Overstock.com, Inc.

Good day, and thank you for standing by. Welcome to the Q2 2023 Overstop.com Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to your speaker for today, Lavesh Himnani. Lavesh, please go ahead.

Thank you, operator. Good morning and welcome to our second quarter 2023 earnings conference call. Joining me on the call today are CEO Jonathan Johnson and CFO Adrian Lee. President Dave Nielsen will be available for Q&A. A slide presentation accompanying today's webcast has been posted to our Investor Relations website and is available to download. Next slide, please. Please review the important forward-looking statements disclosure on slide two of today's presentation. The following discussion and our responses to your questions reflect management's views as of today, July 27, 2023, 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, 2022 and in our subsequent filings with the SEC. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. Next slide, please. During today's call, we will follow the agenda on slide three. With that, let me turn the call over to our CEO, Jonathan Johnson.

Thank you, LaVash. And good morning, everyone. Let me begin by quoting something I said on our June 29th Special Investor Call. I have never been more excited about what's going on at our company. I want to reemphasize that today because it is truer today than it was then. Overstock has had a great business model but weighed down with a boat anchor of a name. Bed Bath and Beyond has an iconic consumer brand but weighed down by a boat anchor of an outdated business model They got worse over time. This acquisition drops both boat anchors. With the great Bed Bath & Beyond brand so naturally tied to home products and our advantageous asset-like business model, this sleek boat should sail anchor-free and allow us to meaningfully grow and scale our business. It is exhilarating to see the hard work and high energy across the organization that has resulted from our exciting new strategic direction. Everyone is focused on ensuring we are successful in our repositioning of the company to attract and acquire customers and increase market share. Suppliers are more eager to sell their products on our website. Since the acquisition, the headwind that came with the Overstock brand is being replaced by the tailwind of the Bed Bath & Beyond brand. Later, I will share some details on our successful launch under the Bed Bath & Beyond name in Canada, something which makes me optimistic as we get ready to launch in the U.S. This morning, we reported our Q2 financial results with revenue slightly ahead of the preliminary performance update we shared last month. Our adjusted EBITDA was positive for the 13th quarter in a row. We ended the quarter with a strong balance sheet. Our consistent and solid financial track record is allowing us to play offense and execute a transformative rebranding of our business. That will include a larger than normal promotional and marketing budget for the next few quarters as we attract and retain loyal Bed Bath & Beyond customers. Our team's commitment and focus and our asset light business model is delivering results. We continue to execute against our strategic growth drivers. Our strong Independence Day performance was better than our internal expectations. For the month of July thus far, our home-only revenue trend has improved slightly relative to June. This is encouraging when you consider the highly competitive environment and the key sales events held during the month by larger players in the industry. Next slide. Now for a brief update on recent corporate events. On May 31st, Pelliot Venture Partners hosted Medici Ventures Day. The event featured interviews with the leadership of T-Zero, BrainChain, Settlement, and Pironova. I found the presentations insightful and exciting. They provided a better understanding of how these companies differentiate themselves in the market in the markets in which they operate, and their potential for growth. I was particularly excited by the Grain Chain presentation. If you haven't listened to these presentations, a recording is available on our Investor Relations website. Pellion Ventures has been making progress in positioning the Medici Venture portfolio companies for success. As we do each year, in early June, all our local and remote employees gathered at our corporate campus in Utah for a two-day event, Overstock Connect. The theme of this year's event was shared ownership, empowered to achieve. Over the two days, our colleagues engaged in breakout sessions and presentations on a variety of business topics. We focused on the importance of having the mindset to unleash potential, inspiration, and action. Importantly, colleagues from across the organization connected with each other. There was palpable and positive energy during the event. Now, that positive energy increased later in June when we announced and completed the acquisition of the Bed Bath & Beyond brand and other intellectual property. We acquired the assets for $21.5 million funded with cash on hand. Within hours of closing the transaction, we launched in Canada. Since then, we have been hard at work formulating strategies and preparing for the U.S. launch. More on this later. Since announcing our plans to rebrand as Bed Bath and Beyond, we've been asked when we will change the Overstock corporate name and the OSTK stock symbol. While there is not much I can share on these topics today, we are certainly considering alternatives and will provide updates in due course. Our immediate top priority is a successful U.S. launch, which includes engaging and retaining the Bed Bath & Beyond customer base, and ensuring our loyal Overstock customer base continues to find the smart value they expect. Now, I'll ask Adrienne to review our second quarter 2023 financial results.

