Thank you for standing by, and welcome to the Beyond Inc. Second Quarter 2024 Earnings Conference Call. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Alexis Callahan, Vice President of Investor Relations and Public Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to Beyond Inc.'s Second Quarter 2024 Earnings Conference Call. Joining me on the call today are Executive Chairman, Marcus Lemonis; Chief Financial and Administrative Officer, Adrianne Lee; and President, Dave Nielsen. Today's discussion and our responses to your questions reflect management's views as of today, July 30, 2024, and may include forward-looking statements, including without limitation regarding our future goals, revenue, file size, financial performance, our outlook for the remainder of the year or any other period, growth, stock price, profitability, strategy, macroeconomic conditions, customer demand, the value of any of our brands or investments, relationships with third parties and agreements we are entering into with them, margin improvement, customer experience and related efficiencies, loyalty programs, the launch, relaunch or other upcoming changes for any brands or websites and the timing of any of the foregoing. Actual results could differ materially from such statements. Additional information about risks, uncertainties and other important factors that could potentially impact our financial results is included in our Form 10-K for the year ended December 31, 2023, and our Form 10-Q for the quarter ended March 31, 2024, and in our subsequent filings with the SEC. During this call, we'll discuss certain non-GAAP financial measures. Our filings with the SEC, including our second quarter earnings release, which is available on our Investor Relations website at investors.beyond.com contain important additional disclosures regarding these non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures. Following management's prepared remarks, we will open the call for questions. A slide presentation with supporting data is available for download on our Investor Relations website. Please review the important forward-looking statements disclosure on Slide 2 of that presentation. With that, let me turn the call over to you, Marcus.

Good morning, and thank you. As Alexis mentioned, I'm joined today by Adrianne Lee and Dave Nielsen. This morning, we'll be summarizing our second quarter results as well as answering specific questions about our company and the meaningful progress we are making. As a refresher, there are a number of imperatives we entered this quarter with that have framed the remainder of the year. I'll start off with my reaffirmation that I not only believe but expect this company to do great things. My conviction is around this company's ability to operate multiple brands profitably, all while growing revenue and file size. Earlier in the second quarter, our shareholders approved a performance stock unit plan that awarded me options that vest when the stock price reaches $45, $50, and $60. I appreciate the acknowledgment but recognize that I only make money when we all make money. I personally believe we'll get there. For those invested in the company today or contemplating it, I want you to know the topics in our mind every single day as the management team, in some cases, things that even keep us up at night. It's imperative that every decision we make is to drive towards profitability. And once there, we maintain that rigor along with holding firm to an asset-light model. Establishing a definitive strategy for Bed Bath & Beyond, not only to be a $1 billion plus e-commerce brand, but find thoughtful and creative ways to expand the brand, generate cash flow off the IP, while also expanding its brand presence even further, increasing the brand's value while maintaining its position as one of the world's most well-known home brands. We also want to focus on the relaunch of Overstock, in a way that allows it to return to its roots of retailing furniture, patio and rugs, but leverage its strong brand name in value shopping to more than just its historical categories. It is our vision, particularly with many off-price retailers leaving the e-commerce space, to become the North American leader where companies big and small can utilize the platform to reduce inventory in their own businesses and improve their turns and margins. They are essentially our vendors and suppliers. In addition to our traditional vendors, we are in the early innings of entering the true liquidation, reverse logistics and closeout business. We have formed material relationships with liquidators, jobbers, wholesalers and reverse logistics companies and are finalizing a formal agreement with a large-scale closeout and reverse logistics company. We are working to normalize margins through proper curation with the right product listed on the appropriate brand platform at the right time, especially at the right price. The merchandising team, led by Stacey Shively, our Chief Merchant, has done exceptional work to begin the curation process around key products and vendors. They have successfully reestablished direct relationships with key vendors, improving both profitability and process for both sides. As we continue that work, along with entering the closeout space, we expect to see continued quarterly sequential margin improvement over the next 12 to 18 months. Look, we need to activate new technology and innovative thinking to attract and retain our customer files. We have made significant strides in improving search functionality with a constant push to catch up and keep up with SaaS-level technology all around us. Part of attracting and retaining customers is the data management around them, building customized experiences for specific audience attributes, improving conversion and annual spend as a solid roadmap. Our relationship with Salesforce and companies like Freshsales will help us create that efficiency and experience over the next 6 to 9 months. Over the next 18 months, we expect to develop a world-class loyalty program, utilizing both our database as well as other companies who coexist with us, who do not compete in the same sector as us. That loyalty shall be rewarded with unique content, information, ideas, and inspiration delivered to them through various mediums. Most of the content will be delivered across the streaming platform, YouTube channels, social channels, and funnel marketing programs. We will move slowly to test and ensure that we feel the return on investment can be realized over the lifetime value of the newly acquired customer. We have made significant progress in the past several months, and we'll continue to execute on our plan to achieve growth and profitability. To recap, in the second quarter, we achieved our revenue target and improved our bottom line by roughly 25%. We improved our gross margin through improved vendor relations, curation and the launch of Overstock. We increased our active customer base and their average order. We established new partnerships around liquidation, closeouts and factory direct. We launched Overstock.com, our mobile app for Overstock, and launched our CRM process with Salesforce. We completed the architecture and POV on Zulily, signed and are trading over 100 legacy vendors with another 100 suppliers in the onboarding pipeline. The site is now in the internal testing phase. We are targeting to launch Zulily on September 10. This effort has been led by a combination of our own and existing staff as well as an unbelievable team of added key legacy Zulily leaders. We also reduced fixed costs, all of which resulted in sequential improvement of more than $11 million in adjusted EBITDA. Lastly, we also refined our org structure during the quarter. I'm pleased to see the flatter structure working so well with teams really starting to gel and getting their sea legs. With that, I'll now turn it over to Dave Nielsen to talk more about the progress of our business.

