Beyond Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 11 speakers on the call.

Operator

Please be advised that today's conference is being recorded.

Operator

It is now my pleasure to introduce Vice President of Investor Relations and Public Relations, Alexis Callahan.

Speaker 1

Thank you, operator. Good morning, and welcome to Beyond's Q1 2024 earnings conference call. Joining me on the call today are Executive Chairman, Marcus Lemonis Chief Financial and Administrative Officer, Adrian Lee CEO of Bed Bath and Beyond, Chandra Hope and CEO of Overstock, Dave Nielsen. Today's discussion and our responses to your questions reflect management's views as of today, May 7, 2024, and may include forward looking statements, including without limitation regarding our future goals, performance, profitability and financial results. Actual results could differ materially from such statements.

Speaker 1

Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10 ks for the year ended December 31, 2023, and in our subsequent filings with the SEC. During this call, we'll discuss certain non GAAP financial measures. Our filings with the SEC, including our Q1 earnings release, which is available on our Investor Relations website at investors. Beyond.com, 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.

Speaker 1

A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward looking statements disclosure on Slide 2 of that presentation. With that, let me turn the call over to you, Marcus.

Speaker 2

Good morning, and thanks, Alexis. Today, we're going to review our Q1 results and the significant progress we are making as we work to build something bigger and better. My mission in being part of the company was to quickly reframe, reposition and retool the company so that the next several years look materially different than they did before. And early on, I see green shoots everywhere. And where I don't, we will correct.

Speaker 2

During my first 100 days at the company, I spent a great deal of time studying the last 10 years, looking at capital allocation, revenue swings, stock price swings, brand positioning, vendor relationships, customer experience and how to improve each of them. I believe that while it takes time to build the right foundation, we have 3 individual brands that have to become $1,000,000,000 revenue brands. Brands that drive growth worth investing in, growth driven by customer retention and lifetime value and growth to make a profit. That growth in leverage of our scale requires an assessment of talent, technology and process. And while that assessment continues, last week we announced both the addition of new leadership across key roles as well as the internal movement within our management team.

Speaker 2

Additionally, we announced a new and wide scoping relationship with Salesforce, along with other new technology partnerships. I believe we now have the best players on the field. As you look specifically at the Q1, nearly 100 percent of the 2,200,000 transactions were done through the Bed Bath and Beyond website with explosive growth in categories like soft home, kitchen and the legacy Bed Bath Care categories, which just proves that the brand is very strong. As we look to monetize this brand and its acquisition, you can expect us to leverage the power of the brand both domestically and internationally. Recently, we completed the sale of Wamsutta, a legacy textile brand inside of Bed Bath and Beyond for 10,250,000 dollars nearly half of the original purchase price of the acquisition of the entire Bed Bath and Beyond intellectual property pool.

Speaker 2

Additionally, we are currently working on the start of a 4 store test in the UAE with 1 of the largest retailers in the region, as well as an agreement to license the Bed Bath and Beyond brand on an omnichannel basis in Mexico. We're pleased to see the power of the legacy brand and categories through both licensing opportunities and our solid performance in our Canadian Bed Bath and Beyond website, which has done well in the Q1. Going forward, our goal is for Bed Bath to have a highly curated and largely brand recognizable assortment to its 30 +1000000 unique customers. This assortment we believe will maximize profitable revenue with an aim to grow it sequentially for years to come in its core categories and all around life events. We want to make sure that we have everything for the bedroom, including bedding, pillows, mattresses, bedroom furniture, rugs, lighting, closet organization and decor.

Speaker 2

It will own the bathroom including towels, rugs, curtains, vanities, mirrors, lighting, accessories and beauty and wellness. In the kitchen, it will continue to grow by focusing on small appliances, tabletop, kitchen furniture and lighting as well as kitchen accessories. And as extension of the house, particularly the kitchen for entertaining, we will focus on patio through furniture, grills, smokers, heaters, games, lighting and other backyard toys and accessories. Average order size finished at $173 materially higher than traditional Bed Bath and Beyond, but lower than what Overstock had previously experienced with larger and higher ticket furniture categories. That delta was caused by an increase of mix on traditional Bed Bath categories and the decrease of penetration in the historical furniture, rugs and large patio categories, a slight mismatch of mixing apples and oranges, propelling our strategy of relaunching Overstock sooner than we originally planned and returning Bed Bath to its historical categories, but enhancing them with room specific furniture being sold as an understandable adjacency, just like selling mattresses and beds around top of bed.

Speaker 2

And while Bed Bath has some success selling into historical overstock categories like family room furniture, large area rugs and taste goods, the performance didn't meet our team's KPI goals around margin contribution and the cost of acquisition, the way we believe Overstock can perform and return to its historical performance in those categories. Those results reaffirmed our conclusion during the quarter around the specific muscles that both brands can thrive separately while complementing each other. We are optimistic that in its full mature state Bed Bath has the potential to be north of a $1,000,000,000 brand with positive contribution and a higher frequency of visit driven by our focus of life events like baby, wedding, home purchase, home renovation, college, etcetera, all the things everybody's always known Bed Bath for. As part of that continued learning and reframing, we also believe Overstock has a clear path to return to its $1,000,000,000 plus revenue performance. For the last several decades, Overstock has been one of, if not the premier name in broad category online value shopping.

Speaker 2

And while it veered in and out of products over time, its reputation always remains strong as the place to get a crazy good deal. We largely led by Dave Nielsen, fought hard to bring this brand back sooner than later. We were duly focused on the reestablishment of revenue and gross profit as we were convinced that the brand was not only strong but could do more. The soft launch of Overstock on March 28 was on the new platform literally starting from scratch since the historical technology used by overstock.com had been given to Bed Bath last fall. We collectively chose to push forward 6 months earlier than previously anticipated.

