Overstock.com's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Overstock.com, Inc. (OSTK)
by: SA Transcripts

Overstock.com, Inc. (NASDAQ:OSTK)

Q1 2014 Earnings Conference Call

April 24, 2014 11:30 AM ET

Executives

Jonathan Johnson – Chairman

Stormy Simon – President

Robert Hughes – SVP, Finance and Risk Management

Patrick Byrne – CEO

Dave Nielsen – Co-President

Analysts

Nat Schindler – Bank of America Merrill Lynch

Scott Tilghman – B. Riley

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2014 Earnings Overstock.com Earnings Conference Call. (Operator Instructions). I would now like to turn the call over to Jonathan Johnson.

Jonathan Johnson

Thank you, Jamie and good morning and welcome to our first quarter 2014 earnings conference call. Joining me today are Dr. Patrick Byrne, our CEO; Stormy Simon, our President; Dave Nielsen, our Co-President and Robert Hughes our Senior Vice-President, Finance and Risk Management.

We’ll start by turning it over to Stormy to take care of some of the legal particularities.

Stormy Simon

Let me remind you that the following discussion and our responses to your questions reflect management views as of today, April 24, 2014 and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in press release filed this morning and in the Form 10-K filed on February 27, 2014.

During this call, we will 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.

Jonathan Johnson

Thanks, Stormy. Now I would like to turn the call over to Rob to highlight some of our Q1 financial results.

Robert Hughes

Thank you, Jonathan. Q1 total net revenue was 341.2 million, a 9% increase from last year. Q1 gross profit dollars increased 9% to $64 million, gross margin decreased 10 basis points from last year to 18.8%. Q1 contribution was $40.6 million, a 1% increase from last year and contribution margin was 11.9%. Q1 technology and G&A expenses combined increased 5% to 34.9 million. Pre-tax income for Q1 was 6.6 million, a 1.2 million decrease from last year. Net income for Q1 was 4 million or $0.16 per diluted share.

Patrick, with that, let me turn the call over to you.

Patrick Byrne

Okay. But before we do, why don’t you – since it’s going to come up in a few ways, why don’t you mention the effect of the timing of Easter and as far as GAAP recognition and such this year versus last?

Robert Hughes

Yeah, one factor we noted in the press release is that although our – and we’ll get to the – the order growth was higher than you see on a GAAP basis, because we had increase in sales in the last week of this quarter on an average daily basis, compared to last quarter. But just to remind you for GAAP, we don’t recognize that as revenue until it’s delivered. So, a larger increase in our deferred revenue at the end of this Q1 versus last Q1.

Patrick Byrne

And how would you – what’s the magnitude of that, say top line and contribution line?

Robert Hughes

On top line, I think there’s a couple of percentage points. So we would have been closer to 12% than 9% on a GAAP basis.

Patrick Byrne

Okay. Okay, well, let’s move forward. Next slide quarterly revenue growth, you see it is – it is still tick down, but we actually think we have the slide virtually – well arrested and coming back into right direction. But that’s ticking down to know what we understand as industry growth rates. But we definitely think we can do better and spin this up over the course of the rest of this year.

Quarterly gross profit growth, same basic story. Slide 6, gross margin – so I assume, you are looking at slides to match my voice, Robert?

Robert Hughes

Yes.

Patrick Byrne

Okay, thanks. Slide 6, quarterly gross margin growth and contribution 11.9, so move back sharply into the right direction. I tend to think as I’ve said I think 12.0 to 12.5 is probably the ideal place for that to be on.

Next slide; slide 7. Here we – you see, we have arrested the deterioration in contribution growth and in fact it’s a little bit better than setting aside the Easter effect, timing effect that Robert just described. But we definitely don’t think anything in the single digits here is acceptable, that’s industry growth rate, we should be able to do better than industry growth rate and happy to say that we’re – well, so anyway, you can certainly take our goal there to be to get this back into the double digits.

Next slide, quarterly operating expenses. Here you see they’ve dropped versus Q4. Jonathan do you want to add, but if – I’d like to look at the red bar or the red and green bars, the red and green bar together, which gives you tech and G&A, so in other words all the corporate expenses. So as you see, the corporate expenses are staying right around 30 million or just a little bit on the plus side of 30 million a quarter. But Jonathan, why don’t you explain the drop from?

Things we them perfectly, PayDeck so if you look at Q3 to Q1, it’s roughly the same. In Q4, we did have a legal expense connected with the California DA case has caused the red bar to go up in Q4.

