Good day, and thank you for standing by. Welcome to the Overstock.com Incorporated's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Lavesh Hemnani, Head of Investor Relations. Please go ahead, sir.

Lavesh Hemnani - Head, Investor Relations

Thank you. Good morning and welcome to all Overstock's Fourth Quarter and Full-Year 2022 Earnings Conference Call. I'm Lavesh Hemnani.

Joining me on the call today are CEO, Jonathan Johnson; CFO, Adrianne Lee; and President, Dave Nielsen will be available for Q&A. A slide presentation accompanying today's webcast has been posted to our Investor Relations website and is available to download.

Next slide, please. Please review the important forward-looking statements disclosure on Slide 2 of today's presentation. The following discussion and our responses to your questions reflect management's views as of today, February 22, 2023, and may include forward-looking statements. Actual results could differ materially from such statements. Additional information about factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2021, and in our subsequent filings with the SEC.

During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC 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 for questions. To ask a question, please use a registration link available under the Events section of our Investor Relations website.

Next slide, please. During today's call, we will follow the agenda on Slide 3. And with that, let me turn the call over to our CEO, Jonathan Johnson.

Jonathan E. Johnson III - Chief Executive Officer

Thank you, Lavesh, and good morning, everyone. I'll begin today's call with an overview of the Overstock investment story and our progress since the pandemic began before asking Adrianne to discuss our Q4 and full-year financial results.

Next slide. Overstock has been on a three-year purposeful, strategic and transformational journey since I became CEO. We focused management on the retail business and transitioned Overstock to a 100% home-only retailer. This transformation coincided with the dynamic - a dynamic shift in consumer spending behavior within the furniture and home furnishings category. 2023 will be Overstock's first full-year as a home-only retailer [Phonetic] in our 20-plus years of being a public company.

The [Technical Issues] on this slide summarize some of the progress we've made over the last three years. During that period, we have grown revenue by over 50%, outpaced the expansion in the furniture and home furnishings total addressable market and consumer expenditures and gained market share. Notably, our home product assortment has more than doubled since we began our exit from non-home products in January 2021.

From an operational standpoint, our [Technical Issues] budgets found efficiencies in automation opportunities and took cost out of the business to ensure we achieve positive adjusted EBITDA for each of the last 11 quarters. We expanded gross margin nearly 300 basis points and adjusted EBITDA margin nearly 500 basis points.

Let me be upfront, progress we have made over the last three years does not erase the fact that our 2022 performance was below our own expectations. Revenue declined 30% year-over-year, resulting in a loss of market share. While we delivered positive adjusted EBITDA in each quarter of the year, our weaker top-line performance drove significant expense deleveraging even as our - even with our already lean organizational structure.

During today's call, I will share areas of opportunity that should get us on the path to improve our top-line performance as we continue to leverage our differentiated asset-light business model.

Next slide, please. We share this flywheel each quarter. It highlights our growth drivers, those efforts critical to supporting growth in the short and long term. While these key growth drivers are not new, we are always evolving underpinning of our drivers to improve performance. As an example, from an assortment standpoint, our internal data shows that more than a third of our revenue during the

Fourth quarter was driven by SKUs added over the last two years. Though our transition to 100% home retailer is complete, we know we still have a big assortment gap relative to competition. Our merchandising team has added more than 4 million new on-prem [Phonetic] SKUs from thousands of partners since the beginning of our [Technical Issues] to home-only. They continue to identify new opportunities that are helping to close the gap to competition. For example being our strategic decision to add a national brand in giftables during Q4, a category which outperformed in the quarter.

Mobile app adoption has grown rapidly, but we can still do better. We will continue to focus efforts to accelerate its growth. It is our best customer engagement platform, one with better order frequency. We're always working to improve customer retention. Earlier this month, we launched an exciting new loyalty offering, a new co-branded Mastercard credit card in partnership with Citi Retail Services. Come on this card launch - launch later into the call.

Improving product findability and how customers browse and engage with product pages on our site [Phonetic] is table stakes for any e-commerce company - any e-commerce retailer. Still, we can improve our search processing and results recommendation to deliver a better customer experience, and we're working on just those things.

None of these growth drivers is capital or resource intensive. All are aligned with our asset-light business model. All will [Technical Issues] our customers, increase [Technical Issues] frequency and market [Phonetic] share. While we continue to appoint managers of our balance sheet and income statement. We are confident that we have the right people [Technical Issues] in key positions to lead these growth initiatives.

Next slide. Overstock is uniquely positioned with significant white space available in the quadrant where home goods expertise meets Smart Value. This quadrant is so attractive that last year, many of our competitors, that had a glut of inventory started to look a lot more like us and drifted into our quandary. While this increases competition for a time, I do not believe their business models and balance sheets will allow them to offer Smart Value pricing over a longer period.

The furniture and home furnishings market is fragmented, with a total addressable market of over $400 billion. We believe we have an opportunity to gain share by sharpening our focus on our key growth drivers where Smart Value offering resonates with our customers and our pricing competency held up well during the fourth quarter, the quarter in which promotions started with - started earlier with competitors relying on deep discounts to stimulate demand and trying to sell-through extra inventory.

