Bed Bath & Beyond - Earnings Call - Q4 2015

Transcript

Operator (participant)

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Q4 2015 Overstock.com Incorporated earnings conference call. At this time, all participants are in a listen-only mode. For the Q&A on today's call, all questions should be emailed in. Should you require any additional assistance during the call, please press star then zero on your touch-tone telephone. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, the President of Overstock.com Incorporated, Ms. Stormy Simon. Ma'am, you may begin.

Stormy Simon (President)

Thank you, Latife. Good afternoon and welcome to our fourth quarter and full year 2015 earnings conference call. Joining me today are.

Patrick Byrne (CEO)

Hello, Latife.

Stormy Simon (President)

Our CEO and founder.

Patrick Byrne (CEO)

That was not me on the violin. Vivaldi, I think. Go ahead.

Stormy Simon (President)

Robert Hughes, our Senior Vice President, Finance and Risk Management, and Mitch Edwards, Senior Vice President, Legal and General Counsel. And with that, I'll turn the call over to Rob.

Robert Hughes (SVP of Finance and Risk Management)

Thank you, Stormy. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, February 9, 2016, 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-Q that we filed on November 9, 2015. Please review the Safe Harbor statement on Slide two. 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. With that, Mitch, let me turn it over to you.

Mitch Edwards (SVP of Legal and General Councel)

Thanks, Rob. We're going to conduct the question and answer portion of the call today slightly differently than we have in the past. In order to do it in a more orderly way, due to the volume and the overlap of questions, we will be taking all questions today via email. If you have any questions during the call, please email them to [email protected]. That's the letter i, the letter r, @overstock.com, and we will try to get to as many questions as we reasonably can. Patrick, with that, let me turn the call over to you.

Patrick Byrne (CEO)

Great. Thank you, Mitch. Thank you, Stormy. Thank you, Rob. So let's just go to Slide three. Q4 results are, as you see, we did have a slowdown to 2%. A lot of things are going on in the market, both in competitors and in our own business. We did not chase growth this year when we saw what our competitors were doing and sort of massive amounts that they were spending. We rope-a-dope a little bit. That also meant that we had to radically adjust our, not radically adjust. We had to adjust our expense structure and not wait for the end of the year once we saw what was going on in the market. So there are some things that get out of tune when you make sudden shifts in your strategy like that.

The expense structure you expected for one side of the business is inappropriate for a different rate of growth. But led by Stormy Simon, the management team responded beautifully and trimmed things up and kept things honest to God, positive net income with no happy tricks. It really came out at $110,000, and that's what the accountant said, and that's really where it is. So I'll be talking more about Q4 and what's going on in the marketplace in response to questions, I'm sure. Slide four, overall $1.7 million in GAAP revenue, just under $2 billion, I think, in GMS. Oh no, did we actually just within a hair's throw, $2 billion in GMS, net income of 2.4. Let me go on to Slide five, and I'll start walking through the numbers, and then we can start talking about reasons and the questions. Slide five, annual revenue growth.

You see the growth numbers on the bottom. I've always wanted to keep this double digit. I want to keep, and I've said to you before, growth, sales growth, gross profit growth, and contribution or nectar growth in the double digits. We succeeded on slide five in keeping annual growth at 11% for the year. But slide six, you'll see our gross profit growth slid to 9%, and seven, our annual contribution dollar growth slid to 8%. We had structured things around, I think, nearly twice as much growth as that on contribution. So we did make adjustments, and like I say, Stormy pulled the trigger, led an army, and scrubbed through all our expense structure and pulled out millions in the fourth quarter and for this year.

And it was quite an effort that she engaged in starting a couple of weeks into the fourth quarter with fantastic adult supervision from CFO Hughes and participation from the executive team. And so slide eight, contribution margin at 11.2% for the year, 30, 40, 50 basis points under what I think we should be performing at. I think that this should really be. I've said many times before, around 12, maybe an 11.5-12, not much over 12. Bad things happen when it gets over 12. We stall the wing. So I think that this was on the low, 30 to 40 basis points lower than we should have done in total. Slide nine, tech and G&A as a share of revenue. It's bounced from 10.6%-10.9%. That's again, it would have come under 10% had the revenue appeared as we imagined it would.

