iMedia Brands Inc (IMBI) 2002 Q4 法說會逐字稿

Good morning and welcome to ValueVision Media fourth quarter and year end 2002 earnings conference call. All lines have been placed on listen-only mode until the question and answer session of the conference. Today's conference is being recorded.

Before we begin, Anthony Giambetti, Treasurer of Corporate Communications, will read a brief statement.

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

I would now like to turn the call over to ValueVision Media's Chairman and CEO, Gene McCaffery. Thank you, sir. You may begin.

Okay, thank you. Good morning. I'm with Dick Barnes, our Chief Operating Officer, CFO, and Nathan Fagre, our Chief Legal Counsel. Thanks for joining us this morning. I'm going to go over some of the key points in the release and then I'll have Dick explain a few things on the RLM and then I'll come back and talk about our guidance for the quarter and 2003, and then we'll open it up for questions.

As we said in the release, sales were up for the fourth quarter 16% over the prior year period. Internet sales continued to improve and grow at a very brisk pace. If you look at our annual numbers, the net sales for the year were up about 20% and our Internet sales for the year were up 50%.

As I continue to mention with regard to Internet sales, it's very difficult to separate Internet sales other than the fact that they are what they are from television sales because the Internet productivity is the direct result of improved and additional marketing approaches that we are taking on television to expand the opportunities for sales on the Internet. We also mentioned that we added 6 million homes for the year, which is just under a 15% increase in homes, or 6 million on 44 million.

You know, I stated in the release that in the past couple of years, we've tripled our distribution and almost quadrupled our sales. As I have talked to a number of you over the past few weeks, it's true that we've had a number of fits and starts, and I mentioned some of those in the press release. And I think it's fair to say that we're committed now to concentrating on improving our sales per home and providing some consistency and reliability in our earnings going forward.

We have been investing in developing a merchandise organization to accomplish this. A number of the more senior people that have joined the company in the past few months are noted. Most particularly, Steve Danker, [INAUDIBLE], and Liz Haesler, who we have mentioned before. And we've also brought in, into the organization, a number of people to deal in the categories of cosmetics and electronics and accessories, as well as health and exercise.

And as we look at this whole conversation that we always have about diversification, we put a staff into the home business last year, or actually about 18 months ago, and our home business has gone, in the last two years, from 0 to about 14% of our business. And of course, our home business is a good business from the standpoint that it's got lower return rates than our jewelry business and maintains margins of a jewelry nature.

So, you know, as we've invested over the past six months or so, in developing staffing, we would hope that this year and subsequent years that we will make much greater strides in this whole diversification, which you've heard so much of. Unfortunately, up until this date, it's really been more on the computer side than it has been any other side. The company is now committed or has made an additional commitment to making sure that this diversification takes place.

You know, I have also had some questions about, you know, whether or not we should be going into this diversification and whether or not, you know, because we seem to sell better jewelry, that should not be an approach we should be taking as opposed to worrying about looking more like somebody else and diversifying the product. I will tell that you, you know, while we many times talk about the fact that we sell better jewelry and that our tickets are relatively higher than the competition, while that has a positive -- while some people may have a positive view of that, I think it's more important to maintain that business and get better at it, but to diversify so that, you know --.

If you look at our homes past, you know, we've just, as you noted in the press release, we've gone just over the 50 million FTE mark, which has been, you know, relatively dramatic over the past few years. And, you know, it's my sense that because our price points are three and four times higher than the competition that many of the houses or the homes that we pass in cable and digital are homes that do not participate with ValueVision or ShopNBC because our price points are too high. Particularly in the jewelry area at the moment. But also that it is limiting to provide only one, maybe two categories, so that you can provide some additional opportunity and categories for people to purchase. So I think it is necessary for our future to make sure that we bring in more popular price points and to expand the merchandise categories.

You know, I did get a question this morning from somebody with regard to, you know, what does it mean by investing in distribution and not necessarily investing in the merchandising area? You know, if you look at our general administrative expense over the past couple of years, you know, if you were to take some of the additional costs of fan buzz out of our GNA for the year, you could see that general administrative expense has remained virtually flat over the last couple of years. There is a bit of an anomaly in this particular fourth quarter based on some LY numbers, but we kind of run in that 3, 3.5 million dollar range of GNA.

