Bed Bath & Beyond Inc. (BBBY) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Overstock.com Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Alexis Callahan. Thank you. Please go ahead, madam.

Thank you, operator. Good morning, and welcome to our third quarter 2020 earnings conference call. Joining me today are Jonathan Johnson, CEO of Overstock and President of Medici Ventures; and Adrianne Lee, CFO of Overstock. Dave Nielsen, President of Overstock Retail; and Saum Noursalehi, CEO of tZERO, will be available for Q&A. Please note that we are conducting today's call remotely. Let me remind you that the following discussion and our responses to your questions reflect management's views as of today, October 29, 2020, and may include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in our Form 10-Q for Q2 2020, subsequent filings with the SEC and in our press release filed this morning. Please review the forward-looking statements disclosure on Slide 2 of today's presentation. During this call, we'll discuss certain non-GAAP financial measures. The slides accompanying this webcast and our filings with the SEC, each posted on our Investor Relations website, contain additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Please note that today's presentation is available for download on our Investor Relations website, and our summary slide contains instructions for asking questions during our Q&A session. With that, let me turn the call over to you, Jonathan.

Thank you, Alexis, and good morning to all. I am excited to be sharing our third quarter results and providing updates on our business. I'll follow the agenda on Slide 3. Next slide, please. Because many of you are new to Overstock, I'm going to start with an overview of who we are. We are a leading and innovative e-commerce company. We view ourselves as a tech company at our core, one that embeds automation in our processes and works to remove middleman. We were founded as an online liquidator in the late '90s, then worked into a general merchandiser and today are a home furnishings-focused online retailer. A lot has changed in Overstock over the last 14 months. We've significantly upgraded our leadership team. We've defined who we are and identified what we do well. We've carved out a strategic niche where we want to play, and we've introduced more and more discipline and focus into the organization. All that work is paying off. The operational improvements we've made have allowed us to take advantage of recent sector tailwinds. We've made good progress but we still have plenty of work to do. We're just getting started. I've never felt as confident about our ability to achieve what I said we would, sustainable, profitable growth. In fact, I'm so confident I will add something to that goal. From now on, our mantra is sustainable, profitable market share growth. Slide 5, please. We continue to strategically strengthen the Overstock team. On October 4, we added a seventh director to our Board. A past Chief Marketing Officer at Walmart and TripAdvisor, Barbara Messing is the Chief Marketing Officer at Roblox, the user-generated online gaming platform. Barbara has over 2 decades of experience in retail and e-commerce and is known for implementing data-driven innovations and leading profitable growth in companies just like ours. Barbara is a fantastic fit for Overstock and a highly strategic addition to our Board, which now has 6 independent directors. She will represent our shareholders well and is already adding value. We're currently looking to hire a new Chief Marketing Officer, a real area of opportunity for us. With our current growth and momentum, I'm confident we will continue to bring on top talent. Slide 6, please. On September 21, tZERO added a fifth member to its Board. John Jacobs is a former senior executive at NASDAQ and the Executive Director of Georgetown University's Center for Financial Markets & Policy. He's a great addition to the Board who can help tZERO grow its business. Slide 7, please. I'll give a quick update on COVID and its persisting impact on our organization. We are still working remote-first, with almost the entire team working from home. We are being productive. We've been able to take advantage of top talent in the market, including in technology and analytics, particularly from industries disrupted by the pandemic. COVID has presented both opportunities and challenges. In many ways, Overstock is ideally suited to operate in the current environment. We've maintained our momentum in the third quarter with retail sales up 111% and new customers up 141% year-over-year. Our core products, home furnishings remain in high demand, and our distributed partner supplier and drop-ship model enable us to be nimble and efficient. Sustained demand has not come without its own set of challenges. We've made a good recovery in areas where we initially felt COVID strain such as customer care, fulfillment and inventory levels. We're not fully back to pre-COVID levels but we are making steady progress. Carrier capacity constraints, which is an industry-wide issue, continue to cause delays in delivery, something I'll discuss later in today's presentation. And given that we expect many will be staying home for the holidays, we're anticipating and already preparing for an early holiday shopping season. Slide 8, please. Now a quick corporate update. We opportunistically raised capital in August. We upsized the original offering due to an increased demand. Bankers fully executed their overallotment options. In the end, we issued 2.4 million shares at $84.50 a share for net proceeds of just under $200 million. We will use these proceeds to support our continued growth trajectory. On the regulatory front, there is nothing of substance to report. We continue to cooperate fully and engage with regulators. Intellectual property remains important to us. We are on the cutting edge of technology, and we are making sure our technology is appropriately protected. 1 year ago, I reported on our patent portfolio so I do so again today. We continue to be active on the patent front. Organization-wide, our patent activity is progressing and is up relative to last year. You can see that our patents are moving through the process. Slide 9, please. I'll now have our CFO, Adrianne Lee, review our third quarter financial results. Adrianne?