But also, this is including quite a spin-up in other efforts, like the efforts related to our Wall Street efforts. And so I like that we have more tech expenses than we have in the past. Slide 10 still has a very strong $55 million operating cash flow. Our free cash flow dipped to -$5 million. But of course, we've built. We've put basically $50 million into a building. Is Rob 50-ish? Is that what we've?

Robert Hughes (SVP of Finance and Risk Management)

Over the last two years, something like that.

Patrick Byrne (CEO)

That building is proceeding right on budget, right on pace. We'll be moving into it this summer. We have a great underlying cash flow, $50 million, and we're not planning on building any more buildings, so our free cash flow should start looking closer to that again. Slide 11, we've under Stormy's tutelage gotten very tight on inventory and inventory management, freed up some nice cash out of it, have a wonderful GMROI running at 53 turns. The GMROI is what I really care about, and that's at 1,200%, a new record for us. Thanks to some new techniques, they have found ways to just shrink and shrink and tighten up that inventory control. Slide 12, cost per customer about the same as last year. Slide 13, number of new customers is down a little bit. Slide 14, unique visitors is also down about 10%.

This really reflects a strategic decision on marketing. Certain areas of marketing by certain competitors are getting bid way up. And as we've made the decision in previous years, when this happens, we don't chase it. We like profits. And when somebody comes in and suddenly starts bidding a keyword to three times the level it was, it's been for a couple of years, and they don't mind what they're losing. We have found, I think we're only here because on the many other half dozen other occasions we've come up against competitors like this, we say we're not going to get in that fight, and we let them go ahead and overbid. And so there are literally terms and such that are suddenly getting three times what they were getting before. And so we did not follow that. We kept our marketing expenses quite tight.

Slide 15, customer orders, average order size. Again, has the normal Q4 dip in average order size. Number of orders was about the same as last year. Gross profit per transaction at 20 lines. Slide 16, basically the same story, stable in that respect. Corporate employees, 17. What Stormy has done is focus this year on really building out parts of the company that were then understaffed and building very solid, attracting solid, experienced leadership from other companies. We have people that we've never dreamed of being able to get the kinds of people we have now have joined our company. Very premier people from large, large companies. I guess I don't want to name any of them, but not retail companies necessarily. Some of them are. Some of them are old line. I mean, remarkable the kinds of people we're now attracting into management.

So I feel this has been a good investment. Stormy has built out the team to, I think for the first time, I really feel like we're adequate across the board without huge gaps. Slide 18, my mitzvah is over. Now, I know my nemeses always referred to this as my jihad, but I would point out that that was their term. My term was mitzvah, which is Hebrew for an obligatory good deed, as in we don't have that in our language. In our world, Western world, good deeds are supererogatory. But in Judaism, there can be obligatory good deeds. There are mitzvahs, like the Ten Commandments or the Ten Mitzvahs. So I felt that this was an obligatory good deed I had to do. When I saw the stuff that was going on in 2004 or 2005, I mean, I didn't get the big picture.

I just knew that I smelled skunk. I was going around Wall Street. People were trying to get inside information out of me. There were a whole lot of different conversations of the form of, "Hey kid, we could make a lot of money together," and I started digging into it and figuring out what was going on, and in my family, there's the church, the constitution, and capital markets. Those are the three sacred things. I found out what was going on 12 years ago, and it just blew my mind that people thought it was acceptable, the way business was being conducted, so I did not know quite what I was getting into. At the end of the day, we have won $33 million in settlements. Now, some of these were secret. Some of them were public, but what they all come to is $33 million.

