iMedia Brands Inc (IMBI) 2006 Q2 法說會逐字稿

Good morning, and welcome to ValueVision Media's second-quarter earnings release conference call. 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 remain in a listen-only mode. At the request of ValueVision, today's call will be recorded for instant replay. Any objections, you may disconnect at this time.

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

Good morning, and thank you for joining us. 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. Will Lansing, President and CEO.

Good morning. This morning's call is an easy one for us. Our team delivered another strong quarter. It gives me great pleasure to share with you our financial performance for the second quarter. I will summarize that performance, and then save most of our time to answer your questions about the business.

In the second quarter, our sales climbed 10% over last year to $187 million, a record second quarter for us. We were also profitable at the EBITDA level. Excluding options expense, we had EBITDA of $4 million, up from the $2.5 million of EBITDA we generated in the same quarter last year. Our team's strong execution is starting to be felt in consistently strong quarterly performance, and we're proud of that.

From a product mix standpoint, sales were strong across the board. No area dominated the quarter, and no single area was a disappointment. We're getting quite good at planning the right product mix and making real-time adjustments to optimize our sales.

This quarter was marked by three major promotional events, and all were successful -- Memorial Day, June All-Star and July Clearance. One of the keys to success in our business is making promotional events work well, and we're increasingly good at this. For all of these events, driving the sales that fuel our business has to do with having the right product lineup, promoting it properly in advance to drive sales and traffic at the appropriate time and presenting it persuasively. Having an integrated web strategy, as we do, lets us leverage the full power of our complementary television and Internet direct marketing business.

Our gross margin was 34.9%, a slight decline of 30 basis points from the same quarter last year and down 50 basis points from the first quarter. It remains a major improvement from the 33.2% margin we had two years ago in the second quarter of 2004.

The slight decline this quarter is largely attributable to merchandise rate and more use of free shipping and handling during these promotions. We're comfortable with this level of gross margin, though we will continue to press for margin improvement where we can. It is worth planning out, though, that our goal is not margin rate; it's EBITDA. The biggest lever in EBITDA is gross margin dollars per hour (technical difficulty). So we optimized our television business with a view to making the most profit dollars per hour that we can, and you can see the results in our steadily climbing EBITDA levels.

Our Internet business continues to be strong, and represents 23% of our total sales. As I have indicated in earlier calls, we believe that there is significant leverage for us in Internet video, an area where we can improve the persuasiveness of our Internet product presentation by repurposing edited television content. This strategy is working well for us, and we will continue to expand the use of video on our site.

During the second quarter, we relaunched ShopNBC.com. We redesigned the site with a view to superior merchandising, better navigation and a more appealing look and feel. The relaunched site is working well, and we're experiencing positive customer feedback in many forms, but most importantly in the form of strong sales.

I know that when you look at 13% sales growth and $7 million of EBITDA year to date, some of you would like to see us get more aggressive with our guidance for the balance of the year. Let me say this. We are optimistic and excited about our prospects for the balance of 2006. We are comfortable that we will be able to deliver what we have promised, high single to low double-digit sales growth and at least $12 million of EBITDA.

I would like you all to be bullish about our business, because it's a great business and it's performing increasingly well. But at the same time, I want you to be realistic about what we will achieve. Our fourth quarter is one week shorter this year than last, because of our change to a 4-5-4 retail calendar. So we have a bit of a headwind versus the very strong numbers we posted in last year's fourth quarter. We feel good about our prospects, but we are realistic, too. We stand by our guidance.

Please recognize that our business has fabulous economic characteristics as we grow. Our contribution margin is about 28%. As we continue to scale our business, our variable profit runs through to EBITDA instead of simply covering our large fixed costs. Our business has achieved minimum sufficient scale. We're delighted about that, and we look forward to delivering ever-improved economics to you, our shareholders.

On that positive note, I am going to stop and take your questions.

(OPERATOR INSTRUCTIONS). Mike Kelman.

Susquehanna Financial Group. Can you talk a little bit about the competitive landscape, particularly now that Shop At Home has shut its doors? Are you seeing any increased traction from these customers? Also, have you signed any of the talent that used to be on that network to your network? Then I'll have a follow-up after that answer.

