Overstock.com 2005 Annual Report Download - page 47

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Gross Margins
Total Gross Margins—Cost of goods sold increased $254.9 million or 59% in absolute dollars, from $428.4 million during the
year ended December 31, 2004 to $683.3 million during the year ended December 31, 2005. In comparing the years 2004 and 2005,
total revenue increased 63% (from $494.6 million to $803.8 million) while gross profit dollars increased 82% (from $66.2 million to
$120.6 million) during the same periods. As a percent of total revenue, cost of goods sold decreased from 87% to 85% for those
respective periods resulting in gross margins of 13.4% and 15.0% for the years ended December 31, 2004 and 2005, respectively.
Direct Gross Margins—Gross profits for our direct business increased 50% from $28.3 million for the year ended December 31,
2004 to $42.5 million recorded during the same period in 2005. Direct revenue increased 52% from $213.2 million during the year
ended December 31, 2004 to $324.9 million during the year ended December 31, 2005. Gross profits as a percentage of direct revenue
were 13.3% and 13.1% for the years ended December 31, 2004 and 2005, respectively.
In 2005, we were able to maintain the efficiencies we had gained in gross margins by the end of 2004. Margins also benefited
(and are expected to benefit in the future) from the higher gross margins of the growing travel and auctions businesses. Overall, the
improvements in gross margins over the past two years are a result of efficiencies gained in several areas. In particular, we believe our
buying has become more efficient as we continue to grow, allowing us to make larger inventory purchases and obtain more favorable
pricing. Our total cost per package shipped (including outbound freight) has decreased due to better process management, lower
packaging costs, and increased sales volumes. Additionally, we have made improvements to the cost of processing returns, customer
service costs and credit card fees. Management believes that additional improvements can be made in gross margins, particularly in
the customer service, order fulfillment and returns areas of the business.
Fulfillment Partner Gross Margins—Our fulfillment partner business generated gross profits of $38.0 million and $78.1 million
for the years ended December 31, 2004 and 2005, respectively, an increase of 106%. Gross profits as a percentage of fulfillment
partner revenue increased from 13.5% for the year of 2004 to 16.3% for 2005.
The increase in gross profit dollars for our fulfillment partner operations was due to the general growth of the consumer business
during the year, and an increase in the number of fulfillment partner products offered on our Websites. The increase in gross margins
is largely due to improvements in product costs and credit card fees, as well as a decrease in BMV gross bookings as a percentage of
fulfillment partner revenue, from 22% in 2004 to 17% in 2005. Fulfillment partner gross margins were augmented by a 45 basis point
increase in gross margins from the addition of Ski West to our existing travel operations in the last six months of 2005. Gross margins
for BMV products have historically been much lower than those of other product categories; however, we have made improvements in
BMV margins in 2005, which, in turn, increased the gross profit margin for the overall fulfillment partner operations.
Travel Gross Margins—The gross profit dollars generated by the travel business this year are primarily a result of merchant hotel
revenue related to the operations of Ski West, which we acquired on July 1, 2005. Since revenues from these sales are recorded on a
net basis, they result in lower revenue but higher gross margins (82% and 81% in the third and fourth quarters of 2005, respectively).
If travel sales continue to increase, the higher gross margins will positively impact future gross margins for the overall business.
Fulfillment
Fulfillment costs during the years ended December 31, 2004 and 2005 were $34.3 million and $59.9 million, respectively, or 7%
of total revenue for those respective periods. Fulfillment costs include
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