Thank you, Jonathan. Next slide, please. Revenue declined 20% year over year in the second quarter. While this is an improvement in the year-over-year trend relative to the first quarter, results continue to be impacted by weakness across the furniture and home furnishings industry, which is a result of lower consumer engagement in the category, a shift in spending preferences, and a weak housing market. Our gross margin performance was in line with our targeted range of 22% for the quarter. This was a solid result as we were able to offer our customers smart value during a highly promotional period. We delivered positive adjusted EBITDA of $8 million at a 2% margin during the second quarter and positive free cash flow for the first half of 2023. Our reported ETF loss of $1.63 was primarily driven by a non-cash, non-operating expense associated with a change in value of our equity securities and the associated tax impact. The change in value of our equity securities reflects the reduction in valuation for our direct investment in T-Zero and our proportionate share of the Medici Ventures Fund. The change in value of the fund was driven by an updated valuation of its investment in BIT, reflecting dilution of ownership interest in BIT from 86% to 63%. Excluding the impact of our equity securities, we reported adjusted diluted loss per share of 2 cents, a decrease of 21 cents versus 2022, reflecting pre-tax losses compared to income in the prior year. Our balance sheet remains strong. We ended the quarter with a cash balance of $343 million. Our Q2 ending cash balance includes the 21.5 million outflow of cash for acquisition of the Bed Bath & Beyond brand and other IP. Next slide. We posted revenue of $422 million in the second quarter, a decrease of 20% year over year. As I mentioned, consumer continues to prioritize service-related and need-based spending putting pressure on the demand for discretionary home goods. Adjusting for non-home revenue, our home-only revenue declined 19% year over year. At the end of the second quarter, we fully cycled our exit of non-home products that was completed in June of 2022. Revenue performance was driven by fewer orders and lower average order value compared to last year. I will discuss our key customer metrics in further detail later. Next slide, please. Gross profit was $94 million in the second quarter, a decrease of $27 million versus the prior year. Gross margin came in at 22.4%, a 58 basis point decrease versus the same period last year. The year-over-year decrease was driven by higher discounting, partially offset by merchandising actions and operational improvements. As a reminder, we do not expect to maintain our current gross margin profile over the next few quarters. We plan to lean in on promotions and provide targeted offers to acquire and reengage Bed Bath & Beyond customers. Our growth margin performance is a proof point of our asset-light model and something we expect to keep in the 22%-ish range following an initial phase of customer acquisition investments. Next slide. G&A and tech expenses decreased $2 million year-over-year, which includes savings related to our organizational review in 2022 and benefits from efficiencies and automation, partially offset by higher stock-based compensation. As a percent of revenue, G&A and tech expense was 11.7% in the second quarter, a deleverage of 192 basis points compared to the second quarter of 2022 due to weak top line results. As indicated previously, our fixed G&A and tech costs continued to track around $50 million per quarter. I would note we may see increased spend in the near term related to higher tech expenses to support expected incremental sales volume one-time G&A expenses for our brand integration efforts, and other short-term discrete investments. Next slide, please. In the second quarter, we delivered adjusted EBITDA of $8 million, a decrease of $13 million versus a year ago. We managed the factors within our control to help offset category headwinds and competitive pressures. We remain focused on successfully integrating the Bed Bath & Beyond brand and deploying strategies that will deliver increased active customers and drive shareholder value. Next slide, please. This slide shows active customers and order frequency. We measure active customers on a trailing 12-month basis. Our active customer base declined to 4.6 million or 29% year-over-year at the end of the second quarter. This decline in active customers is driven by two key factors, a shift in spending preferences as consumers continue to spend on experiences and services, and our purposeful shift to transform into a 100% online home retailer. Excluding non-home customers from last year, our active customers declined 23% year over year. Orders per active customer were 1.56 in the second quarter, a decrease of about 5% versus last year, and a decrease sequentially. Order frequency continues to hold up relatively better compared to our decline in active customers. We expect that over time, the relaunch of the Bed Bath & Beyond brand, growing mobile app adoption, and enhanced loyalty offerings will help improve this metric. Next slide. Average order value declined by 5% year-over-year to $234. AOV improved compared to Q1 as orders shifted away from furnishings and decor and into patio furniture as is typical in the spring and summer months. We have seen evidence of trade down across our primary categories and signs of deflation in product costs. Since our brand pillar is smart value, we continue to offer compelling value to our customers and pass on cost reductions that we receive. Our competitive pricing continues to align with our internal KPIs, even as we navigate a highly promotional environment. Orders delivered were $7.2 million for the trailing 12-month period. This is a decrease of 33% compared to the prior year. As I discussed earlier, the decline was primarily driven by weak consumer sentiment and a shift in their spending priorities, along with the cumulative impact of non-home product removals from our site. Next slide, please. I will wrap up my financial discussion highlighting our strong balance sheet. Year to date, we have invested over $30 million in strategic growth opportunities to drive shareholder value, and we still have capacity to deploy capital on robust customer acquisition strategies. We ended the quarter with over $300 million in net cash, including the cash outflow related to the purchase price and transaction fees associated with the acquisition of the Bed Bath & Beyond brand. Our strong balance sheet has enabled us to acquire an iconic consumer brand that is synonymous with home, and we have developed strategies to maximize the return on this critical investment. We have worked diligently quarter in and quarter out to generate positive adjusted EBITDA. Free cash flow remained positive year to date. We have maintained a laser focus on expense management and have realized operational efficiencies. All of this has resulted in a solid balance sheet, the ability to weather uncertain market conditions, and allowed us to invest for market share growth. This is the significant differentiator of our advantageous business model. With that, back to you, Jonathan.

