Bed Bath & Beyond, Inc. Q4 FY2024 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome. Please be advised that today's conference call may be recorded. I would now like to hand the conference call over to Allison Fletcher, Vice President of Legal and Acting General Counsel at Beyond, Inc. Please go ahead.

Thank you, operator. Good morning, and welcome to Beyond Inc.'s Fourth Quarter and Full Year 2024 Earnings Conference Call. Joining me on the call today are Executive Chairman, Marcus Lemonis; Chief Financial and Administrative Officer, Adrianne Lee; and President, David Nielsen. Today's discussion and our responses to your questions reflect management's views as of today, February 25, 2025, and may include forward-looking statements, including, without limitation, statements regarding our future business strategies, goals, financial performance, outlook for the remainder of the quarter or any other period, anticipated growth, stock price, profitability, macroeconomic conditions, the value of our brands and investments, relationships with third parties and agreements we are entering into with them, margin improvement, expense reductions, market efficiencies, conversion, customer experience, changes to brands and websites, product offerings, blockchain efforts and strategies, tokenization efforts and strategies 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 in our Form 10-Q for the quarter ended September 30, 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 fourth quarter and full year earnings release, which are 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 our presentation. With that, let me turn the call over to you, Marcus.

Thanks, Allison. It always amazes me how these safe harbors get longer and longer over time. I give a lot of credit to the lawyers. They have added a lot of words. As I mentioned, as Allison mentioned, I'm joined today by Adrianne Lee and David Nielsen. And what we really want to do on this call is we're going to go through our prepared remarks pretty briefly, and we want to leave a lot of time for Q&A. As part of that context for Q&A, we have really divided the presentation into two distinct areas. The first area is our primary core business, the thing that actually drives revenue and what we're fighting to get to profitability on. The second part of our call will lean into blockchain, tokenization and a couple of initiatives or ideas that we have out there that we're going to discuss. So when we get into the Q&A section, feel free to break out your questions in those specific areas if you have them. All right. So look, we have made a lot of progress in the last 12 months, and it has not been an easy 12 months, both for the stock price and for, quite frankly, the results. We really have acknowledged that the work that has been done since 12 months ago has really been fruitful. And we feel that we're probably sitting in the best possible spot that we could be. I'm confident to tell you that I believe that the worst is absolutely 100% behind us. Now I'm required to qualify things like that: that assumes market conditions don't eradicate, but for the most part, if the world stays the way it is today, we are headed in a very, very positive direction. For those of you that want to see more details around the things that are going to be discussed, on our investor page of our website is the slide presentation that will break down all of these things that we're going to discuss today, all these key KPI things. And we will continue to update that on a quarterly basis so that you're able to compare and contrast, and then we put transparency at the front of every single thing. That will address revenue, our vendor consolidation, our margins, our SG&A, our marketing and what we're going to show you is not only the good, but the things that we feel like we have a lot of work left to do. As I sit here today, also, I want to be clear that in my mind, as I look at the things that have happened around gross margin, SG&A reduction, marketing efficiency and conversion, the work that we're doing with third parties on improving site experience, improving customer segmentation, we see a path to profitability. And it is my hope and goal that we find multiple inflection points throughout the year. What does inflection points mean? We believe there are several months where we think there is a real good shot at reaching profitability in that specific month. I don't think we'll be profitable for the year. It is our goal. It is our hope. We're going to do all the things that are necessary. But as you would imagine, the lawyers and the accountants want me to qualify that. We are taking a no-prisoner approach to a multitude of things, including how we're feeling about our gross margin. We set a bold target for Q4 of 21.5%. And we said that we thought we could do a little better than that. Happy to tell you that we landed right around 23%. Now when Dave and I and the other merchants talk about this daily, I want to be as clear as I can. We need to be north of 27%, striving for 30%. And we believe that there's creative ways to do that. But some of the principal ways that we're doing that is by rationalizing SKUs, meaning that random things that have entered the marketplace over the last 12 months that have either not sold, created a bad site experience or quite frankly, have only sold because we've overpromoted or overdiscounted. Those days are over. We made clear on October 24 that we did not want to be in the business of selling products on our websites of any brand on any nameplate that had a negative margin associated with the first cost, where the cost to sell it would be incrementally more expensive and, therefore, lead us to a negative contribution margin or any vendors that didn't align to our customer service or customer experience philosophy. We have eliminated millions of SKUs over the last several months. And candidly, there are many more to go. Dave and the team have done a spectacular job, but much, much work still to be done in consolidating vendors. Today, as we look at our vendor lineup, we still believe we have too many. We want to be far more important to fewer vendors because we believe the path to profitability is partially driven by margins. And those margins are driven by your importance to other people and other creative solutions around that. Until we get to a more refined offering, we believe that we're going to continue to have to do a lot of extra work to get to 27%. You should expect sequential margin improvement quarter after quarter after quarter starting with the first quarter. And just to be clear, sequential margin improvement from where we're reporting today. Simply stated, I expect the margins to be better even if it's only incremental than it was in Q4. The second thing that we want to make clear is that we do not anticipate tariffs to disproportionately negatively affect our company. I'd point out disproportionately because we believe the entire marketplace, the entire space is subjected to the same first cost model. But where we believe Overstock has a competitive advantage, particularly in the next 12 months, if you go on to Overstock's website today, you will see that the management team of that brand has done a spectacular job of restoring the core. And as part of restoring the core, Dave has been working very closely with specific manufacturers who have excess inventory. And we're finding that the continual slowdown in the general market that existed in 2024 has given him