Overstock.com Inc. (OSTK) Q4 2020 Earnings Call Transcript

Overstock.com, Inc. (NASDAQ: OSTK) Q4 2020 Earnings Call Feb. 24, 2021,

Corporate participants:

Alexis Callahan — Overstock.com Inc — Analyst

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Adrianne Lee — Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer

Analysts:

Rick Patel — Needham & Company — Analyst

David J. Nielsen — President, Retail

Peter Keith — Piper Sandler — Analyst

Ryan Gee — Bank of America — Analyst

Ygal Arounian — Wedbush Securities. — Analyst

Brad Safalow — PAA Research — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2020 Overstock.com Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. (Operator Instructions) Please be advised that today’s conference is being recorded. (Operator Instructions)

I would now like to hand the call over to Alexis Callahan. Please go ahead.

Alexis Callahan — Overstock.com Inc — Analyst

Thank you, operator. Good morning. And welcome to Overstock’s fourth quarter and full-year 2020 earnings conference call. Joining me today are Jonathan Johnson, CEO; and Adrianne Lee, CFO. Dave Nielsen, President of Overstock 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, February 24, 2021, 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 Q3, 2020, in 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. This presentation is available for download on our Investor Relations website and our summary slide contains instructions for asking questions during the Q&A session.

With that, let me turn the call over to you, Jonathan.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Thank you, Alexis. And good morning to everybody. Overstock had another impressive quarter rounding out its banner year. I’m excited to share our Q4 and full-year 2020 results and provide updates on our business. We’ll follow the agenda on Slide 3. Next slide, please.

I’ll start with a few quick corporate updates. In January, we announced a strategic partnership with Pelion Venture Partners for the oversight at the Medici Ventures portfolio companies. This is a great transaction and I’ll cover it in more detail later in our prepared remarks.

In November, our Board declared an annual cash dividend on our Series A-1 and Series B preferred shares for the fourth year in a row. In December, we distributed that $0.16 per share dividend to all eligible shareholders.

In January, we received a subpoena from the SEC requesting additional information related to the 2019 — to 2019 retail guidance. We are complying with the request. We are co-operating fully. We are engaged with the regulators.

We continue to operate smoothly and efficiently during COVID-19 pandemic restrictions. We are still working from home, it’s going well. And our workforce is engaged and our attrition is low. We are in no rush to get back to the office, particularly with the vaccine rollout proceeding slower than hoped or expected.

We’re watching to see what happens with the current stimulus bill knowing that we saw an uptick in sales with the first round of stimulus checks last spring. We’re continually monitoring our supply chain particularly, the West Coast shipping ports. Both Long Beach and Los Angeles were clogged which shippers have been finding alternatives in Oakland and Seattle. We are in constant communications with our partners in carriers to ensure the best customer experience possible.

Slide 5, please. As most of you know, we’ve been looking for a new Chief Marketing Officer. After a careful search during which we had the interest of and evaluated many highly qualified candidates, I’m delighted to announce we’ve hired an excellent CMO, who will be a key member of our executive team. Elizabeth Solomon will join us as our new Chief Marketing Officer at the end of next month. She comes to us from Amazon, where she was the Head of Marketing for its Global Private Brands portfolios. Elizabeth has also lead marketing teams for numerous Fortune 100 companies. Her extensive track record in growing, building, and repositioning brands will be extremely valuable to Overstock. I look forward to Elizabeth’s contributions to continuing our sustainable, profitable market share growth, just what a CMO should do. I’m delighted to welcome Elizabeth to our team.

Slide 6, please. Our CFO, Adrianne Lee will now review our fourth quarter and full-year 2020 financial results. Adrianne?

Adrianne Lee — Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer

Thank you, Jonathan. As a reminder, we manage our business and report our financial results across three segments. Overstock retail, a pure-play e-commerce home furnishings retailer. Medici Ventures, a blockchain-focused incubator. And tZERO, the largest Medici Ventures business focused on financial innovation and liquidity for private companies. Our consolidated results aggregate these three segments. Post-closing of the Pelion Venture’s transaction, it is our belief that we will deconsolidate the Medici Ventures businesses, which is the accounting treatment we are currently seeking SEC preclearance on.

I will begin with a summary of our consolidated results followed by a more in-depth review of Overstock retail’s performance. Next slide. On a consolidated basis, we delivered another strong quarter. Our sales growth momentum continued with Overstock retail revenue increasing 84% compared to a year ago. This growth coupled with continued expense discipline resulted in adjusted EBITDA of nearly $23 million, an improvement of almost $42 million year-over-year. Diluted earnings per share came in at $0.26, an improvement of almost $1 per share compared to the fourth quarter of 2019. We ended the quarter with a healthy balance sheet, including $517 million in cash, which is an increase of over $400 million versus a year ago. This improvement was driven by our strong operational performance and our successful and oversubscribed follow-on equity offering in August.