Speaker 2

The team spent nights, weekends and days they didn't have to create a brand new platform, integrate new and existing vendors, learn to integrate a new system into supplier oasis and all the new sales and reporting functions to my amazement. They also collectively made the decision to build it carefully, adding layers as the former ones solidified. The launch requires proper ramping of SKU additions, transaction volume and email and marketing deployment. And I am very pleased with the steady ramp and the early numbers are encouraging. Now our positioning for Overstock is simple, a wide array of products at crazy good deals.

Speaker 2

Now obviously, the core categories are anchored in furniture throughout the house, rugs, patio furniture, apparel, footwear, jewelry and a variety of other vendor supplied special buys, closeouts and excess. As we continue to think about the power of this brand built over 20 years, we realized we can get more out of it. We intend to further leverage the Overstock brand as the leader in excess, factory direct, liquidations and reverse logistics businesses. We are currently in discussions around the final term sheet for a partnership with 1 of the largest liquidators in America. We believe there is a moat to be established if you create a circle that provides wins for the vendor community.

Speaker 2

The first half of the circle is a true traditional relationship to consumers built on the power of those brands who sell successfully, coupled with a mechanism to complete the circle to help those same vendors with their domestic returns, creating a more seamless experience for the customer, processing and handling and the remarketing of those same products that have been returned. We believe that if we can be part of improving their supply chain for the vendors on the back end, which is where the game is often won or lost, we will have found another way to monetize the Overstock brand again in an asset light way. Lastly, on March 7, we acquired the intellectual property, consumer database and technology platform of zulily, the historical off price darling of the beauty and fashion and accessory space. Over its history, zulily ranged from year to year between $1,000,000,000 to $2,000,000,000 of revenue. Over the last 60 days, we have been successful in reengaging with the top 10 vendors and have started the onboarding process.

Speaker 2

Historically, margins in that business were in excess of 20%, but we see a path to a higher number closer to 24% once mature. We have and will continue to be diligent about any expense added to this business. So far, we have identified 4 key leaders to run that business on a day to day basis, utilizing the shared services technology team, maybe the first time we'll see real scale in this business as the revenue grows without the high level of follow on fixed expense. Additionally, one of the very unique properties of Zulily is the way it goes to market, cost effective email marketing, not soliciting for product in an open marketplace. By the way, the vendors love that.

Speaker 2

And you spend money winning retention with great prices and great service. We anticipate launching zulily in the next few months and we'll update you as we get closer and firmly believe we're ready. I'd like to turn the call now over to Chandra.

Speaker 3

Thank you, Marcus. I started as CEO optimistic about the strength of the Bed Bath and Beyond brand. And now 90 days later, I am even more excited about the brand's potential. During the quarter, Bed Bath and Beyond legacy categories delivered industry leading results. GMV for Q1 was up triple digits for bedding, bath and kitchen.

Speaker 3

I believe building on brand equity, while modernizing the customer experience is the formula that will deliver differentiation and long term profitable growth. As such, during the quarter, we established 3 strategic priorities. The first strategic priority is assortment curation. We will curate complete solutions for the most important spaces in the home, including bedroom, bath, kitchen and backyard and ensure every item meets our quality and design aesthetics. Our assortment curation will be a key component to our value proposition and you will see us move away from our marketplace like assortment of 12,000,000 SKUs to one that is that has enough breadth and depth to be category leading to our suppliers, but is edited to ensure an easy shopping experience for our customers.

Speaker 3

As part of these efforts, I'm excited to share that I've hired a new Chief Merchandising Officer, Stacy Shively. Stacy brings 30 years of retail merchandising experience and has held key leadership roles at companies such as Target, Container Store and Legacy Bed Bath and Beyond. The second strategic priority is life events. Bed Bath and Beyond has been a go to retailer for life special events such as having a baby, getting married or sending a young adult to college. In Q1, GMV for the baby category was another triple digit green shoots, up 211%.

Speaker 3

Our thoughtful assortment, registry capabilities, new CRM platform and inspirational marketing will help grow our brand equity as a retailer for life events. Our new focus on inspirational marketing requires an exceptional leader. So I am pleased to share that Angela Miner has recently started as the Chief Marketing Officer for Bed Bath and Beyond. Angela brings 2 decades of marketing experience to the team. The 3rd strategic priority is experience.

Speaker 3

In order to elevate our authority as a category leader and best serve our customers during their special life events, we need to create a unique shopping experience. Delivering this experience will require us to modernize our e commerce technology. With that said, I'm also happy to share that we have hired Gunja Mehta as our new Chief Information and Digital Officer. Gunja brings over 25 years of experience to Beyond and will be leading our transformation technology roadmap. I am proud of the results our team delivered for Q1, including positive revenue, a double digit increase in transactions and positive customer growth.

Speaker 3

But I am even more excited about our strategic priorities and how we are refocusing resources to drive capabilities that will help differentiate us and drive greater customer lifetime value. I'll now turn the call over to Dave.

Speaker 4

Thank you, Chandra. I am so proud of the Overstock team for recognizing the need to pull up the soft launch by 6 months in order to maximize both top and bottom line performance of each brand. As you just heard from Chandra, aligning each brand with the legacy product categories each is known for is fundamental to setting the groundwork for future profitable growth. As Marcus mentioned, it's important to note Overstock was soft launch without its 24 years of online history as it was redirected for the Bed Bath and Beyond launch last August. I am encouraged however that even though we're starting from scratch with Overstock, the soft launch site visits are exceeding our initial expectations.