Thank you, Marcus. I echo that sentiment. I'm pleased with what the team achieved in the second quarter and remain committed to continuous improvement and bringing each of these brands back to the $1 billion-plus brands they have the potential to be. To that end, I'd like to walk through some key operational highlights for each brand. On Bed Bath & Beyond, we saw growth in core legacy categories like bedding, bath and decor, as well as emerging strength in categories like patio and outdoor furniture, which are not historically endemic to the brand, but are highly accretive to average order value. This is encouraging as customers are recognizing product adjacencies, for example, bedroom furniture and feeling more comfortable shopping the entire room. While we continue expanding our assortment within the four rooms we're exclusively focused on, we're simultaneously curating down from a marketplace-like assortment of roughly 12 million SKUs to one that has enough breadth and depth to be category-leading, but small enough to ensure an easy and seamless customer experience. This curation also impacts our supplier base, making key suppliers more meaningful, resulting in better margins for us, as their volume increases. Our merchandise team is also working hard to bring back a number of important name brands that left years ago, which we think will move the needle in reviving Bed Bath & Beyond. In addition to an uptick in average order value, it was also encouraging to see a higher proportion of sales from repeat customers during the quarter, a trend we expect to continue as we further refine our targeting and promotional models. Next, on Overstock. This was our first full quarter of operations since our relaunch at the end of March, and we're encouraged by the early progress we've seen. Historically dominant product categories of area rugs, furniture, and patio and outdoor furniture continue to top the list of performing categories in the relaunch, confirming the loyal Overstock customer is excited we're back. As we continue to increase our assortment, which has gone from a few hundred thousand to several million SKUs, and improve our site experience, we anticipate momentum accelerating across the balance of the year. We're also leaning heavily into the white space that exists in online liquidation, as Marcus mentioned earlier. Finally, we launched Google Search on the website. In conjunction with our grand reopening, we launched a new marketing campaign to reengage with customers in a creative way, utilizing AI, which is not only bold, but more importantly, inexpensive, enabling us to offer even more crazy-good deals to our customers. And lastly, Zulily, we hired a team of experienced merchants who were with legacy Zulily, know the Zulily customer and have established working relationships with important brand partners, and their efforts are bearing fruit, as we've made great progress on onboarding key legacy vendors, while also adding some new vendors to the mix. In addition to offering exciting flash sales, we'll also be offering an evergreen assortment of must-have basics on site, which will require a member login and be additive to the P&L. In summary, there has been a lot accomplished during the quarter across the three brand platforms and those efforts are clearly starting to turn our ship around. I'll now turn the call over to Adrianne.

