iMedia Brands Inc (IMBI) 2005 Q4 法說會逐字稿

Good morning and welcome to today's fourth-quarter and year-end earnings teleconference. Following today's presentation there will be a formal question-and-answer session. At that time instructions will be given. Until that time all lines will remain in a listen-only mode. At the request of ShopNBC, today's call will be recorded for replay purposes. Any objection and you may disconnect at this time.

I would now like to turn the call over to Amy Kahlow, Director of Communications. You may begin.

Today's teleconference 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.

Good morning. I am delighted to share with you our financial results. I know that many of our investors have been wondering when ValueVision's turnaround is finally going to show up in the numbers. I know that you have been patient maybe not that patient as we have retooled our Company. So it is really gratifying for me to share with you our fourth quarter results, our full-year results and most importantly our outlook for the future of ValueVision.

First let me summarize our financial performance. Sales in the fourth quarter climbed 20% over last year to a record $209 million. We have strengthened every major product category. The Internet side of the business grew even faster climbing 36% over last year. Internet in the fourth quarter represented 23% of our total business.

Looking at the full year, sales climbed 11% over last year to a record $692 million. Our diversified product approach is working with traditional strength in jewelry now augmented by strength in apparel, cosmetics and consumer electronics. Our gross margin continues to strengthen. Gross margin in the fourth quarter increased 220 basis points over last year to 35.1%. This improvement was driven by discipline in merchandising margin coupled with less promotional discounting and an improvement in shipping margin. Our gross margin for the full year was up 180 basis points over a year ago.

The combination of revenue growth, gross margin improvement and expense management resulted in $8 million of EBITDA in the fourth quarter, an improvement of $11.5 million over the same quarter last year. The strong fourth-quarter EBITDA contributed to positive EBITDA for the year, $3.3 million. That represents a $29 million improvement over a year ago. It is with great pride that I report to you that ValueVision has returned to EBITDA profitability for the quarter and for the year.

What is happening in our marvelous Company? How should we interpret this performance? As you know, we set out in 2004 to diversify the product mix. On the theory that in order to grow in order to achieve the scale necessary to be successful in the home shopping industry, we would have to present consumers with products beyond the excellent jewelry products that have been our hallmark. In early 2004 we were 65% jewelry. We invested in our merchandising organization to broaden the buying skills and capabilities. We invested in studios to support presentation of home and electronics products. We hired additional hosts. And we invested airtime in growing new categories of business.

Today, our jewelry business still extremely important to us accounts for 54% of the total. Our home, cosmetics, apparel, fitness and electronics categories now account for nearly half of our total business. Most significantly they are equally profitable. We have successfully made the transition to being a general merchandise retailer.

It has been our belief that if we offer our customers great quality and great values in products other than jewelry we can maintain the integrity of our brand and accomplish two things. One, get more share of wallet from our existing customers and two; win new customers who are attracted to our new product categories. What we're seeing today is that our hypothesis was correct. We're winning new customers while at the same time improving the retention rate of our existing customers.

Our active customer roster continues to grow. We are now at 800,000 active customers up 6.6% from last year. Those active customers are split 56% new customers and 44% retained customers. It has been a delicate balancing act to change the merchandise mix, win new customers and simultaneously keep old customers happy. And yet that is exactly what we're doing.

Our business continues to benefit from our multichannel direct marketing approach. We manage the multiple channels in our business, television, Internet, e-mail and print in an integrated way. We have a single customer base and we communicate with a customer through all of these mechanisms and there is synergy there. Our television network drives substantial traffic to ShopNBC.com. Our customers find a broader assortment of merchandise on the site than we are able to present them on air. Our print and e-mail let us channels demand to both our website and to particular on-air programming that is of interest to specific customer segments. It all adds up to an increasingly successful integrated direct to consumer business.

I should spend a few moments on the Internet opportunities that we see. Our Internet business is obviously growing very rapidly, faster than our television business and faster than the online retail industry. Why is it working so well? What are we going to do next? Let's talk about our Internet strategy in three steps.