Okay. So, moving on slide 9, quarterly net income $4 million. We of course – we’ve committed what is in my family, the cardinal sin of truncating our ordinate, but we truncated our ordinate here. So other than that, this is actually pretty stable, we had an exceptional Q1 last year. We are making some big investments, the risk is sounding like certain politician I know, but we’ll be talking in a minute about the big investments. But so 4 million here feels okay, we don’t really judge ourselves quarter-to-quarter, we’re thinking of the year. I think I said in the last conference call, I would expect our operating income this year to be roughly what it was in 2013, we’re actually not seeking to grow that this year, because we are – we have seen a lot of opportunities to build stuff. And as long as we can keep that nicely positive in a (inaudible) growing, we can’t resist these opportunities to pursue.

We now really have a technology group to be proud of and I think the way that the business works with technology to be proud of. And anyway, there are just some backup projects we see, we don’t want to let them slide a year or two just to work into our budget gradually, we want to get them down. So for those reasons, I really think that this year and last year, we’ll have about the same operating income.

Okay, next slide.

Free cash flow, trailing 12 months, 55 billion cash flow from operations and 37, that’s from the free cash flow that’s relatively stable. There was an oddity. Rob, why don’t you explain the oddity last year data, again on timing that gave us the bump and so forth.

Robert Hughes

Okay, happy to do so, yeah. As we noted on our last conference call, one thing that was different last year in the holiday season with some of the holidays coming later, so for example Cyber Monday was in December in 2013 as opposed to November. And since we pay our most of our suppliers 30 days from shipments, the payment for that holiday for example then moved to January rather than December. So, you do see more of the greater seasonal pay down in Q1 from accounts payable and also from some marketing invoices and other things like that than you’ve seen historically.

It’s just the way the calendar played out. We pride ourselves on paying our vendors timely and have continued to do so through this whole period. We’ve maintained, what’s called a PAYDEX score ready, which means through all this period, which means we pay our suppliers on time and that hasn’t changed.

Patrick Byrne

Thing we pay them perfectly. PAYDEX score is a rating that the whole industry uses on how well you pay and the higher score you can get is 80. And we’ve been running 80 – I don’t know how many years it’s been since we dropped off 80. But we’re really pride one of the reasons our vendors love us is we pay promptly, we pay correctly, we pay with great information about exactly what we are paying for as such.

So – okay, so 37 – again 37.5 relatively stable with the past setting aside slight growth over the – well, significant growth over the last 24 months, over the last eight quarters. Okay, next slide.

GAAP, trailing 12 months inventory turns, 5.5 on a – on the goods we (inaudible) bring in 45 when we include partners. I don’t like just 5.5, but you have to remember we’re doing also lot of furniture and I think the six is being a minimum acceptable. But we have shifted a lot into furniture and home, which by its nature, has sort of half of the turns that other general merchandise has. So it is – so, we’re not going to see this get to 10 or 12 with this much furniture and home décor as is in our warehouse. But I do – I keep thinking 6.0 is we like there I would get off people’s backs at that one.

Next slide, over a 1,000% for the first time of course that’s a happy day. And on the, on our own interest internal inventory, 83 and I’d like to see that over a 100, I think that’s a reasonable goal for us to get that over 100.

Next slide, unique customers little bit up from the previous year.

Next slide, new customers at CPA. Yes, the – they’re from $22 to $27 CPA. But as we’re going to see, we think that these customers, we’d rather have these customers at $27 and the old ones at $22.

Next slide, customers and average order size, customer orders, average order size, again the customer orders are up slightly from $2.2 million to $2.3 million. Average order size up nicely 153 to 165 significantly. So you really have to take that into account, when you think about our customers, who it is we’re getting and how much they are worth such and we like these ones that we’re getting – that we’re getting much stronger on this at whole CRM side.

Next slide, gross profit per transaction, up slightly.

Next slide corporate employees, this is what we think if it’s the overhead. Then that touching boxes, the blooming boxes are top unique customers.

And you see that, that’s relatively flat with the previous quarter. We have really good control on our hiring, things don’t happen by action in our firm now. I mean everything like this is carefully budgeted and planned. And we think we’re right in the group of where we want to be. We see – we do see so many opportunities and it’s taken hiring a lot of technologists, lot of folks who walk down propellers on their heads to build the stuff that we are envisioning.

Next slide, among the things we’re envisioning, I’ve mentioned in the last conference call, we had sort of six innovations coming. I guess we had already had a Bitcoin. I didn’t tell you what the others were, but I said some of them were fairly small but some big or among the small ones would be pets, we launched Pets Tab that was just kind of a nice thing to do, we’ve realized our technology which has gotten very, very good at sorting and recommending and everything across our millions of products could be – we could wire ourselves into all the 6,000 pet shelters in America get older. Get older stuff, their inventory so to speak, they are in the Overstock business too, they are in Overstock pets business, they’re trying to –

So, we built what I think is the best pet adoption center on the net, it is indeed drawing tens of thousands of people visit. It is generating some adoptions, it is getting us new customers that we never had before are coming in and purchasing, maybe because we have a Pets Tab and are doing exactly – they like us and realize we’re nice people.

