iMedia Brands Inc (IMBI) 2004 Q2 法說會逐字稿

Good morning and welcome to ValueVision Media's second quarter earnings conference call. (OPERATOR INSTRUCTIONS). Today's call is also being 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 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 Mr. William Lansing, President and CEO. Thank you, sir, you may begin.

I would like to update you on our progress and then answer your questions. The second quarter performance was generally what we expected and consistent with what we told you to expect on our last call. Our revenue is up. Our customer growth is up. And our EBITDA loss of 3.2 million is what we said it would be, approximately the same as it was in the last quarter.

Behind these numbers there is a story. Our overall strategy has been and continues to be to diversify our product mix slowly, and to make our products more affordable so that we can sell to a larger percentage of the homes that we pass.

While we remain committed to our jewelry business, we have continued to invest in non jewelry categories. Home, apparel and cosmetics accounted for 17.9 percent of sales versus 14.5 percent a year ago. We'll continue to build our non jewelry businesses, but slowly to insure that we don't damage our jewelry business along the way.

Making our products more affordable is a key part of our growth strategy. You saw in the first quarter that the average selling price of our products had come down dramatically to $168 from the mid 200's the year before. The lower ASPs have continued in the second quarter but not to the same extent, and we're pleased about that.

Our second quarter ASP was $186, down 21 percent from the prior year, but up from the first quarter. So we still had to produce very high unit growth to show revenue growth, and we did. Our unit volume growth was up 36 percent versus a year ago. We netted out higher unit volume and lower ASP with 12 percent revenue growth to $161.5 million.

We believe that making our products affordable is important and we will continue to focus on doing this. But lower ASPs are not the only tool. We're continuing to use Value Pay, that our name for a spreading of purchase over a number of monthly payments, to make our products more affordable. We have been very successful with this strategy and we have experienced very low bad debt. We intend to continue to emphasize Value Pay in the future.

Now there is a cash impact to greater use of Value Pays. Our receivables will grow as we finance our sales in this way. However, we believe that this is absolutely the appropriate use of our cash -- working capital to support growth. The unit volume growth has been extraordinary. We have had 3 quarters in a row with unit volume up over 35 percent. And the decline in ASP is generally good because it makes our products more affordable and accessible to more people. But it does mean we have to work harder to achieve revenue growth; happily we're doing that.

Other metrics continue to move in the right direction. Our new customer count is up 33 percent versus a year ago. Our marketing initiatives are very promising. We continue to test a wide range of marketing initiatives to fuel customer growth. And we will continue to expand those initiatives in the second half.

This week marks the launch of two very important initiatives for us, the network relaunch and the launch of Our Top Value. First the network relaunch. Any of you who have tuned in this week have seen the dramatic overhaul in our on-air look and feel. I feel comfortable saying that today our look and feel is a cut above our competitors. You can see from the new design that product is the start of the show. We have enlarged the presentation space to do is. The graphics support elements are all about elegance and economy and communication. Our customers can now see critical information clearly and quickly and presented in a consistent manner. It is easier than ever to figure out what the product costs, what its attributes are and how to order it.

Our Top Value. We have launched the Our Top Value initiative this week with good early results. OTV, as we call it internally, represents a daily deal with really compelling value. We air the offer 8 times per day or until we sell out. And we intend to sell out. This offer consistently has higher air time productivity than the offer it replaces. It is a new way of doing business for our Company, one that gives the customer more value and gives us higher sales and profit at the same time. Our vendors are key partners in this initiative, competing with one another to provide offers that are sufficiently compelling that they are in the right to the OTVs.

Now you're probably interested in the outlook for the rest of year. We remain comfortable with our previous annual guidance of sales growth in the low to mid teen range. Our 12 percent second quarter revenue growth is in line with what we thought it would be. Margins are still lower than we would like and that will change. In the second half we expect margins to move upward.

In the second quarter we cleared a lot of old inventory. Today we are pleased with our inventory position. At $64 million we're comfortable with the level, and we're also comfortable with its age and composition.

Our EBITDA will also improve from today's levels. We expect the second half to be positive, though that is largely based on our very important fourth quarter. In the third quarter we will narrow the EBITDA loss, and we expect a strongly EBITDA positive fourth quarter.

As we indicated in our last call, we're targeting EBITDA close to break even for 2004. That is largely a question of fourth quarter performance, and we could come in a little above or a little below break even. In closing, I would like to say that I am very pleased with the progress in the business. We have an excellent team in place, some veterans and quite a few new members of management. The business continues to grow healthier. And the potential for both revenue and profit growth becomes more apparent every day. I'm happy about our prospects for the balance of the year. I'm going to stop now and take any questions that you have.

