iMedia Brands Inc (IMBI) 2006 Q1 法說會逐字稿

Good morning and welcome to today's ValueVision Media first quarter earnings prerelease conference call. Following today's presentation there will be a formal question-and-answer session. At that time instructions will be given. Until then, all lines will be in a listen-only mode. At the request of ValueVision, today's call will be recorded for instant replay. Any objections and you may disconnect at this time.

I would now like to turn the call over to today’s host, Ms. Amy Kahlow, Director of Communications. You may begin.

Good morning and welcome. 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. Let me start by thanking you all for joining us on such short notice. We appreciate that. I’m pleased to share with you this morning our first quarter results and some thoughts on the strength in our business.

Our last 4 quarters have shown significant top-line growth and improving EBITDA performance. I don’t think we’re just lucky. We have a strong team executing very well and we have essentially achieved minimum sufficient scale in our [inaudible] cost business. Our future looks bright.

Let me start by sharing with you why we chose to prerelease our first quarter results. Ordinarily, we would prefer to wait until the books are closed and we can give you final numbers. We chose to share these results early for two reasons. First, other players in our industry and in retail more broadly, have been reporting somewhat lackluster results. We wanted to get our positive results out to the investor community as quickly as possible, so that our good performance could be reflected in our stock price.

Second, we are presenting at the Jefferies Media Conference next week and we wanted to be able to speak freely about our business. Sharing our results now is the easiest way to do that.

So let’s spend a few minutes on our business and then I’ll take your questions.

Our sales in the first quarter climbed 13 to 14% over last year, to somewhere between $173 and $176 million. This strength was across the board. Every major product category looked good. The internet side of the business continued to grow faster than the overall business, climbing over 30% versus last year. We will finish the first quarter this year with internet sales constituting more than 23% of our total business.

Our EBITDA will be positive for the quarter, in the $1 to $2 million range. This is a nice $6 million swing from the EBITDA loss a year ago. This profit improvement is a function of a number of factors.

First, our gross margin continues to strengthen. Gross margin in the first quarter will show an improvement of at least 180 basis points. This improvement continues to be driven by discipline in merchandising margin and discipline in promotional activity.

Second, we continue to manage our cost tightly. Our expense growth for the quarter was well behind our sales growth. Expenses grew 9%, approximately $5.5 million, versus the prior year. And the expense growth was driven by the sales themselves. Much of the expense growth was directly associated with volume growth.

Third, the fact that our EBITDA is positive is a reflection of the fact that we have finally achieved minimum sufficient scale. You all know that we work 168 hours a week, 52 weeks a year, selling products to consumers, all with a view to covering the product costs and the high cost of distribution, and all with a view to selling enough product to ultimately pass the profits to our shareholders.

Last year, at $692 million of revenue, we just barely covered those costs. But this year, as we continue to grow, more of those profits on the margin are available to build shareholder value, versus simply covering our costs. We are a highly profitable business on the margin and growth in our business is truly a wonderful thing.

Let me say a word about our internet business. In our last call we talked about our internet strategy. You can see from our continued progress that it is directionally right. Let me summarize the strategy. There are 3 simple parts.

First, sell more products on ShopNBC.com to television home shoppers when they come visit us on the web. This is all about expanded assortment of the franchise that these customers are already familiar with on television. This is the most basic level of our internet strategy and we are executing it well.

Our merchants buy products with a view to how web sales can compliment TV sales. Our customers come to ShopNBC.com expecting to find more products from their favorite designers than we share with them on TV. This strategy is working today.

Second, we want to sell great value products to internet consumers who would not buy from us on television. There are many savvy, value-conscious internet consumers who would never consider buying a product on television, but who would find our terrific values compelling if they only knew about them.

The second part of our internet strategy is to make sure that we communicate our attractive values to the internet community. This strategy is working well also. I won’t share trade secrets on the call, but you can see from our numbers that something is working in our internet business.