Farmer’s market is now live, but just in (inaudible) it’s not at all what we – it’s not close to what it is that we’re working on. So what we have now is basically to get basket business, you can go in and buy jellies and jams and have them (inaudible) ship to you. But we have a much more significant development coming early around in the single-digit months ahead.

The insurance. We have launched, we’ve become an insurance agent. And in 50 states, we’ve – the tab is visible now. I think we’re always showing to about 50% of traffic as of yesterday. Dave or Stormy, do you have any other information, any other opinion on that?

Dave Nielsen

We don’t, it’s just – we’re just showing it to small percentage of traffic right now.

Patrick Byrne

Okay. Anybody who wants to see it, you can go to overstock.com/insurance and there you will see our new insurance center and it is a, it’s an insurance exchange. This is one that works. And you can buy home insurance, car insurance, small business insurance and there is more coming, there is more carriers, we’re getting more data. We’re working a terrific company, all insured to us. That’s been putting this together forward to a small town banks in the United State, but we’ve been working on integration for some time with them.

So we’re now showing insurance, we have sold at least one policy. And I think that there are other financial products that we could bring there and insurance has so many of our purchasers are home buyers, recent home buyers or people redecorating their home as such that we think selling insurance is a nice compliment and lot of margin in it for us and via good business.

Then we get to the big ones. Well E is a big one. Unfortunately, E is being announced on May 5th to our partners and we don’t want to preannounce it to you. But E has been a very big project, cost a lot of money over the last two years to build. It’s maybe the biggest single – arguably, its biggest single tech project, development project, well it is the biggest single development project we’ve ever done.

It has to do with the supply chain in the back end. I don’t want to give anything away, but if the – any of the folks listening knows some of our partners, you can ask them after May 5th, because we’ll be having our big partner summit and we will be unveiling this to our partners.

And F, what do you – do you want to say anything about F, anyone on the phone?

Stormy Simon

I don’t think we should at this time Patrick, we’re excited about it and it’s in development and underway.

Patrick Byrne

Okay. So the main event though in terms of our development would be E, the thing that is coming in another 10 days. And so you will hear about that as you talk to our partners, I’m sure. Okay, now we get to topics and questions.

Can you tell us about your management changes?

Yeah, it’s time, I mean I’m not going to go back and look into transcripts to say, I’ll tell you about each one. I’m not going to go back and look into transcripts to count the number of times I have said that you will someday see me give up the Chairmanship, and I think I even foreshadowed that Jonathan might someday be Chairman.

I think that A, it’s better for me just to have reduced my work load some. And it’s a perfect rule for Jonathan, Jonathan has actually been acting as the shadow Chairman for some years. It’s quite difficult, it’s two hearts beating in one breast just have one person be chairman and CEO, I don’t think it’s a good idea. I’ve said many times, I don’t think that’s a good idea, I kind of that’s why I always had my father around to do it when he was able to and was a chairman of another company.

I’d say, so I wanted those roles split, Jonathan has been shadow chairman for some years and has done a great deal of the work, so it’s a perfect evolution for Jonathan. And it takes – it’s just better institutional design and it wasn’t triggered by, we recently got named one of the 100 most trustable or ethical companies in America was in Forbes.

And the company, they are hired to do the ratings. And it was the rating company looked at all kinds of things, your social footprint and your that and your board governance and your accounting footnotes.

And so some good financial stuff and then a bunch of touchy feely stuff about the environment stuff on which we also do played well. So and they – but they marked this down for having the same person as chairman and CEO. And I had to agree with them and just reminded me, do you have always meant to – I’ve always meant to do separate those rules, I never got around to it. I think this is a law of better sustainable model to have Jonathan is Chairman and me as CEO.

On the management side, Stormy and Dave have been in co-presence for just over year. Dave has evolved add into a fantastic, it was like a CLO over a lot of the organization making sure everything gets that managed and done right. Stormy is off-course – and everyone who’s been involved this story for a while at all, knows Stormy is really my right hand guy, that’s guy used in the general neutral sense Stormy. So I hope that’s okay.

My right hand guy. And we plan together, we plot out our moves together, we’re joined that back – it’s a great relationship. And so having Stormy as President and leaving me just and finally with really the CEO work is a big improvement for me and I think also creates a nice clear chain of command within the company.

Now Jonathan, Stormy, Dave if you want to add anything to that, feel free.

Stormy Simon

Today, we did send out a press release announcing an U.S. VP, Seth Marks over sourcing and merchandizing and we might just address that.

Patrick Byrne

Sure. Seth Marks is a guy that Stormy and Dave found. He was at the time that came across in another context, he was at the time at Tuesday morning and previously worked at Big Lots and Hilco. It has a lot of, it’s really old time Overstock, it’s the stuff we were doing when we got started, real hardcore liquidations and bankruptcies and going to those kind of people.

