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Overstock’s 4Q17 Margin Performance Hit as Expenses Escalate

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Mar. 22 2018, Updated 9:30 a.m. ET

Subdued margin

Overstock reported a 4Q17 gross profit of $85.8 million, which fell 12.5% compared to 4Q16 primarily due to lower revenue. Despite a heavy promotional environment, the company’s gross margin expanded 20 bps (basis points) to 18.8% on account of a favorable product mix (higher-margin home and garden products) and higher marketplace sales.

The company’s total operating expenses rose 10.3% to $108.5 million in the quarter driven by higher sales and marketing and general and administrative expenses.

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Overstock’s sales and marketing expenses rose 12.7% to $54.5 million as it ramped up its marketing spending (television, sponsored search, and display ads for social media). Its general and administrative expenses rose 12.3% to $24.1 million driven by higher staff costs. These higher staff costs, coupled with higher technology license and maintenance costs, also led to a 4.9% increase in technology costs. Subsequently, the company’s 4Q17 operating loss ballooned to $22.7 million compared to its operating loss of $342,000 in 4Q16.

In 2017, Overstock’s gross margin expanded 111 bps to 19.5% driven mainly by a favorable product mix (higher-margin home and garden products). Going forward, margin pressure is likely to continue as the company increases its digital marketing expenses to retain market share as other e-commerce retailers step up their digital marketing spending.

Peers’ performances

In 4Q17, Shopify (SHOP) reported an adjusted operating income of $11.6 million compared to its adjusted earnings of -$0.8 million in 4Q16.

In 4Q17, eBay (EBAY) reported an adjusted operating margin of 31%, a contraction of 100 bps on a year-over-year basis. Its margin was marred primarily by unfavorable foreign exchange rates.

In 4Q17, Wayfair (W) reported an operating income of -$67.7 million compared to its operating income of -$43.8 million in 4Q16. Higher operating expenses offset the benefits of rises in its top line.

In the next article, we’ll take a look at Overstock’s bottom line performance.

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