may be able to be used for both B2C and a B2B solution. Turning to significant news this quarter from BIT. The Central Bank of Nigeria announced its selected BIT as its technology provider for the e-NIRA the country's central bank digital currency. The e-Naira launched on Monday. That much shorter time from announcement of the deal to launch of the e-Naira also shows that the BIT team is winning deals and implementing quickly. Remember, Nigeria is the world's seventh most populous country, and that population skews young and tech savvy. I think this is a big deal. While the detailed terms of the e-NIRA deal with the Central Bank of Nigeria are necessarily private at the request of the Central Bank, the basics are that BIT receives payment in two ways. First, a licensing fee for the software that is related to the number of participating institutions. And second, a variable fee on usage. per transaction fee as the network grows. I think that has real potential upside as it gains traction and as more central banks look at issuing central bank digital currencies. Slide 26. This slide notes a few other updates the Medigee Venture Fund companies have disclosed publicly. The Medigee Ventures Fund participated in Ripio's recent up round. slightly increasing the fund's ownership percentage in rip yield. Medici Land Governance is doing proof of concept pilot in New York City. Votes continues to support elections even in this off-cycle year. It's been six months since Overstock closed the Pellion Ventures transaction. We're pleased with how Pellion is acting as the fund's general partner. Pellion is actively helping many of the portfolio companies advance their respective businesses. And the overstock management team can focus on the e-commerce business. I remain bullish on blockchain technology and many of the companies in the Medici Ventures Fund. I think the market does not yet fully appreciate the value of the fund. And on that note, I understand Pellion is planning to hold a Medici Fund Day in Q2 of next year. Slide 27. I'll now briefly recap the quarter, and then we'll move to Q&A. Slide 28. We continue to improve Overstock's brand association with home, increase the number of home products on our site, and notably, we outperform peers in the outdoor furniture category. As we look forward, we believe we have an exciting event-driven strategy to support the holiday season. The U.S. consumer continues to spend on the home and our supply chain is prepared to support sustainable, profitable market share growth. As I noted earlier, from our current vantage point, including our perspective on the macro environment, we are comfortable with the consensus estimates outlook for 2022 revenue growth and adjusted EBITDA. We are looking to continue to grow and build this business in 2022 and beyond. In summary, we are pleased with our progress, focus, and execution. The market is large and growing. Our business model is distributed and flexible, and our target customers are a sizable market segment. Perhaps the best way to view us is that we are a company gaining market share in a long-term growth market. Now, operator, let's take some questions.

At this time, if you would like to ask a question, you will need to press star 1 on your telephone. And to withdraw your question, just press the pound key once you follow on for questions. Our first question will come from Lavesh Hemnani from Credit Suisse. You may begin.

Hey, everyone. Good morning, and thank you for taking my questions. So thank you for the color on 2022. Just to start with that, with regard to your expectations for 2022, how incremental does GSA become as we move through the year? Is it going to be a major factor for 2022? And then I have a follow-up.

GSA, great question, or Levesque, great question. GSA, we do not think is going to be an incremental factor in 2022. GSA is a long-term play. As I've mentioned before, it started slower than we had hoped and expected, but that's okay. It has helped us add partners that we think will grow for us. It started as a pilot-worthy site, which is now a full-fledged site. The GSA has limited our ability to advertise to customers but it's now loosened somewhat. And it's taken time to expand our product offerings, but that's taking off. So GSA is not a big factor in our 2022 plan.

Got it. Thank you for that, Culler. And just a quick follow-up on the short-term trends. If I go back to the last call, you sort of indicated expectations for trends to improve later in the quarter. So if you can just provide some cadence on the Q3 sales trends by month and what are you seeing in October so far? Thank you.

Les, great question. Let me give some color on Q3 intra-quarter sales. Our year-over-year revenue comp was better in August than it was in July. Our year-over-year revenue comp was better in September than it was in August. And I expect our year-over-year revenue comp for Q4 will be better than it was in Q3. and then we'll be growing top line again. Now, we've been giving intra quarter color since the start of the pandemic based on some SEC guidance about early pandemic color and disclosure. Now that we've lapped our two toughest quarters to come, it no longer seems necessary, or frankly prudent, to give intra company quarter, and instead we're focused on a longer horizon. That's the comments and the prepared remarks about our current view of 2020. I will say this. Even as we sharpen our focus on home, we do expect to be competitive and provide a great assortment of home giftables for the holiday season. I hope that's helpful.

Helpful. Thank you so much.

Thank you. Our next question comes from Anna Andreeva from Needham. You may begin.

