iMedia Brands Inc (IMBI) 2005 Q3 法說會逐字稿

Good morning, and welcome to today's ValueVision Media third quarter 2005 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. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. I now would like to turn the meeting over to Ms. Heather Faulkner, Director of Communications for ValueVision Media. Ma'am, you may begin.

Thank you. Good morning. 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 am happy to be able to share with you our financial results for the third quarter. I'm sure many of you noticed that our final results for the quarter were significantly better than the guidance that we released on October 3. Our sales were up 14% to a record $159.5 million. We are pleased with the improvement and I would like to take a minute to explain the down and the up in this quarter.

We exited the second quarter with good momentum, but part way into the third quarter, we felt momentum beginning to slow. During September, our business was affected by the hurricanes and the fallout that accompanied the hurricanes. Gas prices rose. Consumer sentiment fell. We were affected as a television network as people watched television coverage of Katrina, Rita and Wilma instead of watching our home shopping channel. And we were affected as retailers as bad economic news had consumers tightening their spending behavior. But the impact on our business turned out to be limited. Sales in October bounced back, growing 25% over the prior year.

Our merchandise diversification has continued and I'm proud of our transformation into a general merchandise retailer. In this third quarter we had a near 50-50 split between jewelry and non-jewelry categories. We remained committed to the very strong franchise we have in jewelry. At the same time, we're pleased with the strength in all of our other categories -- apparel, cosmetics, home, fitness and electronics.

Our gross margin for the quarter was 34.2%, an improvement of 230 basis points over last year. This improvement was driven by margin improvement in every merchandise category. Our jewelry business showed strong improvement, climbing 250 basis points.

Finally, this quarter marked the one-year anniversary of Our Top Value. In one year, we have introduced and grown this concept into a major driver of incremental sales and a source of new customers. Nearly 18% of merchandise sales this quarter were driven by Our Top Value. We will continue to provide our customers with compelling one-day-only values and intend to grow Our Top Value business.

I would be remiss if I did not mention that our Internet business continues to grow nicely. Internet is up as a percentage of our total business, from 20% a year ago to 22% today. Our customers are increasingly coming to our site not just for the ease of placing their television orders, but for the substantial incremental offers that we have available there. We are extending our television franchise with expanded assortment on the Internet.

Looking forward into the fourth quarter, we're feeling good about the state of the business. Let me reiterate the financial guidance that was included in the press release. We expect fourth-quarter sales growth of at least 10% and positive EBITDA.

At this point I would like to stop and open it up for questions.

(OPERATOR INSTRUCTIONS). Bob Evans.

Can you comment on the -- I'm actually looking for a little bit more detail on the operating expenses for the quarter.

Yes, we will wind up providing more detail when we publish the results, but we are very pleased with our operating costs. We have held them flat.

Okay. Because I'm trying to make things tie from a model standpoint. And given you had the revenue outperformance, your gross margin was lighter than I had modeled, but then the EBITDA was better. And I guess I'm wondering if that was the result of lower distribution and selling expense or lower G&A expense? I'm just trying to figure how to get there.

Bob, this is Frank. The distribution expense was lower than we had expected and the total operating expense was basically flat year-on-year.

Is there a reason why the distribution expense was lower, and is it sustainable, I guess?

I guess there's two things. Some of our satellite growth has slowed, and there's -- we also have a lower uplinking charge in our rates this year. So, it was a renegotiated rate that dropped our operating expenses about $1 million annually.

Will, can you comment -- as you look kind of into Q4, gross margins -- how would you -- you have been -- you're a little lower this quarter. You have been higher in the previous quarter. Kind of where do you think about gross margins going into Q4 and then '06?

You know, I think you're going to see gross margin climb a hair. But I guess I would caution everyone who follows our gross margin rate, and just emphasize that we care first and foremost about gross profit dollars, about absolute EBITDA. And so we focus on the margin, on maximizing the gross margin dollars per minute so that we squeeze the most profit out of every minute of air time. And sometimes that takes our rate up a little and sometimes it takes it down a little. I think that over time you will see the rate continuing to climb. So, in fourth quarter 35% feels good. It should be into the 36s next year. But again, I would say we reserve the right to produce more profit for our shareholders by doing it with a lower rate if we think we can get the velocity and the volume on lower-margin products. So, I would just urge you not focus too much on the rate and focus more on the absolute dollars.

That's fair. And then from a category standpoint, what really drove October? And again, category-wise, what gives you confidence that you will grow double digits in Q4?

