Overstock Predicts Retailing Profitability on the Way

Overstock (BYON -5.73%) investors found reasons to get more optimistic about the company's earnings potential in recent months. Still, the stock's early 2019 rebound has only removed a small portion of its brutal 2018 losses.

In its first earnings report of the year, the e-commerce specialist with blockchain ambitions didn't do much to change that negative broader retailing story. On the one hand, it took small steps toward improving both its top- and bottom-line metrics over the past few months. Its management team also predicted a better profit outing in 2019. However, Overstock's latest results still show signs of major struggles in its core retailing division.

Here's a look at how the latest results stacked up against the prior-year period :

Data source: Overstock's financial filings. 

What happened this quarter?

Overstock managed a modest sales trend improvement during the key holiday shopping period, but its results translated into significant market-share losses to rivals like Wayfair (W -2.63%). Both its retailing and cryptocurrency tech divisions lost money, as well.

Image source: Getty Images.

Highlights of the quarter include:

• Sales in the retail division, which accounts for the vast majority of Overstock's business, fell 1% to mark an improvement over the prior quarter's 4% drop. Yet with Wayfair growing its home furnishing sales by over 40% in the period, that metric implies significant competitive struggles.
• Gross profit margin fell by about 1 percentage point to 18% of sales. This figure stacks up poorly against Wayfair's 24%.
• Selling and marketing expenses dove 13%, but that success was more than offset by higher spending in other areas of the business. As a result, operating loss expanded to $48 million from $23 million a year earlier.
• Overstock booked far lower tax expenses, and that decline played the biggest role in its improving earnings profile as net losses landed at $42 million compared to $96 million in late 2017.

Check out the latest earnings call transcript for Overstock.

What management had to say

CEO Patrick Byrne took responsibility for the company's profit struggles in 2018, saying in a press release that "Our retail arm lost money last year because I gunned things in an attempt to create a conventional high-growth/money losing e-commerce business." Byrne continued, "But the losses were nauseating, and we reverted back to the philosophy of profitability on which we built Overstock."

Regarding its small but promising blockchain segment, Overstock executives expressed optimism about recent initiatives like a new token trading platform. "We are just reaching the point where our products are being introduced to the public," Byrne said.

Looking forward

Management didn't announce any progress in its hope for selling off the retailing side of the business, and that fact likely played a role in the sharp stock price drop immediately following the report.

The good news for investors is that the company believes its reduced marketing posture should help it deliver positive operating cash flow for the online segment in 2019. Overstock also says it is committed to generating profits in that division for the first time in several years, which should give it more resources to direct toward the blockchain technology that management is most excited about.

Still, given Overstock's market-share losses in e-commerce and unproven cryptocurrency technology products, investors don't have much evidence to rely on that could point to a sustainable earnings improvement on the way.