Overstock.com 2011 Annual Report Download - page 64

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Table of Contents
Gross margins for the past eight quarterly periods and years ending December 31, 2011 and 2010 were:
Q1 2011 Q2 2011 Q3 2011 Q4 2011 FY 2011
Direct 10.7% 9.6% 6.6% 7.0% 8.5%
Fulfillment Partner 20.7% 18.1% 17.6% 17.8% 18.5%
Combined 18.9% 16.9% 16.0% 16.2% 17.0%
Q1 2010 Q2 2010 Q3 2010 Q4 2010 FY 2010
Direct 13.8% 11.7% 9.1% 9.0% 10.7%
Fulfillment Partner 18.8% 19.4% 18.7% 19.0% 19.0%
Combined 17.9% 18.0% 16.9% 17.0% 17.4%
The decrease in direct gross margin for the year ended December 31, 2011 is primarily due to fixed costs increasing as a percentage of revenue due to
declining direct sales, higher inbound and outbound freight and higher product costs from returned goods due to a sales mix shift to the home and garden
category.
The decrease in fulfillment partner gross margin for the year ended December 31, 2011 is primarily due to competitive pricing initiatives. The decrease
in fulfillment partner gross margin for the three months ended December 31, 2011 is primarily due to competitive pricing initiatives, partially offset by a
decline in credit card processing fees.
The shift of business between direct to fulfillment partner (or vice versa) is an economic decision based on the economics of each particular product
offering at the time and we do not have particular goals for "appropriate" mix or percentages for the size of either. We believe that the mix of the business
between direct and fulfillment partner is consistent with our strategic objectives for our business model in the current economic environment and, with the
exception of a transition of some of our direct clothing and shoes category to a fulfillment partner model to reduce our seasonal inventory risks, we do not
currently foresee any material shifts in mix.
During reviews of our partner billing system for returns, we discovered that we had underbilled our fulfillment partners for certain fees and charges
related to returns of approximately $157,000 and $822,000 for the years ended December 31, 2011 and 2010, respectively. Since our business model is reliant
on our relationships with our fulfillment partners and the problem related to an internal record keeping issue on our part, we made the determination to not
seek recovery of these amounts from our fulfillment partners and consequently have not recognized any related recoveries in our consolidated financial
statements.
The other factors described above, such as operational and fulfillment costs did not have a significant impact on the change in gross margin.
Cost of goods sold includes stock-based compensation expense of $193,000 and $212,000 for the years ended December 31, 2011 and 2010.
See "Executive Commentary" above for additional discussion.
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 margin. 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 margin. As a result, our gross
margin may not be directly comparable to others in our industry.
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