We have, from the very beginning, anticipating not quite the battle this would be, but anticipating it would be a battle. We kept a chart of accounts where we measured each trip we took, each hotel room, of course, each legal bill, etc., etc. That all came to $31 million, so it looks like we made $2 million. However, there are tangibles and intangibles, so, for example, in a tangible expense, we have spent about $6 million in 10 years on government affairs. Some portion of that, the people involved, would say less than half, somewhat less than half, was really involved in dealing with Washington and vis-à-vis Wall Street. That all pretty much came to an end by 2009, but in 2006, 2007, 2008, we were trying to convince powers that be that settlement failures and that failures in the settlement system were not a good thing for America.

There were government relations, so you got to say some portion of that $6 million went to that, so less than $2 million-$3 million at the end of the day, and then you can also say there's been intangible benefits. We've certainly gotten known as the people who stood up for when we were kind of a one company Occupy Wall Street before it was an 2004, 2005, and there have been intangible costs too. I know I've ticked off a lot of powerful players on Wall Street, and that's time for them to put on their big boy pants. Don't regret a minute of it. They drew first blood. They were in the wrong. Anyone who hasn't been living under a rock since 2008 knows that these guys were in the wrong. I was correct. There was massive collaboration to the point of insider trading.

There was stock manipulation going on. The SEC was asleep at the switch. The financial press was too close to their sources. All these things I said in 2005, 2006, 2007 turned out to be true. So I don't regret this. In the process, we've also learned an immense amount about the plumbing of Wall Street that we think is working quite to our advantage in terms of our efforts with the blockchain. And since probably the last time I spoke with you, or since a year ago, well, since two years ago, when people were first taking Bitcoin and people were saying, "Why are you taking Bitcoin and stuff?" It's because we knew that this technology, the blockchain, was going to change the world. And we wanted experience working with it. We have that.

I think that you combine that with what we learned about Wall Street in the course of my Mitzvah, and we've got a real tiger by the tail. So with that, that's the final verdict on my Mitzvah. Maybe $2 million. When you count the intangible non-direct costs, you probably say it's a wash. Give or take one way or the other. It's rare that you can do the right thing and I think have quite an enormous effect on global capital markets and come out break even for it. And in the process, learn a bunch of things that I think will be of benefit to this company down the road. So with that, as we've gone through the slides, we've got some questions that have already come in, Mitch?

Mitch Edwards (SVP of Legal and General Councel)

Yes.

Patrick Byrne (CEO)

Okay. Let me start with.

Mitch Edwards (SVP of Legal and General Councel)

Maybe that one.

Patrick Byrne (CEO)

Okay. Let me start with this one. Given the news of the $20 million settlement with Merrill, what caused Overstock to settle rather than go to trial? Was it an effort for Overstock to turn a new page with Wall Street by offering an olive branch with hopes for attracting potential licensing partners for tZERO? That's a fair question, Mike. And it's hard to always know one's psychology. That thought did cross my mind. I did not mean it as a there's another story here, just economic calculation. So first of all, I want to say, I just got to say this. I feel very badly for Merrill Lynch and Bank of America, who had really nothing to do with this.

Merrill Lynch was in the position of when you have a group of kids and one's basically the nasty kid and there's a group of kids who go along, and then there's one kid who's kind of the schlubby kid who just wants to join the group. That was Merrill. They were not the originators of this. The bad kid in the group was Goldman Sachs. And when any reporter decides to have the story of their lifetime, they can dig through the bankers' boxes about this. Goldman Sachs did something, a very deliberate, unbelievable scheme. And at the end of the day, as the Feds got close to them, they brought Merrill Lynch in and sort of passed the ball to them. Just as the vagaries of our legal system that it was Merrill Lynch who ended up paying us $20 million.