Because of pressures successful or unsuccessful, and looking at our bottom line, you know, we have maintained a GNA that's relatively tight, and, you know, looked at, you know, most of our investment going into the whole distribution side of the business and, you know, we have recognized that that was probably short sighted in order for to us develop better merchandising programs obviously the investments going to take place. That's basically what I've said in the release and with the people that have now joined our company. And by the way, some really terrific executives from very well-known companies with great track records.

So as you look at our merchandise margins, there was a great concern that our margins last quarter were in the 31% range. Our merchandise margins this quarter were approximately 38%. We took an additional two points off that margin for some promotional programs in the fourth quarter as the fourth quarter retail business got a little difficult, but I would assure that you whatever difficulties we had from a mix amends and operational concerns with regard to the implementation of the ERP systems, our merchandise margins have improved and continue to improve, and we expect that that will continue.

Why don't I do this. Why don't I turn this over to Dick Barnes for a moment and let Dick take you through the writedown of our RLM investment, and then I'll come back and talk about our guidance for first quarter and 2003. Dick?

Alright, thanks, Gene.

We have been pretty open in the past, [INAUDIBLE] media and the investment in Ralph Lauren media. You can see in our fourth quarter we have taken this decision based on current projections of the business and current status in the business to write down our remaining investment in that enterprise, which is about $31 million as of January 31st. What this means going forward is that we have a zero cost basis on the books for this investment, and we will no longer record our equity share of the losses of the enterprise, which you would have seen going through, while operating income on the line that's equity liquidity share of affiliates. So going forward, that will not be there.

Obviously, the partners, the partners being PRL, NBC and ourselves, have been in all sorts of discussions here as it relates to what we do with this enterprise going forward. We do believe there is some potential to make this thing commercially viable, but it certainly has not lived up to our expectations. From the standpoint of its cost structure, the partners have also been doing a lot of work amongst themselves and how we can adjust the cost structure of this enterprise in a way that it can be at least economically viable going forward.

And in conjunction with that, ValueVision has agreed to rip up the existing cost plus services agreement that exists. This is a ten-year cost plus arrangement with RLM and from the standpoint of RLM, was probably not, you know, commercially logical in the sense given the size of the business, which is quite a bit less than we originally expected.

Now, in compensation for ripping up the services agreement, we are going to receive a one-time $11 million cash payment, which we should receive within the next week or so. This compensates us, both for the investment we made in dedicated fixed assets for Maryland, Bowling Green, and Kentucky, but also for lost income from the agreement that will no longer extend beyond the current year. So we will continue to service RLM until December 31st of this year, at which point in time RLM will be free to tender the business and we would be free to match that if we so choose.

The accounting for the $11 million we're doing it as follows: We're going to write down dedicated fixed assets, primarily Bowling Green, Kentucky to the tune of $5.9 million. We're going to set up, or have set up, $2.6 million of deferred revenue that we'll recognize against the remaining term of contract which runs through December '03, and we recorded $2.5 million as services revenue for early contract termination in Q4.

The upside of this, we think it is a win-win all around. Rlm gets a more reasonable cost basis for its services arrangement going forward. We obviously get the 11 million, which probably covers the capital investments that we put in to support this enterprise. As a result of writing down the Bowling Green asset, we also have a distribution infrastructure there that we think is a much better position from a cost standpoint going forward. And then we have the flexibility to either match any external quote that Ralph Lauren Media might get or to decide if we want to put that facility to more strategic use.

Do you have any comment on taxes?

Yeah. The other thing I want to comment on is taxes and the accounting for taxes in the P&L. As you can see, for accounting purposes in the fourth quarter, we have not tax affected the loss, predominantly driven, obviously, by the RLM investment breakdown.

What this reflects is the fact that we are taking a very conservative accounting position by not carrying and creating a deferred tax that we would carry into next year. What that means for next year is, with the projections we have on the table for profitability, we would not, in fact, record any book tax impact or tax expense against that as we utilize our existing net operating losses and capital loss carry forwards. So that's -- I wanted to make sure that was clear in the for accounting for taxes in the fourth quarter P&L.

Let me talk about the outlook for 2003 or fiscal 2004. As you can see in our release, we said that consolidated net sales would be in the 630 to $650 million range, 14% to 17%. Our EBITDA somewhere between 25 and 30 million dollars. We expect to get between 4 and 6 million additional homes if we are not able to accomplish a particular deal with certain cable companies, and comparable net sales for FTE in the low to mid single digits.

