iMedia Brands Inc (IMBI) 2002 Q2 法說會逐字稿

Good morning and welcome to ValueVision Media's second quarter 2002 earnings conference call. All lines have been placed on loomed. Before we begin, Anthony Giambetti, director of corporate communications will read a brief statement.

Today's conference call may contain certain forward-looking statements within the meaning of the SEC Private Securities Reform Act of 1995. Listeners are cautioned that such statements may include risks and uncertainties that could significantly affect results from those expressed in such forward-looking statements. More information about these risks and uncertainties is contained in ValueVision Media's filings with the SEC.

I would now turn the call over to ValueVision Media's chairman and CEO, Gene McCaffrey. You may begin.

I'm here with Dick Barnes, our COO and CFO. Thank you for your participation. Let me spend a few minutes on some of the numbers. I trust that you all have had the opportunity to see our release. I'll spend some time on a few of the numbers. I would like to make one clarification as we go through that is an important clarification. Then we will certainly open it up to your questions after we discuss some of the issues that affected the quarter.

As we stated, sales were up 22 percent. Homes were up about 16 percent over the last year. The Internet was up over 40 percent in sales. And our EBITDA was up just over twice, twice last year's performance.

One of the issues that - I know Dick and I have talked to a number of you between last night and this morning. One of the things I would like to clarify before we go into the operational issue of systems, because the two big questions that we got on the systems was, you know, how did you figure out how much you lost? And, you know, is this all behind us? I am going to address that in some detail.

One of the things that kind of is glaring on the page but which also deals with some of the operational problems we have had is the issue of margin. I mean, if you look at our margin this year as we reported it at 37-7, let me just state that the - then I'll explain what I'm going to state - that our merchandise margins were 39 and a half this year. Our merchandise margins were 39 and a half this year. What we do here, and what we have always done and we may take a look at making a change and restating, but what we do is we take a look at, we discount from our merchandise margins customer service discounts and coupon redemptions and shop NBC credit card discounts for opening new cards.

What we have here is, if we take this year, our merchandise margins - you know, last year at this time we instituted minimum margin programs with our vendor community as well as a number of return programs.

And I didn't want to leave on the table that, you know, all of a sudden our margins were dropping. Sometimes we talk about margins and say our margins weren't as high as we like because we had a higher mix of computers.

In this case what we had, we had customer service discounts and other discounts as well, shop NBC discounts on our credit card for acquisition purposes of, you know, a million dollars in customer service discounts greater than last year.

What does that mean? It means because we had a lot of operational problems with our customers from the standpoint of posting accurately there, their charges and their credits, when we ran into customer service problems, we do everything we can, obviously, to handle that problem, and keep that customer on board.

So we had merchandise margins this quarter of 39 and a half. Now, we took away, we discounted that by customer service discounts which were predominantly the excess over last year, predominantly the result of our operational issues and our coupon redemptions. We sat down, out 125,000 letters to our customers. In some cases we gave out $25 some cases we gave out 50-dollar coupons, apologizing for any problems that they might or might not have run into as our system slowed us down.

We also, another comp issue, we charged margin with, you know, another 300-plus thousand dollars in discounts that we didn't have last year with regard to shop NBC, credit card discounts on first purchase, and discounts in the acquisition area.

So our merchandise margins have not eroded, which may be, which may look apparent, the merchandise margins are sitting at 39-five. There's no reason for us to believe that those margins will suffer.

As we start to fix and complete the operational issues, a lot of this discounting will go away. Not all of it. Some of it is shop NBC card discounts. A lot of the customer service discounts and price adjustments that we have done will go away going forward. I thought that was important to note.

I think I kind of said it as best I know how to say it, was that, you know, we did have a high sales quarter and improvement in EBITDA. Then we missed a large opportunity. And as I communicated to a couple of you, a number of you have asked, you know, how do we figure lost sales? What was affected adversely in this system conversion was really twofold.

That is, number one, our ability to monitor sales and inventory on a real time hourly, daily, weekly, monthly basis. Then number two, the kindly processing, the timely processing of payments and credits and those areas that affect our customers.

We believe now that our sales and inventories - somebody just - let me explain why that's important to us. You know, for those of you who have visited us, we are able to monitor in realtime what our inventory is on the screen and what our sales permitted are with regard to how the customer is responding to a particular item that is on television. And we make decisions minute by minute with regard to whether or not we should stay with that item or whether or not we should move to the next.