Third, we talked about our internet video strategy. That is preceding okay. We now have video clips on more than 10% of the SKUs on our website. We’re experiencing conversion lists when video is involved. This is clearly going to be a major differentiator for us. Most other internet retailers cannot match the breadth and production quality of the video that we will have on our website. We intend to continue to pursue the internet video strategy and to become a leading edge internet video retailer.

We are optimistic and excited about our prospects for the balance of 2006. I know there are some of you who would like to see us take up our guidance for the year. I will tell you that we have a deep desire to deliver the numbers we guide you to. For now, we are comfortable with our full-year outlook.

So that’s the quarter. Sales up 13 to 14%, margins up 180 basis points to over 35%, and expenses tightly controlled.

On that note, let me stop and take your questions.

[OPERATOR INSTRUCTIONS] Bob Evans.

Nice job on the quarter. Can you elaborate a little bit further in terms of the gross margin, in terms of what are you doing that’s causing the growth in gross margin and do you believe it’s sustainable?

Great question, Bob. We believe it’s sustainable. It’s more than sustainable. We’re going to continue to press for gross margin improvement. What we’re doing there is we have tremendous merchandise margin discipline. And what that really means is that we don’t have to markdown as much and we don’t have to take as much price cutting to move the product as we have in the past.

And that’s a reflection of the excellence of our merchants and how good they are at finding the right product and pricing it right in the first place and getting the value for the consumer. The better we are at that, the less markdown we have to do. And that’s the position we’re in right now. Just a lot of discipline around the merchandise margin.

We’re at 35%. In this industry you can get to higher numbers than that. We are happy at 35% and we’ll be happier still if it climbs to 36 or 37%. Don’t know how long that will take, but you can expect that we’ll continue to press on improving the merchandise margin.

Okay, fair enough. And can you also comment on where you’re at with People? I know some of the competitors, HSN, there’s a lot of turnover and stuff going on there, even QVC, kind of where are you at in terms of your people, do you need to add anything, and maybe a comment what’s going on in the industry?

Oh, another good one. You know, I’m a little bit sympathetic to some of my competitors because we had a lot of management turmoil at ValueVision in 2004. We lost some hosts, we had a lot of turnover in our personnel ranks, we changed out a lot of our merchandising organization, we turned over our officer organization and wound up with fewer officers and [inaudible] control and a lot of new people. And that is somewhat disruptive.

I mean, this is a business with a lot of moving parts. It’s an execution business. It’s only as good as a great team working closely together. And we have the good fortune now to have a strong and able team that’s been working together now for nearly 2 years and really some people longer. But the team that’s in place has been in place for quite a while now and is really working smoothly. And I think that some of the others in the industry are having some challenges around that.

Chris Krueger.

This is Chris Krueger at Miller Johnson Steichen Kinnard. If you look at the last 3 to 4 years of making this merchandise shift away from jewelry and into all the other categories, as well as all the people and turnover you had, all in all would you say the bulk of the volatility or uncertainty is behind you?

I would say that we are feeling good about where our merchandise mix is today. It’s been a march over the last several years to get jewelry to the percentage that it represents today. We’re comfortable with where it is. Don’t expect a lot of volatility there. I expect small moves going forward.

I think I’ve said in the past on some of these calls, that we no longer subsidize categories on air in order to build them. In general, we don’t do that, because we now have a free market in our air time. And on the margin, the best product wins. And so that could be jewelry, it could be electronics, it could be apparel, it could be cosmetics, it could be any of a lot of categories and in different seasons and with different concepts, different categories perform in different ways.

I don’t expect a lot of volatility around that. I expect very modest and incremental changes there. And we’ll be taken there by the consumer and by the market, not through some kind of forced action.

Okay. Last question, but a lot of the newer initiatives to drive sales, you talked about the last year, year and a half, can you comment on any of those and the progress you’ve made, whether it’s oversell, add-on sales or anything maybe that has arisen since then as well?

Thank you for asking. This business is really a function of summing up all of these small initiatives, some not so small. And the major ones that we’ve put in place over the last 18 months have really started to bear fruit. Probably the single biggest one we’ve talked about many times is our top value, which continues to be a very strong and powerful promotional tool for us. Every day we have a different value. It represents 15% of our sales today. Solid and we’re just very happy with our progress there.

