iMedia Brands Inc (IMBI) 2004 Q4 法說會逐字稿

Good morning, and welcome to the ValueVision Media fourth quarter fiscal-year earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. To ask a question, please press star 1. Today's conference is being recorded.

Now I will turn the meeting have to Ms. Heather Faulkner, Director of Communications for ValueVision Media. Ma'am, you may begin.

Thank you. 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.

Good morning. I'm pleased to share with you our fourth quarter and full-year results for 2004. As you all know, 2004 was an investment year for our Company. It was a year in which we took some short-term operating pain for the long-term benefit of the business. We invested in many new initiatives, and we retooled our business to be a more diversified, general merchandise television retailer.

Before I talk about those initiatives, however, I'd like to give you a brief update on the financial performance. Then I will discuss some of our initiatives. And then I will take your questions.

As you saw in our press release, ValueVision's fourth quarter revenues were a record $184 million. This was the largest sales quarter in the Company's history, up 3% versus last year. The core television and Internet business grew 6%. The fourth quarter net loss was $7.2 million and the EBITDA loss was $2.5 million.

Most of the EBITDA loss was a noncash writedown of advertising credits. What this means is that we essentially broke even on an operating basis. Obviously, our goal is to be profitable, but this fourth quarter performance does suggest that our initiatives are starting to work and that the business is getting back on track. Our full-year revenues were $649 million, also a record, up 5% over last year.

We also continue to grow our customer base. I would like to take a moment to explain the customer metrics that we have started to release. Going forward, we will publish what we call our "active customer number." This is the number of customers who have bought product from us over the prior rolling 12 months. We think that understanding the number of active customers is important and should be useful to you in evaluating us.

For the year ended January 31, our active customer count was 754,000, up 9.3% from the prior-year period. It's also important to understand the composition of that active customer base. How many are new customers? How many are repeat customers? Going forward, we will break out the active customer numbers so that you can see what percentage is new customers and what percentage is retained.

In the year-ending January 31, 57% of the active customer base was new, versus 59% in the prior year. And 43% of the active customer base was retained, versus 41% in the prior year. For the record, a new customer -- we define a new customer as one who has bought from us in the last 12 months, but never before. A retained customer is one who has bought from us in the last 12 months, as well as in the period longer than a year ago. Together, these new and retained customers comprise our active customer base.

We intend to continue to grow our active customer base. How should you expect the mix to shift between new and retained? Well, we obviously like both kinds of customers. Retained customers have a higher value to us. When we measure the lifetime value of a customer, a routine customer, one who has bought from us two or more times over a longer time period, is more valuable than a new customer.

So in the fourth quarter, we did put a lot of marketing spend into reactivating dormant customers and boosting our retained percentage within the active customer group. But, we will not succeed in increasing our penetration of the distribution footprint unless we add truly new customers. So we have a fair bit of energy targeted at winning new, never-before-been-with ShopNBC customers. So, I hope this way of looking at our customers will help you understand our business better.

I would like to turn now to some really tremendous achievements in our product diversification efforts. This fourth quarter marked the first time that the productivity of our non-jewelry categories, for example, cosmetics, home furnishings, and ready-to-wear, actually exceeded that of jewelry. That doesn't mean we're giving up on jewelry, not by any means. But it does mean our air time investment in building business in non-jewelry areas has really begun to pay off.

In the fourth quarter, jewelry fell to 55% of our product mix, down from 63% a year earlier. This is a very rapid change for a business like ours. We expected that we would transition away from jewelry by 3 to 4 points a year. So, an 8-point shift in a single year is very rapid. We're delighted with how the shift has gone, as I said, we're now selling this non-jewelry product with essentially the same productivity, measured as gross margin dollars per hour, as jewelry.

You can expect that the mix will fluctuate somewhat and will likely trend back a little towards jewelry in the first quarter as there is some seasonality in the mix. Specifically computers and electronics are particularly strong fourth quarter products.