There were many weeks where that was very difficult for us to do. There were fully, there were hours, part of days, and in some cases a full day where we did not have that ability to monitor our inventory, understand what inventory was on hand, and our systems were so slow that we did not have a minute by minute accounting of how the customer was responding to what we had on television.

When I said that conservatively we lost $10 million in net sales, that is taking a look at mid June through July and stating that, and taking a look at just what we lost from a typical day based on the systems being slow or the inability of the systems to function during the June/July period.

So that's how we got to the 10 million.

By the way, we lost more than that from the standpoint that we had, because we didn't communicate with the customers well, we had, you know, more cancellations. You don't see cancellations because when we deal in net sales, net sales are net of cancellations. We certainly had more cancellations and we obviously had customers that as hard as we attempt to assuage whatever issues the customer may have, I'm sure we have had customers who are upset with our inability to charge and credit them in a timely amount of time.

So number one, we believed that today with an exception here or there, but today we are functioning in realtime and our sales are up and running and that part of our disruption appears to be behind us.

And the secondary is, you know, what else is there? And honestly, there's a hang over of customer service problems because we were not processing payments and credits on time. Or getting authorizations in a timely manner.

What happens is, the people that bought things in June, if we didn't process the charge on their credit card in a timely manner, when they look at their July statement they either don't find the charge or they don't find the credit and they immediately call customer service to find out, you know, what happened to their charge or credit or their transaction information.

Obviously, this has caused an operating cost and we mentioned there or I mentioned that, you know, we have had operating costs there of about $2 million in excess expense in order to have more talk time, more operators on board, just to handle the whole customer aspect of it.

You know, you match up $2 million in operating expense, take the $10 million that I talked about in sales, which I clearly said was conservative, and the intended margin of, you know, 3.9.5 million, and take the operating income out of that of about 3 million, so you've got, you know, 2 million in expenses, another million and a half dollars or million dollars in customer adjustments, $3 million in operating costs, and what it basically says is that, you know, our system conversion has cost us dearly during this quarter and if you look at, you know, how the quarter was going, it's difficult, a little difficult to be exactly accurate on this, but because, because everything was so slow, some of the sales moved within the quarter from month-to-month.

But I would say that, you know, we telemarketed 35 and 40 percent sales increases in May, that we, during the first part of June we were in the telemarketing similar percentages of increased to LY. As you know, we had those very large days during our anniversary where we did close to $20 million in four days in telemarketed sales. Then we started to run into a great deal of difficulty in our ability to do customer service and to manage our sales inventory.

One of the things that came out of the, one of Dick's comments was that, you know, our inventory was high from the standpoint of working capital. As I mentioned in the second quarter of last year, we negotiated a whole return privilege, percentages, and this is not old merchandise, even though our inventory is high. We were not able to accurately monitor our inventory by vendor, by style, by skew during the quarter. And that caused us to see that increase in working capital.

You know, we anticipate that by the end of this quarter, without additional mark-downs, that we will take the inventory and put it into a position where we are running somewhere between seven and a half and eight turns at cost, which is what we strive for normally. It's a temporary working capital issue and we are trying to get our inventory in line without additional costs.

So, you know, the two issues, just to sum them up, was, you know, number one that's how we figured lost sales and revenue. If you want to do some math, would have, could have, on the quarter, and then the issue of the hang over. We believe that we on an operational basis, we're functioning from a sales inventory on line basis, functioning fine today. We get a blip once in awhile, but it's not a blip that affects us overall.

We have teams of the supply organization here in the building and, you know, we expect that this will be corrected totally shortly. We are working through that customer hang over issue as quickly as we can. Those of you that have asked me about August, my sense is that August from a net sales standpoint should run in the high double digits.

As you know, if you were to look at our release from last August, our telemarketed sales increased for last August was in the 35 percent, above 35 percent, 35 to 40 percent range. It's a big month.

But we expect that we will run high double digits this, currently, to give you a sense of trend.

With regard to the third quarter in general, I stated that we believe that, you know, we should have third and fourth quarter sales that, you know, should exceed 25 percent with, for the first time - I guess the second time we did have comp store, double digit comp store increases for the third quarter and fourth quarter.