Thank you, Dave. Revenue declined 6% year-over-year in the second quarter. Sequentially, revenue increased by 4%, driven by an 18% AOV improvement as we mixed out of bedding and into patio furniture. As a reminder, our intent was to deliver revenue in line with the first quarter, while improving profitability, and we accomplished just that in the second quarter. Gross margin landed at 20.1% for the quarter, a 530 basis point decline compared to the same period last year. Elevated discounting and higher carrier costs continue to be the main sources of margin pressure. Sequentially, however, we delivered a 70 basis point improvement in gross margin as we work to optimize discounting and improve carrier costs. These were slightly offset by our seasonal mix into patio furniture. I want to reiterate our 6-store plan we outlined in our fourth quarter earnings call that we continue to execute on to improve our gross margin profile. Renegotiating freight rates with our carriers is now complete. We saw some benefit this quarter, and we'll continue to see improvement in our run rate going forward. Improving vendor relations for more favorable product costs is an ongoing effort by our merchandising team and a key area of focus for our upcoming Partner Summit. Relaunching Overstock.com has thus far been accretive to our overall gross margin, providing integration add-ons. In late June, we launched our partnership with A&G, which will provide customers with installation and assembly services. We continue to market warranties and shipping insurance and are pleased with early performance. Reintroducing owned brands and embarking on licensing activity remain opportunities we are pursuing opportunistically. And lastly, eliminating inefficient discounting. We made progress in the second quarter and expect continued improvements over time as our brands and corresponding value propositions become clearer to customers. G&A and tech expense of $46 million decreased by $3.5 million year-over-year driven by execution of our commitment to reduce fixed costs by an annualized amount of $45 million. Through the end of the second quarter, I am pleased to report we have now realized approximately two-thirds of that commitment, allowing us to reinvest a portion of those savings to support our brand launches. All in, adjusted EBITDA came in at a loss of $36 million, an improvement of $11 million versus the first quarter of 2024. Our focus remains on managing the business to profitability and driving sequential improvements in adjusted EBITDA. Reported GAAP EPS was a loss of $0.93 per share for the second quarter; excluding losses recognized from our equity method and securities, adjusted diluted loss per share was $0.76. Lastly, our balance sheet remains strong as we ended the quarter with a cash balance of $186 million. In addition to our efforts to improve our margin profile, we will continue to evaluate opportunities to monetize non-performing assets and create liquidity. We have made progress in our efforts to sell our headquarters building and have accelerated actions to explore ways to drive value within our investment in the Medici fund, including more active discussions with Pelion and some of the fund's more promising companies. In summary, our teams are laser-focused on building our three brands, while we simultaneously improve our margin profile. We made progress in the second quarter and acknowledge that significant work remains. Our goal is to deliver sequential improvements on our path to profitability. I would now like to turn the call back over to Marcus for final comments before we open up for Q&A.

Thanks, Adrianne. Before we move into Q&A, I want to make one final comment. While our company does not provide specific guidance, we feel it's very important at this time to give our investors a range of our performance expectations. When you look at the history of both Bed Bath & Beyond and Overstock separately, you'll notice that Q2 typically outperforms Q3 from a revenue standpoint by anywhere from 12% to 14%. It is our goal to have our third quarter revenue performance to be in line with that, if not better, than that historical trend. It is also our expectation that we have sequential gross margin improvement as well as a minimum low double-digit percentage sequential improvement to adjusted EBITDA. It is our belief that as we continue to curate and calibrate our business that we will set ourselves up to enjoy the tailwinds that could potentially come from improvements in interest rates, ultimately sparking home demand and demand for home products. With that, we'll take some questions.

Certainly. And our first question for today comes from the line of Steven Forbes from Guggenheim Partners.

Marcus, it sounds like you're talking about an 18-month time frame, or maybe I'm overreading that. Is that how you currently see the business on its path to profitability? Is that a fair time frame for potentially achieving a neutral EBITDA margin profile? Any updates on that? I know you're not providing longer-term guidance, but how do you see the business capturing that state of neutrality with respect to cash flow dynamics and overall profit?

Yes, it better be long before the 12 to 18 months. And the reason I identified 12 to 18 months in a few topics is because there's the maturation process, and we want to set proper expectations and not misrepresent the business. But it is our expectation that at some point in 2025, we are able to achieve profitability. That is how we're building our plan. That is how we're looking at our overall headcount, and that's how we're looking at managing the different parts of our business.

I appreciate that clarity. And then, given the second quarter cash flow dynamics, is there a days payable outstanding ratio we should be modeling OWC needs around or any help sort of as you think about the business, reestablishing relationships with vendors, the SKU sort of optimization path, how we should think about OWC needs and/or usage for the remainder of the year?

Steve, this is Adrianne. And I would just say, as we're working to onboard new vendors within these brands, we're staying within our typical guardrails of payables and receivables. So I would say no change in modeling as you think about onboarding Zulily vendors or curating Bed Bath & Beyond vendors; we're staying really within our guardrails of what you've seen us historically have as payable.

Let me add one thing to that. As our performance continues to improve and vendor consolidation comes to light and those vendors enjoy that consolidation while also appreciating our improvement in performance, it is our expectation that we'll be able to renegotiate even better terms with certain providers. In some cases, some of the terms that we have don't meet my standards, but we understand that we need to earn the right to make that request, and that is a huge focus for us as we look at growing our profitability.

And our next question comes from the line of Thomas Forte from Maxim Group.

I have one question and one follow-up. And first off, congrats on the performance in the quarter. So the first question I have is, Marcus, can you talk about your capital allocation priorities, especially as it relates to potentially monetizing the non-performing assets, either selling the headquarters or anything related to Medici Ventures?