The first step is selling more products to our television customers. This seems straightforward and it is. Television customers come to ShopNBC.com initially because it is an easy way to order what they see on television. What they discover is that we have many more products that are of interest. We can only afford to present 10 to 15 items an hour because our airtime is so valuable. Our customers are learning that if they find additional wonderful products on the website that have never made it on the air. We are extending the franchises of our jewelry and apparel and our many other brands online. We also suggest complementary products when you buy online. All of this is step one, selling more product to our existing predominantly television-driven customer base.

Step two is all about ringing our outstanding offers to the Internet community at-large. Our merchants do a great job of sourcing items, specific items that are simply fabulous values. They don't last long. These truly are limited quantities and we often sell out. But these values are not just great values for TV consumers, these values are nationally competitive and will stand up from a value standpoint in the tough market dynamic of Web retailing. To that end, we are now capturing customers who have never seen our television programming. Our offers are brought to the Internet community through paid and natural search, through the shopping comparison site and through affiliates. This is step two; sell our great products to Internet customers who discover us independently of our television network.

Step three is perhaps the most exciting. It is leveraging our core competence in video retailing into Internet video. What we know is that broadband penetration has increased to the point that on the Internet is no longer painfully slow and choppy, and MPEG 4 is an acceptable quality format. Internet video is starting to happen in 2006. If we look at the state of Internet retailing today, it consists predominantly of JPEGs and catalog copy. The missing ingredient in Internet retailing is salesmanship. It is missing the demonstration of features and benefits. It is missing the excitement that video provides. And that is exactly what ValueVision does best.

At our core we are all about sourcing great products at great values and presenting them to consumers in a high demonstration, high salesmanship format, in short in video. We have many years and many millions of dollars invested in studios, production infrastructure and hosts that we use for our television network. We have refined video sales presentation over many years to achieve optimized benefits presentation, call to action, and an effective close. That investment is precisely what it takes to do Internet video retailing with high production values.

We will be out there with our best offers on Google Video, Yahoo! video, and every major Internet video venue. This is an evolving area and precisely how it evolved is not known. What we do know however is that retailing on the Internet going forward is going to require video capability. Not for every product but clearly for any products that benefit from demonstration and salesmanship and ValueVision is and will be a leader in this space.

Looking forward into 2006, we're excited about the future of ValueVision. From a guidance standpoint we expect revenue growth rates in the high single to low double digits and we expect EBITDA profit of $12 million or more excluding option expense. We are executing in our core television business. We have achieved minimum sufficient scale to cover our distribution costs and be EBITDA profitable. Our multichannel strategy is working. Our Internet business is booming and we're well positioned to capitalize on exciting new developments in Internet retailing.

Do I sound happy about our prospects? I am.

At this point, I'm going to stop and open it up for questions. Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Chris Krueger from Miller Johnson.

Good morning guys. Just a couple of questions. First, for the fourth quarter and maybe for the year as a whole can you indicate if there is any kind of stand out merchandise category that maybe grew faster or had higher margins than expected and then also the reverse of that?

It turns out that the fourth quarter has been just fabulous across all categories. We have really got strength everywhere. Now within categories we continue to experiment and test new product. That is part of keeping our merchandise fresh and winning new customers. But all of our categories have been performing. There is no category that is behind. And in terms of standouts in our jewelry business is as strong as it has ever been maybe stronger and what is nice is to see electronics doing so well and apparel doing so well and cosmetics doing so well. We're just really pleased across the board. I wish I could tell you what is lagging. Nothing is lagging. We're doing great on every dimension.

Good. What was the CapEx expense for the quarter or the year either one?

Chris, this is Frank. For the quarter it was $3 million.

Gross margin expectations for '06, can you give kind of any kind of guidance for that? Do you think it's up a percent overall from '05 or any kind of guidance?

I don't think we're prepared to commit to a specific number. We would like to see it continue to improve from current levels but I'm not sure that we can commit to that going up.

One last question. You're more recent initiatives throughout the year like selling warranties, add-on sales and oversell, can you comment on how those are progressing?

