Good day, and thank you for standing by. Welcome to the First Quarter of 2023 Overstock.com Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to our speaker today, Lavesh Hemnani. Please go ahead.

Lavesh Hemnani — Head of Investor Relations

Thank you, operator. Good morning, and welcome to Overstock’s first quarter of 2023 earnings conference call. I’m Lavesh Hemnani, Head of Investor Relations. Joining me on the call today are CEO, Jonathan Johnson; and CFO, Adrianne Lee. 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, April 27, 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 31st, 2022, and in our subsequent filings with the SEC.

During this call, we will 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 the 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.

With that, let me turn the call over to our CEO, Jonathan Johnson.

Jonathan E. Johnson — Chief Executive Officer

Thank you, Lavesh. Good morning, everyone. This morning, we reported our first quarter 2023 financial results with revenue in line, with the expectations we shared with you in February.

For the quarter, revenue declined 29% year-over-year. On our home-only basis, revenue declined about 27% year-over-year, an improvement in trend. We are encouraged by these results, particularly how we were able to improve results later in the quarter, and look forward to the key spring-summer selling season.

I am pleased with the focus of the Overstock team as it has delivered another quarter of positive adjusted EBITDA. Our 12th consecutive quarter of positive adjusted EBITDA. That’s three, four years of consistent positive performance. This is a testament to our asset-light business model and the team’s disciplined operational approach. Adrianne will discuss these results in more detail later.

Next slide. We shared this slide last quarter. In highlight, how we continue to expect 2023 to be a tale of two halves. This is a year of inventory rationalization for the industry. Something that is taking longer than most expected. It is also a year of rebuilding for Overstock as we get back on track to retaking market share profitably. We remain confident in our ability to execute against our plan to turn around top-line performance.

As a result, we reiterate our current expectations for a better second half compared to the first half of 2023 in terms of both top and bottom-line performance. We continue to make meaningful strides in expanding the depth and breadth of our home product assortment. More on this later.

I will note, while our recent volatility in the financial markets certainly adds another wrinkle of macro concerns, neither Overstock nor any of the Medici Ventures portfolio companies were directly adversely impacted by the recent regional banking crisis.

Overstock’s healthy balance sheet places us in a strong position to navigate various uncertain macro and industry conditions that exist. As we look out to the remainder of this year, it is not clear whether we will face additional headwinds from growing negative consumer sentiment or cutbacks in spending in our categories from credit liquidity or credit availability.

However, this uncertainty is not impacting our team’s focus on improving our business performance. We continue to make progress on our strategic growth drivers in maintaining our focus on efficiency.

Next slide. On this slide, we provide additional information on our home-only active customer base, which we report on a trailing 12-month basis. As a reminder, we fully exited non-home merchandising categories at the end of June 2022. Our strategic focus on home has caused some pain in the short term. We continue to believe it was and is the right decision for our future.

On the left, we show our home-only active customer base over the last four years. This base peaked at about 8 million customers at the end of 2020 during the height of the pandemic. The shift in consumer sentiment and consumer spending preferences over the last two years has resulted in a decline in our active customer base.

Importantly, even with this decline, we continue to track above pre-pandemic revenues with about 4.8 million home-only active customers at the end of Q1. We have been able to attract new customers and retain many existing customers by executing our strategy to increase our presence in the large and fragmented furniture and home furnishings market.

These efforts have been challenged by industry-wide level consumer engagement and the demand within the home category. Even so, we are optimistic about the future. We believe our ongoing marketing campaign, growth in usage of the mobile app, enhanced loyalty efforts, and increased product assortment that is growing faster than our internal plan, and better website experience should help us gain and retain more customers.

Chart on the right shows the sequential change in our trailing 12-month home-only active customer base. In the first quarter, we lost about 281,000 home-only customers on a net basis over the last 12 months. Well, it certainly does not feel good to talk about a decline in customer base.

I am encouraged that our losses have been moderating. We think we have the right strategies to put us back on a consumer growth path — on a customer growth path, sometime in the second half of the year. While we have seen a decline in the absolute number of active customers, we continue to see higher levels of spending for a home-only customer compared to a non-home customer. We see this as a stamp of approval on our purposeful exit of non-home categories.

Next slide. I’ll now provide a quick update on the Medici Ventures Fund. Pelion Venture Partners, the general partner of Medici Ventures Fund will be hosting the second annual Medici Ventures Day on May 31st. Registration details are available on our Investor Relations website. The event will feature interviews with the leaders of tZERO, GrainChain, SettleMint and PeerNova.

All these companies received additional capital investment from Overstock and/or Medici Ventures Fund within the last 18 months, even in a challenge venture capital environment. These companies were able to access new capital and strengthened their teams. The event should provide helpful information on the markets in which these companies operate and their business models.

