Overstock.Com Solidifying Its Retail Safety In The Long Run (NASDAQ:OSTK)

Overstock.com (OSTK) has pushed new highs again to end off an outstanding July after closing higher in 19 of the past 20 weeks, with shares up nearly 3,000% in that time-frame. Overstock is one of the best performing stocks since March, and while shares could still be set to move significantly, Overstock has significantly improved its financial standing and is likely to see long-term benefits from the recent standout quarter.

Overstock posted record quarterly revenue, and its first profitable quarter in a long time, for the most recent quarter as the company witnessed the effects of the shopping-at-home trend within the e-tail sector. Revenues for retail reached $767 million and blockchain revenues added another $15.5 million to that figure, representing a ridiculous 109% YoY increase in revenues.

Aside from the record revenue, Overstock also showed strength across the board within the earnings release – gross margins improved, and adjusted EBITDA grew over 400% to just above $50 million. Expenses also declined as a percentage of revenues – Overstock was able to deal with the influx in revenue without spending significantly more than it had last quarter.

Source: Investor Presentation

Now, revenues doubling QoQ again for Q3 does not seem too likely, as the online shopping trend is likely to have cooled since the previous quarter, and scaling up to $1.5 billion in quarterly revenues just seems out of the picture for Overstock, as it has yet to post $2 billion in annual revenue (though TTM revenues are likely to beat that mark).

Even if revenues are not too likely to grow at the same rate as before (but still grow nonetheless), Overstock has added more than enough strength to its balance sheet, and looks to be setting itself up nicely to hold on to its newly minted top 5 status in the online home furnishings market.

Overstock has witnessed more monthly visits (almost 50 million), over 200% growth in new customers, and an increase in repeat purchase rate from new customers. Although only Wayfair (W) is a near match to the business model, Overstock is in a much better financial position than Wayfair (even from last quarter – read previous analysis on the two here).

Source: Investor Presentation

Even so, all of these top 5 companies occupy a different niche within the home furnishings market – Walmart and Target are more towards the discount/value side while Amazon has a bit more of everything (up to higher prices), while Wayfair and Overstock are more on the style and ‘expertise’ side, albeit at different price ranges.

As the economic reopening progress is stagnant for the most part – some states are still facing record cases, while others are no longer reopening at the same pace as last quarter and continuing to roll back measures, e-tail and Overstock will still see benefits as traditional brick-and-mortar furnishing stores either face less overall traffic or more restrictions.

And as Overstock continues to see benefits from new customer visits, repeat purchasing, and more traffic diverted to online e-tail instead of to brick-and-mortar stores, it should continue to bolster its balance sheet, which has made great progress since last year.

Source: OSTK Financials

Q3 2019 was Overstock’s low point in terms of balance sheet strength – cash and investments were below $100 million, while the gap between current assets and current liabilities hit its widest point. At the end of Q1 (column Mar-20), Overstock was already showing signs of balance sheet strengthening, as net income inched closer to quarterly profitability. Cash and investments were up ~75%, and current assets grew quicker than current liabilities.

Per the most recent quarter, Overstock has hit quarterly highs in all but shareholder equity and long-term debt, as the company had to take on debt during the previous quarter to boost cash. And although having $43 million in debt looked quite daunting in Q1, when cash reserves were relatively low, that’s not so much the case now.

Overstock has nearly quadrupled its cash and investments since Q3 2019, and has more than doubled that figure since Q1. Current assets have nearly doubled, and Overstock finally has positive working capital for the quarter. Debt is not so much an issue, as the interest expense of $0.6 million leaves more than enough coverage; even with asset coverage, Overstock has over three times its total debt covered.

If Overstock continues to find strength due to the overhanging trend within e-tail as the major channel for purchases during the current quarter, a second profitable quarter could be on the way. With that possibility, Overstock can continue to hold cash, and near the half-billion mark for cash and investments by the end of the year.

But even if channel strength doesn’t continue to the end of the year, Overstock has shown a consistent trend with repeat purchases from new customers, which signals customer satisfaction. Now, whether repeat interactions and purchases are stemming from Overstock’s prices, selection/variety/availability of items, shipping, etc., could be hard to tell, but overall shows that Overstock is likely to continue seeing traffic even after stores start to reopen in full force.

Penetration of the online furnishings market looks to have taken a large jump, but had already been growing quite steadily before then. But penetration is not exponential, and will never be – the market is full of players, and once a fairly large market penetration happens, there are less available customers to lure in. But if penetration growth starts to slow, Overstock should not see an adverse effect to revenues due to repeat interactions in the customer base it already has established.

In a worst-case scenario (Overstock losing market penetration/revenues falling in the upcoming quarters/net losses resuming), Overstock still has all the tools it needs to be safe financially. It can cover long-term debt, it no longer is struggling to cover its current liabilities, and cash on hand is much higher. While it would be harder to add to its cash balance, and would need to spend some to cover its liabilities if losses do resume, the cash outflow would not be extremely large, giving Overstock a long runway to pick up the flow of business again.

Looking back to March, Overstock was nearly in a different league when it comes to financial strength and earnings power. Revenues were pretty much down consistently YoY each quarter, but net losses shrinking each quarter were a small sign of hope. And Overstock has capitalized on the current situation extremely well.

Overstock has finally pushed a quarterly profit and saw revenues double YoY. Going in to August, shares could have been propelled a bit past ‘fair’ value from optimism on such a strong quarter as well as the optimism within the e-tail sector as a whole, and could see some consolidation or a pullback as the rally cools off a bit – going 19 out of 20 weeks higher is no small feat, and should be tread carefully. But long-term signs of positivity still linger, even if the share price looks too high; cash has grown significantly, positive working capital has finally appeared, debt is covered easily, and profits could be on the horizon again. Should Overstock continue with its solid execution (posting YoY increases in revenues, more profits, strong margins, and positivity on the customer interaction fronts), shares could easily continue to move higher by the end of the year, and $100 could be an easy target for shares to hit.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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