Thank you, Adrienne. Let's look to the next slide. I'll next provide an update on our Bed Bath & Beyond integration timeline, some early reads into our performance in Canada, and the progress we've been making through the launch in the U.S. Next slide. The Bed Bath & Beyond name is synonymous with home products. Come early August, we will rebrand as Bed Bath & Beyond in the U.S. We expect this to be a seamless transition for the Overstock customer base and the Bed Bath & Beyond customer base. Our new website will have a familiar brand aesthetics. The customer experience will be consistent with the great customer experience we have been providing. We will offer tens of millions of customers the opportunity to browse and purchase quality furniture and home furnishings products at smart value. Phase one progresses on schedule. We successfully went live in Canada within hours of closing. We are making significant progress in onboarding new partners and growing our assortment of quality home products. Since early June, we have added 600,000 new products to our site, many of them well-known name brands. This will be a continued and sustained effort as we expand the breadth and depth of our home product offerings. We have also developed strategies to target the most loyal customers in the Bed, Bath & Beyond and Overstock customer databases with the rebranding of our Club O loyalty program as welcome rewards. I will share more on that shortly. As we are at the end of July, our focus is now on phase two. We continue to target an early August launch in the U.S. now that the Bed Bath & Beyond brick and mortar stores are expected to close this weekend. We executed the Canada launch well. we are confident we will replicate that success with our US launch. The next 60 days will be critical and exciting for the company. We have the right strategies, the right action plan, and the right people in key positions to execute a transformational rebranding of our business. Next slide. Our technology and digital product teams did an outstanding job of launching in Canada on June 29th. We finalized this within hours of the completion of our acquisition of the Bed Bath and Beyond intellectual property assets. The launch was well planned and executed over many weeks. This is a team that knows how to execute. And thus far, we have not encountered any real setbacks in Canada. Let me provide some additional color for our Canada business across certain key metrics, comparing our performance there free and post-launch. We expected direct traffic, meaning customers who type bedbathandbeyond.ca into their browser, to increase given Bed Bath & Beyond's strong brand association with home. Direct traffic visits to the new bedbathandbeyond.ca site have increased substantially. We are taking advantage of a vast Canadian customer file we acquired, a file that is orders of magnitude larger than our previous Canadian customer file. Our email marketing campaigns, which we were careful to roll out slowly to avoid being caught in spam filters, have seen an increase in click-through rates driving further traffic to our Canada site. This channel has been a key driver of our growing Canadian business. The increase in visits has accelerated our rate of new customer acquisition. As we shared with you a few weeks ago, the growth in the number of our active customers is how we will measure the success of this transaction. Our product assortment is resonating with the Canadian customer. The bedding, bath, and kitchen categories have been our strongest growth categories. This is impressive when you consider, as a company, we still have some work to do to add products in these categories. By continuing to add more SKUs, we can grow wallet share within the existing customer base, attract new customers, and capture incremental market share. As expected, our average order values have decreased slightly due to a combination of product mix shift and promotional offers. Our value proposition, quality and style for less, is clearly resonating with customers. In short, the Canadian business is off to a strong start post-launch. We are optimistic about the future of our company under the new brand, acknowledging that Canada is still a small part of our business. We still have work ahead of us to win the customer, something that is never easy in a highly competitive marketplace. And I note that the awareness gap between the Bed Bath & Beyond brand and the Overstock brand is larger in Canada than in the U.S. So the results of our launch in the U.S. may not be as pronounced or as quick to materialize. but I am eager to see. Next slide. We remain on track to launch in the U.S. in early August. We are meeting all our prelaunch targets. Our teams have made a