As I mentioned earlier, we went after [Technical Issues] giftable inventory as we look to take advantage of market share locked [Phonetic] by some of our competitors. We use our strong balance sheet to take some inventory exposure on national brands and categories we have not historically been strong in. This strategy was successful over the Cyber 5 period as we registered year-over-year growth on this inventory. In some cases, we sold through almost two-thirds of the acquired inventory during this five-day period.

While I usually don't talk about performance by category, I want to emphasize that we continue to work to grow our presence in the significant white space available to us. Our Renewed Home focus is enabling us to work with partners who we have not worked with in the past, supporting our efforts to drive market share growth.

Next slide. An integral element of our business model [Technical Issues] supports our efforts to execute [Technical Issues] key growth drivers is the strength of our balance sheet [Technical Issues] even as we navigated a difficult fourth quarter, which impacted our ability to generate cash, we managed to end the year with a relatively strong balance sheet. We exited 2022 with $371 million in cash and just $34 million in long-term debt, resulting in a net cash position of $337 million.

Having amenable debt, a strong cash position in this uncertain macro environment is a great tactical advantage. It allows us to focus on improving our core operations and pursue initiatives without relying on the capital markets. And it has been and will be a big plus for us as we continue to add new partner suppliers.

We repurchased shares in the fourth quarter. Through 2022, we've returned $80 million to our shareholders via share repurchases. [Technical Issues] during 2022, we made a $50 million direct investment in tZERO. Last month, we directly invested $10 million in GrainChain. We believe that both are promising Medici Ventures portfolio companies. More on each later.

Considering these investments and share repurchases, we've invested over $100 million or about 20% of our cash balance sheet since the beginning of 2022 towards value-driving initiatives for our shareholders.

Next slide. Our Medici Ventures portfolio continues to present a differentiated value opportunity for Overstock. It is still a key element in the Overstock investment story. Blockchain investments have made significant progress since we transferred active management of the portfolio to Pelion Venture Partners in April 2021.

Pelion has served as an excellent partner in advancing growth for assets in the Medici Ventures' fund. During 2022, three of the portfolio companies shown on the left of this slide raised additional financing at higher valuations. We believe each has potential meaningful long-term value for Overstock and its shareholders.

There were two of these companies shown on the right side of this slide in which Overstock chose to make a direct investment alongside Medici Ventures fund and/or Pelion Ventures. While we are not a venture capital fund, given our in-depth knowledge of these companies and their management, and the trust we have in Pelion as the general partner of the Medici fund, we believe that both these companies have such real potential for significant growth and we chose to double down on that.

During 2022, we made an additional $15 million direct investment in tZERO in a round led by Intercontinental Exchange. This coincided with tZERO's appointment of a new CEO, David Goone, who has experience creating exchanges and delivering against business objectives. tZERO continues to execute toward its goal of democratizing access to capital markets, aided by the appointment of a new CTO, William Andreozzi in early 2023.

TZERO revamped its web infrastructure and continues to add new issuers to its fully compliant securities trading platform. Earlier this month, tZERO enabled Aurox, a crypto software ecosystem to begin a crowdfunding campaign under the SEC's Regulation Crowdfunding, which allows qualified retail investors to purchase shares of Aurox. This feels like a major step in the democratization of capital raising in pre-IPO companies.

I know some may ask for my thoughts on tZERO shuttering its crypto wallet. tZERO was not built to be a crypto exchange and enabling customers to trade cryptocurrencies was never a core area of focus for tZERO. The crypto trading business was an adjacent activity designed to augment tZERO's focus on bringing unique digital and conventional securities to the market. From what I understand the crypto activity ended up not being accretive to tZERO's financial results or to its future direction.

In January, Overstock made a $10 million direct investment in GrainChain through a convertible note offering. It provides - rather GrainChain provides a software suite to farmer cooperatives that enables farmers to get paid 60% of the value of the commodity upon harvest and the balance upon successful delivery to the end customer. Farmers who don't use the GrainChain platform usually get paid up to 180 days after product delivery. So you can see why this is a game changer.

GrainChain has received high levels of customer stickiness once farmers try the platform. As a result, it has been able to grow relatively quickly over the last few years. 2020, the company [Technical Issues] has grown in an annual compound rate of 125% and revenue has grown nearly 400% [Technical Issues] differentiated technology, we expect GrainChain to become a market leader in tech space.

While I do not expect all our investments to be a regular occurrence, and the bar [Technical Issues] follow-on and investment is high, both these follow-on investments enable Overstock and its shareholders to participate [Techncial Issues] in the future success of tZERO and GrainChain in a greater way.

Next slide. Now for a brief update on recent corporate events. Last spring we introduced our forward or future of remote work and reentry design plan. At that time, most of our employees worked remotely almost all the time. When we created this plan, we expected it to evolve and mature as the business environment and financial performance required. We recently tested requiring employees to come into the office more frequently. We saw better cross-functional collaboration and efficiencies.

[Technical Issues] success of this task, we modified our in-office days under the Forward plan to bring every local employee to the office weekly, most three times a week. The Forward plan has enabled us to attract top talent to the organization from outside of Utah.