I should mention gross margin. We've been working to restore our gross margin to more historical levels. Our fourth quarter gross margin of 33.5% is essentially the same as the 33.8% of a year ago. But is up 1.6 points from the 31.9% of quarter three. We're pleased with our progress on gross margin.

One additional note on the merchandising front, we've talked about stabilizing our ASP in the $170 to $180 range. For the fourth quarter, our ASP was $182, down just a bit from last year. And our ASP for the full year was $179, down 16% versus the prior year. It is worth noting that our unit sales grew a staggering 23% to 5 million units in 2004. Because of the decline in ASP, our revenue only grew 5%. The customer's clearly responding to the lower price points.

Our press release mentioned a number of the initiatives that have been working well for us. It's probably highlighting Our Top Value, then I will stop and take your questions. Our Top Value is a time-honored sales tool in the television retailing business. The idea is to present a single product, that is a really compelling value and to make that offer four to six times a day until the product sells out.

Our customers have learned that the value is truly exceptional and that they don't have to do a lot of research to determine whether or not it's a good value. It is and always is. We've had a number of Our Top Value offers in the fourth quarter which exceeded $1 million in sales. That's in a single SKU, in a single day. And we've had similar success in the first quarter. Our Top Value is also a terrific source of new customers. So, it's clearly an initiative that we're going to stick with.

A few other highlights -- we added 4.5 million homes in 2004, bringing our total distribution to 60 million homes; and we ended with a very strong balance sheet, our inventory at year-end of $54.9 million is down 19% versus last year and represents the lowest level in 18 months. And we ended the year with over $100 million in cash.

So, we are optimistic about how things look as we head into 2005. Our diversification efforts have been working. Our ASP is stable, where we want it to be. Our gross margin continues to improve. Our active customer base is growing. And our investments are paying off.

On that note, I'll stop and take your questions.

Thank you. We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Barton Crockett of JPMorgan, you may ask your question.

Okay, good. Thank you very much. Will, I wondered if you could give us a little bit more color on sales trends through the quarter. In other words, did they start a little bit weaker and then gain momentum as the quarter progressed?

And then a second related question, could you give us a little bit more detail on what gives you confidence that you can grow sales at a double-digit pace this year? Is it partly the momentum exiting the quarter? And is it also partly some of the new revenue initiatives? And if so, could you give us a little bit of a breakdown of how much of a contribution you think those new revenue initiatives might make? Thank you.

Sure, Barton. First, on the fourth quarter question, things did pick up a little bit towards the end of the fourth quarter, so, there was -- we came out of a very weak third quarter, as you all know and -- and clearly fourth quarter was -- was an up quarter and the momentum built through that quarter.

With respect to the first quarter and how -- how that's continuing and where we expect the double-digit growth to come from, I would say that we're continuing to beat last year's numbers and we feel good about the momentum. And I think it's really driven more by the initiatives than anything else. I think that all the investments that we made in 2004 are really starting to take hold. And it's a combination of Our Top Value, which is now 10% of our business, and Oversell and Waitlist, which contributes to the gross margin improvement and the inventory improvement. And initiatives like that that I think are really big drivers of all this.

So I think that's where you're going to see it from. You're not going to see our ASP go up. And I don't think you will see it go down a lot. So I think we're going to have to wind up doing it around the initiatives as opposed to -- as opposed to something else.

Okay. Well, if I could just follow up on that a little bit. In terms of the view for double-digit sales growth, did you exit the first quarter at something approaching that pace? Or is this really a build where you're going to be more in the double digits in the second half and more in the single digits in the first half?

I think you have to definitely look to the second half for it. We are a seasonal business and we're looking for more of the growth in the second half.

Okay, all right, thank you.

Bob Evans of Craig Hallum Capital, you may ask your question.

Good morning, Will, nice progress this quarter. Can you comment on the gross margins, you said you showed sequential progress, but where do you think you can bring them? Historically your gross margins or the Company's gross margins have been in the 36, 37% range, under kind of your new business model, can you get that back?

Bob, thank you, that's a great question. The answer is yes. The answer is we have every intention of getting back to historic levels of gross margin in that 36 to 37% range. You know that the industry operates at that level. We have historically operated at that level and we fully intend to get back to that level.

