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Overstock.com, Inc. (NASDAQ:OSTK)

Q4 2012 Earnings Call

January 24, 2013 11:30 am ET

Executives

Jonathan Johnson – President, Corporate Secretary

Steve Chesnut – SVP, Finance & Risk Management

Patrick Byrne – Chief Executive Officer

Analysts

Nat Schindler – Merrill Lynch

Justin Ruiss – Sidoti

Operator

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Overstock.com Fourth Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to introduce today’s presenter Mr. Jonathan Johnson, President of Overstock.com. Please go ahead, sir.

Jonathan Johnson

Thank you, Jody. Good morning and welcome to our fourth quarter and full-year 2012 earnings conference call. Joining me on the call today are Dr. Patrick Byrne, Chairman and CEO. Patrick is joining by phone today; and Steve Chesnut, Senior Vice President of Finance and Risk Management.

To begin, let me remind you that the following discussion and our responses to your question – questions reflect management’s views as of today, January 24, 2013, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results are included in the Form 10-Q that we filed last year and the Form 10-Q we filed on October 25, 2012.

During this call, we’ll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Please review the safe harbor statement on slide two.

With those formalities out of the way, I’d like to turn the call over to Steve to highlight some of the financial results.

Steve Chesnut

Thank you, Jonathan. Please turn to slide number three of the presentation, which is available on our Investor Relations website. In addition to the annual results, I’m going to add some comments to our – about our fourth quarter results and those fourth quarter results are found on slide 10.

2012 total net revenue was $1.1 billion, a 4% increase from last year. Q4 total net revenue was $342 million, a 9% increase from last year. Regarding gross margin for 2012, this improved a 110 basis points from last year to 18.1% and the gross profit dollars increased by 11% to $198.4 million.

In the fourth quarter, gross margin improved 170 basis points from last year to 17.9% and gross profit dollars increased 20% to $61.2 million. Contribution for 2012 increased 15% to $135 million and contribution margin was 12.3%, an improvement of 120 basis points from last year. Q4 contribution was $40.6 million, a 27% increase from last year and contribution margin improved a 170 basis points to 11.9%.

Combined technology and G&A expenses for 2012 decreased by $12.1 million, due primarily to a reduction in compensation and legal costs. Q4 technology and G&A expenses decreased by $1.4 million. Net income for the year improved by $34.1 million to a positive $14.7 million or $0.62 a share. Net income for Q4 increased $12.2 million to $8.8 million or $0.37 per share. We ended the year with $93.5 million in cash and cash equivalents. During the quarter, we also note that we paid $17 million and exited our asset-backed line of credit. We generated $21.6 million of working capital in 2012, as we ended the year with $7.5 million of positive working capital compared to a negative $14.1 million at December 31, 2011.

So, Patrick, with that, let me turn the call over to you for the balance of the presentation.

Patrick Byrne

Okay. Thank you, Steve, and thank you for giving this all together, so by 24th. So, I’m just going to run through some, the slides revenue. Next slide is we’ve gotten the nose of the plane back above the horizon, not dramatically just a couple degrees, four degrees, but that’s a – it’s nicer as a former pilot. I know it’s nicer to get your nose above the horizon, you get a lot more options. So, we have growth in the fourth quarter, it kicked back into 9% and we see – anyway. So, revenue is satisfactory, gross profit.

The increase of a 110 basis points comes from a tremendous amount of work by the executive team in all kinds of areas, driven in first by fantastic business intelligence that we’re getting out of Steve’s group, but also all up and down the supply chain and in the sourcing and in various methods that we’ve built to get our suppliers realizing that it’s in all our interest for them to be offering the best price first and giving them feedback about how they can – giving them feedback about pricing and how much more volume they can expect giving them price elasticity curves basically all these things are adding up to a sniveling 110 basis points more out of our cost structure.

And I don’t see any reason for that to stop. I don’t see – I think we have projects on, that are coming live over the next 18 months that I think strip a tremendous amount more out of our expense, well that add to our gross margin, gross profits just arithmetic contribution. I’ve mentioned many times that I view contribution as – this is how we really judge our growth, contribution dollars. This is what pays the rent and this is gross profit minus marketing.