During 2022, the Overstock leadership team underwent some major changes in marketing, merchandising, supply chain and product groups where we upgraded talent and identified and filled gaps. For example, just this past week [Technical Issues] with proven international and supply chain logistics experience. In addition, that should help spark our efforts to grow in Canada.

As we progress to 2023, these new teams will deploy new and exciting strategies to drive growth. We are confident we have the right systems in place and the right people in key positions to lead these growth initiatives. We remain committed to hiring remotely, which allows us to upgrade our talent with the best candidates from across the country to strengthen our operations and return to top-line growth.

Now, I will ask Adrianne to review our fourth-quarter and full-year 2023 financial results.

Adrianne Lee - Chief Financial Officer

Thank you, Jonathan.

Slide 12, please. Revenue declined by 34% year-over-year in the fourth quarter, which was pressured by an intensely competitive landscape and our strategic decision to remove non-home products from our site. Our gross margin performance was impacted by elevated discounting and increased freight costs. Through this challenging timeframe, we still managed to deliver positive adjusted EBITDA of $7 million and margin of 1.6%.

Our reported EPS loss of $0.34 was primarily driven by a non-cash non-operating expense associated with the change in value of our equity securities and the associated tax impact. This change primarily reflects our proportionate share of the Medici Ventures funds performance, including an updated valuation of the tZERO investment. We will provide an updated summary of our equity securities, including the Medici Ventures fund in our upcoming form 10-K filing.

Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.04, a decrease of $0.40 versus 2021. The decline in adjusted EPS versus last year it was driven by lower pre-tax income. Our balance sheet remains strong. We ended the quarter with - the quarter and year with a cash balance of $371 million. The year-over-year decline of $132 million was mainly driven by $190 million of investing and financing activities, and a $13 million use of cash in operations. As Jonathan mentioned, we returned $80 million to shareholders via share repurchase and invested $15 million in tZERO.

Next slide, please. We posted revenue of $405 million in the fourth quarter, a decrease of $34 million - excuse me, 34% year-over-year. Weak consumer sentiment and a pressured housing backdrop continued to impact our top-line performance, while we also faced competitive pressure, mainly from increased and earlier discounting activity during the quarter.

The absence of non-home assortment following our transition to home in June of 2022 impacted our year-over-year comparison. Adjusting for non-home revenue - our home-only revenue declined 30% in the fourth quarter consistent with the third quarter. Performance during the Cyber 5 period was significantly better than the reported 34% decline for the quarter.

Our pivot to add strategic national brands and giftable assortment during the fourth quarter drove positive sales performance year-over-year within targeted categories. Revenue performance is driven by fewer orders compared to last year, partially offset by a 4% increase in average order value. I will discuss our key customer metrics in further detail later.

Next slide, please. Gross profit was $90 million in the fourth quarter, a decrease of $49 million versus the prior year. Gross margin came in at 22.1%, a 54 basis point decline versus the same period last year. The year-over-year decrease was driven by higher discounting to support price competitiveness and elevated freight costs. This increase was partially offset by merchandising actions, including negotiated product cost reductions.

Regarding freight, costs came in higher than expected impacting gross margin. We have already taken remedial actions and expect to see less freight pressure ahead from structural improvements in our carrier contracts. Our gross margin performance continues to be a positive proof point of our asset-light model. We maintained our competitive pricing KPIs despite the uniquely competitive environment and delivered gross margin in line with our targeted operating model.

Next slide. G&A and tech expenses decreased $5 million year-over-year, primarily due to savings related to the organizational review we referenced last quarter and benefits from efficiencies and automation. As a percentage of revenue, G&A and tech expense was 11.5% in the fourth quarter, a deleverage of over 300 basis points compared to the fourth quarter of 2021 due to weak top-line results.

We continue to be disciplined in managing our expenses and finding efficiencies. We run a lean organization and we have periodically taken actions to ensure we balance our G&A and tech spend with our top-line performance.

Next slide, please. In the fourth quarter, we delivered adjusted EBITDA of $7 million, a decrease of $21 million versus a year ago. Adjusted EBITDA margin was 1.6%. We are certainly not pleased with this result, however, we continue to manage factors within our control to help offset headwinds during a competitive and highly promotional quarter. We remain focused on managing our business efficiently and pursuing strategies that will drive market share gains and shareholder value.

Next slide. This slide shows active customers and order frequency. We measure active customers on a trailing 12-month basis. Our active customer base declined to 5.2 million at the end of the fourth quarter. This decline in active customers was driven by three primary key factors. First, a deceleration in spending on home-related goods; Second, shift in spending preferences. Consumers continued to spend on experiences and services. And third, our purposeful shift to transition into a 100% online home retailer. As previously shared, this is the right long-term trade-off despite some pain in the short term.

Orders for active customer was 1.6 times in the fourth quarter, a decrease of about 4% versus last year and a decrease sequentially. Order frequency continues to hold up relatively better compared to our decline in order volume. We expect that over time our improved association with home, continued mix into mobile app, our platform with the highest frequency, and enhance loyalty offerings will help improve this metric.