Yes. So from a capital allocation standpoint, we are laser-focused today, tomorrow and deep into the future on continuing to be an asset-light business. And candidly, we have entered into an LOI with a party here in Salt Lake that will allow us to even be more asset-light. That will reduce about $34 million of debt off our balance sheet and potentially bring in cash flow in the neighborhood of $20 million-ish after paying fees. As we look at the Medici assets, Adrianne and I have taken a slightly more active role. While we appreciate the nature of the agreement between our company and Pelion, we have started to open up some dialogue and recently made the request for Pelion to put on a Medici days. They're not obligated to do that, but we have strongly encouraged them to help our shareholders understand the value of that portfolio. Furthermore, it is our expectation, and quite frankly, our mandate for Adrianne and I to increase the level of communication with those companies that are part of our investment portfolio. The money left our company, and it went in to help these other companies start or fuel their ideas and a number of them we have very high hopes for. We think it's our responsibility to have a direct relationship with leadership and management in those companies so we can understand how our company can better help them achieve their goals. While we will always respect the direct relationship that Pelion has with them, because of the engagement that we put in place, we are not precluded from having our own relationship, having our own understanding and driving results that we expect for our shareholders. Now we're always looking at exploring alternatives with the portfolio, but it is our expectation that we want to maximize the results of that investment, and there are a few companies that we believe have a real significant opportunity. Now we don't know what that opportunity is and oftentimes, investors ask us to quantify that. We today use an outside independent third party to establish the value of those assets as they see it. If it was up to us, we probably would put more on the balance sheet, but we really believe that an independent third party who doesn't have a dog in the fight has to really tell our investors what they believe the current value of that portfolio is. It is our expectation that a few of those companies could exceed that, but we're realists. The best way for us to stand behind that valuation, not just on paper, but in practicality, is for us to develop a much deeper relationship with those companies and be able to talk more freely and more intelligently about the results or lack thereof with those respective companies. When I think about the cash that can be generated from them, the one thing that I want to reiterate 10 times on this call is that we are an asset-light company, and we will continue to be such. But I am of the firm belief both through the acquisition of intellectual property like the Bed Bath IP or we did with Zulily, or the decades-long establishment of the Overstock brand that they are untapped. I firmly believe that both the Overstock brand and the Bed Bath & Beyond brand deserve to be in marketplaces that our company may not be in, because of our asset-light nature. We're in the final stages of documentation on working with what we consider a very, very large player in the liquidation and reverse logistics business. We expect them to leverage the Overstock brand, the Overstock website, the Overstock vendor relationships and expect to be financially rewarded for our participation in that partnership. There is a small investment being contemplated in the form of debt that we will be providing to that company in a secured way. In addition to that, a very lucrative royalty that will come directly to Dave's business for all of the things Dave brings to the table, including allowing their product to be sold directly on Overstock.com, where he will also make a fee allowing that company to leverage Dave's multiple relationships with vendors who may need to move product or may need to handle their own returns and to help them figure out ways to optimize their performance by utilizing the Overstock.com database, all of that for a very, very healthy return. We see that the owners of this company have historically not necessarily had investments made that are in the line of sight of the business. You can expect that going forward, anything that we do will have a very, very strong adjacency to not only one of our brands and expanding them and exploring new ideas, but will provide very healthy cash-on-cash returns in quarters, not just waiting for long-term outcomes. We will be disciplined and focused on adjacencies that make financial sense.

For my second question, I wanted to ask you about the changes you've made to management and your efforts to deepen your bench.

From my perspective, I love subject matter experts who are willing to roll up their sleeves. And as I tell them all the time, we have a body on the table, and that body requires seven days a week, 24-hour at least availability. When you run an e-commerce business, it's open 24/7, and we need to have a management team and a supporting staff underneath them that understands that the customer experience can never be impaired. We were fortunate to not have any disruption in our business since the beginning of the year in light of all of the outages that you've seen on the Internet. I attribute the strength and savviness of our team to a lot of that. But when it comes to understanding this company, there's one thing that I believe has been historically missing, and that's their love of product. Dave has reset the expectation along with Stacey Shively in our company's necessity to fall in love with not only brand-new product from the world's greatest vendors, but from closeouts to liquidations to reverse logistics. It is our responsibility to bring the right product to the customer at the right time and most importantly, to be able to serve a wide swath of customers by doing it at the right price for them, which is why we have these various entry points. From my perspective, a flatter, a leaner organization is a more nimble and responsive organization. I think the other thing we've learned is we've added talent like Guncha and promoted people like Carlisha; those folks truly are subject matter experts in their respective business, and they definitively understand the sense of urgency that I demand in this business. Profitability is not an option or a casual observation. It is a mandate, and we will do everything we have to reach that level of profitability. I do want to clarify one thing. I don't want anybody on this call to be confused that an absolute laser focus on profitability and the calibration around assortments or around revenue means we are not a growth company. For those that have known me for decades, growth is my middle name. But I have never operated in a business that's starting from a hole. Until we reach out of that hole, growth will be our middle name and not our first name because profitability needs to come before growth. Once we reach that level of profitability, or more importantly, have a very clear line of sight to it, you could expect me to, as I have traditionally, put my foot on the gas. I think we have the team. We are building the systems, but I need to be confident that the way our customers travel through our websites, the way the search functionality works, the way our vendors price their product and present it to consumers, including the information, the pictures, the videos, the how-to, until those things are right, and we've achieved our margins the way we need to, we will not be pressing the gas or wasting money on anything. Look, I feel that margin is the single biggest thing this company can now do to find its way to profitability. Of course, generating revenue does that, but not if the transaction isn't profitable after all the costs are accounted for, which means we need to improve our marketing costs, our ROAs, our conversion on our website, our delivery expense and all the other added items. Upon my first call of joining this company, I did tell the market one specific thing. My ultimate goal is to build a global database that can be monetized in a different way. That goal has not changed, and the focus on growing the customer file is a small piece of that. Another piece is building alliances. Over the next 3 to 6 months, whether it's the reverse logistics or liquidation company or a variety of other partners, you can expect us to have that goal of building the database to the ultimate goal of monetizing IP and monetizing the customer file as the way this company starts to see real levels of profitability, not marginal levels of profitability. That is not a 6- or 12-month thing. So when I say 12 to 18 months, 24 months, 36 months, I'm talking about our North Star goal, and that's important for us to have that distinction.

