Overstock.com 2004 Annual Report Download - page 43

informative than revenue comparisons, as the gross bookings were not affected by the change in business practices. Gross bookings represents the gross
selling price of all transactions before returns, sales discounts, and before payments to fulfillment partners prior to July 1, 2003. Since it has been over
12 months since we implemented the change described above, year-over-year revenue, in addition to gross bookings, will again be comparable in 2005.
Total revenue grew from $238.9 million in 2003, to $494.6 million in 2004, representing growth of 107%. During this same period, direct revenue
increased from $138.1 million to $213.2 million (54% growth) and fulfillment partner revenue grew from $100.8 million to $281.4 million (179% growth).
The significant increase in total revenue was due primarily to the change in our business practices described above, coupled with an increase in the number of
orders (including both direct and fulfillment partner orders), which grew from 3.1 million in 2003 to 5.8 million in 2004.
Our total revenue continues to expand from increased marketing efforts, including new nationwide television commercials and radio advertising
campaigns. The increase in total revenue is a reflection of our ability to acquire new customers, as evidenced by our addition of 2.5 million new customers in
2004.
Gross bookings totaled $294.8 million and $541.4 million for the years ended December 31, 2003 and 2004, respectively, representing an increase of
84%. Gross bookings differ from GAAP revenue in that gross bookings represent the gross sales price of goods sold by the Company before returns, sales
discounts and before payments to fulfillment partners prior to July 1, 2003.
Cost of Goods Sold and Gross Margins
As a result of the fulfillment partner returns policy change that occurred beginning the third quarter of 2003, we now record sales transactions shipped by
our fulfillment partners on a gross basis instead of on a net basis as we have historically done. Therefore, cost of goods sold increased significantly beginning
in the third quarter of 2003, which resulted in a decrease in gross margins from previous quarters. These margins will now more closely resemble margins we
receive from our direct revenue. As a result, we believe that for year-over-year comparison purposes, gross profit dollar comparisons may be more
informative than gross margin percentage comparisons. Since it has been over 12 months since we implemented the change described above, year-over-year
results will again be comparable in 2005.
Cost of goods sold increased in absolute dollars, from $213.5 million in 2003 to $428.9 million in 2004. In comparing 2003 and 2004, total revenue
increased 107% (from $238.9 million to $494.6 million) while gross profit dollars increased 158% (from $25.5 million to $65.8 million). However, as a
percent of total revenue, cost of goods sold decreased from 89% to 87% for those respective periods resulting in gross margins of 11% and 13% for the years
ended December 31, 2003 and 2004, respectively. Quarterly gross margins during the periods from the fourth quarter of 2003 through the fourth quarter of
2004 were: 9.6%, 10.3%, 11.3%, 13.3% and 15.2%, respectively. The improvements in gross margins are a result of the progress we achieved and efficiencies
gained in several areas. In particular, we believe our buying has become more effective as we continue to grow, allowing us to make larger inventory
purchases and obtain more favorable pricing. Our handling cost/package has decreased during the year due to better process management and lower
packaging costs from increased sales volumes. Fulfillment costs in 2003 and 2004 were $20.3 million and $34.3 million, respectively, representing 8% and
7% of total revenue, respectively. As a result of increased volumes and improved vendor relationships, we have obtained decreases in both inbound and
outbound shipping costs. Additionally, we have also made improvements to the cost of processing returns, customer service costs and credit card fees.
Gross profits for our direct operations increased from $13.8 million for the year ended December 31, 2003 to $27.8 million recorded during the same
period in 2004. For our direct
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