unbelievable opportunities for 2025. Additionally, SG&A reduction was the second KPI that really mattered. We committed to cutting $65 million of expenses throughout 2024. And we not only met, but we exceeded that goal through really disciplined execution. As we look at the goal of achieving $165 million of annual G&A and tech run rate, we have more work to do. I'll be honest, I'd like to be a little bolder. I think that in 2025, we could find another $5 million to $10 million on a run-rate basis from where we ended our $65 million goal. We believe that there are a lot of additional opportunities: selling the building and getting out of those fixed costs, rightsizing our headcount and continuing to leverage third parties as staffing solutions, i.e., Vercel or Salesforce or any other third party that can help us approve parts of our business. That's allowing our headcount to really be in line and, quite frankly, sustainable for the future. The next piece is how do we utilize our marketing dollars. It is still our belief today that our performance in Q4 around marketing at 17-ish percent is unacceptable. And while we've had little wins here and there, it is our expectation that in short order, we get to below 14% in Q1. That's our goal. And that we continue to work our way down closer to 12% and then hopefully, as we continue to optimize the website, improve e-mail execution, get much better at our PLA program, improve site experience and add other features to the website that make it a more seamless process, coupled with e-mails being customized for customers at the right time with the right product, with the right price, of which we've made progress, we then believe we could start to achieve our goal of getting closer to 11%. So just to clean that up, we believe that in Q1, we will have additional improvement. Now that's already factored in our internal forecast. What does our internal forecast tell us? It tells us that we expect to continue to have sequential adjusted EBITDA performance from Q4 to Q1 to Q2 to Q3 and then on to Q4 a year from now. That is our expectation. And while we are providing direct forecasting or providing guidance, you can expect margins to continue to improve, modestly, but they will improve. SG&A to come through in fruition in Q1 because we had a little bit of noise in Q4 with some things that were out there. And you should expect that once we get comfortable that we have achieved the margin targets, have consolidated our vendors, have improved site experience, have put all of the guardrails in place, which we believe will happen here in short order, you could expect this company to be what it's supposed to be, which is a growth business. We are not happy about the retraction of our revenue. But we agreed and we made clear that we will not compromise anything causing us to lose more money or to sell products or do business with vendors that cause us to lose money. That establishment of that foundation, that base of seeing a breakeven in the neighborhood of breakeven, you will see us push the button and start to grow at a much more accelerated rate. I do not expect that revenue will continue to contract for the long haul. I do want you to expect that in the short term, your directive to myself and our full management team is get profitable, eliminate the unnecessary expenses, get those margins where they belong. Put the right vendors in the right place at the right time and stop wasting money with inefficient marketing. That's what leads us to profitability. We have heard you loud and clear. As we get into the final stages of a strategic and total transformation, we're having to look at other companies that we think are subject matter experts. I think historically in this company, it believed that it could solve every single problem by itself. But in today's technology world, particularly with AI, there is so much subject matter expertise that complements our company as opposed to contradicting it. When we look at partnerships with companies like Vercel that are entirely redoing the front-end experience of all of our websites, we see, number one, somebody smarter and wiser that has other examples in commerce for us to glean from. And number two, a primary goal of them making money when our conversion improves and when our revenue improves. We have goal alignment. Secondarily, we have finally completed the implementation of Salesforce in our business. And while all of the different parts and pieces are implemented, the core is — over the next three to six months, that's only going to get faster and more transformative. We have also been selected as one of the few companies to partner directly with Salesforce to install, over the next six to eight months, Agentforce across different parts of our business, enhancing a unique experience for the customer. Agentforce takes all of the parts and pieces of our Salesforce menu, our portfolio, and it ties them all together to do two things: drive down our SG&A and increase our conversion. We believe those two companies are key to us achieving that level of profitability that we expect. Across my feed this morning, I've seen a lot of questions around the use of the ATM. I want to be very crystal clear about when it was filed, why it was used and how I think about it. Last spring, our company filed a $200 million shelf registration, giving us the ability to pull into the company up to $200 million by selling shares into the market. Through the year and through the summer, I was reluctant to touch it even when the share price was much higher. Because I, at the time, could not see a clear path to profitability, myself as a shareholder and as an option holder take very seriously the dilution of our stock because it not only affects you but it affects me. We're on the same elevator. Until I saw clear green shoots that showed margin heading in the right direction, conversion moving up in the right direction, SG&A getting to our levels and us starting to see paths to profitability, which I started to see more clearly in November and December and subsequently in January and even through today, I didn't touch the ATM. We started to touch the ATM because we need to rebuild and fortify our balance sheet for two distinct purposes: growth and return on investment. The ATM should never be used or should really not be used, in my opinion, just to burn capital from laziness or poor performance or inefficiency. That's your money, and I take it very seriously. It's my money, too. I take it seriously as well. As we went through that process, we waited day by day to make sure that all the things that we mandated on October 24, around eliminating SKUs and raising pricing and modifying marketing and making the headcount reductions happen day by day. And we all agreed as a management team, again, that we weren't going to touch it. That money was principally used to restock the shelves in some cases, for working capital that I think we need to be opportunistic, but it was also used to make very strategic investments and acquisitions. In the fourth quarter and recently, we completed our transaction to make our investments to own 40% of Kirkland's, a $400 million business that for the last two quarters has really turned the tide over their year-over-year results. I think they reported positive EBITDA in the last quarter. We love the management team there. And as a reminder, we have structured not only an equity investment in that business but a mutual partnership to bring Bed Bath & Beyond, Overstock