As we do each quarter, I will provide some fund updates. First, some of our shareholders, we provide clarity regarding the disclosure related to Medici Land Governance in the financial statement exhibits in our 2022 Form 10-K, which we filed in February. MLG had a financing round at the end of 2022. Raising capital from a third-party investor. These are Overstock nor the Medici Ventures Fund participated in this down route. This resulted in a reduction of the value of the funds holdings to about 2% MLG. The impact of this is reflected in our Q1 2023 financials. But there was no impact to reported adjusted EBITDA or adjusted EPS.

Second, FinClusive, a blockchain-based compliance as a service provider recently announced a partnership with Cross River Bank. At a time of increased volatility in the financial markets, this partnership emphasizes the importance of the work being done by FinClusive to promote safe and compliant access to financial services. Third, Bitt added two advisors, Bonnie Glick and Sean Cairncross through its leadership team as the Company seeks to expand its digital currency management system offering to other markets.

In my opinion, these advisory appointments and the 2022 edition of the CBDC team from Criteo positioned a bit to capitalize on the research and rollout of digital currencies.

Fourth, as we shared last quarter, in January, Overstock invested $10 million in GrainChain via a promissory note. The Medici Ventures Fund also participated in this funding round. 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 consumer and customer rather, the silo or the grain elevator. The follow-on investment in GrainChain will enable Overstock and its shareholders to participate in the future success of the Company.

Next slide. Now for a brief update on our recent corporate events. In March, the Board of Directors of Overstock appointed Joanna Burkey as a new independent board member. Joanna currently serves as the Chief Information Security Officer at HP. She brings more than 25 years of experience in cybersecurity, information technology, data privacy, and digital strategy. Her wealth of experience and unique cybersecurity skillset complements the skills and strength of the current Overstock board members. With the addition of Joanna, the Overstock board now has eight members, seven of whom are independent.

At the end of March, we filed proxying materials related to our annual meeting of shareholders. A copy of these materials is available on our Investor Relations website. This year, we will be holding the meeting virtually on May 18 and invite all our shareholders to participate.

Last week, we launched the next phase of our marketing campaign to improve our brand association with home. This next step build on the get comfy commercials we launched last fall, where we communicated Overstock’s transition to a 100% home product online retailer.

Manu, your home, your treasure commercial specifically focuses on Overstock’s brand pillar of smart value, meaning quality on-trend products for all. Our smart value brand pillar is a differentiator in the marketplace. This new phase of our marketing campaign highlights the joys of finding your perfect home furnishings or piece of furniture at the best price online.

Now, I’ll ask Adrianne to review our first quarter 2023 financial results. Adrianne?

Adrianne Lee — Chief Financial Officer

Thank you, Jonathan. Slide 10, please. Revenue declined 29% year-over-year in the first quarter, mainly driven by continued pressure across the furniture and home furnishings industry, what — which is a combination of lower consumer engagement in the category and a weak housing market. Our gross margin performance was solid in the quarter and increased almost 20 basis points year-over-year as merchandising actions and operational efficiencies more than offset increased discounting in a highly competitive landscape.

All in, for the quarter, we managed to deliver positive adjusted EBITDA of $3 million and generated free cash flow. Our reported EPS loss of $0.23 was primarily driven by operating losses and a non-cash non-operating expense associated with a change in value of our equity securities and the associated tax impact. The change in the value of our equity securities reflects our proportionate share of the Medici Ventures Fund performance driven by an updated valuation of the Medici Land Governance investment. Excluding the impact of our equity securities, we reported adjusted diluted loss per share of $0.10, a decrease of $0.31 versus 2022.

Our balance sheet remains strong. We ended the quarter with a cash balance of $375 million, a slight increase from the fourth quarter. Our Q1 ending cash balance includes the $10 million outflow of cash related to our direct investment in GrainChain.

Next slide. We posted revenue of $381 million in the first quarter, a decrease of 29% year-over-year. As I mentioned, the consumer continues to prioritize service-related and need-based spending, putting pressure on demand for discretionary home goods. Adjusting for non-home revenue, our home-only revenue declined 27% year-over-year in the first quarter. Performance improved each month in the quarter with a more meaningful improvement in March as our revenue decline moderated to the low 20% range year-over-year compared to the negative 30 plus percent range we shared with you in February.

Revenue performance was driven by fewer orders and a relatively flat average order value compared to last year. I will discuss our key customer metrics in further detail later.

Next slide. Gross profit was $90 million in the first quarter, a decrease of $35 million versus the prior year. Gross margin came in at 23.5%, an 18 basis point increase versus the same period last year. The year-over-year increase was driven by merchandising actions and operational improvements partially offset by higher discounting compared to 2022.

