Overstock.com 2008 Annual Report Download - page 56

Table of Contents
Comparison of Years Ended December 31, 2006 and 2007
Revenue
Total revenue decreased 2% to $765.9 million for the year ended December 31, 2007, from $780.1 million in 2006. During the
three months ended December 31, 2006 and 2007, total revenue was $282.4 million and $294.5 million, respectively, a 4% increase.
Direct revenue decreased 35% from $301.5 million in 2006 to $197.1 million in 2007, and comparing the fourth quarters, direct
revenue decreased 29%, from $94.4 million in 2006 to $67.2 million in 2007. On the other hand, fulfillment partner revenue
experienced 19% growth during fiscal 2007 and 21% growth during the fourth quarter. For the year ended December 31, 2007,
fulfillment partner revenue was $568.8 million compared to $478.6 million in 2006. For the three months ended December 31, 2007,
fulfillment partner revenue was $227.3 million versus $188.0 million in 2006.
Gross Profit Percentage
Generally, our overall gross profit percentages 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 profit
percentage on retail sales.
Gross profit percentage for the twelve months ended December 31, 2007 increased 480 basis points, from 11.5% in 2006 to
16.3% in 2007. Gross profit for the years ended December 31, 2006 and 2007 amounted to $89.8 million and $124.6 million,
respectively, a 39% increase. For the three-month period ended December 31, 2007, gross profit percentage increased 730 basis
points, from 8.4% in 2006 to 15.7% in 2007, and gross profit increased 95% from $23.8 million in 2006 to $46.4 million in 2007.
Gross profit percentages 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
12.8% 13.5% 13.6% 8.4% 11.5% 15.2% 17.6% 17.1% 15.7% 16.3%
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 Profit Percentage—Gross profit for our direct business grew 74% from $16.7 million during the
year ended December 31, 2006 to $29.1 million for the same period in 2007. Gross profit for our direct business as a percentage of
direct revenue increased from 5.6% in 2006 to 14.8% in 2007. For the three-month periods ended December 31, 2006 and 2007, gross
profit for our direct business totaled $(4.3) million and $10.4 million, respectively, a 342% increase. Gross profit percentage for our
direct business for those three-month periods increased from -4.5% in 2006 to 15.4% in 2007. Gross profit percentage for our direct
business expanded despite direct revenue decreasing 35% for fiscal 2007 and decreasing 29% 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 profit
percentages have increased at the same time, since the remaining inventory in general turns faster and has higher profitability. Gross
profit percentages 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 6.1% of sales in 2007
compared to 7.8% in 2006, a 170 basis point improvement.
Fulfillment Partner Gross Profit and Gross Profit Percentage—Our fulfillment partner business generated gross profit of
$73.1 million and $95.5 million for the years ended December 31, 2006 and 2007, respectively, a 31% improvement. Gross profit
percentage for the fulfillment partner business also increased from 15.3% in 2006 to 16.8% in 2007 for those respective periods. The
increase in gross profit dollars for our fulfillment partner business is the result of the 19% increase in fulfillment partner revenue
combined with increased gross profit percentage. The increase in partner gross profit percentage 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 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.
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