I think that there's probably some people who believe that because of the mix shift that we're undergoing, there could be pressure on the gross margin. But I would want to disabuse you of that notion, because we are in this for -- for that full gross margin and we intend to get there in a variety of ways. So, although jewelry runs with -- with a higher initial gross margin, also has some higher returns, there are -- we have other products that run with a little lower gross margin, with lower returns.

We have -- we have a dramatically expanding warranty program, which extended to electronics and computers now, but which we expect to extend to jewelry as we go forward and that winds up being very high margin that we introduce into the mix. So, I think that -- I think things like that are going to contribute to gross margin improvement.

Add-on sales is one more thing we haven't spent any time talking about, but we've now got the capability to offer our customers a second, a third and a fourth product when they call into our call center, and we do the same thing on the Internet, and we're getting much better at offering complementary products and typically these products have really high margins. So, all of those kinds of things, I think, taken collectively, will enable us to get back to the historical levels.

So, as we look at '05, should we expect gross margins to improve kind of sequentially as the year goes on?

I think you should expect gross margins to improve as the year goes on. I can't promise you that quarter-to-quarter you will see dramatic jumps. I mean, it may move around a little bit within the year, but I would certainly expect that we will end the year with higher gross margin than where we started.

I guess one other thing I should add is, a big contributing factor to our gross margin deterioration in the last year was the fact that we had given away free shipping and handling to 270,000 customers, and we didn't do that this year. So, in 2005 we're collecting a full -- full shipping and handling from our customer base and that's better than 1 point of improvement right there, about 1.5 point of improvement on shipping and handling.

And can you give us a little bit more color on the Our Top Value? What's working there? And when did you start the program, so -- because you obviously didn't have it for the full year, I think it maybe started -- was it in the third quarter sometime? If you can refresh my memory?

We started Our Top Value in mid-August and it's been a program that's gaining traction as we've gone through the year. And I think we've learned a few things as we go along, and more importantly, our customer has learned that we have a lot of credibility in our offer.

The whole psychology of Our Top Value turns on having a consumer believe that when they see this offer, they will not get a better offer on this kind of a product from anyone, anywhere, any time, including from us at a different time. And that gives them the confidence to buy the product right then and there without having done a lot of research. And that's so much what television, retailing is all about, is having a customer who's confident and comfortable making a purchase on the spot.

And so -- so Our Top Value really tapped into that and key to making it work is that we actually deliver the value that we promise. And so a tremendous amount of work goes into engineering this with -- with our vendors and making sure that we have a truly compelling value. And then -- and now here we are having done this since August, having well over 100 of these Our Top Value offers behind us and the customer believes us now. So, now when we -- when we get the product up, it's a tremendously compelling offer and they buy it without really a lot of concern.

It is running 10% of our business today, it is higher productivity than the air time that it replaces. I will give you a flavor for some of the really blockbuster values that we've offered in the last 60 days, 90 days. And we've done a notebook computer with tremendous results, over $1 million in sales. We did a cosmetics offer, Isomers cosmetics offer that was very strong. Serta mattresses, we did a $2 million day in a single SKU, in a single -- in a mattress on January 2. Just a tremendous offer. Great value for our customers and a great product for us.

We've had a number of really successful OTVs -- we call them OTVs, around LCD TVs, which is a very hot area for us right now. And it winds up being a great opportunity for us to win new customers, and it's a nice way for us to really push the category diversification because -- because we typically -- we typically do blockbuster OTVs in non-jewelry areas.

Thank you. And can you comment in terms of distribution growth? I think you added 4.5 million homes in this past year. Would you expect the same -- about the same number of homes again this year or --?

I think it's safe to assume that we will continue to grow at about the same rate, 4 to 5 million homes, probably a little more than 1 million a quarter. Some of that is, call it organic growth, as our distribution deals with -- with DIRECTV and DISH continue to -- and some of our other cable systems, continue to add customers. And then some of them are new deals. We do have -- we have a relationship with NBC in which we -- with our group and with their group, go after incremental distribution. That will continue and we're -- we're pretty confident we will see another 4 or 5 million homes this year.