Thank you, Jonathan. Next slide, please. As a reminder, we manage our business and report our financial results across 3 key segments: Overstock Retail, a pure-play e-commerce home furnishings retailer; Medici Ventures, our blockchain-focused incubator; and tZERO, our largest Medici Ventures business focused on financial innovation and liquidity for private companies. Our consolidated results aggregate these 3 segments. I will begin with a summary of our consolidated results, followed by a more in-depth review of Overstock Retail's third quarter performance. Next slide. On a consolidated basis, we delivered another strong quarter. Sales at Overstock Retail doubled for the second sequential quarter year-over-year. Trading volume on the tZERO ATS increased 20x compared to a year ago, and we maintained disciplined spending and investing across the organization. In summary, we posted 111% revenue growth year-over-year, adjusted EBITDA of $40 million and diluted earnings per share of $0.50. We also ended the quarter with a healthy balance sheet that included a cash balance of nearly $530 million, $193 million of which was the result of our successful and oversubscribed follow-on equity offering in August. Overall, we remain focused on executing against our key initiatives, and our recent financial performance reflects this commitment. Next slide. This slide provides a summary of Overstock Retail's exceptionally strong third quarter performance. New customers more than doubled, supporting our revenue growth and profitability as measured by adjusted EBITDA improved by $51 million versus the same period last year. Overstock's business model is highly scalable. Our pure-play e-commerce and partner supplier drop-ship model naturally supports growth. Our recent results illustrate our ability to generate significant operating leverage within our business. We remain focused on growing our top line at a faster pace than our operating expenses, and for the second consecutive quarter, we achieved that. Total revenue doubled in the third quarter while operating expenses increased by only 62%, which includes sales and marketing efforts. Next slide. In the third quarter, we recorded retail revenue of $718 million or an increase of 111% compared to the third quarter last year. Customers are increasingly finding our home furnishings products and coming back to make repeat purchases. We are pleased that third quarter sales performance remains strong. Although it's difficult to predict future trends right now, we believe that the shift to purchasing home furnishings online will continue and that this shift should serve as a tailwind for us. Recall that our goal is to gain market share in an expanding U.S. online home furnishings market. Next slide. Retail gross profit increased by $100 million year-over-year to $169 million in the third quarter. Retail gross margin came in at 23.5%, which is an improvement of nearly 350 basis points versus a year ago. Improvements in gross profit and margin were driven in part by operational efficiencies, including the rollout of our successful marketing allowance program and leverage from our fixed cost warehouse infrastructure. Operating results were also impacted by certain items unique to the third quarter, similar to what we experienced during the second quarter of 2020. These unique items included lower discounting as we strategically balanced marketing efforts against product availability and customer acquisition marketing activity and fulfillment-related charges per our service level agreements in order to protect our customers' experience. We have already experienced improvements in adherence to our SLAs. In addition, we expect fourth quarter discounting to be higher, which is more in line with historic seasonal trends and traditional customer shopping experiences. Next slide, please. This chart illustrates over Overstock Retail's operating expenses in absolute dollars and as a percent of revenue. As a reminder, Overstock's operating expenses includes sales and marketing, general and administrative and technology expenses. As a percent of revenue, operating expenses improved by 530 basis points year-over-year. We were able to leverage our G&A and technology expenses to double sales. Next slide. Overstock Retail posted $50 million in adjusted EBITDA during the quarter, an increase of $51 million year-over-year. EBITDA margin was 7%, an improvement of over 700 basis points versus last year. We also delivered $43 million of net income, resulting in our second sequential quarter of profitability. We continue to expect consistent EBITDA margin performance in the mid-single digits long term as pandemic-related expense benefits normalize and revenue growth moderates on a higher base. I should also note that margins in the fourth quarter generally tend to be lower, driven mainly by increased holiday promotional offerings. Next slide. And that summarizes our third quarter 2020 financial results. Jonathan?