And really has the – has that early Overstock whisky in his blood I would say. So we’ve – we got him in a year ago and he is been with us just about a year and we thought this was a great move and would also free up some of Dave’s time that Rob Hughes is the CFO now reports to Dave. So that gives Dave between that and technology that’s a lot on Dave’s plate.

So Seth is a strong liquidation player from the industry and from Hilco and it had significant roles with Big Lots, Tuesday Morning and Hilco. So I think that it’s kind of – and his focus has been focusing on the big strategic acquisitions, we are really getting these opportunities that we haven’t pursued in a while, a large multi-million dollar purchases, the chance to buy something 50 million at retail for $5 million or something, that’s where Seth’s head is.

And I know, other than that, Dave and Stormy, what would you like to say.

Stormy Simon

Dave you have anything?

Dave Nielsen

No, I think it’s a nice change at Overstock, it’s always about change and doing better, finding new ways to do things being innovative and I support and I’m really excited to see. I saw that in Seth exactly what you described Patrick that a drive for those big deals and I think that is a great opportunity for us in the future.

Jonathan Johnson

Well, thank you Patrick, this is Jonathan if I may. I think these management changes are good for the company, I think everyone has a well defined role that they are well qualified for and things are running well at a management level. So, I think the reasons you gave are good reasons for doing it and I think we’ve been running this way things have been going well.

Patrick Byrne

Yeah. I really agreed. Over to you if you take everybody’s names of it and just look at the responsibilities and such it makes a lot of more sense to have this, it was a little bit to – much of it [inaudible] undefined and with me having too much roles and so forth. So I think this is a really nice improvement.

Lastly how do the three color membership in Q4 work out – worked out, okay. We’re testing different, we really like Club O. Club O is now I’ve said in the past, it’s up to single digit percentages, it’s now up to mid-teen percentages of our sales. I really don’t see why we shouldn’t be getting this to 20% or 25% by say this time next year. And we are testing different ways of driving that we’re testing different ways of driving that growth in members, it’s a super loyalty program.

I again saw a couple of things in the last quarter about people now are starting to noticed in the press, people are starting to see and say, well, especially given what Amazon promised doing, people are starting to cast around and write about other loyalty programs and coming at ours and recognizing. It depends on what you want, but I think ours is the best, I think ours is a wonderful loyalty program and it’s very generous.

But we want more, the behavior of people who by in to it is so good, we can afford to be that generous with them. You will be seeing some things’ analysis shortly and some changes, some innovations in Club O, some enhancements. But then this – but you will be seeing us also over the next year trying all kinds of different promotions what’s the right way. We’ve learned that it doesn’t really trigger. If you make the offer too cheap, it doesn’t trigger the right kinds of subsequent behavior. So you have to balance on the other hand you get more people. They have to balance, make some changes that get more people with keeping them such that it triggers the appropriate subsequent behavior. So, with that –

Jonathan Johnson

Patrick, I think you may have inadvertently hit the second question on updating on international expansion and then we’ve had one another question e-mail that which I’ll get to you after you talk about international.

Patrick Byrne

Okay, that was inadvertent, sorry. International expansion, we’re not going to name the countries, but we do see a way to improve this significantly over the course of the rest of this year and I – we are shipping to a 100 countries now. And we’ve changed the approach technologically of how we’re going about this as opposed to sort of a completely independent system, actually the supply we’ve – the supply chain system that we have overhauled, which is an – which is what’s been released in a week or 10 day, is a very advanced supply chain system. Will let us – we will provide the foundation for international.

So if international will, I think finally be able to start moving forward and get some momentum based on the new platform that we are unrolling in a couple of weeks. And you might see us actually in a couple of foreign countries by the end of the year. And Stormy do you want to add anything to that.

Stormy Simon

Not much. But I will say that we’d sound some ways to just be more efficient in improving the customer experience when shipping internationally and more well those out over the next few months. There is a team that is diverted their attention towards that and I think there is some easy wins just in the customer experience.

Patrick Byrne

Okay.

Jonathan Johnson

Patrick we’ve got one question e-mail then. What’s the company’s current thoughts on a share repurchase?

Patrick Byrne

They are all – I’m not sure how much I should say Jonathan, so why don’t you take that?

Jonathan Johnson

Well, okay. We think about it all time, it’s discussed almost every quarterly Board meeting. We do watch our – for this analysis, we watch where our shares trade and we look at it – we do look a husband cash week as we think there is a lot’s of buying opportunities out there, we also have a head quarter project underway. So, we’ve balanced the needs for the cash and the desire to husband cash against other value we think it would be – the company to purchase shares and look at it frequently. We haven’t committed to anything, when we do commit, we’ll certainly announce that what we’re required to do. Patrick, why – you add?