And then our outlook for the first quarter is a pretty difficult call. You know, we're saying 135 to 140 million, up to 5% over the prior year period, and EBITDA flat to up 2 million. You know, it's based on what's going on from the standpoint of the international complex and potential for war probably sometime in the next day or so. You know, we would expect, as we have in the past, to have some disruption in our business for a short period of time, hopefully a short period of time, and that would be dependent upon the drama, if you will, or the results of the military operation that's now being contemplated. If the military operation is, you know, relatively quick and over relatively soon, we would expect a minimal disruption.

But initially it will affect our business and so we've taken a very conservative view towards the quarter, not because we know exactly how this is all going to turn out, but we figured it was best for to us put a conservative spin, if you will, or a number out there and beat it, as opposed to putting something out there that might have a trend attached to it, or whatever the case may be.

As far as the year goes, we feel real good about the year. You know, if you think about what Dick said, you know, we, in the release we mentioned that we took a loss last year, or this year, this past year, of just under $6 million in RLM losses. We'll no longer be taking those losses. The NOL issue that Dick talked about, you know, we actually, from a balance sheet standpoint, we have no other overhangs. You know, we would expect that our margins will continue to improve.

As I mentioned in our release, we have no expectation of, you know, taking risks with our sales from the standpoint of attempting to diversify categories at the expense of our jewelry business. Liz is working with the development of these other categories but is also working to improve our productivity in our better jewelry business. So we expect that our margins will be good. Actually, most of the categories, maybe with the slight exception of electronics, but all the categories that we're adding are categories that have very, very good margins.

Our sales trends, we would expect, also, to be very good. And, you know, not the least of which, if you look at second and third quarters, we cycle some very difficult performance that was self-imposed, regardless of whatever the economy may have done, or may will do. The late, you know, after June of last year right through September, October, and probably with some spillover into the fourth quarter. And what I mean by spillover is, that we, you know, probably had such difficult customer service that we probably alienated customers that probably affected our business as well.

You know, our customer service, as you can see in the releases,is one of the highlights that we're working on and have been working on for some time. And you know, we would expect that we should have a very, very good year. And without a lot of distractions.

So with that, let me 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 Touch-Tone phone. There you will be announced prior to asking your question. Again, to ask a question, press star one.

Our first question comes from Stacy Forbes. You may ask your question.

Hi, good morning.

Hi, Stacy.

Just a couple of things. You had given us, I think last quarter, kind of a same home basis revenue per home improvement, you know, first quarter, second quarter, third quarter. Could we get that number for the fourth quarter?

Okay. I think that the same home increase for the quarter was 1%.

Okay. And that's just because -- is that due to the less, you know, you guys did promotions so you were selling at a lower cost, or is it volume or both?

I think a little bit of everything. You know, fourth quarter was a generally difficult quarter in retail. We did take, as we said, two points of margin out, which obviously affects the top line retail sales, as well. It's hard for me to say, you know, what amount of disruption we might have caused by folks that we did not handle as well as we should have, you know, back in the second and third quarter.

Also, as we mentioned there, we took on, you know -- when we give you those numbers per home, you know, there is another couple million homes in that number that are incredibly unproductive. You know, you guess there's an argument that says the homes that have been around for a while you'd think would be more productive and the homes that are coming in that are not very productive, is there a wash? I'm not sure I know how to answer that. Up 1% in the quarter. So I guess you could call it a comp store increase of 1%.

Okay. And then you guys have obviously been focused on merchandise mix and gross margin improvement and whatnot for quite sometime. There always seems to be some issue that comes up that prevents you guys from being able to achieve your goals there. I know you have some new management coming in, or that just came in, that you are expecting to help. But what's really going to drive that? Are you expecting not to add full-time equivalents like you have been adding, or what's the major change that can give us more confidence?

Well, I think that we do think that we can add, you know, another 4 million to 6 million full-time equivalents this year. Picked up just over 2 million just in the last quarter. The comment, I guess, should be, we're just not -- I mean, we certainly didn't plan the disruption of the ERP implementation. We obviously added, as you can see by the release, an additional professional assistance there in management in Steve Danker.

My level of confidence in the management that has joined the company, most of it being, frankly, incremental, particularly in the merchandise area, is that, you know this is a year that doesn't -- should not, does not have distractions, that we are just going to have the entire company intent upon raising our sales per home and improving our profitability.

Okay. And then just two other small things. On the ERP, you had said on the last call that you expected to decide how to pursue or if you were going to pursue lost revenue. Have you made a decision there?