They are actually all performing very well. We won't be breaking up the numbers on that. We keep that proprietary but we're very pleased with the results across the board. I'm glad you mentioned it. We did introduce warranties on jewelry which was a big opportunity for us. So in addition to the electronics warranties, we have them on jewelry and add-on sales are doing great. It is just strength across the board on all of the new initiatives.

Barton Crockett of JPMorgan.

Good. Thank you very much. Let me see. I wanted to ask I guess a couple of questions one kind of bigger picture and others a little bit more closer to the numbers you just reported and the guidance you are giving. In terms of the bigger picture, there has been a lot of public talk about combinations, consolidations, deals in this kind of TV shopping sector whether it is involving the PAX network potentially or Donald Trump or the Shop at Home network. I was wondering if you could provide some perspective on your view about what all this activity and talk means for this sector and how VVTV when analyzing any opportunities that may not be before it in regards to these publicly disclosed situations? I understand there is some sensitivity there, but if you can at least kind of frame how we should look at this it would be great.

And then in terms of some of the number questions, your distribution and selling expense grew $8 million or so sequentially Q4 versus Q3. A large portion of that I thought was supposed to be pretty fixed in terms of spending per home that you are reaching. So I'm just wondering what drove that increase and if you could give us some sense on what is the outlook for that line into '06? I think I'll leave it there for now. Thank you.

So first the question about all the activity in the space and how do we think about it. I guess in terms of us combining or acquiring other companies we are really pleased with a way we are executing today. We have a really nicely tuned machine. We have a great team in place. We are executing on every dimension and so we are not excited about the prospect of a lot of integration risk and fooling around with that nicely tuned machine that we have to. Would we never consider it? Of course we would consider it. But our focus is very much on our core business and our Internet business and making that all work. And it is working. So we are keeping our eye on the ball here.

In terms of are other people interested in us? I think I would have to say that we are a unique asset. I mean we are the only really independent, highly performing television home shopping network and as we just talked about with all the Internet video opportunities I think that these skills and capabilities that we have will become increasingly attractive to potential acquirers. I say that not because we are for sale or because we want to be for sale but I think it is a reality that we have a unique and wonderful asset.

We are building this Company to be successful on an independent basis. We have made tremendous investments in the infrastructure here and the people here and everything we do we do with a long-term view. We know that this isn't a quick flip kind of situation. This is about building sustainable value. And this Company has the potential to grow at attractive rates for the indefinite future. And so we will always do the right thing by shareholders and that could be remaining independent. And that could be winding up in someone else's arms under the right circumstances. But we are very focused on building a sustainable franchise independent of any kind of acquisition.

On the distribution question, I'm going to turn that over to Frank to comment.

The year-on-year increase for the quarters if you look at it that way instead of sequentially was up about $8.5 million. And that is broken down into a few buckets. The cable distribution is up a little over $2 million a year-on-year. The volume was a big component of it because that year-on-year difference from $35 million in sales drove probably another $2.5 million of the increase. And then higher payroll costs, we have, continued to add a few hosts and other investments in the team and that is a little over $2 million. Those are the major buckets that drove the year-on-year increase.

Okay. And so is this -- it is about 6 to $7 million or so that you highlighted there of the $8.5 million. I guess we can assume that this is the rate that we will be maintaining as we go into 2006?

I think that there is some conservatism in our guidance for 2006 and I think there is also a recognition that we intend to continue to invest in growth opportunities and it is a delicate balancing act because on the one hand profitability is extremely important to us in demonstrating to the entire financial community and all of our investors that this Company can produce the high operating margins that we believe it can. It is important for us to do that.

At the same time we have a historic opportunity before us and we are not about to blow it. I mean I think we have an opportunity to have a true leadership position in Internet video retailing. We will be a top 10 Internet video retailer and we can all speculate on what that means but I think what it really means is that we have some skills that other people just don't have. And we are going to make appropriate investments without jeopardizing our profitability. We're going to make appropriate investments in 2006 to make sure that we really do have a dominant franchise carved out as this territory gets carved up.

And then just one final clarification. On your $12 million or more EBITDA guidance, I assume that your calculation would include the equity in JV contribution I guess from your 12% stake or so in polo.com.

Yes. That's correct.

