Overstock.com 2012 Annual Report Download - page 51

Table of Contents
We had positive net income in each of the four fiscal quarters of this year. 2012 net income was $14.7 million versus a net loss of $19.4 million in
2011, a $34.1 million, or $1.46 per diluted share, improvement. The year-over-year improvement in net income resulted primarily from revenue growth
of 4%, a 110 basis point improvement in gross margin and $10.5 million of lower general and administrative expenses.
Revenues in 2012 increased 4% compared to 2011, largely due to increasing growth rates in the second half of the year; we posted 9% revenue
growth in Q4 2012 compared to Q4 2011. The primary reason for the improvement this year was an increase of 10% in the average order size, from
$123 to $135, which is largely due to a sales mix shift into the home and garden category. This increase more than offset the impact of a 3% decrease in
customer orders due to lower conversion rates.
Gross profit in 2012 increased 11% compared to 2011 primarily as a result of 4% revenue growth and a 110 basis point expansion in gross
margin. Approximately $8.1 million of the $19.3 million increase in gross profit was due to higher revenue growth, while the other $11.2 million was
due to the improvement in gross margin percentage. The increase in gross margin was primarily due to the sales mix shift referenced above. While we
spent $1.7 million more in sales and marketing in 2012, as a percentage of revenue, sales and marketing expenses declined to 5.8% from 5.9% last year.
The result of higher gross profit and a decrease in marketing spend was 15% growth in Contribution (see "Non-GAAP Financial Measures" below for
a reconciliation of Contribution to Gross Profit) in 2012, and a 120 basis point improvement in Contribution margin which increased to 12.3% for
2012.
Technology expense in 2012 decreased $1.6 million compared to 2011, primarily due to decreases in compensation and recruiting-related costs
from lower headcount earlier in the year. However, technology expenses increased during Q4 2012 following investments we made in technology-
related initiatives and personnel. We anticipate this trend will continue through 2013. General and administrative expenses in 2012 decreased
$10.5 million compared to 2011, primarily due to lower legal fees.
Our fulfillment partner business continues to make up a large percentage of our total revenues, expanding to nearly 86% of total net revenue in
2012. Our decision to shift sales from the Apparel & Shoes category away from the direct business and into the fulfillment partner business contributed
to this shift in 2012. We are converting revenues into cash on average five days before we pay our suppliers. This has reduced the capital requirements
needed to operate our business, and has helped us to generate positive operating cash flows on a trailing twelve month basis for the past several years.
We ended the year with $93.5 million of cash and cash equivalents compared to $97.0 million at December 31, 2011, and working capital
improved to $7.5 million from $(14.1) million for the same periods, respectively. In November 2012, we fully paid the $17.0 million in advances under
the U.S. Bank Financing Agreement and the facility expired at the end of 2012. In December 2012, we entered into a $3.0 million credit agreement with
U.S. Bank to provide a line of credit to support letters of credit.
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.
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