No. We have chosen to first attempt to a negotiated solution. This approach is currently underway. And we obviously will keep any of our other options open if that doesn't work out. But we in the process of attempting some negotiated solutions with regard to that issue now.

Okay. And this is the last thing. On the Ralph Lauren Media, you guys were at cost plus 10% or something like that before. In serving that contract through December '03, should we just assume it's something less than that or is there a number you can give us there? And then, do you have any plans for that capacity at Bowling Green once that, or if that goes away?

Sure.

Stacy it's Dick. Two things. One, between now and December, we will provide services then of 20 bucks an order, which probably doesn't have a lot of meaning to you, but it is more of a market basis for them in terms of being rational. And from our standpoint, it covers our costs in a little bit. Probably no cost plus ten.

Relative to capacity in Bowling Green, for starters, my guess is we will continue to service RLM after December 31st, but that, potentially they have the right to go elsewhere. We have a right to match that. We are currently doing some aspects of our business there. The MUC store, which is not huge. We do elements of our lamp and home business out there of. We do cosmetics, health and beauty aids from that facility. We also are consolidating aspects of Fan Buzz's distribution empire, so to speak, into that facility as well. So from our standpoint, we think it's a good cost effective facility right now and, probably whatever happens to RLM will fit into our plan going forward.

Okay, thank you.

Thank you. Your next question comes from Rob Brown. You may ask your question.

Hi this is Rob Brown from [INAUDIBLE] Capital You mentioned sort of a 3 1/2 to million dollar SG&A run rate, or G&A run rate. What's kind of your run rate for next year, or maybe as a percent of revenue, would you say going forward with the added management and sort of the new kind of look of things?

Dick, do you have that?

G&A next year is inclusive of Fan Buzz, of 3.5 million [INAUDIBLE], referring to the [INAUDIBLE] of Fan Buzz. But inclusive of Fan Buzz, that will probably run in the $4.5 to 5 million range, something like that.

Okay, thanks. And as you look out a year from now, what's sort of your target or realistic expectation of revenue mix compared to today?

Well, I think the revenue mix this year, you know, we don't expect that we're going to have a dramatic difference in our revenue mix probably through the next two quarters. You know, the organization, I mean, you know, if I made a mistake in the past it was that we hired folks to look at developing some, you know, diversification of these product lines, and we probably didn't invest enough time or in people to make sure that we had it right before it went on the air.

What we're doing now is we have the beginnings of an organization in place that is now testing. And, you know, we test a couple times a week different categories. And I would imagine that each category will come on board as we all feel and Liz and the balance of us all feel comfortable that those categories are incremental and not just a particular trade of jewelry business against some other category.

So I don't think you will see a dramatic change in our mix until we probably move into fourth quarter. And then, as I mentioned in the release, I think that you can expect from us in, let's say late second quarter, beginning of third quarter, a progress report on where we think some of these numbers are going to come from.

Okay, thank you. Also, have you targeted a gross margin range looking forward? I know, you said it should improve over this year. So your guidance, what kind of gross margin range do you expect?

Well, I think that our merchandise gross margins, you know, should run between 38.5 and 39.5% because everything that we're adding, with the exception of electronics, are high margin goods. Of course, the opportunity will be when we get into certain aspects of health and cosmetics. There could be a fairly significant margin uptick because of the continuity aspect of those merchandise categories. But I would hesitate to go any further than the 38.5 to 39.5.

Just to add a comment to that. On the total company P&L, it will probably average around 38 when you factor in total, and other things that impact the total company margins on top of the merchandise margins.

Okay, thank you. And if you could just comment on your plans about buying back stock. Do you continue to do that? Do you plan to continue to do that? Thank you.

Well, since mid January, we have been in a blackout period through today. So we've been in a normal self-imposed quarter end blackout. It is our intention to buy back shares.

Thank you. Our next question comes from Greg Wyrick. You may ask your question.

Asked and answered, thanks.

Thank you. Our next question comes from David Brenner. You may ask your question.

Yes, good morning.

Good morning.

I had a question for you on Comcast AT&T. Wondering what you could tell us just about how the new company, or what negotiations, if any, you've had with them, and the possibility of a large-scale carriage transaction there?

Unfortunately, I'll probably skirt the answer, only because we have had as recently as two weeks ago, I had some discussions with the folks -- with NBC about some issues with regard to Comcast and AT&T, whereas these discussions --. As you know, NBC Cable represents us. It's very -- you know it's very -- there's a lot of speculation, you know, based on the liberty and liberty issues and what's going to happen with QVC. First of all, I don't know any of those answers, obviously. We don't know what's going to happen.