Interestingly, you’ll note that if we – we and Amazon keep our numbers little bit differently. They put a bunch of logistics numbers in the line they call sales and logistics or something. So to get to apples – and so their margins look higher, but actually if you calculate their contribution margin and our contribution margin, it generally come out within a few dozen basis points of each other.

We’re happy to see this growing 15%. We’d like to see it growing faster, but given – we think of the industry growth now, let’s say 12% to 15%, so we are back above – and if the industry is growing at the top line, I think I can assume that the – it’s growing that, the industry is growing their contribution margin at that top line. So it’s nice to see at that line as well, at 12% to 15%, and it’s nice to see us back at or above the industry in terms of growth.

As a matter fact I think that if you look at players other than Amazon, certainly if you look at pure play players, our understanding is there’s been a – things have gone flat, flattish for them and they – as the Christmas season we’re on, we saw evidence of and heard evidence around the industry of things being a little bit softer than expected and I’ve started seeing projections dropping for the industry in general down to 8% to 12% range. And again the pure plays or that bottom end or below the bottom end of that in Amazon, and e-Bay or up above that top end of that range. So, we’re – in any case we’re happy that we have our growth back, I think a good notch above the industry now.

Contribution – next slide, contribution versus technology. Good belt-tightening. Contribution versus technology in G&A, basically you see there is some good belt-tightening in the last year has gotten those line as back with a crossed as they should be or uncrossed I should say.

Okay. Net income, $15 million. We’re happy with that. I mean, it’s a nice start, it’s a nice start, we think the earnings power of this business is just beginning to be – get expressed and be recognized by a very few people.

Operating cash flow and free cash flow, nice that they are $28 million and $15.6 million. We’re – it’s always good when that’s positive, we are adding to our cash, I’m happy – so happy that we paid off the last of our debt. It’s going funny that, now it might be a time when you want a nice thick layer of that I suppose, we get it fixed for some long-term, but hasn’t been in the offering yet. So, we pay off our debt. We are debt free. I like being able to say that.

Then we get into the quarterly results. Steve, would you like to walk through anything you want to say about the quarterly’s?

Steve Chesnut

Yes, I think – I mean on page 11, it’s nice to see the 9% of top line in revenue growth. I think that as we progress through the year, we continue to build the strength on the revenue line.

Patrick Byrne

Jonathan, why don’t you walk us through the quarterly slides?

Jonathan Johnson

Thanks, Patrick. So on slide 11, you can see that we are up 9% at $342 million. Slide 12, you can see the quarterly gross profit grew 20% at $61.2 million. We’re pleased – we’re very pleased with this result and like the fact that 2012 graph has slopped up there, so that’s good.

On slide 13, you can see our quarterly gross margin and contribution, those held nicely. Q4 generally dip a little bit because of a mix shift and what people are buying for the holidays, but we like having contribution where it was at 11.9% and for the year it was 12.3%, so we’re very pleased with those results.

Slide 14, the quarterly contribution and growth chart, again, 27% growth. We’re pleased with that, and I think we can continue to work on that and do better.

Looking at slide 15, you can see our quarterly operation expenses. Marketing, we did spend a fair amount in Q4 and we’re pleased with the results, but it was more than last year and so you can see that the numbers here.

Patrick Byrne

Can I interrupt here Jonathan?

Jonathan Johnson

Please.

Patrick Byrne

I would say that this graph would be – the – this – a number that’s really useful is the sum of the G&A plus tech, so we have to this, this is a good graph, but we have to do this putting them at the bottom and marketing on the top because world should understand we manage marketing, we fine tune it as a expense – a variable expense that really varies very closely with sales, of course, and so if that were on the top and we had G&A and tech on the bottom of these bar graphs, we would see – it would give us – we could look at the sum of the G&A and tech and it would be good way of looking at things.

