Beyond, Inc. (NYSE:BYON) Q4 2023 Earnings Call Transcript

Beyond, Inc. (NYSE:BYON) Q4 2023 Earnings Call Transcript February 21, 2024

Beyond, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to Q4 2023 Beyond, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. [Operator Instructions] Please be advised that today’s call is being recorded. I would now like to turn the conference over to Adrianne Lee, Beyond’s Chief Financial and Administrative Officer. Adrianne?

Adrianne Lee: Thank you, operator. Good morning, and welcome to Beyond’s fourth quarter and full year 2023 earnings conference call. Joining me today on the call are Executive Chairman, Marcus Lemonis, CEO of Bed Bath & Beyond, Chandra Holt, and CEO of Overstock, Dave Nielsen. Today’s discussion and our responses to your questions reflect management’s view as of today, February 21, 2024, and may include forward-looking statements, including without limitation, regarding our future goals, performance, profitability and financial results. Actual results could differ materially from such statements. Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2022, and in our subsequent filings with the SEC.

During this call, we’ll discuss certain non-GAAP financial measures. Our filings with the SEC, including our fourth quarter earnings release available on our Investor Relations website at investors.beyond.com contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management’s prepared remarks, we will open the call up for questions. With that, let me turn the call over to our Executive Chairman, Marcus Lemonis.

Marcus Lemonis: Well, good morning, and welcome to the first Beyond earnings call into 2024. I am really honored to be here and I understand the gravity of this opportunity. Over the last 75 days, we have made substantial progress, laying the foundation for material growth, a differentiated business model and improved customer retention and an affinity focus with our customer. Our goal is to take a simple commodity transaction and turn it into a trust transaction. We realize that’s going to take time, but we are going to lay the foundation for it. Positive transactions with frequency with our Bed Bath & Beyond brand, we’ll create trust and trust will create our ability to sell the bigger ticket items from Overstock to more complex products and services from Beyond+.

As many of you know, we’ve gone through both a management and company restructure in the last 75 days. Yesterday, we announced management changes, which provide clear direction on the two brands and position us with a leadership team that is now aligned with shareholders on incentives and driving value. Adrianne, Chandra and Dave are the three leaders whom I trust to lead the day to day operations with full P&L authority and responsibility. They bring expertise, vision and the change management skills that this company needs to drive results and evolve this business. You’ll be hearing from each of them today in both prepared remarks and the Q&A. One thing you can count on going forward is better communication, especially related to our vision, better results and the clear path forward.

That vision lands squarely on providing our customers ideas, inspiration and information in addition to the products and services they need to unlock the value of their household. That focus is centered around the four walls of their home extending to the four corners of their property. To begin this transformation, we feel like we have an unbelievable amount of low-hanging fruit at this company. As an example, we know the most valuable tangible asset we own is our database of consumers. We know that improving the quality of that database drives up conversion and brings variable costs down. Much to my delight, our database is massive with over 150 million records. However, to improve efficiency and profitability, we’re going to invest in cleansing, deduping it by household and instituting a more efficient segmentation strategy.

We have brought in both external leading firms and subject matter experts to create our gold standard of that database now. The implementation of that database across the modern day CRM will improve conversion and materially reduce inefficient marketing spend. I believe this simple strategy will reduce the company’s marketing expense as a percentage of revenue by anywhere from 0.5% to 1% annually, better than last year, a number that we know we have to reduce materially over the next 24 months. Beyond will have one purpose: to unlock the home’s potential for both homeowners and renters, giving us a chance to expand the lifetime value of each customer we establish as a relationship. We believe this will drive growth and profitability. While a utopian state would be to create the AAA of the home, a true affinity model, providing both products and services that grow the lifetime value, expanding and growing our core business is where our laser focus is.

That starts with generating core revenue and delivering better margins. Our primary focus this year is to achieve $2 billion in sales, a material increase from 2023, and follow that up with achieving a run rate of $3 billion by the end of 2025, all while sequentially improving margins over that period back to the 20%-margin-plus level. Those two factors, coupled with material SG&A reductions, will result in a profitable run rate by year-end 2024. We believe the bridge and building blocks to achieve that are clear and the team is going to walk you through that bridge shortly. Before I turn the call over to the team, I wanted to provide a short summary on our 16-company Medici portfolio, a non-core asset that many holders have requested an update on.