We continue to believe that the annual 22%-ish range is the right range for us for a few reasons. It enables us to gain market share as the category continues to migrate online. We are yet to recognize our seasonal cadence as a home-only online retailer and consumer spending in the category is not at a state of normalcy.

Our gross margin performance is a positive proof point of our asset-light model. We maintained our competitive pricing KPIs, offering quality and style for less, and delivered gross margin in line with our targeted operating model.

Next slide. G&A and tech expenses decreased $3 million year-over-year, which includes savings related to our organizational review in 2022 and benefits from efficiencies and automation, partially offset by higher stock-based compensation. As a percentage of revenue, G&A and tech expense was 13.4% in the first quarter, a deleverage of over 300 basis points compared to the first quarter of 2022 due to weak top-line results.

We are disciplined in managing our expenses and consistently finding efficiencies across the organization even while compensation-related pressures persist. On average, our business runs at around $50 million in fixed G&A and tech costs per quarter.

That said, we are always looking for efficiencies to match our expense structure with our top-line performance.

Next slide, please. In the first quarter, we delivered adjusted EBITDA of $3 million, a decrease of $18 million versus a year ago. We continue to manage factors within our control to help offset category headwinds and competitive pressures. We remain focused on managing our business profitably 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 4.8 million at the end of the first quarter. This decline in active customers is driven by two key factors. First, a deceleration in spending on home-related goods, including a shift in spending preferences as consumers continue to spend on experiences and services. And second, our purposeful shift to transform into a 100% online home retailer.

Orders per active customer were 1.57 in the first quarter, a decrease of about 6% versus last year and a decrease sequentially. Order frequency continues to hold up relatively better compared to our decline in active customers. We expect that over time, improving our brands association with home, including increasing home assortment, growing mobile app usage, and enhanced loyalty offerings will help improve this metric.

Next slide. Average order value is relatively flat year-over-year at $220. AOV improved slightly compared to Q4 as we shifted out of a more giftable assortment into patio furniture and home decor. We have seen some evidence of trade down across our primary categories and signs of deflation in product costs.

To support our smart value brand pillar, we continue to offer compelling value to our customers and pass on cost reductions. Our competitive pricing continues to align with our internal KPIs, even as we navigate a highly promotional environment.

Orders delivered were 7.5 million for the trailing 12-month period. This is a decrease of 39% compared to the prior year or 4.8 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.

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 chart on the left, at the end of the first quarter, our comparable home-related active customer base declined 29% versus the reported 35%. The chart on the right illustrates that our comparable home-only revenue declined 27% year-over-year versus the reported 29%. On a sequential basis, the impact of the non-home category removal has moderated as we near the completion of lapping all non-home sales over the last 12 months.

Next slide, please. I will wrap up my financial discussion highlighting our strong balance sheet and minimal debt obligations, each of which continues to be a highlight and differentiator for Overstock. Our strong balance sheet gives us the opportunity to focus on executing against our key growth drivers and being opportunistic on capital deployment.

It’s important to note that our cash balance increased quarter-over-quarter, even after directly investing $10 million in GrainChain, an investment that we believe has promised of a healthy return. We generated positive free cash flow in the quarter, maintained a laser focus on expense management, and realized operational efficiencies while slightly improving our top-line trend. All this enabled us to maintain a solid balance sheet, whether uncertain market conditions and invest for market share growth.

With that, back to you, Jonathan.

Jonathan E. Johnson — Chief Executive Officer

Thank you, Adrianne, and thank you for protecting our strong balance sheet, a real differentiator in the market.

Next slide. Next, I’ll provide some updates on how we are making progress on our strategies to return to gaining market share.

Next slide. We regularly share this flywheel both internally and externally as it outlines our key drivers to deliver growth and helps us maintain focus on what matters most, those efforts that are critical to both our short and long-term goals. While these growth drivers are not new, we are always succeeding and evolving their underpinnings to improve performance.

As I’ve noted before, none of these growth drivers is particularly capital-intensive. Importantly, all of them fit squarely within our asset-light mindset. They help us increase order frequency, retain and attract customers, and gain market share. These are the right growth strategies for us.

We are confident we have the right processes and the right people in key positions to lead our growth initiatives. These drivers focus us on being disciplined stewards of our healthy balance sheet and delivering and growing positive adjusted EBITDA.

Next slide. As I noted, while our growth drivers have not changed, we are routinely assessing and deploying new tactics to improve our performance. Tactics are guided by our three brand pillars; product findability, smart value, and easy delivery and support, each of which are an integral element and differentiator of Overstock’s business.

Today, I’ll share some color on recent wins, starting with loyalty offerings. Following the completion of our transition to a 100% home online retailer last year, we have been focusing our efforts on enhancing our loyalty offerings. In the current environment, where the customer is less engaged in the overall home category, we need to ensure that our loyalty programs are compelling enough to attract new customers to our site by providing such benefits as special finance offerings or exciting in-app deals and exclusives.