Speaker 4

We anticipate continued visit growth as we engage our robust customer file and ramp the warm up of our email list and other acquisition channels. We are on schedule to complete the email warm up by the end of May, addressing our total email list population of 31,000,000. To expedite the Overstock growth, we soft launched our mobile app last week. The most loyal Overstock customers historically shopped on the mobile app and it was our highest converting, highest average order size and highest repeat purchase platform. We're taking the same iterative approach we did to launching the website and with a few more experience enhancements, we'll be launching our mobile app download campaign within the next 30 days.

Speaker 4

Sales and conversion rates have improved each consecutive week over the 1st 5 weeks of the soft launch. Average order size and contribution margin are right in line with expectations and customers are back to their previous purchasing habits of buying furniture, patio and of course a wide range of area rugs as we knew they would. As we ramp over stock over the coming weeks months, it will play a pivotal role in driving higher average order size and contribution margin for the VEON portfolio. The assortment ramp up is progressing nicely. We're transitioning more of our products in patio, furniture and area rugs from Bed Bath and Beyond as well as actively pursuing crazy good deals.

Speaker 4

Our merchandising and our marketing leadership team is top tier and I'm thrilled to have proven executives in place to take both Overstock and Zulily to all new heights. Over the coming weeks months, you will see this team add new product categories in apparel, footwear, sporting goods and tools, just to name a few. As I've said before, we're going back to our roots. Turning to zulily, we're making terrific progress and expect to soft launch in the Q3. Our vision for zulily is to focus on the segment of customers who loved zulily before, working moms who enjoy shopping for themselves and their families.

Speaker 4

Shopping is fun for them and they like to browse frequently. They have an emotional attachment to the thrill and excitement of finding the best deals. At the same time, to bolster the P and L, we'll provide an evergreen must have basics assortment in a highly curated everyday shopping experience that will require customer login. We're actively onboarding strategic brands that focus on mom and her family. We've hired a team of experienced merchants who were previously with Zulily, know the Zulily customer and have established working relationships with these brand partners.

Speaker 4

Each of these brands plays a critical role in our future success and I look forward to coming back next quarter with the progress we've made with each. I'll now turn the call over to Adrienne.

Speaker 3

Thank you, Dave.

Speaker 5

Revenue increased year over year in the Q1 led by 26% growth in active customers and a corresponding 27% growth in orders delivered. Average order value remains a headwind. AOV declined 21% versus last year primarily due to sales shifting into bedding and bath categories and out of furniture and rugs, as well as in category trade downs. We are acutely focused on closing the $47 year over year GAAP in AOV. To break that down, a $30 improvement on one half of the transaction would have been $33,000,000 in additional revenue.

Speaker 5

We believe providing a more curated assortment on Bed Bath and Beyond and relaunching Overstock will help us close this gap over time. Gross margin landed at 19.5% for the quarter, a 7 20 basis point decrease versus the same period last year. Increased discounting drove about 400 basis points. Welcome Rewards redemptions drove almost 90 basis points and increased shipping costs drove 270 basis points of pressure. 1st quarter gross margin improved 20 basis points versus the 4th quarter, driven in part by actioning against some of the 6 tactics that we shared on our last earnings call.

Speaker 5

Renegotiating freight rates. This is essentially complete with our carriers and we expect to see improvement in our run rate going forward. Improving vendor relations for more favorable product costs. This is an ongoing effort for our merchandising team. Relaunching Overstock.com.

Speaker 5

Overstock was soft launched at the end of March. Since launch, this brand has been accretive to our gross margin profile. Providing integration add ons, as of April, customers are now able to purchase product warranties and shipping insurance from our site. Reintroducing owned brands and embarking on licensing activity. This is in the early innings, but something we continue to pursue.

Speaker 5

And eliminating inefficient discounting. We expect this to be realized over time as our brands and corresponding value propositions are clear to customers. G and A and tech expense decreased $1,000,000 year over year, primarily driven by cost cutting actions supporting our plan to reduce fixed costs by $45,000,000 To that end, I am pleased to report we have delivered half of the annualized savings with a path to secure the balance. We changed the presentation of our customer service emergencies to better reflect how we manage the business and to ease with comparability to peers. This expense is historically included in gross profit.

Speaker 5

For additional details, a historic recap was provided in the slides posted to our IR site. All in, adjusted EBITDA was a loss of $48,000,000 On a margin basis, this was negative 12.5%, a 1300 basis point decline year over year with approximately 50% of the decline driven by gross margin pressure. Our reported GAAP EPS loss was $1.62 for the Q1. Excluding losses recognized from our equity method securities, we reported adjusted diluted loss per share of $1.22 Our balance sheet remains strong. On a net basis, our cash balance was $222,000,000 As Marcus shared, we expect to reduce spend on acquiring transactional customers and invest in our brands and corresponding customer experience to improve the lifetime value of each customer.

Speaker 5

We will also continue to opportunistically monetize non performing assets. As an example, we sold Wamsutta and reinvested in Zulily, a brand that has a more recent active customer file. Notably, we did these transactions with a net positive cash impact. Our headquarters building in Utah is still listed for sale and we will continue to keep you apprised of our progress. Additionally, as it relates to Pellaeon, Marcus and I have been working for several months to improve the relationship with Pellaeon and have engaged multiple outside advisors to evaluate all of our options as it relates to this asset.