While our pace of new customer acquisition is lagging, in part, due to navigating an intensely competitive environment, our year-over-year change in customer retention rate is comparable to the average of other online furniture and home furnishing retailers as measured by third-party data.

Next slide, please. Average order value improved by 4% year-over-year to $215. Our AOV was primarily driven by the mix within our home product assortment. AOV declined slightly compared to Q3 as we shifted out of seasonal outdoor furniture and into a more giftable assortment.

If you reflect on our three-year AOV journey, our AOV has improved over 40% or about $70 to a full-year average of $231. While this is more aligned with our home retailer peers, we still have opportunity for improvement.

Orders delivered were 8.2 million for the trailing 12-month period. This is a decrease of 39% compared to the prior year or 5.3 million orders. As I discussed earlier, the decline was primarily driven by weak consumer sentiment and a shift in their spending priorities, along with the cumulative impact of non-home product removals from our site.

Our AOV and revenue proactive customer metrics continue to support our future of being a home-only online retailer. The customers retained in our ecosystem purchased higher-value items and have compelling reasons to improve our relatively stable frequency.

Next slide, please. This slide provides a recasted view of our business excluding non-home revenue, which allows for a more direct comparison to our peers. As you can see on the last chart, at the end of the fourth quarter, our comparable home-related active customer base declined 31% versus the reported 36%.

The chart on the right illustrates our comparable home-only revenue declined 30% versus the reported 34%. On a sequential basis, the impact of the non-home category removal increased due to the cumulative impact of non-home customers exiting our ecosystem. Our home-only revenue trends stabilized during the fourth quarter and we are focused on strategies to improve the sales performance.

Next slide. I will wrap up my discussion of the financial section by providing a snapshot of our full-year 2022 results. We ended 2022 with $1.9 billion of revenue, a 30% decline year-over-year, but a 34% increase versus 2019. As Jonathan mentioned earlier, this illustrates the operational improvements we have made in the business.

Gross margin was in line with our financial targets, highlighting the benefits of our asset-light model, especially during times of demand volatility. G&A and tech expense deleveraged for the year because of top-line performance, despite expenses declining $10 million year-over-year on an absolute basis. This is a result of our focus on expense management and delivering against our EBITDA target. Overall EBITDA was $63.5 million for the year or a 3.3% margin. This was below our mid-single-digit target, but a positive result driven by a closely managed outcome.

With that, back to you, Jonathan.

Jonathan E. Johnson III - Chief Executive Officer

Thank you, Adrianne, and to our shareholders. Those are not the type of results we like to report. We can and will do better.

Next slide. I'd like to provide some thoughts on our outlook for 2023 and our strategic path forward before taking your questions.

Next slide. We continue to direct our efforts to drive sustainable profitable market share growth within our financial recipe card targets. While we did not achieve all the elements of this targeted financial model during 2022, we continue to believe this targeted framework is the right model for our business over the long and even medium term. We have clear, focused strategies to deliver performance in line with these targets.

Our gross margin performance is a good example of this. Despite the hyper-competitive environment with significantly - significant oversupply in the back half of 2022, our merchandising efforts and our asset-light business model enabled us to deliver on our gross margin target.

2022 topline performance was below expectations. Both the team and I know we must turn around performance. I still firmly believe we can expand our presence in the significant whitespace available to us, take market share while running a profitable business. That is not an easy task and one that few in our industry achieve. We believe we can and will over time.

Next slide. Before I talk about our strategic path forward, I will share some thoughts on our outlook for 2023. I think 2023 will be a tale of two halves in a year of rebuilding for Overstock as we get back on track to recover market share. From a broader industry perspective, we expect to see the [Technical Issues] macro drivers of inflation, rising interest rates, and the weak housing market will influence performance through the year. In 2019, we lapped the year as a strong consumer purchase sentiment [Technical Issues] during the year.

Macro drivers could improve as we move through 2023 predicting consumer activity is difficult. Regarding inventory, based on our conversations with many in the industry, we don't believe the industry completed its inventory rationalization in 2022. We expect that will continue through at least the first half of 2023.

While aggressive discounting should normalize during 2023, the shape of demand will be a key determinant [Phonetic] [Technical Issues] remains uncertain. On supply chain, ocean freight costs have decreased significantly. However, domestic costs remain high due to surcharges and labor headwinds.

While some of the industry drivers are difficult to predict, we expect Overstock's second-half performance to be better than the first half due to the following. We will fully wrap the headwinds from non-home products removals from our site in June. Based on conversations with partners, we expect to benefit from newness in product assortment during the second half of the year. Last year, some of our partners had cash locked in expensive inventory that was not moving. This limited their ability to invest cash on new product innovation.

We are expanding our loyalty efforts. As I noted earlier, we launched a co-brand credit card with Mastercard earlier this month. We expect engagement with our - within our Club O members to grow as we market this great offering to new and existing customers. We are also looking at how to best renew our private-label credit card offering and improve our email personalization competency to drive repeat business.

During 2022, as I mentioned, the Overstock leadership team underwent some major changes, upgrading talent and identifying and filling gaps. During 2023, we expect these new teams will deploy new and exciting strategies to drive growth. I think you'll particularly see this in the marketing area.