Jonathan Johnson

That’s a good change. We will do that. The sum of the three is just over $53 million and marketing was just over $20 million in the quarter, but the other quarters aren’t as easy to see, so we’ll make that change and show it that way going forward.

Slide 16, quarterly net income. The thing that most pleases me is that every quarter this in 2012 we were profitable and finished strong, we’re just under $9 million in the fourth quarter.

Slide 17, operating and free cash flow; again, these numbers are in good place for us. We like where they are.

On slide 18 you can see our trailing 12-month inventory returns for our core business. There are up a little bit over where they were last year at 5.4 turns, not high enough for us. We think we can do better, but when you look at all the business together running at 34.5 that’s a good business for us.

And then on slide 19, you can see our trialing 12-month (inaudible) fourth quarter is always a little lower, but it’s a real nice improvement over the 2011 number. So we’re pleased with that.

And you can see on slide 20, we had a slight decrease year-over-year in unique customers, but basically held flat like it has for most of the year looking at each quarter on a year-over-year basis.

And then on slide 21, new customers in the cost per acquisition, you can see we did increase new customers and it cost us a little bit more to get in this year than last year.

Slide 22, I think is, has some good news, our average order size has a 15% increase year-over-year. When you’re looking at it on a quarterly basis and the orders are down. So I think when we, the message is, we’re getting new customers and the customers are purchasing a little bit more with us, a the higher average order size.

And then on slide 23, gross profit per transaction, you can see there was a 25% increase and it’s up over $20 now.

And then slide, the last slide, slide 24, you can see that year-over-year our corporate head count decreased by 3%. It’s picked up a little each month, each quarter this year. And we are being very thoughtful on our hiring and still looking for more developers, that speak Java and that’s where most of this growth is. Patrick, anything else to add?

Patrick Byrne

Nothing to add to that. I should know that somebody sent in an e-mail of questions, you have that in front of you, why don’t you run through them and then we’ll take questions from the audience.

Steve Chesnut

Let me ask a few of these questions. Just on general economic outlook, Patrick, in the past you’ve talked about being on the edge of the global financial meltdown, what are your thoughts for 2013 and how do you think that will affect the business?

Patrick Byrne

Well, I gave that metaphor of – there is 300 bridge built for a 100 trucks and there’s 300 on it and you can say, well how many more can get on it, and I’d say I don’t know, I thought it was only going to make a 200. I mean the system is so stressed and I think that the – I wouldn’t have thought it at this long. But there are obviously – the U.S. government is just putting the full faith in credit of the treasury in various ways behind supporting this whole thing. I think that there is a – John Maynard Keynes used to refer to the bezel, which was at any given time in civilization there is a bezel and it’s getting bigger and smaller or smaller.

And it’s the difference between what – if everybody added up – if you could freeze time and add up what each individual thinks they own in the financial system and you could look at what’s actually collectively there, the difference between the two is the bezel is the amount that has been embezzled out of the system. And I think in one way or another through actual or unsoundness, through the settlement system through, et cetera, et cetera., there has been just – the bezel has reached the breaking point in our society. And the government is being jumped into – is being jumped into guaranteeing it and they’re not standing up to of course the financial industry is doing it.

So, with that said, I think that in a Zombie’s walk, the earth scenario, there’s just no business model matters. But short of that, I think that the cookie is going to crumble from the outside in, Overstock is in the business of moving electrons around more than moving boxes, it’s algorithms and electrons. And that’s where you’re going to want to be standing. We’ve got a super agile, super flexible supply chain, it is getting more so, month-by-month over the next 18 months. There’s a very deliberate plan, so over the next 18 months, it’ll be – really be the network agile supply chain that I really don’t think anybody else has.

And as, so I think that gives us a lot of downside protection. Of course, if there is a contraction, there is a – which is going to affect consumer spending and that will hurt us like everybody else. But we have wonderful plans. I mean we plan out different scenarios for what kind of contraction and what we have to do. We’ve already got the files in the filing cabinet on okay, given this sort of circumstances, this – these are how we’re going to cut the expenses, this is what we’re going to do differently and we have one file for sort of each scenario we can think of.