Next slide. We delivered record results and record profitability in 2020. We recorded $3.2 billion in gross merchandise sales, an increase of 74% year-over-year. Adjusted came in at $88 million, which was an improvement of $162 million or 220% year-over-year. In addition, we posted diluted earnings per share of $1.24, an increase of $4.70 versus full year 2019. The organization’s focus and operational improvements we made at the end of 2019 allowed us to profitably capture the increased demand for online home furnishings.

The next slide. This slide provides a summary of Overstock retail’s strong fourth-quarter performance. New customer growth was 94% in the fourth quarter. This increase coupled with improvements in our year-over-year average order values drove our increased revenue. Our profitability as measured by adjusted EBITDA also improved by a notable $36 million versus the same period last year. Overstock’s business model is highly scalable, our pure-play e-commerce partner supplier dropship model naturally supports growth. Our results also illustrate our ability to generate significant operating leverage within our business. We remain focused on growing the top line at a faster pace than our operating expenses. For the third consecutive quarter, we’ve achieved that. Revenue increased by 84%, while total operating expense increased by 41%, which includes sales and marketing efforts.

Next slide. Overstock retail achieved record results in 2020, $3.2 billion of gross merchandise sales, and $136 million of adjusted EBITDA. In addition to delivering record financial metrics, we achieved our long-term profitability targets. Gross margin in the 22% range, operating leverage, and adjusted EBITDA in the mid-single digits.

Next slide. In the fourth quarter, growth remains strong with retail revenue up $670 million, again an increase of 84% compared to the fourth quarter last year. Importantly, estimates from third-party transactional data suggest that our fourth-quarter growth was ahead of the overall online home furnishings industry. Future trends remain difficult to predict, but we continue to believe that the shift to buying home furnishings online is a trend that will continue. It’s not whether customers will continue to buy home furnishings, but where they will buy them. And we believe the convenience, assortment, and value offered in the online purchasing experience will continue to prevail. Our goal remains to take market share in the expanding US online home furnishings market. Year-to-date, our sales growth remains strong.

Next slide. Retail gross profit increased by $75 million year-over-year to $151 million in the fourth quarter. Retail gross margin came in at 22.5% which is an improvement of more than 180 basis points compared to a year ago, and is in line with how we intend to run our business. Our call center was adequately staffed, partners were meeting customer expectations and we offered great promotions to our customers. The year-over-year improvement in gross margin was largely driven by operational efficiencies including more effective promotional activity, the April 2020 rollout of our marketing allowance program, and leverage from our fixed costs warehouse infrastructure. On a full-year basis, gross margin came in at 22.9% and was largely in line with our long-term targets. We did experience some pandemic-related gross margin inflation in the second and third quarters that I would not expect to repeat.

Next slide. This chart illustrates Overstock retail’s operating expenses in absolute dollars and as a percent of revenue. Operating expenses are composed of sales and marketing spend, general and administrative expense, and technology expense. As a percent of revenue, operating expenses improved by 563 basis points year-over-year, as we were able to leverage our G&A and technology expenses while sales nearly doubled. This illustrates the scalability and strong operating leverage inherent in our business. Our expense structure has remained relatively consistent in absolute dollars and as a percent of revenue throughout the last three quarters, demonstrating our focused discipline in managing our business.

Next slide. Overstock retail posted $34 million in adjusted EBITDA in the fourth quarter, an increase of $36 million year-over-year. EBITDA margin came in at 5.1%, an improvement of over 570 basis points year-over-year. We also recorded $27 million in retail pre-tax net income posting our third 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 moderates on our now higher established base. In summary, we delivered a strong fourth quarter and a record 2020 financial results.

With that, back to you, Jonathan.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Thank you, Adrianne. 2020 was an amazing year for Overstock. For the full year 2020, the retail business delivered a $136 million in adjusted EBITDA at a margin of 5.4%. This is incredible performance. It’s also within the margin rate guardrails we’re targeting in our long-term plan. Which sure is a far cry from our 2019 performance, and I think it’s our new normal, profitable growth.

Slide 15, please. I just have to say I’m so pleased with Overstock’s preformance. It represents discipline, focus and execution. I thank all my colleagues at the company for their hard work. This certainly was team effort.

Slide 16, please. I’ll now discuss our operations specifically, how we achieved these results.

Slide 17. Overstock is a top-five company in the fast-growing online home furnishings market. A market that is now more relevant than ever and one that we believe will remain relevant. You will see we’ve expanded the list on this slide from 5 to 10. We would love to show some of the serious home furnishings names that we outperformed. After years of major growth in online penetration, the industry saw a significant spike this year and we estimate that as of December 35% of home furnishings are being purchased online. Just like other categories before it, I think books two decades ago, in apparel a decade ago, we think home furnishings is now experiencing a similar permanent shift. Our mantra is sustainable, profitable market share growth. I’m proud of the fact that Overstock grew 2.3 times the pace of the online home furnishings markets. Overstock is gaining market share, I’m confident we can continue to outperform the market.