(OPERATOR INSTRUCTIONS). Bob Evans.

Craig Hallum Capital Group. Can you talk about margins a little bit more, Will, in terms of where you expect improvement, but where do you think they can normalize out to you once you get the business running the way you expect to?

Good question. Our margins in the second quarter -- our gross margin was 33.4 percent, which is about the same as it was in the first quarter, 33.3 percent. That is lower than we would like. The business has historically fluctuated between 34 and 37 percent gross margins. We would like to move them upward a point or 2 over the next 6, 12, 18 months. That would be very healthy for the business. We certainly pick up profit quickly if we can push the gross margin up in that direction.

I will say that the longer-term strategy for the business, and we're talking 24 to 36 months, is to experiment with lower gross margins at that point. Because there's no question that we can make it up on volume if we have enough viewers. And so as we broaden our audience, as we broaden our penetration, as we find ourselves successfully selling into more of the homes that we pass, I think that we can really run a business where we make it up on volume. And we see the beginnings of that with our computer business where we have a much lower gross margin, but we really do make it up on volume.

That said, I think that we're still too under penetrated and our audience is not big enough for us to really supported lower gross margins. And so I think in the next year anyway you're going to see us trying to get the gross margin up. The gross margin that you saw in the first and second quarter did reflect clearing a lot of old inventory and a lot of experiments -- I would say diversification experiments that didn't work.

Will this continue? We feel really good about the inventory position today and with what we have in the pipeline. As we diversify our product mix there will always be mistakes, but I don't think mistakes of the magnitude that we have made in the past. And so I feel comfortable saying that the gross margin should go up a point or 2.

And can you also comment -- I know you've hired a number of new people over the last quarter or 2. Is your team set? What other areas do you need to strengthen? Can you comment a little bit more there?

Absolutely. I think there is an ongoing process of bringing in the very strongest talent we can possibly bring in. And as we grow as a Company and as this becomes a ever more dynamic place to work, I think we will attract better and better talent. If I think it never stops.

Over the last quarter we brought in lot of new merchants and a bunch of new hosts. We really focused on the merchandising side and expanding our merchandising operation parade because we believe that product is the beginning of the whole business. And if we have really compelling products at compelling prices our customers will buy from us. And so we're putting a lot of energy into that. We have made hires in other areas, but I would say that the biggest ones are merchandising and the host ranks.

Your accounts receivable is a greater use of cash than I had expected. Could you elaborate there?

Yes, absolutely. Two things. One is as we grow our accounts receivables are going to go up. That is kind of a simple math. But the other factor is we have emphasized Value Pay more in the last quarter been in times past. So just a brief digression on Value Pay.

Value Pay is where we still charge a customer's credit card, but we charge it not in one transaction, we do it over a period of months. So the -- when $100 purchase turns into $333 purchases that is Value Pay. And we would hit them -- the credit card over three subsequent months. It increases the bad debt risk a little tiny bit because there is the risk that the credit card isn't there. It expires or it is over its limit when you go back months 2 and 3, but that is a very small risk.

What it does mean though is that we're financing that transaction until we get -- until we collect the money. And so increased use of Value Pay is while making the product much more affordable for the customer and expanding our business, does contribute to our accounts receivable position. And that is the single biggest factor.

Would you expect that to continue?

It's been a very successful strategy for us and I think it will continue, yes. I think that you go back to our competitors with average price points in the 20s -- $20 range and the $40 range, and then you look at ours at $186 and you say, well, would you rather bring down your average order size and your average selling price, or would you rather find another way to make it more affordable for the customer? And you can see the challenge we have had as we have brought down ASPs and increased the unit volume that the revenue growth, while still attractive, isn't what we wish it were. We wish it were even higher. And it is because ASPs have come down so much. So I'm not anxious to bring ASPs down a lot more. And the easier, better way to make product more affordable, get closer to where our competitors are is with Value Pays. So yes, I think you will see it continue.

Howard Rosenkrantz.

Howard Rosenkrantz from Value Advisory. The questions were touched on that I wanted to ask about. Could you quantify for us how much of the bleed in gross margin you would attribute to inventory clearance per se?

It's a little bit hard. We have a combination of clearance which happens at set times and we have markdowns which occur throughout our business.

I know it is a little subjective, but (multiple speakers) something like that.

Call it 1.5. But I mean it is subjective.