Yes. Well, a couple of [public] home shopping businesses have gone out of business recently. One is WSS, a small local player, and Shop At Home is not the company that it was. That is a benefit to us, obviously. There's only so many television home shoppers in the universe, and we would like them to find product with us, as opposed to with competition. So having fewer competitors is obviously a good thing.

You did point out where the biggest benefit is, which is in picking up some of their vendors, some of their employees and actually even a little bit of their distribution. We have done all those things with Shop At Home, and it's looking really good for us from that standpoint. We have some of their best vendors coming to us, and we'll see them in the third quarter. We have some terrific employees, including our new Head of Internet, Geoff Smith, who came from shopathometv.com. We have picked up about 0.5 million homes in distribution that were formerly Shop At Home. So we are feeling really good about that.

So yes, a positive all around.

On a separate question, given the strong operating performances over the last four quarters -- or five quarters, now -- your cash balances remain relatively consistent. They now sit around $2 per share. Do you have any intention to start buying back your stock, particularly since the market has not really fully rewarded you for much of the success in your turnaround that you have been executing on?

With that being said, there's clearly some level of cash you would like to have to maintain for working capital purposes. So if you can give us a sense as to what that is, so we can get a better understanding of how much stock you realistically could buy back, if you are interested in pursuing that avenue?

You raise a subject that's near and dear to the hearts of many of our investors, and to me, too. We talk about it at virtually every Board meeting. We do think our shares are undervalued at this level and represent a great opportunity, a great buying opportunity. Buying back our stock is something that we discuss from time to time, and it's certainly on the agenda when our stock reaches low levels like this, and I'm sure it will be on the agenda for our next Board meeting.

Our current stock purchase authorization is no longer in force, and so it would take a new stock authorization for us to be able to buy back stock, but it is something that we discussed at our Board meeting. I can't tell you that we're about to go out and do it, but I can tell you that we think the stock is a pretty good buy at this level. So it's a reasonable thing to contemplate.

What is the magic level of cash that we need in the business? How much cash is there available to do other things with? We do need to fund working capital as we grow. Our accounts receivable consume -- with sales growth, we increase our accounts receivable, and so they consume cash. Now, it's a near cash kind of a thing, because our bad debt is extremely low, and we don't really mind having our accounts receivable swell with sales. That is the biggest single use of cash; that's where the cash goes.

So as we anticipate greater growth in the balance of 2006 and 2007 and 2008, there would be some cash need -- certainly not the full $74 million that we have on the balance sheet. So there's some additional cash there that we could do something else with.

With regards to the gross margins in the quarter, coming in around 34% --

34.9%.

I'm sorry, 34.9%. Do you expect more free shipping and handling campaigns to go throughout the [remainder of] the year? Would you expect gross margins to kind of hover around this level, or would you expect them to expand throughout the remainder of the year?

Great question. I'm glad you asked it. In terms of the free shipping and handling, we use it as a sales tool typically connected to promotions, and we try to manage it down. But there's a time and a place for it. It's a very powerful tool with direct marketing, with television home shopping. We're not going to stop using it.

In terms of its impact on gross margin, as you could see in this quarter, it clipped our gross margin a little bit. But the fact is that our gross margin is more sensitive to the rate of the merchandise than to that, and we have a free market in air time with which product winds up in our lineup on the margin. It's not driven by gross margin rate; it's driven by gross margin dollars per hour.

So let me just take a minute to talk about that a little bit more. We care about EBITDA. More than anything, we care about producing EBITDA, and if we can produce more EBITDA by selling a lower gross margin product, lower gross margin rate product, because we can get more gross margin dollars per hour by doing it, that's what we will do.

We could have a 37% gross margin, but have lower EBITDA to show for it if we had the wrong mix. We don't do it that way. We really do optimize for EBITDA, which is another way of saying we optimize for gross margin dollars per hour. So I don't think you'll see us forcing a gross margin rate. That said, I would imagine that we will hover in this range to slightly better, but I couldn't promise you that. If it went down, it would be for good reasons. It would be because we thought we could get more money by selling a lower rate product.

Bob Evans.

Craig-Hallum Capital. Good morning, and nice job on the quarter. Good progress. First, a couple of detail items. Do you have the net distribution and selling number and G&A number?

