OSTK – Overstock.com: Behind The Freefall

The odds of going to the store for a loaf of bread and coming out with only a loaf of bread are three billion to one.”― Erma Bombeck

Today, we shine the spotlight on retailer Overstock.com, Inc. (NASDAQ:OSTK). The stock was a high flyer during the pandemic. However, since the beginning of 2022, the equity has lost over 80% of its value. Part of this is due to the company got distracted by its foray into blockchain/Crypto in late 2021. Overstock invested some $15 million in this tZERO initiative in 2022, but our analysis will focus on the retail side of the business. An article from October of 2021 goes into more details about this effort.

There were also big changes on the core retail side of the business in 2022. Can the freefall in the shares be arrested in 2023? An analysis follows below.

Company Overview:

This online retailer is headquartered just outside of Salt Lake City, UT. The company offers goods such as furniture, décor, area rug, bedding and bath, home improvement, outdoor, and kitchen and dining items. 2022 was a transformative year for Overstock as leadership completed the removal of all the non-home merchandise items from their site and increased assortment of home-related products by over 50%. While this contributed to a large drop in sales in FY2022 (which also wasn’t helped by a significant deterioration in the housing sector), the company enters FY2023 as a more focused retail concern. The stock currently trades around $19.50 a share and sports an approximate market capitalization of $875 million.

Fourth Quarter Results:

On February 22nd, the company posted its fourth quarter numbers. They were not good. Overstock had a non-GAAP loss of four cents a share, the consensus was looking for losses to be half that. Worse, revenues fell approximately 34% from the same period a year ago to just under $405 million, more $40 million below expectations.

Management tried to highlight some positives:

Average order value for the quarter was $215, an increase of 4% over 4Q2021. Net revenue per active customer over the past 12 months was $374, an increase of 9% year over year. Over half of the company’s overall orders (52%) are now coming from mobile devices as well. For FY2022, the company had a net loss of $35 million as sales dropped 30% on a year-over-year basis to $1.9 billion.

Analyst Commentary & Balance Sheet:

Since fourth quarter numbers were posted, Bank of America ($19 price target, down from $23 previously), Raymond James, and Barclays ($19 price target) have all reissued Hold/Neutral ratings on the stock. D.A. Davidson ($91 price target), Wedbush ($26 price target, down from $42 previously) and Piper Sandler ($29 price target, down from $34 previously) have all maintained their Buy/Outperform ratings on Overstock.

Approximately 13% of the outstanding float in these shares is currently held short. Two insiders, including the CEO, purchased just over $300,000 worth of shares in the fourth quarter of last year collectively. So far in 2023, several insiders have sold just over $140,000 worth of equity in aggregate.

The company ended FY2022 with just over $370 million worth of cash and marketable securities on its balance sheet against nearly $35 million of long term debt after posting a net loss of $16 million in the fourth quarter. Overstock bought back some $80 million in stock (at higher prices) during the fiscal year. The company has approximately $20 million left on its existing stock purchase authorization.

Verdict:

The current analyst consensus has the company losing 15 cents a share in FY2023 as revenues fall in the mid-teens to just over $1.6 billion. Analysts’ project revenues will rebound in the mid-single digits in FY2024 and losses will be cut in half. Given the current uncertain economic outlook, I would take all analyst projections in the retail space with a significant grain of salt.

It is hard to get too excited about Overstock’s future until we see more signs of a turnaround at the beleaguered retail concern. I personally wish management would have used its cash hoard to extinguish all debt in 2022 instead of heavily buying back its own stock, which is an easy call in retrospect.

Overstock’s initiative to become a ‘home-only‘ online retailer play is a prudent move in my opinion. The company should benefit over time as more and more of this space migrates to the online channel. That said, the timing of the move was unlucky as it happened as average mortgage rates more than doubled in 2022, which proved to be a major headwind to the entire housing sector.

Unfortunately, higher rates are likely to be with us for a while as the Federal Reserve continues its efforts to squash surging prices throughout the economy. With the average consumer losing buying power to inflation for 23 straight months now, the retail sector is likely to remain under pressure in FY2023. Overstock’s fortress balance sheet will ensure it gets through these challenges as a going concern. However, until fortunes improve for the consumer and housing sector, the stock is likely to continue to underperform the overall market.