Patrick Byrne

Well said and only that I, yes I think of this all the time. I think of maybe it’s if the market doesn’t like us, maybe it’s time to do something big. But I think of this all the time. Okay, and you mentioned – Jonathan mentioned that there was a new facility was disclosed in our press release, don’t know if there is much more that has been made, things have been filed with the appropriate, how government –

Jonathan Johnson

Here is always Jon – we’ve announced that we’ve entered in some non-binding agreements to purchase land, we are doing the diligence on that land when we when we purchase the land and start building, we’ll make a disclosures as things get more firm.

Patrick Byrne

We have a great building design too that you’ll be reading about if we go forward with this project. And we think – go ahead.

Jonathan Johnson

It’s a killer. The design is really – the design is really good and will be great for our culture, great for our brand and good for – great for the business.

Patrick Byrne

Yeah, we have two building in Salt Lake. One on the East side, one on the West. The one on the East is the corporate center, the one on the West is a 650,000 square foot warehouse into which we have built a 1,000 square feet of office space. But that means that we end up with our office workers, 700 or 800 on each side separated. And so this would be a chance to consolidate and save money. Keeping the warehouse where it is of course, but and save money or at least be no more expensive and get about 80% more space. So, those are – that’s the end of our presentation. Let’s go to [inaudible] just on the crowd.

Jonathan Johnson

Jamie, I know we’ve got at least one person in the queue. Can you all open up the queue for questions, please?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Jason Mitchell from Bank of America/ Merrill Lynch.

Nat Schindler – Bank of America Merrill Lynch

Yes, hi. Actually this is Nat Schindler. Hi, guys. I want to ask you just a quick question. A couple of quick questions. First, weather it was a big deal to retailers, I wonder to know if you had any thought about how the poor winter weather affected e-commerce and how it affected you guys in particular? Then I have some other questions for you.

Patrick Byrne

Well, let me give that first one question to Dave.

Stormy Simon

I’ll actually take it.

Patrick Byrne

Okay.

Stormy Simon

I think in addition to the weather, the UPS and FedEx had some capacity issues, I don’t know that they’ve forecasted the amount of packages that would actually be travelling this holiday seasons.

Unidentified Corporate Participant

Wait, wait, wait. Are you talking about (inaudible) like Q1 or usually like Christmas or – or you are talking about Q1?

Nat Schindler – Bank of America Merrill Lynch

Well my question actually is more general than just Q1, it’s also – it’s useful to know how Q1 had affected you and particular the weather was very bad, but it was also bad in December. So, it’s more general question that how the weather has affected e-commerce?

Patrick Byrne

Okay, go ahead Stormy.

Stormy Simon

Yeah, I think that it was that the entire experience affected it in both ways, the weather and the capacity and the carriers. And so in Q4, that was definitely in December that compound about those issues affected the customers. And in Q1, I think when you are out 5 days of holiday, customers aren’t so anxious and they are more understanding and forgiving of the weather, but it doesn’t affect e-commerce and we – the response rates from FedEx, UPS, other carriers are getting more boots on ground and trying to move faster and more efficiently as well as Overstock.

We’re shipping out within 24 hours from different locations and just trying to – that weather we will be able to predict or overcome, but I do think with multiple locations and the efforts of the carriers that it will get better.

Nat Schindler – Bank of America Merrill Lynch

Do you know – is there anything any positive though specifically the people just prefer not go out to the stores, so they go to their computer or is that just not an effect that’s big enough or well unknown enough to be able to measure?

Patrick Byrne

There are so many things going on all at the same time, but to pinpoint anyone, that is a challenge. Look –

Nat Schindler – Bank of America Merrill Lynch

Okay.

Patrick Byrne

We’ve heard from many our partners that especially those in the fashion, soft goods, soft lines industries, apparel and footwear in particular that with the long endless winter, especially along the East Coast, many have seen challenging, the challenging first quarter because of that.

Stormy Simon

A bad weather can be our friend too, because I do think people stay at the computer as long as their power is on to shop when the elements are bad, but on the reverse of that, the delivery can get delayed.

Jonathan Johnson

And I think with e-commerce that has an advantage in some respects, because we’re not changing our changing our showroom floor unlike brick-and-mortars are. Brick-and-mortars get to a certain point in season and they have to have spring cloths out on the floor where we can continue, because we not limited by floor space, can sell winter coats into a long winter.

Nat Schindler – Bank of America Merrill Lynch

Okay. And then next question, I mean you continue to have, I know you are transitioning out customers that what grade customers and giving the better customers and it seems those are more expensive supplying which would kind of actually make sense. So, that’s an important transition, but if I really look at some of your trends, you haven’t seen any real customer number growth in basically a couple of years now minor. You have been though benefiting a lot from average order size growth. But if you look at this quarter, if you look at that trend, that curve line, it seems to have flattened out a lot. And I imagine that’s a lot due to the transition in mix of product. Is there anything else driving in that flattening out and how are you going ever kind of reaccelerate customer growth?