And our next question comes from the line of Seth Sigman from Barclays.

Marcus, the philosophy going into the quarter was to use Q2 as a test period, I think, not to chase sales but to really try to understand the demand sensitivity to marketing and promotions and create this baseline. Can you elaborate on that? And how did that play out? I realize a lot of this is still ongoing, right, as you guys figure things out. But what is the philosophy as you think about the third quarter here and maybe tie that in with the expectation for EBITDA to improve sequentially?

Yes. So I think there's a couple of things. We went into the quarter and month-after-month in the quarter, we saw nice progress as it related to our fixed expenses, our gross margin improvement and started to see that as we closed out each month, we were marching towards that. Now the first month of the quarter unfortunately did not meet the same expectations as the second and third month did of the quarter. As we entered the third quarter, we sat down as a team and had very candid conversations about the macro environment, about how the consumer was feeling, around the noise, around the geopolitical environment, the upcoming Olympics. We looked at ourselves and said, listen, we need to improve profitability, and we have a choice in the first month: do we chase revenue and overspend to try to attract new customers or hold on to them, or do we very strategically learn to find ways to use our e-mail database more effectively, improve our PLA spend and do things to improve contribution margin, including raising prices. Now we all know that when you raise prices, you're going to get some level of resistance, and we saw it in small pockets. But I'm here to tell you that I'm happy with the profitability performance thus far in July and feel like as we marinate towards August and September and get ready for Labor Day, we will have continued to make improvements in margin, in our ad spend and our fixed costs. When you look at the third quarter in comparison to the second quarter, as I mentioned earlier, the second quarter typically outperforms the third quarter historically by 12% to 14%. We feel confident that we can not only meet that objective or that historical trend line, but our goal is to outperform that while also sequentially improving margins and sequentially improving EBITDA. As we head into the fourth quarter, we're getting ready for what we would call our mini Super Bowl. The reason I call it the mini Super Bowl is that we want to test other things. It will be the first year where our quarter-over-quarter where our Bed Bath & Beyond brand really drove the volume of transactions. But when we look back on Q4 of last year, none of us will accept the margin performance, the expense performance or the EBITDA performance. So our clear goal in Q4 is to have a significant, significant year-over-year improvement on the bottom line. We believe it could be the first quarter where we start to lap and improve year-over-year results that we're really looking forward to. As we transition into 2025, we expect that sequential margin improvement and the continual growth of Overstock, which is trending very nicely by the way. When I look at the launch of Overstock starting at the end of March, essentially April 1, I now look at my daily dashboard, and I'm seeing average sales around $300,000 and $310,000. You can extrapolate out what that looks like, but we believe those daily sales will continue to grow nicely over the next several months. Additionally, we'll be launching the Zulily business right around September 10, call it mid-September, and expect that to contribute more in Q4 than it will in Q3. We'll have some ramp-up costs in Q3, but from a revenue standpoint, more in Q4.

Okay. Super helpful. And then just one follow-up, thinking about revenue from this past quarter. It came in slightly ahead of how you are forecasting it. It looks like AOV was maybe the surprise. Can you speak to that? It sounds like there was maybe some success selling bigger ticket things on Bed Bath also Overstock relaunching, how did that play a role in that? And how do you think about how that could play out through the rest of the year?

Seth, that's a great question. Average order size, as I mentioned in my comments, had an uptick, and the adjacencies of bedroom furniture, patio and outdoor furniture and those areas that we've talked about—the four specific rooms that Bed Bath is focused on, the bedroom, bathroom, the kitchen and patio furniture—as the bedroom was traditionally and historically for legacy Bed Bath more of the soft goods, we're seeing that migration that it's okay to shop that entire room and buy that bed and buy that mattress, buy that bedroom furniture. We're seeing that in these categories, and that's an advantage to us. Again, Overstock becoming more meaningful, as Marcus just mentioned, as we progressed through the quarter, is on a very healthy path back to where it was before in average order value which we expected and anticipated, and that also contributed to that uptick.

