iMedia Brands Inc (IMBI) 2004 Q1 法說會逐字稿

Good morning and welcome to ValueVision Media's first-quarter earnings conference call. Your lines have been placed on listen-only until they question and answer session. Today's call is also been recorded. Before we begin, Anthony Giombetti, Director of Corporate Communications will read a brief statement.

Today's conference call may contain certain forward-looking statements within the meaning at 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 to turn the call over to Mr. William Lansing, President and CEO. Thank you sir, you may begin to.

Good morning. You can see from our press release that the business transformation is well underway. I can tell you that we are largely pleased with our progress today, though not everything is as we would like it to be. What I would like to do is briefly comment on the business over all and then some of the key metrics and then I will throw it open to questions.

In summary, our business is undergoing a very rapid change and almost all of it is in the direction that we want. I'd like to give you a little context. Our business has historically been primarily jewelry and gems, sold to a small percentage of the homes in which we are distributed. We've generally sold to an affluent customer with a greater than $50,000 annual income. Our average order size has historically been well over $200. Now we believe that in order to grow the business beyond the jewelry and gems focus, we must broaden our product offering and lower our average selling price.

If we do those things then our products become more accessible to a larger population and our sales productivity per home will increase. We will be able to achieve growth within our existing distribution. As you know, our sales penetration, the percent of homes in which we are available that actually buy from us, is about 1.5 percent. The penetration rate of our competitors is as high as 8 percent. So we need to offer products, specifically products other than jewelry and gems at lower prices.

Our average price dropped 23 percent to $168 from $219 in the prior year; this is really a dramatic change. Needless to say, with prices down that much it takes extraordinary unit growth to produce revenue growth. And we've achieved tremendous unit growth. We are up 42 percent versus last year. This achievement, I'm pleased to say, represents the highest unit volume quarter in the Company's history.

When you net out the reduction in average selling price with the explosion in unit volume, you wind up with 11 percent revenue growth. Are we happy about that? I would have to say we are very happy with that. Our strategy has been to reduce the average selling prices and increase the unit volumes and that's exactly what's occurring.

Other metrics are also moving in the right direction. Our revenue in home apparel and cosmetics has grown from 17 percent to 21 percent versus last year. Our product diversification initiative is beginning to take hold.

Another very encouraging sign this quarter besides record Internet growth of 37 percent versus last year was the strong growth in new customers. Our new customer count is up 30 percent over last year. Now this is attributable to a number of things; broader product offerings, lower average selling prices and increased marketing promotion. While we don't yet know what the lifetime value of these news customers is and we won't surprised if it is lower than our typical jewelry customer, we do find the growth and customer account very promising.

What are we less happy about? Well, we lost $3.4 million in EBITDA in the first quarter. While we anticipated that the first half of the year would be negative and the second half positive, we would have preferred to lose less this quarter.

Why the loss? The loss was almost entirely attributable to a reduction in gross margin. In the first quarter we averaged 33 percent versus 37 percent last year and 36 to 38 percent in prior years. Now I've said before that I believe that because we have this high fixed cost model, we should operate our business with a view to much higher volumes and lower gross margins. But I think 33 percent is too low. Ideally we would operate in the 34 to 35 percent range; however, over the last quarter and frankly into the second quarter, we are selling inventory at prices designed to move the product.

We've also done a fair bit of experimenting in new product categories and the penalty for experimentation is that not every concept works. Lower prices and lower gross margins are how we recover. This level of gross margin is not structural, not permanent and not desired. It's how we move our existing inventory through the system as we learn, sometimes painfully, what works and what doesn't.

So what's the outlook for the rest of the year? Our annual guidance was for sales growth in the low to mid-teen range, lower at the start of the year. So while I'd prefer to see stronger growth, 11 percent is broadly in line with where we thought we'd be. Based on what we see today we're holding to our previous annual guidance of sales in the low to mid teen range.

