Overstock.com 2010 Annual Report Download - page 59

Download and view the complete annual report

Please find page 59 of the 2010 Overstock.com annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 154

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154

Table of Contents
Gross margin fell by 140 basis points in 2010, although gross profit growth in 2010 was 15% compared to 14% in 2009. While we believe that pricing
initiatives had a positive effect on our revenue growth, they had the opposite effect on gross margin. This was offset somewhat by supply chain efficiencies
resulting from initiatives focused on returns and fulfillment, and from a favorable sales mix shift this year away from BMMG and consumer electronics into
home and garden products.
Sales and marketing expense as a percentage of revenue in 2010 fell 70 basis points to 5.6%. We believe that we used relatively effective advertising
campaigns and maintained a disciplined approach to marketing expenditures, and that our pricing and other promotional activities were also effective in
generating revenues. We believe that our primary focus of increasing contribution has been an important factor in improving our marketing efficiency.
Although we made significant investments in 2010 through increases in IT, marketing and merchandising related personnel and through increased capital
expenditures, technology and G&A expenses increased at a slower rate than contribution. Contribution growth was 17% in 2010, while combined technology
and G&A expenses increased by 13%. We intend to continue managing the business by focusing on contribution growth while controlling expenses.
Net income improved by $6.1 million in 2010 to $13.8 million, or $0.59 per fully diluted share, compared to $0.33 per diluted share in 2009.
We retired $25.4 million face amount of our Senior Notes throughout the year, using $24.9 million of cash. As of December 31, 2010, $34.6 million face
amount of the Senior Notes remained outstanding and are a current liability at year-end. As a result, working capital decreased to $14.7 million at year-end.
On February 1, 2011 our Board of Directors approved a $10 million increase to our previously-announced debt repurchase program. With this increase
we may repurchase up to $15 million of our outstanding Senior Notes. On February 7, 2011, we retired an additional $10.1 million of our outstanding Senior
Notes, reducing the balance outstanding to a face amount of $24.5 million.
We experienced a $43.0 million year over year decrease in free cash flow (See "Non-GAAP Financial Measures" below for a reconciliation of Free Cash
Flow to net cash provided by operating activities), from $38.8 million in 2009 to ($4.2) million in 2010. This was due primarily to $13.2 million of
incremental capital expenditures in 2010 over 2009 and a $29.8 million decrease in operating cash flow due primarily to changes and timing differences in
inventory, accounts payable and accrued liabilities that were partially offset by changes in net income, depreciation and amortization, and gains on the early
retirement of our Senior Notes.
The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the
matters discussed above and other important matters affecting our business.
53