As a reminder, in April of 2021, our company entered into a limited partnership agreement with Pelion Ventures in Draper, Utah to manage the Medici portfolio. This partnership came with an annual management fee in addition to upside deal economics in exchange for them nurturing these companies and building value. While we are wildly excited by the prospects of a few of them, the overall performance has not been as good as we think it could be. We intend to increase our communication with these respective companies and work closely closer with Pelion to modify the relationship in a way that singularly unlocks value and hold parties accountable. We do believe there are a few companies that could surprise and delight all of us. We’re firmly committed to delivering updates quarterly.

I’ll now turn the call over to Dave.

Dave Nielsen: Thank you, Marcus. 2024 is a pivotal year for the company as we lay the groundwork for our new strategic vision and work toward a return to profitability. We have a roadmap to launch new home-centric websites and value-add services over the course of the year to acquire new customers, improve our retention of them and ultimately drive down the cost of customer acquisition. As a proof point to the above strategy, this dynamic was evident in Q4. Leading up to and during the holidays, we saw a higher number of repeat customers compared to the same period last year. This is important as we work to improve our marketing efficiency and build loyalty among the new acquired customers. Some may say our repeat rate increased because of the categories we leaned into like bed, bath, kitchen and dining, and that may be true.

But we see this as a benefit to the home-centric portfolio of businesses and see Bed Bath & Beyond as a flywheel to power customer acquisition for the entire portfolio. On the third quarter earnings call, we told you that we would relaunch Overstock in September of 2024. Our team found a way to pull that launch date up significantly working with my new best friend Harley Finkelstein, President of Shopify. We are planning to relaunch Overstock in roughly five weeks. This is significant because relaunching it will mean we can immediately begin to build accretive business with the Overstock customer in furniture, area rugs, patio and outdoor, among other categories. We’re also planning to relaunch the jewelry business, which was once $100 million-plus business annually among other product lines that the Overstock customer was drawn to over the years.

Pulling up the relaunch of Overstock has the potential to drive higher average unit retails, improve overall margins and meet customers where they are shopping for the items we know they want, which is a far more efficient way to leverage each of our iconic brands and drive marketing spend efficiencies. Adrianne will outline our targets as she walks you through our margin improvement plan for 2024 later on the call. As we look to the future, we believe we can maximize profitability with a larger e-commerce revenue stream underpinned with multiple brands, layering value-added services and operating a more variable cost model. While we have a lot to improve, there is also a lot of good work happening. We are thrilled with the fact that we exceeded our expectations and are sitting today at nearly 6 million active customers, a 20% improvement over last year.

November through today, revenue growth has remained positive, the first time since 2021. We’re encouraged to see our work to improve vendor relations begin to bear fruit. Vendor partners are recognizing our improved sales performance in the Bed Bath & Beyond power categories of bedding, bath, kitchen appliances, cookware and dining, just to name a few, and are working with our merchandising teams to increase breadth and depth of assortment to help us drive sales and improve margins. During Q4, our new partner additions grew by 74%, with more than 200 new partners added. In fact, as we turned the page on 2023, more than 100 additional partners were under various stages of contracting. As you can appreciate, there is an incredible amount of work being done by our team.

They are excited and engaged. Our strategic vision is aimed at increasing our engagement with customers by staying connected with them beyond a single sales transaction. It is our mission to help customers unlock the potential of their home. We believe these actions will enable us to achieve our long-term aspirational goals, or what we internally refer to as our North Star, 10 million active customers, $250 average order value and a 2 times annual order frequency. Before I wrap up, I want to give a warm welcome to Chandra. I’m thrilled we’ve added such a terrific leader and experienced retail professional to our team. With that, Chandra?

Chandra Holt: Thanks, Dave. I joined the company because I’m passionate about Bed Bath & Beyond and I’m driven to reestablish its category dominance. It’s my goal for Bed Bath & Beyond to be a leader in unified commerce. We aim to create a customer experience that is more seamless than today’s traditional omnichannel retailers. We also plan to introduce tailored experiences for purchase occasions that are adjacent to our core Bed Bath & Beyond offerings, such as Baby and Beyond, Kids and Beyond, College Living and wamsutta.com. Baby and Beyond is expected to be our first specialized experience and we are excited about the upside because we know many Bed Bath & Beyond customers frequently cross shop the baby category. Wamsutta is another exciting initiative.

At its peak, Wamsutta was a top bedding and textile brand in the U.S. In the coming weeks, I plan to partner with suppliers and designers to set the new vision for Wamsutta. I look forward to modernizing the marketing and creative processes through a partnership with a powerful and influential female leader that will serve as a Creative Director and will be announced at a later date. Across all brands, we seek to build and curate assortment to improve quality and provide unprecedented value for our customers. We have significant opportunities ahead of us with our robust portfolio of brands and I look forward to leading the charge and positioning the business for growth and interacting with our investment community. I will now turn the call over to Adrianne.