At this juncture do you feel like you're pretty much done? Obviously if an item doesn't sell through, you're not. But at this point given the comment that how comfortable you were with your inventory, at this point do you really feel like you're pretty much done?

We don't have a lot of inventory that is really stale. We really feeling like our inventory is pretty clean. And I think that in the first half we worked off a lot of inventory that represented experiments in product diversification, things we didn't understand that well. And so I'm pleased to have those behind us.

I don't want to mislead you. We will continue to experiment. This business is all about experimenting with product outside of the jewelry category. And we will continue to make mistakes. I just don't think we will make them at the same scale. So do I feel like we are out of it? Yes, I do feel like we are out of it.

Is there -- in Q3 in particular -- or is there a mix issue that works for you just in terms of the type of merchandise you will sell in Q3 as contrasted with Q2? Is there a favorable or unfavorable mix shift?

I would call it neutral. I think that from a product stand -- product category standpoint we are continuing to do what we have been doing which is manage jewelry at around the two-thirds of the business level -- working down slightly, non jewelry at one-third of the business. And I think you'll see that continue in the third quarter.

To follow on the prior person's AR question, can you give us an idea of what you expect AR or inventory growth, or just in sum what this working capital aspects you believe will be to your business in the second half?

I think in total we're looking at consuming another 10 to $15 million of cash in the second half.

X -- okay. And you're expecting -- if I heard you correctly, you're expecting the year to be -- did I hear you correctly -- the year you're looking for break even on an EBITDA basis?

That's right.

Very good. So you're expecting profitability there for us in the second half. So are you netting the working -- are you netting the working --?

To be clear, the profitability we believe will be in the fourth quarter. The third quarter is still going to be -- we will narrow the loss and maybe we will get to break even, maybe we will be a little bit negative. And then the fourth quarter is where we expect to make it up.

I'm just saying the 10 to 15 million, is that just from the working capital or are you including the profitability in the second half half?

It is Dick Barnes here. The 10 to 15 million will be pretty much entirely working capital growth. As Will said, we expect to be EBITDA positive in the back part of the year. We will have some CapEx that is broadly in line with EBITDA being positive. And the cash impact would come pretty much solely from working capital.

Last question, what is the CapEx that you're looking at for the full year?

The year CapEx is going to be in the 10 to $12 million range.

Harvey Isman (ph).

Harvey Isman from the Bedford Oak. My question is what you and I have talked about off-line. If I take what I just heard in the call regarding the uses of cash, 10 to 15 million for accounts receivable, 10 to 15 million roughly for CapEx, current cash position is what? Can you comment on that?

$112 million.

So my question is does it not make sense to allocate a portion of the cash for a share repurchase?

That's a good question. I think at today's stock price, stock repurchase is a very attractive thing to do. It is hard for me to say that it is not a no-brainer to buy our stock at $10. I think we have a $20 million stock authorization in place as a Company. In the last quarter we're not in the market buying stock. I think at these levels you'll see us in the market buying stock.

But I don't want to mislead anyone. I do think that we have a use for that cash. And generally speaking we're very conservative with that cash position because I think we are going to need to fund our growth over the next 3 years. As we grow from the $700 million of revenue we expect in '04 to $1 billion a few years out, we will consume that cash with working capital growth. And so a small amount of the cash could be allocated to share repurchase. But I think the larger portion of it is certainly going to be husbanded for capital growth.

So that to me is an amazing statement. This cash you think will be consumed in the next 2 to 3 years from internal growth?

I think if you do the arithmetic on a $1 billion business we will consume a large portion of that cash in the next 3 years, yes.

When are you planning to give guidance for next year?

I think we will be in a better position later in the year. We're not in a good position today because we are still reading the results and seeing how quickly things are going to turn for us. We feel good about the direction. The changes that we have made internally are starting to take root. Things like a OTV, for example, that we mentioned. These initiatives are really starting to work, but it is a little bit early to say.

Okay, let me just then make a final comment. I have been an investor in this Company for a long time, as other people on the call have been. And when the stock was in the high teens I was an advocate of doing some sort of financing, either through an equity offering or a convert. All I am simply saying is after doing this for 35 years that when your stock gets to the point where our stock is, it is painful for the existing holders. It is painful for your big shareholders, i.e., General Electric and is an incredible value. So for us to spend $20 million to me seems like a very wise investment at this point. I just want to be very clear about that.

Thanks, Harvey. I appreciate that. We will be -- I don't know if we will be in at that level, but we will be in the market buying stock from time to time with the stock at these levels.

Great. Thank you.

Robert Taylor.