By the way, let me also state without taking up too much of your time before the questions that, this was not a systems conversion that was haphazard or it would happen on reflection that a lot of things may not have been planned well. I mean, this was in the planning for a year and a half. In fact, we put it off six months because of issues that we thought would have been disruptive.

Frankly, the organization was, you know, somewhat taxed to get it up and running. That was because of the volume increases that we expect going forward and the scaling of our current system. I guess I asterisk that by saying that the process that we were led to expect in many cases did not materialize. And we are doing everything we can to correct it.

All right. Enough of that. On a few other issues, we said that we were going to be doing more stuff with NBC. I don't know if we announced it, but our NBC sale program premiered a few weeks ago and comes up this week again and it was terrific. As you know, we are working with ABC Daytime and they are giving us cross-promotion Friday afternoons. We are having the soap stars here on Shop NBC and there are a number of initiatives with NBC. Other initial Telemundo tests have been terrific and we are going to do a lot of things with Telemundo.

I mentioned on the last call that air time sales have been de-emphasized with regard to the plan and the numbers that we expect to make pretty much are being replaced in many cases by other of our own vendors on the air. We continue with Bose and AOL and a number of other vendors that are involved in the air time program.

Frankly, it never materialized as big as we thought it was going to be. If you look at the opportunity, we just had and kind of missed this last quarter, we don't anticipate that it will affect us in any negative way because we discounted in all our financials by 50 percent the air time losses, if you will, when we put the vendor programs on the air.

We will continue with vendor programs. We just don't see them as aggressive as we did, or I did last year. So as you look at our performance for the quarter, it certainly is not what I would have liked it to be. It is a shame that, you know, that we had to have operational issues affect what was trending as a great quarter.

But I believe that our business going forward will be good and I thought it was also important to understand that the effects on our margin while we still will probably have adjustments in third quarter, our merchandise margins remain very high.

Our corporate governance, we put an area, put a section in there on corporate governs. We felt what has transpired in the past few months with a lot of issues with regard to corporate governance, that we would just be proactive and state that we are certainly in agreement and compliance with the general spirit of any legal and ethical guidelines that are now being espoused.

We have been before, Dick and I always signed off on our Qs and Ks. And felt that we were attesting to accuracy of the financials that we file as a company. With that, Dick, do you have anything to add?

The other thing to note of relevance here is the buy back programs or the sums of the two buy back programs, originally $25 million, approved in August of 2001, a further 25 million approved in July, we have been very aggressive in repurchasing shares because we feel the market opportunity is obviously significant.

Just to bring you totally up to date, as of close of business last night, we repurchased 2.8 million shares for $42.3 million. An average price of $15.18.

You know, we will continue to execute against that program. The opportunity seems to be good at the moment.

You might want to moment, I asked Dick, it didn't look like - we purchased a lot of shares in the last ten days. So that will be more reflected as we announce this quarter.

Well, the point that Gene is referring to, if you look at basic shares as reported on the bottom of the income statement that is attached, the 38 million shares, which seems a little at odds with what we repurchased. That's just the mathematics of how you have to calculate shares. We have been purchasing in July and that only gets weighted based on the day in that calculation.

As of the end of July we have 37 million of basic shares outstanding. When you roll past the end of the third quarter, the fully diluted shares will reflect everything that has happened up to today.

A few of you asked me whether or not we would consider, based on how we feel about the third and fourth quarter in a positive way, and the price and whether or not we would expand the buy back to additional dollars, I would tell you while we need board approval to do such a thing, I am inclined to do that.

I think with that, we'll open it up for questions.

Thank you. At this time we are ready to begin the question and answer session. If you would like to ask a question, please press star one on your touchtone phone. You will be announced prior to asking your question.

To withdraw your question you may press star two. Once again, if you would like to ask a question, please press star one on your touchtone phone.

The first question comes from Stacy Forbes. You may state your question and state your company name.

Hi, good morning. I had a couple of questions. Just so I understand correctly, you guys, the quarter not exceeding your original guidance as you thought it would, was it based on any kind of slow down in retail sales as a result of the economy? Some of your competitors said that July was actually pretty slow. Am I to understand you guys haven't experienced that and it was really related to this operational issue?

It's difficult to separate because we did have a July that was so seriously affected by our operations. But, you know, my sense is that, as I think I stated in the release, is that, you know, we have this maturing opportunity.