And final question. New category productivity, you said exceeded jewelry productivity for the first time, I believe. Can you talk -- which new category specifically? And give a little color there?

I think probably just a bit of background on it, we have spoken over the last several calls about the retooling of our business. We've talked about how when you move from what was basically a jewelry business, predominantly a jewelry business to a more diversified business, you have to invest in these new categories, because your customer group is not yet ready to accept the new products from you and the new customers who are interested in those products don't really know about you yet, you're not known for those kinds of products yet.

So, we spent a very big part of 2004 airing product which we knew was going to be less productive on a gross margin dollars per hour basis; that we knew would be less productive than the jewelry and yet we knew we had to do it if we were going to build these businesses. So, we continued to do it and we tried to do it in a smart way. We did continue to do it.

What's occurred in the fourth quarter is that we have a whole bunch of categories that are performing every bit as well or better than some of our jewelry categories, and so what we have now is much more of a free market in the air time. So, on the margin -- we will continue to invest in new products -- but on the margin, -- and so some of that is investment. But on the margin, what's happening, is you've got jewelry and non-jewelry product competing for the same air time and it's a function of putting it to the most profitable product and so that's what we do.

You asked specifically what are some of the ones that have been really productive, we've had tremendous success with computers in the fourth quarter. LCD televisions have been very, very hot for us. Why is that? LCD TVs are just a perfect kind of a product for television. It's -- it's new technology, it's perfect to -- perfect kind of a product that you'd explain to a customer what the features and benefits are. We do a nice job of it.

We also offer tremendous value. We are more nimble than most retailers. We're able to source a little more quickly than most retailers and we can translate that buying advantage into a selling advantage when we provide really great pricing to our customers. So, when you compare our prices on LCD TVs to some of the big retailers, including Best Buy, what you see is that there's really compelling value coming out of ValueVision. So, we've become known as a tremendous seller of these things.

Okay.

Okay.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Greg Wyrick of West Cap Investors.

Hi, good morning, guys. A couple of questions. First one is, as we look into this year and two kind of semi-disruptive things are going to anniversary. One is the most rapid part of the mix shift. And the other one is the kind of stabilization of the host base, what -- what kind of view on sales velocity with those things kind of not happening this year does that give you?

And second, could you try to quantify any impact that the Company's had by having the higher oil and gas prices? And, does any segment of our customer base is really sensitive to those higher prices as you've seen really at the low-end retail base?

Yes, let me comment on both of those things. First, with respect to the mix shift and the hosts, the mix shift -- mix shift I think is reasonably linear, it continued all through '04 and it will continue in '05. And I don't know that that's going to have a tremendous effect on our sales one way or the other in terms of positive or negative. I think that we're now at a point that we put the best product on air, that we think will be most successful and it will likely result in a mix shift that looks pretty much like it looks today, and over the course of a year, it will probably shift a little bit away from jewelry, but it could shift towards jewelry first and back away. There will be an ebb and a flow there.

In terms of the disruptiveness and lapping disruptive events, you all saw our third quarter and it was driven by a whole bunch of events that I don't imagine will be repeated. I mean, earthquakes happen and tsunamis happen, but elections only happen every four years, Olympics only happen every four years. We don't intend to lose any more hosts, at least not unless it's our choice to.

And I say that because we have a really, really strong host ranks right now. We're really pleased with the roster of hosts that we have. They're really expert at what they do. They're doing a really nice job and we're just delighted with them. And we have them signed to long-term contracts with non-competes. So we don't expect them to go anywhere, either.

So, in terms of lapping disruptive events, we do intend to lap the third quarter and have a much stronger third quarter in 2005 than in 2004, and I think that is part of why we expect the revenue to be more back-loaded. Because we are going to be lapping the -- that third quarter.