lot of progress to ensure success. I'll provide some details by business segment. First, merchandising and supply chain. The merchandising team is clearly seeing the tailwind from attaching our business model to the well-known and much-loved Bed Bath & Beyond brand name that ranks much higher than the Overstock brand name in its association with home. Within Bed Bath & Beyond's historical vendor base, we have an 80% overlap across the brands which represent most of its revenue in addressable categories. meaning product categories we offer. However, in the past, some partners, some of our partners, have not offered us their entire catalog of these branded home products. That is now changing in a meaningful way. Since we already have an existing relationship with so many of these brands, we have been able to quickly add new SKUs from these partners as they open their catalogs of products to us. The total number of SKUs we've added since early July when the media first reported the news of our acquisition is now 600,000. Importantly, all these SKUs will be fulfilled on a dropship basis, aligning with our asset-light model. When we measure our delivery metrics, we look at click-to-delivery, or the time between a customer placing an order and receiving delivery. Our small parcel click-to-delivery time is more than a full day faster than Bed Bath & Beyond's historically was. We are faster. Our supply chain team is keenly focused on ensuring we continue to deliver product to our customers quickly and on time. Prospective partners are now more willing to work with us. Our partner funnel conversion success rate has increased by 60%. This metric tracks the merchandising team's success when we reach out to prospective partners. Simply put, knowing we will be operating as Bed Bath and Beyond has made us more attractive to supplier partners. The merchandising team is onboarding new partners faster. With the acquisition of the Bed Bath & Beyond brand, contracting time has decreased by 50%. New partners are more willing to onboard SKUs and give us access to a broader and deeper product offering. Moving to an update on our marketing plans. Like we did in Canada, We intend to launch in the US using both the Bed Bath & Beyond and Overstock logos for an initial co-branded period. Over time, we will sunset the Overstock logo and brand. Customers and suppliers like the Bed Bath & Beyond brand. So do we. That is who we are becoming. We have robust strategies to engage with and acquire the Bed Bath & Beyond customer base. These strategies will drive our marketing and promotional budget higher than our recent run rate and higher than our financial recipe card targets. However, we expect to benefit over time from this marketing investment as we increase active customers and gain market share. We intend to target the Loyal Welcome Rewards customer base a cohort that is in the high single-digit million range. We think this represents a real opportunity to grow our loyalty program in a meaningful way. We will leverage our hugely popular mobile app to acquire and retain customers. Our mobile app has been a big success for us. We will rebrand it as the Bed, Bath & Beyond app. We have strategic plans to incentivize those who love the Bed, Bath & Beyond brand to download our mobile app with specific promotional calls to action. The coupon-loving Bed, Bath & Beyond customer will love our mobile app promotions. We acquired a Bed, Bath & Beyond customer file that substantially exceeds the 20 million active customer base. We have separate plans to target these customers over time and bring them back to the new Bed Bath and Beyond. For an update on customer experience and technology team efforts, we are doing the following. As I shared earlier, our technology and digital product teams have a roadmap to ensure that the US launch progresses as smoothly as the Canada launch did. The customer experience in Canada has been impressive so far. In fact, our post-incident MPS in Canada has improved since our Canada launch. With the pending U.S. launch, we are confident we can handle the expected incremental traffic in the U.S. As a reminder, as part of the acquisition of the Bed Bath & Beyond intellectual property, we did not acquire any website backend systems or architecture. The relaunched experience will continue to run on our current web architecture, which handled pandemic era order volumes of more than two and a half times current order volumes without a hitch. Since then, our technology team has upgraded our infrastructure. We have a solid technology stack. As I mentioned, the merchandising team has done a great job of adding new product assortment. We know we need to make it easy for customers to find just what they are looking