So, we do a lot of planning to make robust power. Our systems, not just technologically, but our corporation in a way that we care a lot about our employees and we’ve given this a lot of thought of how do we keep this – given whatever happens or if something happens and God knows, I hope it doesn’t happen. But given any sort of downturn or financial dislocation. How we can keep our people safe and happy and assist our corporation robust, and you just have to be – it’s like that all, I don’t have to run faster than the bear, I just have to run faster than you. We’ve just have to run faster, be able to be more agile and more robust than everybody else in that situation. So that maybe a longer answer than people want it.

I can handicap the chance that I think something is going to happen because its I’m – the GAAP financials – every year the treasury puts out by law has to say what it’s GAAP deficit would be, and people talking about this $1 trillion – $1.4 trillion deficit, but in fact that’s all on a cash basis. On a GAAP basis, it’s a quite a bit larger. It’s has been running $4 trillion or $5 trillion. The delayed announcement of it this year in Q4, oddly enough they didn’t put out when they normally do. They just put it out I think a weak or so ago, and then on a GAAP basis, our government is running at $6.9 trillion deficit now, which is 40% to 45% of GDP.

So – and I think in the long run, as Mr. Buffet thought me, GAAP financials are generally what capture the economics of an enterprise. So I am just amaze that the systems is held together as long as it has. I was just over in Europe and I think that – well anyway, I will stop there on the economics lecture, but shareholders should know that we are – we think about these issues a lot, maybe obsessively in the eyes of some and we have plans and we have taken steps to make our systems or company not just the technology, but our workforce robust and robust in the face of all kinds of – all kinds of possible events.

Jonathan Johnson

Another question that came in was, did you first give us an update on the Goldman Sachs law suite...

Patrick Byrne

Take a stab and add yourselves.

Jonathan Johnson

I’ll do that. I’m just reading the question first. So, last January it was dismissed in summary judgment on technical grounds. We have filed our pellet brief, the Goldman and Merrill responses is due towards the end of March, and then we’ll file a reply and look for the quarter, set a date to hear our appeal. We do have good confidence in the brief we filed. We like the legal arguments we made and we expect to be back to trial eventually. So, that’s update on the Goldman suite.

Patrick another question just came in is just about competition in general. What do you see is our competition and how are brick and mortar becoming brick and clicks affecting us?

Patrick Byrne

Well, I think that the brick and mortars have gotten much better, at brick and clicks, it was really about the middle part of the last decade that Wal-Mart and target started to get very good just in their websites themselves became leading state-of-the-art websites. It has developed a good website. It’s becoming more common and easier and lot lower – lower price than it was 10 years ago to have a really first rate website.

And there is such an advantage to having a – to the brick and click model. I think where the gods of economics probably want the models to converge is at brick and click, because the guys who have Wal-Mart has – I don’t know how many hundred million people a week come in to their stores, and they can just add the bottom of their receipts to visit walmart.com. And as they print out the receipts, that’s a zero marginal cost for them for marketing to a hundred million people a week. Whereas we – we have seven to eight points of our expense structure tied up in having to market.

On the other hand, we have some advantages that they don’t have. But at the end of the day, I think that the combination, the brick and click, is where the Gods of economics think the real equilibrium is going to arise over time. So – but what that means in general, the pure plays are not doing so well. I’ve heard that their growth is actually down to about zero and will no more, but that their – the pure plays are having a harder time because they have that constant headwind be walking into that I described.

And so, as the brick and mortars get better with their websites, it’s – and they can also offer things like you order it and pick it up in the store, if you don’t like it, you just return it to the store, any one of our stores, things like that. Those are real advantages over a – over the pure play model. So, again, I respect all our competitors, but I think in particular the brick and mortar fellows are the – are the ones to watch and have.

