Overstock.com Inc. Reports Operating Results (10-Q)

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Oct 25, 2012
Overstock.com Inc. (OSTK, Financial) filed Quarterly Report for the period ended 2012-09-30.

Overstock.com, Inc. has a market cap of $260.3 million; its shares were traded at around $11.39 with and P/S ratio of 0.3.

Highlight of Business Operations:

The allowance for returns was $6.3 million and $10.9 million at September 30, 2012 and December 31, 2011 respectively. The decrease in allowance for returns at September 30, 2012 compared to December 31, 2011 is primarily due to decreased revenues mostly due to seasonality.

We expense the costs of producing advertisements the first time the advertising takes place and expense the cost of communicating advertising in the period during which the advertising space or airtime is used. Internet advertising expenses are recognized as incurred based on the terms of the individual agreements, which are generally: 1) a commission for traffic driven to the Website that generates a sale or 2) a referral fee based on the number of clicks on keywords or links to our Website generated during a given period. Advertising expense is included in sales and marketing expenses and totaled $12.8 million and $11.7 million during the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, advertising expenses totaled $37.0 million and $35.9 million, respectively. Prepaid advertising, which consists primarily of prepaid advertising airtime, (included in Prepaids and other assets in the accompanying consolidated balance sheets) was $2.1 million and $1.4 million at September 30, 2012 and December 31, 2011, respectively.

Revenues in Q3 2012 increased 7% compared to Q3 2011. We continued to see an increase in the number of unique visitors to our website and average order size. These increases more than offset the impact of fewer customer orders due to lower conversion rates. Gross profit increased 21% compared to Q3 2011 primarily as a result of 7% revenue growth and a 220 basis point expansion in gross margin. Sales and marketing expenses remained flat at 5.8% of revenue in Q3 2012 compared to Q3 2011. As a result, we had a 29% increase in Contribution (see Non-GAAP Financial Measures below for a reconciliation of Contribution to Gross Profit) compared to Q3 2011. Contribution margin was 12.4%.

Our fulfillment partner business continues to make up a large percentage of our total revenues, expanding to nearly 87% of total revenue in Q3 2012. As a result, we are converting revenues into cash on average nearly seven days before we pay our suppliers. This has reduced the capital requirements needed to operate our business, and has consistently helped us to generate positive operating cash flows on a trailing twelve month basis for the past several years. Our working capital improved from $(14.1) million at December 31, 2011 to $(4.5) million at September 30, 2012.

Total revenues from international sales were $2.3 million and $2.2 million for the three months ended September 30, 2012 and 2011, respectively and $6.6 million and $6.2 million for the nine months ended September 30, 2012 and 2011, respectively.

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