and now our recent acquisition of BuyBuyBaby to the market in an omnichannel way. What we love most about that company is how razor thin they run everything. They are locked down on the supply chain side. They have great inventory management, and they are very focused on running profitable locations. That, for us, was the most impressive reason that we chose to partner with them because we find them to be very responsible stewards of capital. Additionally, they understand how to run small-format retail. And we believe that Bed Bath & Beyond, Overstock and BuyBuyBaby should exist in small-format retail. That doesn't mean that there won't be a flagship location in a big city like New York or Chicago, but those plans aren't on the table today. As we move forward, the ATM is used to make strategic acquisitions like that or strategic investments like that, where I firmly believe to my core that the accretive nature of that investment outpaces the dilution that is created by using the ATM. Furthermore, we want to get back to Overstock's original core. And while we are closing our distribution center and eliminating a piece of our supply chain, we have access to other distribution centers, including Kirkland's if we ever want to make strategic or opportunistic investments in inventory. More recently, without having to take on the inventory, we cut two transactions with two vendors that are creative and experimental in nature. What we're testing is to see can we partner with three core vendors of ours to deploy capital to pick up no less than 10 to 12 percentage points of incremental margin from where we have been operating historically. It's the thing that I think gets us closer to the 27%, 28%, 29% and 30% if all things come together. So we are using your working capital not to burn it and pay our bills, but to drive growth, to drive opportunity, to make acquisitions, to enhance margin, to deploy new technology on our website and to leave a little extra dry powder as we look at that Medici portfolio. All of those acquisitions and all of those investments are really part of our core business. But what became clear to me in the last 12 months, and I apologize it took me a little longer to understand how to connect the dots, is the beauty and the genius of what Overstock created decades ago when it started to develop blockchain and crypto and all these things. If I had one criticism of what previous management did, it wasn't the creation of those ideas or the creation of the core business. It was the fact that those two things operated on islands, and they had never really thought of or made the decision to interweave them. Over the last 12 months, as we've learned and learned and learned, what has become more clear is that our company needs to take a very active role in every single part of that Medici portfolio. And while we signed an arrangement to have Pelion manage that portfolio, as you can see, we have had significant write-downs in the portfolio as part of our noncash charges this last quarter and over the last several quarters that are quite frankly unacceptable. We decided to take matters into our own hands and start to build relationships with both tZERO and GrainChain in a very different way. Furthermore, in conversations with companies like Voatz and Ripio, also part of that portfolio, we are seeing lots of different green shoots. Is every one of the 16 companies functioning well? The answer is no. Are some real heavy hitters starting to turn the corner and unlock value that I never could have imagined? Yes. We started to think about what our responsibility was in solving that problem. As we looked at all the opportunities that were out there, as I mentioned on my Spaces call last week, we have decided to explore the opportunity for us to look at tokenizing certain assets on our balance sheet. We're looking at certain pieces of intellectual property, but one thing must remain absolutely disciplined. It's a security and it's an offering, and it requires compliance. These aren't meme coins or non-asset-backed things. This is something that we believe we want to take off of our balance sheet, establish a value and look to create an opportunity for both our current holders and future holders and potentially private investors to invest in a token that would give them the rights to the monetization of that asset. That asset should also come with some form of cash flow, whether that's a revenue share or royalty or whatever the lawyers and accountants require us to call it. That's the goal. What we're starting to show you is the ability to connect and weave together those things. What we're excited about is we do not need to deploy any SG&A or any headcount or use any of our current capital to execute these things. All of our current shareholders will have benefited from the hundreds of millions of dollars that were deployed over the last ten years. But it's now time to extract that value. So tZERO and our company are working on lots of different things, looking at all of our assets, and we believe in short order, we could have some really fun and exciting news. Secondarily, our understanding of what GrainChain is doing is simply spectacular. Those founders and that management team have cracked the code on understanding supply chain, not just in the agriculture business, but across all sorts of other industries. I'm excited — I wish I could reveal more, but I know that Luis will, in short order, be announcing some major partnerships that GrainChain is getting ready to announce in the next several weeks and other items in the next several months. So we want to leave a little extra dry powder. If somebody like David Goone or Luis at GrainChain can convince us that investing more of your money in their business to give us a greater return is available, we definitely want to take a look at that. I'll close with the final piece. After the call today, there will be a slide presentation that will be posted on a concept that we will own inside of our company. It's called LifeChain. I shared a basic idea on our Spaces call. But beyond just thinking through ways to advance our blockchain and AI strategy with LifeChain, a next-generation platform for secure, verifiable and tokenized asset management initially focused on homeownership, we view LifeChain as an opportunity to potentially expand into broader financial, insurance and asset record keeping. That's why we're in the retail business: to make money and build the database for products like this. Key features and strategic impact of LifeChain would be blockchain-powered security, immutable ownership verification and seamless asset transfer; AI-driven automation, including enhanced risk assessment, fraud detection and real-time asset valuation; comprehensive digital ledger, including secure storage for property needs, financial records, estate planning and credentials; and a Salesforce partnership with a deeply integrated relationship with their AI function, Agentforce, for insights around automated document management and smart contract execution. Beyond is working with regulatory and financial partners to design LifeChain with secure and compliant adoption in mind, reinforcing blockchain and AI integration into commerce around the home, which is who our target customer is. We're hopeful that LifeChain will position us at the forefront of financial and innovative technology and unlock value for investors that you have been waiting for for the last decade. I'll now turn the call over to Adrianne.

