Overstock.com 2007 Annual Report Download - page 61

partner revenue experienced 16% growth during fiscal 2007 and 15% growth during the fourth quarter. For the year ended December 31, 2007, fulfillment
partner revenue was $564.5 million compared to $484.9 million in 2006. For the three months ended December 31, 2007, fulfillment partner revenue was
$224.4 million versus $195.9 million in 2006.
Gross profit and gross margin
Generally, our overall gross margins fluctuate based on several factors, including our product mix of sales; sales volumes mix by our direct business and
fulfillment partners businesses; changes in vendor and / or customer pricing, including competitive pricing and inventory management decisions within the
direct business; warehouse management costs; customer service costs; and our discounted shipping offers. Discounted shipping offers reduce shipping
revenue, and therefore reduce our gross margin on retail sales.
Gross margin for the twelve months ended December 31, 2007 increased 480 basis points, from 12.0% in 2006 to 16.8% in 2007. Gross profit for the
years ended December 31, 2006 and 2007 amounted to $94.8 million and $127.6 million, respectively, a 35.0% increase. For the three-month period ended
December 31, 2007, gross margin increased 710 basis points, from 9.3% in 2006 to 16.4% in 2007, and gross profit increased 74% from $27.4 million in 2006
to $47.7 million in 2007. Gross margins for the quarters and fiscal years during 2006 and 2007 were:
Q1 2006 Q2 2006 Q3 2006 Q4 2006 FY 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 FY 2007
13.3 % 14.0% 13.6% 9.3% 12.0% 16.0% 17.7% 17.5% 16.4% 16.8%
Cost of goods sold includes stock-based compensation related to the adoption of SFAS 123(R) of $412,000 and $460,000 for the years ended
December 31, 2006 and 2007, respectively.
Direct Gross Profit and Gross Margin—Gross profit for our direct business grew 71% from $18.3 million during the year ended December 31, 2006 to
$31.3 million for the same period in 2007. Gross profit for our direct business as a percentage of direct revenue increased from 6.0% in 2006 to 16.0% in
2007. For the three-month periods ended December 31, 2006 and 2007, gross profit for our direct business totaled $(3.6) million and $11.3 million,
respectively, a 417% increase. Gross margin for our direct business for those three-month periods increased from -3.6% in 2006 to 16.9% in 2007. Gross
margin for our direct business expanded despite direct revenue decreasing 35% for fiscal 2007 and decreasing 32% for the fourth quarter of 2007 compared to
the respective periods in 2006. This was primarily due to a significant reduction in direct inventory. However, gross margins have increased at the same time,
since the remaining inventory in general turns faster and has higher profitability. Gross margins have also improved from the reduction of fulfillment costs
(defined as warehousing costs, credit card fees and customer service costs—see further discussion in the following section entitled "Fulfillment Costs") to
6.2% of sales in 2007 compared to 7.7% in 2006, a 150 basis point improvement.
Fulfillment Partner Gross Profit and Gross Margin—Our fulfillment partner business generated gross profit of $76.5 million and $96.3 million for the
years ended December 31, 2006 and 2007, respectively, a 26% improvement. Gross margin for the fulfillment partner business also increased from 15.8% in
2006 to 17.1% in 2007 for those respective periods. The increase in gross profit dollars for our fulfillment partner business is the result of the 16% increase in
fulfillment partner revenue combined with increased gross margin. The increase in partner gross margin is the result of better product pricing and
improvements in partner fulfillment costs, particularly the cost of customer service.
Fulfillment costs
Fulfillment costs include all warehousing costs, including fixed overhead and variable handling costs (excluding packaging costs), as well as credit card
fees and customer service costs, all of which we
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