for with our increased product assortment. As a result, our product and technology teams have been working to improve search and navigation on both our website and our mobile app. I hope this update gives you an insight into the amount of focus and work our teams are putting in across the organization. As I mentioned earlier on the call, everyone at the company is focused on repositioning the company with this iconic consumer brand within the home category to capture market share. Next slide. We expected the acquisition of the Bed Bath & Beyond brand of intellectual property positively influence our growth flywheel and help accelerate some of our work. Even before the US launch, this is already happening. As you can see from the shaded items on this slide, nearly all elements of our growth flywheel are directly benefiting from our association with an iconic consumer brand. This acquisition gives us a greater opportunity to grow our presence and gain market share within the large and fragmented total addressable market that exceeds over $440 billion. Our opportunity is real. Unlike the Overstock brand, the Bed Bath & Beyond brand is and always has been all about home. That was the primary strategic rationale for purchasing it. As I've mentioned, we've added 600,000 SKUs since early June. I expect the merchandising team to continue adding SKUs. As I noted on an earlier slide, our Canada business is already benefiting from being associated with a brand that has a much better association with home. Regarding category management, the acquisition of Bed Bath & Beyond's vast customer data coupled with the subsequent customer interaction will allow us to learn more about which categories and subcategories resonate with our new and expanded customer base. This will inform our long-term strategy of assortment expansion and pricing optimization to position us favorably for market share growth. I talked about our plans to leverage our mobile app to acquire and retain customers. If you loved the Bed Bath & Beyond mailed coupons, you will love engaging with our new mobile app, which will be available to download with the US launch. We believe that the Bed Bath & Beyond brand will drive stronger customer retention over the long term. It is a well-known and beloved brand. We believe marketing our assortment under the iconic Bed Bath & Beyond brand will help us deliver a better return on our marketing expenditures. We've already seen that in Canada as our return on ad spend has significantly increased since we launched there, even as we spend more on search engine marketing. We plan to launch We plan to launch an improved internal search experience before launching in the U.S. We expect this will enhance the overall customer experience and increase conversion. As I've noted, product findability is paramount as we continue to add more SKUs to our site. Next slide. Before we take your questions, I'll provide some color on quarter-to-date trends and our expectations for Q3 and beyond. As I indicated previously, we've seen a slight improvement in our year-over-year revenue trend in July compared to June. Quarter-to-date net revenue has slightly improved with the negative high-teens range. The U.S. launch of FedBath and beyond is on track for early August. We expect our revenue trends to improve post-launch. These expectations do not make in any improvement in the poor macroeconomic environment or weak consumer spending in our industry, both of which are uncertain and difficult to predict. We expect to benefit from operating our advantageous asset-light model, business model, with the much-loved Bed Bath & Beyond name in the furniture and home furnishing space. Early performance in Canada is encouraging. I'm eager to see what happens in the US. Moving to adjusted EBITDA. Based on our assumptions for customer acquisition, We expect to see adjusted EBITDA margins moving into negative territory for a few quarters. We will spend more on discounting and marketing to win customers during this unique window, including those in the large Bed Bath & Beyond customer list we acquired. We have a range of planning scenarios for the top line, and as a result, at this time, we will not provide more specific guidance on profit or margin targets. As a management team, we intend to take advantage of this unique opportunity to grow our customer base. We will be purposeful and agile in our plans for incurring higher discounting and marketing expenditures to attract customers for a few quarters. As I've mentioned previously, Our measure of success for this transaction is growth in the number of active customers. We are focused on significantly increasing the number of our active customers. Now, operator, let's take some questions.