Slide 18, please. How are we outperforming competitors? Well, our brand pillars are resonating. More home furnishings shoppers are discovering Overstock’s value proposition. Through internal brand research, we see customer purchase intent, which is the measurement of the probably that a customer will purchase a product from us is up 7.5% over the previous year. Importantly, we’re winning the customers who best fit our value proposition, the savvy shopper. Purchase intent among savvy shoppers increased 20%, the greatest improvement compared to any of the competitor brands we measure internally. Customers increasingly, excuse me — customers increasingly perceive Overstock as a brand that makes you feel like a smart sharper, offers quality for the price, and of course, has free shipping, a top driver persists[ph] consideration.

Slide 19, please. As we’ve discussed before, we know where we fit in the market. We play to our distinct position of strength in the market. Home expertise and smart value defined as quality and style that cost less. Our customers, particularly the segments we are focused on want quality and style and want it for a great value. During[ph] the market are focused on this unique blend of style, quality and price, like we are. The competitors in the smart value space aren’t focusing on quality to the same degree we are. For example, IKEA has a different value proposition and focuses on a very different customer. We believe our position differentiates us from the other top 10 online players. And we believe it is a position that is relevant in any market conditions but especially during challenging or uncertain economic times. Going forward, we’ll continue to clarify and strengthen our identity.

With the amount of white space in our quadrant, we think there is a real opportunity to increase our share of the market and brand association with home and with smart value, something I’m excited to have our new CMO address as a top priority.

Slide 20, please. Continuing in the spirit of differentiation, our research and findings have driven us to focus on targeting two customer segments that particularly fit our strengths, savvy shoppers and reluctant refreshers. Together they represent 40% of the home furnishings market or about $120 billion. We’d lean into these two customer segments that 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.

Slide 21, please. Next to our Focused Strategy. Much of this strategy will appear familiar and remains the same in 2020 although, we’ve made some slight refinements. Overstock’s vision is to create dream homes for all, making beautiful, comfortable, and well-appointed homes accessible by helping customers find what they want for less. To achieve our goal of sustainable, profitable market share growth, we must focus on serving our customers’ house needs. Our brand pillars aligned to these needs. Product findability, smart value, and easy delivery and support, these provides a long-term guardrails and focus for innovation. So we’re only working on the things that improves the experience our customers want.

I’d like to call your attention to the enablers on this slide, the heart of our strategy. Specifically, to the data-driven culture we are developing and refining, we consider ourselves a technology company first. These enablers show we are embracing that mentality. We are allowing data to drive our decisions and actions. And we’re growing long-term relationships with the customers to drive repeat purchase behavior. This cultural focus has had and will continue to have real impact on our business performance. You can also see our 2020 strategic initiatives. I’ll get to these later in the presentation.

Slide 22, please. I’ll now walk through the process we made — I’m sorry. I’ll now walk through the progress we made in each of our three brand pillars. Improving our mobile platform was one of the four initiatives for the retail business in 2020. In fact, people[ph] loves our product findability better[ph]. I’m pleased with the progress we’ve made. Sales from mobile remained at 50% of revenue through the third quarter in a row which is a particularly nice achievement in the fourth quarter. There are still improvements we need to make in our mobile experience in 2021, particularly increasing adoption of our mobile app. It’s a great app and a great retention tool, and its broader adoption is one of the things I expect our new CMO to help drive. As customers continue to naturally migrate to mobile, it’s an increasingly important platform particularly, for millennial customers.

Slide 23, please. Our vision is to create dream homes for all. I emphasize the word homes in that vision statement. As demand for home furnishings continues to increase, new and repeat customers are finding us and liking us for our core competency, home furnishings, which remained above 90% of our sales mix in the fourth quarter, higher than any other fourth quarter in our history. We have a real opportunity to increase our brand association with home. While we’ve made good progress, we still have plenty of room for improvement in clarifying Overstock’s identity. We know it’s helpful from a sales perspective, shoppers who come to us in search of home items are twice as likely to include Overstock on the companies they will purchase from when they make their next purchase.

Slide 24, please. Our value proposition is smart value. Shipping and promotions are two key components of that proposition. We know free shipping is a top purchase driver, particularly for larger items. So we launched free shipping on all items initially in response to the COVID-19 pandemic to support our customers during a challenging time. Because free shipping responded so strongly with our customers, particularly the savvy shoppers, in late 2020 we made free shipping on all items a permanent benefit. Savvy shoppers love this. Customers rated us 11% better than our competitors’ customers rated them at shipping charges in the fourth quarter. It’s important for us to differentiate — for us to differentiate in this space and we’re doing just that.

