Overstock.com 2004 Annual Report Download - page 39

customers were added during 2004) from our online and offline marketing efforts. We consider the growth in gross bookings especially noteworthy, because
we ended our arrangement with Safeway in February 2004. The Safeway program had represented 10% of gross bookings during 2003, and less than 1% of
gross bookings in 2004.
Commentary—Improved gross margins. Quarterly gross margins during the periods Q4 2003 through Q4 2004 were: 9.6%, 10.3%, 11.3%, 13.3% and
15.2%, respectively. In comparing 2003 and 2004, 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). Management considers improvements in gross margins and the resulting increase in gross profit dollars to be an
important aspect of our financial results.
The improvements in gross margins are a result of improvements made or efficiencies gained in several areas. In particular, we believe that 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 per
package has decreased during the year due to better process management and lower packaging costs from increased sales volumes. As a result of increased
volumes and improved vendor relationships, we have obtained decreases in both inbound and outbound shipping costs. We have also made improvements to
the cost of processing returns, customer service costs and credit card fees.
Commentary—Marketing efforts. For 2004, our sales and marketing expenses increased 101% from $20.2 million in 2003 to $40.5 million in 2004. Our
average customer acquisition cost ("CPA") for 2004 increased to $16.43, an increase of 36% over the $12.09 we achieved in 2003. This increase in CPA is
partially a result of increased pricing of on-line marketing in general, as well an increase in overall marketing expenditures in an effort to strengthen our
brand. In addition, in the fourth quarter of 2004, we spent approximately $1.6 million marketing our new auctions business, which increased our overall
marketing expenditures and reduced our return on our marketing investment.
Commentary—Expense Control. G&A increased 79% in absolute dollars, from $16.9 million in 2003 to $30.2 million in 2004, but as a percentage of
gross bookings, G&A remained constant at 6%. Increases to G&A are a result of higher payroll costs from additional corporate staffing, as well as increased
technology, legal, accounting and other corporate costs.
Commentary—Inventory. During the third and fourth quarters we increased our inventory in preparation for the 2004 holiday season. We believe that
we ended 2004 with appropriate inventory levels for the first quarter of 2005.
Commentary—Strategic Projects. Following is a brief update on some of our recent strategic projects and initiatives:
Auctions—We launched our auctions business in September 2004.
Travel—In January 2005 we added cruise offerings to our website. We intend to add additional travel services in the future.
Design Your Own Jewelry—In January 2005, we launched a new category within our jewelry store—Design Your Own Jewelry. This category
allows customers purchasing diamond rings to select both a specific diamond and ring setting. In August 2004, we entered into an agreement with an
entity which allows us to lend up to $10.0 million to the entity for the purpose of buying inventory, primarily to supply this new category. In
November 2004, we loaned the entity $8.4 million for this purpose (See Note 20 to the consolidated financial statements for additional information
regarding this transaction).
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