Thank you, Adrianne. I'm so pleased with these results. They represent disciplined focus and execution against our strategic initiatives. I thank everyone in the company for their hard work. Slide 18, please. I'll now discuss how we achieved these results, starting with Overstock Retail. Slide 19. Overstock is a top brand in the fast-growing home furnishings online market, a market that is now more relevant than ever and one we believe will remain relevant. After years of meager growth and online penetration, we've seen a significant spike this year and now estimate 35% of home furnishings are being purchased online. I'd like to emphasize that we were able to keep growing at over 100% even as brick-and-mortar began bouncing back in Q3. Slide 20, please. As I've discussed before, we've carved out our niche and are playing in our own distinct position of strength in the market, a position that is relevant in any market condition but especially during challenging or uncertain economic times. Our brand vision of Dream Homes for All differentiates on home good expertise and smart value. Our customers come to us to find quality home goods for a great value. We are not, nor do we strive to be, an everyday low price leader nor to be inspirational. We believe our value proposition uniquely meets the needs of many customers in the market, our customers who we focus on every day. Slide 21. During Q3, our customer count grew 141% year-over-year. Nearly 2/3 of these new customers were in our target customer segments, something which demonstrates success in our focused marketing efforts. It also gives confidence that we will be able to retain these customers. Our new customers in the last 2 quarters are making repeat purchases at a higher rate than they had in the past 10 years. Their 28-day repeat rate is up 19% year-over-year. This tells us that new shoppers are not only finding us and the products they love, they are having a great experience. This bodes well for retention, something we are especially focused on with these new customers. Slide 22, please. We have built a strong foundation in our core competencies. We are customer-focused. We know what our customers want and how to reach them. 59 million average monthly visits is a testament to that. We are technology-driven. We've been building and integrating innovative technology in online retail for 20 years and we remain cutting edge. Our infrastructure's ability to handle the extreme and what's proved to be steady growth we've experienced during the last 2 quarters is a testament to that. And our business model, which utilizes thousands of partner suppliers and fulfillment centers, is efficient and highly scalable. Our sales and our margins are a testament to that. Slide 23, please. Now to our focused retail strategy, Overstock's mission is to create Dream Homes for All, making beautiful, comfortable and well-appointed homes accessible by helping customers easily and confidently find just what they want for less. We've consolidated this vision and focused on a single page that everyone in Overstock Retail lives by. In order to achieve sustainable, profitable market share growth, we must focus on serving our customers' highest needs. We've aligned our brand pillars to our customers' needs, product findability, smart value and easy delivery and support. These brand pillars provide the long-term guardrails and focus for innovation, so we're only working on the things that improve the experience our customers want. Slide 24, please. As we've mentioned, we've done a great deal of customer research, and our findings have driven our focus. Two customer segments particularly fit our strength, savvy shoppers and reluctant refreshers. Together, they represent 40% of the home furnishing markets or about $120 billion. While other pure-play home goods retailers focus more on inspiration, we've leaned into the white space of the 2 customer segments who already have a higher propensity to shop with us. These customers are deal-driven, want to feel great about their purchases and want a low-hassle shopping experience. Well, that's Overstock. We continue to leverage analytics and machine learning to ensure we provide the shopping experience these customers, our customers, desire. Next slide, please. Our 2020 initiatives align to our 3 brand pillars. These initiatives have not changed during the pandemic and will remain a focus through completion. We've made recent notable progress in mobile by improving the customer experience, in the prepositioning of inventory with the opening of our Southern California distribution centers and in customer care by increasing self-service options. I'll dive into a little more detail on each. Slide 26, please. Mobile has always had good traffic but lagged in conversion. Our work to improve the customer experience has resulted in a significant increase in conversion, which is up 16% in Q3. Sales from mobile exceeded 50% of our revenue for the second quarter in a row. We've made good progress. And as customers naturally migrate to mobile, we know we must continue to improve our mobile experience. Slide 27. Both new and existing customers are finding us and liking us for our primary focus and core competency, home furnishings, which again represented more than 92% of sales in Q3. Home furnishings remain in demand. Our sales mix is for products that are historic strong sellers, giving us real confidence in sustained demand. Slide 28, please. The health of SEO remains strong as shown by continued growth in top 3 keyword rankings and increased organic market share. Now we did experience a slight decline in keyword ranking growth at the end of September, but we have been able to quickly reverse that trend and are now at a 2-year high. The industry has experienced a similar drop-off in organic search visits as seen in the home and garden category data. Some of this drop-off is seasonal. Slide 29, please. Our value proposition is smart value. Shipping and promotions are 2 key components of that proposition. We know free shipping is a top purchase driver so we now permanently give free shipping on all items. Our customers are recognizing this value and rate us as 10% favorable relative to competitors for shipping charges. Promotions matter too, and we've been rating at 6% favorable compared to competitors in promotional competitiveness. We are not an everyday low-price leader but we do strive to win on price after factoring in promotions. It's nice to see this is resonating with our customers. Slide 30, please. As I mentioned earlier, the current environment has strained our fulfillment capabilities. We're not alone in that challenge. While we have made progress in reducing fulfillment times, carrier capacity constraints continue to cause lagging deliveries. There is only so much carrier capacity in the U.S., and with more people shopping online and perhaps an earlier-than-usual holiday shopping season, we don't anticipate full recovery on delivery speed until next year. Given this environment, some are predicting shipageddon this holiday season, with an even greater pressure being placed on carrier capacity and delivery capabilities. We have been and are being as proactive as possible. For example, our logistics team has been sharing our forecast with our primary carrier per month in an effort to ensure adequate trailers and trucks in our fulfillment centers. Because our higher demand began 2 quarters ago, we believe we have carrier commitments. Others do not. While speed does and always will matter, we found that in the current environment, the accuracy in delivery time matters more right now, particularly for large personal items. Customers want to know if their couch will be delivered at noon on Saturday, so they can make sure they are home to take delivery and instruct a delivery person to place it in a specific place. We are always working to improve delivery estimate accuracy and have been giving more automated and enhanced delivery communications to our customers. Slide 31, please. Customer contact volume remained high in Q3, driven by our increased sales but was 20% lower than last year as a percentage of orders. The slight uptick relative