Some of the other initiatives, over-sell and wait list are in place and working very smoothly. We’ve expanded our add-on sales, so that is where a customer calls in and we offer additional merchandise that’s complimentary to whatever it is they’re trying to buy. We used to have 1 or 2 offers, and we’re not up to as many as 4 offers, if appropriate. There’s always a balance between whether the offer is relevant or not and if it’s not relevant you risk antagonizing a very valuable customer. So we don’t antagonize customers. If we see that the conversion rates aren’t good, we don’t offer the add-on.

That’s a long way of saying add-on sales is working and working well and we’re now up to a capability of offering as many as 4 items to go with every item that gets ordered. We’re pretty happy with it.

One last question. Cash balance is about $75 million, EBITDA turning positive here. Any investments that you need to make in the next year or two that could use some of that cash?

We think that the operating cash flow will largely offset any capital expenditures and really the only use of cash that we see in the foreseeable future, in the near future is in terms of funding working capital. We do use cash to grow our business, because we use ValuePay. And so that’s the single biggest place the cash gets used as we grow.

We’ve said before that we’re very comfortable with that, because it’s what we call a good use of cash. Very low bad debt associated with our accounts receivable, under 1%, and so that would be the place where you’ll see cash being used.

Barton Crockett.

Barton Crockett with JP Morgan. Thanks for taking the question. I wanted to ask you for more granularity if you can, on the sale trends. The fourth quarter was very strong up, basically 20% and here it was very strong again, not quite as strong in the fourth quarter, up 13 to 14%.

Can you tell us whether the quarter started stronger and maybe decelerated in the last month or so and if you can give us kind of a monthly sort of year-over-year sales trend? And any sense of what you’re seeing as we go into the second quarter, is it closer to the 13% or closer to the 20% rate or something below that? A little bit of color there would be helpful.

Okay. I will say that we came out of the chute very strong. Fourth quarter was big and strong and February was strong for us. And frankly, it surprised us a little bit, because we were up against the Olympics in February and historically, being up against big TV events like that really hurts us. And I shouldn’t say remarkably, but I was very pleased that our execution and the thoughtfulness with which our people put together promotional events to compete against the Olympics for their attention. And some of those things really made February a very solid month, when it otherwise might not have been as strong.

We would have expected it to be not as strong as it was. So that’s one way of saying February was really good.

March also, solid. In April we had a little bit of softness, but we’re feeling pretty good right now. Our customers love clearance and the better part of April has been a clearance event. We have about a 10-day event at the end of April where we clear out some inventory and our customers have always loved our clearance events. And we expect them to and fortunately their loving it now.

Okay. Your guidance that you haven’t changed at this point has been for double-digit sales growth for the year. I would assume that, given that you’ve got 13 to 14% in the first quarter, that the balance of the year you see pretty close to that pace, there’s no reason to think that it would be substantially different. Is that correct?

I think that is correct. There is no reason to think that it would be different. Without saying our guidance is 13 to 14% for the year, I would say that we feel good about our business today and we feel good about the way the whole year is going to come out. We’re standing by our original guidance, which was high single-digits to low double-digits, kind of a 9 to 11% range for the business overall for the year.

I think that there is a little bit of conservatism in our minds around lapping a very strong fourth quarter from last year. So we are internally, we’re a little bit cautious around predicting double-digit numbers around the fourth quarter and that’s why you would see that a little bit more conservative.

Okay, that’s great. Very helpful. Thank you very much.

Robert Routh.

Jefferies. A few quick questions for you guys. This was the second really good quarter. Obviously, the business is turning around. And as a result of that, I’m wondering if you’re evaluating any strategic moves you could make in terms of asset sales that you have that you’re not getting value for within the stock that would bring in some more cash? If there are any other opportunities you’re looking at in terms of partnerships with possibly the big box retailers or internet companies, anything like that?