I have to say I'm really proud of the fact that it was not a single category. It was across the board excellent performance. Every single one of our categories is performing well right now. Our watches business is back on track. Our jewelry business broadly is very much back on track. You saw that it's up 250 basis points in margin. Our electronics business is solid. Our fitness business is picking up a little bit. Our apparel business is terrific. We just have a lot of pride in our business across the board. Cosmetics is good. We continue to grow all those categories and they're all doing well.

Barton Crockett.

Will, I guess a couple of things I wanted to focus on. First, part of what helped you in the quarter and, I think, also in October was easy comparisons in the year-ago period. And I was just wondering if you could talk, again, talk about what the sales comparisons were in the year-ago period by month, and how that may have helped kind of the improvement in October, which I'm sure was also helped by an improving environment and improving execution there as well.

And then as we look into the fourth quarter, obviously, we don't have many days under -- as we look forward to the next quarter, obviously, we don't have many days under our belt yet. But just what is the trend? You talked about, I think, better than 20% in October. And is that continuing in the first part of November? Are you expecting that to maybe moderate perhaps because of tougher comparisons? That's one part there. The other thing is if you could just update us on what you guys exited in terms of cash and what happened with free cash flow in terms of CapEx, working capital, and what you see for the balance of the year there. Thank you.

So, I will start with the comparison to last year month-by-month. And I don't have the details in front of me, but I can do it from memory. August was okay. September last year was also a reasonably tough September. That was largely because of the hurricanes then, and the one that hit us during Labor Day, which really crushed us because that was a big event for that quarter. But I think October was not worse than September last year. I think it was the same kind of a month that we had. So, September, October last year were more consistent with one another. And this year I think that the difference you see between September and October really says that October did outperform and that the trend is substantially up.

In terms of the fourth quarter, how do we feel -- we all know that this business is -- every day is a new day. The first part of November we were feeling really great. We're up about 30% month-to-date for November. But that is a week of November. And let's really try to keep that in perspective. Are we optimistic? Do we feel good about our prospects for the future? Do we believe that the consumer seems to be coming back after being hunkered down in September? Yes. But this is a business where things change quickly, and so I'm really cautious about predicting too much. But right now the beginning of November feels very good.

Now, I will say that we just came off of our biggest promotional event of the year, which is the All-Star promotion. This is a five-day promotion that we do twice a year. We do it in June and we do it in November. And it's -- for our customers it's really a reason to buy. It's a lot of fresh product. Every hour is guested by an expert guest. And we have live audience events and put a lot of promotional energy into it. This year's All-Star set a record for us. It was the biggest -- it was the biggest All-Star we've ever had in the Company's history. We did over $14 million in five days, and we feel pretty good about that. Just a terrific showing across the board. Every category looked good and the customers were really there for us. And so we are feeling -- we feel good about November.

Now, I will -- again, caution is in order. The holiday season is still in front of us. There's -- the fourth quarter has all the holiday season, and then it has the big clearance event in January. And those both need to go well for us to be able to produce a really terrific quarter. But so far it's good. The first of the big three events of the fourth quarter is behind us and it went well.

Finally, the question on cash. Our cash is down about $15 million for the quarter. And the breakdown of it is most of it went into working capital. We put 11 million into inventory, about 3 million into capital spending, and then the balance, 2.6 million, was funding the EBITDA loss. So, that is our cash position.

David Brenner.

I guess my question -- on full-time equivalent homes, it looks like you had another good quarter and ended the quarter with about 62 million FTEs. I'm just wondering if you could remind us -- I think you have gone over before how long it takes for those new FTEs to mature and how long before you can convert those into customers. And related to that, as your FTEs rise, I'm wondering if you still see a need to have that Boston station that you have, and whether that could be monetized at some point in the future.

On the homes, the 62 million homes and the rate at which they mature. You point out a fact about our business which is new homes do take awhile to mature. And for a lot of homes, the first year is not as productive as subsequent years. There's some exceptions to that. I mean, we find pretty good performance -- we focus less on the sales than on the sales versus the cost. And so, when we can pick up sales against a really good cost for the home, meaning that the homes are really productive homes for us on a profitability basis, we go for it. And so, of those homes that we have added, about half of them are homes that come to us organically through existing deals. And they exhibit the typical characteristics of a home, which is slow maturation in the first year and then the kind of normal behavior in the second year. But the other half of the homes that we add are more call it cherry picked; we've really done a lot of modeling to figure out what kinds of systems have the kinds of consumers with the right kind of demographics for our kinds of products. And we increasingly are focused on going after systems like that. And those tend to perform better for us initially.

On the Boston station, our feeling there is that owning the Boston station is a contributor to EBITDA today. And so -- and it also guarantees us excellent channel position in a really important market. So, we like that arrangement. I think down the road it is a potential source of cash and we could conceivably sell it in the future, but it's not something that's in the short-term plan.