to Q2 is primarily because we didn't have all our customer service channels open at the beginning of Q2 when we were understaffed, just like many of our peers. We're fully staffed now. All lines are open and we continue to make progress in automation initiatives. In fact, self-service cases are up 3.6x over last year, which means customers can quickly and conveniently help themselves, avoiding the time to make a phone call and the cost of an agent. Our customer service satisfaction scores, which dipped during the height of our sales increase, have markedly increased as we make technology improvements. Our technology routes show as we innovate through automation. Slide 32, please. As previously announced, Overstock was 1 of 3 vendors awarded a contract for a 3-year proof-of-concept pilot with the U.S. federal government, General Services Administration. The platform went live as planned in August. We remain guardedly excited about this potentially large opportunity. We are focused on training and onboarding, which is a more involved process than you might suspect. We continue to add features and functionality to the platform as requested by the GSA to improve the purchasing experience. The pilot is ramping up slowly, at least what feels to us like government speed, but we are making progress. We'll provide updates as trends emerge. Slide 33, please. In summary, Overstock Retail remains well positioned for continued growth. Our revenue growth continues to outpace the industry, driven by our technology, our customer focus and our business model. We have maintained our normalized gross margins. Our expense rate continues to grow slower and revenue driving operational leverage. All this flows through to produce long-term adjusted EBITDA margins in the mid-single digits. We are driving sustainable, profitable market share growth for Overstock Retail by envisioning -- by enabling our vision of Dream Homes for All. Slide 34, please. Let's turn to our Medici Ventures business. This slide shows Medici Ventures' areas of focus and where each of our blockchain companies fit into our vision. I've talked a lot about focus, discipline and strategy introduced to our Overstock Retail business. That doesn't mean we are any less enthusiastic or committed to our blockchain businesses. We remain highly supportive of them and bullish on blockchain technology more broadly. It is difficult to say what we think these businesses are ultimately worth, but I can say we certainly think we've made some great bets. With that, I'll first discuss tZERO. Slide 35, please. For those who might be newer to the tZERO story, tZERO is a leading liquidity provider for private companies. It offers institutional-grade technology and trading solutions for issuers looking to digitize their cap table and trade on a regulated platform. This gives issuers valuable liquidity optionality while simultaneously democratizing access to private assets. I'm pleased that tZERO has had a lot of recent momentum. Its first third-party security commenced trading. It delivered record ATS volume and it launched its retail broker-dealer, to name a few of its momentum items. I'll touch on each of these more in a moment. Slide 36, please. tZERO continues to lead the digital security space. Last quarter, tZERO recorded nearly $40 million in transactions on the tZERO ATS. To put that in perspective, the ATS recorded $2 million in the same period last year and roughly $3 million in the second quarter of 2020. As a result, tZERO was responsible for roughly 99% of all security token volume last quarter, and the securities trading on its platform represent roughly 85% of the value of all security tokens trading today. tZERO is winning in this new market. Slide 37, please. I want to spend some additional time illustrating the record volume tZERO recently recorded. This is important for a couple of reasons: first, this volume is a key revenue driver given the commissions that tZERO generates on this volume; second, we expect prospective issuers to take note of these figures as volume is a key consideration for them. During the third quarter, over 4 million shares were traded on the tZERO platform. This is more volume than in all previous quarters combined. This data is encouraging. We look forward to the tailwind that trading additional assets should have on these figures. Slide 38, please. In addition to the record trading volumes, tZERO also experienced healthy growth in its crypto app users. It added over 2,200 new users last quarter, bringing the total user base to over 11,000. tZERO plans to migrate these users into its newly launched tZERO Markets, which would allow them to also invest in the digital securities that trade on the tZERO ATS. Slide 39, please. As I mentioned earlier, tZERO hit several milestones last quarter. I've discussed some already and will highlight a few more, beginning with the approval of tZERO Markets. tZERO Markets, which was approved by FINRA in September, officially launched last week. This is important for several reasons. It allows tZERO to control the entire user experience rather than relying on third-party broker-dealers. It allows tZERO to control everything from investor onboarding and trading to ongoing customer support. And it provides additional monetization opportunities down the road, such as revenue derived from data and cash balances. tZERO also launched 2 third-party broker-dealers on the ATS this month. And as of this call, 6 broker-dealers are live and trading on the tZERO ATS. And tZERO just signed a new subscriber agreement with its seventh. As noted earlier, John Jacobs recently joined the tZERO Board. I'm thrilled to have him on the team. Slide 40, please. I'd like to reiterate tZERO's priorities: add more assets, enhance liquidity on the tZERO ATS; and improve the investor experience. I'm pleased that tZERO made meaningful progress against each of these objectives last quarter, and the fourth quarter is off to a strong start, too. Slide 41, please. Now to 2 other Medici Ventures companies with notable news and progress. Slide 42. Bitt is our Barbados-based financial services company focused on developing blockchain-based digital payment solutions in developing countries. Just yesterday, we announced Medici Ventures purchased an additional $8 million in equity, which will allow Bitt to pursue market opportunities that accelerate the adoption of Central Bank Digital Currency. Its pioneering work in the CBDC space promotes social inclusion, financial empowerment and economic growth. We are strong believers in Bitt and this additional equity purchase demonstrates our commitment to this area. We are -- this is an exciting announcement and a win-win for all parties: Overstock, Medici Ventures and Bitt. Slide 43, please. I would be remiss if I didn't mention Voatz the week before the presidential election. Based in Boston, Voatz has developed a mobile voting app that utilizes the built-in security smartphone technology and the immutability of the blockchain to enable safe and secure voting. Just 2 weeks ago, the Voatz app was used to cast the first presidential vote using blockchain, ever. It has now conducted 70 successful elections in 29 counties across 5 U.S. states and has 3 in progress and 3 in the queue for later this year. I hope everyone in the U.S. is voting or at least trying to. If it doesn't work as well as it should, next week, think about how Voatz could have solved that. Slide 44, please. I'll briefly recap before we move to Q&A. Slide 45. We have made a lot of progress thus far in 2020 across all our businesses. We are executing against a focused and disciplined strategy. Those efforts show in our financial results. We've reacted quickly to adapt to changing market conditions and consumer demand. Our business model and our employees have demonstrated remarkable resilience. The growth Overstock is experiencing has taken and continues to take a lot of work and mental effort to produce and maintain. It is not just COVID-produced. Our team has done a wonderful job meeting and maximizing the opportunity. We are stronger than ever, well positioned to continue our growth trajectory. Now let's take some questions.

