Overstock.com 2003 Annual Report Download - page 23

Both direct and fulfillment partner revenue are seasonal, with revenues historically being the highest in the fourth quarter, reflecting higher consumer
holiday spending. We anticipate this will continue in the foreseeable future. With the exception of our acquisition of Gear.com, we have achieved our
historical growth from internal operations.
Executive Commentary
The following executive commentary is intended to provide investors with a view of our business through the eyes of our management. As an executive
commentary, it necessarily focuses on selected aspects of our business, including the following:
The difference between our revenue reported under generally accepted accounting principles ("GAAP") and our gross merchandise sales;
Changes we made to our merchandise returns policies during 2003 that affect our GAAP revenues;
The increases in our gross merchandise sales and factors contributing to the increases;
Certain issues relating to our operations;
Certain issues relating to our expenses;
Certain issues relating to our capital resources and liquidity; and
The status of certain of our strategic projects.
This executive commentary is intended as a supplement to, but not a substitute for, the more detailed discussion of our business included elsewhere
herein. Investors are cautioned to read our entire Management's Discussion and Analysis of Financial Condition and Results of Operation, as well as our
audited financial statements, and the discussion of our business and risk factors and other information included elsewhere in this report. This executive
commentary includes forward-looking statements, and investors are cautioned to read the Special Note Regarding Forward-Looking Statements included
elsewhere in this report.
Commentary—Changes to our Returns Policies. At the beginning of the third quarter of 2003, we changed our merchandise return policies and
procedures to permit our customers to return all items directly to us, rather than to the fulfillment partner who may have shipped the merchandise to the
customer, and we are now considered the primary obligor. As a result, our GAAP revenue increased significantly and gross margins decreased significantly in
the third and fourth quarters compared to previous reporting periods. Investors should understand that a significant portion of the increase in our GAAP
revenues resulted solely from this change, and consequently, that gross merchandise sales comparisons year-over-year may be more informative than GAAP
revenue comparisons for the affected periods. We also believe gross profit dollar comparisons year-over-year may be more informative than gross margin
percentage comparisons.
Commentary—GAAP revenue and Gross Merchandise Sales. Management believes that to understand our business and our financial statements,
investors should understand the difference between our gross revenues as recorded under generally accepted accounting principles, and the non-GAAP
measure we call gross merchandise sales. Gross merchandise sales ("GMS") represents the gross sales price of all sales transactions, including those for which
the Company has recorded only a commission under generally accepted accounting principles, and therefore differs from GAAP revenue. Management
believes that gross merchandise sales provides useful information to investors because it represents the total sales price of the merchandise sold via the
Overstock websites or through our other business-to-business sales channels, regardless of the amount of GAAP revenue recorded by Overstock on those
sales, which varies, depending on, among other things, the returns policies applicable to the
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merchandise sold via the website. Management uses the measure of gross merchandise sales for internal planning purposes, including measuring the
Company's growth, measuring the effectiveness of marketing expenditures, and capacity planning for information technology, customer service and logistics.
In the future, our GAAP revenues are likely to constitute approximately 90-95% of our gross merchandise sales, and the difference between the two measures
will be less significant than in the prior years.
The following table reconciles our gross merchandise sales to our GAAP revenues for the quarter and year ended December 31, 2003 (in millions).
Three months ended
December 31,
Year ended
December 31,
2002 2003 2002 2003
Total revenue $ 41.5 $ 123.2 $ 91.8 $238.9
Add: obligations payable to third parties upon sale of third-party merchandise 22.0 — 51.0 39.9
Add: sales returns and discounts 3.7 7.0 11.7 16.0
Gross merchandise sales $ 67.2 $ 130.2 $154.5 $294.8
As mentioned above, we believe gross profit dollar comparisons year-over-year may be more informative than gross margin percentages comparisons. In
the fourth quarter of 2003, our gross profits increased to $11.8 million from $9.1 million in the fourth quarter of 2002. Note that this increase is, on a
percentage basis, much smaller than our GMS growth (gross profits increased 29%, while our GMS increased 94%). For the year ended December 31, 2003,
gross profits increased to $25.5 million from $18.3 million (gross profits increased 39%, while our GMS increased 91%). The difference is accounted for
partially by our decision to sell books, music, and videos at extremely slim margins, and also by some of the expense control issues discussed below.
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