Thank you. I noticed the jewelry mix has declined, I think, as you mentioned to about 50-50. I'm just wondering if you want to take a stab at where that might go in '06, and what you think would happen with price points as jewelry declines below 50%.

Jewelry is actually at about 52% right now. And I think you're going to see jewelry fluctuate between 55 or 56% and down into the 40s over the next 18 to 24 months. And it will be very much where -- it will be where the market takes us. We focus on producing the most profit that we possibly can. And we have a free market in air time between categories on the margin. And so we bump jewelry hours with LCD TVs if that makes sense. And we bump LCD TVs with cosmetics if that makes sense. So, it's really a free-for-all out there on the margin. We are no longer in a mode of subsidizing investment in categories we believe we must be in to grow our business. We're now at the stage where all of our categories are performing pretty well. And on the margin, we move it around. So we're not forcing a mix.

I think we have an excellent franchise in fine jewelry and high-end jewelry with our customers. And we don't want to alienate those customers. We don't want to lose that franchise. And I think we will stay committed to it. At the same time, if we can make other products perform well, we will mix those in more and more. Where does that take the price points? We don't anticipate the price points moving a whole lot. It's true that we have a lot of high-priced jewelry mixed into the mix. But even as you move out of jewelry you have high prices in LCD TVs, in computers, mattresses run 800, 900 to $100 apiece. So, there's a lot of pretty high ASPs in the home area and the electronics area that -- and fitness, too, for that matter -- that keep our ASPs in that $200 range. So, even if jewelry were to decline as a percentage of the total, I don't imagine that the ASP would fall dramatically.

(OPERATOR INSTRUCTIONS). Bob Evans.

As it relates to the breakdown of sales, I think you said jewelry is 52. Can you give us the other detail by category?

Bob, we have it in the attachment. It is for the three months -- for the three months that just ended, apparel, health and beauty were 10%; home and all other was 37%; Jewelry was 53%, per the attachment.

I'm sorry; maybe I missed the attachment. Thanks.

Eugene Fox.

Could you talk about this sort of recent surge in sales? Has that been coming from your existing customer base or have you been successful in adding new customers and broadening your base?

I'm sorry, Gene; sales from what?

New customers, new users of your service.

Where are the sales coming from?

Yes.

It is a mix between old and new, but predominantly old. We have our existing customers, what we call our retained customers, probably account for 80% of our sales, over 80% of our sales. And the new is a much smaller piece. And the reason for that is our retained customers buy from us much more frequently. So, our top 10% of our customers buy from us 26 times a year, whereas a brand-new customer buys from us once or twice. And it works out to an average of four times a year, but the lion's share of the volume really is with the existing customer base.

Ross Taylor.

I missed the first couple of moments of the call, so I did not hear any explanation that was offered on why the rapid shift or the sudden shift in fortunes between the significantly downward guidance that was offered in the beginning of October and the numbers you ended up producing, which struck me as awfully good and certainly not warranting the earlier caution.

I can summarize it for you, Ross, and also it's available in the replay. The biggest part of it was September really looked very weak and bleak to us because the hurricanes had consumers watching television and not watching us, had them watching footage of the hurricanes and the devastation in New Orleans. And so, just as a television network we were competing for their attention and we weren't getting it.

And then from -- as a retailer, you had consumers who were affected by the bad economic news. They tightened their belts and consumer sentiment was down. So, we had a September that was starting to feel very soft. We didn't like the trend. And we were concerned that on the heels of the very strong second quarter, a lot of people had some outsized expectations for what our performance would be. And then coupled with all the things that seemed to be going poorly in September, we thought it would be prudent to share that with investors. As we knew it, we thought we would share it.

What happened was towards the end of September, the business really started to come back. And early October it really did bounce back. And the consumer was back. And I would say that a substantial part of it is our own excellent execution, but a part of it has to be attributed to the consumer coming back and sentiment improving a little bit. And they came back and October was 25% over the prior year and we are thrilled with that. We also have clearance at the end of October which is something we know our customers love, so that also buoyed us a little bit.

Yes, but you have clearance at the end of every October.

True.

So, looking at it -- so, basically what you're saying is you basically saw a return to more sustainable business metrics in October?

Absolutely, that's right.

I think I would speak for a lot of your shareholders; in the future perhaps you would withhold your caution until it's actually fully warranted since the stock is currently trading substantially lower than it was when you issued that cautionary guidance.

Another question real quick. Fourth-quarter cash flow expectation. You burned -- you put 11 million into inventory; you burned 15 million in the (multiple speakers)

We should be up in our cash position for the fourth quarter probably on the order of $5 million -- plus 5.

