Bed Bath & Beyond - Earnings Call - Q1 2015

Transcript

Operator (participant)

day, ladies and gentlemen, and welcome to the Overstock.com first quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance, please press star and zero. As a reminder, this conference call is being recorded. I would now like to turn the call over to Stormy Simon, President. Please begin.

Stormy Simon (President)

Thanks, LaToya. Good afternoon and welcome to our first quarter 2015 earnings conference call. Joining me today are Dr. Patrick Byrne, our founder and CEO, and Robert Hughes, Senior Vice President, Finance and Risk Management. Now, I'll turn the call over to Rob, and he'll highlight some of the financial results.

Robert Hughes (SVP of Finance and Risk Management)

Thank you, Stormy. Before I cover the financial highlights, let me remind you that the following discussion and our responses to your questions reflect management's views as of today, April 27, 2015, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in the press release filed this afternoon and in the Form 10-K we filed on March 12, 2015. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our investor relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Please review the safe harbor statement on slide two. Turning to slide three, Q1 2015 total net revenue was $398.3 million, a 17% increase from last year.

Q1 2015 gross profit dollars increased 18%, $398.4 million, and gross margin was 18.9%. Q1 2015 contribution was $47.5 million, a 17% increase from last year. Q1 2015 technology and G&A expenses combined increased 25% to $43.6 million. Pre-tax income for Q1 was $4.5 million, and net income was $2.7 million. Trailing 12-month operating cash flow for Q1 was $67.4 million. Patrick, with that, let me turn the call over to you.

Patrick Byrne (Founder and CEO)

Thank you, Rob. Thank you, Stormy. I'll be taking folks through the slides to begin with. Welcome, everybody. Slide four, quarterly revenue growth, as you see, it's sort of high teens, still looking to break that 20, and of course, we're still dreaming of ways we might get back into more of a hyper-growth phase, but we're happy with this. We think it's really about 10 points above the industry, the median of the industry, so quarterly revenue growth, next slide, the gross profit growth, you go right to the next slide, slide six, the contribution growth. It's encouraging to me that when those all get tuned in, when we're tuned in as a company, those come together.

When you've seen big divergences in our numbers, that's when things are really out of tune, and it's encouraging to me that we've sort of got these all up into that and they're tuned in. They're not diverging. 17 on contribution. And I guess I'll make a, well, we'll be getting back to contribution on another slide. Seven, contribution is staying at 11.9%. That's, I think, 12.0%-12.5% is the sweet spot for our business, is my experience tells me. And this was a nice recovery, nice recovery this year. We're figuring some nice things out. All I'm going to disclose is that we're figuring some nice things out. Places we're still shipping discounts out here and there, and we're able to just keep on passing them on, and we like that. Slide eight, let me address this. So slide eight, the red line is our contribution margin, 11.9%.

Amazon is somewhere between the black and the blue. And Rob, why don't you take a moment to explain why it's a range for them?

Robert Hughes (SVP of Finance and Risk Management)

Okay. Yeah, what we showed here in the black line is just looking at their total net sales and calculating as best we could from their public disclosures what that contribution margin would be, but that includes, for example, their Amazon Web Services and other things that we don't have, so it's hard to compare on that basis, so then we also looked at it, just looking at their product sales, and that's the lower line there, and although they did disclose Amazon Web Services this time around, they didn't break down the expenses by line item, but you can clearly see that the margin in that business looks like, if I recall, it was around 17%, so it's pushing what we show as the black line here clearly.

So again, that's why we believe their real comparable contribution margin is going to be below that and more towards what we show here is the blue line without their service business in it.

Patrick Byrne (Founder and CEO)

And then also there's Wayfair, whom Q4 ran at -3%. Let me take a moment to explain why I spend so much time talking about contribution margin. And I have to give credit where credit's due. This actually came from a conversation 10 years ago with the Herb Allen folks who pointed out to me, see, I know that I have sometimes an adversarial relationship with Wall Street, but I've gotten some good pointers too. Somebody pointed out to me about 10 years ago that the value of measuring this would be like a media station measures itself by contribution margin. I've always been surprised at how Wall Street looks at various companies in our industry and, to be honest, how little logic is involved. People talk about the price-sales ratio of Amazon versus eBay, but a dollar of sales is quite different for the two companies.

One's at 68% margin and one's much lower. So to me, multiples of sales don't make any sense. Multiples of gross profit start making sense, but you got to remember how different companies book the components of cost of goods sold differently and in some cases rather imaginatively, I think. So you have to true up for that. But ultimately, where the rubber meets the road is, I think that looking at internet businesses as a multiple of contribution margin has a lot of rationality behind it. You certainly don't want to look any higher up the income statement than contribution margin. So that's why I spend so much time on this, and so I look at a competitor in one case who, yeah, their sales grew 35% in the fourth quarter, but they spent 88% more on marketing.