Thank you.

The first question comes from the line of Rick Patel of Raymond James. Rick, please go ahead.

Hey, guys. This is Josh filling in for Rick here. Thanks for taking the question. I was just curious if you could provide us a bit of an update on the couponing. I know you mentioned it a bit, and I know it's important for the Bed Bath & Beyond brand that coupons apply to that. So I'm curious, are you aiming to target specifically the Bed Bath & Beyond legacy customers? And also, how should we think about the margin implications of this?

So let me talk briefly, maybe turn to Dave to add, and then Adrian can talk about margin implications of that. We know that the Bed Bath & Beyond customer loves coupons. Bed Bath & Beyond historically has been a high-low retailer. So have we. We have always offered great promotions and coupons. I think the Bed Bath & Beyond customer will find that our pricing is sharper and better than they've historically seen at Bed Bath & Beyond. So while we intend to continue the promotion strategies we have used in the past, they won't be as big as Bed Bath & Beyond's work. Now, that said, I think during the initial launch, Bed Bath & Beyond customers, Overstock customers, people who've never shopped with either, can expect to see some significant coupons to attract people to attract them to the Great Overstock site. So there will be an initial, I think, push with kind of bigger than usual coupons, followed by great prices with Overstock's traditional promotional strategies. Dave, I've said a lot, maybe more than I should have strategically said. Anything you want to add there?

I think you answered that question perfectly, and I think it's going to be a really exciting couple of months as we launch. I'll leave it at that for now.

Now, on margins, and before I said I'd let Adrian talk to that, we're not providing a lot of margin guidance because there's a lot to still be figured out. Now, we have had a month. in Canada, which is a great test place for us because it's a small part of our business. We're guiding to negative adjusted EBITDA for a few quarters because this is a very unique opportunity to acquire a lot, a lot of customers, and that's important. Adrian, I probably said what you were going to say, but what would you add about margins?

Jonathan, I wouldn't add, I'd just reiterate, as I said in my scripted remarks, we'll see pressure on gross margin. We don't expect to be in our kind of targeted 22%-ish range. And as you mentioned, negative adjusted EBITDA margins. So just reiterating those two comments.

Yeah. So Josh, great question. We're going to be very strategic here. You know, Overstock, our mantra has been sustainable, profitable market share growth. We expect to get back to that. But in getting there, it will take – it could and it will and it should take acquiring these customers as we rebrand. And so there will be a lull for a few quarters, a departing, a purposeful departing from our mantra to get back to that mantra.

Yes, thanks for all the color there. Best of luck. Next.

Please stand by for the next question. The next question comes from the line of Seth Sigmund of Barclays. Seth, please go ahead.

Great, thanks. Good morning, everybody. I want to just follow up on the state of the business currently. So the improvement that you saw from June into July, the down high teens, maybe just discuss some of the drivers behind that between customer growth, frequency, AOV, anything specific that you did to drive that? Or do you think maybe the market is just starting to see some signs of stabilization? Just any context there would be great. Thank you.

So first thing I would say is I'm really proud of our team for running our business and running it well, while we're doing a ton of work to get launched in Canada and be prepared to launch in the U.S. There's this excitement in the building for what's new and next. But even with that, the team has not taken their eye off the ball of running the business every day. I'll turn to Dave after I say, I don't see a lot of macro change. The macro still feels very hard. Interest rates went up again yesterday. Consumers are still spending on experience. You know, Swifties are spending a lot on going to concerts around the country. People aren't buying for the home like they did during the pandemic. That said, I think the team is focused on doing well. Dave, you want to talk about particulars?

Yeah, just a couple items I would add. Independence Day, our 4th of July promotion was really well received by our customers. That was the primary driver. And we had a lot of success. In fact, record-breaking success with our mobile app. We continue to lean into our mobile app promotions. It drives a more loyal customer, a higher order frequency, and a higher average order value. we, as a percentage of our sales, had one of the best, have the best major promotion we've had so far. The mobile app is really working out nicely for us. JJ?

Yeah, we're also seeing some trade down. You know, we talked about AOV being a little lower this quarter. The second quarter is typically a quarter that does well because people are in patio and That's a higher price point, a larger basket. Even then, even as they buy patio furniture in the good, better, best products, they're trading down a little. So people are watching their wallets. I hope that answers the question, Seth.

Yeah, no, that's super helpful. I appreciate that. Maybe just one follow-up about what you're seeing in Canada thus far with The positive trend in visits, do you have a sense as to whether that is, you know, the current Bed Bath customer coming back? Is that an overstock customer that's maybe, you know, seeing an improved experience or a wider assortment or maybe just a new customer for both banners, right? I'm just trying to think about the incrementality. Thank you.