Yes. For the quarter, before stock option expenses, selling and distribution was $55.3 million, so that's up about 9%.

And G&A?

The G&A was $6.9 million.

Do we expect -- obviously, (technical difficulty) distribution and selling goes as your distribution goes. But G&A -- do we expect that to be relatively stable?

For the balance of the year, yes, it should be pretty stable.

Could you elaborate a little bit more in terms of distribution in Shop At Home? Have you gotten the homes that you think you're going to get there, or are there other opportunities? Are there other opportunities from a vendor standpoint, [host] standpoint there? Or do you think you have pretty much what you think you're going to get there?

On the distribution side, remember that we have essentially a full national footprint. So most of the distribution was duplicative. So what we did was we systematically went through the Shop At Home distribution and identified (technical difficulty) distribution lineup where we thought we could economically pick up homes, and we have done that. So I would not expect more distribution to fall out of the Shop At Home equation, although, as you know, we add approximately 4 million homes a year, on an ongoing basis.

In terms of the vendors and other things coming out of Shop At Home, you haven't seen the impact of that yet, and we haven't either, but it's coming. We are in negotiations or [close to negotiations] with a number of vendors, and you'll see them on ShopNBC in the third quarter.

Also, I believe you have done roughly $7 million of EBITDA thus far this year. Your guidance is for over $12 million. The second half is seasonally stronger than the first. That would appear to be quite conservative. Can you elaborate a little bit more there? Is that just conservatism on your part?

I guess what I would say is we stand by our guidance. We don't mean to disappoint, and we don't intend to. Is it conservative? We have a reasonably hard economic environment, with consumer confidence and gas prices and all that. We're going into the third quarter and the hurricanes that go with it. I probably don't need to list all the things that could go wrong in this business. And yet, at the same time, I would say our business is executing better than it ever has. Our team knows what it's doing. I wouldn't call it flawless execution, but I don't think our company has ever executed as well as it is today. I believe that it's sustainable and repeatable, and I'm just incredibly proud of our team and the way we are executing. So I am much less worried about the economic backdrop than I used to be.

So where does that take us for guidance? We are standing by our guidance.

I understand. I know you don't want to say that you are being conservative. Finally, not to beat the shareholder or the buyback question to death, but I've talked to a number of shareholders. I guess the question is, what do shareholders need to do to really be able to really convey the message that I think a buyback makes sense? Because obviously, (technical difficulty) the one multiple, and the use of that cash can get a much higher multiple, based on your valuation. It seems, now that you are kind of in a positive cash flow environment on your fundamentals and you have really done quite well and the market hasn't rewarded you, I just know that a lot of shareholders would really like to see that occur.

I think the points are well taken, and you have identified the key elements of the debate that we have internally, which is yes, whenever our stock price is low, which it has been, it looks like a buying opportunity. Then you set that against the comfort that you have from having cash when the business isn't EBITDA positive. Yet today, we have that situation where the business is EBITDA positive, and it looks like it will be on a sustainable basis going forward, and the stock price is low.

So you have that alignment of the planets that makes you think it sure makes some kind of sense to do a buyback. But I couldn't commit to that, because that's a decision that the Board would have to make.

Internet strategy -- can you elaborate a little bit more on your Internet business and what can make that grow further? To a degree, I think you have (indiscernible) in the past and trying new relationships and so forth. Can you give us an update there?

Yes. I guess I would start with the relaunch of ShopNBC.com. We have new navigation on the site. We have a new look and feel. We have an approach we call searchandising, which lets us kind of mix navigation with presentation of merchandise in a way that we think is appealing to our kind of a customer. That's all adding up to reasonable strength in sales. The next iteration of it will allow us to do a fairly high level of AB testing on the site, which will really let us optimize the sales per pixel.

So we feel very good about the infrastructure and the general layout for ShopNBC.com. That's kind of at the level of the guts of the site. We think of it is an integrated business. ShopNBC.com and ShopNBC, the television network, are two sides of the same business. We have a relationship with the customer, as you know, and we try to manage that relationship to optimize the lifetime value of the customer. We do that by presenting stuff on TV, and then by extending the franchise that we have built on TV on the website.