And you can get all excited about, I mean, we were there once too. We've been in that place 10 or 12 years ago. And at the end of the day, of course, no amount of scale helps you if you're at zero. In fact, if you're at negative, it hurts you. So no amount of scale, that's a business model issue, not an operational issue. So to me, that's why I spend so much time and I've spoken for so many years about contribution margin. Okay, let's go on. Slide nine. Total technology and G&A expense. This is going up, but I have to tell you, we're sticking right to our strategy. We have a strategy we have spoken about in the past of dropping half of the increase in contribution margin to the bottom line.

I've surrounded that with different caveats about, well, just don't look at anything. We don't do anything quarter to quarter. We're budgeting and planning on a year-by-year basis. So that's not going to hold true quarter by quarter. Then I think about a year ago, I said to folks, "I'm not even going to back off that commitment because we just see so many things we should be doing and that we are funding and doing." And of course, in the long run, it's a whole question of does it pay off. But for example, I used to say 10 or 12 years ago, we're not a technology company. We're a lemonade stand with a computer. I wanted to emphasize within the company how we were focused on old-fashioned retail principles. And I mean, that's how we thought of ourselves.

But we have become a tech company, and we're seeing places to put expense and develop stuff that's better than anything out there. And most of it is right in our core business. A lot of it is stuff Stormy can talk about that she's been designing, and nobody is more in touch with our customer than Stormy, both the consumer customer and the supplier customer. But beyond that, there are some other things that you hear about out there, like Project Medici is this thing to take on to change Wall Street. And you may have noticed that Friday afternoon we filed something with the SEC that has some mention of this. So anyway, we don't take part in the internet strategy of let's lose $500 million a year or $100 million a year.

I mean, there was a brief period where we had to do that. But I think for me, it's a fine goal. If we can be growing this much faster than the median of the competition out there and really laying down the foundation for a big future, this is the right strategic plan. If it means we're keeping our pre-tax operating income sort of around the $15 million-$20 million dollar range as we explore these different things, that's our strategy. So people shouldn't be surprised at it for now. Okay, slide 10, quarterly net income. So again, I do want to $2.8 million, $2.7 million. And again, we don't worry. I know that a lot of people in Wall Street worry about this number quarter to quarter. First of all, the quarterly numbers don't make any sense.

It's an annual number for us because, as I think I've mentioned a number of times, we really are managing the business to make I want to keep it positive each quarter. I think we've now been positive 13 quarters. I think we're the only pure play out there other than eBay or somebody I can think of that's doing that. But to us, it's not about how much do we grow Q1 GAAP net income versus last year. That's not where we are in the game yet. We're up against people who are spending 88% on marketing to grow 35% and comfortable losing hundreds of millions of dollars. And it would be too conservative a strategy to be focusing on just trying to grow this, and especially quarter to quarter. So I'm very comfortable with our growth and expenses.

Operating through free cash flow, we have $25 million free cash flow and $67 million trailing 12-month operating cash flow. So we have a nice, healthy business spinning off a bunch of cash. Okay. GAAP inventory turns, page 12. Of course, we get the benefit from all this drop shipping, so this number always looks fantastic. I am a little discouraged that we're not getting our inventory turns up. However, I should let folks know that there's quite a big factor in here that kind of washes out the normal analysis of this, and that is partner returns. Would you like to explain, Mr. Hughes, the effective partner returns on this number?

Robert Hughes (SVP of Finance and Risk Management)

Sure, I'll comment on that. So part of our business model and our agreement with our partners is when we get returns of their merchandise, we will restock them. And so when we restock them, then that becomes part of what we call our direct business and becomes direct inventory. So that's weighing a bit on the lower line here in the GAAP TTM Inventory Turns the total. And we think it's an important element of our business with our partners to do that, but it does weigh on this a bit.

Patrick Byrne (Founder and CEO)

It does. It does. And since 90% of our sales are now drop shipped, but the returns associated with those 90% all count against the capital of the 10%, it's really a great big chunk in there. So I think that our real, setting that aside, our real turns are closer to six on what we're ordering, which is always what I want. I think it detracts 21 points off our core giveaway. If you go to slide 13, our giveaway is all-time high on a GAAP basis, 1,095%. But on a direct basis, it's 64%. But again, of that 64, there's about 21 points, I believe, that is tied that if we didn't have, if you count it without counting our partner returns, it's at 85. It's about six turns. It's still not acceptable. I think we should be clearly breaking 100 and maybe doing significantly better.

But you just ought to be aware when you're looking at these giveaway numbers that we should probably report this actually, even setting aside partner returns. And then there was this very large purchase late last year of Bidz.com. The Bidz.com inventory, I can't disclose how much it was, but we got it for a real song. But that has swelled our inventory too. But we're working through that. Comfortably, in fact, it's adding, it's improving our margin. It's so good, it's improving our giveaway. Okay, slide 14. Unique customers, cost per customer, again, slight, well, 1,472 versus 1,319. Let's go to slide 11, number of new customers. I know Stormy would probably want to point out increasing slightly from 1.77 to 1.9. Oh, that's unique customers, sorry. Slide 15, new customers, again, slight improvement. However, the value of our new customers is going up.