Now, on that other hand, there are still – many of them are still 5 to 10 years behind. It’s just kind of surprising me, there are majors sites out there – I mean major retail chains out there who their – their online presence is basically a website that you go to when you type in your ZIP code and it tells you where the closest store is. That’s like circa 1999 kind of technology, and so, I think that they are waiting. Those kinds of companies have been waiting to see how the internet shakes out, and – but, I have some evidence that even in those cases, people are saying, okay, we’ve waited long enough, we will see how it’s going to shake out, we will see what we want. We waited a decade, longer than we might have, but we see what’s way to go now and they’re getting serious about – they’re getting serious about developing an online presence or (inaudible).

Jonathan Johnson

All right. Next question is comment, it’s probably best for Steve to deal this, please comment on the increase in deferred revenue?

Patrick Byrne

Yeah, as you’ll see on the balance sheet, our deferred revenue line increased 2012 over 2011. This is driven by two things. First of all for revenue recognition, we don’t recognize the revenue until the goods are actually delivered to the consumer. And December, finished strong, but because we can’t recognize that revenue until it’s actually delivered and UPS because of how the timing of the calendar stopped shipping those last couple of days, we saw an uptick in the deferred revenue line. Obviously, that’s going to roll into January.

Jonathan Johnson

Next question has several marketing components. As Patrick noted in 2011 that we had stumbled, how was 2012? How is our new SVP of Marketing, Tim Dilworth doing? Do we have an update on Carbo, and any thoughts on 2013? Patrick, do you want to take the initial stab a tab?

Patrick Byrne

Sure. Club O is growing. We think we have it on – back on track. It did stall for, then it actually got good for year, then it stalled, but now we have a dedicated first team who is taking it and driving in with some great ideas, Tim is doing wonderfully, he’s been here about 10 months, settled in. I’d say our online marketing is all dial-in and e-mail is all dialed-in and our website is dialed-in, but there’s more we can do and there is a whole list of project, he’s chewing his way through, it’ll probably take this year to chew through them all.

I think that our – our marketing, we have adequately done the brand building side and getting the warm associations in our marketing and you can expect to see some new ads come out that maintain the educational value, but does add a lot more information. Which we think is – I like informative ads myself and not just of the ones that are touchy feely and make you feel good about the company.

So, Tim and Stormy have developed a skeleton going forward, that is a – should be both entertaining and also informative about the futures of shopping at Overstock.

Jonathan Johnson

Yeah, I’ve just comment, we did have some self inflected marketing wounds in 2011, but I think those have been remedied in 2012 and we’re – we think marketing is running very well internally. So, Joe, can you – I think we’re ready to take question from those that have logged in.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Nat Schindler from Merrill Lynch.

Patrick Byrne

Hey, Nat.

Nat Schindler – Merrill Lynch

Hey, there. A few questions here, so if you could let me. I’ll start off with one kind of real big picture and I know you’re not probably jumping up at the, down on the idea of changing your brand again after O.co. But in a lot of ways, I’m just wondering whether that you think of yourself as an Overstock or an off-price merchandise company anymore considering that so much of your sales are now bedding and furniture and home stuff that really aren’t off price. They might be good deals or what have you, but they are new in season product, and does your brand now really reflect what is really your driver which is that home goods?

Patrick Byrne

Good question. Well, I have concerns about that myself which is why I may have been a little quick to draw on the O.co. I don’t think that Overstock really expresses all of what we do. We do now, just be aware of those different ways something can be Overstock. There can be overstock in the sense of something, say, a cancelled order, but there can also be overstock in terms of materials in the supply chain or time in factory that we’re getting, we are getting special rates on and in order to keep a factory busy somewhere that doesn’t have some orders for a six-week period and they want some fill in business.

So, we do – even if stuff looks like you described first run is such it even may be a different kind of supply chain overstock store behind it. But in general I don’t think the name Overstock really fully expresses what it is that we do now. We do think our pricing is the most competitive on the internet. In fact, our data last I saw was we’re about 9% cheaper than Amazon. If you take our products and you find our products on their site, or you can compare stuff in general, we’re about 9% less expensive and I think our customer service is better and so on and so forth. So I think that it may be time that you may see some other effort to evolve away from Overstock as a brand. But this one would be much more patient and careful and low risk.