Now, there's plenty of things that we do that are unique to the website. But we think about the businesses in a complementary way. They really are, and they are working more and more together. So we are feeling three good about it.

I guess I should add one other thing, which is some of you may recall from our last call, we talked a little bit about our Internet strategy. The one piece of it which is obvious is let's sell more products to our television customers when they come to the website, because we can have an expanded assortment on the website, and we do that. The piece that's a little bit newer and that is working incredibly well for us is online customer marketing, where we take our terrific value proposition and we go out to the Internet community with it, and we find Internet consumers who would otherwise not be caught buying on television -- they are not TV home shoppers. But they are still competitors shoppers and they care about a good value, and that's what we do; we provide great values. We put those values in front of them, and we are increasingly doing that with paid search and natural search optimization and shopping engines and affiliate marketing and kind of the classic Internet customer acquisition approaches. It's working very well for us.

[Simon Fraser].

[Redoubt Management]. I wanted to, first, commend you for an excellent quarter, and in fact a string of excellent quarters. But it strikes me as what is really telling in here, and I am going to offer more support for the buyback and try to figure out what it's going to take to get a Board action out of you. You've been positive for a buyback, really, for every time it's raised on the call. We haven't seen that action from the Board yet. The stock is down 18% from where it was a year ago, in spite of really excellent operating results.

Where is the sticking point on this? It's clear you would buy back stock, if it was up to you, I think, from the way you talk. It's clear that the endgame strategy being a likely transaction in this situation, buying stock back at the $10, $11 level is particularly compelling. What's holding this process up? I think that shareholders would not to see a Board actually show a little bit of confidence in the sustainability and viability of the business.

All I can say is that we do discuss it in our Board meetings, and the case becomes more compelling as we move into a position where we are EBITDA positive, like we are today, and where the stock price is depressed, like it is today. So all I can say is that we will continue to discuss it.

You have the Boston station; that was basically a strategic purchase. What is the thought process on that? Do you still need to actually hold that asset, for the strategic reasons you bought it?

Good questions. That station gives us about 1.6 million, 1.7 million homes of distribution. If we didn't own it, we would have to pay the MSOs for comparable distribution, and we probably couldn't get exactly comparable distribution, because we have really nice analog channel position because of the must-carry rules.

So we like that distribution a lot, and it has an EBITDA benefit to us. That said, it does tie up cash. That said, we don't need the cash. So for the time being, I think we're going to wind up just keeping it and continuing to run it. It gives us good distribution and it's profitable for us. I think that it's not an asset that we have to own forever, and one could easily imagine the day when we decide to part with it. But that day is not anytime soon.

Earlier this year, there was a lot of smoke around the Company. There were rumors of everyone from Donald Trump to Martha Stewart to Internet companies and the like looking at ValueVision/ShopNBC as a strategic acquisition. We haven't heard any of that. What does the market look like? Did the Shop At Home sale take the bloom off of the rose? Are people just not interested in this space strategically anymore?

I think there's always a lot of smoke around this business, to use your words. We are a unique asset. There is no other franchise anything like us. The other two players are inside of other entities, as you know. QVC is in Liberty, and HSN is in Interactive Corp. So we are really the only pure play out there.

I think that the skills and capabilities and franchise that we have is really hard to duplicate, and becomes ever more valuable as we move more and more into a universe where people value multi-channel retailing and focus on direct relationships with consumers and focus on Internet relationships with consumers and start to think about how to leverage Internet video, which is a core competency for us.

So the level of interest in our company and our asset, I would imagine, will grow. But who can say when?

I assume that the Shop At Home [effectively] fire sale in the quarter had some damaging impact on your business. Is there any way to quantify that?

It had a very short-term impact when they went -- during the month of June, they went through a kind of a going-out-of-business sale and they sold their product at well below cost. They did wind up with higher traffic then, and it did come out of us to some extent, just for a very short period. You saw our numbers for the quarter. Apparently, it didn't hurt the quarter enough to make a difference. So I would say, if that's how we do with Shop At Home with a fire sale, I guess there's not that much to worry about with us.

I was going to say, because what I was actually wondering was, how much better would the quarter have been without Shop At Home?

A little bit better.