Slide 25, please. Aside from shipping cost, our product pricing must be right. One of our four strategic initiatives in 2020 was to clarify our promotional messaging and refine our pricing model. What that means is, we need to ensure our products were optimally priced versus competition. Not too low and post promotion certainly not higher. We’re not an everyday low price leader. Our model, it is promotion-driven. Our goal is to win on price after coupon and other discounts. If we can price competitively on 80% of our SKUs pre-promotion, that’s in line with where we want to be. As you can see, we’ve made great progress this past year.

Slide 26, please. We know delivery speed and on-time delivery accuracy matter to customers and are key drivers of customer satisfaction. On-time delivery accuracy especially matters. It can mean[ph] the difference between a customer purchasing with us again or not. Despite what many predicted would be a challenging quarter due to more customers doing online — their holiday shopping online, coupled with carrier capacity constraints, Overstock stayed well world during the fourth quarter due to rigorous planning, diligent communication with our carriers, partners, and customers. For us, (inaudible) didn’t have as much as an impact as some anticipated.

All things considered, we maintained good customer service levels during the fourth quarter, in part because our main carrier delivered well on its commitment. We continue to build out our free consortium program with that carrier. A program which allows our partners to take advantage of our lower shipping rates. All in all, we held up well during a challenging quarter and we expect that to continue.

Slide 27, please. As a percentage of orders, customer contact volume declined 23% year-over-year due to more accurate delivery estimates and improved automation. I should note that the second quarter was a bit of an anomaly, as[ph] not all customers were able to reach us when we temporarily turned the phone lines off, as was the case with many of our peers which artificially drove down the contact during that quarter.

Self-service enhancements we’ve made throughout 2020 not only reduced cost but also improved customer satisfaction because customers prefer handle returns and solve issues themselves without having to call anyone or wait for help. Self-service cases were 3 times higher as a percentage of total sales than the year ago. You’ll see a slight dip in the percentage of service cases in Q4. That is typical as customers are a little quicker to pick up phones prior to the holidays. During 2021, we’ll continue to make improvements, to increase self-service capabilities, and to enhance the overall customer experience.

Slide 28, please. Retail business had four strategic initiatives in 2020. We have four new initiatives in 2021. Our first initiative is to continue to improve product findability on our site, which means customers can quickly and easily find the products they want. If we need to win in this area of product findability, we need to upgrade our onsite search capabilities, including search relevancy and recommendations, enabling customers to search more with more granularity and specificity to save them time and hassle, and generally ensuring a better shopping experience. This initiative makes life[ph] normal e-commerce blocking and tackling, it is. That’s why I like it so much. I’m a blocking and tackling and execution guy. I know it’s something we need to do better and I know it’s something we can do better.

The next to our growth initiatives. First, geographic expansion. As we think about geographic expansion opportunities, Canada is close and promising so we are planning to grow there in 2021. This means serving our Canadian customers from Canada, not just to Canada like we’ve been trying to do. We will locate and source product in Canada and then specifically mark that product to and for our Canadian customers. This will allow us to win on smart value and easy delivery, two of our three brand pillars.

The other growth area is the establishment of our government business. The GSA pilot contract, which we were awarded in 2020 was really the impetus business initiative and the foundation from which we will build our government business. And the GSA tier[ph] continues to slowly ramp, we are chasing the opportunity to expand the products sold to government agencies and to make those products available to additional government agencies including at the State and City levels. We are also engineering a more intuitive purchasing experience. I know many of you would like to hear specific sales results on the GSA contract. But it’s still too early to report anything meaningful. We’re forging in on this initiative to change that.

Our fourth initiative is to transform our enterprise platform. One component of this initiative is to improve the organization and accessibility of our data to enable faster and better business insights. Data is one of our greatest assets and we use it to drive improved performance. The other component of this initiative is to increase cloud adoption to a level that maximizes efficiency and ensures sufficient redundancy again, transformation of a basic technology blocking and tackling. And again that excites me. I’m not sure I will be improving our business by blocking and tackling and by throwing Hail Mary passes. In summary, we’ve chosen four initiatives for 2021 that we think will have a material positive impact on the business.

Slide 29, please. Let me sum up the retail business. A business that remains well-positioned for continued growth especially market share growth. Our revenue growth is outpacing the industry driven by our technology, our customer focus, and our business model. We’ve improved and maintained our normalized gross margins. Our expected rate — our expense rate continues to grow slower than revenue, driving operating leverage. This allows through[ph] to produce long-term adjusted EBITDA margins in the mid-single digits. We are delivering sustainable, profitable market share growth by enabling our vision of dream homes for all.

Slide 30, please. Let’s turn to the Medici Ventures business. Before I summarize our recent and exciting announcement, I’ll give a brief recap of the rationale for the transaction. Medici Ventures was a turning point. The portfolio companies now have different needs and require different skills than when we initially started investing. They now require more strategic data-to-day attention. We’ve looked at a host of alternatives to address these needs and increase the likelihood of success for each of the portfolio companies with the goal to maximize shareholder value. After evaluating several options, we decided to partner with a professional venture firm with expertise and decades of experience, helping companies like those in the Medici Ventures’ portfolio scale and achieve successfull economical outcomes. And we’ve found exactly the right firm to do this, Pelion Venture Partners.