Steve Chesnut

I’d also like to comment on that, if I may, Patrick. When we did rebranding back – back and forth in 2011. One thing we learned from our customers was they understood what Overstock meant and it didn’t necessarily to them mean liquidation, but it meant a place for great deals. And so, Nat, I think while you’re technically correct we we’re primarily no longer a liquidation side. We still are a discount side and that the customers I think will recognize that in the brand.

Nat Schindler – Merrill Lynch

Okay. And then another question particularly for Steve, this is more a technical. Your technology line item had been going pretty linearly by quarter. And then there was a pretty big, a substantial quarter-over-quarter step up in the fourth quarter. Is this a new level that you’re going to grow from as you use technology to improve your ability to move product or is it, was there something one time in this quarter?

Steve Chesnut

So I think it’s a recognition that as Jonathan and Patrick have said. We were skinny at the beginning of the year, we’ve been adding in and hiring and building the technology side of the business. So I think this is more a new level of spend.

Nat Schindler – Merrill Lynch

Okay, that’s – this line usually goes like that, but you guys have had one-time things in the past, so, I just want to make clear that up.

A final question for Patrick. You said – this was several years ago now, that you really didn’t see yourself running this business, really this long. You returned to growth. You’re at profitability. Are you looking towards your transition at this point?

Patrick Byrne

No, I’m having way too much fun, way too much fun. I think I’ve been saying that since 2003 that I don’t see – I don’t – they are not going to – well, Buffet says he is going to be carried out first and then he is going to hold Sam managed by – I don’t think I’m going to do that, but I’m having too much fun and I know what’s coming down the pike in the next couple of years and I think it’s going to be really fun. And I think that we’re going to get Goldman Sachs into court and I won’t miss that for the world. And, I think we’re going to get them into court sometime next year.

So, but I’m having too much fun and the truth is, it’s become now that we have such a solid executive team. My life is changing immensely and that I’m getting to be institution guy. I’m getting to design the institutions of the company and the institutions that surface different voices and modulate the different voices correctly and I spend actually a lot of time designing the enterprise 2.0 systems and working with that team which has actually really – has a lot, has contributed widely to the improvements.

We have all kinds of enterprise 2.0 technologies that we’ve built ourselves on the Microsoft SharePoint platform which by the way is a phenomenal platform. I think it’s – I think Microsoft has come out with has something called sharepoint which is now in last few years turned into really powerful system for corporate Enterprise 2.0 platform. And we’ve done a lot on that and it’s really fun for me to be not sort of filling in for executives. Now that we have a full team of everybody who can do, everyone of which of whom can do his or her job better than I could do his or her job.

So my contribution, I’m getting to be kind of the philosopher statesman, in terms of designing the institutions within the company and setting up constitutional principles and debating constitutional principles with people and establishing constitutional principles and the budgeting working just on the budgeting, and really, really designing the – thinking hard about the institutions, how do we want to design the company. So it’s going to have the best next 10 years or 20 years. Now, do I see myself with it for next 10 or 20 years? At some point there’s other things, I would I might like to do. But I’m really having the time of my life now.

Nat Schindler – Merrill Lynch

Okay. Thank you.

Patrick Byrne

Okay. Thank you, Ned.

Nat Schindler – Merrill Lynch

Sorry, it’s Nat.

Patrick Byrne

So it’s fun working with the colleagues I have. Right down to – I mean throughout the company, it’s corny to say, but we just have – I like to buff it, I want to tap dance into work every day. It’s just a fun place to work.

Nat Schindler – Merrill Lynch

Okay. Thanks.

Patrick Byrne

Thanks.

Operator

(Operator Instructions). Our next question comes from the line of Justin Ruiss from Sidoti.

Patrick Byrne

Hello, Justin.

Justin Ruiss – Sidoti

How are you?

Patrick Byrne

Good sir. How are you?

Justin Ruiss – Sidoti

I’m doing well. So I have a bunch of questions. Just first off on easy one. I am assuming that CapEx went up just in kind of tandem with the technology spend.