But I actually feel quite bad for them. Not bad enough I'm not going to cash the check, but I actually have no ire at all towards Merrill Lynch. All that said, what caused us to settle the economic calculation became overwhelming. And I'll walk through it. I thought that we thought that if everything worked out, we could be winning $40 million-$50 million plus interest brings it to sort of $85 million, $90 million, maybe $100 million, something like that. We did do mock juries. We found that we were getting $25 million-$50 million. But as the cost, what really at the end of the day was the cost of this of another five to eight years. When I learned that the appeal process would likely be another five to eight years with a clock ticking, we've been spending $3 million-$3.5 million a year on this.

Five to eight years, and then you count in what the expected value is and what if things go wrong here, here, here, here, here. The U.S. Supreme Court heard this fall a lookalike case involving a scholar. And it's a New Jersey naked short-selling case that has made it to the U.S. Supreme Court. And they're going to rule this June on whether these can even be brought in state courts. Or is it all federally preempted? And if they rule the wrong way on that, it means that our case would disappear. So I was facing some non-negligible risk of the whole case disappearing this June when the Supreme Court rules. And then if we press forward $6 million to try it, $10 million-$15 million, assuming we won, to then appeal, five to eight more years, on and on and on, or the court appointed.

What our lucky draw was that after years of this kicking around the California legal system with not anybody really seeming to want to try it, I don't want to say anything more about any previous courts, but this was finally given to a judge who seemed to have the courage to do something about it. And she started moving the case forward. And once she started moving the case forward and setting trial dates and telling Goldman Sachs or telling the other players involved, "No more delays. This has been kicking around for eight years. We're going to try this." The other side finally got serious about having serious conversations. And a court-appointed mediator, after hearing everything, came to both sides around New Year's and said, "I recommend $20 million." And I did all the math.

It had reached the point where there was no straight face argument for me that I could just keep on pursuing this on the shareholder dime. When I thought we might be pocketing $100 million a year from now, I was really keep spending another $5 million-$10 million to get there. When it looks like I started looking like spending $15 million in five to eight more years, I said, "Hey, I'll take $20 million right now." That was the thinking. Thank you for your call. Thank you for your question. This one. Next question. How can you defend? I always like questions. Open-minded questions you'd start. How can you defend keeping your Bitcoin capital markets, other experimental operations together with the core business? The latter is a huge drag on an otherwise wildly profitable internet retail business. Nothing wrong with your new endeavors. Just spin them off.

Let investors other than yourself have some say in the matter. What's holding you back? Why punish investors who've stuck with you? Good question. There's only one thing here that would be appropriate to spin off. Arguably a second thing, which would be an effort to commercialize some of our technology. That's something I don't think I've ever spoken on these calls about. We've developed some really cool technology we could license to other. That would be a different possible spin-off. But the only thing right within our businesses that could be spun off on its own would be the blockchain capital markets. Now, that's a nice look. Call that collectively Medici.

Medici owns SpeedRoute, which is this company that we bought for $31 million back a few months ago that's doing, I think about $35 million or $40 million in revenue, growing nicely, has a nice bottom line to it. Its bottom line, I think, of $3 million, maybe growing to $4 million or $5 million this year. The other part of Medici is the tZERO efforts. The tZERO efforts, which is the whole crypto capital market. And then there's a third part of Medici, which is we've made, and this has been disclosed, a standby just a moment. We've had $7 million of investments in private companies that are sort of related to this business.

I wish I had adopted this years ago because we have brought in other companies and worked with them and helped them develop products that went on and they got sold for a billion dollars. And I think, "Oh, jeez, we were the ones who sort of called them exactly what we needed them to develop." So of that $7 million in other businesses, $5 million is invested in a crypto-related business, and it's a very good one. And so anyway, you put all those together, that's Medici. We could spin that off. I think the truth is it should be spun off with one exception. There is a synergy possible between our current retail business and that business. It's a wonderful synergy. I'm working on it all the time now. If it works, they'll stay together. If it doesn't work, and if it doesn't work, we will yes.