Patrick Byrne

Well I don’t think that we’re going to see the average order size go up. I think it has flattened out from here. And I think that we can do a little bit better in marketing, we see some areas that are still [inaudible] most of the areas tuned in, but we see a couple of more areas that we can improve.

One of the – now this is the way they balance each other. When your average order size is $110, as it was your conversation is let’s say – let’s take up number 2.5%, while one year average order size goes up to a 165, that grew from 110 – that automatically drops your conversion from say 2.5 to 1.8 or something, which means you are getting fewer new customers. Same around revenue, maybe higher revenue, but sort of the conversion on the average order size very inversely and then the conversion is what drives that number of new customers.

So, the fact that the number of customers and new customers has gone flat versus it is really to me an expression of the fact that when the average order size went up, the conversion didn’t get suppressed. However, we’ve got the – now the conversion moving the right way too. I think that you may have – I am not sure actually any big thing, I think that you will see the average order size stay about flat from here and I see on the other side, just continuing to find opportunities in the standard retail channels or maybe – or in branding you’ll see some new branding campaign roll-out very shortly, and just to keep tinkering way out of it like that.

Stormy Simon

Let me add, I just want to add that we’re everything home and the consumers know for home. But we are so strong in jewelry and other categories and even baby products, that I do feel like we can remind consumers that we are more than home, while we are dominant in home, there are many other things that I think the female consumer needs to be reminded she can shop at Overstock for.

Nat Schindler – Bank of America Merrill Lynch

Okay. And when you look at that average order size of $150 to $160, something like that. Is that usually a single product or is that multi-product to get there. So one thing we have seen there is a lot of research out there about a breakpoint on when taxes start to matter and that’s under a $100 most e-tailers don’t see an impact to the sales taxes changing, their sales tax tariffs changing, but over a $100 products customers shop around. There is a recent study, Ohio State just did one on Amazon’s recent moves. Do you see that as an issue with all the recent talk of really going after the sales tax?

Patrick Byrne

Well we do have – in front of you say that, we have about 1.6 items per order, that means the average items about a $100 right at your breakpoint, I saw that study on Amazon. It’s different than our experience I believe our experience – because we’ve had places like states or one point we had a warehouse in Indiana, we collected sales tax in Indiana and saw the effect and the effect was smaller, it wasn’t anything like this 10% that is being (inaudible) and it was good tiny, tiny, tiny people or essentially didn’t understand, I think it was measured in bps. Go ahead.

Jonathan Johnson

Go ahead, Patrick. Sorry to interrupt.

Patrick Byrne

In addition, we’re going to say, the taxes you made by Amazon more than it bites us. Jonathan, do you want to explain?

Jonathan Johnson

Well, yeah Amazon has basically become a big box retailer with footprint in many, many states. You just don’t go under its big box as it ships from its big box. And so it is collecting taxes in many more states. We’ve also found as we’ve – Patrick referenced that we had a warehouse in Indiana at one time and then of course didn’t. So we saw what the effect of collecting in Indiana and then the effect of not collecting in Indiana.

Since then, we’ve opened, we’ve created a footprint in Kentucky and Pennsylvania and the years or the difference between opening in Indiana and opening in those two new states, we’ve seen less of a tax effect than we’ve predicted from our Indiana experience. So, we were (inaudible) Ohio State study and noted internally that our experience was a little different.

Nat Schindler – Bank of America Merrill Lynch

I’ve actually heard from other retailers very different experiences than that study suggests as well, but I have heard that breakpoint of the $100 multiple times, mainly about that people start to care when it gets to be an expensive product. But thanks for that.

Patrick Byrne

Thank you, Nat.

Jonathan Johnson

Jamie, are there other questions?

Operator

(Operator Instructions). The next question comes from Scott Tilghman from B. Riley.

Scott Tilghman – B. Riley

Yea, thanks. Good morning.

Patrick Byrne

Hi, Scott

Scott Tilghman – B. Riley

There were few things I wanted to touch on just related to your comments during the presentation and also following up a little bit on what Nat was asking. And the first is with respect to your top-line comments that revenue growth should probably tick up through the course of the year from where it was in first quarter. Obviously part of that is the role forward of the last week in capturing that in second quarter. But with the order size assumption, you are saying flat where do you expect the traffic driving to come from or do you think it will be more frequent orders from the existing customer base?

Patrick Byrne

Well, that’s always frequent orders, Club O is – Club O behavior is so much better and as we get more people into Club O, that takes care of some things. We’d also see opportunities – for example last year, Google introduced a significant algorithm change and it bid us for a couple of months, we figured our way through it. But as we lap that, which we start in a couple months, that itself creates growth versus last year. And we’re also – we have dedicated teams now in each marketing and each channel in marketing, they keep on finding new ways whether it’s affiliate marketing which we’re pretty good at. We used to be – actually we’re really good at now in growing – we take keyword just like that. We keep on having small technological breakthroughs which help get us 5%, 10%, 15%.