Great. Thanks so much. Good morning, and congrats, guys. Really great results. Two questions to Jonathan. Really exciting about the SPU opportunity. Can you maybe talk about some of the new subcategories where Overstock has the right to win? I think you mentioned Casper and KitchenAid, and also where you plan to add the additional depth, and what's the timeline for we should think of for next year as you begin to flow in those SKUs. And second question to Adrian, really solid expense control. I think, right, this is the second quarter in a row that FX dollars are declining. Sounds like we should expect leverage to continue. Maybe, Adrian, can you talk about some of the specific buckets where you're seeing the opportunity? Thanks so much.

Ana, thank you. It's good to hear your voice. As far as increased SKUs, as I've mentioned, our distributed and diverse supply chains helped us on this front. As people have been expanding their living spaces from the four walls of their home to the four corners of their property, outdoor furniture was a big deal. and our merchandising team was able to work with our partners despite supply chain challenges to do this well. We are working on expanding breadth and depth, and I'll turn it to Dave to talk a little bit about where we're focused without giving away too much of our inside baseball and some of the timing on this.

Yeah, thank you, Jonathan. You know, we are adding products every day in multiple categories. And there are categories where we are well-penetrated and we own the categories, as Jonathan mentioned with outdoor furniture earlier. And then there are categories where we're under-penetrated and we're focusing on adding products always in those areas. And with that vast distributed network of partners, we like the potential that that they bring us to add these new product categories. And just to give you a couple of them, like storage and organization, to be specific, is one that has just really taken off for us recently, and we're continuing to put resources behind it. Having our home strategy of removing some of our non-home products has allowed our teams to focus even more on those home categories where we are underpenetrated and see opportunity for future growth. Thanks, Dan.

Adrienne, why don't you address the question on expense controls? There's something I want to say on that.

Certainly. Yes, our kind of absolute dollars, as you've noted, have been relatively consistent over the last nine quarters. I think two things, obviously, to take away is that we don't need to add a significant amount of G&A and tech expense to support additional sales. We've got a lot of scalability in our business. And the second is just we're very disciplined with our investing. And so as we invest dollars into the business, we're very focused on ROIs and making sure that we can have our guardrails work within our investments. So I would just say nothing in particular that we're targeting as takeouts. It's more of just being really measured in our spending and investing.

Jonathan? This is a great question. We follow the financial recipe card, so we call it internally, that we share with the street. We are going to have 22%-ish gross margins, and then we're going to manage expenses tightly to bring in big single-digit adjusted EBITDA. You know, I sometimes hear that, oh, the only reason Overstock's taking market share is we're cutting price. Not so. We're taking market share because we are running a great business type and because we're offering smart value to our customers. This is a growing segment and we're a growing business. I think as long as we follow that financial recipe card, there's market share to be taken. And as I've said so many times, keeping our gross margins at this level for now is, we think, Absolutely the right thing to do. The example I've given so many times is the Oklahoma land rush. When the bell went off and the prairie scooters started going, they didn't take time to water the horses and feed the oxen. They ran. We're not taking time to water the horses and feed the oxen. We're staying at 22% gross margins and taking market share.

Okay. That's terrific. Thank you so much, guys, and best of luck for the holiday.

Thanks. Shop early and shop often, Anna. That's what I would say.

Next question on the coffee line. Peter Keese from Piper Sandler. You may begin.

Hey, good morning, everyone, and great results. And a nice summary with the prepared remarks as well. You know, Jonathan, you guys talk about sustaining this 22% gross margin and sustaining the mid-single-digit EBITDA margin. We get a lot of questions and pushback that right now we're in a low promotional environment and that as we go into 2022 and inventory availability gets better and promotions pick up that overstock is going to get beat up and see margin pressure drop. Why would that thinking be wrong?

Well, if we were – yes, we're in a low-promotion environment, but we're also in a very competitive advertising environment. I mean, ad spend is aggressive. It felt like there was cooped-up ad dollars from last year. People are spending more on their ads than they have recently. in the past. Maybe it's low competitive because there's limited, some have limited SKUs. We seem to be able to find the SKUs we need. And if we don't have the exact SKU we need, we have a replacement SKU that our customers are finding, liking, and buying. So when the supply chain kinks, get un-kinked, and products flow a little more smoothly, I think that's going to be great for us. We're going to increase the number of SKUs we have on the site. We're going to have more products to offer. We're going to continue to compete on price and do so well. I get that there will always be a bear case. That's the best bear case. I don't get it. That's not a very good one.

Okay. Yeah, fair enough. And then, so you did just tease out a little bit of commentary around Q4 in the previous question. So is it, to understand, you would expect year-on-year growth or it's quarter-on-quarter growth for the quarter?

I said I think we'll be growing our top line again. I think that's year-on-year growth.

Very good. Thanks so much, everyone.

Yeah, thank you, Peter.

Our next question will come from Victoria James from DA Davidson. You may begin.

Thank you for taking my call. So I have two questions, but let's take them one at a time. You commented a bit on the last question about the supply chain. So from your vantage point, what is it going to take to improve the supply chain and logistic challenges, and when should we expect a significant improvement?