[Operator Instructions] Your first question comes from the line of Tom Forte with D.A. Davidson.

Congratulations on another outstanding quarter. So my one question and one follow-up is, how should we think about your ability now that you have the Aspen token to add additional tokens to your ATS? Where are we in the BOX joint venture? And then my follow-up is, I'm very curious on why you decided to make incremental investment in Bitt. What did you see in their results that made you think it was worth making incremental investment?

Tom, thank you, and thanks for the congratulations. We're certainly excited about our third quarter results. Saum, I'll let you talk about where we are on adding additional tokens and the status of the BOX JV, and then I'll address the Bitt question.

Sure. Thank you, Jonathan. So Tom, our top priority is finding more assets. And as you heard, so we got Aspen live this quarter. That's probably one of the top-quality digital securities that exists today. We also just yesterday announced that we -- a tokenization agreement with a fund called Tynton Capital. They're well-respected fund, raising $300 million. We also have past announcements like River Plaza, which are now doing their raise and we hope to trade probably early next year. So we've announced several assets. There's several more in the works. But just to be kind of frank is most of the assets that exist today don't pass our diligence. And we don't want to launch assets out there that aren't the quality that meet our standards. So we're being quite selective about what we're willing to trade. But the new assets that we're getting, we feel very good about, like Tynton Capital. I'd also note, we are shifting our strategy a bit to direct listing rather than these offerings, which have the lead time of having to build offering memorandums, have a successful raise and then sometimes lock-up periods before they trade. So we're shifting to direct listing where we feel we can get assets up and running much faster. On the JV question with BSTX, our joint venture with BOX Digital, the rulebook was filed, as you know. There's been very positive back and forth with regulators, and we're optimistic we'll get a positive answer as far as moving forward with the exchange in late November. Their deadline, the SEC's deadline to get back to us is late at the end of January, but we're hopeful we'll see something positive maybe late November. But one way or another, we'll hear an answer by the end of January. Jonathan?

Thanks, Saum. And on Bitt, the market opportunity for Central Bank Digital Currency or CBDC is enormous. And it is a focus of almost every central bank around the world. The pandemic has increased and accelerated that focus. So in our view, the market opportunity is right in Bitt's crosshairs. And this additional investment enables Bitt to pursue the market opportunities today. When the pilot in the Eastern Caribbean launches -- when it goes live next month, and it was delayed slightly because testing during the COVID -- user testing during the COVID period was slowed, but when it goes live next month, we think Central Bank guys from around the world will be watching it. We believe in this mission. We are bullish on CBDC, and we think it's only a matter of time until digital currency will be the norm as central banks around the world are exploring it right now. So to have a controlling interest in the company that allows for that just seems like an easy decision for us.