So it’s just hammering away at those. Also I think we can do better on our branding campaign. I feel good about a new one that’s coming out very shortly. I think we can do better there. Stormy, what else would you want to say?

Stormy Simon

I think Dave is.

Dave Nielsen

I’m glad you mentioned the branding campaign. Patrick we’re really encouraged by what we’ve got keyed up for third quarter and beyond is when we will be releasing that, but we think there is a lot of new customer opportunity, new exposure, new impressions. We think we have a great product at Overstock.com and we are focusing on getting more of our customers or more of the country looking at us and knowing about us and so it maybe what we continue on was some great marketing campaigns on the net, there is some real opportunities for just brand, Overstock brand awareness and brand exposure that we are working towards.

Stormy Simon

I’d add on mobile presence. We (inaudible) the past couple years with a real mobile app that was engaging and sticky. And I think we have developed one that is exactly that, a lot of our consumers are, most consumers are browsing on their mobile phone and we’ve made it easier to check out. We have little things coming up like gift registries, which are definitely ways to attract new people. We also have some creative ways that will be coming out in this quarter, affiliate type marketing that should drive new traffic. So I definitely think we are expanding our reach and our goodwill messages of pet, world stock and telling those stories a little more or a lot more should drawn a new crowd.

Dave Nielsen

Our social platform is another way that we are putting a lot of energy into right now.

Scott Tilghman – B. Riley

That’s helpful. One of related notes the sponsored search costs have been up for the last few quarters. Do you think that trend will continue or is there a point where you overlap it and the margin pressures that you use?

Patrick Byrne

Well, actually Google’s cost per click, that was dropping a few percent. Did I get that wrong?

Scott Tilghman – B. Riley

You called out in your release that your sponsored search costs were up, so that’s why I asked the question.

Dave Nielsen

Sponsored search that I gave. Patrick may I, sponsored search costs are up and as one would expect as more and more people jump into this, it’s the market the costs of those clicks continues to go up. However, much like Patrick mentioned, there are always curve balls that come at us and we’re innovative, we find ways around them, we find ways to optimize natural search and there are other channels that we are working on feverously to offset those costs.

Unidentified Corporate Participant

And I’ll go back to Club O, Club O is so powerful. For us, it’s just a matter of cracking, but not to have it. I think I think we’ve got to it to be a more of our customers shift into Club O, but Club O and mobile are both growing handsomely and mobile is growing the fastest of all. And then actually reach the point where there are significant enough part of their business, of our business that their growth now really does start adding something to our overall growth.

Scott Tilghman – B. Riley

And it seemed like something that would slowdown, but I wanted to ask nonetheless since you specifically called it out in the release. Related to the weather questions from before one other things we saw with a number of the e-commerce players was a change in pace with the slowdown in December that stayed slow in January and picked up in February and March and that’s according to a lot of the third party data. I was wondering if your sales pace sort of follow trend there?

Unidentified Corporate Participant

I don’t think so. I think that we came up with Q4 in a bit of a (inaudible) and that it more accelerated – but that it accelerated through, but it slightly different than what you just gave. Dave or Stormy, do you want to add to that?

Unidentified Corporate Participant

We did not see a slide throughout the quarter, if anything slight improvement week-over-week as we continue through third quarter.

Scott Tilghman – B. Riley

Right, that’s what I said that there is a slowdown in December of it was little softer than the before, so it sounds like the first quarter –

Unidentified Corporate Participant

Yeah, that is we did not – that is –

Scott Tilghman – B. Riley

Right. And then the last thing I wanted to touch just in terms of the operating income. I won’t call it guidance, but commentary. When you look at last year’s numbers, are you including all the different variations of legal fees or are you stripping this out when you look at the comparisons on a year-over-year basis?

Robert Hughes

No, I was including the legal fees in the operating income.

Scott Tilghman – B. Riley

Okay.

Robert Hughes

That included the tax effect.

Scott Tilghman – B. Riley

Okay, thank you

Robert Hughes

Okay, thank you.

Jonathan Johnson

Patrick, we have another question e-mailed in, you may want to answer. And it’s from a long-time shareholder. What gives us confidence that we can grow contribution in double-digits?

Patrick Byrne

Well, we see where we are now for example as one of things indicates that, I guess in terms of it’s the industry, our industry the pure play industry is really probably growing at about 7% to 10%, some people say higher numbers, but it’s really Amazon’s higher hired 15 to 20 and most of the pure plays out here about are lower single-digit. And I think contribution and which obviously should grow as fast as the industry at least and contribution which you get there by not just going marketing, so which means contribution should grow as fast as the industry’s top line growth.