So slide 16, our average order size is now an all-time high for Q1, $174, up from $165, up from $153. So it's kind of an eight-ish, averaging about 8% growth. Some of that is mixed shift. And we're also just getting there's areas where I think really, really good and then areas that we're still feeling our way around. And it's so funny when we find one of those areas, I don't want to disclose for competitive reasons the area I'm thinking of. We dig in some area and realize, gee, there's a whole lot of low-hanging fruit. We can still make nice improvements. Slide 17, gross profit per transaction, same story. Again, this creeps up a little bit each year, all-time high for Q1, $28.69. Slide 18, we have finally broken the barrier of 1,000 corporate employees.

Stormy, would you like to describe how we think of corporate employees versus?

Stormy Simon (President)

Corporate employees is everyone minus customer service and warehouse.

Patrick Byrne (Founder and CEO)

Right. And not customer service and warehouse because those employees scale linearly with sales. If sales double, you need sort of twice as many people at the warehouse, twice as many people in customer care. But the corporate employees, theoretically not. So we have, in general, I would worry about this, except I look at the individual projects people are working on, and we're doing so much interesting and creative work that is adding to the overall enterprise that I wouldn't want to lose any of them. And actually, our HR function has become. We've installed Workday, which is a great system. Do you want to say, and Stormy has been.

Stormy Simon (President)

I would just say on the corporate employees, I think that we ran lean a few years. I actually think that we might have hired a little more a little earlier. But we have brought our recruiting efforts in-house. It's been good culturally to do that and to find the right employees for the right place. And we're highly focused on that. This number makes me happy, even though I know it's a big increase. We're undertaking a lot, and competition is stiff, and we need the talent. Found the bodies.

Patrick Byrne (Founder and CEO)

We are really attracting talent. We're attracting really high-caliber people from all over the country who are coming in technology, sourcing, marketing.

Stormy Simon (President)

Turns out Utah is not so bad.

Patrick Byrne (Founder and CEO)

Yeah, we're attracting a lot of great people to Utah and finding a lot of great people in Utah. Anyway, we have a really we're getting some spectacular hires. Slide 19, these are just innovations we were working on last year. I told you about Farmers Market. I mean, Farmers Market is a negligible amount of business. It's something that may, I'm not sure how much I did this like Pets, which ended up costing a few hundred thousand to do as a social service, or how much I think this can actually work. I do think that Farmers Market can actually be something. We're currently covering 33% of the country with local home delivery. So there are these things called CSAs around the country, Community Supported Agriculture. We built a platform into which they can all integrate. There's a lot of reasons for them to do so.

But you have to live in an area where you have local farms working in a CSA. What's the 33%? Another week or two, we should be crossing 40%. And it's going a little bit slower. We have lots of people. It isn't a problem getting the people coming to us. It's getting the people integrated. But we should be fifth, probably by the time we speak again, I think we'll be at 50%. Overstock, I'd like to turn over to Stormy to talk about the fulfillment services and the Supplier Oasis.

Stormy Simon (President)

Sure. On the past calls, we referred to Supplier Oasis Fulfillment Services, and as we've continued to build the business, we see reason to divide that. Now is a great time to explain it to everyone, so we have Overstock Fulfillment Services where it's really just exactly that. You can put your product in our warehouse. We run the warehouses, and we run them really well. We have a few dozen folks that are currently in that. We're just exiting a beta with it, but it's successful, and it's true Overstock value to put your products there. The second part of that equation is Supplier Oasis. Supplier Oasis is a technology platform with which our suppliers will transact with Overstock as well as potentially through other channels should they choose to do so, so they're really two businesses. The Supplier Oasis business is our internal technology.

We've rewritten the partner platform and made it much more agile, very much an inventory management tool, and it's pretty slick. So those are two different things. Our partners are transitioning over, and it's a great technology.

Patrick Byrne (Founder and CEO)

Yeah. And the Overstock fulfillment service competes with Amazon's head-on with the exception of.

Stormy Simon (President)

Amazon will get you in their fulfillment service, and then they'll give you these benefits on site. We're running a fulfillment service because it turns out we're really good at logistics. We've been doing it a long time. We have some real talent in that area. And so our fulfillment service is agnostic to whether you're fulfilling an Overstock order or you can fulfill an Amazon order through it. We help you fulfill Overstock orders, but we're agnostic.

Patrick Byrne (Founder and CEO)

Let me explain what that means for the people who are not that. If you're a candle maker and you're selling your stuff at Amazon and you have it in an Amazon warehouse, they support your sales. But suppose you have a sale on eBay. They'll let you send the order to the Amazon warehouse, and they'll ship it to your eBay customer, but their fees go way up. That's called out of network.

Stormy Simon (President)

Yes.

Patrick Byrne (Founder and CEO)

We built ours so it is agnostic. And that's what Stormy said. And our fees are what, about half?