Your next question comes from the line of Seth Sigman with Crédit Suisse.

Congrats on the quarter. I wanted to focus a little bit on the retail business. Very good performance this quarter despite some industry constraints that we heard about, right? Inventory seemed tight and may be worse in the second quarter for the industry. There are also incremental supply chain and shipping costs. So I was hoping you could discuss those 2 factors. How are you able to manage that so well in the third quarter? And then what do you see, as you move into the fourth quarter, whether those headwinds are better or worse?

Great questions. Dave, I'll let you address those initially. I may have something to add.

Okay. Thanks, Jonathan. Thanks, Brad (sic) [ Seth ]. Yes, regarding both inventory and carriers and the challenges we faced, I'll touch on inventory first. From an inventory standpoint, our business model is very resilient, with over 8 million products on our website. So we recognize that we missed out on some opportunity to really make hay with some of our top-performing products that were out of stock. But with the trade-off sales and the incremental inventory assortment that we have, customers were trading off and we had an increased percentage of our breadth of assortment selling and we also sold more units per item with that. So the business model is resilient. Regarding the carrier challenges, Jonathan mentioned it earlier, shipageddon is coming. We've really been through that for the last 6 months, working to understand how to get trailers and trucks in place with 100-plus percent growth in the last 6 months. And those trucks know their way to our warehouses. We've been working very closely with our carriers. We've provided them forecast and we continue to work on that. We're in good shape there, confident that we have our commitments in place with our carriers and looking forward to a solid Q4.

Yes. I would just -- Seth, I'd just add on to what David said. Because our growth started happening 6 months ago, we've -- the carriers have adjusted, they know our needs. We've given them our forecast. We have commitments from them for what we think we'll need. I think shipageddon is going to affect people that are more holiday-focused, that haven't had the huge increase in sales we've had for the past 6, 7 months.

Okay. That's really helpful. I appreciate that. And then I think you suggested early on that holiday sales, they could come early, and we've heard that from a lot of companies as well. Can you talk a little bit more about what you are seeing early here in October and whether some of the momentum from Q3 has continued? And then just related, you did mention higher discounting in Q4. I just want to clarify that's higher versus Q3, but is it also higher year-over-year versus the fourth quarter? If you could just sort of elaborate on that, too, that would be helpful.

I'll start with the question about what Q4 looks like thus far and then turn it over to Dave or Adrianne to discuss the rest of the question. We have been hesitant and do not give guidance on what we see in Q4. I will say that, thus far in Q4, sales remain strong. Demand is high. So Dave or Adrianne, do you want to talk about the discounting?

Sure. I'll talk about discounting and some of the promotions we're looking at being pulled forward, as Brad mentioned. So Brad, what we've seen is a lot of talk and a lot of articles from -- probably driven, frankly, by the carriers to encourage everyone to release Black Friday deals in October and push promotions up. We've been -- we're not the market dictator in this case, and so we wanted to make sure that we were ready to go. We're nimble. We've got our content set, but we're not seeing a large uptick in holiday early from our competitive set either. We're seeing some and continue to monitor that on a daily basis. In terms of our promotional discounting in the fourth quarter, we do not anticipate that being at greater levels than last year's. But we do anticipate it being -- as we get into the fourth quarter into our doorbuster deals and our daily deals, we're going to become more promotional with that because you have to be in the fourth quarter. But I hope that answers your question there.

Yes, that's great.

Your next question comes from Rick Patel with Needham & Company.

I'll add my congrats on the strong execution as well. Can you provide additional color on the repeat business? It looks like it was up 19% in the third quarter, which is an acceleration. What do you attribute that to? And how should we think about the runway you have to continue driving that higher?

Thank you, Rick, and that's a great question. We are extremely focused on the repeat rate. In the second quarter, as new customers tripled and in this quarter, third quarter, as they more than doubled, we need to be able to take advantage of this new set of Overstock customers and make them Overstock loyalists. What do we attribute it to? I think it is several things. It's our focused marketing. We know who our customers are. We've divided the market into 6 different customer segments. We focus on 2 of them, those that we call savvy shoppers and those what we call reluctant refreshers. They represent 40% of the market. They're predisposed to shop at Overstock. When they come and find us, we're working hard to delight them. And so I think it's knowing we have to increase our repeat rate and knowing who we're marketing to, that's what I attribute the growth to. And it's what we're going to be looking at next quarter and all next year. Dave, what would you add to that?

The word personalization, to add to that, Jonathan. It really is about knowing our customers, knowing what they want and when they want it. And using machine learning and our marketing models and our e-mails and our different campaigns is super important for us as we think about how to get that customer to reengage.

And you talked about 2/3 of your new customers being within your target base. So that implies a pretty material increase in customers that could be considered outside of your umbrella, so to speak. So what's your confidence in being able to retain those new customers that perhaps aren't savvy shoppers or reluctant refreshers and that your TAM is perhaps wider than the $120 billion?