Adrianne Lee: Thank you, Chandra. I’m going to start by reviewing some key financial results to provide context into how we’re thinking about our path forward. Revenue declined 5% year-over-year in the fourth quarter and grew [3%] (ph) sequentially. Improvement in our revenue trend was led by 9% growth in active customers, driving 35% growth in orders. Average order value declined 30% year-over-year due to the sales mix skewing to lower AUR categories. November and December revenue combined was up year-over-year and we have seen that trend continue. There is measured progress being made and we are focused on carrying the momentum through this year as Chandra leads our team in curating a better assortment for our Bed Bath & Beyond brands and Dave leads the relaunch of our once $1 billion-plus Overstock site.

Gross margin landed at 15.6% for the quarter, a 650 basis point decrease versus the same period last year. We believe this result is somewhat transient and was primarily driven by reigniting old customers, attracting new customers and educating and enticing them on a wider assortment. Increased discounting drove about 400 basis points. Welcome Rewards redemptions drove about 160 basis points, and increased shipping cost drove about 170 basis points of pressure. We are taking the following actions that are within our control to improve our gross margin profile: renegotiating freight rates; improving vendor relations for more favorable product costs; relaunching Overstock.com, which we believe will drive higher AOV; providing integration add-ons like product warranties and shipping insurance; reintroducing Wamsutta and other owned brands to complement the superior name brands we have assembled; and eliminating inefficient discounting.

The G&A and tech expense increase of $7 million was primarily driven by us booking approximately $6 million of discrete one-time item costs, primarily associated with expense reduction actions announced in December. All-in, adjusted EBITDA was a loss of $49 million. On a margin basis, this was a negative 12.7%, an almost 1,500 basis point decline year-over-year, with approximately 50% of the decline driven by gross margin pressure. In addition to our focus on improving gross margins, we continue to look for opportunities to reduce expenses throughout the P&L. We have identified a total of $45 million of annualized cost savings, which is expected to be fully annualized in the first half of 2025. This includes the $25 million cost reductions committed to in December and $20 million of incremental savings.

We expect to reinvest these dollars to continue to drive growth. I want to highlight that we have revised our executive team’s equity compensation to align it with stock price appreciation and revenue growth. This is meaningful as it incentivizes the team to push to our $2 billion revenue goal, make progress towards getting back to a 20%-plus gross margin, and continue to identify cost savings. Our reported GAAP EPS loss of $3.55 for the fourth quarter was primarily impacted by establishing a valuation allowance against our net deferred tax assets due to our recent operating losses and expected near-term pressure on profitability related to growing our customer file. Excluding the impact of equity securities, our building write-down and the valuation allowance, we reported adjusted diluted loss per share of $1.22.

Our balance sheet remains strong. On a net basis, we ended the year with a cash balance of $268 million. On our third quarter earnings call, we shared that we expected to spend $175 million on the purchase of Bed Bath & Beyond brand and subsequent customer acquisition strategies. We have spent about $100 million through the fourth quarter, and I expect that we will invest less in large part due to the key learnings Dave mentioned from the fourth quarter. Chandra and Dave are focused on growing our anchor brands and launching new products and services. These products are under various stages of launch. Our margin and cost saving actions are well underway. So, as far as expectations, we expect revenue to be positive year-over-year in Q1 with the goal of $2 billion for 2024.

We expect gross margins to be in the 16% to 17% range in Q1, with a goal for the full year closer to 20%. We expect the second half of the year to be profitable. There is work to be done, but I’m confident in our path forward. And now, I’ll turn the call back to Marcus.

Marcus Lemonis: Thanks, Adrianne. Before we get into the Q&A, I want to reiterate that we hope you hear loud and clear from us what we know the expectations are from you and what our standards are of ourselves. I’d like to now turn the call over to the Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Rick Patel of Raymond James. Your line is open.

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Q&A Session

Rick Patel: Thank you. Good morning, everyone. And congrats to Chandra, Dave and Adrianne on the new and expanded roles. I just had a question on just the low-hanging fruit that you touched on. So, you talked about database and — opportunities around the database and segmentation. Can you dig a little further on how to gain efficiency here? And when should we really start to see this initiative gain traction? Is it something that happens in 2024, or is it more of an out-year event?

