Overstock.com Inc. posted 3% sales growth for the first quarter—a far stronger sales quarter than a year ago when revenue for the online retailer of home décor and accessories fell 13%. However, the sales growth comes at the expense of the retailer doubling its sales and marketing expenses as it struggles to adjust to Google Inc.’s search algorithms. Meanwhile, Overstock.com founder Patrick Byrne said Overstock plans to sell its retail business to a retailer that operates stores.
Sales for Overstock, No. 32 in the newly released Internet Retailer 2018 Top 1000, reached $445.3 million in the first quarter, compared with $432.4 million a year earlier. It also reported a pre-tax loss of $33.6 million for its retail business.
However, on the investor’s earnings call on Tuesday, Byrne and other executives hinted that the company’s retail business may only stay on a growth trajectory for the next two quarters.
“We accelerated (revenue) 16% this quarter and our operating losses were slightly less than we previously indicated should be expected,” Byrne said in a statement. “I am looking for two more good quarters of acceleration and then plan on truing the craft for that rate of climb.”
The retailer also posted a 3% increase in average order size and a 6% increase in orders in Q1 2018, which was a result of “…a continued sales mix shift into home and garden products,” the retailer says.
However, the gains were partially offset by more promotions, including coupons and an increase in marketplace sales for which Overstock only records the commission it takes as revenue.
Notably, sales and marketing expenses totaled $77.2 million a 105% increase from and $37.6 in Q1 2017, representing 17.3% of total net revenue compared with 8.7% a year earlier.
The increase was mainly because of a strategy to more aggressively pursue sales growth and new customers, and also to help offset the effects of Google algorithm changes, the company says.
Overstock says it has struggled to adapt to changes Google has made in its natural search engine algorithms. “It is taking us longer to analyze and to seek to adapt to the 2017 algorithm adjustments than it took us to respond to Google’s changes in previous years,” the company said in a statement. “We have reorganized a large number of resources around addressing this challenge, as well as seeking to prevent it from occurring again. We have implemented a variety of innovations and technical improvements in this area and expect to continue to do so.”
To keep up sales and to acquire new customers, Overstock increased spending in paid search, display ads on social media and television marketing channels.
On its earnings call, Overstock executives said they are confident the retailer can get, “Wayfair-like domestic sales growth” with an appropriate level of marketing spending. The retailer said on the call that its email signups are up 100% from a year earlier and it posted a 40% increase in new customers.
Indeed, adding to its difficulties are rising paid search costs thanks, in part, to the competition it faces from home décor retailer and competitor Wayfair Inc., No. 13, which has long been focused on top-line growth, rather than turning a profit.
“We have faced off this endless stream of competitors who come in and they blow hundreds and hundreds of millions of dollars; we lost $160 million, we burned $160 million of capital in our history; Wayfair burned half that [in the] last three months,” Byrne said during Overstock’s third-quarter earnings call in November 2017.
No matter how sophisticated the retailer’s technology is, it is still competing with retailers “spending four- or five-times what we’re spending in online marketing, running seven-times as many commercials. There’s one thing that Wayfair is bidding on now that we’ve been paying 7 cents for. [Wayfair has] bid up to $2,” he said.
Still, Overstock says it is improving its retail operations. “We have a much stronger and deeper retail team than we’ve ever had before,” Saum Noursalehi, the former president of Overstock Retail said on the call on Tuesday. Noursalehi on Monday was named CEO of tZERO, the retailer’s buzzed-about blockchain business. “[The retail team is] run much more efficiently and independently than it has been in the past.” Executives said Overstock’s retail business is becoming more efficient at product management and its technology teams are quickly shifting to an agile approach in which a project is broken up into small phases and the overall goal evolves as staffers complete each phase.
The retailer also said it plans to build at least one more U.S. distribution center this year, which will enable it to provide two-day shipping to 98% of the country. It also is ramping up its Canada business with a new Overstock.ca that recently launched. Overstock’s international sales are growing quickly but off of a low base, executives said. Byrne noted that Canada accounts for more than 1% of sales for Overstock but that the country should account for around 10%, adding that the retailer’s international strategy is “very heavily focused” on markets that are easy to enter and grow sales in. The retailer also recently added free shipping in Canada and less than load (LTL), or the ability to ship relatively small freight of less than 150 pounds, as opposed to only using full truckload carriers.
In December, Byrne said he aims to aims to sell Overstock.com to focus more on his blockchain business. And on yesterday’s earnings call, Byrne said he foresees that sale being to a retailer with stores. Overstock.com “…should be a part of a brick-and-mortar chain that hasn’t gotten its own digital efforts where they want them,” Byrne said. “We are committed to the point of view that we should be hybrid with brick and mortar.”
Of the sale of its retail business, Byrne said Overstock is exploring various parties, including late entrants. “It takes time. It’s like baking a soufflé. There is no way to rush it,” he said.
On Monday, Overstock announced a management shakeup of top executives in hopes of fueling growth in its blockchain technology business tZERO. Byrne is switching roles with Noursalehi. Byrne will now be president of Overstock Retail while Noursalehi will take on the role of CEO of tZERO. Byrne will still be involved with tZERO as executive chairman.Favorite