Also, given that your business seems to be moving more and more towards the internet and that’s expected to continue, which makes sense, I’m wondering if you can comment a little bit as to why you don’t trade closer to an internet company on a valuation basis? Because it seems as though if the businesses are very similar when you look at an Amazon or someone like that and what you guys are doing, yet from a valuation point of view in terms of the stock price, there’s a great discrepancy that doesn’t seem to make any sense.

And finally, if you could comment a little bit on NBC’s position in your company, how is that relationship going and do you think there’s any way to possibly get back the warrants they hold that are out of the money or is that not something to look at at the moment it’s just focusing on the business?

Wow, that’s a lot of questions, Robert! Let me see what I can do with them. So let’s start with assets. I don’t think we have any near-term immediate plans to make any asset sales. But it’s probably worth pointing out where the chunks of value are that we don’t get complete credit for, I think, in our valuation.

We have talked from time to time about a television station in Boston, which is worth somewhere between $30 and $40 million. It’s not for sale. We’re not planning to sell it in the short-term. Long-term, that’s something that might get sold, but that’s definitely not on the near-term horizon. But there’s a value there. That is reflected on the balance sheet.

Another valuable asset that we have that is really not reflected as much, and it has to do with the fact that it’s become more valuable recently, is our stake in Polo.com. I don’t know if the investor community is aware that we own 12.5% of Polo.com and Polo.com is doing very very well. And so this is an investment we made many years ago. It didn’t look good and it was written down and so we carry it at essentially 0. But it’s worth substantially more than 0. So I would call that kind of a hidden asset in our balance sheet.

We do get a little bit of benefit there, we equity account a portion of their income. But it’s really the absolute value of the asset that I think is missing from the way people see us. 12.5% of Polo.com.

In terms of partnerships, we are always looking to do partnerships. That’s something we’ve talked about in the past. We’ve got our eyes open. We would like to do more partnerships in the internet space and get a bigger piece of the action there. There are certainly some obvious places we could participate. We can’t go into details now, but we have every intention of being bigger players in the internet space and partnering with more people there.

We should be trading closer to internet multiples. I think your point is really well-taken. It’s a little hard to understand how to value a company like ours, a television home shopping business, because we’re really the only pure play out there. The others are all parts of bigger organizations where it’s harder to figure out what they’re worth. So there’s not really any good comps.

We believe that because of the internet video capabilities we have and our multichannel capabilities and the way we have this integrated direct marketing approach, we think we’re a pretty valuable asset going forward. We think we have unique skills. And even within the internet space, we think we have capabilities that a lot of internet retailers just don’t have. And we are already essentially a quarter an internet business. Our internet business is bigger than a lot of big brand name internet businesses. So we do think we should trade closer to an internet multiple. And we fully expect that someday the world will figure that out.

With respect to NBC, we have a good relationship with NBC. I don’t think there’s any near-term plan for getting back the warrants. There are some warrants out there that are struck in the 17 range and NBC has those warrants and they’re good until 2010.

Okay, great. And just one follow-up question. In terms of your distribution costs, obviously the world is migrating to ultimately 100% digital. And you pay significantly less for digital carriage than you do for analogue carriage. So whereas we see your distribution costs going up slightly as cable systems, etc, keep you on analogue and increase their penetration of their market, ultimately should we be looking for your distribution costs to go down, because what you’d be paying would be less, because you’d no longer be on an analogue distribution tier, but more so on a digital tier, which would increase your margins overall? Or is that not really the right way to look at how things could turn out?

I think it’s a great way to look at how things could turn out. When you think about distribution costs, you said it perfectly. Analogue tends to cost more than digital. Digital is much more available going forward. The world is moving to digital. We’re increasingly adding digital subs. When we add additional subs it’s at much lower cost than analogue subs. And our productivity in digital is actually pretty good. It’s not quite what it is in analogue, but it’s really quite good. We’re happy with it.

And so, we tend to add additional subs and they’re profitable right out of the chute. So, I think that as we go forward, we should expect long-term our distribution costs to drop. Now I would say that long-term, because we have large contracts in place with our current carriage agreements that really have us covered through 2008. And they are fixed cost, fixed price, we know where we stand, we’re not loosing any distribution and actually we think that’s a plus, not a minus.

