Overstock.com 2008 Annual Report Download - page 53

Table of Contents
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 include as costs in calculating gross profit percentage. We
believe that some companies in our industry, including some of our competitors, account for fulfillment costs within operating
expenses, and therefore exclude fulfillment costs from gross profit percentage. As a result, our gross profit percentage may not be
directly comparable to others in our industry.
The following table has been included to provide investors additional information regarding our classification of fulfillment costs
and gross profit percentage, thus enabling investors to better compare our gross profit percentage with others in our industry (in
thousands):
Years ended December 31,
2007 2008
Total revenue $ 765,902 100% $ 834,367 100%
Cost of goods sold
Product costs and other cost of goods sold 594,276 78% 644,212 77%
Fulfillment costs 47,076 6%47,246 6%
Total cost of goods sold 641,352 84%691,458 83%
Gross profit $ 124,550 16%$ 142,909 17%
As displayed in the above table, fulfillment costs during the years ended December 31, 2007 and 2008 were $47.1 million and
$47.2 million, representing 6% of total revenue for those respective periods. Fulfillment costs as a percentage of sales may vary due to
several factors, such as our ability to manage costs at our warehouses, significant changes in the number of units received and
fulfilled, the extent to which we utilize third party fulfillment services and warehouses, and our ability to effectively manage customer
service costs and credit card fees.
Operating expenses
Sales and marketing. Sales and marketing expenses totaled $55.5 million and $57.6 million for the years ended December 31,
2007 and 2008, representing 7% of total revenue for those respective periods. Comparing 2007 and 2008, sales and marketing
expenses increased 4% from 2007 to 2008. We direct customers to our Website primarily through a number of targeted online
marketing channels, such as sponsored search, affiliate marketing, portal advertising, e-mail campaigns, and other initiatives. We also
use nation-wide television, print and radio advertising campaigns to promote sales. Sales and marketing expenses also include stock-
based compensation related to the adoption of SFAS 123(R) in 2006 of $336,000 and $313,000 for the years ended December 31,
2007 and 2008, respectively.
Costs associated with our discounted shipping promotions are not included in marketing expense. Rather they are accounted for as
a reduction of revenue and therefore affect sales growth and gross profit percentage. We consider discounted shipping promotions as
an effective marketing tool, and intend to continue to offer them as we deem appropriate as part of our overall marketing plan.
Technology expenses. We seek to efficiently invest in our technology, including web services, customer support, search, and
expansion of new and existing product categories, as well as technology infrastructure to continue to enhance the customer experience,
improve our process efficiency and support our web services infrastructure.
Technology expenses totaled $59.5 million and $57.8 million for the years ended December 31, 2007 and 2008, respectively
(7.8% and 6.9% of revenue for 2007 and 2008). From 2007 to 2008, technology expenses decreased 3% primarily due to decreased
depreciation expense. Technology expenses also included stock-based compensation related to the adoption of SFAS 123(R) in 2006
of $764,000 and $792,000 for the years ended December 31, 2007 and 2008, respectively.
General and administrative expenses. General and administrative ("G&A") expenses totaled $42.0 million and $38.4 million for
the years ended December 31, 2007 and 2008, respectively, representing approximately 5.5% and 4.6% of total revenue, respectfully.
G&A costs decreased 9.0% to $38.4 million for the year 2008 from $42.0 million or $3.6 million. The primary reduction in G&A
expenses year over year is primarily due to a $4.1 million decrease in bonuses accrued in 2008 (including our decision to not pay
senior executives and company-wide profit sharing bonuses). In addition, the performance goal described in the Performance Share
Plan (the "Plan") was not attained as of the end of the year ended 2008 and $1.0 million in total compensation expense accrued under
the Plan was reversed. This year over year decrease was offset in part by an increase of approximately $1.5 million related to
consulting costs and professional fees.
We incurred stock-based compensation related to the adoption of SFAS 123(R) in 2006 within general and administrative
expenses of approximately $3.0 million and $2.0 million for the years ended December 31, 2007 and 2008, respectively.
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