Beyond Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Q2 2023 Overstock dotcom Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Lavesh, please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q2 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 and A. A slide presentation accompanying today's webcast has been posted to our Investor Relations website and is available to download.

Speaker 1

Next slide please. Please review the important forward looking This concludes 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 During this call, we will discuss certain non GAAP financial measures.

Speaker 1

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 3. With that, let me turn the call over to our CEO, Jonathan Johnson.

Speaker 2

Thank you, Lavish, and good morning, everyone. Let me begin by quoting something I said on our June 29 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.

Speaker 2

Bed Bath and Beyond has an iconic consumer brand, But weighed down by a boat anchor of an outdated business model, we got worse over time. This acquisition drops both boat anchors. With the great Bed Bath and Beyond brand So naturally tied to home products and our advantageous asset light business model, this sleek boat 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.

Speaker 2

Since the acquisition, The headwind that came with the Overstock brand is being replaced by the tailwind of the Bed Bath and Beyond brand. Later, I will share some details on our successful launch under the Bed Bath and 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.

Speaker 2

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 and 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.

Speaker 2

Our strong Independence Day performance was better and 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.

Speaker 2

On May 31, Polyant Venture Partners hosted Medici Ventures Day. The event featured interviews with the leadership of tZERO, BrainChain, Settlement and PuraNova. I found the presentations insightful and exciting. They provided a better understanding 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 GrainChain presentation.

Speaker 2

If you haven't listened to these presentations, A recording is available on our Investor Relations website. Pellaeon Ventures has been making progress Positioning the Medici Ventures 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 2 day event, Overstock Connect. The theme of this year's event was shared ownership empowered to achieve. Over the 2 days, our colleagues engaged in breakout sessions and presentations on a variety of business topics.

Speaker 2

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 and Beyond brand and other intellectual property. We acquired the assets for $21,500,000 funded with cash on hand within hours of closing the transaction we launched in Canada.

Speaker 2

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.

Speaker 2

While there is not much I can share on these topics today, we are certainly considering alternatives and we'll provide updates in due course. Our immediate top priority is a successful U. S. Launch, which includes Engaging and retaining the Bed Bath and Beyond customer base and ensuring our loyal Overstock customer base Continues to find the smart value they expect. Now, I'll ask Adrian to review our Q2 2023 financial results.

Speaker 3

Thank you, Jonathan. Next slide, please. Revenue declined 20% year over year in the 2nd quarter. While this is an improvement in the year over year trend relative to the Q1, 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.

Speaker 3

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 $8,000,000 at a 2% margin during the Q2 and positive free cash flow for the first half of twenty twenty three. Our reported EPS loss of $1.63 was primarily driven by a non cash, non operating associated with a change in value of our equity securities and the associated tax impact. The change in value of our equity securities reflects a reduction in valuation for our direct investment in tZERO and our proportionate share of the Medici Ventures Fund. The change in value of the fund was driven by an updated valuation investment in BIT, reflecting dilution of ownership interest in BIT from 86% to 63%.

Speaker 3

Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.02 a decrease of $0.21 versus 2022, reflecting pretax losses compared to income in the prior year. Our balance sheet remains strong. We ended the quarter with a cash balance of $343,000,000 Our Q2 ending cash balance includes the $21,500,000 outflow of cash for acquisition of the Bed Bath and Beyond brand and other IP. Next slide. We posted revenue of $422,000,000 in the 2nd quarter, a decrease of 20% year over year.

Speaker 3

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.

Speaker 3

Next slide, please. Gross profit was $94,000,000 in the 2nd quarter, a decrease of $27,000,000 versus the prior year. Gross margin came in at 22.4%, a 58 basis point decrease versus the same period last here. 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.

Speaker 3

We plan to lean in on promotions and provide targeted offers to acquire and reengage Bed Bath and Beyond customers. Our gross 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 and A and tech expenses decreased $2,000,000 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 and A and tech was 11.7% in the 2nd quarter, a deleverage of 192 basis points compared to the Q2 of 2022 due to weak top line results.

Speaker 3

As indicated previously, our fixed G and A and tech costs continued to track around $50,000,000 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 and A expenses for our brand integration efforts and other short term discrete investments. Next slide, please. In the Q2, we delivered adjusted EBITDA of $8,000,000 a decrease of $13,000,000 versus a year ago. We manage the factors within our control to help offset category headwinds and competitive pressures.