Speaker 5

As it stands today, we are dissatisfied with the decline in value of this asset since it transferred to the portfolio. Kendra and Dave are focused on growing our 3 anchor brands. And as I mentioned, our margin improvements and cost saving actions are well underway. There is still significant work to be done, but I am confident in our path forward. And now I will turn the call back to you, Marcus.

Speaker 2

Thank you, Adrian. Before we move on to Q and A, I want to make one final point. I understand the P and L of this company now to its core, but I don't like seeing when there's a loss. The only justification for any loss running through the P and L is when each of those dollars actually provides a return on investment at some point. In the absence of that, it no longer turns into an investment.

Speaker 2

It just feels like wasteful spending and we won't be doing that. Let's go ahead and take some Q and A back to the operator, please.

Operator

Thank Our first question comes from the line of Thomas Forte with Maxim Group.

Speaker 6

Great. Thanks for taking my question. So you talked a lot about this in the prepared remarks, but I was hoping you could distill it to kind of 60 to 90 seconds. What gives you confidence you're acquiring customers whose lifetime value exceeds the related customer acquisition costs for Bed Bath and Beyond, more recently Overstock and then looking ahead Zulily?

Speaker 2

We can take a look. First of all, we had a difficult time analyzing those things in the past and we brought on far more data analytics folks to help us do that. But what was the missing element inside of all of that is a platform that really divided and conquered our actual transactions with each customer. We recently engaged with Salesforce after months months of scoping alternatives and now realize that understanding who that customer is, what their propensity is to buy, how they behave and what are the different things that give us those key indicators is now in place. As we move forward for the balance of quarters, I'm looking for maturation of those 3 brands, the cleansing of those 3 unique databases, the ability to find the through line where each of those databases can actually transact in the other businesses and the direct understanding of who is here for just a commodity purchase and who looks like based on technology and data is here to stay.

Speaker 2

The one thing that I noticed in quarter 1 is that while we had a significant increase in transactions, I think there could have been anywhere from 100,000 to 200,000 transactions in the quarter that were done simply to take advantage of the deal. And when I look at the overall transaction that those customers engaged in, the revenue generated, the gross profit generated and the cost to acquire that customer, it just didn't make sense to me. So as I said earlier in my prepared remarks, we are no longer going to be making investments into customers that we believe are here just to take advantage of the deal of the day with no intention to returning. When they provide us their email, answer other questions, engage in other ways, they start to identify themselves as long term prospects, particularly when we see old customers from the 30,000,000 plus database reengage in a meaningful and multiple time way.

Speaker 6

Great. And then for my follow-up, and thank you for that, Marcus. So this is similar. You talked a lot in the prepared remarks on this, but I was hoping to distill it to 60 to 90 seconds. In the earnings release, you indicate that all three brands have the potential to generate a $1,000,000,000 or more revenue.

Speaker 6

I want to focus on zulily. Its high watermark is $1,800,000,000 in 2018. What gives you confidence you could surpass $1,000,000,000 in revenue for zulily? And how should we think about the relative profitability of those sales versus those from Bed Bath and Overstock?

Speaker 2

Well, my records may be wrong, but I show some historical data back when QVC HSM was involved that it may have crossed the $2,000,000,000 mark. But when Dave and I walked the streets of New York reengaging with all the powerful vendors that actually drove that site, we learned that there is truly white space in this marketplace. When you look at off price apparel, there are the major retailers that do it at the brick and mortar level, the TJ Maxx's, the Ross's, the Marshalls of the world. But when you go to the online sector, there really isn't anybody playing in that space. Now there are certain people that play in the upper tier space, the true, true luxury that are an aggregator of what other people have on their shelves.

Speaker 2

But in addition to that, we believe those sites need some competition. But in addition to that, we believe that as you go down the price value stack all the way to the every man or every lady in the middle of America, we don't believe that they're being served properly. We believe there's more volume opportunity and margin opportunity when you play in that mid level tier. We want to be able to have Zulily provide the greatest shopping experience for that working mom, for her, potentially her husband, definitely her child, up and down the price pendulum, providing a superior value at each one of those levels. If we're selling a superior luxury brand, there still is a perception of value when it's 50%, 60% 70% off for all buyers.

Speaker 2

But as you think about the general consumer in the marketplace, we can't just serve that consumer. And subsequently, we can't just serve the consumer that needs to buy an outfit to go to work for 49.95 dollars And we say that because we think that's where the bulk of transactions are. As we look to warm up that zulily customer and that fashion space is something that our team knows a lot about, we want to find different entry points as that aspirational lady graduates from college and now needs to modify her wardrobe to go to work and to have a good time on Friday night, we need to make sure that we are there to serve her from that point all the way to the time she gets married, has kids, becomes a professional working woman, becomes an empty nester, becomes a retiree, all the way through her life events. And we want to do that not only with fashion, but with fashion accessories and beauty. When you look at that overall space and the need to serve that consumer, including plus sizes, which we think is an absolutely ignored market, we think that that is easily over time in a mature process over the next several years, dollars 1,000,000,000 brand.

Speaker 2

But more importantly, we think it will have much better margins than some of the current categories we play in. We believe those margins will be north of 22%, hopefully 24%. And without adding all of the fixed costs that zulily had, corporate offices, giant warehouses and all those things, we believe our competitive advantage will be exposed for the first time when we start to gain revenue, while we're tightening up costs at the same time. We think that revenue ramp is going to be slow and methodical because we want to make sure, particularly with apparel, that the experience to buy that garment, properly size that garment, be able to receive it in your home and figure out what you're going to keep and to curate them with a more highly stylized environment is going to take several months. This isn't one of those situations where you just plug in the vendor and start selling.