If there's not a synergy between the businesses, I think the right thing to do is spin Medici off. In fact, I think the right thing to do, I'd love to dividend it out, but there's tax consequences because it's not been in business five years. The right thing to do with Medici is to find a partner, and I'm talking to many of them, but global partners in the world of fintech or that oddly construed fintech in the financial world who want to be our partner. And right now, we own 81% of Medici. The SpeedRoute people own 19%. The truth is a partner who came in at a the right partner I'd led in at a reasonable valuation. These businesses now have quite large the other people trying to get in this space have generally quite nice valuations.

We think we're quite a good bit ahead of everybody. I'd love to have the right large partner come in, make an investment, and even I could turn this over. In their stable, that billion-dollar or multi-billion-dollar company could take the Medici product and integrate it into their current operations. I've had a number of conversations over the last six weeks along those lines. I'm going to New York this week for a couple more. There's a number of large. If you read the financial press, you know the world is figured out since Mr. Dimon of JP Morgan, who happens to be a guy I've known since my 20s, or I knew in my 20s, came out and said what he said about, "This stuff is going to come eat Wall Street's lunch." He said last May in a letter to shareholders.

The whole financial world has figured out this is the biggest innovation in our lifetimes in fintech, maybe in 600 years, and there's a lot of very large people many, many times our size who want to jump in and be part of this, and by getting involved with tZERO, Medici, they can jump right to the front of the line, so there's all of those kinds of conversations going on. I'm flying back to New York tomorrow to continue them, and we really are at the point I've been having them for two months. It is at the point that we make a decision, and so the question's a fair one, and my answer is I doubt the premise, or I don't know if the premise is true or not, that there's no relation between these businesses. We'll be discovering within single-digit months whether there is or not.

If there is not, it absolutely should be spun off separately. And wait a second. I've got a second. I've got a couple more things thrown at me. Okay. Oh, okay. Questions are total operating expenses for Medici were $8 million directly. Now, that includes all the salaries and things like that and the outside legal bills and so forth. But you could argue it doesn't include any of Rob Hughes' time or CFO or Mitch's time or my time. Maybe it's good for the company to have me have something to get out of the place. So you can find intangible expenses, but everything associated with traveling to New York and traveling around for these meetings and all the developers and stuff is baked into that $8 million.

And I would say that in the eyes of gods of economics, if you count everything else, it might be 12 or something like that. In the sense of if we had decided not to save at least that $8 million and maybe $12 million, I mean, the second's an estimate. When will it be spun out so that we can focus on the core business? I just need to satisfy myself first that there's not this one synergy lurking that I think might be a wonderful synergy for Overstock. And if there's not, we will spin it out. And we already are in all kinds of conversations with people who would like to invest or own 20% or things like that. So there's no hurry there.

I mean, I don't want to. I'm not dawdling, but I need a couple months to figure out what the right we're marrying off one of our daughters here. We got to find the right suitor. What are the revenues for Oasis? Oasis is more of a we've sunset a bunch of old technology that has grown up over the years and Stormy dove in and has a very deep understanding, actually much deeper than mine at this point, of how the plumbing of all these things work. And she designed Oasis as Supplier Oasis, and it is the foundation for all these other things we're doing, for international business we're doing now, for the way we're having we have described before that you will probably see a large increase in the number of SKUs on our site and so forth.

So Oasis is the ROI on Oasis. You get to stay in business against a bunch of people who are spending much more on technology. So it's not as sort of an independent revenue thing. We are shifting. Stormy, when are all of our partners going to be over to Oasis?

Stormy Simon (President)

Sometime this year, we will have sunsetted. Probably by Q3, we'll be operating fully from Supplier Oasis.

Patrick Byrne (CEO)

Supplier Oasis gives so much more functionality to us and to partners. It makes us so much more competitive. So that's the way I think of it, not in terms of exactly what the fees are. Although by the time we move everyone over to it, that will be okay too. The operating expenses relating to other initiatives like Pet Adoptions, Insurance, and Farmers Market, another question, are pretty in the grand scheme of things. They're pretty small. Pet Adoptions, a few hundred thousand dollars to build, probably half of that per year in operating expenses. Rob, is that fair?