Patrick Byrne

Yes. Steve, do you want to augment that.

Steve Chesnut

Yeah, I mean that’s, we’re trying to keep the CapEx in line with where revenue and cash flow is going.

Patrick Byrne

Yeah, I would prefer to expense all of our development. But unfortunately, there are these accounts who say, no, some of it – to me it will be more conservative to expense everything we can expense. But we have to capitalize some of it and the accounts have a very careful study and decide what gets capitalized and what doesn’t.

Justin Ruiss – Sidoti

Perfect. Okay. And then before when you were talking about gross profit and gross margin, you had mentioned the supply chain and sourcing that’s going on. I just wanted to kind of get a feel of, is it relationships with your suppliers and the sources, is that’s what’s improving or are you finding new sourcing methods or are you getting them on better terms with the existing ones? Can you just speak to that a little bit?

Patrick Byrne

All of that above plus the logistics. The logistics is big part of the cost and our logistics are getting more rationalized. We’re getting, reaching scale, negotiating better and better deals, finding, using algorithms to find ways to shave basis points out of our shipping cost, handling our returns more efficiently, just analyzing our returns and discovering for each component, the things we can do to generate higher recovery cost, for example. So it bodes in the logistic systems and with the suppliers and with the suppliers it’s a matter of working with current suppliers better tying them into us, better giving them information that they can’t get anywhere else. And we see a lot more steps we can take in that regard, that incentivize them to be giving better-and-better pricing tasks. So it’s a combination of all those factors and it’s snowballing.

Justin Ruiss – Sidoti

Okay. Perfect. And I just wanted to touch on marketing a little bit. Now I know, I guess marketing is a huge factor for you. Is this the kind of level that we’re going to be seeing going forward from marketing and what are you experimenting with different marketing routes. I mean, everybody is doing social media and all this other stuff but are you sticking with the traditional or are you moving to other things, how does that work?

Patrick Byrne

We have – we do constant experimentation. We have a very forward thinking marketing team who is always at conferences, always reading the journals, getting of course all the visitors from the different marketing vendors. And they have as part of their budget as a non-insignificant piece of their budget is just for testing, testing new things. And we’re known in the industry as different start ups, get creative with different start up ideas about how we can do this or that with marketing tie, twitter and do a edownload, just that they – people know they can come to us and we will give – we will do small deals with them. So we can see if something works and if it works, we take it.

So we’re known as being willing to work with a lot of innovative new companies. And then, it’s just like playing draw poker, you just – but a game of draw poker, where you can keep betting, discard card and cards, getting new cards, betting again and just do that iteratively. So, but I really do think it’s to our advantage that companies like the RichRelevance, whom we love and – has been a great partner for us. It will – and we’ve tried to be a good partner for them. They come to us with some new idea they have, and they know that we’ll put some money into. We don’t expect to do – them to do it for free, but we’ll put some money into it and try to get it off of the ground with them.

So, we’re – we probably – I wouldn’t be surprised if – and this is just a rough guess, but I won’t be surprised a 15% to 20% of our marketing dollars actually are going into areas where we don’t know what the return is going to be and we got to give it a try and then we just see what – so what works and make it a program.

Justin Ruiss – Sidoti

Sure. And then, just two other things, I don’t know if you have liberty to speak on this, but do you have any kind of guidance of where you think inventory is going to be at the end of 2013?

Patrick Byrne

Steve?

Justin Ruiss – Sidoti

Well, I mean like on a dollar amount?

Patrick Byrne

Chesnut?

Steve Chesnut

Yeah, I won’t give you an absolute dollar, but I think as Jonathan mentioned, we’re not happy with the inventory returns. We’re looking at ways that we can continue to shape inventory out of the network on the core side.

Patrick Byrne

Yeah, I’d love if we could grow15% and have the same inventory at the end of 2013. What it would be a – so in other words we’ve gotten 15% better, I think it would be a reasonable goal.

Justin Ruiss – Sidoti

Got you. And just on the revenue side, I kind of just wanted to get a feeling of – I know a lot of your – a lot of revenues derived from the Home and Garden and what have you. But was there any kind of mix this year that you saw that was a surprise, anything that’s selling better?