Your guidance to me -- you guys basically did $7 million in EBITDA in the first half, on something about like $365 million in aggregate revenues. Your guidance gives $400 million in aggregate revenues in the second half, yet you are only offering up $5 million plus as your EBITDA guidance. Either there is something seriously going wrong, or you guys have set this bar so low that even I could hurdle it.

I just don't know how to answer that question. All I can say --

It's provocative.

Yes, it is provocative. It is provocative. We don't want to be perceived as a bunch of sandbaggers, and yet we don't want to be way out there on a limb, either. So I think that what we have is numbers that we think we can achieve. We are comfortable that we can achieve them. We would love to surpass them. If we believed we were going to surpass them in a really, really significant way, I think we would guide upward, and we would do that as we got more and more comfortable with that.

This is a business where you earn the money every day, and you take it a day at a time. Right now, we are a couple of weeks into the third quarter. I couldn't begin to tell you how the third quarter is going to be. We will work our way through it. We will see. A year ago, we had Katrina; that didn't help us very much. This year, I hope we have nothing like it. We just don't know.

So what basically you're saying is, at the end of the third quarter, you basically are through hurricane season, and we, at that point, should expect to see you guys offer what those of us on the buy side might consider more realistic guidance, something in the $15 million, $17 million [cluster].

I think we have offered realistic guidance, and if we have different guidance at the end of the third quarter, we would give it. Probably, I will be saying to you we don't know how the holiday season is going to look.

There's always going to be something that you can hold (multiple speakers) --

There's a lot of uncertainty in this business. All I can tell you is we've got a great team that knows what it's going, and so we will react as well as we can possibly react to the outside economic environment. We will just keep doing our jobs as well as we know how to do, and I am really proud of the way they do it, proud of the way our team operates. But I can't make you promises beyond the guidance we have given you.

Well, obviously, you have done an excellent job. We ourselves, I think, think you are going to have a substantially better year than you are willing to guide to.

I hope you're right.

We offer our support and only ask how shareholders (indiscernible) what we have to do to push management and the Board to get a buyback in place. The stock down at this level -- basically, you are paying less than $9 for the business. My assumption would be -- I think Bob Evans from Craig-Hallum made an excellent point. The fact that the cash is a one multiple, now that you are generating cash, you are basically -- in buying back stock, you are investing in a stock that would probably -- a company that would be sold, when it's sold, at something in the low teens on an EBITDA basis. So buying something back at $1 and being able to sell it back at $13 is an awfully high margin. I think you guys in the retail business understand that pretty well.

Duly noted. (Multiple speakers).

Barton Crockett.

From JPMorgan. I wanted to ask you, Will, if you could talk about -- I know it's early in the quarter. But what are you seeing in sales trends going into the third quarter? Does it look stronger or weaker than the 10% you put up in the second quarter? You had a couple of crosswinds there, and you might expect that Shop At Home hurt you in the second quarter and it might be helping you in the third quarter.

The quarter is really young. I could tell you that the quarter is off to a great start, and it is; it's off to a great start. But if I gave you the great start numbers and you took those and extrapolated from those, you would have our guidance in a place that I would not want you to be.

So all I can say is we are happy with our execution. We're happy with the way the second quarter ended. We are happy with the way the third quarter has begun. It is in excess of the 10% number we put up in the second quarter. I guess I would just leave it at that. I don't want you guys to go and get carried away. There's a tendency to get carried away when you hear good numbers, and I don't want you to do it on the basis of a couple of weeks of good results.

Fair point. Turning to the expense side of the equation, the fourth quarter -- obviously, it's skewed on the top line by the period accounting change. But that may also have some implications for expenses. I know last year in the fourth quarter, we had a hard time anticipating the big increase. For instance, in distribution and selling in the fourth quarter of 2005 was $60 million, and the second quarter was $52 million, up $8 million. That was more than just growth in homes; there were some other things happening. Is there anything seasonally that should lead us to expect that the distribution in selling would have a comparable increase in the fourth quarter of the this year versus the third quarter?

No, you won't see that kind of increase that we had in the (technical difficulty) last year. One of the things that did impact the fourth quarter last year was because it was such a significant improvement, we did have to accrue the majority of the bonuses that were paid in the fourth quarter. This year, we are doing that as we go through the year. It should be much more driven by our steady increase in homes, and the variable component will grow as sales grow on a sequential quarter basis.