Dave, you want to take a first cut at that and then I'll add?

Sure. Thanks, Jonathan. Rick, what gives me confidence is that repeat rate increase in 28-day new customer repeat. When you see that -- we have a statistic internally that we look at with our deliveries. And when a delivery goes well, a customer has a high likelihood of repeating when that experience is solid. And that's why you'll hear us talking so much about our operations and our customer experience because when the customer has a great experience, regardless of whether they're one of our target customer segments or any customer, if they have a good experience and they like what they see, we have a lot of customers shopping on our website every day that are not our target customers that need a sofa or need a coffee table.

Yes. I think there's 3 metrics that we look at every day and if any one of them is dipping, a flurry of e-mail and activity ensues. One is a fulfillment score that we monitor. Another is a customer care response score, and then the third is the customer post-incident and NPS score. Those are not broken out by customer segments. Those are for all of our customers. And our goal is to delight anybody who shops on our site, not just the savvy shopper, not just the reluctant refresher, but everyone. And I think that operations aspect that Dave mentioned is why we think anyone that comes to shop with us is going to have a great experience.

Your next question comes from the line of Peter Keith with Piper Sandler.

It's Bobby Friedner on for Peter. Congratulations on the continued success. First, I wanted to ask about your recent announcements to offer permanent free shipping on all orders. Can you discuss what went into this decision-making? Have you been seeing notably higher conversions since implementing this in March? And also, going forward, should we expect any adverse impact on gross margin as a result of the decision?

Bobby, thanks for the question, and I'll give a brief answer and have Dave provide more detail. A lot of analysis went into it. It's something we've talked about for months and even years before we did it. The pandemic was a nice catalyst to do it. It has -- the worry was it would cost us money because in the past, it was free shipping for items over $45. That has proved not to be the case because incremental sales more than made up for any dip on shipping costs on those lower-cost items. Dave, what else -- Dave or Adrianne, what else would you add on this one?

Yes. Thanks, Jonathan. I would add that free shipping is identified by our customers as the #1 customer benefit that they wanted. And as we survey our customers frequently, that free shipping awareness has grown 9 percentage points in just a mere 6 months, with one of the quickest moving metrics of awareness topics that we've had. For our customers, it really has resonated with them and given us the confidence to move forward.

Great. Appreciate the detail there. Just separately I want to ask around gross margin. So we continue to see strength there, Q3 at 23.3% was above Q2 at 23%, even though you thought Q3 would be a little bit lower as you restaff your customer support center, among other things, what led to the upside in Q3 versus earlier expectations. And are you rethinking your near-term gross margin potential, given the operational improvements you're seeing?

Well, we want -- I think as Adrianne noted, and I'll have Adrianne address this one, but we do think Q3 is probably a little higher than people should expect in Q4. But Adrianne, why don't you talk about gross margins and what we're doing on that front?

Yes, certainly. Thanks, Jonathan. In the Q3, and I had said this a bit in my prepared remarks, there was a couple of unique items that continued to prevail from Q2. Notably, we did do less discounting. We discussed that. And you'll see when we file our Q, our advertising costs in retail were up 70 basis points. So we were opportunistic with advertising and did do less discounting, which is kind of a similar phenomenon that we did in Q2. And then the other item is we did continue to see a bit of SLA charges in the third quarter, similar to Q3. So I'd say the 2 takeaways are: we don't expect our discounting to remain at the levels we saw in Q2 and Q3; and we're already seeing a lot of improvements within kind of our SLA fees, as I mentioned. So those are the 2 key things that persisted into Q3 from Q2 that we really don't expect to continue.

Good luck in Q4.

Thanks, Bobby.

Your next question comes from the line of Ryan Gee with Bank of America.

So I'm trying to get a sense for what 2Q and 3Q, when you're doubling sales year-over-year and in an unprecedented demand environment, means at all for 2021 and your business going forward. So can you just take an opportunity to talk about your confidence in growing the business next year, capitalizing on this awareness in Overstock? And then as a follow-up to that, what product or site enhancements should we be looking for the rest of this year, maybe into next year that will kind of sustain the KPIs as you're seeing them today? Is there some improvements to the site or the customer experiences that we should be aware of?

Thank you, Ryan. I appreciate the question and the interest. Let me first say, as I've said in the past, I think the focus that we began bringing to the business in the fourth quarter of last year paid off in the first quarter. And I think there was a lot of operational strength and muscle that we had built that we were able to take advantage of when the pandemic tailwind kicked in. Some of the growth, like in mobile, I think is more operationally derived than pandemic derived. And so yes, we will rise against significant comps and starting in Q2 of 2021, but I think the operational focus and the initiatives we've been working on and that we've got slated for 2021 should help continue to drive growth. And it's why I've added 2 words to the company's mantra, which is sustainable, profitable market share growth. We see this as a big market. We like the white space we're in, where we're competing with others but in a different space. And so we think we can -- we think 2021 does have market share growth possibilities that we can achieve. Dave, what would you add to that?