Slide 31, please. This slide shows the summary of what this partnership looks like. We will be converting Medici Ventures into a limited partnership that will become Pelion Venture Firm[ph] Partners fund[ph]. Pelion Ltd will be the general partner. Overstock will be the limited partner. Once the deal closes, Pelion will handle all day-to-day operations of the fund. This will include operating oversight and investment decisions. (inaudible) that an experienced, dedicated, and professional team will work to take these companies to the next level. The term of the fund is eight years, $45 million in cash has been committed to the fund, just[ph] a fund raiser’s additional capital, Overstock has an option and its sole discretion to contribute the first additional $30 million. Pelion will earn an annual fee for running the fund and success fees according to the performance as outlined in a limited partnership agreement. This is a standard venture capital fund structure. We anticipate the deal will close in three to six months pending required regulatory approvals. We were pleased to find the right partner, Pelion[ph]. We believe this is the best way to maximize the value of both the Medici Venture portfolio and Overstock.

Next slide, please. It’s not just that we believe Medici Ventures reserve it[ph] for more specialized oversight, it’s equally important that we found the right partner. Pelion is experienced in investing and is done so for nearly 20 years and its team has over 90 years of combined investment experience. It’s focused on early-stage companies, the current stage for most of Medici Ventures portfolio companies. It’s focused on this space, disruptive technology. And what’s more disruptive than blockchain technology. It’s staffed with effective advisors with a reputation of being trusted and active board members for its portfolio. It’s a proven fundraiser. They have the ability and the networks necessary to help the portfolio companies raise additional capital when necessary. And it’s staffed with proven operators and its team knows how to help companies scale. Overstock made this decision because we found the right partner in Pelion. We’ve made good progress since we announced this transaction, (inaudible) not including completing the process of winding — of nearly completing the process of winding down the day-to-day operations of Medici Ventures and making the appropriate regulatory filings. We continue to keep you apprised of our timeline. In summary, the deal simplifies our story and enables all parties to do what they do best. And we think that’s good for the Overstock shareholders.

Slide 33, please. I’ll briefly recap before we move to Q&A.

Slide 34. We made a lot of progress in 2020 across all our businesses. Shown here are some of the many 2020 highlights. We significantly strengthened the leadership team. We appointed key independent and diverse directors to our board. We identified our strength and casted a focused and disciplined strategy to enable us to succeed and we’re executing against that strategy. We’re awarded a federal proof-of-concept — federal government proof-of-concept pilot contract with the General Services Administration, which is a long-term play that will take time to become a meaningful piece of our business, which we believe has real long-term upside. We opportunistically raise capital. We found a strategic partner in Pelion Ventures to oversee the Medici Ventures portfolio. We had a banner year with record sales and profitability. We remain focused on delivering sustainable, profitable market share growth in 2021 and thereafter. We are stronger than ever.

Now, let’s take some questions. Alexis?

Alexis Callahan — Overstock.com Inc — Analyst

Operator, can you please open up the line for Q&A.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from Rick Patel with Needham. Your line is open.

Rick Patel — Needham & Company — Analyst

Thank you. Good morning, everyone. And congrats on capping off a strong year. We’re about a year into the pandemic and your business continues to thrive. Would you be able to paint a picture of what’s selling — when you think about the early days of the pandemic versus more recent trends, what has been strong? What has moderated? And as you look out to how ’21 will play out, where are you placing your bets, or which product categories will have the most potential?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Rick, great to hear from you. Thanks for the question. So I’ll let Dave comment on what’s selling specifically. I will tell you this, as I mentioned in the prepared remarks, we are honing in on home. 90% of our sales came from the home furnishings products, that’s only going to continue to grow. You know, we expect to get that close to 100% over the next 12 to 18 months.

Dave, you want to comment on specifics and trends we’ve seen that have changed from March to February?

David J. Nielsen — President, Retail

Sure, Jonathan. And thanks for the question, Rick. You know, it’s interesting. We’ve — in the prepared remarks, Jonathan mentioned the home categories. And I will tell you for the specific home categories, it has been our largest biggest categories that have flourished throughout each of the quarters. There is some seasonality switching between patio and furniture. But I will tell you, our largest categories of rugs and home furnishings, furniture, patio and outdoor continue to be our largest categories and have been throughout the entire pandemic.