And in addition, on I continue to see I mean we’ve we – our history is a history of finding some low hanging fruit and midsized fruit and picking it and when we do, we get these surges and then the surges (inaudible) and then we find more fruit to pick. And I think we’ve never gotten, we’ve never been anywhere close to where we are now in terms of being able to spot the fruit and pick it technologically. And so I mean just look at the three or four grade big things, we have coming and I say well anyone or two of them work our growth should be well, well above the – or at industry or above.

So that’s why. Well I wouldn’t accept a plan that as sections we’re going to be willing less than that. If we’re growing a 1% for a full year contribution then we’re definitely doing something wrong. And I think just basic – getting up to 10% is just sort of basic, the bottom edge of what’s acceptable. And again I think it’s possible, it wasn’t that long ago we had it growing north of 20 and I think it’s possible for us to get it back there with a winter too.

Jonathan Johnson

Thanks Patrick. Jamie, I understand there is one more person on the line, we’re coming up on the hour mark, why don’t we take one more questions and be done.

Operator

We do have another question from Scott Tilghman.

Scott Tilghman – B. Riley

Thanks. And so I had a couple of follow ups. First on the international side. I was wondering if you can just comment on the number of available partners out there. You talked about moving into a couple of markets by the end of the year, but without a significant investment on your part. I’m curious as to how many your partners, your partners are out there you could work with to make that happen and it seems like it’s a pretty fragmented market and then on just a related topic in terms of inventory flow, I was wondering what you’re seeing in terms of in your supplier relationships, whether more are coming to you or if there are any defects – defectors out there?

Jonathan Johnson

Stormy or Dave?

Dave Nielsen

Okay I’ll take the supplier question. We see – we’ve seen an all time high number of new suppliers wanting to come and work with us at Overstock and signed on more in the first quarter than any other quarter. We have access to goods, our partners that we work with, the drop ship for us, have access to goods and we’re very encouraged when we see that growth.

Regarding international, I would say we’re evaluating many different types of partnerships as both Stormy and Patrick have alluded to, and there are several ways to go about this. Stormy is finding all kinds of incredible ways to improve the experience and cut costs in our current international business and then there are some partnerships that we’re evaluating.

Stormy Simon

There are some great marketplaces in these different countries that maybe an easy entry into that kind of partnership and then our current partner base that are able to currently we can shift anywhere almost anywhere just by shopping on our site. And we would – I’m not sure what you meant by partner in the international question, so there’s existing websites we can partner with in these different countries and then –

Scott Tilghman – B. Riley

Right, we’re…

Stormy Simon

Go ahead.

Scott Tilghman – B. Riley

Right, I wasn’t sure if we’re looking at marketplace type opportunities or there is I know there’s third party infrastructure companies that you could also partner with that you can essentially go live in another country with very limited upfront investment?

Stormy Simon

Yeah and we’re definite – well we’re evaluating both and I think the marketplace is a great way to enter.

Scott Tilghman – B. Riley

Perfect. Thank you.

Patrick Byrne

Thank you.

Jonathan Johnson

Thank you, Scott. We thank our shareholders for calling in and listening, we thank them for entrusting with their capital and we will continue to work to be good stewards of it. Patrick, do you have anything, you want to say before we sign out for the quarter?

Patrick Byrne

No, I do – well, yeah a little bit. When we are sensitive to we expect brought up before, I think Nat and we’ve started (inaudible) brought it up and I think we are sensitive to the home industry. We’d like to be a less sensitive and we will always but, keep it – that I have a confirm but I think it was not last time and we’ve looked into it yes with our good sensitivities, between our six sensitivities, between our business in home, housing starts and house sales and stuff like, it’s fair bit of our business is as people shift homes. But actually I don’t know no why I feel more – we’re confident, I know that I have felt it in a long time that we have really sharp business emerging here.

We are especially excited about the project that will be weak but, I have given away a little bin this goal. The project in (inaudible) and 10 days to all our partners is a really sophisticated supply chain system platform that competes favorably with the best out there in the industry and even has the possibility of being disruptive.

So I’m really quite kind of a confident, comfortable where we are. I wish we had a business like $100 billion a year – and I think we are making the investments – we’re making the investments with that goal in mind.

So with that, I am finished anyone else on the call else has, and you three have – something else do you want to say?

Stormy Simon

I’ve nothing else. Just thanks to everyone on the call.

Dave Nielsen

Thank you.

Jonathan Johnson

We will talk again in the quarter. Thanks.

Unidentified Corporate Participant

Bye

Unidentified Corporate Participant

Shareholder meeting in a month.

Jonathan Johnson

Shareholder meeting in a couple of months. Yeah.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again thank you for your participation, you may all disconnect. Have a good day

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