One thing that everybody does have to start to think about as Zulily launches is that we'll be operating three distinct businesses with two similar portfolios kind of between Bed Bath and Overstock. But if you go onto Overstock today and you compare it to the Overstock of a year ago, where Overstock was a year ago just selling primarily furniture, patio furniture, rugs and some other home decor, it is now an entirely different marketplace. You can go onto the liquidation tab and see name brand apparel starting from $20. When you start to see transactions like that, or factory-direct furniture or closeouts or open boxes, it will put pressure on some of the average order. As we launch Zulily, which is apparel and beauty, it will put pressure on the average order, and we will do our best going forward to try to call out the differences between the average orders to the extent that we're permitted, the differences in the average orders between the categories. So if we look at furniture, rugs, patio, things like that, we can show AOV, but we will break out apparel and other small items to not distort from the overall performance of the brand as we expect those transaction counts to be ultimately very meaningful.

And our next question comes from the line of Rakesh Patel from Raymond James.

Nice to see the progress. Can you provide some more color on active customers? How much of the increase versus the first quarter came from Bed Bath customers versus Overstock customers? And what's the right way to think about the shape of growth going forward? We had your expectations for revenue between 2Q and 3Q, but I'm curious about your customers—do they follow a similar or different path since you'll be stacking cohorts from the platforms that are both ramping?

Yes. As we get into the third and fourth quarter, the comps are becoming far more meaningful because, in our opinion, the company significantly overspent in Q3 and Q4 last year, particularly once August hit to acquire new customers. When you look at the customer file in the second quarter, most of it was largely attributable to Bed Bath & Beyond. As you looked at the first quarter performance of Overstock, we largely kept spend very minimal as we were testing out the algorithm and rebuilding the site and looking at the taxonomy and looking at ways to improve the customer experience; we didn't want to go out and spend a ton of money and then have conversion be unacceptable to us. So we relaunched the e-mail. It has not been as easy as we initially thought it would be to reengage that Overstock customer. We sat dormant for a number of months, and so we're having to be very creative about how we're doing that. We're having to incentivize customers, but we're balancing that against overpromoting site sale, which is a mistake that Bed Bath made starting in Q4, and trying to have Overstock have positive contribution margin to the company, all while trying to reactivate the file. As we get deeper into the third quarter and we're happier with our assortment, we'll start spending a little bit of money and we'll start learning how it performs, and we'll start seeing how the conversion works. But we want to be very clear about something. This is not a fast fix where we're just going to pour a bunch of money into the market. The macro environment is already difficult. The advertising environment, particularly right now—and we hope that other companies pay attention to this—is very expensive in light of all the geopolitical spend that's happening. So we're trying to be very surgical and very thoughtful about days of the week, times of the day, products that we're picking to see how efficient we can be. Remember that as we do those things, the algorithms are learning, Google search is learning, we're learning. As we take those learnings and we start to forecast 3, 6, 9 months, we're able to extrapolate those learnings and leverage on top of them, particularly when we see positive ROAs, and we know that we can chase that. When we try things in small doses and we see flat to negative ROAs, we'll ask ourselves one question: Is that negative ROAs because we're investing in a customer that we believe is going to give us lifetime value? Or is that transaction with negative ROAs nothing more than a discount-value transaction where they're buying one thing from us? We start doing a very deep dive on: Are they buying one item? What's the size of their basket? How many items do they have? How do they engage with us on customer service e-mails? How do they engage with us on other offers immediately following? We use that information to create a prospect model to understand who we should chase and who we shouldn't chase. That may seem far more scientific than people want us to be, but that is how we find our path to profitability. That is how we create a true customer attribution model where we understand their behavior and how it's going to perform. Now one thing that we are going to be testing over the next 3 months is a new technology concept called Versal, which takes those learnings and takes that information and creates a layer on top of the Shopify site. That layer allows us to customize the offering and customize the communication with each specific customer in milliseconds. We know that price matters with conversion. We know that site experience matters with conversion, but we also know that speed matters. We believe there is a tremendous amount of room for opportunity when we start to get very granular on how we communicate with each specific customer.

Can you also speak to the potential to cross-pollinate customers between the banners? I know the platforms are being run independently, but when a new customer or a relapsed one comes on board, what are you doing to entice them to shop the other banner?

There was a lot of early hope that there would be this pool of a database and that that pool would transfer across each brand. We want to be very careful as we establish very specific points of view and brand attributes to each one of the brands to not confuse the customer. One way we believe that will ultimately be solved is by creating a global loyalty program, and that loyalty program allows customers to understand how they can use their reward points or club points specific to a brand to transfer across brands. Think about it like Bonvoy at Marriott or a Star Alliance in the airlines. Over the next several months as we pursue the North Star goal of creating an overall global loyalty program, we believe there are parts of the home and family industry that we may never specifically play in because of our asset-light model. But we want to bring companies that don't compete with us but complement us—whether they're a CPG company or a services business—to participate in our alliance. It's a difficult proposition for companies of our size to make on their own. What we're finding, and what you'll find with me, is that I believe in creating a community or cooperative that allows a finance company, a services company, a pool service company, a retail company that sees similar customers to all play in that same space to live in that global database. That global database will have a global loyalty program. Ultimately, once a customer is in that system, we'll then start to sell them other high-margin recurring revenue products once we build their trust and their loyalty.