Patrick Byrne

I think our electronics are doing better than they have in the past. But Steve I’ll let you – Steve, you’ve got the numbers in front of you, why don’t you?

Steve Chesnut

Yeah, Justin, it is clear throughout the whole year, we’ve seen a stronger and stronger mix in the home categories and that also played out in the fourth quarter. Some of that we’re seeing, a little bit of that coming out of the electronics BMMG area which are kind of the lower margin categories for us and we’re seeing the strength in home categories.

Justin Ruiss – Sidoti

Got you. And actually just one last question.

Patrick Byrne

Let me throw something on, let me correct what I said. I don’t – on the electronics, I know that in the fourth quarter, we now have I think for the first time in electronics department that we can be reasonably proud of and we’re getting prouder of it. We’re getting new vendors, people are coming to us, people who aren’t crazy about other channels, they’ve been dealing with. And so I think that we’re on our way to having a very strong electronics department.

Justin Ruiss – Sidoti

Very nice. And then my last question is, now that you have paid off the debt and you’re debt free, what’s, any ideas with cash, what that would be used for?

Patrick Byrne

At these prices, I would start buying in stock. That would be my preference. Jonathan, Chesnut, what do you say? Not to that, but what would you do with more cash?

Patrick Byrne

Clearly, the stock price where it is provides an opportunity. I think we also see opportunities to continue to deliver, there is technology enhancing the business as we have continued to invest back into the core, fundamentally investing into the business as we know it today, to keep extending the reach.

Patrick Byrne

Yeah.

Patrick Byrne

I agree with that, I think we can spend our cash within the business in ways that we’ll have nice ROI and we always have projects on our list that we want to get done and not having to service debt will help us do that.

Justin Ruiss – Sidoti

Patrick, you talked about supply chain. There is still many opportunities with our partner network to enhance the supply chain and the visibility of the supply chain, I guess become better-and-better business people with. So there is no lack of opportunity internal to continue to enhance who we are today.

Patrick Byrne

Right. And I also see international is a great opportunity for us. Right now only a couple percent of our sales are international. But we’ve actually build a really good international website. And it needs to be supported more, but we have a way of going international, we have figured out that is – should not take much capital. And it’s a different way than other people have approached it. And you’ll see that starting to unveil, unroll actually in June, in April should be the first country. And but that’s an area – that’s an area. But in general I would go with, we have so many projects we can do now that we see is really additive to the business and we want to pursue them and we want to have a disciplined expense structure.

Not go willy-nilly after them all. But I’m not sure if our constraint should really be the budget or how quickly we can grow the development teams and business leaders who can pursue those projects. That’s really more of the constraint than the budget dollars. And so as we develop more and more of that human capital that can pursue, we have a couple of huge projects on the board for this year. And if we get those well started and well designed and stuff, I could see spending some extra dollars into getting them resourced. So, they can finish in half the time they otherwise would.

Justin Ruiss – Sidoti

Thank you very much and very best of luck.

Patrick Byrne

Thank you, Justin.

Patrick Byrne

Thanks, Justin. Jody, any other questions.

Operator

No sir, there are no more questions. I’ll go ahead and turn it back to the presenters for closing comment.

Jonathan Johnson

Great, Patrick anything that you want to say before we close.

Patrick Byrne

Thanks for sticking out another year. I hope it was a good year for us, for shareholders in the sense of our stock, it’s about doubled in the last year or tripled in the last six months. We don’t pay attention though inside the company to the stock price. We pay attention to the intrinsic value we’re building and we think we’ve built a heck of a lot of intrinsic value in this company that seems the world is starting to figure out.

Jonathan Johnson

I would agree, we thank our investors for trusting us with their capital and we’ll keep working hard with it and get right back to it now. Thanks a lot.

Patrick Byrne

Bye, bye.

Jonathan Johnson

Thanks Jody.

Operator

Thank you, sir. That concludes today’s conference call. You may now disconnect.

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