My sense is that, you know, our sales - I understand all the economy issues, but I think that our sales going forward will be very positive.

Okay. Is there any - I mean, I'm assuming, I don't know who is at fault, I'm assuming it's the technology company that was implementing the new system for you. Is there any way you will be compensated by that company because of lost business?

Let me answer that in two ways. First of all, we decided we are not going to get involved in, you know, who the company is. That doesn't serve much of a purpose. Number two, you know, we are working with that company to take a look at what the opportunities are to recover certain areas. I think, you know, it would be silly for me to speculate on how that will turn out. Yes, we are looking at that.

Okay.

By the way, we have already initiated that. That's not something we are looking at in the future. We already initiated that.

Could you touch base, last quarter you gave us more detail on the actual revenue per FTE numbers and I know you expected to have, you know, year-over-year improvements in that for the first time in the while because the household business, as dramatic as it was before. Could you give us an update on that?

In our second quarter Stacy, which I think is what you are talking about here, you know, in spite of all the kind of news and noise and everything else that Gene articulated here, the base net sales per home year-over-year was up by 2 percent, which is the first time in I don't know how many quarters we have seen or experienced that.

You know, our belief is it should have been a lot better. But from a directional standpoint, you know, we feel pretty good about that. We expect in Q3 and Q4 that is going to accelerate.

I would actually, you know, reemphasize that, you know, we fully expect double digit comp increases in the third and fourth quarter.

Thanks, guys.

Thanks, Stacy.

Jeff [Kleinfeldter], you may state your question and please state your company name.

It's actually [Dina Friedman] from Piper Jaffrey. In terms of jewelry, I see it's capturing a bigger part of the mix. Has there been any change in the jewelry offerings? Is that attributable to something else?

Yeah, what happened was, which many of you have read about, but again it's a little self-inflicted. Our computer sales slowed down quite a bit to the point where we actually took some of the computer hours and moved them into other categories.

When we took a look as to why, because computer business had slowed down generally, what we did was, we competitively, the retailers had started to tailor their offer and the offers as you have seen on television got as low as strip-down versions, 799 and 999. We achieved success with $1,800 with a flat screen as high as $2,100.

As the world changed, we were too expensive out there for a few weeks.

As we more competitively structured our offer and took our pricing down to the $1,500 range, our computer sales rebounded significantly.

So I think that was a temporary glitch that you're talking to. But I will tell you, you know, that we are looking at and have brought in a number of other categories of goods that while not significant at the moment we hope will be significant going forward.

Great, thanks a lot.

Once again if you would like to ask a question, please press star one on your touchtone phone. Our next question comes from Stephen [Bierberg]. You may state your company and your company name.

Hi, Steve.

How are you guys? Just curious. I got on the call late, so I hope I didn't miss this. In terms of the inventory draw down that you are expecting in the second half, have you quantified the amount there? Or should we expect inventories in general, you know, year-over-year to sort of rise with the annual sales gains?

I think that's really a fair statement. We actually were looking at this the other day, what number we wanted to hit at the end of the quarter.

I did say earlier there was not going to be a margin application to the inventory position because it is not an aging issue yet. Obviously there's a financial implication to the utilization of cash.

You know, we are looking to get between seven and a half and eight and a half turns in cost. And, you know, if you were to take a look at what the numbers are for the third and fourth quarter, it's kind of where we would be. It obviously, we should get - we haven't, but we should get some efficiency.

If we are going to run 25 plus percentage sales increases in each quarter, we should get some efficiency over last year's inventory. Not necessarily take that whole hit. We haven't been able to do that yet. I expect that, you know, that percentage number is probably a fair percentage to put on the LY number.

Last year's inventory from the figure 10-K was 40 million. So sales grew 25 percent and inventory tracked, that's roughly 50 million. You are 75 million at the end of this quarter.

Is it fair to say that over the next six months that inventories should come down by 25 million?

Yes.

That's the boost to cash -

That is a fair assumption. The only thing I would add to that - Dick here - the end of Q3 we would not be there. We're heading into the fourth quarter, the year end position.

You're right. I think that's a good number, Steve.

Good, thanks.

Thank you.

Once again, if you would like to ask a question or have a comment, please press star one on your touchtone phone.

We would like to thank everybody for your interest. Thanks very much for being on the call.