Marcus Lemonis: So, this is Marcus. Thank you for the question. For me, when I look at a valuable asset like the database, understanding the construct of it and the cleanliness of it is probably first and foremost. And when we made the Bed Bath & Beyond acquisition, we picked up a very large database. But understanding what a large database looks like, it’s important to understand the quality of that database and the segmentation of it. So, putting people in the right categories at the right time, offering them the right products, improves efficiency. Today, in my opinion, we are basically just spraying the database with every single offer that we have. And we need to do a better job of understanding who that customer is, what their historical purchases are, creating some predictive logic around what their next purchases could be, understanding their address and their home better to understand size of property, square footage of home, number of rooms in the house and what the things are that are going to speak directly to them.

Too often customers forget to curate a message or an offer specifically to an individual consumer. And when they do that, they end up exhausting the database, creating fatigue and having people either not come back and do business or opt out of the relationship because they don’t feel like it’s customized to them. When you do these things, you should expect to yield more from that customer over a 12-month period. As Dave mentioned, our goal is to increase the frequency of visits to two and to expand the offering to them by looking to generate a higher AOV. The process has already started. We’ve engaged with a leading database provider in Acxiom. It is our expectation, within 30 days, we’ll have done the deduping of those households and then it will be implemented into our CRM.

This is a now task, not a tomorrow task. And the primary reason for doing it in addition to growing revenue is we need to take costs out of this company. This company cannot spend north of 13% as a percentage of revenue driving revenue. Every 1% is meaningful to the bottom-line and we take that seriously. In fact, at $2 billion, 1% represents $20 million. We know that when we look at a $200-plus million marketing budget, there has to be inefficiency in it. And it’s not about just trimming that expense. It’s about taking that savings and reinvesting it in growth. That is why we believe that by the end of ’25, we could be at a $3 billion run rate as we launch these other brands. So, it’s a now thing.

Rick Patel: And Marcus, can you talk about your assumptions for macro and the home product market as we think about the $2 billion goal for this year? Are you assuming things get better from here, or does it remain very challenging? Just curious how we should think about the market relative to the self-help levers that you can pull?

Marcus Lemonis: We expect the market to stay challenging and, quite frankly, have some headwinds. But what I think people are underestimating is the power that the Bed Bath & Beyond historical customer operated with. And what we learned in this entire process to be really candid is that shutting Overstock down was a fatal mistake. Because while we were able to win the buy box on selling large big items with high AOVs at Bed Bath & Beyond, we had to do that by buying the business. Overstock.com has built a legacy on selling those types of products. And when you try to convince people that a new brand is going to do the same thing, you lose them. Turning Overstock.com back on will not only allow Bed Bath & Beyond to expand its existing assortment and hone in on its historical legacy success, but it allows Overstock to do the same.

In bringing in and establishing separate CEOs for the Overstock brand and its family of products, and we’ll talk about that in a minute, and Bed Bath & Beyond and its family of products, we have an acute focus by each of them to manage their P&L, to establish their own vendors and to chart their own course to growth. The only mandate that exists in their collaboration is that I don’t ever want to see the same product on both sites. They’re tasked with establishing new vendors, new ideas and new pathways to find customers, all while ensuring that they’re adding to the overall company database, which allows us to monetize that customer through these other products and services in the recently launched beyond.com.

Rick Patel: Thanks very much, and all the best.

Marcus Lemonis: Thank you.

Operator: Thank you. One moment, please. Our next question comes from the line of Curtis Nagle of Bank of America. Your line is open.

Curtis Nagle: Great. Thanks very much for taking the question. I guess, the first one, just, Marcus, I’d love to dig into the $250 AOV target. Just kind of curious what, I guess, is assumed in terms of contribution from normalizing pricing and promotions? How much of that is contribution from new products like baby or new categories, I guess, cross-selling across brands? And then I guess services contribution, which I’ll have a follow-up question on that in just a second.

Marcus Lemonis: Yeah. So, I’m going to unpack that a little bit because I heard a question around the AOV. And then I’m — is that right? And then I want to separate out what we think the contribution of those other businesses are to the total top-line. Did I hear that right?

Curtis Nagle: Just contribution to total AOV, yeah, how do all those things factor in?

Marcus Lemonis: Yeah. So, AOV…

Curtis Nagle: [If you want to go] (ph) more broadly, that would be great, too.

Marcus Lemonis: So, AOV is really a function of mix. And when you look at the Overstock customer, the frequency that that customer visits the website is lower, primarily because there are larger ticket items, large furniture assortments, outdoor aboveground spas, big outdoor patio furniture and larger items that Overstock.com had historically really, really excelled in. When you look at driving overall revenue, you need the frequency of visits that Bed Bath & Beyond brings to the table, with common items from bed, bath, kitchen and dining along with other things that Chandra is expected to grow over time. What we really have learned is that if we can stay myopically focused on the premise that our job is to deliver products and services to everything inside of the four walls of the home and the four corners of the property, we then really understand which brand is going to actually execute that different part of each strategy.