Margins and EBITDA were a little lower than I would like, though necessary to move the inventory that we wanted to perch from our warehouse. I think you should expect to see a bit more of that in Q2. While it's possible that the business will strengthen enough in the second half of the year so that we surpass 2003 EBITDA of $6 million; I think it's safer to think about EBITDA as breakeven for 2004.

It's really a timing question. All the metrics other than gross margin are very positive and as we tune our product offerings we expect to operate on higher gross margin. We just don't know whether it will happen as quickly as we would like it to.

In closing, let me reiterate that we're very happy with the progress made in Q1 on strategic metrics like product mix, new customers added, units shipped and average price point decline. I continue to be excited about the business; we have a really strong team in place and the changes we're making are working.

I'll stop now and take any questions you may have.

(OPERATOR INSTRUCTIONS) Robert Routh.

Natexis Bleichroeder. Two quick questions. First, on the last call you had mentioned regarding getting increased distribution for the network that that wasn't really a goal initially you just wanted to kind of clean up the existing high cost inventory and kind of do a little bit of product mix shifting which appears as though you are well on the way to getting done. I'm wondering whether or not your philosophy regarding increasing distribution other than through organic growth on the satellite side and the cable side is more of a priority now or whether you are still going to hold off on that until the product mix shift is what you want to be and make that more of an '05 kind of event?

Second, I was wondering if you could comment a little bit -- the NBC, especially with the VUE closing relationship is and what their outlook is with respect to ValueVision; whether they plan on possibly rolling it in? Whether they view it as a strategic asset or whether they just view it as kind of an investment that at some point could go elsewhere?

Okay. Two good questions. On the distribution side I should clarify, we have interest in increasing our distribution. The point that I really tried to make in the last phone update is that we have so much opportunity within our existing distribution that in terms of priorities, we're really focused on trying to squeeze out higher sales productivity per home in the footprint that we already have. That is not to say that 'were' not interested in additional distribution and we continue to look for distribution every day. Above and beyond organic growth and cable, systems that we're already in, above and beyond growth in the satellite systems we're already in. When you look at our plan to -- we're looking for 60 million homes by year-end. When you look at that kind of a plan, that's not a purely organic growth plan. That does reflect picking up some incremental distribution.

That said, I would say that getting our house in order is a higher priority; getting really compelling value proposition is a higher priority; getting the product diversification to really take hold and work well is a higher priority and with those things in place, I think we would really turn up the dial on distribution in '05.

On the NBC question, I can't really -- I can't speak for NBC, GE. But I can say that we have we continue to have a good relationship with them and work with them and there may be opportunities for us to do additional things now that they have so many additional assets under the umbrella with Universal. We are in discussions about how to extend some of the work that we do. Today we do the NBC store for NBC, and some of the NBC branded product on the web site. We operate that for them. I would imagine that that relationship will expand with the new Universal product.

Great. One follow-up question. I know in the past the Company has bought back stock and obviously you're overcapitalized from a balanced sheet perspective. I'm wondering whether or not the Company has any intention or did buy back any stock in the last quarter? It doesn't look like you did. But given where the stock is now, it seems like it's probably an opportune time to maybe do so. I was also wondering whether you could comment on whether or not management has intended on -- has or intends on purchasing any equity in the public markets to kind of reaffirm their commitment to this business?

We have a $20 million stock authorization -- stock buyback authorization in place. We were not active in the last quarter, but with our stock at the prices that its at today, we think it represents a really good investment. We are torn between the benefit of doing stock buyback and the notion of keeping our precious cash and powder dry for growth. We have a lot of -- we really have a lot of opportunity ahead of us. The growth will consume some of the cash.

That's not to say we couldn't afford to be in the market; buying stock and it is something we look at. At these kind of prices, you can imagine that the discussion is certainly taking place.

Could you give us a sense as to what your average purchase price has been over the past couple quarters or years?

We've had three different share buyback authorizations from the Board totaling $75,000. $75 million, I'm sorry. Under those, we repurchased 3.8 million shares. This dates back like three years now at an average price of $14.20 a share.