Thank you, Marcus. I'll take a few minutes to walk us through our fourth quarter financial results. Revenue declined 21% year-over-year in the fourth quarter as we continue to make trade-off decisions to rightsize our margin profile. For the year ending December 2024, we posted $1.4 billion of revenue, which was an 11% decline versus full year 2023. As a reminder, we expected revenue to decline year-over-year as we continue on our path to profitability and as we swiftly made progress on restoring margin guardrails. We do remain laser-focused on the four key areas of conversion, gross margin, sales and marketing efficiency and expense management that we laid out at our October 24 investor event, in which Dave will speak to in greater detail. I will start out with gross margin where we exceeded our targets. Gross margin landed at 23% for the quarter, a 380 basis point improvement compared to the same period last year. Sequentially, we delivered an accelerated 180 basis point improvement in gross margin, as we continue to optimize pricing, improve freight costs and rationalize assortment. You may recall, we targeted a 50 basis point improvement from the third quarter of 2024 and we overdelivered by 130 basis points. We took a significant step forward to return to our historic operating levels. We posted improvements each quarter of 2024 as we continue to work the six-part plan I outlined at the beginning of last year: renegotiating freight, improving vendor relations, growing the margin-accretive Overstock brand and integration add-ons, embarking on licensing activity and eliminating inefficient discounting. The fourth quarter was a strong execution proof point. G&A and Tech Expense of $48 million decreased by $6 million year-over-year as a result of our commitment to reduce fixed costs by an annualized amount of $65 million. I am pleased to report we have realized this entire commitment, allowing us to reinvest a portion of those savings to support growth initiatives and innovation. We continue to progress towards our goal of $165 million annual G&A and Tech run rate. All in, adjusted EBITDA came in at a loss of $28 million, a 43% or $21 million improvement versus the fourth quarter of 2023 and an improvement of $4 million versus third quarter 2024. It's vital that we reestablish the discipline of profitable commerce and our focus will remain on delivering sequential improvements in adjusted EBITDA. Reported GAAP EPS was a loss of $1.66 per share for the fourth quarter. Excluding losses recognized from our equity method securities, adjusted diluted loss per share was $0.91. As Marcus mentioned, our balance sheet strengthened in the fourth quarter, as we ended the quarter with a cash, cash equivalents and restricted cash balance of $186 million. In addition to improving our margin profile, and moderating cash burn, we recognized $17 million in net cash proceeds from the building sale and $43 million of net proceeds from the sale of common stock pursuant to our ATM. Again, our team is laser-focused on rebuilding our brands while we continue to, quarter in and quarter out, deliver proof points on our path to profitability. We made progress throughout 2024, and I know we need to create a profitable foundation by which to grow. With that, let me turn the call over to Dave.