When we think long-term, distribution costs come down as more digital carriage becomes available. In the short-term there is a little bit of a battle going on for hanging on to analogue carriage and we’re in very good shape as far as that goes. Because we have these long-term contracts of price for 80-plus percent of our distribution. So we’re pretty happy.

Michael Kelman.

It’s Susquehanna Financial Group. I wonder if you can give us a little more granularity on your 3-pronged internet strategy? I know at least with the first one, offering more products to existing TV customers, obviously seems to be a natural extension of the business. Maybe you could focus on the latter two, because I think that’s where the real longer-term growth could come from.

Yes, I’d be happy to do that. And if I sound vague, it’s because I know we’re leading our industry and I hate to share trade secrets. But let me give you a little sense of it.

Part two of the strategy is let’s sell more products to the internet community, to internet consumers who would not otherwise buy from us on TV. And it really starts with, you know, probably most of the people on this call don’t buy on television. A lot of the people on this call wrinkle up their noses at the prospect of a television home shopper buying a product on television.

And yet, if you really get under the covers, the television home shopper is a very astute, savvy, smart competitive shopper. She knows her value. She knows her product. She wants to know everything there is to know about the product. Part of the reason that she watches television is to have an expert salesperson, the host, explain to her why it is that this is such a great deal and she’s pretty good at comparison shopping. She prides herself on the value that she gets.

And the thing that I find a little bit amusing is the same people who wrinkle up their noses at the TV home shopper are the same people who are on the internet who are so competitive about the shopping they do on the internet. And this probably does apply to most of the people on this call.

When these internet shoppers go to buy something on the internet, they compare prices and they want to know as much about the product as they can possibly find out and they go to multiple sites and they look at multiple photos of the product and they read the catalogue copy that they find and they’re mad when the copy on all the websites is the same, because it’s the vendor supplied copy and the website didn’t go to the bother of actually adding and expanding upon the copy with some additional information.

And in the end what you have is a very competitive, astute, smart, savvy shopper who wants to know everything there is to know about the products. And that is very much like the TV home shopper, it’s just a different medium.

And so our whole piece of the strategy, this part two of the strategy, is let’s take these great products and let’s take all this great information we have about the products and let’s take these great values and let’s put them in front of the internet consumer, so that he or she recognizes that this is their kind of a value.

The thing that was a question was, would the internet shopper go for non-national brand products? Could we take proprietary products and brands and mix it into the internet world and expect that we get any kind of take rate? And that was an open question I would say, 9 months ago. We didn’t know whether they would or they wouldn’t. We do do some national brands, but we also do a lot of private label, a lot of exclusive brands and we didn’t know how that would work in the internet space when we got to a consumer beyond our TV shopper.

And the good news is, great product at great values, well explained and presented, can be sold on the internet to a consumer who would never otherwise buy from you on television. That’s our strategy in a nutshell. There’s a lot of different ways you can get in front of the internet consumer. I won’t share all the tricks of the trade, but it’s everything you would expect, from paid search to natural search optimization, to affiliate marketing, to leveraging the shopping engines, to email marketing and those types of campaigns.

It is the wide range of those things and I would say in those things we are learning as we go. We’re pretty good at it and we’re going to get better. But that’s part two of the strategy and I know it was a long answer to your question. But it really is such a core part of where we’re going, that you may as well hear all the details.

Part three of the strategy, the internet video piece, is all about leveraging the facilities and infrastructure that we have to support the TV business on the internet. So what we now have is capability in-house to take our television video and edit it and trim it down and if necessary, we’ll cut from produce, but right now we’re in an edit and trim mode. And take the relevant pieces of it and put them next to the products where they belong on our website.

Mostly we’re focused on our own website right now. Over time you’ll see us working much more to other people’s websites, getting video into affiliates’ sites, doing video advertising, linking in the video markets that are evolving like Google video and Yahoo video. But I would say the early part of this is focused very much on our own site and making our own site distinctive by leveraging video.