As I indicated earlier, during Q4, we purposefully added national branded and giftable products to our website to capture market share, including from struggling competitors. This was just phase one of our efforts. We will continue to expand our assortment, working with new and existing partners to deliver a fulsome product assortment for our customers.

The current external environment of fluctuations in consumer sentiment, make it difficult for us to provide traditional guidance. Still, I will do my best to provide some selective color. Since our renewed focus on home three years ago, sorry - since our renewed focus on home three years ago, Overstock has delivered on profitability. This profitability tenant and our strong balance sheet differentiate us among our peers. This will not change in 2023. We expect to be profitable for the year. While we are comfortable saying this on an annual basis, given seasonality and other factors, there may be a time within the year when we aren't profitable.

Now for a quick update on the first quarter. Through the first three weeks of February, our year-over-year sales performance has remained relatively consistent with the fourth quarter. Based on this, even with a relatively strong Presidents Day weekend we just had, we currently estimate Q1 total revenue to decline in the 30% range year-over-year.

Regarding profitability during Q1, the current sales trajectory in our estimated Q1 sales volume, we expect to see further expensive deleveraging, and while we continuously look for cost savings and process efficiencies, we expect Q1 adjusted EBITDA will be below Q4 levels. Given the range of revenue guidance, we are not providing specific adjusted EBITDA margin guidance.

Next slide. Before we open the call for questions, let me make a few comments on our strategic path forward, a path which I believe leads us to a better 2023. Next slide. Overstock's three brand pillars guide how we operate our business in the short and long term. Our focus is clear and executable. In my opening remarks, I highlighted how we will continue to focus on our key growth drivers while applying new underlying techniques - tactics to improve performance. We are leveraging aspects of our business that have worked and have further room to spur growth.

Let me highlight four. We are improving our website experience and internal search results. I mentioned earlier, we started removing non-home products from our website in January 2021 and have more than doubled our home-only assortment through the end of 2022.

While assortment available on our website has increased, we have identified gaps within our search experience which we need to fix to improve how our customers engage with us. Our goal is to provide customers an easy shopping experience on our website to deliver on our product findability brand pillar. Our product and tech teams are collaborating with leaders in the space to improve our search and web experience in a way that aligns with our asset-light business model. These leaders are at the forefront of technological innovation currently underway in the search environment.

Our teams have identified opportunities to improve our search result recommendation engine to cater to our growing home assortment. An improved website experience is critical for us to drive repeat purchases and even more important as the merchandising organization continues to increase breadth and depth of this sort. [Phonetic]

We will leverage our loyalty offerings to increase our customer engagement. Our loyalty offering primarily included our fee-based Club O membership program. Our Club O members are our most loyal members who repeat most frequently and spend more than any other customer cohort on an annual basis. I'm excited about the potential growth and engagement as we add new Club O members with the recent launch of our co-brand Mastercard credit card partnership with Retail Citi Services - with Citi Retail Services.

This card offers Club O memberships at no fee to cardholders. We expect our customers [Technical Issues] special financing offerings. Citi is a great partner, among the top five card issuers in the US. Its vast customer network and marketing support will aid us now and into the future. If you have looked at the details of the card, you should, it offers Club O members [Technical Issues] points [Phonetic] they can redeem at checkout on our website [Technical Issues] on qualifying apparel, department store, gas and other purchases. This should help us drive repeat purchases.

It also provides a special 60-day interest-free financing offer, which in our view can help drive customer conversion among customers that may have delayed purchases due to stretch budgets. In essence, this card is an extension of our smart value brand power and offering enabling holders to stretch their dollars further.

We are accelerating the growth in our strongest customer experience platform, the Overstock mobile app. The Overstock mobile app has been successful in driving traffic and sales. It helps our customers easily find the products they want with the convenience of their smartphone, something that fits squarely within our product findability brand pillar.

Our mobile app customers' KPIs are healthier than the desktop-driven business. While we have not shared the actual mix of app sales, we want to highlight its growth trajectory. During 2022, mobile app mix of sales grew around 500 basis points. For 2023, we expected to achieve at least the same level of growth. Mobile app helps us market more efficiently with app exclusive coupons. As a result, we see better conversion in customer KPIs. This platform helps us attract a younger demographic, helping to diversify our customer base. We expect the mobile app to benefit from our increased consumer engagement on social media through our brand ambassadors' [Technical Issues] influence program.

We continue to enhance our customer experience. Under our easy delivery and support brand power, we are constantly and proactively looking for ways to enhance the customer experience; from pre-purchase browsing to our customers' post-purchase engagement with us.

Last quarter, we shared details about a unique partnership with UPS for handling returns. It is an asset-light innovative solution to improve returns handling. Returns are always a major friction point impacting customer experience. The initial results of the pilot have been good, and we are expanding the pilot to learn more. And there's a lot we're working on to improve our trajectory that makes me bullish about Overstock's [Technical Issues] There's a lot [Technical Issues]

Now, operator, let's take some questions.

Question & Answers

Operator

Thank you. [Operator Instructions]

Our first question comes from the line of Peter Keith with Piper Sandler. Your line is now open.