Speaker 2

Your customer service needs to be improved. That's one thing that Zulily struggled with. Your delivery times from the time you order to the time you receive it in your home has to be improved. That's one of the things that Zulily struggled with. So we are making sure that we're doing a lot of research with older consumers, meaning historical Zulily consumers, talking to every one of the vendors that sold tens and 20s and 1,000,000 of dollars worth of product there to find out what went right and what didn't, so that we can assure that we don't make the same mistake.

Speaker 2

The last piece, and this is in a development concept only, is that Adrienne and I are putting our heads together with a number of advisors to try to figure out how to get those very, very crucial vendors who make up 90% of all of the fashion in America to become sticky to the Zulily brand by properly incentivizing them on the growth of that business through some creative mechanism. And while we want to be vendors and supplier relationship, we also want to help them improve their turns and margins. We also want to help them with their returns. We also want to help them with their customer and brand experience. And in exchange for that, we have goal alignment.

Speaker 2

And we think that's one thing that's been missing across all these brands is a true goal alignment between what the vendor needs to accomplish for their own shareholders and what we need to accomplish for our shareholders and how those two things can meet in one place and become very sticky to each other.

Speaker 6

Thank you so much, Marcus.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Anna Andreeva with Needham.

Speaker 7

Great. Thanks so much and good morning. Two questions. Good morning. Good morning.

Speaker 7

You had previously talked about profitability in the back half and the comments this morning I think are about more of a sequential improvement as we go through the year. So should we still expect beyond to be profitable in 3Q and 4Q? And as you look out to 2025, do you think low single digit EBITDA margins is a realistic level for the business? And then we had a follow-up.

Speaker 2

Yes. I think it's an excellent question. After really digging into the 1st 100 days, we realized that the investment required to build these three standalone brands in a way that is foundational that will last us a lifetime will take longer than we expected. We need to ensure that the technology stack is clear, that the customer experience is unique, that their vendor relationships are set up in a way that are profitable and that every single dollar that runs through our P and L between now and the end of the year is exclusively and singularly related to either building the technology stack, improving the customer experience, hiring and bringing on the best talent that we believe is possible and acquiring and retaining customers that we believe have a lifetime value proposition. As we unpack the financial statement for the balance of the year, what we have decided is we are not going to chase what we believe is going to be unprofitable transactions.

Speaker 2

But there still needs to be an investment in waking up historical customers that haven't been communicated to in months in identifying target specific audiences through the Salesforce CRM that we can mature, water and create green shoots out of. And quite honestly bringing those 3 brands back to life in different ways. And whether that's licensing or branding or partnering, there is work to be done. So no, I do not expect there to be positive contribution through the end of this year. But I want to caveat that.

Speaker 2

That delta between what we previously thought and now isn't a function of us not managing our cost. We are well on our way of eliminating the $45,000,000 that we've identified. We're slightly more than half and have a very clear path to finishing that. The delta is truly related to how we want to allocate our capital to invest intelligently in building the right foundation. I wish that a lot of these costs could be capitalized, but GAAP accounting doesn't allow that.

Speaker 2

And when you launch a brand new business like Overstock, while it had a legacy name, it does not have a legacy platform. And while you launch a legacy business like Zulily that stopped a year ago, it costs money on the human capital side, on the technology side, on the customer experience side and the marketing side. And I would strongly encourage and respectfully request that everybody look at all of the costs that are going to go on through the balance of this year as nothing more than a true investment that is going to run through the P and L. No wasteful spending. I can guarantee you that.

Speaker 7

Okay. That's helpful. And as a follow-up to Dave, it sounds like the Overstock soft launch is proceeding on plan. How should we think about the contribution of Overstock in the Q2 and then for the year, if you have any color there? Thanks so much.

Speaker 4

Well, I can't wait till next year when it is on such a great pace that we're reporting it individually to you because the performance and contribution margin performance of Overstock is better than it was previously so far in the test. It has performed incredibly well and as Adrian said, it's accretive to the total even in the month the total contribution margin even in the month of April as we were launching from scratch. So what we're seeing right now in the core competency categories of patio, furniture, area rugs and even jewelry, we're seeing

Speaker 2

mid teens of contribution margin to high teens. It's exciting. Let's give you a little revenue perspective, even though we don't break it out that way. In the early days of the soft launch with very, very skewed categories live with very few emails going up, it was averaging call it $50,000 $60,000 a day and we were processing transactions so that we could understand how is that customer moving through the funnel, which is on a new platform. How is their customer experience?

Speaker 2

What kind of feedback? What focus groups are we running? And we have slowly started adding SKUs. We have slowly started adding emails to that file. And little by little in a very short period of time, it went from 50,000 a day to 80,000 a day to 100,000 a day to 150,000 a day.

Speaker 2

And by the way, when I mentioned 150,000 a day, that's at a point where only 3,000,000 of the 20 +1000000 emails have such been deployed. And every single day that goes by where more categories are added and more emails are deployed of our total pool, we are seeing that incrementality on the revenue side. But more importantly, we're seeing the conversion of those customers improve. We were worried about our conversion in the 1st couple of weeks. And as we were trying to figure out what happening, we realized there were some bugs in the system.

Speaker 2

By the way, when you drive a new car, buy a new house or do anything like that, there's always a punch list of things that need to be repaired because you just built it. We wanted to make sure that our slow proper growth was going to create a $1,000,000,000 plus brand over time. Our confidence that this thing gets back to a $1,000,000,000 brand isn't really low at all. It's actually high. But I want to make one defining clarification.