Great. I think it's safe to assume that that's what the Company would view as a floor valuation for the equity? Internally?

That's an average of a long time period. I don't know if we've thought of it in the context you just asked that question. That's a product of history. We've been doing this for three years now. Within the last year, we bought back 586,000 in the last fiscal year at an average price of $10.94.

Okay. Fair enough. Thank you very much.

Bob Evans.

Craigal (ph) Capital. Can you comment upon what -- you're changing your mix obviously on the product side. What's working from a new product category and also if you could in the same discussion talk about what have you learned or what's working, what's not working from a new marketing initiative standpoint?

New product categories, you saw that where -- jewelry and gems down a little bit and home apparel and cosmetics is growing; those represent -- I want to say incremental changes from the business we're in. None of those represent dramatically different kinds of product than what we have sold in the past. It's really more of an expansion in air time. What we think works is truly compelling offers, with some level of uniqueness, and the more of that kind of stuff we can do, the more success we have.

Things that demonstrate well; we are big on demonstration product and we are increasing the amount of demonstration product in the mix. (multiple speakers) Things like floor care and vacuum cleaner kind of products. The traditional stuff you imagine you find on television, that stuff works well for us. I give you an example from yesterday where we had a very successful show with that. I think that kind of stuff makes sense.

We plan to expand our electronics offerings. There is definitely more opportunity there. We're doing well with things like portable DVD players. I hope that gives you some kind of a sense.

On the marketing side, we are testing many different kinds of initiatives raging from bill stuffers in the cable billing systems and in satellite billing systems, to reactivation offers for dormant customers. We test a variety of dollars-off coupons. And we are having pretty good success. I would say that the lion's share of the things that we're testing are turning out to pay back very nicely.

We're in the test mode in the first half of the year and I think we really turn up the dial on doing these things once we understand what works and what doesn't. Right now everything looks like very low cost, customer acquisition. We're very pleased with that.

As you are into this job now kind of more of a full quarter, what are you seeing that's -- what's either more of a challenge or a nice surprise? More than when you first started?

I think that the business is fundamentally a product business. I mean this is not entertainment; this is retailing and you're only as good as the product that you offer and how compelling the value proposition is. I think that the surprise for me, personally, is that 168 hours in a week is a lot of hours. If you want to fill up 168 hours a week with truly compelling offers, that is an enormous amount of work.

We've got a lot of energy going into that right now. I imagine that six months and a year from the percentage of truly compelling offers that come out of ValueVision, out of ShopNBC will be much higher than it is today. And the surprise is just how much work there is involved in populating 168 hours with absolutely great stuff.

How do you attack that? Is that by people; getting the right people?

It's a lot of different things. But people are a big part of it. It's people. It's a little bit of strategy. It's focusing on the right kinds of things. The demonstration product, the right kind of prices, learning from your mistakes is pretty important. Having the feedback so we don't repeat mistakes; that's important. As we experiment with new categories.

On the surprise to the upside, I think that the ability to win new customers, the ability to use direct marketing techniques to win new customers is -- at least early read is that it's going the way we want it to go. And that's good because we are really breaking new ground in the television home shopping industry by applying direct marketing principles here. This is not an industry that has traditionally spent much energy on direct marketing. And has relied in general on people channel surfing to the network.

We are really taking this other tack and -- we will do that too, but were taking this tack of investing marketing dollars in very specific ways with measurable results to bring customers to the network and it seems to be working.

Final question. Your gross margins you alluded to down, kind of below what you would consider normal margin levels. Do you -- it sounds like that's maybe carries over somewhat indicate Q2, is that correct? Do you see it improving second half and again can you get back to the 37 percent range or do you think under the new model, is 34 or 35 percent the right target?

I do see it improving in the second half. I think Q2 we're still working off some inventory that we're just working off. We want the air time to be productive. We want to move the product through here. So we will continue to do what we need to do to keep the product moving. Can we do better than 33 percent margin in Q2? I hope so, but I can't promise it. Will we do better in the second half? I am fairly confident we will do better in the second half.