Can you give us any sense since that has really just started to be meaningful, particularly visible this last quarter, what the $12 million guidance presumes in terms of ballpark contributions from that?

I think -- assume at a flat level and hopefully we will all be surprised to the upside. I don't think they will be going backwards.

Bob Evans of Craig-Hallum Capital.

Good morning and nice job on the quarter. To follow up to the previous question as it relates to the distribution and selling, $60 million level for this quarter, as we look forward or sequentially to Q1 into '06, I mean the level of increase I guess part of the question would be how much is variable; how much is fixed? Should we expect a dip down in that number as we head into a kind of seasonally weak Q1?

There's a little bit of variable. It is mostly fixed. The biggest piece of the growth in that expense comes from adding additional homes. I mean as you look into '06, you know when we expect to add 3 million homes it will cost us an incremental $6 million and that is how you should think about it.

Fair enough. And you had listed well the mix of your Internet business kind of three parts. Could you give us the kind of ballpark percentage of sales of those three parts? As it sits today and maybe where you think it might be a year or two from now?

Well in very rough numbers I think no one knows. Today the lion's share of our business is part one. It is selling additional products to our television customers, customers who learn about us on TV, they channel surf, they bump into us and then they come to the website and they buy other stuff from us. That is over 90% of our Internet business. Customers who are in our database who probably have experienced us in some way on television.

There is another piece of it which is part two and that is most of what is left. That is pretty much new in 2005 where we go out and we try to find consumers who have never experienced us on television and probably never will -- or may never. I mean we don't really know. And it is a very different kind of a consumer in a lot of ways but they also respond to value. So when we put great values out there, they respond to it and that business is doing nicely and kind of an open question how big that will be two years from now. I expect that it will be much bigger because we're targeting a much, much bigger potential market so we take a direct marketing view of how we do things. We invest customer acquisition costs against a lifetime value of the customers. We are reading the results today. We're happy with what we see. We're going in it very conservatively because right now our customer acquisition costs are well below the even very conservative lifetime value estimates of that bucket to that Internet consumer who hasn't seen us on television.

I would expect that to grow fairly dramatically over the next two years. It will be a substantial part of our business going forward. It is part of why we think that the Internet area is going to grow a lot faster than television.

The third piece Internet video is anybody's guess. I think it is fairly clear that there won't be a lot of revenue associated with it in 2006. That is not the year we're going to be pulling a ton of revenue out of Internet video. And yet, it is such a gigantic opportunity for us over the long term, we have to be all over this one. And I think today it is going to be under 1%. It is all in how you define it but it will be under 1% and it will grow from there and in the coming years we don't really know exactly what it looks like.

What I would encourage you to do is to explore a little of what we are doing today in video. So if you go to the major vendors, go to Google Video and for those of you who don't know how to do it, go to video.google.com and type in mattresses for example. And what you'll discover when you do that I should leave it as a surprise but I won't. What you'll discover when you do that is there is a bunch of amateurs out there with their amateur video flicks and with their offerings and there is someone in Sterling Heights Michigan who has pointed his handy cam at his warehouse and talks about the great values you can get if you're in Sterling Heights.

And then you will see ShopNBC ValueVision and you will see our offers. We have a couple of them. We have a two-minute infomercial a five-minute infomercial high production values, very slick, Serta mattresses delivered to every address in the country. Fabulous values. The best values you'll see in the country and what you see is that we will rapidly -- for the categories we choose for the places where we have the compelling values -- we will rapidly establish a first mover position. And we will hone our skills in terms of one-minute or two-minute or five-minute infomercials but we are really leveraging everything we do so well. It is the V role, it is the host, it's the presentation, it's the features and benefits all that. You can see it all today. Go to Google Video and check it out -- mattresses under Google Video.

We are doing that in other categories too. You'll see it in PCs, LCD TVs and on and on. We're kind of in an experimental stages as they are but a big dose of that coming in the future.

The other piece is when you come to our website if you come to a ShopNBC.com, our website at some of levels looks like other websites. You get the JPEGs and the catalog copy that all Internet retailers provide. But one of the other things you get at our website and we're going to be tuning it up more us the go forward, but even today you can get this, there is a little see video button. And so if you see a watch that you like, and we had a host talking about it on air a week ago, click on the video and you cut right to the three- or four-minute segment in which our watch expert talks about the features and benefits of that particular watch.