Our newly launched co-branded credit card with Citi Retail Services is progressing well. It has been just over two months since the launch, and the number of sales from these card owners is still small, but signups have been as we generally expected, and order values and conversion rates are higher than the Company average.

We continue to believe these co-branded cards will help us to better market directly to these cardholders and personalize our offerings to them. Something we’ve not done particularly well in the past.

As the next step in our loyalty efforts, we will be refreshing our private label store card later this year. Combination of these two cards, our Club O program, and strong engagement through the mobile app should help Overstock attract new customers and win repeat business more frequently.

On the important topic of SKU expansion. During the first quarter, we expanded our home product assortment by nearly 20%. This SKU growth is ahead of our internal plan and comes on the heels of doubling our home assortment over the past two years. While we continue to grow the depth and breadth of our product assortment, we are still well below some of our competitors. We know we have work to do and we are doing that work.

Our merchandising organization is focused on expanding the breadth of SKUs across the good, better, best spectrum, always adhering to our smart value brand pillar. As an example, within our rugs business, we have great relations with our partners and always have access to new and exciting products. However, as we have seen increased demand from the home customer for additional differentiated options, we see a growth opportunity to expand our rug assortment.

We expect to see more new products available during the second half of 2023 as our partners redeploy cash that has been stuck in the industry-wide inventory glut. We have also been improving our post-purchase customer experience. Last year, we talked about how we are diversifying our freight carrier network. This has contributed to an improvement in our less-than-truckload or LTL delivery timelines, easing what can sometimes be a pain point for our customers and negatively impact our NPS scores.

We’ve made significant progress in improving delivery times during the first quarter of 2023. Our customers are now receiving LTL shipments two days faster. We also continue to make improvements in delivery times for our small parcel deliveries and have done so without investing in expensive logistics infrastructure.

Another key delivery metric that is improved is our accuracy of delivery time messaging or the estimated delivery date shown when a customer places an order. Our on-time accuracy improved nearly 500 basis points in Q1 compared to Q4. It is important that our customers receive their products on the estimated delivery date, not a day earlier, not a day later, and that is happening more often. You can see that the entire Overstock team is focused on brand pillars and growth drivers.

Next slide. We continue to direct all our efforts to get back to delivering sustainable, profitable market share growth within our financial recipe card. We have clear and focused strategies to deliver performance in line with these targets. This financial framework is the right operating model for us in the medium to long term.

While achieving these metrics continues to remain difficult in 2023, I am encouraged that we’ve performed in line with our gross margin and free cash flow targets during the first quarter.

Before we take your questions, I will provide some color on quarter-to-date trends and our expectations for Q2 and beyond. As I indicated previously, we saw an improvement in our revenue trend in late Q1, which improved to the negative low-20s range in March. This negative low-20s performance has continued into April thus far.

We are being cautious in our expectations for the rest of the quarter with a big portion of the spring-summer sales still ahead of us. Well, I’m hopeful for continued improving trends. It’s just too early to know how the quarter will go. There remains uncertainty around consumer spending. Housing market remains under pressure. Consumers continue to allocate dollars to services such as travel and recreation.

As a result, the demand environment for discretionary home-related purchases remains unpredictable. For one more quarter, we are still comparing against non-home sales, which impacts our year-over-year revenue trend.

Regarding profitability, we expect to deliver positive adjusted EBITDA for Q2. As I indicated previously, getting back to our mid-single-digit adjusted EBITDA margin goal is going to be difficult this year. However, we want to reiterate that we expect to deliver positive adjusted EBITDA for the quarter and the year. Our ability to live by our profitability tenant and our strong balance sheet differentiate us among peers. This will continue in 2023.

Now, operator, let’s take some questions.

Question & Answers

Operator

[Operator Instructions] Our first question comes in from the line of Thomas Forte of D.A. Davidson. Please go ahead.

Thomas Forte — D.A. Davidson — Analyst

Great. Thanks for taking my question. So Jonathan, good morning here now since David Goone became CEO of tZERO, when can investors expect additional details in a strategy for leading tZERO? And then in addition, how should investors think about the current competitive environment for tZERO, given some of the challenges large players are facing right now, such as one that’s involved in a lawsuit with the SEC? Thanks.

Jonathan E. Johnson — Chief Executive Officer

Tom, thank you. I appreciate that question. The closing of the ICE investment round was a material event for tZERO, and this capital infusion certainly helps — should help tZERO pursue strategies to accelerate growth. tZERO recently sharpened its focus with the closure of crypto trading to help companies and investors raise and trade capital in primary and secondary markets.