Matt Egger - Piper Sandler - Analyst

Good morning. This is Matt Egger on for Peter. Thanks for taking our questions. I guess first thing, in 2022, you highlighted how your pricing algorithms would remove items from the site if competitors took a mark down on that same item. The feedback we've received from suppliers is that that was highly disruptive to their sales through Overstock. So I guess maybe two quick questions. Would you agree that the competitor markdowns were disruptive to your 2022 sales? And then, I guess, secondly, are you contemplating an adjustment to your pricing algo to reduce the number of items getting pulled off the site when that happens? Thanks.

Jonathan E. Johnson III - Chief Executive Officer

Great question. I'll make an initial response and then look to Dave for any more color. It's important given our smart value proposition that we went on pricing post-promotion. While suppliers may like to have little thicker margins, we need their first cost to be low. And we approach them frequently to ask them to lower prices when it's important, when they're not competitive. Most of the time, they make these adjustments. And so there's no disruption in sales on the site or customer experience on the site.

Some of the time, they choose not to make this adjustment, and we remove the products for the site - from the site to ensure that we have our smart value proposition being met. When we do this, partners frequently come back to us quickly, lowering their costs and coming back to the site. When partners behave the second way, it is slightly disruptive. But it's important that we do this so that we will maintain our smart value proposition.

Dave, anything you want to add on that?

Dave Nielsen - President

No, I think you answered that perfectly, Jonathan.

Operator

Thank you. One moment for our next question. And our next question comes from Jonathan Matuszewski with Jefferies. Your line is open.

Jonathan Matuszewski - Jefferies - Analyst

Hey, great. Good morning and thanks for taking my question. A lot of discussion this morning around the highly competitive, highly promotional industry backdrop. Jonathan, I think you outlined an expectation for industry inventory rationalization to continue into at least the first half of this year.

So in light of this expectation, do you think it's reasonable to expect gross margins to trend maybe south of that 22%, at least for the first six months and recover thereafter? Any thoughts on kind of the cadence of how gross margin may trend this year would be helpful? Thank you,

Jonathan E. Johnson III - Chief Executive Officer

Yes, Jonathan, great question and I think it relates to that last question we had. Our asset-light business model, even during a period of highly promotional liquidation sales by competitors, allowed us to keep our gross margins at their levels in Q3 and Q4 last year. We don't own inventory, we haven't made that bias. [Phonetic] That's why we're always working with our partners to lower their first cost, so that we can keep our inventory - our gross margins at the level they have.

So, part of our differentiated asset-light business model lets us keep gross margins more consistently at the level we shoot for than some of our competitors. We saw that in the third and fourth quarter last year. I think, you'll continue to see it all throughout 2023.

Adrianne, anything you want to add on that?

Adrianne Lee - Chief Financial Officer

Nothing further to add, Jonathan.

Operator

Thank you. One moment. Our next question comes from the line of Thomas Forte with DA Davidson. Your line is open.

Thomas Forte - DA Davidson - Analyst

Great. Thanks. One question and I'll go back in the queue. So, Jonathan, can you compare and contrast today's home e-commerce market with a few prior notable periods, dot-bomb, where a number of players exited the market, you took significant share, then the Great Recession, a period of weak consumer spending where you generated your first profits. Thanks.

Jonathan E. Johnson III - Chief Executive Officer

No, I think, there's a lot of similarities, Tom. I mean, at times where consumers look to stretch their wallet, and they become more thoughtful, the term I heard yesterday is more choiceful in their purchasing, Overstock has historically done well.

Turn of the century, dot-bomb was your word, that's when Overstock went public and it was a unique position and we were strong. During the great recession, we - as we saw in home furnishing and furniture, in particular, strong growth in our business then. So, as customers look to stretch their dollars, they're more thoughtful in purchasing smart value [Technical Issues] more and more of them become savvy shoppers. So it's hard to predict what the economy looks like in 2023, as I noted in my remarks, but I think we're well-positioned for it. And the strategies we're employing and deploying, I think are good for growing in any kind of environment, but particularly a tough economic environment.

Thomas Forte - DA Davidson - Analyst

Thanks, Jonathan.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Anna Andreeva with [Technical Issues] Your line is now open.

Anna Andreeva - Needham - Analyst

Great. Thank you so much, and good morning, guys. You guys have been helpful in the past in providing KPIs for the business and AOV slowed a bit this past quarter. Just any color you could provide on how we should think about that as we go through '23, should AOV be still positive for the year?

And secondly, I was just curious, performance of Overstock Day events that you ran in October, any learning from that that could be applied to events going forward and anything to call out about the new customer demo from this event? Thank you so much.

Jonathan E. Johnson III - Chief Executive Officer

Adrianne, why don't you talk to AOV and what we saw in Q4, like we usually do, and then, Dave, maybe you could talk to Customer Day and then I'll also add some color at the end.

Adrianne Lee - Chief Financial Officer

Great. So Anna, as we mentioned, not giving kind of top-line guidance, I'll share a little bit about AOV, you mentioned didn't grow as much as we have seen at 4%, again, mainly driven by mix, but I would say as I talked about gross margin, highly promotional discounting environment, clearly that impacts your AOV. So we have pretty a sizable impact to that.