And there is an obvious beauty to that because we have introduced the salesmanship and the demonstration and the presentation that video provides into a Web retailing format and it is something that is highly differentiated. Think about your own experiences when you're shopping on the Internet, you poke around for the site and you look for more information. You go to a few sites looking for as much information as you can get and there is no one who can stand next to us in terms of the level of information we provide when we have a host romancing a product for four minutes.

So you will see that increasingly for all of our SKUs. It is not there now but any SKUs that you see on air will eventually wind up with video clips on the website supporting the JPEGs and the catalog copy.

So just a lot of opportunity there. It's a long answer to your question but I think you all probably are interested in where we take this thing and why we believe we have such a tremendous advantage as the Internet retailing moves in the direction of video.

Thanks. And a couple of detail items. What was the average ASP for your products this quarter?

Just a little over $200 I think. $198.

$198. It's in the attachment.

Okay. And how much was financed through your own financing arm? Or your private label product?

The increase in our accounts receivable due to the use of ValuePay was $11 million for the quarter.

Okay. ValuePay $11 million. And then finally on personnel and management team, you have made a number of changes and additions over the last couple of years. I mean are you at where you need to be or are there other changes that need to be made?

Thank you for asking that Bob. I am so proud of my management team. This is a Company -- there really has been a turnaround and I guess any new Chief Executive is going to bring some of his own people in and mix it up with some of the best people who (indiscernible) in the Company. And that is what we've done here. And over the last two years we have assembled really a crack group of people, tremendous turnover. I mean we wound up replacing over half of the officer group in '04. But the group that we have in place today is a group that has been working together closely for about 1.5 years now and this is a talented group, respect one another and are all about achievement. And we are really performing well together. I am really proud of the team, really happy about the team. And no, we don't see a lot of changes coming.

Robert Routh, Jefferies.

First congratulations on an excellent quarter. Given the turnaround that you guys have done, I don't understand why the stock is trading where it is today but what do I know? Anyhow, a couple of quick questions. First I was wondering if you could quantify in anyway shape or form given the amount of growth you've seen in the Internet site of the business and a penetration level that we know on the television side, if you were to look at the Internet side in addition to the TV side. What would your penetration in your estimation really be because it has got to be significantly higher than the number that we are seeing in terms of just pure television purchasers of product?

Meaning if we took the Internet consumers and applied them to the denominator that is the homes that we're in?

Yes.

That's an interesting exercise. I am not sure what that would do. I couldn't give you that answer. I think it will grow dramatically. Some of it will already be in the number because if they are in our homes in our homes passed area, we're going to count them in the denominator. But then you get into a whole world of consumers who don't have television, don't have cable and aren't in it at all. And that is where I think you would see the increase in penetration if you imputed some of them into the denominator.

Great. And also I was wondering if you could comment a little bit I know that Q1 is seasonally weak. But so far in your estimation how are things going as expected, better-than-expected, worse than expected? Are we continuing to see this improvement? And I was wondering if you could comment a little bit on the Boston station and what your intentions are with respect to that? Whether you intend to keep it or possibly monetize it at some point in the future?

And also if you could comment a little bit on -- I know you have the proprietary products that you do whether or not there is anything new that is going to becoming up in the not too distant future that will continue to differentiate what you have relative to some of the other home shopping networks? And in addition to obviously no one knows what is going to happen with Trump and everything else whether you have looked at other personalities that possibly could drive sales such as Martha Stewart or anybody like that? I was wondering if you can comment on that a little bit?

Boy that's a bunch, Robert.

Okay. Here we go. First on the first quarter we are six weeks into the quarter we're happy with where we are so far. I wouldn't call anything until the quarter is over because this as a volatile business as we all know and we have to earn our wings every day. But we are pleased with the way things are going so far. We continue to execute everyday a little bit better. Everyday we are knocking it out. So we're happy about the direction.