Stormy Simon (President)

Yeah, maybe even a little less. But they're fair fees. I mean, it's not. We're not doing this for free. And I think people will join the service and.

Patrick Byrne (Founder and CEO)

I think Amazon has been extracting sort of monopolistic rents here, frankly, and we've.

Stormy Simon (President)

We're disruptive.

Patrick Byrne (Founder and CEO)

We're disruptive there. And actually, I think it's better in the sense of, well, no one else can really do it like Amazon is doing it until we came along. You can't have a ChannelAdvisor and people like that because they don't have the customer-facing website. Because we have the customer-facing website, we give a lot of information back to our suppliers that is of value to them. So this is a program Stormy has dreamed up and built in the last few years. And we had to upgrade all our supply chain technology. So it has been rebuilt to support this whole new business line.

Stormy Simon (President)

With that came an international support as well. We are globally making a footprint. We will be live in China with a fulfillment center selling within China on the marketplaces there in May. That's exciting.

Patrick Byrne (Founder and CEO)

That's really exciting. And we scaled back our plans to expand elsewhere this year and another part of the world. But we want to get this right. We think we have something pretty special coming together here, and we just want to get it right before we spend too much hitting the world with it. But getting China live and selling products through their marketplaces is, there's a whole team building that.

Stormy Simon (President)

Yeah. But once we get it right there, I think we'll be able to take on other countries a little more easily. But the technology that supports the fulfillment service, our Supplier Oasis, was needed to support our international efforts.

Patrick Byrne (Founder and CEO)

That's what we've basically been putting, well, I would say the accounting people who would fully burden everything would probably be saying $15 million-$20 million a year for a couple of years, and do building out the Supplier Oasis and ops, would you go along with that, Rob? A burden basis?

Robert Hughes (SVP of Finance and Risk Management)

Yeah. Fully burdened to where we kind of generally say, "Let's double the cost to cover everything else." So it's been substantial.

Patrick Byrne (Founder and CEO)

Maybe even a little bit more than that, I'm thinking. So on that basis, $20-ish million a year. And it's just starting to pay off. But what's nice is, do you want to say anything about what's happened? We're having a lot of people. I know you mentioned how many people have signed up. But our warehousing, as we were taking down warehousing capacity, we're filling it up with these kinds of suppliers.

Stormy Simon (President)

Yep.

Patrick Byrne (Founder and CEO)

And what Stormy has overseen the rebuilding of in the last two or three years supports all three of these things: Overstock Fulfillment Service, Supplier Oasis, and it was all built international.

Stormy Simon (President)

Right, and let's give everyone peace of mind to know we had great technologists.

Patrick Byrne (Founder and CEO)

We've gotten so much better at the management of these kinds of projects. It's why we've shifted our strategy to being really a tech company. We see these errors. We can jump out and do things no one else is doing it. Loyalty. I've got it. So have we released publicly the percentage of the quarter sales that were Club O? Okay. Well, a little more detail of what happened on the quarter, bit of a slow start on the quarter. Things were a little bit soft for us at the beginning, and then we accelerated in the second half. But now for the quarter, it's just under 20%. But it's accelerating wonderfully, and it's now running in the 20s and 20% of our sales. And like I said, it's accelerating rapidly. We love our loyalty program.

While it may look that some of these different things we're doing seem a little bit disjointed, the truth is the master plan is to tie it all together with the loyalty. Last, Medici. Medici is our internal name for the project of using crypto technology to reconstruct some financial technology. We basically have a subsidiary that's a fintech subsidiary that is developing some. I'm not even sure at this point. It's a legal or is that just where we're sticking the IP? Anyway, do you want to comment on that, the legal structure?

Mark Harden (Corporate Treasurer of Investor Relations)

Subsidiary.

Patrick Byrne (Founder and CEO)

Subsidiary. But so far, it's just been expenses. But we do have stuff that let us file. We have reason. We didn't file as a lark on Friday when we filed something in our amended S-3 that says we'd like to issue a crypto security. But the truth is we want to issue. We don't want to raise capital. We have plenty of capital. We're generating capital. I think the price, I wouldn't want to raise money at anything like today's price. But purely as a small proof of concept, it might. Well, we filed the S-3. We filed the S-3. That speaks for itself. But we think this technology, there's Jamie Dimon. You may have seen last week it was reported two weeks ago.

Reports all over, Jamie Dimon, head of JPMorgan, devoted space in his annual letter saying we are basically they're freaking out about the Silicon Valley guys who are coming into the world of fintech. Well, if you read between the lines and not even between the lines, he sure seems like he's talking about some things I've said in some of those in some of his lines. And we think we have some very interesting patents applied for, two very interesting patents that could be of real value and some real financial technology that we're developing that it goes to our Mark. Do you want to comment on any of this?

Stormy Simon (President)

I don't think he does.