Katch & Associates. Following up on Harvey's comments, one of the things that it strikes me as is everyone looks at ValueVision as being an incredibly cheap company compared to its competitors on most metrics. Where and how do you make the decision on the basically operate versus sale when you're looking at a situation where most people I talk to, bankers and others, indicate that the value of this business is probably if sold close to 2X what it is currently trading at?

That's a good question. I think that it largely turns on whether we succeed in executing. You guys will watch us and you guys will be the -- you guys will be the judges. I believe that we are executing. I believe that this Company is being turned around. And I think we are going to have a really attractive 2005. And so it becomes a question of are you throwing in the towel because you don't believe that we can execute our way out of the situation we in where we don't make any money, or do you believe that the strategy is going to work?

And because we all know that once the strategy takes hold, and if we succeed in executing, this is a cash machine. We all are familiar with the model. We've spent time in prior calls, and I didn't need to tell you guys this, you know this. With the high operating leverage model that we have, and the scale that we're at right now, as we grow we will become very, very profitable. We will start to resemble the kind of profitability that number one and number two players in this space have.

There's plenty of room for this to be a very, very profitable number three player. And so you have to be the judge of whether you believe we are on our way to that. I'm feeling pretty good about it. Just so you know, I feel very good about our prospects. And I think we are going to get there. It is definitely too early to talk about selling.

What kind of time horizon do you see? And it what point do you make that decision that if you're not getting traction that you are not getting it?

I think you're going to start to see traction in the third -- you're seeing traction in metric -- in certain metrics today, although it is not being reflected in EBITDA. I think in the third and fourth quarter you're going to start to see us move to the EBITDA metric as well. And I think in 2005 you're going to see good numbers all around.

I wish you good luck. Obviously as investors we hope that you are successful and able to generate the value sooner rather than later. And we would also second Harvey's opinion the idea that at these prices devoting some of your cash towards repurchasing stock, if you actually do believe in your ability to generate success one way or the other, would be a very prudent thing to do for shareholders.

Greg Wyrick (ph).

West Cap Investors. Sorry, I got on the call a minute late. I'm not sure if you talked about it or not, so hopefully I won't have you guys repeating yourself. But, Will, as you mentioned in many statement since you joined the firm that you're going to be spending some incremental marketing dollars doing some direct mailings and things of that nature. I don't know if you have talked about in earlier in the call, But can you talk about what you are doing as far as incremental marketing and what you're learning about the things you have done so far and where the direction of that is going to go over the next 6 to 12 months?

Great question. And we did not talk about it, so thank you for the opportunity. We have tested and are still testing a pretty wide range of marketing initiatives. But that is a pretty big label, marketing initiatives. So let me see if I can narrow it down a little bit. I'm very focused on customer acquisition. And customer acquisition at a low cost. And so the math that we do around here is what is the lifetime value of the customer? And today that lifetime value for the average customer is in the 200 -- $200 range. And does it cost us to acquire a customer? And through all these different approaches, and some things are billing inserts and sometimes we're in directories and catalogs and some of it is couponing, and some of it is reactivation of dormant customer and -- we go on and on. There's a whole range of things that we look at.

The question is, what does it cost us to acquire or reacquire a customer? And we set that against the value of the customer having acquired or reacquired that customer. The thing that is hard to read is what is the value of the customer that -- by channel. So what is easy to read and what we have been reading to date is it cost us $20 or $40 or $50 or whatever the number is to acquire a customer from channel A or channel B or channel C. What is harder to figure is whether that customer turns out to be a customer that does 3.5 transactions with us a year or just the one, or turns into a really great customer and does 12 transactions with us. That takes time to read.

And so although we have a fairly clear picture by channel for each of our marketing experiments, for what the customer acquisition cost is, we don't actually have the lifetime value channel by channel. And that is just our database; it just takes time to build. And that is the only reason we haven't really turned on the marketing spend in a really dramatic way, because we're still learning.

But the early results are extremely promising. And I am confident that we will continue to do this and we will be growing our customer numbers by spending, marketing through less traditional channels -- off their (ph) channels. And so you will continue to see that.

What is your feeling on now that you have got your ASPs at or below where you wanted to bring them down to, and you've got some velocity of sales going up, are we going to start to see the acceleration in revenue growth next quarter or is that the fourth quarter in the next year? Do you have any kind of --?

Yes, we do have a feel for that. I think a little bit in the next quarter. Quite a bit more in the fourth quarter because that is a big quarter for us. And then '05 I would hope that we are really hitting on all cylinders.

So that is -- the effect of bringing down your ASPs is essentially done?