The goal, the longer-term gross margin goal for the company; 37 might be a little bit high, maybe that's ambitious, maybe 34, 35, 36 percent range I think is very reasonable. 37 is a nice to have -- I don't know that we will get there soon. Could we have a quarter like that? Sure. But systematically I'm not sure that is the right trade-off against the unit volume.

Thank you.

Brian Warner (ph) , you may ask your question.

Performance Capital. You actually asked my question, but I am going to ask you another in response to your comment about the 168 hours. If you look at the productivity of the best 10 percent maybe versus the middle, maybe versus the bottom, could you give us a sense what those how those numbers would related to each other? Does the worst 10 percent produce half of the top or is it 25 percent?

We use internally -- we use a ratio of about 1 to 8. Prime time versus middle of the night. In terms of the way we run the business, we've divided up the world into four categories, prime plus, prime, subprime and overnight. But the ratio between the best and the worst is about 1 to 8 in terms of productivity.

I didn't realize I was talking -- I didn't realize about how the day parts play into that. I am going to ask it another way. What percentage of your programming now do you think has really strong product offerings? Because you commented you were light and you are going to get better.

With all due respect to our merchandising organization, I'd say we that we do a really high-quality job on probably 40 percent of our hours. We do an okay job on 20 or 30 percent of our hours. And the balance I think we're not populating those hours well. I think that represents a tremendous opportunity for us if you think about it.

Thank you.

(OPERATOR INSTRUCTIONS) Howard Rosenkranz (ph) .

I'd like to focus more with you on the inventory liquidations you did during the quarter. Could you guess for us or -- what percentage of your hours or volumes emanated from inventory liquidations and what was your sure gross margin on those?

That's a hard thing to answer for you. We try to concentrate our liquidations in off hours and in specific events. We try not to do it kind of all the time everywhere. So we try to kind of pack it in. We have some guidelines in place where we don't mark things down within a certain timeframe because we don't want customers who bought it at the original price to be disappointed and unhappy. That puts a different kind of pressure on when and how you liquidate. We try to liquidate as much as we can on the Internet and avoid putting it on air if possible. I can't give you a straight answer to the question; it's kind of a complicated question.

I guess in theory, just to throw random numbers around if 10 percent of your product was inventory liquidation and in a normal quarter, hopefully, where you get to or what the big guys are at at this juncture; if you had 10 percent in a normal quarter per se if you're where you wanted to be, you would have three or four percent with the inventory liquidation and now you're running 10 or 15? And on those 10 or 15 percent, your gross margin is only 15 or 20 percent, is a lot of that going on? I guess that is what -- obviously the gross margin decline as you acknowledge and the price point erosion were more pronounced than you targeted at least this early in the phase. So I am just trying to get a sense of when that weight is off from the inventory liquidation, is there immediately a pop or is that not the case?

I think there'll be a dramatic improvement in our EBITDA and earnings when we reach a state where we understand really well the product we are putting on air and how it will perform. Remember, we're a business; we've been -- we are a jewelry and gems business; we're experimenting in these new categories. We make mistakes when we experiment; it's that simple. And we own the inventory. Sometimes it has return privileges and sometimes it doesn't. Sometimes we get benefit from vendors in terms of marked down money to move it as opposed to return it. So we work out those kinds of arrangements.

The net of it all is that we do have inventory that probably shouldn't have been on air; that we wouldn't put on air again, knowing now what we know today. And it's a matter of moving through it. Will we be making the same kinds of mistakes six months from now? I doubt it. But we will continue to make some mistakes because we will always be in a process of experimentation. But as a percent of total, I would say that the experimentation will decline and we will be much more systematic about learning -- incorporating lessons from the past. I think your broad description of the weight of it is I think is accurate. I think the percentage of inventory liquidation type stuff will go down.