Mark Harden (Corporate Treasurer of Investor Relations)

I will agree with you. It is interesting. But the S-3 that was filed allows for the possibility of a digital securities offering that. That was the S-3 that was filed on Friday. And that's about the only thing that's different in the S-3 except for the offering amount raised too.

Patrick Byrne (Founder and CEO)

Yeah. We did raise. So my dear departed father always instructed me to always keep a Universal shelf on the shelf. You always keep it there because if the day comes that you do want to issue something and you don't want to have to go with filing and so forth, so it's quite a hassle to keep it updated. But we've had a Universal Shelf for a decade now or something. We did just raise it from $200 million-$500 million. That has no significance. We're not thinking of doing anything like that. But as long as you can have a Universal Shelf, why not have it cover anything you can think of doing? But we added on Friday some language that says crypto that may be digital security. And I see Wired Magazine just picked up.

Someone just handed me a Wired magazine where they picked up on it. So I think that this technology has some extraordinary potential. Next slide is questions. Was that first going to be for Stormy or did I dawdle?

Stormy Simon (President)

No dawdling. We're not dawdlers.

Patrick Byrne (Founder and CEO)

Okay. Let's go to questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. And once again.

Patrick Byrne (Founder and CEO)

Stormy?

Stormy Simon (President)

Yes.

Patrick Byrne (Founder and CEO)

I see that we have had some questions emailed. Stormy is going to walk through before we take any. Stormy, why don't you go ahead and read this?

Stormy Simon (President)

Have you learned about the economics of shifting Largess to Club O members? Does it have any impact on contribution margin and growth? At what pace do you plan on making that shift?

Patrick Byrne (Founder and CEO)

Yes. I see you're using my language. I must have said this in a previous call, but it is Largess. We're shifting our Largess to the people who give us their patronage, their loyalty. It's having an amazing effect. It makes them far more valuable. And at what pace do we plan on making that shift? Much faster. It is mine and Stormy's bête noire that we're sitting here. I want us off the crack pipe, so to speak. I want us off the wins. I want us off using coupons. I don't like this use of coupons, although we pioneered it. We were really good early on at email marketing. I don't want to keep using coupons. I want to make Club O more shift more and more of that Largess to Club O. And I want it to happen faster.

But all that said, Club O contribution margin is growing at the same pace as Club O overall, which is growing at a very brisk pace. Over three, closer to four times our overall sales rate, just to kind of roughly give it to you. Three to four times our overall sales rate. Anything else?

Stormy Simon (President)

There are three more questions that I have. This is a hard question, but I'm going to ask it because Tom sent it in. It says, "Hi, Patrick. Why are you investing $5 million of our money into a risky Bitcoin VC investment? If people would like VC exposure, then they'll invest in a VC firm. Our money must be spent on projects in which you have direct control.

Patrick Byrne (Founder and CEO)

That's a very fair point. I think of myself as the steward of your capital. In this case, there's an opportunity that's come our way. There's a number of opportunities coming our way. We've actually missed for years. I'll tell you my honest to God thinking. We are on the forefront of so many new companies with new technologies. For years, we have known about emerging technologies before the world seemed to know. I mean, we've had partnerships, and we provide a lot of value. We're basically. I'm not sure if this is true anymore, but at one point, we were the largest pure play who was integrating with third parties. If you got bigger than us, you just built everything internally. We integrated with a lot of third parties. In the process, we got to find out whose technology worked and whose didn't.

In addition, Stormy, being quite the demanding customer, brings a lot of value to some of these relationships. For example, there's a partner who had some great customer service software but worked with us for years, and I would say Stormy drove a lot of the development of their technology, and they ended up selling to somebody for $1.5 billion a couple of years ago. There are more stories in our rearview mirror like that than I care to think of, and so I do want to start finding a way to monetize this front-row seat on a lot of technologies. Now, the Bitcoin thing was a bit different, in that it's not directly tied to our business, and you have a fair complaint, but I'll put it this way.

An opportunity came to me as some of the leading lights in Silicon Valley were behind a company and some names I know and some people I know. I would have surely felt if I had taken this investment myself, which I could have. It would have been a usurpation of corporate opportunity because I think this $5 million bet is a bet on a portfolio. This is a group of really fancy folks in Silicon Valley who are in the crypto revolution, who are thinking about it the same way that I am. This lets us make sort of one broad-spectrum bet on the crypto revolution.

Stormy Simon (President)

That's why.

Patrick Byrne (Founder and CEO)

That's why.

Stormy Simon (President)

I respect your question, Tom, and I think it's really fair that you asked it.

Patrick Byrne (Founder and CEO)

Which Tom is that? May I ask? Mr. Oatman?

Stormy Simon (President)

It just says Tom.

Patrick Byrne (Founder and CEO)

Okay. Well, they didn't print off.

Stormy Simon (President)

And then the second question from Tom is, "I've been an investor since 2004," which we really appreciate. "And it's no secret that many professional investors disapprove of you." Well, I take offense to that, Tom. "Why not offer us a healthy premium, do an MBO, and never have to deal with such questions as this again?