I would also say that, as Jonathan mentioned, we increase our assortment and different offerings, we should see potentially some different seasonality of items of which we sell and then consumer sentiment, what people are buying, if they're buying the actual patio furniture or kind of patio refresh items. So I think those are some things that we will expect to still see some potential variances in AOV pending those type of items.

Dave Nielsen - President

And I would just add regarding Overstock Day or Customer Day as you refer to it, Anna, we continue to lean into being a mobile-first retailer. And our mobile app was where we leaned in heavily here. As you heard in the remarks, Jonathan mentioned, we had an increase of 500 basis points in the percentage of our 2022 mobile app purchases to our sales. That was directly influenced by the ambassador campaign, brand ambassadors, as we continue to push on our social media front, an area where we know we have opportunity to grow. Jonathan?

Jonathan E. Johnson III - Chief Executive Officer

Yes, thank you both Adrianne and Dave.

Look, fourth quarter AOV is usually lower than the rest of the year because of giftables, people tend to spend more on themselves than they do on others and fourth quarter is a gifting period. Customer Day was a win for us, we saw nice sales and we saw great mobile app adoption.

I do think we'll see people in the good, better, best category, trading down this year. We've seen it already in the first quarter and some of our Presidents Day sales. Looking not for that best product but for the product that they - the best product they can afford for the money they are willing to spend a day which appears to be a little bit less than they were willing to spend in the past.

Operator

Thank you. One moment for our next question. And our next question comes from Seth Sigmund with Barclays. Your line is now open.

Seth Sigmund - Barclays - Analyst

Hey, everybody. Thanks for taking the question. My main question is around profitability. I'm just wondering how you think about this in potentially a scenario where sales are down again this year? How do we think about the deleverage in the model given that a lot of tech and G&A expense has been fixed in the past? Obviously, Q4 is really well managed, but just trying to understand sort of the breakeven points and how to think about that? Thanks.

Jonathan E. Johnson III - Chief Executive Officer

Yes, Seth, I appreciate the question. As I noted in my prepared remarks, we are committed to and think we can be profitable for the year. Given seasonality and other things, there may be a time during the year when we're not. But we are always looking at our expense - our G&A and tech expenses and how we spend marketing.

We did some right-sizing in late Q3 that I think helped us and have us in a better place today. We're maniacal about expense control and that's why I think that we can be confident as they - we'll be profitable in the year. But you're right, you can't deleverage to zero and we've got to get sales back to grow. And that's why - we have this go-forward strategy we talked about, we're excited about that. And we think it will make a difference.

And while the first quarter sales are still shrinking, we're confident that by the end of the year, we can get back to a place where it all makes sense. Adrianne anything you want to talk about? Deleveraging is always a [Technical Issues] uncomfortable [Phonetic] topic, but one worth discussing.

Adrianne Lee - Chief Financial Officer

No, Jonathan. I think that was well said. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Steven Forbes with Guggenheim Partners. Your line is now open.

Steven Forbes - Guggenheim Partners - Analyst

Good morning. I wanted to focus on the active customer base given the first quarter-to-date net sales trend. It appears, Jonathan, you can correct me if I'm wrong here, that the expected quarter-over-quarter net customer loss remains elevated. So, I would love if you could start to take a step back and maybe talk again about the initiatives that you have planned here to drive engagement and loyalty among the current base?

And then also comment on your reactivation strategy, right, when you think about just how many lapsed customers there are over the past couple of years here? Any comment on how you're thinking about reactivation opportunity in 2023?

Jonathan E. Johnson III - Chief Executive Officer

Yes, Steven. Good question. Let me make an initial comment, then ask Dave to add some more color. I'm really excited about our new co-branded credit card with Citi. It allows us to treat more customers like Club O customers, and really Super Club O customers because they earn points they can spend on Overstock. Purchases - lots of places, not just Overstock. So, I think that's going to create a more loyal customer, better repeat rates. It will also let us go out and engage with new customers who haven't been with us before. A lot of efforts we're making on retention and reactivation.

Dave, you want to provide any more color?

Dave Nielsen - President

Sure, Jonathan.

Jonathan mentioned earlier in his remarks, in his prepared remarks, the excitement over some of the leveling up we've done with our management team and our marketing team in particular, I am really excited about. We brought in some industry experts from several areas. And we're really looking forward to, as you think about some of those key growth drivers, increasing our brand association with the home is really critical to getting that message out there and doing it through our brand ambassador program, through some of our new television commercials, we're investing heavily there. That marketing team has yet to lap a year and will do so this year. Takes a little bit of time for them to get up to speed and get a feel for all of the levers and opportunities and where they go with that.

But we're seeing good adoption into our mobile app and with a younger demographic, and we're excited about that and think that that is going to also pay us dividends as we move throughout this year and continue to drive a mobile-first presence.

Jonathan E. Johnson III - Chief Executive Officer

Thanks, Dave.