Speaker 3

We remain focused on successfully integrating the Bed Bath and 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 $4,600,000 or 29 percent year over year at the end of the Q2.

Speaker 3

This decline in active customers is driven by 2 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 2nd 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 and Beyond brand, Growing mobile app adoption and enhanced loyalty offerings will help improve this metric.

Speaker 3

Next slide. Average order value declined by 5% year over year to $2.34 AOV improved compared to Q1 as orders shifted away from furnishings and decor into patio furniture as is typical in the spring 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.

Speaker 3

Orders delivered were $7,200,000 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.

Speaker 3

Year to date, we have invested over $30,000,000 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 $300,000,000 in net cash, including the cash outflow related to the purchase price and transaction fees associated with the acquisition of the Bed Bath and 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.

Speaker 3

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.

Speaker 2

Thank you, Adrian. Let's move to the next slide. I'll next provide an update on our Bed Bath and 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.

Speaker 2

Bed Bath and Beyond name is synonymous with home products. Come early August, we will rebrand as Bed Bath and Beyond in the U. S. We expect this to be a seamless transition For the Overstock customer base and the Bed Bath and 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.

Speaker 2

We will offer tens of millions of customers the opportunity to browse and purchase quality furniture and home furnishings products It's smart value. Phase 1 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.

Speaker 2

This will be a continued and sustained effort as we expand the breadth and depth of our home product offering. We have also developed strategies to target the most loyal customers in the Bed Bath and 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 2. We continue to target an early August launch in the U.

Speaker 2

S. Now that the Bed Bath and 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 U. S.

Speaker 2

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 standing job of launching in Canada on June 29.

Speaker 2

We finalized this within hours of the completion of our acquisition 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 They're pre and post launch.

Speaker 2

We expect a direct traffic, meaning customers who type Bed Bath and Beyond. Ca into their browser to increase given Bed Bath and Beyond's strong brand association with home. Direct traffic visits to the new bedbathandbeyond. Ca site has increased substantially. We are taking advantage of the vast Canadian customer file we acquired, A file that is orders of magnitude larger than our previous Canadian customer file.

Speaker 2

Our e mail 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 This transaction. Our product assortment is resonating with the Canadian customer.

Speaker 2

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 4 Less is clearly resonating with customers.

Speaker 2

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 and Beyond brand and the Overstock brand is larger in Canada than in the U. S.

Speaker 2

Stock 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 and materialized, but I am eager to see.

Speaker 2

Next slide. We remain on track to launch in the U. S. In early August. We are meeting all our pre launch targets.

Speaker 2

Our teams have made a lot of progress to ensure success. I'll provide some details by business segment. 1st, merchandising and supply chain. The merchandising team is clearly seeing the tailwind from Patching our business model to the well known and much loved Bed Bath and Beyond brand name that ranks much higher And the Overstock brand name in its association with home. Within Bed Bath and 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.

Speaker 2

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.

Speaker 2

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 And Bed Bath and Beyond historically was. We are faster. Our supply chain team It's 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.

Speaker 2

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. Truthfully 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 and Beyond brand, contracting time has decreased by 50%.

Speaker 2

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 U. S. Using both the Bed Bath and Beyond and Overstock logos for an initial Co branded period.

Speaker 2

Over time, we will sunset the Overstock logo and brand. Customers and suppliers like the Bed Bath and Beyond brand, so do we. That is who we are becoming. We have robust strategies to engage with and acquire the Bed Bath and 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.

Speaker 2

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.

Speaker 2

We will rebrand it as the Bed Bath and Beyond app. We have strategic plans to incentivize those who love the Bed Bath and Beyond brand to download our mobile app with specific promotional calls to action. The coupon loving Bed Bath and Beyond customer We'll love our mobile app promotions. We acquired Bed Bath and Beyond customer file that substantially exceed the 20,000,000 active customer base. We have separate plans to target these customers over time and bring them back to the new Bed Bath and Beyond.

Speaker 2

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 U. S. Launch progresses as smoothly as the Canada launch did. The customer experience in Canada has been impressive so far.

Speaker 2

In fact, Our post incident NPS 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.

Speaker 2

As a reminder, As part of the acquisition of the Bed Bath and 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 2.5 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.

Speaker 2

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.

Speaker 2

We expected the acquisition of the Bed Bath and Beyond brand and intellectual property to positively influence our growth flywheel and help accelerate some of our work. Even before the U. S. 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.