Robert Hughes (SVP of Finance and Risk Management)

Something like that. Clearly not significant. A worthy effort, but not financially expensive for us.

Patrick Byrne (CEO)

Same with Insurance. Farmers Market is a different story. Farmers Market probably took us $1.4 million to build or something. But in the process, we built a bunch of technology we needed. We've been wanting to build for the site itself. So for example, we built subscription service with Farmers Market. So it's in that $1.4 million, but part of the real reason for doing it was we had that subscription service, which we turned on in the fall, and there now are people ordering toothpaste and soap and things like that delivered from us on a subscription basis. So going forward, I think Farmers Market starts looking like an annual operating expense of a mid-six-figure number. And we'll have gotten that technology out of it. But the other thing is Insurance and Pet Adoptions. You're talking about things in the order of $200,000 per year.

Let's see. Next question. Given a deceleration in revenue growth and a likelihood of slower growth in the future, are you considering reducing expenses in some of the areas you've invested in in the past two years? Yeah, we already have. We already did. Stormy in October, Stormy and Rob got a wonderful project together and went through and really between letting some attrition happen and just scrubbing through all of our contracts and all of our suppliers and doing that thing you need to do. I mean, ideally, you do it continuously, but the truth of the matter is if you do it continuously, you never try anything new. You got to take some risks.

So we used to have a thing annually where we went through and cut 5%-10% of expenses at the end of each year and then let them just sort of get built up over the year and do it again. We haven't done that ruthless thing for about five or six years. We went through this time, and to be honest, I thought, "Gee, this was going to be something that at the end of the year, I'd be talking my colleagues into." And in fact, Stormy took the ball, ran with it. I came in in early November, and they were ready for me just to greenlight, just to pull the trigger, which I did. And they stripped well over $10 million out of the system and sort of been done. It's not pie in the sky.

It was done over the last 60 days of the year. There's some more giblets and costs to dribble out through this quarter, but there's been a real reduction in expense. So next question. What was the CapEx for property related to the new facility? Stand by a moment. Okay. What was CapEx for property related to the new facility? $34 million in 2015 and another $15 million-$20 million for the year before that. But from October of this year forward, we're now just drawing down on our line, which has been gracefully provided by.

Robert Hughes (SVP of Finance and Risk Management)

U.S. Bank?

Patrick Byrne (CEO)

U.S. Bank. And the other line too, the $20 million line, the furniture and stuff?

Robert Hughes (SVP of Finance and Risk Management)

Yeah. We both have the real estate loans from U.S. Bank. And by year-end, we borrowed about $10 million on that. And then late in the year, we entered into a leasing facility with U.S. Bank as well.

Patrick Byrne (CEO)

And I'll even give you some more numbers on that. The board authorized, and these numbers are off the top of my head. They may be a million off here too. The board authorized a couple few years ago $75 million for this project or $74 million, not including the price of the land and the architects. And we found anyway, it all comes to basically the board authorized about $98 million-$99 million. There was a $100 bet made between me and Jonathan that this would never touch $100 million, and he was sure it'd go to 120. This is coming in now, all in, said and done at $98 million. So right on budget. Hundreds of thousands one way or another of what the original expectation was. Great value engineering. And that's not including about $10 million of various tax credits we've gotten.

Now, those tax credits extend over seven years and things, so the net present value isn't $10 million. It might be $7 million or something. Put it all in a bag, shake it up. It's coming out like the real net present value of this project was about $90 million or $90 million-$91 million, which I think is great. We'll be moving furniture in in June, certificate of occupancy in early August, and we'll be moving ourselves in through the rest of August and September. I think that the benefits of this are setting aside. We get rid of a co-location facility where we paid $2 million a year, and we get rid of our current corporate headquarters, which we're going to $5 million-$6 million a year. You also have the two halves of the business, 1,000 people on each side, no longer separated by 15 miles.