With respect to Boston, we don't have any immediate plans to sell that station. Right now it works for us. We have an arrangement with Comcast in which we have given them a must carry waiver and we get some incremental distribution as a result of that. And we are also pleased with the way that distribution is working out for us in Boston. It is cost-effective. It is good from an EBITDA standpoint and so we don't have an immediate intention to part with it. Down the road I think it is an asset that we would consider selling because it is not truly strategic. Although at the moment it works for us.

In terms of the proprietary product, thank you for asking because so much of what we do is about having unique and different and special stuff that you can't get elsewhere. That is what make home shopping as distinctive as it is. And we have just a fabulous merchandising organization that is at work doing that. And part of it is going out and finding interesting and unusual products that can't be found widely and part of it is developing them and designing them ourselves in owned brand.

And I would be remiss if I didn't mention our Pamela McCoy collection which is our owned brand apparel which is now a big business for us. And this is the business in which we go to Europe and we see what is hot and then we develop our own designs based on what we have seen in Asia and we bring them to North America and we sell them for a fraction of what the Italian designs go for. And our customers respond to that and it goes really well. It is great stuff. And that business is just booming.

We do intend to continue to expand with owned brand and we also look for designers that we can get on an exclusive basis and so we're working on that as well in the cosmetics area, in the jewelry area, additional apparel designers. And so I would say that the proprietary price area is an expansion area for us.

Finally on the personalities that can help us sell, you know it is such an interesting -- it is an interesting situation for us because what we know about home shopping is that a personality by virtue of the personality it doesn't sell. A personality that is credible on the product sells. So it is really important to us that whoever it is that we tie ourselves up with and we've experimented in the past with some pretty big names -- that whoever we tie up with from a promotion standpoint from a presentation host, guest or however you want to characterize it, that that person have a lot of credibility with the product that is being pushed. It is not just about slapping a brand on it and hoping for the best.

And so are we interested? We are always interested. If we can find a personality that is a good fit with our consumer that we think can drive traffic our way that is credible on the products, we are always on the prowl for those kind of arrangements, strategic relationships with personalities like that. At the same time if we don't see that true strategic fit with our consumer and the product being pushed, we don't see how it works. And so we are cautious about it. But we are interested but cautious.

Great and just two real quick follow-ups. Given the growth in your Internet business and where it seems this industry seems to be going, it would seem very logical to me that some of the Internet players would have a significant interest in getting into what you are doing because it would give them both a television presents as well as an Internet presence. I am just wondering whether you could comment or not as to whether or not there have been any discussions or any thoughts along the lines of possibly partnering up with or doing something with a Yahoo! or (technical difficulty) like that?

And the last question is given your cash balance and given where the stock is and obviously the turnaround that we have been seeing, I was wondering whether management has considered or would consider repurchasing shares at this level if the Board would approve it or doing something along those lines to rebalance the capital structure a little bit?

On the Internet player’s question, I guess it kind of depends on what you have in mind when you think through what are we talking about here. We are in conversations with Internet players about how we can extend our Internet retailing franchise onto the net and specifically in the video area. We are really thinking through how do you work with the major players to make that happen. And that is probably about all I should say about that. I don't want to lead you to any wrong conclusions there. You know I think that the Internet is a space where there is a lot of collaboration and a lot of partnership and it is the only way that the place really works. You don't do things on an arm's length basis. You do things in partnership wherever you can. And so we are always looking for ways to do that.

I think that the interest in us from a capability standpoint, from a TV standpoint, from a video standpoint what we bring to the party we are reasonably unique and there is a lot of interest in talking to us about what we can bring to the party and that is something we will continue to explore and try to leverage. I think you're absolutely right that there is interest there.

On the cash side, we don't have any immediate plans to go out and do a big stock buyback. It is a conversation we have from time to time with the Board. And I can say safely that we believe the stock is a tremendous value in the 12s and so -- and that is probably where I should just stop. I don't think that we can comment on share repurchase intentions at this time.

Great. Thank you very much and again, congratulations.

[Jonathan Winter] of [Fine Capital].