Speaker 2

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 $440,000,000,000 Our opportunity is real. Unlike the Overstock brand, Bed Bath and 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.

Speaker 2

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 and 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 expansions 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 and Beyond mail coupons, you will love engaging with our new mobile app, which will be available to download with the U.

Speaker 2

S. Launch. We believe that the Bed Bath and 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 and Beyond brand will help us deliver a better return on Our marketing expenditures.

Speaker 2

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 an improved search I'm sorry, we plan to launch an improved internal search experience before launch in the U. S. We expect this will enhance the overall customer experience and increase conversion. As I've noted, product findability It's paramount as we continue to add more SKUs to our slide our site.

Speaker 2

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.

Speaker 2

S. Launch of Bed Bath 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 and Beyond name in the furniture and home furnishing space.

Speaker 2

Early performance in Canada is encouraging. I'm eager to see What happens in the U. S? 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.

Speaker 2

We will spend more on discounting and marketing to win customers during this unique window, including those in the large Bed Bath and 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.

Speaker 2

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 Number of our active customers. Now operator, let's take some questions.

Operator

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

Speaker 4

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, like I know you mentioned it a bit. I know and I know it's important for the Bed Bath and Beyond brands that coupons apply to that.

Speaker 4

So I'm curious, are you aiming to Target specifically the Bed Bath and Beyond legacy customers? And also how should we think about the margin implications of this?

Speaker 2

So let me talk briefly, maybe turn to Dave to add and then Adrian can talk about margin implications a bit. We know The Bed Bath and Beyond customer loves coupons. Bed Bath and Beyond historically has been a high low retailer. So have we. We have always offered great promotions and Coupons.

Speaker 2

I think the Bed Bath and Beyond customer will find that our pricing is sharper And better than they've historically seen at Bed Bath and 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 and Beyond's work. Now that said, I think during the initial launch, Bed Bath and Beyond customers, Overstock customers, people never shopped with either and 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 rate prices with Overstock's traditional Promotional strategies. Dave, I've said a lot, maybe More than I should have strategically said.

Speaker 2

Anything you want to add there?

Speaker 5

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.

Speaker 2

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?

Speaker 3

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

Speaker 2

Yes. So Josh, great question. We're going to be very strategic here. Overstock, our mantra has been sustainable profitable market share growth. We expect to get back to that.

Speaker 2

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'll be a lull for a few quarters, a departing, a purposeful departing from our mantra to get back Thanks.

Operator

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

Speaker 6

Great. Thanks. Good morning, everybody. I wanted 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?

Speaker 6

Just any context there would be great. Thank you.

Speaker 2

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, Be prepared to launch in the U. S. There is 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.

Speaker 2

The macro still feel very hard. Well, interest rates went up again yesterday. Consumers are still spending on experience. 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.

Speaker 2

That said, I think the team is focused on doing well. Dave, you want to talk about particulars?

Speaker 5

Yes, just a couple items I would add. Independence Day, our 4th 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.

Speaker 5

It drives a more loyal customer, a higher order frequency and a higher average order value. And 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?

Speaker 2

Yes. We're also seeing some trade down. We talked about AOV being a little lower this quarter. The Q2 is typically a quarter. It does well because people are in patio and that's a higher price point, larger basket.

Speaker 2

Even then, there's even as they buy patio furniture in the good, better, best Products, they're trading down a little. So people are watching their walls. Hope that answers the question, Seth. Yes.

Speaker 6

Yes. No, that's super helpful. I appreciate that. Maybe just one follow-up about what you're seeing in Canada thus far. The positive Trend in visits, do you have a sense as to whether that is the current Bed Bath customer coming back, is that an Overstock customer That's maybe seeing improved experience or wider assortment or maybe just a new customer for both banners, right?

Speaker 6

I'm just trying to think about the incrementality. Thank you. Yes.

Speaker 2

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 and Beyond, The conversion rate is higher. I mentioned earlier and it's kind of not everyone The company loves me using this analogy, but the Overstock name really was a boat anchor. And I'm not sure we knew how much how heavy of an anchor it was.

Speaker 2

But as we see Better conversion in Canada through search engine marketing. And as I mentioned, return on ad spend It's 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.

Speaker 2

So 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.

Operator

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

Speaker 7

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 long time participant in the home e commerce category, at a high level, what are your thoughts Looking ahead, the timing of the category returning to positive revenue growth, recognizing The near term pressures from revenge travel and consumer spending on live events, Taylor Swift, as you pointed out, things of that nature.