Patrick Byrne (Founder and CEO)

Well, fair enough. My first thought is our job is the company. My job and Stormy's job is the company. It's the company's results. Stock price is the stock price. And I know some people feel that way. Other people tell me they're behind us 100%, and they understand why we do some of the things we've done. But we don't get excited about the stock price when it goes up. It goes down. We focus on the results. And we said, "Gee, we built a close to $2 billion company this year that's running at positive 1%, growing twice as fast as the industry, the median member of the industry at large." And unlike just about everyone we're up against, we're not gushing red ink. And we're finding it so we're playing out our strategy.

The market, I mean, we're flabbergasted how the market values some of these of our competitors. But now all that, so I'm happy with the results. I think that we can do better. We're making some big long-shot bets, but I'm super excited about the business. Now, why not do an MBO? It's not the dumbest idea. It's not the dumbest idea I've ever heard. In fact, I think of it all the time. What I've often felt like was until we wrapped up certain things, I would feel I was taking advantage of my fellow shareholders if we did an MBO at anything like current pricing. And so that's why until enough things that we were working on got public, I would have felt that way. I guess I'm feeling less guilty about it now.

Most of the things we're working on, including the Medici stuff, which will be apparent over the course of this quarter. I think after we get through this quarter, I don't feel like there's any big secret strategies in the bag that I'd be taking advantage of people if we then were to discuss an MBO. I would have felt anytime in the last year or two when that idea started bouncing around the community, both yours and my own circle. I would have felt like I was taking advantage of people until certain things got to the public. But if they get to the public and the public yawns about them, then that is absolutely something. We would need a capital partner, I think. But it's not. Rob, do you want to say anything? First, have I given our general counsel any? Okay. I'll stop there.

Stormy Simon (President)

We're good.

Patrick Byrne (Founder and CEO)

Rob, anything?

Robert Hughes (SVP of Finance and Risk Management)

Nothing to add.

Patrick Byrne (Founder and CEO)

If there were a capital, what kind of capital partner would we be looking for in a world like that?

Robert Hughes (SVP of Finance and Risk Management)

Somebody who shares your philosophy about the company and Stormy's, I think. Exactly who? I'm not sure.

Patrick Byrne (Founder and CEO)

Okay. General Counsel, do you want to add anything other than just pulling the reins on me?

Mark Harden (Corporate Treasurer of Investor Relations)

No, just pull the reins.

Patrick Byrne (Founder and CEO)

But I will feel, Tom, at the end of this quarter. Bring this up again when we talk in July because I actually feel this quarter there's some significant things that will be being revealed to the world. And if we reveal these and the world yawns, then no big deal, and we could actually start thinking about something like that.

Operator (participant)

There's one more question.

Stormy Simon (President)

Sorry, LaToya, we just have one more written in. When will the previous goal of dropping about half of contribution dollar growth to the bottom line become a possibility again? I may have answered that.

Patrick Byrne (Founder and CEO)

Well, I touched on that earlier. It's a possibility now. We could anytime we want. There's probably $20 million of expense, plus or minus, or maybe plus $20 million-$30 million of expense that we could take out of the business anytime we want without really hurting the business as you see it. The truth is there's only about $10 million or $12 million of expense that are associated with projects that are outside our fairway or that won't have a payoff sort of in the next year or so. So let's say we could take $10 million-$12 million out instantly. But again, we're just making so I don't think this year, I don't think you'll see that result. What you might see is us spawn companies that turn out to have a great deal of intrinsic value.

That's where I don't think you see it showing up as an operating income thing. It's that do we generate, do we spin off a company or develop some financial technology, for example, that has some tremendous value? And I think that's the way you'll see it.

Stormy Simon (President)

That's the end of the questions I have here, LaToya.

Operator (participant)

All right. And I do show we have a question from Scott Tilghman of B. Riley. Your line is open.

Scott Tilghman (Senior Analyst)

Thanks. Good afternoon. I have a few questions here. I'll just lay them all out upfront, and then we can walk through them. First, easy one. Any concerns about the changes in shipping prices and specifically dimensional pricing? Second, you did call out some of the items in SG&A that were a little bit surprising. I was wondering if you could categorize what there might be transitory versus more of a permanent issue. Third, yeah, I've had a number of questions recently about your preparedness for the shift to mobile, specifically with respect to search, but also what type of traction you're seeing with the mobile apps. And then lastly, Patrick, you were just talking about spawning companies. There's some language in the press release about potential investments going forward.

It sounds like most of your internal initiatives are public at this point, so perhaps that is more of a cash flow and balance sheet item, but I was wondering if you could comment on that a little bit further?

Patrick Byrne (Founder and CEO)

A lot of great questions, Scott. A lot of great questions. Let me go through the SG&A increase. How about we hit that first, so it's a total of $5.2 million increase. Of that, $1.9 million is sort of directly building out the business as you see it from outside the company. There was a legal increase of $1.5 million related to a number of lawsuits as such. It's all out there, Mark. I'm coming on. We also have a relationship with an outside consulting service at this point. I'm not going to name, but they've been very useful to us, and they're adding about $1.25 million, $1.25 million per quarter, but we think that they are paying for themselves, likely to pay for themselves sort of 20 times over.