I guess I wanted to start of congratulating you as well on the excellent quarter. It was really strong across the board. My question really kind of centers in on the Internet sales. I was wondering if you could help me understand the economics of an Internet sale versus a TV sale? I understand there is a cost save on the phone call. But if you could give me any color on the margin implications?

There is a number of -- there is a number of differences. That said, I will preface this with we run this as an integrated business. The Internet business doesn't exist as a standalone business because independent of our television network, we would not have a lot of traffic in our Internet business. We wouldn't have the $140 million of sales that we have in our Internet business. So I think that -- I think it is just important to keep that in mind as I answer the question.

However, there are differences and they are notable and they work in our favor. So I will share them with you.

First and foremost and most obviously, we don't have to spend any airtime on the products we sell in the Internet so our distribution cost there is much, much lower. What is our distribution cost? It is really whatever we spend on paid and natural search on affiliates on shopping sites. It is that side of the marketing side -- it is the marketing side of the equation and in that we are getting ever better. We like the numbers as they are today and we're getting ever better but it is really by comparison with our television distribution cost, it is far more economic to acquire customers on the Internet.

In terms of the operating costs, yes there is no phone call involved and so from an order/capture standpoint, the Internet is attractive and it is the cost of a call and without sharing secrets it is the cost of a call that we save.

We also find it there is customer service implications because Web customers are more inclined to check out their account status online than to call the call center. That saves us money. But probably the most important difference is when we have someone's e-mail address and we have a Web relationship, our level of communication with a customer goes up dramatically because we have a lot of very targeted mail stream, e-mail streams to a customer's segment to keep them informed of the things that they are interested in. And so that is a pretty big difference where we can really increase the level of communication. We don't have to pay for postage costs obviously.

So on a whole bunch of dimensions, the economics of the economics of the Internet consumer are better. On one dimension they are a little worse and that is average order size is lower on the Web but that is partly a function of the assortment that we present there.

Just a quick follow-up to that. Your subscriber acquisition cost on the Internet is lower because you are not -- I mean most of those subscribers are coming from the TV or -- I mean you are not actually acquiring them on the Internet, correct?

Well we are acquiring customers on the Internet so it is true that the lion's share of our Internet customers today are customers who have experienced us on television and often who started by calling our call center. But today we are broadening the pool of consumers, customers who come to us from the Web who have never seen us on television and that is there is a cost associated with that. That is the customer acquisition cost on the Web and we have millions of dollars allocated to that these days.

[Steve Ranieri] of [Ramos Capital].

It's nice to see you guys getting some traction. Congratulations and thank you. The 23% figure which is the percentage of sales coming from the Internet is a tick up from where it has been -- I seem to remember the number being closer to 20. Is that more or less right?

That is correct. It has climbed in the last year from 120 to the current level.

And on a higher revenue base as well. So what I'm trying to figure out -- and maybe you talked to some of this before and I missed it -- but are you -- this suggests that an increasing number of people that are on the Web site are (technical difficulty) unless you are plugging the Web site more to on TV now, why would you have a higher conversion to the Internet from the TV channels now versus before? Or are you bringing -- (multiple speakers).

I understand. It is a combination of a number of things. But we are plugging the Web site more on television. That is for starters. We do a lot of presentation to our customer our television customers on how to order on the Web, how to service themselves on the Web and frankly the time when we take it out is when the lines are jammed and our call center can't quite handle it. That is when we flash up here is how you order on the Web. So we have been pushing our customers to the Web. We like that.

I would say that it is complemented by the much higher level of communication and we now have a lot of e-mail to our customers pulling them to the Web. So if you buy a product of a particular jewelry designer, we will send you e-mails to remind you when that designer is back on air six weeks or eight weeks or ten weeks later. We will say come on, check this out, she is back with all of her latest and greatest creations and you can find them on air on this particular weekend; here are the showtimes. But you should also check out the Web site where a broader assortment is available, where some Web exclusives will be available. And so we are getting higher conversion and repeat purchase and more transactions out of our existing TV base by leveraging the Web site.

So you are just doing it more?

We are doing more.