In term of your question about -- I guess you were trying to get at consumer confidence and what -- what impact that has on our sales. I think that we are, like all retailers, subject to -- to how consumers feel about -- about their well-being. And maybe even more so than many retailers because we're in the business of selling things that are not essential, but things that are nice to have. And so when consumer confidence is high, we tend to do really well. When consumer confidence is low, it hurts us a little more.

There's some offsets. We have a more affluent customer base and so they're not hit quite as hard by it. At the same time, these are the products that people don't have to have and so they can postpone these purchases if they're not feeling too good. I think that with the oil and gas, we cleared $50 a barrel in the third quarter and I think that did shake up a lot of people because it got translated right into high pump prices.

It seems to me, at least, and I'm no expert on the subject, that consumers start to get used to these higher prices and then it stops being as much of a barrier. All of that said, I think that when consumer confidence is high, we will do well. And when consumer confidence deteriorates, we're going to suffer like everyone else.

Thanks.

Robert Routh of Jefferies, you may ask your question.

Yes, good morning. Just a few quick questions. Bill, you gave a range in terms of what you -- or you gave a guidance for '05 in terms of what you expect, double digit in terms of sales and return to positive EBITDA, which would be great. I'm wondering if you could give us somewhat of a range in terms of double digit? Are we looking at 10%, 15%, 20%? And when you say EBITDA positive, are we looking at $1 million or are we looking at 15? If you could kind of quantify that a little bit so we can get a little better handle on it for valuation purposes.

Oh, Robert, I wish I could help you with that, but I really can't. Part of the reason that we haven't given as much specificity around the guidance as you all would like, is that I don't think we're really in a position to do that. I think we are really rebuilding this business, and transitioning from the jewelry retailer that we were into the general merchandise retailer that we now are, has been a tremendous transition and it's a little bit hard to predict. And I think our team is comfortable predicting we will be able to do double-digit growth.

How much beyond 10%? I don't know. Could it be 15%? It could be, but 10% is a big number, too when you figure the industry is growing at two-thirds of that rate. And retail at a third of that rate. So -- so that's why you've got guidance of double-digit and not 15 or 20%. So, you will have to put into your models whatever you want to put into them. We'd like to do something really grand and I think we're prepared to commit to double digits.

And in terms of the EBITDA, it's the same issue. I think that you know that our model is highly, highly sensitive to how we do on the top line and we swing from lots of loss to lots of profit very, very quickly. And so I think we have an internal plan and we have a team that's comfortable with a $21 million improvement in EBITDA by going from 2004 to 2005 and that gets us to a break-even EBITDA for 2005.

Will we surpass that? I'd like to. But I don't want to promise by how much. And so again, for modeling purposes, I think you will have to do what you're going to have to do, but I think break-even would be a good performance for us.

Okay, great. And just a couple of quick follow-ups. Could you give us any -- have you had any conversations with any of the distributors regarding contract renegotiations in terms of getting a little bit better economics for ValueVision as opposed to the current model that you operate under? Or is that not taking place?

And second, I was wondering if you could comment a little bit on -- I noticed GE had sold some stock up around $14. How the relationship is between GE, NBC and ValueVision at this point and how you see that progressing on a going-forward basis?

Okay, sure. On the distribution question, we do renegotiate deals from time to time, most of our deals are long-term deals, but on the margin we're constantly tweaking deals. And what we're doing these days is, because there's a lot of digital distribution opening up that's interesting to us, we're more involved there and we're getting what I consider to be pretty favorable economics there. They work for our business or we wouldn't be doing it.

You should know that we're not in the business of signing up homes to be able to say we have that many homes. We're in the business of signing up homes because we believe we can make a profit with those homes. And so the only homes that we're planning to sign up are homes that we think make economic sense for us. To us, we're way past bragging rights. We have a national footprint and we don't need to prove anything more there. I think what we need to do is prove we're productive with the homes that we have.

In terms of our really big deals, we have what is largely a fixed cost structure, as you know. And although that has been a challenge for us in had the past, I think that trends to our advantage as we grow. There is a point where having that fixed cost structure is a tremendous advantage. And so we've been somewhat reluctant to renegotiate those deals, because most of that renegotiation would involve switching out of the fixed cost arrangement that we have today and switching over to more of a variable one.