Speaker 2

The biggest challenge that we faced in the last 60 days is threading the needle between the categories that existed at Bed Bath and Beyond that were generating revenue, but weren't meeting our gross profit requirements or our cost of acquisition requirements, slowly moving over to Overstock in a way that would be seamless to the customer, but most importantly would have zero impact on our vendors. And we have taken it in the teeth for a few weeks by continuing to sell product at a margin rate that we will not continue to do to ensure that our vendors do not miss a beat. I think that's the one big change in the way this company is being managed and will forever be managed as long as we're here is that the vendors need to be made a priority and we had to balance that. So over the course of the next several weeks, I would expect that $150,000,000 to go to $250,000,000 $250,000,000 to go to $350,000,000 as we work our way back up. But I would not plan or put into any model that this business is going to be doing $5,000,000 to $6,000,000 a month anytime soon excuse me, a day, dollars 5,000,000 to $6,000,000 a day anytime soon like it did before.

Speaker 2

And as it grows, some of there will be some degradation of the Bed Bath and Beyond brand because some of those categories, not all of them are moving over. As a clarifying point, we will still sell bedroom furniture at Bed Bath and Beyond, kitchen furniture at Bed Bath and Beyond that it largely is driven by kitchens, bathroom furniture at Bed Bath and Beyond, patio furniture because it has backyard, but we will have pulled away all those unobvious non endemic pieces and move them over to Overstock as we ramp up. So I would almost think about Overstock going up by $2 and Bed Bath and Beyond potentially dropping by $1 or $1.20 as things move over. But you should be happy to know that as it moves over, the margin profile and the total gross margin contribution of those transactions over time will improve and we've already started to see that.

Speaker 3

All right. Appreciate all the color, Marcus.

Operator

Thank you. One moment please for our next question. Our next question comes from the line of Rick Patel with Raymond James.

Speaker 8

Hey guys, thanks for taking my question. This is Josh Ries filling in for Rick. I'm just trying to dig in a little deeper on what you're seeing with customer acquisition. Does the growth reflect legacy Bed Bath customers coming back, former Overstock customers or just completely new people? And where do you see the opportunity ahead?

Speaker 2

The growth in the Q1 was largely driven by 2 primary factors, the Bed Bath and Beyond customer coming back to life.

Speaker 3

Yes. And we're seeing growth with reengaging the historical Bed Bath and Beyond customer and then also acquiring new customers through use of performance marketing. So we had significant customer growth and we continue to see that because there is white space in the market and Bed Bath and Beyond offers products that you can't find other places. So we are seeing new customers entering the site as well as the historical Bed Bath and Beyond customers coming back to the site.

Speaker 2

And when Chandra and I looked at the $2,200,000 transactions for the quarter that were almost 100% of them through the Bed Bath and Beyond site, while a portion was made up by legacy customers and a portion was made up a small portion maybe by some Overstock customers, we spent a lot of money to find new customers. And we've identified that there are 2 separate pots inside of that. The one customer that we believe is going to retain and return based on certain behaviors we've seen and ones that came in specifically because they saw a heck of a deal in the buy box on Google. And we want to be very careful to improve our metrics. While we want to have the best pricing in our core categories, we don't want to continue to chase revenue when we know it's not endemic to the Bed Bath and Beyond brand or it's not going to give us a lifetime value monetization.

Speaker 2

If it's just essentially a customer that's coming in to buy something today, say thank you very much and we'll never see them again, that's not a customer that we believe today, today we can afford to invest in today because we don't have a clear roadmap to them returning.

Speaker 8

Thanks. Very helpful. And one follow-up, just you guys got a lot of moving pieces going on. So I was just hoping you guys could provide a little bit more color on how you see a bunch of the KPIs moving and like in terms of like customer growth, AOV, purchase frequency, especially with the recent relaunch of Overstock and Zulily coming online in the coming months?

Speaker 2

Well, thank you for the question. We actually don't believe we have a lot going on. We believe we have 3 very specific things going on with 3 very specific management teams that have been assembled, world class managers that have an acute knowledge of those specific brands. And with Chandra and Stacy and Angela all leading the charge at Bed Bath and Beyond and its related properties, I have the highest level of confidence that the execution will be flawless, that the curation will be flawless, that the vendor relationship model will be flawless. And it will have its own AOV targets.

Speaker 2

Those AOV targets are going to be materially lower than Overstock's because it will not encompass some of the larger ticket items that Overstock has. But I will tell you one thing, that company's ability today to out perform its historical ALV, which was down in the 70s 80s is exceptional. This team's ability to capture some higher item, higher ticket items like mattresses, like beds, like kitchen stools and kitchen lighting, That's abnormal for Bed Bath and Beyond, but the customers have responded in a way where it's logical to them. As we move over to the Overstock brand, we have very specific managers who understand that off price value proposition crazy good deals. And the DNA of that business and its management team is very different.

Speaker 2

And she separated it out with a bright line from Bed Bath and Beyond because Bed Bath and Beyond is there to inspire, inform, give ideas. Overstock is there to cast a wide net in the marketplace to find very specific vendor relationships that are going to provide the value proposition of 30% to 70% off every day, not a gimmick like some of our competitors have, but a very clear value proposition combined with some off price liquidations and reverse logistics inside of it to bring value to the average customer. As I move to the 3rd stack, which is very clear, we have a clear management team that is hyper focused and has experience and whether that's from Saks Fifth Avenue, Bergdorf, Zulily themselves or any other offpricer have a specific and acute focus around fashion and beauty for the working mom. Are there going to be other products there? Of course, they are.