Just when you look at the Web site itself and there was a question earlier about partnering but when you look at the Web site as a standalone retailing Web site and you compare it to just other standalone retailing Web sites that are not associated with a TV retailing business I still think -- I wonder if you could critique it and tell us what more can be improved and if you think that is worth spending money and time on?

Well, interesting questions. First, again the cautionary you know which is it is really not a standalone business. That said, what could be improved? We have dozens of improvements in the hopper which I'm not going to share on this call. You, our investors don't want me to share this on this call. But we do have a lot of improvements coming. We are going to do -- we're going to do some work around the presentation of product, dynamic merchandising is probably the way to think about it.

It is a combination of search and merchandising. And I guess one way to explain it is most men when they go to Web site they type in what they want and they get a gazillion responses and then they narrow the search and they narrow the search, narrow the search. That is not how women typically shop. So there is an evolution in Web retailing in the direction of presentation of subcategories of product below search results. So you don't just get a big general pool of answers, you get categorized answers. And I know it sounds a little bit abstract but (multiple speakers) if you go to our website in a month or two, you will find us moving in that direction.

Will, do you have anyone there that has sort of been brought in to (indiscernible), because that is a skill set guys like Amazon or any other player have been at for a long time.

We are always trying to build our team. Our Internet team is strong and getting stronger every day and we do take people from industry and we take people with marketing backgrounds who aren't deep in Internet. We take both and we take merchants and put them over there too. So we are, our style of management here is we care about -- we care about talent. We care about experience too but we really care about talent and we are on the continuum, we are more inclined to take the natural athlete over the less strong but more experienced person.

That is our long way of saying we will go get the best people we can get for the Internet group. We have good people there now and we will continue to add to them.

Good luck. Thank you.

[Kevin Fall] of [Magnetar].

Hey guys, nice corner. Could you just talk a little bit about the database of customers that you actually have the e-mail and kind of full customer information on? And also do you write your list out or do you rent other lists from other catalog operators?

Good questions. We really think of ourselves as direct marketing firms so you are really in the right space when you ask us that question. It is an astute question. We have many attributes and I will tell you that the number is a trade secret. We won't share the number. We track many attributes about our customers and those attributes inform which mailings they get and for what reason. We take -- essentially what we do is we take all of our customers in the database. We assess their value to us with a lifetime value models on the basis of the model and on the basis of the attributes that we know about the consumer, the customer, we do different kinds of communications. Typically a combination of e-mail and print. And the frequency is a function of their value to us and whether we have a good fit from a product offer with the attributes we know about them.

And so that is the magic. That is what we do. That is part of being a sophisticated multichannel retailer and it is truly working. I mean what is happened is we use the e-mail communication as a great way to channel demand to our television programming at the appropriate times. It is not random. It is we know something about you; we know we have something you're going to be interested in and we let you know about it. We give you a reason to come check it out and the equation closes. So that is increasingly our style of doing business.

We are continuing to invest in it and our database gets better all the time. In terms of renting out our lists, we don't do that. We just hold our customer information dear and we don't share it with anyone.

And do you do all your prospecting internally or do you --?

No, we experiment in all kinds of ways. We are a classic direct marketer from the standpoint of we rent lists, we test lists. We do affiliate relationships with other Web sites to see what they can drive to us. We work with the shopping engines. We try a lot of different ways of doing paid search, natural search, paid inclusion, all of the above. So we are in constant test mode, constantly evaluating the return on investment from a customer acquisition against the lifetime value at a customer standpoint.

Last question, are you seeing pretty good response rates to your e-mail campaign?

Yes, extraordinary. And part of the reason for that you should know is we don't abuse the privilege. So we consider e-mail not free at all. E-mail is an intrusion. E-mail is you are clogging up someone's e-mail box so you better have something important to say. So we don't burn up our customers with a lot of e-mail that they are not going to be interested in. We really focus on making it relevant and sending them offers that are based on some level of understanding about what they would be interested in. Given the fact that our e-mail is so surgical and sophisticated, our extraordinarily high response rates are not surprising.

(OPERATOR INSTRUCTIONS) At this time I show no further questions.

Okay. Well thank you very much, gentlemen. We appreciate it.

Thanks for participating in today's teleconference and have a nice day.