Clearly, on the outside of the house, Overstock is going to lead that process with things like trampolines, aboveground spas, outdoor patio furnitures, outdoor kitchens and things like that. When you come inside, it’s clear that Overstock is going to be better at delivering large ticket items around furniture. Now that doesn’t mean that Bed Bath & Beyond can’t sell furniture? But if you look at the historical brand attributes, the consumer didn’t intrinsically think of them that way. And I believe what happened in the fall of 2023 is that when the company made the decision to shut down an Overstock, it believed that it could transition that large ticket high AOV consumer to Bed Bath & Beyond. And quite frankly, it didn’t happen. And anybody that had a brain would have known it wasn’t going to happen.

When you look at Bed Bath & Beyond and you look at those historical categories that had high margin and high frequency, it was obvious to us that we needed to lean into those things. So, when you look at growing customer count, well clearly Bed Bath & Beyond does that. When you look at increasing frequency, clearly Bed Bath & Beyond does that. But when you’re looking to drive AOV, you need the trust and relatability that Bed Bath & Beyond created to then have Overstock be able to convert that consumer in our database. We know that driving overall revenue and getting to this $2 billion number are essentially Lego building blocks. The core Bed Bath & Beyond business has to deliver. And you heard about adding new vendors and adding new relationships and eliminating distributors and picking up margin by having first cost dollars.

But we also know that, that particular consumer has life events, having a baby, getting married, going to college, buying their first home, whatever that may be. And Chandra is a world-class expert and has proven over several decades that she knows how to execute that quite frankly better than all of us that are currently here. That’s why we added her to the team. But when we look at driving to $2 billion, we believe that Overstock is going to fill that gap up. You heard Adrianne mention, Overstock was a $1.5 billion brand before Bed Bath & Beyond even showed up. Now it is true that there are some categories that both businesses played in. Overstock sold some bedding, off price bedding, but it sold some bedding, and it sold some household items.

But for the most part, that revenue was driven by other categories. I believe that splitting these roles, giving them full P&L responsibility, giving them the resources and the tools they need to grow their companies and improving vendor relationships will drive the gap that everybody seems to be so convinced that we can’t achieve. We’re telling you today and you can look at our pay plans and look at our stock incentive plans, we signed up for a program we believe we can achieve as opposed to what the historical model was where management was just taking bonuses and taking RSUs regardless of what the outcome was, we’ve all signed up for a program that we firmly believe we can deliver. In spite of the headwinds, it is our intention to aggressively grab market share.

And if you look at the P&L for the full 2024 year, we plan on returning to profitability by the end of the year on a run rate basis. We know the first two quarters are still going to be — we’re still going to be operating at a moderate loss. The first quarter, we expect that as we continue to build the database, as we get ready to launch Overstock, as we reengage with customers on a continued basis, we’re confident that that’s going to happen. Keep in mind, last fall, this company told you that it was going to take up to $175 million to reignite the brand. Dave and Adrianne and myself prior to Chandra coming committed that there was no way, no way we were going to spend $175 million. We believe that we will materially improve that statistic, but we know that launching Overstock was the simple silver bullet that quite frankly was obvious to us, but not obvious to others.

Curtis Nagle: Got it. Thank you, Marcus. That was really comprehensive. And just a bit of follow-up on the services angle. So, you talked a lot about trust, right? And driving purchases that either require, I guess, more intent or just things you’re not playing in. Where do you see — so I look at your site, you’ve got a couple of new businesses, mortgages, you’ve got home services business that is coming soon. In terms of plan to eventually get into $3 billion run rate, I would assume these things are kind of longer dated or just how do you see those things integrating, and I guess when do you think they’ll start contributing to the revenue?

Marcus Lemonis: Look, I have — yeah, I have been a public company CEO now for eight years and I have learned a lot of hard lessons. And one of those lessons is setting expectations properly around what could be achieved. And while we have an immense amount of enthusiasm about what we know we have transformed this company into, we don’t want investors and the people that we work for to be confused with any lack of focus on us delivering core revenue with improved margins with reduced SG&A. But let me be really clear about one thing. I did not join this company to be a peddler of products on the Internet. I joined this company because I am 100% confident that I will turn this business into the AAA of the home business. I’ve done it in other businesses.