Rick Patel — Needham & Company — Analyst

Got it. Very helpful. And a question on the rate of growth for 2021. You noted that Overstock should outpace the market growth. Could you help us think about the assumption we should be using for that market growth? I don’t think anyone is expecting the strong growth of 2020 to repeat in 2021. But just curious how we should be thinking about that trajectory for the industry as comparisons get meaningfully tougher here in about a month?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Great question. No, we’re not a company that gives guidance. But I’ll tell you this. As Adrianne mentioned in the remarks, like they were in Q4, Q1 results to date have continued to be strong. And as you know, towards the end of Q1, our year-over-year growth comps get tough, but we’re at a new operating level and will continue — we expect to continue to grow. We expect to continue to be profitable and we expect to continue to take market share. As far as other kind of thoughts on how the models plays out, we expect our gross margins to remain in the 22% region and adjusted EBITDA margin to be in the mid-single digits. So it’s hard to predict what 2021 will look like, but that’s our the best — that’s the best we can do right now.

Rick Patel — Needham & Company — Analyst

Thank you very much. All the best this year.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Thanks, Rick.

Operator

Our next question comes from Peter Keith with Piper Sandler. Your line is open.

Peter Keith — Piper Sandler — Analyst

Thank you. Good morning. Congrats on just wrapping up a phenomenal year. I wanted to just parse apart the adjusted EBITDA margin guide for mid-single-digit. It looks like with 2020 your retail EBITDA margins going to come in at 5.4%. And I think you’ll get another good quarter with Q1, you’ll probably land closer to 6%. So how do you really think about that going forward? Is the intent that you think you should hold EBITDA margin as kind of flattish going forward to take market share? Or do you want to see some level of normalization and then maybe readdress where that retail EBITDA margin can go over time?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Peter, thanks for a great question. I’ll let Adrianne give her thoughts and I may add something at the end.

Adrianne Lee — Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer

Great. Good morning, Peter. How I think about our EBITDA margin, one of the biggest obviously functions of that, EBITDA margin is our gross margin which Jonathan just discussed. So I think for us we still feel very confident in that 22% range, we think that gives our customers kind of the right value and pricing that those two target segments — excuse me kind of require of us. So that’s kind of how I think about the EBITDA margin is really derived from kind of our — that gross margin performance. And then as you saw this year really leveraging our G&A and tech.

I think one of the things we have said right is, let us deliver those results consistently, those are our long-term targets. And then if it makes sense, we’ll address at some future date anything different than that. Jonathan?

Peter Keith — Piper Sandler — Analyst

Yeah. I think it’s really important as we think about how we slowed down the P&L. And we maintained kind of the 22%-ish gross margins. That’s important to our customers. We have to be providing smart value. If we start getting thicker on margin, we lose — we play in that upper looking quadrants, I think it was on one of our slides. When the margins start getting thicker, we’re not really in that quadrant. We’re not providing that smart value they look for. So for us, that’s the top of the P&L. And then we got to manage everything else in the P&L to get to the EBITDA margin. And coming in on the mid-single digits, you know, is where we think is the right place to do, to maintain a proper balance everywhere.

Rick Patel — Needham & Company — Analyst

Okay. Helpful. Maybe sticking on the gross margin. You had highlighted as one of your goals for 2020 was just to improve the pricing and promotions. It looks like you’ve had success there, do you feel though that you’ve accomplished the lion’s share of that work or is there still opportunity to get a little bit sharp around pricing and maybe even doing less promotion when you’re overly discounting relative to the rest of the market.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

So I’ll give an initial answer and then turn to Dave. And the answer is, there is always more work to do. And just because something was sort of an initiative that we think we performed well on 2020, we don’t put it on the shelf and let it gather dust. There is a pricing team that’s looking at this constantly. Dave, why don’t you add some more color around this?

David J. Nielsen — President, Retail

Thanks, J.J. You know it’s — as Jonathan said, it is a work in progress always, as we continue to grind down our pricing and understand where we need to be. Promotions is key to that. And understanding that our customer, that savvy shopper, that customer expects a promotion. As Jonathan mentioned in the prepared remarks, the customer wants to get the best deal and we price our products so that we’re competitive every day, but our customer can get the best deal on promotion. And running those promotions is key to our customer satisfaction and repeat rates. They like this model and that’s why they come to us. That’s why we — that’s why they selected us and we selected them as our primary target customer.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Yes. I would add on — just add on. We’re not an everyday low price leader. We’re at high level. And that’s what our — and frankly, that’s what our — the savvy shoppers and the reluctant refreshers like. And so we’ve catered it to them.

Peter Keith — Piper Sandler — Analyst

Okay. Thanks for the feedback, guys. Good luck.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Thanks.

Operator

Our next question comes from Ryan Gee was Bank of America. Your line is open.