And our next question comes from the line of Curtis Nagle from BofA.

Just quickly going back to 3Q. One, can you comment on quarter-to-date trends? And then I just want to make sure I understand the mechanics of what you called out for Q3—down 12% to 14% seasonally. It doesn't sound like you're factoring any sort of basic ramping from the brand. Can you walk through how all that bounces out and what's incorporated that results in the 12% to 14% step down?

Yes. As a reminder, we don't provide guidance as a company, but I felt obligated to provide our investors more context particularly until we reach a level of profitability with more insight on all parts of our business. I looked back at historical Bed Bath & Beyond financials when it was a public company and Overstock as well. The third quarter always was a little softer and it typically stepped down by 12% to 14% sequentially. Ironically enough, both businesses look similar, which means that overall the home space steps down when it's coming out of big patio furniture and things from the summer and is transitioning in preparation for Q4. We're spending a lot of time learning how to calibrate our business and being very specific about how we'll approach each day inside the 90 days of the quarter: the calendar, holidays, big sporting events, the Olympics, primaries, weather patterns. Using historical facts, I wanted to set an expectation based on historical information. If 12% to 14% is the walk down from Q2 to Q3, then people can do the math; it's 12% to 14% of $398 million. We feel confident that we could achieve that, but candidly are more focused on bucking that trend. Even though the companies have both historically done that, we're looking at ways to outperform it. Now we're not going to overspend or be reckless with how we do that, because we also want margin improvement and EBITDA improvement at the same time. So our goal for the quarter is to outperform the historical step-down, improve margins sequentially from the previous quarter and to improve EBITDA no less than low double digits in the third quarter on a percentage basis. We think we can do better, but we are doing a better job of setting the proper expectations.

Got it. Just a quick follow-up. How should we think about sales and marketing spend as a percentage of revenue in the back half of the year? How dependent is that on total revenue? Marcus, you mentioned customer acquisition costs are up given election and other things. How are you thinking about that for the remainder of the year?

We are not satisfied by any stretch at our ad spend as a percentage of revenue. It doesn't meet our standards, and we know we have to improve that. At the same time, we need to keep growing our file and finding new customers who have an affinity for our company. We need to continue to engage with the customers we have now, and reengage legacy Bed Bath & Beyond customers who still have not come back. We need to find the balance of inducing them at our payroll and inducing them to our benefit. As we launch and continue to grow Overstock, we will have to spend to find new customers who believe in the liquidation closeout space Overstock is leaning toward. Lastly, we plan on launching Zulily at the end of Q3. So when you see all those things happening—Zulily launch, throttling up Overstock, reengaging Bed Bath—you'd expect marketing spend to be meaningful even as we pursue margin and EBITDA improvement. We can't simply cut marketing spend to find profitability. I'm not going to do that. I'm still committed to growth, but with temperance and rationalization so we get the right customers at the right economics.

Our next question comes from the line of Marvin Fong from BTIG.

A couple questions. First, about a year ago you talked about a roughly 22% gross margin target for Bed Bath. Is that still a guiding light, or have you rethought the gross margin target for the core Bed Bath business?

Marvin, it's Adrianne. One reminder: we did change our presentation of gross margin on our conference call to be more similar to our peer set. There are about four points that we moved out of gross margin into OpEx. If you do an apples-to-apples comparison today, that number would be closer to 26%. Our goal is to continue to improve gross margin, and we know that each of these brands historically have operated in those ZIP codes or better. On our path to profitability, we'll continue to chip away at gross margin and get closer to that mid-20s number.

Marvin, a couple of ways we're approaching this: as we think about curation and making assortments more meaningful for our customers and the shopping experience, that ties directly to our supplier base. As our supplier base narrows and deepens in the volume flowing through them, that is a real opportunity for us and our partner base to renegotiate and to get more entrenched together in this business, giving better margins to us with more volume and more scale to those partners. It also aligns us with the customer experience and the shopping experience, which are needed.

A couple of other points: you're seeing a lot of focus to explore the uncharted white space in e-commerce around liquidation, closeouts, factory direct and similar areas. Some have commented that off-price and closeouts have never been successful in liquidation, but they historically haven't done business with us. Overstock is principally an off-price closeout business, and prior to integration it was about a $1.5 billion business. Dave is a merchant and understands the category deeply, and we're going back to those areas. We aim to become the leader in closeout and liquidation. We've also eliminated a number of distributor relationships that required us to go through middlemen, and by rebuilding direct relationships with big global brands, we'll enjoy margin improvement from those direct relationships alone. Lastly, over the next 6 to 12 months we'll be rolling out private label programs that will be sold in multiple channels. When we build brands, we think there are other places where we can monetize them as well. We're looking for every way to source product, improve first cost, buy closeouts and bring them to consumers in different ways.