Everybody working together. I think there are great benefits to be had in efficiency there. It's going to be such a nice property, reducing attrition and attracting talent. I think that the benefits of this are going to be wonderful. Does cash flow from operations include settlement proceeds? No, not yet. The settlement will not be recognized until 2016. And here's this oddity of accounting. In the two previous years, we had legal surprises on or around January 10th. Out of the blue surprises. And through our canon of accounting, they were counted in the previous year. They were legal bad surprises. Big judgments against us that came in in the first 10 days of January. This settlement doesn't do that. And that is because Rob Hughes, why don't you explain? The angels on the head of this accounting pin.

Robert Hughes (SVP of Finance and Risk Management)

The other two were loss contingencies, and this one's considered a gain contingency. And so it can't be recognized until you've actually achieved it. And so it'll be recognized in 2016. The rules are different.

Patrick Byrne (CEO)

Okay. The world is not symmetrical. However, the person who paid us the $20 million would have to recognize in Q4 the cost, right?

Robert Hughes (SVP of Finance and Risk Management)

Yes. Oddly, they're different. Yeah.

Patrick Byrne (CEO)

The world doesn't balance, so we did, as of this morning, we received the $20 million wire. It's not a contingency on anything. We got the wire this morning, so that does not show up in these 2016 numbers. However, not only do we get that $20 million, we had budgeted $6 million to try it this year. The thing's been costing us $3 million-$3.5 million plus or minus for some years, etc., etc. Now, some people out there are going to say, "Well, that's a one-time benefit," to which I say, "Horse pucky. You count the expenses here. You count the winnings. That's how it works. Or you take the expenses out, and you don't count the winnings." We counted the expenses each year as we went. We get to count that $20 million is in our bank account, and that's real money.

And that's what we want. So there's that question. Next question. What was my $22 million mistake on the retail side? I have nothing against telling it except for competitive intelligence reasons. I don't want to say the area where the mistake was made, but I am owning. I made a mistake. I made a bad call, and it really hurt us on the marketing side. And Stormy and team, once again, stepped in, and sort of they make up when I make bad mistakes, and they made about $11 million of it back for us. But it was a mistake of judgment in marketing, a transition between a couple of programs that I considered sort of very, very important, did not go very well. Well, it went poorly.

Maybe that transition was because I was pushing too hard for the transition to happen, and the people weren't ready. It could be maybe the people might have understood. I'd been waiting for it for two, three years, and I was getting really anxious, and I pushed them hard. In any case, a certain transition, technical transition in marketing did not go as well as expected, and that had some ripple effects, which we've identified and have reversed and so forth, so I own the $22 million mistake. My friends made up about half of it, and we've got the ship turning back, but it's also, I'd say, not all the mistake.

When we saw what was going on with certain marketing spending from competitors, and we've done this before, we have faced all kinds of people coming at us, the Gilts of the world and the Groupons and LivingSocials and other people who, when they did this and they said, "We'll just lose. We don't care what we lose," we stepped back. We rope-a-doped, and we let them drive up the cost of paid keywords and all these things and stepped back until they couldn't do it anymore. Now, Wayfair is different, and I respect Wayfair has grown very quickly. We model it ourselves. I think we can have Wayfair's income statement tomorrow.

I think they can go out and spend $200 million more on marketing and go back to losing $50 million-$100 million and be growing 80% or 90% and even maybe do it on a cash flow break-even basis on an annual basis. But that's not a place I like to be. So if you're looking for those fast-growing internet companies that you don't care what they lose, we're not the guy to talk to. If you're wanting to talk to a retailer who makes money year after year, we've made money six of the last seven years. And by the way, I'll point out now, where's our balance sheet? Do you have that handy? Okay. We are on total equity of a stand by just a moment. Accumulated deficit of $166 million.