Ryan Gee — Bank of America — Analyst

Hey, good morning, guys. Great results. Clearly, there still some tailwinds that you guys continue to benefit from. So one for Jonathan and then one for Adrianne. Jonathan, can you talk high level about how much the past year has impacted some of the mission-critical aspects of running the business. For example, marketing strategy or pricing or technology investments. I know you talked about mobile but maybe put another way, is there one or two things that you start or maybe temporary changes you guys are going to have to make for investments during 2020 that you now feel are going to be long-term changes at Overstock, how the way you operate and maybe any observations on buyer behavior that’s sustainable?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Great question, Ryan. All things that we put into place as part of the pandemic, I think we’re going to be part of the course going forward. In terms of marketing strategy, I talked about how we launched free shipping on all items, now we’ve[ph] initially in response to the COVID-19 pandemic to support our customers during challenging time. But we saw in August that it was actually helping our sales. We’ve had a significant cost and so we’ve made free shipping permanent on all items. That’s something that the business turns[ph] during the pandemic. It’s going to be (inaudible). I think pricing, it was a time where I think we had to get sharper because people were shopping online and spending a lot of time comparing. So we did that. And then the only thing I would say that’s become kind of, it was pandemic driven but has become normal and that’s more automation in customer service. When you look at what happened in March and April last year, there’s a lot of sales, not[ph] a lot of customer service calls. And we weren’t staffed with that. And so, we did a bunch of things. One, we hired more. Two, unfortunately, we turned off the phones a little bit. But three and most importantly, we started automating customer service, partner management area, all different parts of the business and that — we had a great response and we’ll keep doing that. It’s facilitated millions of automated responses in our partner base or customer care and it’s going to be normal going forward. And (inaudible) the product team we have working and automating things, I think we just scratched the surface, so that’s where that will go. (inaudible) addressing the question.

Ryan Gee — Bank of America — Analyst

Yeah. That’s a super helpful color. Thanks, Jonathan. And then another one is, I know that you guys mentioned earlier in the prepared remarks, still your partners are having some constraints getting supply into the country. And that that given things to adjust, but can you talk about the in-stock rates, which I know were a challenge, that you called out kind of in the summer last year. How is that in-stock rate kind of trended since then?

And then, as you think about the partner — I mean as you think about the competitors that maybe you called out on one of the slides in the presentation. Do you guys feel that Overstock is any better or worse positioned or your partners are any better or worse positioned to get supply to the country than they are, or maybe you’re in a better position, that if they are facing — if you’re facing challenges your partners — not your partners, your competitors are facing even greater challenges getting supply in. Thank.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Dave, let me — There’s a lot I could say on this. But Dave, why don’t you take the first pat on this one.

David J. Nielsen — President, Retail

Okay. So let me address first, in-stock — in-stock rates and how we’re performing versus our competitors. I think our performance really speaks to that end-stock rate, are we our getting are our products in. When you look at our growth rate versus what the external markets are, and resources that we use are showing from a market share standpoint, we are getting more than our share of the goods from our partners. We think our partners are doing a fantastic job being creative at switching ports, shifting their supply chains, flying materials in from other countries when needed to get products through. We’re keeping close contact with them on a daily, in some cases weekly basis, and provide forecasts for them. They provide forecasts for us. We keep very close with them. So on that front, I think we are doing a good job managing through this pandemic.

On the first question, regarding — or part one of the question regarding the supply chain challenges. It’s really shifted for us. It’s shifted from early on being about quarantining and factories not being able to get labors in to manufacture the goods to now being more of a, end of the supply chain challenge where the ports are congested as the brick and mortar retailers are now bringing inventory back in, at the same time. So there is an influx going through that will pass through the supply chain. But we’re happy to be creative with our partners and our carriers of bringing that product into the country. The in-stock levels are improving. We’re up 20% from our low and we’ve got more to go.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Yeah. [ph]Only think what I would say. I would we’re still below where want to be. We need to improve significantly. We still see trade-off sales are higher, so there is work to do. Everything Dave said is spot on.

Ryan Gee — Bank of America — Analyst

Super helpful. Thank you, guys.

Operator

Our next question comes from Ygal Arounian of Wedbush Securities. Your line is open.

Ygal Arounian — Wedbush Securities. — Analyst

Hey, good morning, guys. Thanks for taking the questions. I wanted to dig into the free shipping a little bit more. And maybe if you can add a little bit more color around when you made that switch to free shipping. You had some strength in purchase intent, your customer growth was strong in the quarter. Can you just talk a little bit more around some of the metrics that changed once you implemented that?

And then, how do you think about free shipping in terms of pricing and margins. Where you allocate the cost, if you can price differently and promote differently because you have free shipping there as an offering?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Great. Adrianne, you want to take first — first answer at this one?

Adrianne Lee — Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer

Yeah. Thanks, Jonathan. The free shipping, Ygal — thank you for the question. I would say that the best part of that, as we talked about is the purchase intent and this is really a driver for our target customers and really a big component of their satisfaction. And what we’ve been fortunate enough to see in the P&L is that free shipping cost has just been offset by additional sales. So for us, it’s been a real win on obviously the customer satisfaction side. And we think will be a really good retention — a retention component. And we haven’t seen kind of any of the negative financial impact that could come with offering such a great value like that.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

I would also say, Ygal, we’ve had free shipping for orders over $45 for a long time. And so this is really a change just on the smaller (inaudible) we watch carefully was due to shift, basket size, how did that affected. There wasn’t much of a change, so it was a fairly easy decision to go forward and offer wholesale going forward.