On that marketing team, I love what they've done with our “C'mon, Get Comfy” ad. That's had - it's had a really nice resonance. And I think as they roll out more on our kind of brand transition to associate the Overstock name with home, that will pay dividends in this area too [Technical Issues]

Steven Forbes - Guggenheim Partners - Analyst

Thank you.

Operator

Thank you. One moment for our next question. Comes from the line of Curtis Nagle with Bank of America. Your line is now open.

Curtis Nagle - Bank of America - Analyst

Great, thanks for taking [Phonetic] the question. Just as a first one, Jonathan, you describe this year as a tale of two halves. I guess, would you think likelihood [Phonetic] or you think you can return to revenue growth in the second part of the year or no?

Jonathan E. Johnson III - Chief Executive Officer

[Technical Issues] careful on the guidance because I think the macro economy is tough, but with the efforts that we're taking internally - that's our - that's our expectation. And as you see assortment continue to grow with a larger and larger operative product, more new product as many of our partners, suppliers get through their old inventory, can invest in new product, it's going to be an exciting time.

So want to be a little squishy, Curtis, on my answer to that because we're - it is an uncertain time and giving traditional guidance is [Technical Issues] but we're doing everything we can and we plan to get back to growth in the second half but not going to give guidance today for sure on that, yes.

Curtis Nagle - Bank of America - Analyst

Okay, fair enough. Just as a follow-up. So I mean, in terms of thinking about marketing spend, has been very disciplined. I guess, would there be any willingness to take that up maybe just trying the customer acquisition going in, or - I guess in the context of - still pretty promotional competitive environment, maybe that doesn't make sense, how are you thinking through that?

Jonathan E. Johnson III - Chief Executive Officer

Well, we're thinking through that every day. I mean, it's kind of top of mind all the time. And you'll note that on our financial recipe card, we're trying [Technical Issues] We like marketing spend to be somewhere between 9% and 10% of revenue. We have picked that up. [Technical Issues] and we will continue to look at that to try and reignite growth while maintaining profitability. But you can see as we kicked it up, even as we manage expenses well, that impacted where we came in with adjusted EBITDA percentage at the end of the year, a little bit outside of our mid-single-digit growth that we like to have on our adjusted EBITDA percent.

So, we look at it, we'll continue to look at it. Dave, I know you're - Angela, and her team, [Phonetic] all the time. Anything else you'll comment on there?

Dave Nielsen - President

I couldn't emphasize enough what Jonathan just said. It is a daily activity and discussion at Overstock. We understand deleveraging the top-line is problematic and we are working feverishly to prevent that.

Operator

Thank you. Our last question comes from the line of Rick Patel with Raymond James. Your line is now open.

Rick Patel - Raymond James - Analyst

Thank you for taking my question and squeezing me in here. In terms of expanding the assortment in the home category, you touched on better performance of newer areas like giftables and national brands. Can you talk about the opportunity to lean into categories that are working well intra-quarter?

So, giftables may not be strong year round, but given high inventories in the industry, I'm assuming product is available. So how quickly can you chase into some of the stuff that's working? And on the flip side, with such a broad assortment, how do you ensure that consumers don't get overwhelmed by all the options they have?

Jonathan E. Johnson III - Chief Executive Officer

I'll make two comments and then turn to Dave. One, I think our balance sheet gives us great ability to add quickly - inventory quickly. We did it in the fourth quarter. We actually took some inventory, and like I mentioned, sold through it quickly. Our balance sheet means that partners, suppliers are assured they're going to be paid and paid on time. And that's been helpful as we've added new home partners and we've done well adding new home partners. So those are important things.

Dave, what would you add to this?

Dave Nielsen - President

Yeah, I would say that additional inventory we took on in the fourth quarter was a strategic move for us. As we've transitioned to a home and home furnishings retailer, some of those brands that we're seeing during the fourth quarter on Overstock ignited a whole group of small appliances national brands who haven't necessarily been interested in doing business with Overstock that now are. As we mentioned, with a competitor - a formidable competitor that is struggling considerably, there's an interest in replacing ourselves. And we've had several national brands and retailers in the hundreds that are very interested in joining Overstock. So that's one component of it.

The other component I would add is the findability of that product. And Jonathan mentioned in the prepared remarks, our improvements in search that are undergoing, we think that gives us the opportunity for customers to find that incremental additional assortment that we're adding, easier, quicker for an overall better customer experience. Jonathan?

Jonathan E. Johnson III - Chief Executive Officer

Yes, I'm - Dave, I'm glad you mentioned that because we have made a [Technical Issues] product findability has some gaps, and we're working on it today. [Phonetic] And we think when we do that, it's going to be a much better site experience and shopping experience for our customers. So I appreciate the question.

Look, I'm [Technical Issues] 2022's in the rearview mirror, it's a year we will not forget nor repeat. The projects that this management team is diligently working on to improve Overstock's trajectory are exciting. I believe they'll bear fruits. I believe they will.

So, I continue to be bullish about Overstock's future. Thank you, everyone, for participating on today's call. We appreciate your interest in and ownership in Overstock and mind you we are working the best we can to be good stewards of your capital. Thanks, everybody.

Operator

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Q4 2022

Earnings Transcript

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