But I guess you had probably, what, like $3 million to $4 million last year in bonus accrual that was unusual in the fourth quarter? We shouldn't expect that this year?

That bonus accrual is being smoothed out through the whole year now. So yes, you won't see that one big lump.

The other thing I was wondering is, could you give us on color on what is happening with your Polo.com, your [equity in] JV? What was the contributions there in the second quarter, and what should -- give us some sense of what you expect happening there over the back half of the year.

The equity income for the second quarter was $1 million, and it's a business that continues to perform very well, and will probably continue to perform very strongly through the rest of the year. But it's a business that we don't control, and we simply equity account for it.

$1 million -- that would, I think, be very big growth over the year-ago period. Strategically, do you guys think that you're going to continue to own that? Or at some point -- it's a nice contributor to earnings, but it has also got some asset value at some point. Could there be a change in that structure?

At some point, there could be a change in the structure. It's not strategic; it's a nice to have. We're really delighted that it's doing as well as it is. If you think about the asset, the Polo.com asset, what you have is a separately massive subsidy from Ralph Lauren to the Polo.com asset, because you have all the advertising and marketing and promotion that goes with Ralph Lauren that benefits the Polo.com business, without that money having to be spent within the P&L of Polo.com. So there's tremendous benefit there. We like the asset a lot.

That said, it's not strategic. ValueVision could get along just great without it. So it's another asset we could part with at some point, although we don't have any immediate plans to do so.

Just remind me -- is there cash distributions attached at some point to the earnings you are reporting there?

Yes, there is. Sometimes -- they have gone in and out of a dividend program. Currently, this quarter, we did not receive any dividends, but we expect to receive some dividends in the balance of the year.

But should we normally expect that your cash would be much less than the earnings you're booking from it?

Yes.

Can you give us a sense of, Will, of how you think this business should normally perform in a recessionary environment? I think that's one of the fears out there. I think Barry Diller addressed it, saying that he thought that normally -- or what he has seen historically is that they have done well in a recessionary environment; they have not been affected. But you have got kind of a different skew, more upscale stuff. I was just wondering what your thoughts -- maybe [less] history also -- but what your thoughts are about how you should normally be affected if we do see a meaningful turndown in the consumer.

Good question. I would say that we have historically been quite affected by a recessionary environment or lower consumer confidence, for a couple of reasons. One is that our product mix skews to discretionary purchases, and also -- that's really the biggest piece of it. The other piece of it would have to do with kind of our set of skills internally for handling those kinds of situations, for handling that kind of economic backdrop. I would say on both of those, we're in much better position today than we have ever been in the past. So our product mix is much more diversified than it has been in the past, and we are much more able to shift from one product category to another, if we sense that the economic environment calls for it.

What does that mean specifically? It means that if we sense that discretionary purchases like jewelry are a little bit off, we can skew our product mix a little bit more in the direction of things that sell better in a recessionary environment. So I would say that we're better positioned that way. Then from an execution standpoint, again, our team just gets stronger and stronger, and knows what it is doing better and better. That adds up to better performance against any economic backdrop.

So that's a long way of saying we feel better about it, and we are less -- of course, we're still affected by the environment. But we're less worried about it than we once were.

Let me just follow up on that, just to elaborate. Are you seeing any signs that the consumer that you're dealing with is affected by the things we're seeing -- the higher gas prices, the weakening of the housing market?

Our sales are just fine, and we are happy with what we see. But I think that's as much about our product mix and our execution as it is about the economic environment. I couldn't really make a bunch of broad predictions about the environment based on what we see.

One other thing, just to follow up on -- I know that you had a question on what was the share count for the quarter. It was 37.7 million shares. That gives you an EPS loss of $0.02 per share.

Chris Krueger.

Chris Krueger, Miller Johnson. For your sales guidance for the rest of the year, it's high single digits to low double digits, or call it 10%. Do you see that being a roughly 50/50 mix of new home growth versus sales per home?

No, no. If you take 4 million homes a year over our 65 million homes, you're looking at about 2.5% organic growth in homes. So the balance would be same-store sales, if you want to think about it that way. It's actually even more skewed to same-store sales, because typically new homes are less mature and produce even less than average homes.