One quick follow-up on your marketing. Your marketing dollars are going to show up in distribution and selling, right?

Yes.

That number was up only about 7 percent. I mean your top-line was up 11. Since you told us you are going to ramp marketing, what sort of growth can we look for -- I mean -- I'm assuming that distribution dollars are up the lower part of that and the marketing dollars -- distribution dollars are up 3-ish, and the marketing dollars are up 10-ish and they are somewhat even. But can you give us some color on whether or not we will see much more of a year-to-year ramp in the DNS category?

As we go through the back part of the year, certainly as it relates to marketing spending, you will see some ramp up in our spending there, more so in terms of percent increase than you saw in Q1. I think that's a fair expectation.

What percent of the DNS does the marketing represent?

Marketing was a small portion of DNS.

It's small and it varies depending on how we do at the test. This is a dial that we spin and as long as we can acquire customers at well below their lifetime value, we will continue to do it. And where we run out of interesting marketing opportunities that deliver against that balance, we will dial back the marketing spend. It's a moving target.

More than half of what we report as distribution and selling is cable fees that we pay for distribution in the industry.

Thank you very much.

Kathleen Heaney.

Maxim Group. I just have a quick question. At the bottom of your quarterly highlights you talk about FanBuzz but can you give us a little more color on that. We see a lot of statements coming by talking about new that you have gotten. Can you give us an idea how much it's growing or what percent of total revenue FanBuzz is contributing?

The kind of business we do, I will give you in example is the Elvis Presley Store we just picked that up as a client. A more long-standing client would be the National Hockey League. That gives you an example of the kind of stuff we do. We do their branded merchandise, which we fulfill on their behalf and kind of run the e-commerce for that. The company is -- its positive from a profitability standpoint. It's not really -- it's not a drag on what we're doing here. And its well run and doing well and growing.

Is it a key part of our strategy today? No. Is it doing just fine? Yes. We are really pleased with the progress there. We're continuing to look at ways in which we can tighten up the relationship between our TV business, our ShopNBC Internet business and FanBuzz. And I think we are still in exploratory stages.

Thank you.

Peter Evely (ph).

Schneider Capital Management. I was wondering if you could provide us with the return rates in the quarter versus this quarter and year-ago quarter?

A year ago we were at 36.2 percent. This quarter we were at 32.9 percent. So that's a fairly significant improvement in return rates. I would attribute that to primarily the lower average selling price. What we find is a very direct relationship between the average selling price and the rate of return. There is some category specificity to return rates but pricings to be the best indicator. We're pretty pleased. We are going in the right direction here.

Okay. The other question I had was with regard to you mentioned earlier that people were a big part in getting the right offerings. Do you think today you have the right group of people there to get the right offerings in place?

We have a really top notch merchandising organization performing right now. I would say that we have some very capable people who are here. We have brought in a lot of new very capable people and will continue to add new capable people. It's a work in process. I'm very proud of the organization we have on hand today and I think we are going to be in great shape.

Thanks.

Robert Routh.

Natexis Bleichroeder, again. Two quick follow-ups. I know you partially answered this sort of -- but can you give us a sense as to in what time frame do you expect all of the old inventory that you are trying to clean out. When do you think that will all be d done and that you will be kind of just stocked with what you want to sell in terms of the product mix? IS this an '04 event, calendar '05 event or sooner?

And second, regarding the equity -- the redeemable convertible preferred stock held by GE and NBC, I was wondering if you have had any discussions with them considering -- it is obviously a busted convert at this point about restructuring that piece of paper or doing something with it? So more of the value of the company can fall to the common equity holders and less to GE?

On the inventory question, I think you'll see us -- it will decline, the amount of inventory that we're bowing out of here will decline overtime, so you will see some more of it in the second quarter, less than the third quarter. And I would say that by the fourth quarter, we ought to have product that's largely the kind of product we wan to have in place. I think certainly by next year we're feeling very good about the inventory.