I would just tag on to your comment on the unique white space we're in. I think that we have focused on differentiating ourselves from those top competitors. And as the market moves forward, it's a large U.S. home furnishings market. We expect to continue to grab and grab more than our fair share of our -- of that market. And with a focused team and a focused strategy, we're confident in our abilities to do that.

Now as far as what you can expect to see improvements on the website and our operations, we've just gone through a pretty rigorous decision cycle on what we expect to work -- we focused on with initiatives next year. I think you will see that our website becomes easier to navigate. Finding products will become much easier. The more products you have on your site, the easier you have to make it for people to find them. So there's always a longer to-do list than things we can do, but part of what we're doing is picking the most important and moving forward on those.

Okay. And if I could just squeeze in a follow-up for Adrianne. I appreciate the margin commentary on 4Q. I was just curious, from a revenue perspective, can you compare what new Overstock looks like in a 4Q holiday period? Should we just rely on the historical seasonal trends? Or is there something we should be aware of whether or not revenue is flat, down, up sequentially in this new Overstock that we have?

Sure. Thanks. I think Jonathan mentioned in a previous Q&A, sales remain strong. I think one of the things we've said is Q4 will be seasonally more holiday, and Dave mentioned doorbusters and promotional so I would say some of the similar activities we've experienced in Q4s of past will prevail. And then as Jonathan noted, I think sales remain strong.

Your next question comes from the line of Marc Cohodes with Alder Lane.

Well, well, well. There's a lot of ways I can go on this but I think I want to hit on Medici. And I always say there's no greater motivator than disrespect. And the fact that the followers all value Medici collectively at 0 is a little bit of a slap in the face. May I suggest that instead of an analyst meeting going forward, maybe you have a Medici Day that brings in top management from your portfolio companies to discuss in greater detail, first of all, the size of their markets, their initiatives and how close they are to becoming stand-alone investable companies because I think the opportunities are very large. And my real question is, people seem to think that you're limited to home furnishings and that's your only vertical. What prevents you from expanding, especially with the GSA business, into other verticals? And when could we maybe expect to see something along those lines?

Marc, thanks for the questions and for the suggestion. We do know, as I mentioned in the prepared remarks, we can do a better job telling the Medici story. We did hold a Medici Day in second quarter but I think it's high time for another, and so that's something we can work on. We are bullish on so many of these companies in Medici. Which ones are the ones that are the Lotto tickets versus the Super Lotto versus the Powerball still remains to be seen, but there's some great companies in there. As far as other lines of business, I really think that's an interesting question and one that I think we are forced and focused, first, to think about and are focused on, given the GSA pilot and that may be a chance to grow things out. Dave, do you want to comment on additional business lines and what we're thinking we have, we are and I think, right, we're so focused on home? Where do you think things could go?

Yes. Thanks, Jonathan, and thanks, Marc. I would break it into 2 components, completely new businesses that we're not necessarily in and then expansion of some product categories. So as we think about it for Overstock, it probably would make -- it probably makes some sense to add medical and lab tech, commercial-grade safety supplies, those areas, theme of relevance in the GSA world of customers that we could be servicing there with that contract, and then I think expanding into more into commercial-grade office furniture and office supplies, janitorial, even office electronics, now things along the lines of chargers and monitors and monitor stands and more professional-grade and some of that. So it is on our minds and we are thinking about it. And as Jonathan mentioned, we're guardedly excited about this opportunity but trying to take advantage of every capability we can from the award of this contract.

And back in the day, it was sort of explained to me that your architecture can support something close to $10 billion in revenue. Is that still the case?

Well, we're always working on the architecture. We -- I would tell you this. The fact that we had this tsunami of sales come into early -- mid-March, early April and didn't miss a beat on it tells me that our architecture is, today, strong and ready for growth. I don't know that the number is $10 billion, I don't know that the number is not $20 billion. But I do know that the technology team is always upgrading, always building so that we're ready for the next surge, the next big thing and for growth, growth, growth.

Just stay focused, guys. Well done. Well done fighting through the adversity of the past years and I'm counting on you. Just keep it going and have that Medici Day at some point. That would be very helpful to people.

Thanks, Marc. Alexis, I think we've hit the hour. Should we wrap this up?

Yes, operator?

Yes. We have reached our time for allotted questions. Presenters, do you have any closing remarks?

Yes. Thank you, Marc. Just let me give a quick closing remark. I want to thank everyone for participating on today's call. I appreciate your interest in and ownership of Overstock. Until we talk again. Stay safe, stay healthy and rest assured we will be working to deliver a great fourth quarter. And let me be the first to wish each of you a happy holidays. Thanks so much.