We're up against people who don't mind if they spill that much or twice that much in a year. So we see ourselves as stewards of owner's capital, of your capital. And to me, that means I don't want to chase people and do what I just described and spend $200 million more on marketing and such. I mean, Wayfair spent. I think they spent about $300 million this year. We spent about $150 million. I don't want to spend the extra $150 million. As a steward of your capital, I think the right thing to do is keep playing the game intelligently, keeping ourselves profitable. Boy, it's a different world strategically when you're keeping yourself profitable. Anytime we want, we can turn ourselves into one of those companies that just jams marketing, and we'd be growing so much faster and losing $50 million-$100 million.

That's not the way I was raised. I'll stop there. Any other questions, Mitch?

Mitch Edwards (SVP of Legal and General Councel)

No. That is the extent of the questions that have been emailed in.

Patrick Byrne (CEO)

Okay. Thank you very much. I will tell you that I think we have a tough one or two quarters. We had last year, well, we have a tough one or two quarters in terms of getting things growing again, confident we can do it, confident by the third quarter, you'll be seeing real growth emerge. We also were up against last year, we did this jewelry, a huge jewelry liquidation. We bought Bidz.com inventory. I think it's public what we bought them for, $3.5 million. I think they paid about 12. I think it may have had two or three times that in normal retail value. We had a huge liquidation last year. I think we only have about $500,000 left of that inventory, but we were blowing that stuff out at 40% margins or more. So it does affect.

It makes the numbers, but that's a very tough comp for February and March. We're comfortable that we're making the right sort of realignments within marketing and see some real opportunities to do better. I just thought I'd warn you upfront, though, that that's how the year looks to me. It's a little tough in the first six months, and then you'll see nice growth emerging by the end of the second quarter and into the third. Can I even say? I'm going to even say something that's going to make my general counsel here unhappy. I'm looking for pre-tax net income this year. I'm looking for no promises. I think that we make $40 million pre-tax net income. That's what I'm aiming for. I should say $40 million plus gamma.

And Gamma is the difference between what our SpeedRoute business makes us and what we end up investing in the capital markets. So SpeedRoute will basically fund the investment in the capital markets, but maybe we spend an extra $3 million or $4 million, and the difference will come out of that. But let's say $35 million-$40 million is what I am. That's my target for the year. No promises. California highway mileage will be lower. Mitch is going to give you all these reasons. I shouldn't have said that. But anyway.

Mitch Edwards (SVP of Legal and General Councel)

Certainly subject to the Safe Harbor, and there's no assurance that any predictions or projections come true, and the risk factors in our 10-K and everything else subject to that.

Patrick Byrne (CEO)

Thank you. And I'll say one last thing on this. As you folks know, watch me in any public appearances. I think the world is a very unstable place. What we have focused on in the last couple of years is making our system robust. I think we are very robust. People laugh at us, laugh at me that, "Hey, we put a vault out there that we have involved with some gold and silver in it." We're all about making this company robust. I'm ready for Great Depression number two. The world used to only have one great war because they didn't know enough to number it. We had two world wars. We've had one Great Depression. I think the world is incredibly fragile right now. And we have really very consciously in this business for the last couple of years made it robust financially.

So we are really ready to survive any sort of downturn that hits the United States. And I'm not sure that can be said for all of our competitors. So we've given up something upfront for that, but we have a really robust company now. I'll stop there. Stormy, anything wise you want to dazzle us with?

Stormy Simon (President)

I have nothing to add. Thank you for your time today.

Patrick Byrne (CEO)

Sounds like Charlie Munger. I have nothing to add. Okay. Mitch?

Mitch Edwards (SVP of Legal and General Councel)

Nope.

Patrick Byrne (CEO)

Rob?

Robert Hughes (SVP of Finance and Risk Management)

Nope.

Patrick Byrne (CEO)

Thank you very much.

Operator (participant)

Ladies and gentlemen, it does conclude your Q4 2015 Overstock.com Incorporated earnings conference call. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.