You mentioned briefly about the hurricane impact last year. I know it basically draws viewers away from your channel. It hurts that region, of course, too, but it also draws viewers away, at least for a couple of weeks, over to the news networks. Can you talk a little bit more about -- maybe in a dollar amount or in a growth rate amount, how that impacted you last year, just kind of a review?

Of the impact of Katrina on our third quarter?

Yes.

It's a little bit hard to quantify, what we felt was softness as a result. I would say that we got through the third quarter in 2005 better than the third quarter in 2004, largely because we have gotten better with the merchandise mix.

So let me be specific about that. When people see homes flooded out on television, they may feel guilty about buying high-priced jewelry, but they feel less guilty about nesting and buying comforters and quilts. So if that's what it takes to move product during periods when the viewers are looking at hurricane on other networks, that's what we will do. We shift the product mix in the direction of things that work. We will continue to do things like that.

Kevin Foll.

Magnetar Capital. Nice quarter. Just wondering -- are you guys going to do $50 million EBITDA this year, or what? I'm just kidding.

Can you give me a little bit of just how to think about the leverage in the model a couple years from now -- if you guys do $900 million in revenue, what the distribution and selling rate would look like, giving the structure?

That's a great question. The way we think about it -- and you all have to model it your own way, but I think the way you have to look at it is you look at the top-line growth, which has run 12.4% on a compound annual growth rate basis for the last six years. So assume that we're in this 10%, 11%, 12% kind of a growth trajectory going forward. Then you look at the economic model that says how much of the contribution can you expect to drop through to EBITDA? That number is somewhere in the 25% to 28% range. We have a 35% gross margin, approximately, which says 65% product cost. We have about 7 points of variable cost, which is order capture, customer service and fulfillment. So you're at about 72 points of truly, truly variable, at least, so 28 points for contribution margin.

So there's a little bit of complexity for a telephone call. But if you take the 28% contribution margin and you apply it to the incremental revenue year to year, as we grow 10%, 11%, 12% per year, that's what should be dropped down to EBITDA and added to the prior year's EBITDA. So you can take that out a few years, and you can see where the business goes. There's a lot of leverage in the model, a lot of leverage.

On the D&A, how much are you modeling for the year? About $20 million, $21-ish million? Is that kind of what you're thinking, or --?

No. For the year, it's going to be a little higher than that; it's probably going to be a little over $22 million. We've got some IT projects that have been developed in the first half and will start to depreciate in the second half, so it's going to -- the run rate will go up slightly.

How can I think about the revenue growth, the specific drivers there? Is it transactions? Is it average price point that is driving it? Is it a combination of the two?

It is a combination of the two. If you look at our ASP, two years ago it was $240, and today it's a hair over $200; we are down about 20% from two years ago. We have more transactions, obviously. So it is a combination of the two. What we really focus on is trying to get more transactions per customer. We want more transactions per customer, so we spend a lot of time on getting first-time purchasers to repeat, and then on getting repeat purchasers to repeat more frequently. We have lots and lots of direct marketing technology around doing that. We hit them with email and direct-mail and promotions of all sorts that are very much designed to get incremental transactions out of consumers that we have a relationship with of some sort or another. That's the biggest driver.

So I think what you do is you look at what we have done to date and you say, well, they are probably not going to get worse at how they manage their relationships with customers. They might get better. They might stay the same. We seem to be getting better, quarter in, quarter out.

So that's how I would think about that. Assume more transactions per quarter, and then assume that we continue to grow our number of customers, and then assume the ASP is in a range -- although we would like, over time, for it to come down but come down very slowly. I think those are the factors at work.

(OPERATOR INSTRUCTIONS). Robert Routh.

Jefferies & Co. We have, through some channels, actually done research, have heard that some of the very high-end retailers -- Tiffany's, Coach, et cetera -- are suddenly getting an interest in actually having their products on a home shopping network. The only thing that has kept them from doing that so far has been concerns about the value of their brand and the lead-in to whatever they would be selling. I'm curious if you could comment a little bit as far as have you had any interest from any high-end luxury retailers, as far as selling their products on your network yet. And if so, if you could give us any insight as to how close you may or may not be, or who they may or may not be, and how good of an idea you think that could be for your business, because I would assume the margin would be incredible if it does come to fruition.