Ygal Arounian — Wedbush Securities. — Analyst

Thanks. And then I wanted to ask also a little bit more about your — the brand and marketing. You hired Elizabeth. Obviously, it’s a little bit early. She is not starting until late March. But kind of to those points also that things that you’ve seen this year again back to the purchase intent and the strong customer growth in 4Q customers coming more to you guys for the home category and aiming to kind of become fully home, as you said up to nearly 100%? How do you think as we kind of work through 2021 and you’re trying to continue to take share in the category, what your brand and marketing efforts will be? Thanks.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Dave, you want to take the first answer, branding there?

David J. Nielsen — President, Retail

Yeah. Our vision is dream homes for all. And we’re going to lean into it, heavily. We want to continue to grow our portion of the home business. That’s our vision and our mission. Jonathan?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

I think you can see on that slide where we listed the top 10. We’ve historically listed the top 5, but the reason to those other five below us, is those are people that everyone associates with us. We will continue to push so that everyone associates (inaudible). And when we look and we see what Elizabeth has done at the companies she has been, she’s been great at repositioning and building brands and that’s why we are so excited to (inaudible).

Ygal Arounian — Wedbush Securities. — Analyst

I appreciate it. Helpful. Thank you.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Great. Why don’t we take one more set of questions from another person then I’ll wrap it up.

Operator

Our next question comes from Brad Safalow with PAA Research. Your line is open.

Brad Safalow — PAA Research — Analyst

Thanks for taking the questions. First, I was wondering if you could dimensionalize where you stand with your vendor partners. Let’s say, at this point this year relative to a year ago. And what I’m thinking about is A, what kind of allocations you’re getting from your existing vendors. B, how many new vendors have you been able to add to the ecosystem in the past 12 months?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

So where do we stand? We stand in a better place. They love our forecasting. That’s helped them run their businesses. They love our growth, that helps them be successful in their businesses. They love our level of communication and we’ve been very, very communicative during the pandemic. One thing they don’t always love is our customer-centric approach. Always wanted to do right by the customer, which in times means pushing them harder to get deliveries, but in the end, we know that’s better for them. As Dave mentioned, with our market share growth, we are getting more and more allocation from them. They’re going to allocate to where they see growth.

Dave, would you add anything to that?

David J. Nielsen — President, Retail

No, agreed.

Brad Safalow — PAA Research — Analyst

Okay. And I know you guys are trying to separate the discussion around tZERO Medici to, let’s just say, other platforms, but just on the tZERO front, with coin bases value at $75 billion to $100 billion and many people on this call think that tZERO has similar potential. Can you at least give us an update on some of the things that we’re having discussed for tZERO, notably what are the prospects for new tokens trading in the next three, four months? Where do you guys stand on getting the self-custody issue resolved or the self-clearing issue resolved? And then, when can we expect integration of tZERO crypto in tZERO markets?

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Great questions. Self-custody, I think they are hopefully by the end Q3, with self-clearing rather by the ended Q3. What is the differences between coin-based and the tZERO crypto is self-custody of the token or the coin. And it is important to have hardcore crypto codes buying that. Most people on crypto today don’t think that is important and so tZERO is moving and I think in the next quarter, we’ll have someone else custody that and we’ll feel more like coin base and I think it will be a much easier user experience. As far as giving new tokens, I think the recent announcements with (inaudible) Family Office Networks and the third company which (inaudible) my name right now, those will help drive the biz dev [p] for tokens and I suspect we’ll see a doubling or tripling of tokens by the end of the year for tZERO. Lot of good progress is being made. And as Tom has mentioned in his very report, tZERO is working to raise money and I think when it finds that strategic partner to money raise, you will see its token growth and its ability to market and do biz dev go way up. So I do think it has enormous potential, but I think it really needs a strategic partner and preference in Overstock that is more Wall Street focused and we will take off. And that’s where we’re focusing now.

Brad Safalow — PAA Research — Analyst

Okay, thank you.

Jonathan E. Johnson — Chief Executive Officer, Director, President of Medici Ventures

Well, I’d like to thank everyone for participating on today’s call. If there is one thing that everyone should take away from the call is that Overstock is taking market share in the online home furnishings space. We grew 2.3 times the pace of online home furnishings market in general and we took market share among those in the top 10. Sustainable profitable market share growth. One other nugget to chew on. New home starts are expected to reach pretty new high in 2021, driven by record low interest rates and higher household saving rates. This macro environment bodes well for home projects overall and the related benefits in the home furnishing market throughout 2021, a market that we continue to grow in.

I appreciate your interest and ownership in Overstock. Until we talk again, we’ll be working diligently to deliver our 2021 plan. Thanks everybody.

Operator

Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone have a great day.