Overstock.com's 10% Promise To Investors

| About: Overstock.com, Inc. (OSTK)
This article is now exclusive for PRO subscribers.

Rob Zenilman submits: On Overstock.com's Q2 conference call, Chairman & CEO Patrick Byrne commits to raising Overstock's contribution margin (gross profit minus marketing expenses) to 10% by the first quarter, up from the 6.8% just reported:

Patrick Byrne

...Here is something we call nectar. I think contribution margin is the official term, although people use contribution margin differently, but basically gross profit minus marketing expense. I would like to see this get over 10. When this gets over 10, we will have a nice real business. I do think that is possible...

Scott Devitt - Stifel Nicolaus

Finally, let’s see, fixed operating costs this year, at least in terms of my models, somewhere in the range of 12.5%, a couple of percentage points with that is a non-cash depreciation. On slide 12, your nectar, which I call contribution profit, 6.8% and Patrick said you hope to get it toward 10%, or at least that is when you think things start moving in the right direction.

I am a little unable to get that contribution profit expansion in percentage terms, kind of similarly to the prior question related to how you actually re-accelerate revenue growth without spending more sales in marketing dollars. Also, in terms of even if you were able to get it to 10%, how you can scale the fixed-cost structure so that you can actually turn profitable, because as you are growing at a slower rate, it is a lot more difficult to scale the fixed costs. That is all I have, thank you.

Patrick Byrne

Jason, do you want to say when you think that will be over 10%?

Jason Lindsey (President & COO)

I have not spent a lot of time looking at that number as I have looked at the projections over the next couple of years. I do not know off-hand when that hits 10%.

Patrick Byrne

I think it is over 10% in the first quarter. Was that you saying wow, Jason or was that…? I think that is going to be over 10% in the first quarter.

If it is over 10% in the first quarter, it can do better than that for the year, but I think we are about to see it...

Jason Lindsey

I think what all that means, Scott, is the way that gets over 10% in the near-term is there has to be a quick increase in margin expansion, and margin expansion can come definitely from selling more of the 20 that does the 80, and less of the 80 that does not do so much gross margin for us.

If our product mix does not really change that much, because remember, 80% of the sales is coming from this small 20, but we are able to eliminate the 80% of the stuff that does not sell that much but has a drag on margin, it could actually increase our margins dramatically, even though the product mix itself would not change that much.

I think, Patrick, what you are saying is it can get over 10% in several ways, but one of the big key ways obviously is your margins increase.

Patrick Byrne


Scott Devitt - Stifel Nicolaus

Thank you.

Patrick Byrne

Scott, hold me to that. Remind me in the first quarter of my commitment to get that over 10% by the first quarter.

Scott Devitt - Stifel Nicolaus

I will write it down right now, thank you.