And number two, our discussions with AT&T and Comcast have always been very difficult, but we continue to have them. For me to project, you know, whether or not we're going to have a fairly large-scale deal is just not appropriate for me to guess. I mean, we currently have, you know, somewhere in the neighborhood of, oh, I don't know, I think it's about a million to a million and a half homes on Comcast, and we probably currently have somewhere between 3 1/2 to 5 million homes on the AT&T. So until you get a deal, I just can't speculate.

Okay. Great. And second question is with respect to the Norwell Television Station, is that something would you do again or was that sort of a one off thing because of the Paxon sale?

Well, it was a -- I would say to you that it was a one off thing because of the Paxon sale. I would also say, though, it has prompted, you know, a plan, or a consideration of a plan, to take a look at market where we think there's, you know, some, there might be some delay in us being able to get in those markets, take a look at the value of those television stations, determine what the marketability of those television stations would be at a later date, and whether or not the cost of those television stations, you know, makes sense financially, based on our best assessment assumptions of what sales per home would be in those markets.

We're going through that review right now. Not a general review of every market we're not in of television stations but of what we would consider to be significant markets, taking into consideration what I just kind of laid out. I don't have the result of that review, but I will have in the next few weeks.

Okay. Thanks very much.

Thank you. Our next question comes from Peter Iso. You may proceed.

Yes. A couple of questions. When I look through the numbers in terms of your goals for this coming fiscal year, it looks like it works out to about a little over 12 bucks in terms of sales per home versus about 11.75 this year, which represents a little over 3% sales per home increase, which given what happened this past year in terms of your Oracle systems debacle, it would seem like -- Are you setting the bar low or are you -- it just seems like such a very low goal in terms of HSN being over $20 per home and QVC over $40.

I think it's fair to say that we've decided, based on everything that's going on, to be very conservative. I mean, you look at -- if you look at, you know, 31 point margins and, you know, the third quarter, and you look at what caused those, and if you look at all of the sales we lost, and I actually kind of laid some of the sales out in some of the quarterly releases that I thought were reasonable sales losses, we have just elected not to go in and build a very aggressive plan based on, you know, taking a look at all of those ingredients.

You know, I think that if -- I mean, one of the criticisms is that I think that we have built fairly aggressive plans in the past and maybe not considered what it takes to grow as quickly as we have. You know, when you look at -- I did this for another reason, but when you look at HSN, with sales, you know, over $20 a home, and this was for a different question, but if you look at the mix of our satellite homes versus our cable homes, and if you were to take some sense of trying to equalize the performance of satellite and cable, our sales per home, relative to HSN comes out today.

If you take $6 or $7 in one particular satellite group and another $8 or $9 in another satellite group and then take the somewhere between $17 and $22 in some of the analog cable homes, we come out to well over $15 a home in sales because we've got 17 million, I think that's the number, 17 million digital homes on a base of 50 versus HSN having 17 million digital homes on a base of, you know, 75 to 85 million homes.

I'm not trying to make excuses, I'm just saying that as I've looked at all of the issues from the standpoint of, you know, putting aside the ERP issue, which is, you know, probably worth a considerable amount of money in upside sales and profitability. You know, I probably did not consider what it was going to take to, you know, pick up that 150, $200 million in distribution costs, and I've just decided that, you know, this year, I think your observations are fair. But I just decided that this year we were going to come out with guidance that was moderate, conservative and, you know, for a change, you know, have us at a year that absolutely beats the guidance on the street.

Okay. Thanks very much, Gene.

Thank you. Again, if you have a question, you may press star one.

Our next question comes from Ken Teller. You may ask your question.

Yes. Were there any shares bought back in the fourth quarter? What is the remaining authorization on the buyback?

there is not any shares bought back, and, yeah, go ahead, Dick.

Yeah. The remaining authorization from the second to last authorization the board gave us, we have about $2 million left, and we have not yet spent anything against the $25 million in the final authorization that was announced with our third quarter results.

Let me just reiterate that, we do plan on buying back shares.

Thank you.

Okay. Thank you very much. I appreciate your interest.

Thank you. Again, if you'd like to ask a question, press star one.

Okay. I think that in the absence of some other questions, I thank you for your interest and for the call. We certainly plan on having good quarters and a good year. Thank you very much.

That does conclude today's conference. At this time, you may disconnect your line.