Those are the increases, but at the sort of core where the rubber meets the road of the $5.2 million, only $1.9 million is in headcount increase in internal expense structure.

Scott Tilghman (Senior Analyst)

Okay. So just to be clear, nothing unusual in the commentary around the staff and travel-related costs. That's just normal growth?

Patrick Byrne (Founder and CEO)

Yes. That's correct. That's just normal growth. That's $1.9 million. That's about a third of the 34% increase. There's about an 11-point increase there.

Scott Tilghman (Senior Analyst)

Right.

Patrick Byrne (Founder and CEO)

On mobile, so let me hit some other questions unless you want to follow up with that first, or.

Scott Tilghman (Senior Analyst)

Nope, that's good.

Patrick Byrne (Founder and CEO)

Okay. Let me go to your preparedness on mobile, on the shift to mobile. We've been way in front of this shift. In fact, we were initially way too in front of the shift. We built out a mobile thing in 2002, and Americans didn't show up. And we discontinued it in 2007, and the iPhone got introduced in 2008. But our mobile app has, in the last couple of years, won I don't know how many awards for me.

Stormy Simon (President)

It's won a couple of awards, and I would say, as ahead you are of mobile, you always want to be further ahead because that's where everybody's going and spending their time.

Patrick Byrne (Founder and CEO)

We're over, I believe, 50% of our traffic mobile. And whenever we've reported that number, and I've reported it over the years, it's always well above where the industry was at 10% of their traffic mobile and 3% of their sales, we were 20% of our traffic mobile and 10% of our sales and such or something like that. And it's continued. Now we're, I believe, we were at 52% of our traffic mobile. Was that just for? I don't remember the time period. I don't know if that's for the quarter as a whole, but it's pretty representative now, right?

Stormy Simon (President)

Yeah. It's close, and being so heavy with home sales, it's a hard place to make a transaction on your little phone if you're buying a big couch, so the traffic goes there, and they tend to buy on the big screen because they want to make a more educated decision, but I think the traction with the apps, we've been very pleased with it. Our search on mobile is where we get a lot of the traffic because we're very relevant there, and I would say we are as prepared as any home retailer can be, but we will be increasing our content and engagement there this quarter heavily.

Patrick Byrne (Founder and CEO)

Right. And so my point of reeling off those stats is we have been, I think, ahead of the game on mobile. What you're referring to is Google recently came out, and there's a whole bunch of sites that are not mobile-friendly. And they basically said and they give you a ranking. They tell you either you're mobile-friendly or not, and then they give you a score. And what they did for the first cut is what they've said is, "If you don't count as a mobile-friendly site, we're going to radically devalue you." Well, we made that cut. And there's a number of other large guys who did not make that cut, whose sites are not considered. It's a binary thing with Google, mobile-friendly, not mobile-friendly, and you can look it up. We got the flag. We're mobile-friendly. We made the first cut.

We're not as good as we can be and think we can be in another three to six months, but we're still sort of way ahead, but what Google is asking people to do to get mobile-friendly, we've done a lot of, but there's still a lot of runway in front of us, a lot more improvements we can make, so that's what happened with Google, and you ought to look up and see who didn't count as mobile-friendly. Okay. Do you want to address things, Dims, this whole change, everyone's?

Stormy Simon (President)

Yes. I mean, of course, we're always concerned with the shipping prices, but I think what gives me peace of mind is that it affects everyone in our space. It's not just going after overstock. It's something everyone has to be aware of and address.

Patrick Byrne (Founder and CEO)

Right. So Rob?

Robert Hughes (SVP of Finance and Risk Management)

Nothing to further add at this point. We're in constant discussions with our carriers. We're an important customer to them. We've historically been able to negotiate very competitive rates with them.

Patrick Byrne (Founder and CEO)

This is really going to be a function of who wins that game is a function of who has the most granular data about their expenses down to the SKU level because then you can price in where you have more expenses. If you just peanut butter spread your shipping expenses across a bunch of items, then you can't price them correctly. So ultimately, this thing about the shipping dims, that concern is going to be the companies that benefits are the ones who have the most granularity in their expense management down to the SKU level, where, again, I think we're good but have ways that we're getting better.

I mean, significantly, this quarter, I'm so proud of how the team reacted to some things in the first four or five weeks of the quarter and how Stormy directed a very significant Stormy and Rob sort of dug in and got our granularity another level down and how the more granular you can have your data related to your expenses right to the SKU level, of course, the better you can do. So we keep pushing the boundary there. Potential investments going forward, the $5 million investment was quite an unusual investment. I see investments more in the $500,000 line. We did recently make, and I'll be able to describe in the next quarter the nature of the investment, but we recently did make a $1 million investment in something. But the other ones you'll see in just a moment. Okay.