Thanks, Adrianne. On October 24 of our investor session in New York, we committed to four key priorities for restoring our core business: marketing efficiency, sales growth through improved conversion, margin enhancement and expense management. Today, we are pleased to share our fourth quarter progress. While there is still work to do, we see a path to our goal of profitability. Let's be clear, our immediate focus isn't top-line growth. It's about rebuilding a strong, profitable foundation. Once that is in place, we'll shift our focus to unlocking long-term sustainable growth. Now let's dive into the data. The materials in front of you on the chart we reviewed at the October investor event, with Q4 and December's performance added to show how we're tracking. I'll add some color from January results to highlight ongoing areas of focus as we march towards profitability. December was our best performing month of Q4 in terms of marketing efficiency, as you can see on Slide 12 of the prepared materials posted to the Investor Relations page on our website. We hit our target of 12% sales and marketing as a percent of revenue, driven by reallocating spend to high-performing channels, focusing on our power categories and refining audience targeting. January came in slightly higher but well below the 2024 run rate of 17%. And while there will be ebbs and flows along the way, I'm encouraged to see the trend moving in the right direction toward our goal of 12%. Next, on Slide 12, you can see December conversion trending upwards. This was fueled by SKU rationalization and vendor streamlining, ensuring customers find our most productive assortment. As we've said, Bed Bath & Beyond was never meant to be a marketplace. We're curating a sharper, more efficient product mix. Since April of 2024, we've reduced Bed Bath & Beyond SKU count from 12 million to just under 6 million by November and further cut an additional 1 million SKUs and 800 more vendor partners in December. January's conversion dipped slightly, expected for seasonality, but slightly lower than anticipated as we continue to make some difficult decisions to remove unprofitable transactions. We've identified additional assortment improvements and we'll continue to curate at Bed Bath & Beyond. We've discovered additional friction points in the Overstock experience and are actively addressing them to enhance customer experience and improve conversion. We've entered into agreement with a terrific new tech partner, who we believe will help us improve our site responsiveness and overall experience first for Overstock and have already begun that work. This transition is expected to be completed by midyear for the Overstock brand, and then we will begin work on Bed Bath & Beyond. We believe this will be a major step forward in improving conversion rates. As you heard from Adrianne, gross margin has been steadily improving over the past several quarters, as you can see on Slide 12. We've worked to remove unprofitable transactions by leaning into our most profitable vendor relationships, reduced our level of discounting and optimized pricing where applicable. We've also removed products where we're losing money. At the same time, we continue driving down outbound shipping costs. While monthly results may fluctuate, we are firmly on a path to achieving our near-term gross margin target of 25%. Adrianne already mentioned our expense management progress. And with that, I'll turn it back to you, Marcus.