It would probably buy us some short-term benefit, I would imagine our EBITDA could go up in the short-term, but for the long-term success of our business, I think that the contracts that we have in place are actually much stronger for us. So, we're not actually out trying to change the economics of those deals. They're long-term deals and I think we're nicely growing into them. It's just going to get better, not worse.

With respect to the GE relationship, our relationship is strong. It's as strong as it's ever been. We have three GE Board members out of our nine-member board. We have -- yes, there was a sale of some stock, GE Equity sold about 2 million shares to a private investor, and I don't think anyone should take that the wrong way. We still have GE support, we have continued rights to the ShopNBC name through 2010. We continue to have all kinds of business relationship with NBC and so don't read -- don't read too much into the fact that GE Equity is monetizing part of their -- their investment portfolio. That's something that they are on record, planning to do and they're doing it.

Okay, great. Thank you very much.

You're welcome.

Our next question comes from Chris Hanrahan of Sigma.

Good morning, Bill.

Hi, Chris.

Most has been touched on, but I wanted to ask you about the asset impairment, if you could give us a little color on why this advertising credit was written down, kind of where that shows up on the -- on the financial statements on the balance sheet and kind of just provide a little more detail on that.

Sure thing. Just a little bit of history, the -- we own 12.5% of polo.com, one of our investments. Not as part of that ownership, but because we have a relationship with them, we do third party fulfillment and -- and customer service and order capture work -- customer service work for polo.com.

A couple of years back we took, in payment for some of those services, we took $2 million of television credits. At the time, we thought that they would be useful to us as we were getting into our rebranding with ShopNBC and for a variety of reasons we thought they'd be useful to us. It's not that they're useless, they still have a value and we still intend to use them, but now that we've done a fair bit of work understanding what the cost per lead is and what the conversion rates are and what it actually costs to acquire a customer and how many customers we'd expect to get out of television advertising, we are of a view that we're really much more of a direct business.

We're about selling product, selling items, in relationship with a consumer. One-on-one kind of a relationship. We're not a big branding entity like Coca-Cola and so that air time doesn't have the same kind of value to us that it might have to someone else. And so, we worked with our auditors and came to a view that they shouldn't be sitting on our balance sheet at $2 million. So, they're largely impaired at this point. As you know, it's noncash, -- it was a noncash writedown.

Okay, right. Thank you.

Thank you. Our next question comes from Allen Arenson of AVRS.

Good morning, gentlemen.

Hello.

Good morning. Good morning.

Good morning, Allen. How are you?

I am fine. Not completely happy with our results, but I understand what's going on. But let me ask a silly, little question. We used to get a listing in the grid, in Time Warner's TV Guide in Manhattan.

Yes.

And we're no longer listed in the grid. QVC is, but SNB is no longer listed in their grid. Is there anything we can do about it?

Allen --

Why did we lose the listing?

-- I wasn't aware that we had and I thank you for bringing it to our attention and we will look into it.

Fair enough.

Thank you. Our next question comes from Barton Crockett of JPMorgan.

Okay, great. I just wanted to do a follow-up question here and that is talking about free cash flow for 2005. If you take it to baseline that you will be at least EBITDA break even, when we look below the line in terms of the CapEx, the working capital, where you had positive inventory trends this past quarter, and I think some other things going in terms of deferred revenues, can you give us a sense of what that would be in kind of a break-even EBITDA scenario? And what the elements of that working capital/CapEx might amount to? Thank you.

Yes, I think that we will -- the punch line is we will probably consume about $15 million in cash in 2005, if you assume a break-even EBITDA for the Company. That would be broken out between CapEx of around $10 million and working capital of around $5 million. The working capital is largely inventory.

Okay, great. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] We have no further questions at this time.

Well, thank you very much, gentlemen. Talk to you next quarter.

Thank you, this concludes today's conference call. You may disconnect at this time.