Speaker 2

We're capitalists. But each one of those brands has an acute awareness. And the only shared service, the only through line between those things is the credit card, over time the reward system, our accounting, HR, technology and legal infrastructure. And other than that, those are 3 distinct big bold silos that are being tasked with running their company with an iron fist SG and A model with the goal to have profitable growth quickly, but not recklessly.

Speaker 8

Thanks so much for the color. Best of luck.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Peter Keith with Piper Sandler.

Speaker 9

Hi. Thank you. Good morning, everyone.

Speaker 2

Good morning, Peter.

Speaker 9

I was wondering, I know I believe it was Anna asked earlier about some of profitability target. I guess I'm also curious just about around the $2,000,000,000 revenue target for 2024. As you're getting Bed Bath and Beyond growing and ramping Overstock, now you have Zulily. How do you feel about that $2,000,000,000 target for this year at this point?

Speaker 2

I early on myself, nobody else on February 2, felt like a $2,000,000,000 annualized revenue goal was something that was possible. As I dug in deeper and understood more clearly how to best manage our cash, best manage our vendor relationships, best manage our human capital and most importantly manage this business to drive towards profitability. I've revised my outlook and no longer want to spend recklessly to try to get there. Quite frankly, in the 1st 100 days, I learned a lot. And while I believe this company could get to $2,000,000,000 the cost of doing it does not seem prudent.

Speaker 2

And if I was managing this business as if it was my own personal business, I would not make the leap to spend money recklessly. As a capitalist, I understand how hard it is to make a dollar and to watch people in other companies and in other industries burn money as if it's okay is just something we're not going to do. Now is there an outside shot that Overstock hits the moon and takes off? You bet. Is there a chance that Zulily outpaces our expectations?

Speaker 2

You bet. But what we're not going to do is pour gas on it and light it on fire while cash is burning just to be able to hit a number that we don't believe builds foundational stability for the long term. Do I believe that $2,000,000,000 $3,000,000,000 $4,000,000,000 are possible? You bet. And quite frankly, that's the only reason I'm here working for free.

Speaker 2

I have my time and my reputation on the line and I only make money when this company hits a certain level of performance, which would indicate that the stock would go to a certain place. And I will invest as many hours and as much time as I need to because I truly believe that I see green shoots everywhere, everywhere in monetizing the brand, in finding new ways to make money, in finding new ways to cut costs. I'm confident that the proclamation that I made in February, we could do. But as a management team, we look at your capital differently. We do not want to be the company that gets to $2,000,000,000 $3,000,000,000 by taking on 1,000,000,000 of dollars of debt.

Speaker 2

We're debt free other than the mortgage on our building, dollars 256,000,000 in our bank account. We do not want to be the company that has to take on more equity holders and dilute our current shareholders just to hit a temporary number. If I was the shareholder of this company, which I am, I don't want to be diluted. I want the management team to earn and work hard to receive their compensation, to earn and work hard to grow my investment without diluting me, without taking on debt, and I want them to do it prudently and smart. And that's my vantage point as an investor, as a person who's working here for free and as a good capitalist who understands how hard it is to make a dollar.

Speaker 9

Okay. Very helpful, Marcus. And I guess I want to ask a second question maybe directed more to Adrian and maybe framing up how we should think about Q2 revenues because there's a lot of moving pieces. I guess one point I'm a little worried about is you're indicating you're going to pull back on promotions and by my math based on the orders that you got on promotions in Q1 that added about 8% to 9% of sales. So pulling back on that, but you have Overstock ramping, should we expect sales growth in Q2?

Speaker 9

Maybe some parameters on how it could shake out?

Speaker 2

So let me address. I don't want you to be worried about anything. I noticed that you started that you were worried. We don't want anybody to be worried other than are we making the right decisions as stewards of this business.

Speaker 3

Yes. And thanks, Peter.

Speaker 5

And I think to Marcus' point and kind of what we talked about in our scripted remarks, our goal is going to continue to improve our profitability, how we're investing in our capital, how we're spending money. So I would just think about one of the things we're going to do as a management team is really focused on how do we secure a revenue outcome kind of similar to what we have, but doing it more profitably. And that's going to be our goal for Q2.

Speaker 2

So said more clearly, Peter, I want to build models that we can understand more intimately when we do a certain amount of revenue from wherever it's coming from, how do we maximize profitability, maximize value creation with the customer base, improve transaction count, but not burn money recklessly. We unfortunately have laid off a ton of people. We continue to work at getting out of leases and things of that nature. But what we don't want to do is use today's takeaway tomorrow's investment dollars today just to hit a number. So really clearly, our goal and we intentionally created this goal by the way is to target being flat to Q1 revenue.

Speaker 2

We intentionally created a goal from being flat to Q1 revenue, but seeing how much more profitable we could be on that revenue. So we understand going forward where the pools and pushes are because so many new businesses have come on and the categories have changed so dramatically that we don't have good visibility using historical data because the historical data is contaminated by the way the mixes have shift with the addition of Bed Bath and Beyond. We need to get a level set. And so good, right, wrong or indifferent, we have made a decision to scientifically understand for our shareholders exactly what this business looks like in a vacuum. And then once we understand what that is, come back to you and show you what it is and then ramp from there, So that our ramping is really logical, is very sound, is specific to each brand and we can tell you for every dollar we invest, this is what we get in return.