So you will be seeing reported eventually two $1 million investments. And even that is, I think, at the upper edge of, I mean, I think in terms of more of $250,000-$500,000. But two nice opportunities came along, and they're related to technologies that we're users of, and they look like the right people and a great, great, great pedigree of the people and the other investors in the round. And so again, we feel like we're monetizing our front row seat on where a lot of technology development is.

Scott Tilghman (Senior Analyst)

It sounds like this will be more cash flow-centric rather than flowing through the operating statement. Is that correct?

Patrick Byrne (Founder and CEO)

That's correct.

Scott Tilghman (Senior Analyst)

Thank you.

Patrick Byrne (Founder and CEO)

Yeah. As you and others have noted in the past, we have built up a lot more cash than it looked like we needed. And I think when people see the nature of the two investments we've just made, they'll understand.

Scott Tilghman (Senior Analyst)

Great. Well, thanks. I appreciate the color.

Patrick Byrne (Founder and CEO)

Thank you, Scott.

Stormy Simon (President)

Thanks, Scott.

Operator (participant)

Thank you. And once again, if you have a question, please press star then one.

Patrick Byrne (Founder and CEO)

Are we finished, LaToya?

Operator (participant)

We do have one question from Mike Arnold, a private investor. Your line is open.

Patrick Byrne (Founder and CEO)

Hello, Mike.

Hey, Patrick, Stormy. How are you doing? Congrats on the quarter.

Stormy Simon (President)

Thanks, Mike.

Patrick Byrne (Founder and CEO)

Thank you.

No problem. Hey, I'm just thinking out loud here. I noticed in the Amazon press release that they're now offering, I guess, a third-party marketplace for services. And I think Houzz does a similar thing where they sell on a subscription basis, access to the customer base to remodelers and home decorators and such. Just curious if that's another way to monetize your platform given you have an increasing flow of traffic to the site. Thanks.

Absolutely. In our mind, I kick myself. Stormy's been after me for a long time to do this. But do you want to comment on this, Stormy?

Stormy Simon (President)

You go first.

Patrick Byrne (Founder and CEO)

Probably not something we have plans to do this year, but it's been on our drawing board for several years that this, I think, would be a great place for us.

Stormy Simon (President)

Yeah. I think that as we the internet environment, e-commerce environment, e-commerce is becoming content-driven, and people are looking for services. There's all sorts of things going on, and we just have to select wisely. And I think that's what we're doing. So while we may not get into that this year, we will start answering it this year.

Patrick Byrne (Founder and CEO)

And some of the things you've seen us do, like pets. Yeah. There was a social value and service in doing that. But also, it was to develop experience and skill at doing things like search on a whole new type of product. It's not anything like a product we've ever dealt with. The reason for developing that talent was we expect to apply that. We've actually gotten quite good at internal search. And I don't want to go into too many details, but if you start looking at our site and search for stuff versus other sites, we've gotten very good at internal search. And we think there's a lot of areas that we can that's talent that we can apply to other industries than just selling toasters and pets.

Great. Well, yeah. I think you guys are putting together a lot of interesting, I call them Web 2.0 toll bridges or ecosystems. So I think it makes a lot of sense, and hopefully, I'll catch you guys next week now at the Sun Valley. I think I'm going to drive down from Portland.

Stormy Simon (President)

Calm down, Mike. We'd love to see you.

Patrick Byrne (Founder and CEO)

Come down, and I think by the time we have our July conference call, the several big things that we're going to be able to have more open discussion of the future strategy, I think.

Stormy Simon (President)

If not, they're going to ask us why we don't.

Patrick Byrne (Founder and CEO)

Okay.

Thanks, guys.

Stormy Simon (President)

Thank you.

Operator (participant)

Thank you. There are no further questions in queue at this time. I'll turn the call back over for any closing remarks.

Patrick Byrne (Founder and CEO)

Thank you, shareholders, for sticking with us. I'm really happy where things are, although we always see ways to improve, and we're super excited about some of this money, your money, that we've been spending. We think it's going to really pay off. So, Stormy?

Stormy Simon (President)

We make every decision with the shareholder in mind. So we appreciate the questions, even the tough ones. To those who have invested in us since 2004, thanks for sticking with it.

Patrick Byrne (Founder and CEO)

Yeah. And we have a great board. We really do. We have a board that thinks very much like you folks think. This is they speak for, well, there's 60% of the capital provided there at the board. And believe me, they want they think of this as the board represents the owners of the shareholders beautifully here. And the interest that the understanding that we are stewards of your capital and that we're taking some risk, but every one of these risks gets discussed and balanced and so forth. Rob?

Robert Hughes (SVP of Finance and Risk Management)

Nothing further. Appreciate your time.

Stormy Simon (President)

Until next time. Shop Overstock.com.

Patrick Byrne (Founder and CEO)

The more you spend, the more you save. Bye-bye.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.