Now, to your question about when to expect future updates, it’s difficult for us to put a timeline since Overstock is not involved in the day-to-day operations. To the extent, we can. Overstock does provide updates on tZERO and the other companies in the Medici portfolio — Medici Ventures portfolio, and I would encourage you and everyone else to tune in to the upcoming Medici Ventures Day on May 31st for additional insights in the tZERO and the other participating companies. You can also submit questions related to tZERO and anyone else participating in the event by going to our Investor website.

And I’ll note one other thing, Tom. A lot of people in this space have been, I think, selling what they don’t have. David Goone is a trusted operator. He will report on what he delivered rather than on what he hosts to deliver in a industry full of likes of FTX and SBF. We are glad to have someone who’s going to say what he’s done rather than promise something that may or may not get done.

Thomas Forte — D.A. Davidson — Analyst

Thank you, Jonathan.

Jonathan E. Johnson — Chief Executive Officer

Yeah.

Operator

One moment for our next question. Our next question comes from the line of Steven Forbes of Guggenheim Securities. Please go ahead.

Steven Forbes — Guggenheim Securities — Analyst

Good morning. Jonathan, I wanted to start with the new marketing campaign. So curious if you can expand on how the customers responding over the recent weeks, right? Especially just given the state of promotional activity in the marketplace today. We’d love any color on engagement trends.

Jonathan E. Johnson — Chief Executive Officer

Yeah. Well, I’ll start and I’ll look to Dave to add more explanation. The market right now is frothy with people spending what I would say is from time to time, irrationally. We’ve seen that most recently, some of our competitors will spike up marketing spend in a way that just seems — well, it doesn’t fit our account of making money. I’ll just say it that way. It doesn’t fit our account of making money.

We are spending our marketing dollars judiciously on our rebranding spend. Sure, we could spend more and get out in front of more people. But to do so and make money is hard. Dave, I think we’re- the market is responding relatively well to firstly get comfy. And of course, your treasure — your home, your treasure is very, very new. It’s hard to have a read on that. What would you say, Dave? You’re on mute, Dave. We’re still in the pandemic.

Dave Nielsen — President

The information we receive, it’s always difficult with television and with the commercials in general. But when you get to YouTube, where you can get some actual click data, it’s really interesting to see in the click data from get comfy, we over-indexed in the performance on this commercial. It resonated with the customers. We’re only a week in on your home, your treasurer, but we like what we see. It’s from the same group that developed get comfy with our creative team. We’re optimistic. There’s some catchiness to it that we think will help really focus on our smart value customer.

Jonathan E. Johnson — Chief Executive Officer

Thanks, Dave. And Steven, thanks for the question.

Steven Forbes — Guggenheim Securities — Analyst

Sure. And just a quick follow-up. You mentioned the 20% assortment expansion during the quarter. Curious if you can comment on whether you saw sort of an immediate impact or whether you expect to see one over the coming weeks here on the back of that assortment expansion? And then if you could just comment on how the assortment is expected to evolve throughout the remainder of 2023?

Jonathan E. Johnson — Chief Executive Officer

Sure. How will it evolve? Remainder of 2023 will continue to expand breadth and depth. I do think there’s — there was opportunity in Q4 as we expanded into small appliances as one of our competitors was on the ropes, and many of its suppliers were eager to expand their distribution channel. And Overstock was a good partner there. That will continue as [indecipherable]. So we see continued opportunity there.

Dave, I know you were at High Point Market this weekend and earlier this week. Anything you want to add to this?

Dave Nielsen — President

Just we’re seeing the product additions. These partners of ours in our asset-light model, while they have been strapped, as Jonathan mentioned, with the inventory glut, their cash being tied up in their current inventory assortment. They are product generating, product creation powerhouses and all of our partner base are looking for ways to innovate, adjust to the cost pressures, and many different things going on and altering packaging and the way things are shipped to cut costs. So there’s a lot of different ways to innovate and add new products that our partners are very involved in and our merchandising kings are very involved in that with those partners.

Jonathan E. Johnson — Chief Executive Officer

And those ways we’ll always include and are particularly focused right now on good, better, best. We’re in the right categories. It’s just expanding the offering in that way. I’ll also tell you, Steven, our partners like that we treat them as partners. We’re not there to squeeze them. I mean, yes, we always want the best price. There’s some of that back and forth as there isn’t any business, but we pay them quickly. We’re not in the business of disintermediating them and treating them unfairly.

We win, our customers win and they win. This is a three-legged tripod where everyone wins and our partners get that. And it’s why we’re — it’s why we think we’re growing our breath and depth excuses faster than our plant. And by the way, it wasn’t a sandbagging plant. It was a push to grow plant.

Steven Forbes — Guggenheim Securities — Analyst

Thank you.

Jonathan E. Johnson — Chief Executive Officer

Yeah.