It's a good question. I would say that historically, our business has had -- the television home shopping business; I shouldn't say our business. But the television home shopping business has had a little bit of a down market look and feel, and that has prevented some of the higher-end retailers from wanting to be associated with it. And also some of the brands, some of the manufacturers and their brands -- they didn't really want them on television home shopping.

That is certainly changing, and I think that ShopNBC is at the forefront of changing that perception. We have a much more affluent customer. We have an upscale demographic. We're a classy outfit. No product that appears on our network is worse for having appeared on our network. They are only better. They are only enhanced. The brand positioning has only improved.

So that is increasingly recognized by both manufacturers and the brands, and also by high-end retailers. We have had some conversations -- I think you're starting to see it show up in our cosmetics area, where we have some higher-end brands showing up. In the consumer electronics area, we have a branded product increasingly coming on that wasn't willing to be on before. We have had conversations with retailers, too.

So I think your instinct is right. I can't really comment on specifics, but I would say that television home shopping is a much classier world than it used to be. So the kinds of discussions you are contemplating are certainly possible.

Also, I wondering if you could comment a little bit on -- given the Internet sales are growing so fast, not only for you but also QVC and HSN, it appears as though ultimately, we're probably going to see a shift in terms of percentage of revenue being more Internet-based and less television-based than it currently is. I was wondering if you could give us a sense as to what your Internet margin is vis-a-vis your television margin on sales, and ultimately where you think, say, three, five years out or even one year out, Internet sales as a percentage of total could be, in your opinion? Because at that point, obviously, the multiples that would be assigned to your business would be significantly different than the way people look at it now.

Let me answer the second half of the question first. What could Internet be as a percent of the total going out? We are 23% today, and there's no question in my mind we'll be in the 30's and 40's. Over time, is it conceivable that Internet would be a bigger part of our business than television? Yes, it's conceivable.

You can take the growth rates and kind of multiply them out for yourself, our Internet business growing over 30%. So you kind of draw the two lines, and you get some sense for where that will all go. That is before we do any kind of M&A of Internet retailers or anything like that, which might also change the mix, the percentage mix.

On the first part of your question, the margins associated with Internet -- there's a lot of different ways to answer that question, but I'm going to be very straight about it, which is we don't think it's a separate business. We really think of it as an integrated business, because our Internet business wouldn't exist but for our television (technical difficulty). We drive so much traffic from the television side over to the website that it's hard to contemplate a P&L for the Internet business that's truly independent of the television business, because we shell out $130 million in distribution to get 0.5 million new customers a year who come in through the television side. Many, many, many of them wind up on our website.

So are those free? Are they free for the P&L on the Internet side? Or should you burden the Internet P&L with some amount of distribution charge from the TV network? We don't wind up doing the transfer pricing there, so I can say that our Internet business is highly profitable on a standalone basis, and yet it couldn't stand alone.

Obviously, QVC continues to do incredibly well, and better than everybody expects and has for many, many years. Everyone has always said it's a declining annuity, and it just hasn't been the case. Largely, that has been a result of the expansion into other markets outside of the United States. I'm just curious whether your company at some point has any macro level plan to explore other geographies with the network, given the name brand at NBC, the recognition and the success that other home shopping networks have had in doing so.

Great question. I would say that we have such tremendous opportunity in North America still that we would probably pursue -- not probably, we will certainly pursue domestic options before we go an make investments in international. The reason is, look at our penetration rate. We are at 1.3% penetration, and QVC is at 8% penetration in North America. That says that there's a lot of TV home shoppers who ought to be buying from us who are not buying from us yet.

So before we go and figure out how to present our product in a different language with hosts, with all those other skills and all the extra costs associated with that, we would really rather leverage the infrastructure we have in place in North America to get more North American sales. It's not that those other markets aren't attractive; they are. But we have so much growth ahead of us right here at home that I think we're going to stick to North America for the time being.

But it is safe to say that you are looking at, say, even Canada or wherever, that it's not something that is just totally out of the question?

No. If it makes sense, we would do it.

We have no further questions at this time.

Thank you very much. We will see you next quarter.

Thank you for joining the conference today. You may disconnect at this time. Thank you.