Thanks. I have one quick follow-up question. In terms of the product categories, have you noticed a big difference between what works on the internet as opposed to what’s working on the television and does jewelry tend to not sell as well online as opposed to on TV?

There are some subtle differences between television and internet, but our internet business is still largely related to our television business. We still have the same customers in general – not all, but a lot of the same customers. And so our mix is not very very different. Our price point is a little bit lower. Our average price point is a little bit lower on the internet. But the mix, we still sell a lot of jewelry. We sell a lot of our trends. We sell a lot of everything on the internet that we sell on television. There’s not big big differences there.

There is a slight difference in the average selling price. And what we’re reading over time is whether there’s a difference in the value of an internet customer versus a television customer, versus a customer who buys through multiple channels. And the jury is still out on that. We don’t have mature lifetime value models for our internet consumers.

Deborah Fine.

Fine Capital. Congratulations on your results. Could you talk a little bit about how returns are running? I know you use that as a kind of advertising vehicle, but I’m wondering if they’ve gone up, gone down, if you see any opportunity there? And then I have a follow-up question.

Returns. First I’ll give you a statistic, but then we’re going to talk about it. The certificates are the same. Returns are flat, they haven’t changed. But the real question is whether we’re happy with that or not happy with that. And I would tell you we are reasonably happy with that.

Our jewelry business has pretty high returns, but we want it that way, because jewelry doesn’t cost a lot to ship and it doesn’t cost a lot to return and especially when you’re into high-priced fine jewelry, you really want to encourage the consumer to take the jewelry home and look at it and evaluate it and if she doesn’t like it, send it back to us. That’s okay. And we don’t get stuck with it, because we have return privileges with our vendors.

So we want to encourage that kind of try it, check it out mentality with our consumers, with our customers. And that works great with jewelry and so we encourage it.

At the other extreme are things like mattresses and televisions, where we really would prefer that they not return it. We want to manage those rates down as low as we can. And so in those cases we don’t encourage the customer to take it home if they’re not sure. If you’re not sure, don’t buy it. And that’s okay. We also help them along with charging them for return shipping and handling on things like mattresses, to encourage them to really be sure before they buy it.

And so we manage our return rate down to low single-digits in some of these categories by virtue of the way we present them and the policies that surround them. So I think it’s a balance. We have high returns in some areas where we want it. We have low returns in other areas where we want it. And on balance, we’re happy with where we are overall.

That’s not to say that we don’t think it’s a big opportunity area. We are always evaluating how do you reduce your return rate. And so we look for sources of discontent and dissatisfaction. We study it. We have analytics around it. And I would expect that we’ll make progress, but I wouldn’t say that it will necessarily show up in the overall number.

Okay, thank you. And then in terms of your internet strategy, are you trying to go towards any branded products on the internet, in terms of maybe some companies that already exist out there that have some branded value on the internet already?

You mean in terms of the products that we sell?

Yes.

We do a mix. We have some national brands, we have some brands that are semi-exclusive to us, their products are more widely available with us than with others, but they’re known, because they show up in other venues. And then we have some that are absolutely exclusive and only on private label. It is a mix. We like it that way. We think the national brands give credibility to our private label brands. We think the margin in the private label brands is really attractive, so we’ll keep at that.

And I think you’ll see us continue to mix it up on the internet as we do on television. Just a mix of both. We have a nice balance there. We’re happy with it.

Well, I guess what I was trying to ask was not brand of products, let’s say, but having a branded umbrella under which you sell the products?

Well, obviously, our primary brand is ShopNBC.com and that is the major umbrella under which we sell the products. We do sell some of our products in other venues and there’s a strategic question about how noisily we want to do that. Obviously, you have market places like eBay and Amazon, where we could have a lot of volume and we have to think through, do we want that volume, under what circumstances, at what kind of margin rates, how prominently do we want to feature our brand when we do that? So, we wrestle with those issues. And I think that there is opportunity there, yes.

At this time I show no further questions. I would like to thank everyone for participating in today’s teleconference and have a great day. You may all disconnect.

Thank you.