Operator

Our next question — one moment, please. And our next question comes from the line of Seth Sigman of Barclays. Please go ahead.

Seth Sigman — Barclays — Analyst

Great. Good morning, everybody. Thanks for taking the question. My question is really around the improvement that you saw throughout the quarter. It does seem contrary to what other companies have been discussing. Can you just comment on that? Do you think it’s more specific to Overstock, maybe something you’re doing with discounting or marketing? Or do you think it reflects, I guess, a broader stabilization or improvement in consumer demand? And then I have one follow-up. Thanks.

Jonathan E. Johnson — Chief Executive Officer

Yeah, and I’ll comment and would love to get Dave’s thoughts on this one too. I don’t think our improvement represents a broader stabilization of consumer demand. I think the customer — the consumer is still under tremendous pressure and has become very much a savvy shopper, a smart value seeker, and when she shops, she’s looking for a good deal, one that we provide.

I do think our team took extraordinary efforts in — toward the — in the last third, last month of the first quarter, spent a lot of time together improving their collaboration. So I think there was some better execution than we’ve had. And so I think for us, it came to really strong execution. And maybe Dave, you could talk to some of those specifics.

Dave Nielsen — President

Yeah. Thanks for the questions, Seth. It’s interesting. I just can’t put an emphasis enough on Jonathan’s comments around the pressures in the market by the consumer, and we see it every day. We watch our competitive pricing, and our competitive KPIs like a hawk and compare them to several of our peers in the industry. And there’s been a lot of focus. I’ll just put it at that. I won’t get into detailed specific product strategies, but I will tell you a lot of focus around the discounting of the right products make a difference. Jonathan?

Jonathan E. Johnson — Chief Executive Officer

Seth, Dave gave you a great color. I think the consumers going to continue to be under pressure, and I think that’s why smart value makes a difference. I think about the looming. If student debt holders have to start repaying those loans that have been on a kind of 24-month hiatus, that’ll be pressure on the economy.

I think the Fed seems bound and determined to keep raising the rate. That’ll be pressure on mortgage rates, which are impact our industry. So being able to run a business leanly offers smart value and turn a profit is crucial to getting through whatever canyon of recession or pullback we are in. And I think we’ll be in for a while. And that’s why we run the business the way we do profitably or a positive adjustment even down right now.

Seth Sigman — Barclays — Analyst

Right. I’d love to follow-up on pricing and AOV. AOV was down this quarter. I’m curious, is that related to discounting? Are you actually rolling back prices? And I guess in general, I’m curious if you could discuss the tools in place today, maybe what’s different versus the past to effectively manage pricing and maintain that value proposition in this environment where prices do seem to be coming down across the industry?

I assume that’s different than the last two or three years when everything was just going up. So I guess like what’s changed in your process and the tools that you have to more effectively manage that value proposition?

Jonathan E. Johnson — Chief Executive Officer

Yeah. Adrianne, you want to make an initial comment on that? And maybe Dave, you could add to that.

Adrianne Lee — Chief Financial Officer

Sure. Seth, I can kind of discuss the AOV year-over-year, which was, I think, relatively flat, slightly down. I would say there’s three main things that’s attributable to all of which we mentioned in our prepared remarks. Clearly, discounting did increase year-over-year, so that impacted our gross margin and AOV. We did say kind of in my remarks too, we have seen some trade-down. Now for us, that’s not a bad thing. We want to make sure that we meet the consumer where they are and the price points they need.

And then third is we have seen some cost deflation, and as we’ve talked about that, it’s really important for us to pass that on to our customers so they can realize that smart value tenant. So I would say those are about the three things, primary impacts of our AOV year-over-year. Dave?

Dave Nielsen — President

Yeah. Thanks, Adrianne. In terms of our pricing mechanisms and how that’s changed, again, we’re asset-light. This is not internally built, so we use external resources who crawl the different markets with bots to understand where we sit versus our competitors on like products. I won’t get more into the details than that other than to say it’s just a maniacal focus on being that smart value offering to our customer.

Jonathan E. Johnson — Chief Executive Officer

Thanks, Dave. And I understand we got a number of people in the queue in about 15 minutes, so we’ll get a little CRISPR on our answers. I will get CRISPR on my answers. I know I’m the main offender. Operator?

Operator

One moment for our next question. Our next question comes from the line of Rick Patel of Raymond James. Please proceed with your question.

Rick Patel — Raymond James — Analyst

Thank you. Good morning, everyone. Can you talk about the potential to gain share from the development at Bed Bath & Beyond? Anything you can share about what you could do differently to go after those customers since I think they would also be pretty heavily focused on smart value?