Yeah, I think it's all three of those. And I think what's really telling us is that A lot of it is coming through search engine marketing. So when people type in a product they're looking for in Google or another search engine, and they find it, and it's being sold at Bed Bath & Beyond, the conversion rate is higher. You know, I mentioned earlier, and it's, you know, kind of not everyone at the company loves me using this analogy, but the Overstock company, name really was a boat anchor. And I'm not sure we knew how much, how heavy of an anchor it was. But as we see better conversion in Canada through search engine marketing, and as I mentioned, return on ad spend is just better, even as we spend more. And usually we haven't found the elbow on that curve yet. I think that gives us a sense that in the past when people found a product through a search that was on Overstock, they may have had questions. Is this last year's good? Is this liquidation's good? With Bed Bath, they're comfortable making the purchase. It's been a boat anchor with customers. We clearly see it with how SKU growth has picked up. It's been a boat anchor with suppliers. And so, as I said, dropping that boat anchor, adding it to our great business model, this is a sleek boat that's going to sail.

Great. Thanks so much. Good luck.

Please stand by for our next question.

The next question comes from Thomas Forte of DA Davidson. Thomas, please go ahead.

Great. So first off, Jonathan and team, congratulations on the quarter and congratulations once again on the Bed Bath transaction. So Jonathan, you've been asked this question a lot of times. I'm going to ask it just slightly differently. So as a longtime participant in the home e-commerce category, at a high level, what are your thoughts on you know, looking ahead, the timing of the category returning to positive revenue growth, recognizing the near-term pressures from revenge travel and, you know, consumer spending on live events, Taylor Swift, as you pointed out, things of that nature. And then also at a high level, is it overly optimistic to think that as you transition the brand to Bed Bath from Overstock, that at a company level, you could return to revenue growth faster than the category?

So the first part of that question is hard. You know, I think that reading the papers, there's talk about the U.S. economy avoided a recession. I would say the home furniture and furnishings industry has had a recession. Our industry has been in recession and still is. There's still some glut of inventory out there. There's still liquidation going on. I can't predict how quickly we're going to get out of this and we get back to normal. I will say it's the normalization we've seen is in the quarter over quarter trend. So, while the spending is not yet back to normal, The second quarter, we did see a comeback in patio. You know, we saw an uptick in the second quarter like we expected to. So I think the quarter-to-quarter trends are starting to feel more normal. It's just not the total volume has not yet back to normal. The second part of the question, do I think the Bed Bath acquisition and rebrand helps us outperform folks in the industry? An emphatic yes. I really think so. I mean, we did this for a purpose. We've been looking at FedBath and beyond for quite some time. We loved its brand. We loved its customer base. We didn't like its business model. So buying it as a going concern, looking at it as a going concern, not something we wanted. But when this opportunity came to get The good parts of it, without its boat anchor parts, it felt like, you know, just a dream come true. So I do think between the customer base, the brand, the customer base that we've acquired and we can now, new customers we can market to, I do think we perform better and get back to where we need to be and where we want to be more quickly than others in the industry.

Thanks, Jonathan.

Thank you, Tom.

Please stand by for your next question. The next question comes from the line of Curtis Nagel of Bank of America. Curtis, please go ahead.

Great. Thanks for taking the question. Just, I guess, a quick one on thinking about the comparisons through 3Q. July did see an improvement, right? It sounded like it was due to a better fourth. But I guess is it possible? Can all see who could see a fall off in August, September, you know, without the support of a big event or a big holiday period? How big is the Labor Day period versus July 4th in terms of sales generation?

So just historically, and I'm not counting what we're doing with our rebrand, which I think kind of, really shakes the snow globe and things will be significantly different for us with the rebrand, or that's what I'm eager to see. August tends to be a little slower, but Labor Day is a big event. Labor Day in this industry has always been big, and we've performed well in the past. Historically, sometimes in September, October, we see some of our competitors do their special events. That also generally has a halo effect for others in the industry. So I think there's a lot of good in the third quarter still to come, particularly around Labor Day. I will note, not this year, but next year, I think we're going to get some more tailwind in the third quarter with back to dorms. back to college. The timing of his acquisition means we've missed that up. We've missed most of that opportunity this year. But we know Bed Bath & Beyond has historically done well and even won in that segment in the past. we have every intention of marketing hard to that group next year. So not really relevant to the next 60 days, Curtis, but relevant to the quarterly trends as you think about us in the future. Dave, anything you'd add to that?

No, you covered it.

Adrian, any, okay. I can see the thumbs up from Adrian on our screen here. So Curtis, I hope that addressed the question well.

Yeah, no, for sure. Good, good answer. And the, College registry point is certainly a good one. Maybe just as a follow-up, I'm kind of curious to dig into the trade-down comment, right? So it sounds like it hit AOV a little bit, but I guess would there be any offset from customers coming in because they are seeking value in a relative industry, or to you, in a relative industry, or is that just kind of being not really happening because, you know, things are so promotional at the moment?