(OPERATOR INSTRUCTIONS). Barton Crockett.

Actually, that last question about what you see for cash flow in the fourth quarter was what I was looking to ask. So, I'm all set.

Eugene Fox.

Will, can you talk about any progress you might be making relative to the credit issues that you and I have been discussing?

I'm glad you bring that up. We have -- and this is not something we talk about a lot, but we probably should. We have a big opportunity in our credit business. We today do our business in essentially two forms -- one is on Visa MasterCard, and the other is on the ShopNBC credit card. And that really works for two different kinds of customer segments -- one being more credit -- one being more interested in the credit and one less interested in the credit.

Completely missing from our credit picture is having a co-branded Visa or MasterCard, a ShopNBC MasterCard of the sort that you see with a lot of other retailers where you can collect points for your spending all across many retailers and then use those points with us. And so, one of the things that we have in the works -- and it will be sometime before we can implement it; it will certainly be late '06 before we can implement it. But one of the things that we have in the works is launching a ShopNBC MasterCard or ShopNBC Visa card.

And then on the ShopNBC card, the proprietary card, we are always evaluating where we do our credit cutoffs and thinking through is there an opportunity for us to lower the credit cutoff and increase our sales. And if you look at our credit performance, our bad debt runs less than 1%. And our contribution margin, as you know, is around 30%. So, we clearly can afford to take some slightly less creditworthy customers and still have it be a very profitable business.

Today, we turn a lot of those customers away. And these are people who watched the show, found the product they wanted to buy, called us up, ready to buy it and we turned them down. And so, one of the things that we are evaluating -- and we will test our way into this extremely slowly. But one of the things we are evaluating is relaxing our credit standards on the low-end, to a point, and increasing sales that way, and profitability at the same time. So, you will see that happen very slowly. That's a test-as-you-go, read the results, and make sure you don't make any mistakes.

Sean Kernan (ph).

Can you tell us or give us an update -- have you been exploring some -- exploring strategic alternatives?

You know, we are always looking at ways to maximize shareholder value. I would say that today, we believe that focusing on the core television and Internet business and focusing on improving the operations of that business is the best route to maximizing shareholder value. But we are always evaluating whether there are alternatives to that and complements to that, and so that's about all I can say about that.

Thank you. My other question has been answered.

Ross Taylor.

Will, I wanted to say -- did you catch the GE Paxson announcement, and do you see any impact on VVTV given GE is your largest shareholder and has three people sitting on the board? Is there any collateral affect or possible impact from GE's, perhaps, change in strategy with relation to Paxson and VVTV?

You know, it's a little bit early for us to answer that question. We haven't explored it with them. There is not a strategy that, you know, has yet to be disclosed that we have in our back pocket. Brandon Burgess, the new CEO at Paxson, used to be on our board, and ran business development at NBC and has always been extremely on top of our business, familiar with our business. And, you know, whether there's something we could do with Paxson in the future is certainly something that we would explore. As you know, they have a lot of terrific television stations with great channel position. And if there was a way that we could work something with them that made sense, we would certainly look at. And it's nice to have friends over there.

Another question is -- there is among investors, the people I talk to, there's a lot of thought that part of the future of home shopping television is actually stronger links with branded Internet companies -- Amazon, eBay and things of that nature -- where you would actually be able to get like a multimedia approach. Has VVTV done anything to explore those types of opportunities?

I actually think there's a lot of merit in that thought, Ross. And I would say that we have started to explore it. Where that will go, who knows? But we have started to explore that.

Lastly, it strikes me as a telling miss that I see nothing on -- of the 370-something TV stations I get up in Connecticut, I see nothing of a home shopping geared towards the Hispanic population. Yet they are, obviously, a sizable population and increasingly affluent population. Has any thought been given or any exploration been given to the idea of trying to tap into that market?

You know, that is an interesting question. There's no question that the Hispanic market is an interesting one, a big and growing one. And our research shows that they buy on home shopping disproportionately. They do more home shopping on television then other demographic groups. So, there's a lot of beauty to that.

The flip side of it, though, is that it's very hard with a single network to segment the product and the programming so that it appeals to the Hispanic market and still retains the appeal to the broader market. And so we kind of walk a fine line there. I have to say that we really don't have a strategy to go after the Hispanic business as an independent business, but it's something we probably ought to explore.

At this time we have time for one more question. (OPERATOR INSTRUCTIONS). At this time I show no further questions. I would like to turn the call back over to you, sir.

Thank you very much. We really appreciate it, and we're going into the fourth quarter feeling good. And best wishes to all of you for a happy holiday season. Thanks.

Thank you for participating in today's teleconference and have a great day.