I should be careful about the way I describe this. It's not that -- it's not that we have a bunch of stale or obsolete inventory; our inventory is really pretty clean. It more goes to the price at which we have to price it to move it on air. Some of this product is just not the most natural project to have on-air. And I will give you a specific example. Fitted apparel; something we tried, it doesn't make that much sense on air if you think about it, although when we did it we thought it made sense. The reason we thought it made sense, you take branded fitted apparel, and you say -- well we are kind of upscale and it's consistent with our demographic and it's more of a department store kind of branding approach to apparel. That part of it makes sense.

And then when you think about the way women really buy fitted apparel, they like to try it on, and it makes sense to do it in a department store in a changing room. And so you say well what's that doing on television? That's the kind of lesson that we've learned the hard way. And that's the kind of inventory we've been moving out at thinner margins than we'd like.

I think those kinds of lessons we've learned and we won't repeat those mistakes; I'm sure we will make new mistakes. I just don't think we will make them of the same magnitude. I am feeling pretty good about how we will be in the fourth quarter. Third and fourth quarter I should say. On the convert, we have not had those kinds of discussions with GE. I really don't have anything else to offer you there.

Do you have any intentions of possibly having them?

I think if they are interested in restructuring the paper, of course we would talk to them about it.

Thank you very much.

Steve Baronburk (ph) .

Golphen and Glossburg (ph) . One quick question on FanBuzz and then a more detailed question. Whether or not it grew above or below the rate of overall company revenue growth for the first quarter? And could you discuss a little bit the interaction between TV sales and Internet sales? The reason why I ask is if you back up the Internet sales, the growth rate of what would be FanBuzz plus TV sales is just in the mid single digits. I think you report your revenue for FTE combining Internet NTV, so I am a little curious on how you view that and how sales are directed? Maybe from the TV viewer to the Internet or vice versa?

The answer to the FanBuzz question. FanBuzz in Q1 grew actually at about double the rate of our total sales, so it would be in the mid-20s. It's also a relatively small portion of our total Company though so it doesn't materially impact top-line. Let me speak to the relationship between TV and Internet. We think of this as a unified business. So much of the order capture for what goes on air happens on the Internet site that we have to treat them as two sides of the same business. The way we think about the business is that we have a relationship with the customer and the customer comes to us on television at the network and watches product there, product offers there; sometimes orders on the Internet, sometimes orders through the VRU, sometimes orders with a live operator. And then the same customer or different customers buy from us on the web site, sometimes it's the products that's on air, sometimes its product that's never aired.

But it is still the same customer -- often it's the same customer we had this relationship with the customer. We have a direct marketing view of the world which is you start with a relationship with a customer and then you work with the customer through multiple media. Frankly, we're doing increasing amount of direct-mail and catalog with our customers which seems reasonably productive and I think we will get better at it.

I think it would be misleading to subtract the Internet business and look at the TV business independently. I think they are just very connected. Now that said, there is an opportunity for the Internet business to grow even more, even faster and I would say we have underinvested in the opportunity. Most Internet retailers don't have the kind of -- they certainly don't have television network behind them and they don't have -- they tend to have traffic issues. After you get through the first half-dozen Internet retailers, the biggest problem for all of these Internet retailers is getting customers to show up at their site. That is not a problem for us. Because we have lots of traffic there. I think there is a big untapped opportunity with us to grow the Internet business.

Do you have any idea how your Internet sales as a percentage of total sales compare to your competition?

We tend to benchmark than QVC and HSN meaning our Internet business which has been around 20 percent of the total company is higher than you would see at the other two major networks. But we just spend a lot more time leveraging that with our television asset compared to what they do.

Last question. Any sense for how much of your -- what percent your Internet business is Internet only as opposed to sort of TV related?

20 percent. That's a rough number. That's a pretty rough number.

(OPERATOR INSTRUCTIONS) This does conclude the question and answer session. I'd like to turn the call back over to Mr. William Lansing for closing.

Thank you very much for joining us today. Good day.