Thanks, Dave. We'll actually turn the call back over to the operator to open up our Q&A section.

We have our first question; this comes from the line of Jonathan Matuszewski from Jefferies.

The first one was on just top line. Obviously, you had some good progress recently in terms of bringing sales and marketing expense down. Just curious about the monthly cadence of revenue throughout the quarter and how revenue trended from a cadence perspective as you brought down ad spend? That's my first question. And then on gross margin, you outlined some of the building blocks as we go forward maybe towards that initial north star of maybe 25% to 27%. Maybe just give us some perspective in terms of what inning you're in in terms of moving SKUs from Bed Bath back to Overstock, how much work is left there? What are the biggest buckets in terms of gross margin expansion ahead?

Well, I think we have to be careful. We don't provide revenue by month. But I will tell you that we're focused on doing profitable transactions. As we mentioned earlier, when you look at the revenue in the month of October compared to November and December, they started to decline. And the reason they started to decline is because we started eliminating vendors and SKUs that we were losing money on. When you go through a very large loss in October and you get down to a mid-single-digit loss in December, you have to understand that driving margin and eliminating negative SKUs is going to have that effect. As I mentioned earlier, Jonathan, we are going to continue to contract things to get profitable. We obviously want to continue to drive revenue and meet new customers at the front door. But as we continue to eliminate SKUs and eliminate vendors, it does have a contraction on our revenue. I would expect that revenue will continue to be a little tighter here in the first couple of quarters, but that EBITDA and net income should have explosive growth on the bottom line. As we raise margins and lower our marketing expense, I would expect to see nice year-over-year improvement. The first quarter of last year, we lost a lot of money. That is not our expectation for this year. We will sell less in the first quarter than we did last year. I don't think that's lost on anybody. On the gross margin question, I'll say this: you should expect sequential margin improvement through the balance of this year. A big contributor is the growth that we're seeing coming out of Overstock. If you look at that assortment today and the management team that's there specifically on Overstock — we brought people back who understand that brand — we're going to see some nice revenue growth and the contribution margin and gross margins there are simply better. Secondarily, we're starting to use our balance sheet and our relationships, primarily through vendor consolidation, to get our first costs in line across our enterprise. I don't want to predict what inning we're in because I think ultimately there's never going to be an end to the game. The goal going forward is to always improve margin. While we're setting a short-term goal of 27%, I'm never going to be happy until we're north of 30%. North of 30% requires a certain mix, assortment and vendor relationship and omnichannel mix that allows that to happen. Our investment into Kirkland's was done to be able to activate the Bed Bath & Beyond omnichannel business, and that omnichannel business is a driver for incrementally better first cost because vendors are seeing multiple places they can sell their product and additional revenue opportunities. So we are early in the game, but the game doesn't end. If I could wave a magic wand, I'd like to get to 27% at some point at the end of this year. I think that's a little bullish, but we're going to try hard to get there. North of 25% is our absolute first milestone. When you model how the company will get profitable, you can tweak gross margins, tweak SG&A down another $4 million to $5 million over the next 12 months, and then in the back half, once we establish a margin base, we'll start to slowly spend more money growing revenue again. We do not want to contract revenue throughout 2025. But if we can get to profitability in 2025, that is the primary goal.

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

Marcus, I listened to your Medici Ventures related call last week; I thought it was very interesting. Can you talk about your current efforts to generate shareholder value from the Medici Ventures portfolio, including how potentially offering a BuyBuyBaby token with tZERO advances that effort? And then you hinted in your prepared remarks, but can you let us know when investors can expect an update on GrainChain, which sounds like it's been doing incredibly well and that you consider it potentially a very promising supply chain company? Do we have to wait for 1Q '25 earnings for an update? There was a time when you had dedicated investor calls on the Medici Ventures portfolio outside of your quarterly earnings call.

Yes. There was a time when the company did have that separate call. Unfortunately, a few years ago previous management created the transaction with Pelion and our ability to communicate is now distilled down to our ability to get information directly from those companies. We get a report when requested from Pelion. But right now, Adrianne, Dave and my focus is we have to figure out how to unlock the value there. We think the only way to unlock the value is to provide use cases and to bring those brands to the forefront. Let me back up on the motivation behind blockchain and tokenization. Tokenization in the simplest form is similar to issuing stock for a big company; for a smaller company it's an easier way of achieving capital formation and community-building. Our motivation to explore tokenization for assets such as BuyBuyBaby or Bed Bath & Beyond had multiple prongs. The first is to rebuild a community of followers that ultimately drives the business. If you look at other organizations like Costco that have club memberships, I look at tokenization as the highest level of loyalty program one could have. When you think about it like a loyalty program, it should have additional benefits at the highest level, access to previews, and something that can be relied upon. When you study companies like REI that give rebates based on purchases, I wanted to take tokenization and create connective tissue into our retail business to accomplish the highest level of loyalty. This is an idea, and the lawyers and accountants require me to say that, but if I could take a piece of our IP and give you the ability to own the monetization of that, you would be buying tokens in that monetization at a fair value. Ideally, you'd receive incremental benefits plus shared incremental value created through driving that brand — almost creating an owner-ambassador program where token holders receive benefits and a share of monetization. The second reason for tokenization is proving the efficacy of tZERO. As I dug into it and spent time with David and Alan, I don't believe the asset value has been exploited as it should. Rather than waiting for other companies to call David and for David to have successes, I decided to create our own narrative about proving the efficacy of our ownership of the business and demonstrate how these companies can work together. The combination of those elements should drive revenue and show the value of that asset, ultimately unlocking value. In a perfect world, we want to continue to find ways to unlock value that don't require us to invest capital. The easiest asset-light investments are to exploit the value of GrainChain, tZERO and other Medici assets.