Jonathan E. Johnson — Chief Executive Officer

Yeah, right. Great question. It’s — we operate in a large and fragmented marketplace. So whenever there is white space created by any struggling competitor, we view it as an opportunity to capture market share. We view it that way in the third and fourth quarter. And you saw we got into small appliances in a bigger way and did well there. We are well aware that Bed Bath & Beyond has filed for bankruptcy, and our suppliers are well aware that they’ve filed for bankruptcy.

When Dave was in High Point this week, suppliers that have supplied to Bed Bath & Beyond are looking for expanded distribution channels, even ones that have been with us want to use us more. So we think there’s some real opportunity to take market share, of course, with partners and perhaps otherwise, but I don’t want to comment specifically on the steps we may or may not take to maximize our ability in this situation.

Rick Patel — Raymond James — Analyst

And then a question on gross margin. You had a year-over-year increase despite pretty widespread promotional activity in the marketplace. And you touched on merchandise actions and operating efficiency. Can you provide additional color on those areas that are offsetting the higher discounts?

And as a follow-up, I think you touched on gross margins being — the 22% gross margin level being the right level going forward. It did a little bit better in the first quarter and it would suggest a year-over-year decline as 2023 moves forward. Any thoughts on that would be great.

Jonathan E. Johnson — Chief Executive Officer

Well, let me comment briefly and then go to Adrianne. We always say 22%-ish. We know there’s ish is a little wiggle room. I think one of the reasons we’re able to maintain consistent gross margins in a time of inventory glut and liquidation is our asset-light business model. We did not buy and own that inventory that we had to liquidate. And we worked closely with our partners to help them move their inventory, but at our gross margins.

I can’t say enough how much I like our asset-light business model, particularly when you’re talking about the ability to maintain gross margins. We don’t make that inventory bias and we kind of can control that. And we like the number 22%-ish a lot. Adrianne, Rick asked about promotions and other things. Any comment on that piece?

Adrianne Lee — Chief Financial Officer

Rick, like you said, we mentioned merchandising actions and operational efficiencies. This kind of happen quarter in, quarter out at different magnitudes, just things like negotiating with partners, things like kind of sponsored product opportunities, customer care efficiencies, warehousing improvements. So we’re always looking kind of in those buckets and quarter in, quarter out trying to improve our results there.

Rick Patel — Raymond James — Analyst

Thanks very much.

Jonathan E. Johnson — Chief Executive Officer

Thank you, Rick.

Operator

One moment for our next question. Our next question comes from the line of Anna Andreeva. Please go ahead.

Anna Andreeva — Needham & Company — Analyst

Great. Thank you so much and good morning guys. We had a question on opex. I guess that’s to Adrianne. You guys have managed the P&L very well for a number of quarters now, expense deleverage widened though a little bit in 1Q on a smaller sales decline. So could you provide some color on how we should think about expenses as we go through the year? Can you still manage dollars down double digits, even on top of pretty significant declines from last year, especially as we lap the back half?

And secondly to Jonathan, and apologies if I missed this, is Bitt [Phonetic] expected to be speaking at the Investor Day coming up and just any color on performance there? Thank you so much.

Jonathan E. Johnson — Chief Executive Officer

Sure. Let me address the second piece first and then turn it to Adrianne to address the first. Bitt will not be participating in me Medici Ventures Day. It’s the four companies that are listed on the slide that will be there. And I hope you submit some questions on our Investor Relation website. Do so this week so we can get them to the teams ahead of time. I think it’s going to be an enlightening day.

Just before I turn it to Adrianne on opex expenses, can we continue to deleverage down to zero? Of course, not. Of course not. But you’ve seen as we’ve come out of the pandemic and the consumer trends have changed and our sales have declined, we’ve been able for now 12 consecutive quarters to have positive adjusted EBITDA. We’re maniacal about expense control.

Now we can’t be maniacal down to zero. That’s why we’re very focused on improving top-line sales. We like the fact that the trend is reversing. It seems to be — I mean, look, it’s still bound, prefers to admit it, but it’s getting better and that’s the beginning of getting it fixed.

Adrianne, I probably stole your thunder. But if you want to add anything?

Adrianne Lee — Chief Financial Officer

No, not at all, Jonathan. I just think, Anna, as we mentioned, kind of that $50 million per quarter is about where we run on average. And I think when you think about our revenue and expense, I don’t think the kind of declines, as you mentioned, will match, right? Just because as Jonathan mentioned, we can’t go down so far on that fixed base cost. But we’re always looking for efficiencies and ways to make that number as small and efficient as possible while delivering a profit.

Jonathan E. Johnson — Chief Executive Officer

And I will say, Adrianne — also, Adrianne has done a very nice job managing expenses. The extra expenses we’ve been able to bring out of the rag quarter-after-quarter. This is the team that knows how to run efficiently and Adrianne is helping us do that even better.

Anna Andreeva — Needham & Company — Analyst

All right. Terrific. Thank you so much, guys.