Well, look, we are... Our value proposition is smart value. We provide quality product for less. Whatever the price point a person is willing to spend on, we think we provide the best value there. Someone else asked earlier, what are we doing that's helping us do better? I think it's that value proposition. Is that value seeker The savvy shopper, as we've referred to in the past, are they finding us more frequently? Yes. And that's a shopper that really shops for value, something we offer. So, you know, as we see a little trade down in good, better, best, I think we're also probably getting some benefit from people just looking for a value as they shop hard across the industry.

Okay. Got it. Thanks very much. I appreciate it.

Thank you, Curtis.

Please stand by for the next question.

The next question comes from the line of Anna Andrieva from . Anna, please go ahead.

Great. Thanks so much, and good morning, guys. A couple of questions from us. Great to hear that the consumer in Canada is buying. And I think you mentioned strength so far over there in the Bad Bath core categories like Bad Bath and Kitchen. But curious, how has response been to some of the overstock core categories? And what type of marketing are you finding most effective at driving that conversion? I think you said the plan is to have coupons potentially less deep than what historically Bad Bath offered. And then I had a quick follow-up.

So, you know, as I mentioned, we've seen the categories that have done best in Canada are the ones that are traditionally associated with Bed Bath & Beyond. Bath, bedding, kitchen. But we've seen growth across the board. It's not just those categories. It's people... Finding patio furniture, finding a bedroom or rather living room and dining room furniture, rugs, art on our site in Canada and buying it. So, you know, those ones I mentioned are the ones that are growing the fastest. And I think there's a familiarity there, but the brand is helping all categories. How are we marketing? Most of it has been through search engine marketing. As I mentioned, the email push ramped up slowly. It ramped slowly. It's not yet at full. We're not sending it to everyone yet because we really need to make sure we stay out of spam filters. Now, the good news is our email team knows how to do this. You know, I think there's There's always an eagerness. If they're faster, send to a larger group. I mean, that's the CEO's mantra. The good news is the email team says, whoa, Nellie, slow down, Jonathan. You know, if we do what you want to do, it actually is going to backfire on us. And so we know how to do it, and there's a lot of marketing there. Couponing, you know, yes. We've done some little bit more aggressive couponing in Canada out of the gate, like, you know, I've hinted that we'll do in the U.S., but that's not a long-term play. Let's remember, we still like our financial recipe card over the long term. And while Adrian said gross margins will go down a little bit initially because of some aggressive couponing and promotions, We intend to, over time, get back to our financial recipe card, which has gross margins in the 22%-ish range. I hope that addresses the question, Anna.

Okay, yeah, that's super helpful. Just as a follow-up, on the vendor base, I know you've taken some direct possession of goods just on the margin historically and recently. How should we think about the willingness to take that direct possession of goods from suppliers as it relates to bad-bath vendors coming to the platform.

Yeah, so we did take a little bit of what we call core inventory, where we purchased it in the second half of last year, and pulled through it quickly. It was really to prove to vendors that there was demand on our site. As I noted in my prepared remarks, as we've added more product, all of that product is on a dropship basis. We love our asset-like business model. We intend to continue with that asset-like business model. One of the things that we've seen is that with vendors are more eager to sell to us even before in the U.S. we've become bad, bad and beyond because they know it's coming. And so they're not requiring that we take, we purchase inventory. We really don't have an intent to do that on any kind of meaningful scale.

That's perfect. Thank you so much. Best of luck, guys.

Thank you, Anna.

At this time, I would like to turn it back over to the speakers for any further comments.

Operator, thank you. And for everyone that's been on the call, thank you. In closing, I need to thank the entire team for its focused hard work on our rebranding. I'm confident it will pay off. Our supplier partners are motivated by this deal. So are the new suppliers who now want to sell at the new Bed Bath & Beyond. We expect our customers will be excited by the preservation of the beloved and trusted Bed Bath & Beyond brand. They sure have been in Canada. Our employees are energized by this opportunity. It has shot adrenaline into the company. They see a bright future, and so do I. With the iconic Bed Bath & Beyond brand attached to our great business model and the actions the team is taking, I'm more bullish than ever on the future of our company. This team will capitalize on this great investment. I look forward to sharing more on our progress on our next quarterly call. Have a great day, everyone.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.