Well, that is the $64,000 question to go back to 1970s game show parlance. It's going to take some time. I think it's going to go beyond the end of the year and into 2022. And the supply chain has many links, and different of those links have been kinked at different times. Early on, it was the manufacturers. that doesn't seem to be the kink right now. Then it was the carriers from warehouse to customers. We worried about ship again, which by the way, didn't affect us because of our forecast. Then it was the ports and the containers and it's still containers. Uh, today it seems to us that the worst kink is the trucks and chassis as containers, empty containers are piled up at the ports. Um, The supply chain is fragile. And that's why we like our model. It's so well distributed that if one supplier is not getting something, others can't. And one thing we've noticed, our supplier partners are nimble. Some of them are smaller. And their ability to call in a favor with a trucking or shipping company to deliver a smaller number of containers rather than hundreds or thousands of containers has been real. And so, you know, it's part of the reason we like our model. I think this is here to stay for a while, unfortunately, but there it is. Dave, you're much deeper into the logistics than I am. Do you need to add to that?

No, I think that was well answered.

Thank you for that. And then my next question would be, at Davidson, we've been monitoring a bunch of different data about what consumer trends are doing. Specifically, we've been looking at TSA throughput data, and we've seen that consumers are clearly traveling more this year than they were last year. How, if at all, do you believe that's impacting the home category?

Fair question. As I mentioned on our Calling Q2, we think it did have a negative impact in Q3 is pent-up travel demand, particularly at the end of the summer. People got to the beaches, they got to the mountains, they got to wherever they were going. I think there's still some of that there. My premise is there's pent-up gathering demand and that people will gather during the holidays. They're going to travel and gavel. I know I'm just so eager to be with family and friends and Thanksgiving and Christmas. I think gathering demand spills over into home demand. When you're going to host people, you got to make sure the house just looks a little bit better. The home's going to feel a little more homey. And so, you know, we, yes, there is that demand, but we think that some of it's correlated. Again, Dave, anything you would add to that?

The only other thing I would add is, you know, in this new work environment where people are working more remotely, people are more aware of their home surroundings and they are remodeling and they are updating more frequently than they did before. So we think that plays to our advantage as well. Even though the travel restrictions are easing, there are other counter activities going on that are holding that demand high.

Great color. Thank you so much.

Thank you. And our last question for today will come from the line of Curtis Nagel from Bank of America. You may begin.

Good morning. Thanks very much. So apologies if I missed this, but Jonathan, just a quick question on 3Q. In terms of the incremental supply chain improvements, vendor improvement, or I should say product improvement, which specific categories did you really see you know, an incremental benefit and, you know, really made a difference in, you know, what looked like a pretty nice quarter.

Yeah, Curtis, good question. We did talk about that a little bit in the prepared remarks. I think the category we'd highlight is outdoor furniture. We took the number one space in that this summer. We beat everybody in that this summer. And I think it's because We've got this broad supply chain. Our partners were there for us, and we were there for them. They needed to move it because outdoor furniture is seasonal, and they know who they can move product with. That's us. That's us. And so that's why we think we're getting a good first look at inventory. As I also mentioned, they don't like tying up their inventory in any particular one supply chain. And when they feel pressured, and pressured I think is a euphemism, when they feel pressured to put their product in one distribution, one channel's DC, they don't want to do that because they're not sure that that distribution channel can deliver what they need. So they keep it out and that's why we don't require or pressure people to put product in our supply our OASIS fulfillment center services warehouses. We think it makes a big difference for us.

Got it. Expense. And then just as a follow-up, yeah, how should we think about capital allocation? You know, balance sheet's in great shape. You know, where does that, where does the cash go, you know, over the next couple years in terms of deployment?

Great question. As both Adrian and I mentioned, We have a $100 billion stock repurchase program. We haven't executed on that at all. We've got dry powder on that. I think as we learn from our Canadian expansion in the future, we could use that capital to expand internationally. I will say there's not a second country that's imminent right now, but we are learning from Canada, and when we feel like we're ready to go, we'll release that one, you know, we'll release that course and have it off and running. And then we get pitched M&A deals all the time. And we look at them carefully. Thus far, none seem like the perfect right fit. But when we find one, it's nice to have some capital in reserve as dry powder.

Okay. Makes sense. Thanks very much.

Well, We appreciate everyone participating on today's call. We're passionate about the business we're in and our business model. Flexible and scalable, macro trends support the category, and the gains achieved during the pandemic are proving sustainable. The business model is resilient within economic cycles, especially with our foundational operating improvements. As the pandemic tide goes out, Overstock is wearing an operational wetsuit that will allow us to continue to take market share. We appreciate your interest in ownership in Overstock. Until next time, we'll keep working hard to consistently deliver sustainable, profitable market share growth. Talk to you after the first of the year.

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