Speaker 7

And then also at a high level, is it overly optimistic to think that as you transition the brands 2 Bed Baths from Overstock that at a company level you could return to revenue growth faster than the category.

Speaker 2

So the first part of that question is hard. 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 We have had a recession.

Speaker 2

Our industry has been in recession and still it. 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.

Speaker 2

So while the Spending is not yet back to normal. The Q2, we did see a comeback in patio. We saw an uptick in the 2nd quarter Like we expected to start with the quarter to quarter trends are starting to feel more normal. It's just not the total volume is 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?

Speaker 2

An emphatic yes. I really think so. I mean, we did this for a purpose. We've been looking at Bed Bath and beyond For quite some time, we loved its brand. We loved its customer base.

Speaker 2

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 motor anchor parts, it felt like just a dream come true. So I do think between the customer base, the brand or 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.

Speaker 7

Thanks, Jonathan.

Speaker 2

Yes. Thank you, Tom.

Operator

Please standby for your next question. The next question comes from the line of Curtis Nagle of Bank of America. Curtis, please go ahead.

Speaker 8

Great. Thanks for taking the question. So 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 4th.

Speaker 8

But I guess, is it possible, can all see if we could see a fall off in August September without the support of a big event or a big holiday period? How big is the Labor Day period versus the Lock 4th in terms of sales generation?

Speaker 2

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, 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 September, October, we see some of our competitors do their special events. That also generally has a halo effect for others in the industry.

Speaker 2

So I think there's a lot of good in the Q3 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 3rd quarter With back to dorm, back to college, the timing of this acquisition It means we've missed that up. We've missed most of that opportunity this year. But we know Bed Bath and Beyond has historically done well and even won In that segment in the past, we have every intention of marketing hard to add 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.

Speaker 2

Dave, anything you'd add to that?

Speaker 5

No, you covered it.

Speaker 2

Adrian, any okay. I can see the thumbs up from Adrian on So Chris, I hope that addressed the question well.

Speaker 8

Yes. No, for sure, good answer and the college registry point is certainly a Good one. Maybe just as a follow-up, kind of curious to dig into the trade down comment, right? So it sounds like it had 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 row of the industry or is that just kind of being not really happening because things are so promotional at the moment?

Speaker 2

Well, look, we are our value proposition is smart value. We provide quality product for less. And whatever the price point a person is willing to spend on, we think we provide the best value there. So someone else asked earlier, No. What are we doing, that's helping us do better?

Speaker 2

I think it's that value proposition. So, is there 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 as we see We'll trade down in good, better, best.

Speaker 2

I think we're also probably getting some benefit from people just looking for a value As they shop hard across the industry.

Speaker 8

Okay, got it. Thanks very much. I appreciate it.

Speaker 2

Thank you, Curtis.

Operator

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

Speaker 9

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.

Speaker 9

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 that that's offered. And then I had a quick follow-up.

Speaker 2

So as I mentioned, we've seen the categories that have done best in Canada are the ones that are I think you traditionally associate with Bed Bath and 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 bedroom or rather Living room and dining room furniture, rugs, arc on our site in Canada And buying it. So 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?

Speaker 2

Most of it has been through search engine marketing. As I mentioned, the e mail push ramped up slowly. It ramps 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 expand filters. Now the good news is our e mail team Knows how to do this.

Speaker 2

I think there's always an eagerness. Get there faster, send them send to a larger group. I mean, that's the CEO's mantra. The good news is the Email team says, woah, Nelly, slow down, Jonathan. If we do what you want to do, it actually is going to backfire on us.

Speaker 2

And so we know how to do it and it's there's a lot of marketing there. Couponing, Yes, we've done some little bit more aggressive couponing in Canada out of the gate, Like 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.

Speaker 2

We intend to over time get back to our financial recipe card, which has gross margins in the 22% -ish range. Hope that addresses the question, Anna.

Speaker 9

Okay. Yes, 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 Bab Bath vendors coming to the platform?

Speaker 2

Yes. 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 hold 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 light business model.

Speaker 2

We intend To continue with that asset light 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 Bed Bath 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.

Operator

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

Speaker 2

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 and Beyond.

Speaker 2

We expect our customers will be excited by The preservation of the beloved and trusted Bed Bath and 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 and 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.

Speaker 2

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.

Operator

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

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Earnings Conference Call
Beyond Q2 2023
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