Jonathan E. Johnson — Chief Executive Officer

Welcome.

Operator

Getting our next question. Our next question comes from the line of Curtis Nagle of BofA. Please proceed with your question.

Curtis Nagle — Bank of America — Analyst

Great. Thanks very much. Just a quick one on EBITDA. Jonathan, appreciate the color. In the rest of the year, just fortunate a little bit more. I think on the prior call, you had mentioned that not every quarter would be profitable. Do — should we now expect that? So we’ve got two key profitable, same for 3Q and 4Q? Or is there some potential variability there?

Jonathan E. Johnson — Chief Executive Officer

Curtis, you do well to remember my words from February. Good for you. Glad someone’s listening. Look, I — we’re pretty clear we expect to have a positive adjusted EBITDA in the second quarter and we expect to have for the year and talk about a tale of two halves with the first half being probably the hardest half of the year. So that — take that. It’s for what it’s worth.

But we feel like we — trying to think. I can think of the word in Japanese, but I can’t think of it in English. We feel like we kind of kept going through Q1 didn’t well, ed out a $3 million adjusted EBITDA. Q2 is generally bigger than Q1 on the revenue side. So here we are.

Curtis Nagle — Bank of America — Analyst

Okay, fair enough. And I guess just sticking on the topic in terms of sales progression and like you said, tale of two halves to keep to it should be better. In terms of just, I guess ranking, sort of what the most important drivers would be — would assume just compare to some degree, more inventory, marketing, all that? How does the macro or just I guess, consumer fit into that?

Jonathan E. Johnson — Chief Executive Officer

So the growth drivers are on that flywheel slide we show. They haven’t changed. There’s what — there’s — those are the things that got to drive our business and they’re pretty standard running the business the way we’re supposed to run it. The macro will impact it. The macro has impacted it. I mean, the last two years is people’s sentiments have changed. Folks aren’t buying as much patio furniture when they’re spending hundreds of thousands of dollars to go to Taylor Swift.

It’s just people are doing different things today than they were doing during the pandemic. As I mentioned, if the Fed continues to raise rates and mortgage rates goes up — go up, that’s hard. So macro is what makes us the most cautious. We control the controllables really well. It’s the bigger environment that we react to and we think our asset-light business model means we’re fairly nimble reactors and do so better than others. I hope that answers the question.

Curtis Nagle — Bank of America — Analyst

Yeah.

Jonathan E. Johnson — Chief Executive Officer

Take one more. Operator, I know we’re coming up on the bottom of the hour.

Operator

Oh, all right. Our last question will be coming from the line of Peter Keith of Piper Sandler. Please go ahead.

Peter Keith — Piper Sandler — Analyst

Hey, thanks. Good morning, everyone. And Jonathan, for what it’s worth, I’d rather buy patio furniture than go see Taylor Swift, but…

Jonathan E. Johnson — Chief Executive Officer

You and me both. You and me both. That’s good.

Peter Keith — Piper Sandler — Analyst

The one thing I wanted to ask, we get questions a lot about the cash position. So any evolution you’re thinking around capital allocation? You’ve got 40% of the market cap and cash, stock price below 20 [Phonetic], but industry backdrop stuff. So what are you guys sticking here?

Jonathan E. Johnson — Chief Executive Officer

Well, I won’t comment on — my comment on 40% of the market cap in cash makes me — make our market cap is too low. That would be my first comment there. We think in difficult economic times, the term we try and use internally is fortress balance sheet. We think it’s important to have cash. We think opportunities are and will arise. And it lets us look at things in a way that our competitors can’t or may not be able to.

And so although we did not buy stock back in the first quarter, we’ve been having a little bit of extra cash, given the current environment is right. We’re continuing to look at M&A. We look at it really carefully. It’s — I think the worst thing a company can do is dumb M&A. Because you get excited about a deal. We’re going to do something that enhances our home brand. That’s consistent with our asset-light business model. That’s something that moves us forward even with all the difficult synergies or putting things together that M&A involved.

So I know we’ve got more cash than maybe — 40% to market cash, probably a ratio. Most people think it’s too much, but we think it’s rather have it than not have. I guess that’s what I’d say, Peter.

Peter Keith — Piper Sandler — Analyst

Okay. I’ll leave it there. Thank you very much.

Jonathan E. Johnson — Chief Executive Officer

All right. Well, everyone, thank you for joining our call. Even in a tough macro and industry environment, I’m bullish on the Overstock business. We’re arresting our top-line slide. We live by our profitability tenant, and these allow us to maintain our strong balance sheet is the last question we went to. Thank you for participating in today’s call. We appreciate your interest in and ownership of Overstock. We’re going to keep doing the best we can to make that a good investment for everybody. Thanks.

Operator

[Operator Closing Remarks]

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Q1 2023

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