Our next question comes from the line of Steven Forbes from Guggenheim.

This is Julio Marquez on for Steve Forbes. How does the average contribution margin compare between Bed Bath & Beyond and Overstock today versus back at the 2024 Analyst Day? Are we in a place where both are acceptable? And then any way you can help us better understand the base level productivity needed to achieve free cash flow neutrality? Any initial comments on where you see the greatest productivity opportunities today, whether at the category level or at a banner level?

So Julio, I'm going to break that into two questions. I'll have Dave take the first one, breaking down the improvement in contribution margin and how he sees the banners interplaying, and I'll ask Adrianne to address where she thinks revenue needs to be to get to breakeven.

Thanks, Marcus. Marcus mentioned on the call that Overstock was rebounding and had solid economics. What we're seeing is exactly what the model for Overstock was intended to do. It is coming along and we continue to grow and develop that brand. It does have a slightly better contribution margin than Bed Bath & Beyond. As we've talked about today, we continue to curate. We continue to remove unprofitable vendors and SKUs, and we continue to fine-tune that assortment. We will continue to grow that contribution margin. Overstock more naturally fits that model and the SKU assortment and we're continuing to grow it. We brought back portions of the prior management team and they have been effective at moving us toward the contribution margin levels that support profitability.

Thanks, Dave, and I appreciate the question. If you think about our scripted remarks today and what we shared at our investor event, all of the pieces we have shared — conversion targets, gross margin targets, tech and G&A — those are the places we need to get to in order to be profitable, which will ultimately generate free cash flow. So if you look at some of our operating metrics prior to the Bed Bath & Beyond integration, when we were generating free cash flow and operating profitably, it's really recalibrating those four key metrics we've been talking about to those historic levels.

I want to add something that ties to cash because I get questions often around our cash balance. That's an excellent question when a company is burning money because you want to know the runway. But as we get closer to profitability, people should understand that cash goes through the balance sheet in multiple ways. It can go into inventory or other working capital. As we get into the second, third and fourth quarters, I want to focus on working capital of the business. For example, as Kirkland starts to open Bed Bath and BuyBuyBaby, and even potentially Overstock stores, we may choose to partner with them to accelerate growth. They have a fairly rigid balance sheet that doesn't provide a ton of runway for short-term growth. So we want to ensure every single dollar in our kitty is used with the highest and best use. You have our commitment that any money we raise, spend, or invest will be done to create maximum return on investment. That is why we are so focused on eliminating burn as fast as we can — every dollar burned is a dollar not available to invest with double- or triple-digit returns. That's why you're sensing the vigor in our voice around getting to zero. Every dollar leaving is not going where I want it to go.

Just as a quick follow-up, any additional color you can give on the contributors to the positive gross margin surprise during the quarter? I think you mentioned better vendor support — was it internal efficiency capture or other factors?

No. The upside in the margin profile for Q4 was simply the team doing what they're supposed to do: working with their vendors to execute proper first cost, consolidating vendors, eliminating unprofitable SKUs, eliminating unprofitable vendors and not wasting money on marketing. The expectations I have for the team over the next several quarters are going to increase and the pressure will continue to mount to get us to that 27% margin and ultimately a much better contribution margin. They did a great job. And what I'm seeing in January and February is continuing sequential improvement.

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

This is Alexia Morgan on for Peter Keith. First, you've talked about the importance of conversion rates and gross margin on your path to profitability, and we have some visibility on gross margin. You touched a little bit on conversion rates in the presentation. Could you give more color on conversion rates and how those performed throughout Q4 and possibly quarter-to-date in conjunction with marketing spend? Second, we've been hearing from channel checks and other companies about the slowdown in demand in January and February. Understanding that you're simultaneously going through SKU and vendor rationalization, have you been seeing any change in underlying consumer demand quarter-to-date?