Within a range. I think that quarter by quarter it is going to fluctuate. But we don't have any great desire to get it to $120. We like it in the -- north of $160 range. And probably at the tops, 190 or $200 we're going to be really squeezing our market a little too tight. So it is going to be in that range. I'm pretty happy in the 180's.

It is Dick. As it relates to prior year, we really started dropping our ASP in the fourth quarter of last year. Third quarter year-over-year it still might look like a decline, but you wouldn't see that going forward from that point in any material way.

So it is going to kind of annualized off after --?

So you will lap the fourth quarter. And it is really last year's fourth quarter that we started on that track.

Your point though is right which is we can't expect a lot more wind at our backs from dropping ASP. But I think that if we can keep the ASP stable and we leverage Value Pay I think we can start to translate some of that unit volume growth into higher revenue growth.

What was the -- back to the Value Pay thing, and I'm sorry I guess I should probably get back in queue, but one last question then I will let someone else have a chance.

That's okay.

Is that 1 for 1 on the Value Pay so that 10 million of cash is really 10 million of sales financed, or --?

No. If you figure your average Value Pay is 3 months, it is really 25 percent.

It is 25 percent?

That is how I think about it, 25 to 30 percent.

So there's a 2 to 3 times multiplier on that?

That is how I think about it.

From a sales standpoint?

Yes.

David Brenner.

Natexis. Just one quick question on the products. I'm just wondering if there are any early indications on how either Olympics products or universal branded products are selling?

You know we have a little bit of Olympic stuff in the store, but as you probably know, QVC is the official television home shopping partner of the Olympics. So there are limits to what we can do. Selling fine, but not anything that is going to move the needle on our business.

And one other question. I just wanted to ask the Value question in a different way. I believe that you pay -- your distribution expense is based in a flat fee, which initially anyway causes a lag in cash flow as the subs mature. I'm just wondering if you have ever done any sort of internal calculation that if you paid your distributors on a percentage of sales, what the cash flow would look like at the Company?

We think about it often. But it is a little bit of a hypothetical because our contracts are in general long-term and lock down. So there's not a lot of flexibility there. We do -- we do wrestle sometimes with whether it makes sense to try to renegotiate these contracts because we know that we going to be a much bigger business years down the line. And percentage of sales will cost us more later. And is this the right moment for us to try to variablize that? And painful as it is to have high fixed distribution costs today, I think we're going to be congratulating ourselves for that model 2 years from now. We spend a lot of time thinking about it. I think it is more speculative and not likely to occur.

And just as a follow-on, your unit growth -- your FTE growth has been traditionally about 1 million a quarter. Is that what you see for the next couple of years?

Yes, I think that is fair. The absence of something dramatic, what we get is organic growth with our satellite distribution. And then we continue to acquire digital distribution when the economics makes sense for us. And so that does result in the kind of numbers you just described.

Periodically, I imagine we will have opportunities to pick up step function increases in distribution. And if the economics work, we will do it. But as I have said on prior calls, we are penetrating 1.5 percent of our current footprint. We are selling to 1.5 percent of the homes we pass. And until we get that number up, I just don't see a lot of reason for us to chase incremental distribution.

Bob Evans.

A couple of my questions were answered, but could you comment more on the Value Pay? If I missed this, what percent of the business do you think this quarter was Value Pay, and where do you see that trending over time?

Value Pay was about two-thirds of the business. And over time I would imagine that it is going to stay stable around that level. The only thing that would change that is we currently do not offer Value Pay on the ShopNBC card. So let me just take a step back and explain how we do business.

About half of our business is -- I am sorry -- two-thirds of our business is done with credit cards and from the customers who call us. And then a third of the business, a little over, is the ShopNBC credit card. We don't offer Value Pay on ShopNBC credit card today. And so all the Value Pay is on the other side. And virtually all the customers take advantage of it.

Someday one could imagine us offering Value Pay on the ShopNBC card as well, and that would expand Value Pay. But we also have better economic terms on the ShopNBC card so if we wind up shifting Value Pay business to the ShopNBC card I think it would pay for itself. It is still consumed cash, but I think it would pay for itself.

And can you also comment, one detail on CapEx for the quarter? What was that?

5 million.

Total tax CapEx on the quarter is about $3.5 million.

Howard Rosenkrantz.

Actually I think it was pretty well addressed.

This concludes our question-and-answer session of today's conference.

Thanks very much you guys. I appreciate your participation. And hang in there, we really do think the stock price will go up. Thank you.

Thank you for participating in today's conference. This does conclude today's call. You may disconnect at this time.