Speaker 2

And we don't with certainty, with absolute certainty have the ability to do that today and I can't stand for that.

Speaker 9

Okay, very helpful. Thanks so much.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Jonathan Matuszewski with Jefferies.

Speaker 10

Hey, good morning and thanks for taking my questions. The first one was on margin. Just wanted to follow-up on Anna's question regarding profitability.

Speaker 5

So it sounds like you're going to

Speaker 10

have a heightened focus on repeat ad spend. I imagine that will result in sequential improvement in sales and marketing spend as a percentage of sales as we move through the year. Is there just a way to help us understand that the magnitude of potential improvement as the year progresses? Thanks.

Speaker 2

I want to break that, unpack that in a couple of different buckets. The first bucket is on gross margin. And gross margin profiles are going to become more clear to us by business division in the coming two quarters where Bed Bath and Beyond has a pure curated assortment and we can see the margin profile and we will report back on that. We expect Overstock, we hope that Overstock and we believe strongly that Overstock can return back to its historical margin performance that you have seen prior to. And we're looking at ways to expand that through the addition of apparel and other things that we think could be margin accretive.

Speaker 2

In zulily, we only have historical data to go by. And that historical data, we believe, is okay at best. We don't trust it. We've done a lot of work to believe that the margin profile could be north of 20%. The challenge that we have now and we're asking for your patience in is that each one of those individual revenue stacks has its own margin profile.

Speaker 2

And we need to have probably 3 to 6 months where we see that uncontaminated transaction count happen with that margin profile inside of that. Additionally, when you drop below a couple of lines, you're going to see the SG and A associated with, in the case of Bed Bath, growing that installed base. In the case of Overstock, restarting that company, which has a different expense structure than a business that's already going and launching zulily, which has even a more painful start. So if I looked at gross margin across the 3, they're going to normalize over the next 3 to 6 months and we will unpack that for you with absolute transparency. And then when we get into the SG and A, those three things we will report separately to the best of our ability, not from an SEC perspective, but in our narrative around why it is a certain way, what we think the improvement can be, what we think the one time costs are going to be, because we believe that through the balance of the year, there are more one time costs to actually fully launch Overstock as we've spent very little marketing money and there will be the same launch and marketing costs associated with Zulily, which is the only reason that it's causing our P and L to look like it has more investment than anything else in the given year.

Speaker 2

I don't think it's a good idea going forward for this company to report average order, gross margin or cost of those brands combined because it doesn't tell the proper picture because as you start selling dresses and shoes and kids clothes and Zulily, it's going to break the global average order. So we are working to give you that average order individually and we expect within the next 90 days to start to be able to give you more insight on what that looks like.

Speaker 10

That's really helpful. Thanks for the color there. And I guess my follow-up question just on the cost actions. Congrats on the progress so far in moving towards that $45,000,000 annualized target. Maybe just any more color in terms of what's to come and how the remaining portions will be achieved without impacting business performance?

Speaker 10

Thank you.

Speaker 2

Yes. So the key element and I will tell you that I couldn't be happier having Adrian as a teammate through this process is really understanding what from a headcount standpoint, revenue generating, non revenue generating and how do we really understand how to do that. And people have said to me over the last week, how are you going to grow $3,000,000,000 brands then cut costs at the exact same time? It's very simple. We have a very acute and hyper focused silo in each one of those brands and the additions that we recently announced, we made material cuts, unfortunate, very difficult material headcount cuts to fund that.

Speaker 2

Every other cost going forward is selling the building, which we've received a couple of offers that did not meet our standards. We're still working and hope to have an update here shortly, continuing to work ourselves out of unnecessary leases and unnecessary consulting and long term technology agreements and just improving the overall efficiency. But when you look at expenses, there are other things to think about like shipping expense, like return expense. There's a variety of things that are out there. And I think the single biggest expense in our company is really people and marketing, marketing being number 1.

Speaker 2

Chandra and Dave have a very surgical approach to ensuring while we're doing some branding efforts to ensuring that the performance marketing is yielding them what they ultimately want because they're giving a finite amount of money. So you should rest assured that Adrian has put us on lockdown. You can't order a pack of gum in this building. And I say that with severity because when we look at the shareholders' dollars, we have been tasked and been given a financial incentive as a management team to drive shareholder value and you don't drive shareholder value by taking on debt or diluting your shareholders. You create shareholder value by delivering revenue, by delivering profitable revenue, by thinking about every single dollar that you spend and you squeeze it as if it's your last dollar.

Speaker 2

And lastly and most importantly, looking for ways to monetize the brands and unlock the dead assets. We don't mention Pellion because we want to be difficult, but we are not going to continue to allow that asset to continue to deteriorate. We love GrainChain. We love gZERO and we see the value in those businesses, but we haven't seen the management of those businesses meet our expectations on the performance side. So Adrian and I have gotten more involved and we'll continue to get more involved because the exploration and the realization of value in those businesses is nothing more than additional seed money that our shareholders are giving us to either give them a return in one form or reinvest in their business as they want it to be done.

Operator

Thank you. I'll now hand the call back over to Executive Chairman of the Board, Marcus Lemonis for any closing remarks.

Speaker 2

Thank you very much for joining us on this call. We look forward to being out in the marketplace at conferences and meeting people over the next quarter, and we look forward to reporting our Q2 results and goals to you shortly. Thank you.

Operator

Ladies and gentlemen, thank you for participating. This does conclude today's program and you may now disconnect.

Powered by Quartr
Earnings Conference Call
Beyond Q1 2024
00:00 / 00:00