Right now, we are singularly focused on driving margin, lowering SG&A, improving conversion, and we're operating in our own strategy to get to zero. While others continue to burn money, we are focused on getting to zero and making money. I can't speak to what's happening in the overall industry. What I can say is our revenue will continue to tighten as part of our strategy to get to profitability. We don't report our contribution margin specifically, but I can tell you contribution margin is improving. For those who understand contribution margin, it's not simply gross profit on a transaction; it includes frictionals inside it — site experience, discounting required, shipping expense and other elements. Improving contribution margin is truly a process efficiency gain. We're bringing in better talent and continuing to make operational changes until contribution margin is where it historically was for Overstock. I believe we are many points away, but we are more positive than this company has been in 18 months and seeing sequential improvement every day.

Our next question comes from the line of Rick Patel from Raymond James.

I had a question on marketing. You touched on the opportunity for better efficiency. Can you expand upon the work that remains to be done and how we should be thinking about marketing from a modeling perspective as you work towards sequential margin improvement? Also, on the near-term outlook for gross margins, I think you mentioned near-term figures being 25% and also 27%. For modeling purposes, what is a reasonable assumption?

On the marketing side, it's important to understand all the parts that go into creating marketing efficiency. Site experience is at the forefront and we still believe our site experience is not where it needs to be. Search functionality, while materially better, doesn't come close to our standards and we're accelerating improvements. Having the right vendors with the right product at the right price at the right time is also part of that strategy. How customers come to our site — through e-mail, PLA ads, or organic methods — matters. We are not operating near optimal on e-mail execution and are making significant human capital changes, with new additions coming to our team in the next ten days to bring e-mail execution back to the company's historical standard. E-mail execution requires cleansing and clarity around the e-mail file. We have begun to work closely with Agentforce and Salesforce in cleansing that file. We're disappointed certain categories and segments of the Bed Bath acquisition are not performing at all; some of those addresses may no longer be viable. We're cleansing and segmenting the list; each time we do we see slightly better performance. But we have a long way to go. Adrianne, on the margin side?

If you were talking about our sales and marketing as a percent of revenue, December at 12% was certainly lower than our 2024 run rate and better than the quarter. First, second and third quarters should all be better than the fourth quarter in total, but fourth quarter is seasonally higher because of promotional activity. For the full year, I don't expect we'll be at our long-term target yet, but we're making great strides toward it.

Dave, if you'll address the other question around gross margin for modeling purposes. We are targeting to get to 25% as a near-term goal. That is not the end target, but the target to get to 25% is clear. We see sequential progression over the quarters and have a path to work with our partner base to cull down nonprofitable partners, make stronger relationships with legacy vendors in power categories, and give them access to more locations on the website in exchange for better costs as they get more volume. This is about leveraging legacy vendors to get back to historical gross margin and beyond.

We are working the plan: targeting 25% near term, and then progressing beyond that. Execution includes negotiating better first costs, consolidating vendors and leveraging our top partners. As Marcus noted, once we establish a margin base, we'll have the flexibility to reinvest for growth.

I'll be direct: we're going to partner with vendors who understand growth is mutually important and who understand being profitable is a mutual goal. We've eliminated vendors who abused the marketplace over the last 12 to 15 months. Those vendors who are loyal and good partners will get the lion's share of our business, especially when we press go, open stores and spend marketing dollars again. There will be upside. Once we learn and build everything exactly the way we want — profitable transactions and SG&A in line — we will be a growth company. That's who I am and what I believe, but I will not compromise cash or the business to chase growth. Revenue growth needs to be profitable growth. Everything we've done in the last six to eight months are building blocks to get there. We are very close and appreciate your patience as we unlock value.

And seeing as there are no more questions in the queue, that concludes our question-and-answer session. I will turn the call back over to Marcus Lemonis for closing remarks.

Great. Thank you very much. Just to make sure that we don't leave with any lack of clarity, our goal is to make money. Our goal is to grow our margins, improve our efficiencies, improve our marketing conversion, improve our site experience and integrate our blockchain and other assets into our business to take all of the investments that we've made in the Kirkland's and BuyBuyBaby examples and to start having them bear fruit. We understand the mandate. We expect to deliver this quarter in hitting the metrics that we were promising you, much like we did last quarter. Thank you so much for your support.

Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.