Got it. My follow-up: hearing that patio and outdoor did well in Bed Bath. Last quarter it seemed like some of those build-type products might be better suited to Overstock and there might be a transition. Should we interpret Q2 as you'll be keeping those products on Bed Bath and continuing to grow those categories there?

Yes. Before Dave takes a deep dive on patio, I will tell you I was not satisfied with how patio performed. While it performed better and Bed Bath & Beyond is getting more comfortable selling those categories and the consumer is more comfortable buying them from us, I wanted to see better performance out of that category. We know where we slipped up and we are documenting day by day, week by week, what our missteps were so that we build the playbook for 2025 in that area.

Marvin, there are opportunities as we mentioned around curation and calibration as we move forward. The curation component in one of the four rooms we're really focused on for Bed Bath & Beyond is patio and outdoor. It's not going to be everything to everybody. Over the last few years we've seen many pop-up suppliers of outdoor and patio furniture that don't provide a good customer experience or understand packaging. We have very deep and solid relationships with several of the top providers in these categories. Working with Stacey and the merchandising team and really curating that assortment, there are margin opportunities and private label and branding opportunities that we believe can create another level of growth for Bed Bath & Beyond. On the Overstock side, I want to touch on the advantages of the liquidation piece. Historically, when Overstock bought distressed merchandise, those items drove traffic and acted like marketing spend. With our partnerships with liquidators and reverse logistics companies, where we don't invest in the assets and remain asset-light, we can provide access to products through our partner base that are incredible for customers. We have thousands of partners who have distressed merchandise. Getting access to distressed inventory in local areas, where we can drop ship out of those locations so we don't have to move the merchandise, is where margin becomes very accretive for all of us.

There are thousands, if not tens of thousands, of companies—from small Main Street businesses to Fortune 500 companies—that need to deal with excess inventory or mistakes in their inventory. For a medium to small business that has cash trapped in inventory, we aim to become the solution to plug into. We've started to onboard small, medium and large businesses through supplier Oasis, Shopify plug-ins and other integrations that give people that ability. The reason that's so important is that brands often don't want to air inventory mistakes publicly. If they can monetize inventory in a marketplace where their brand isn't damaged, that's where things excel. When you look at Overstock and Zulily together, that marketplace provides a safe place for big companies to move inventory across many categories—pet, outdoor, patio, jewelry, collectibles, reverse logistics—and we see no borders to Overstock's ability to dominate in that space. I joke with Dave about how wide the opportunity set can be; we'll expand as our strategy proves out. We'll be visiting trade shows and doing other things to expand on that.

And our final question for today comes from the line of Jonathan Matuszewski from Jefferies.

First, on vendor conversations and vendor strategy. The prepared remarks referenced the upcoming Partner Summit. Can you give perspective on your goals for that event in terms of conversations with suppliers and efforts to reengage them? I think you mentioned a strategy of narrowing the supplier base, which sounds encouraging from a unit economic perspective. Is there any risk to consumer choice?

Yes, great question, Jonathan. We're really excited about this upcoming summit. I was in Las Vegas on Sunday spending time with many of these partners, giving them a preload into some of the thinking we'll be presenting and discussing. There is always risk to any transition, but we are confident in the work we've done with these partners and what they have to offer. Many of these partners can scale much larger and have additional assortments. Our prior strategy of bringing on everybody, especially into patio and furniture categories since COVID, created a lot of noise. It's important from a margin-accretive perspective that we make our relationships with key partners more strategic and aligned. We see this as low risk on the sales and selection side. There's only so much a customer can process on search pages; it's about the customer experience and providing an experience that excites them to shop without confusing them or disappointing them with poor packaging or slow shipping. There are many elements that eliminate cost in our ecosystem by taking this more strategic approach.

That's helpful. My follow-up: how do your aspirations for a physical presence play into this? How should we think about the opportunity if Bed Bath were to get product into four walls in a financially accretive way without building stores—leveraging someone else's network? How does that fit into your approach going forward and what's the opportunity there?

I want to clarify: we are and will continue to be an asset-light company. Taking on contingent liabilities, leases, or building distribution centers or holding massive inventories are not part of our future. However, it's our mission to put Overstock and Bed Bath & Beyond back into the marketplace in ways that make sense to the consumer. We believe omnichannel presence, at least from a consumer perception standpoint, is important for growth. That doesn't mean we have to do it ourselves. There are many subject matter experts who do omnichannel very well, and we're in discussions with multiple parties to execute that strategy in short order. Any such partnership will be part of a larger alliance around database monetization and IP monetization. As we negotiate and disclose future transactions, investors should rest assured that any partnership will be materially accretive to the company and will remain within an asset-light framework.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Marcus Lemonis for any further remarks.

Great. Thank you for joining us on today's call. We look forward to seeing you next quarter. Take care.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.