iMedia Brands Inc (IMBI) 2007 Q1 法說會逐字稿

Good morning and welcome to ValueVision Media's First Quarter Earnings Release Teleconference. Following today's presentation there will be a formal question and answer session. At that time, instructions will be given. (OPERATOR INSTRUCTIONS) Until that time, all lines will remain in a listen-only mode. At the request of ValueVision media, today's call is being recorded for instant replay. If you have any objection, you may disconnect at this time.

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

Good morning, and welcome. 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 effect 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 would like to discuss our first quarter results and the state of the ValueVision Business. As you know from our press release we had a tough quarter. Revenue's were only up 5% over last and our EBITDA, which has been positive for the last five quarters was negative. When he an EBITDA loss of 1.4 million versus a 1.9 million gain a year ago. I'll share with you this morning some of the steps we've taken to size our costs appropriately, given lower than expected revenues in the soft retail environment. Then I would like to spend some time on our future opportunities and particular on ShopNBC.TV.

First, let's discuss the revenue this quarter. February was a strong month and we felt good about strong sales across all categories. In March, however, sales decelerated rapidly. April saw no improvement. Like many or retailers we found across the board weakness in sales. No particular category was off significantly more than the rest. To what do we attribute the slowdown? You've all read the various explanations, high gas prices, weakness in housing, credit pressure, and we, like many retailers, are effected by diminished consumer confidence. The suddenness with which the revenues fell off was pronounced and contributed to the EBITDA loss for the quarter. While we hope that the consumer will come back stronger later this year, we're not banking on hope. We've undertaken a major cost reduction effort to swing the Company back to EBITDA profitability. What specifically have we done?

Yesterday we executed a reduction in force of about 12% of nonvariable head count. This is obviously a deep cut, a painful cut, but it reflects our recognition of the tough environment in which we are operating and our commitment to managing through it profitably. We are also consolidating some of our operations. We will close our Eden Prairie, Minnesota Fulfillment Center and move that volume, predominately Jewelry, into our Bowling Green, Kentucky Fulfillment Center. Greater scale in a single facility coupled with lower labor rates will reduce our operating costs. We are also closing our two outlet stores, these stores were primarily aimed at liquidating excess inventory and we believe that we can achieve a superior recovery rate at lower costs by moving that volume to eBay and to ShopNBC Auctions. We've reviewed our shipping and handling pricing and selectively moved it upward to reflect increases in our own shipping and handling costs. The net impact of all these changes is to lower our SG&A and increase margin by well over 10 million per year. We'll take a one-time charge of 2 to 3 million this year to cover the operations restructuring.

Let me spend a moment on guidance. We have narrowed our 2007 revenue target to 6 to 8% growth based on recent trends. We've reduced our EBITDA guidance to a range of 15 to 20 million from our original guidance of greater than 20 million. How do we arrive at this? We believe that our cost actions and margin enhancements will offset the shortfall in Q1 and some additional softness in the balance of the year. Maintaining positive EBITDA momentum is very important to us and we expect EBITDA performance to improve through the year. What does the future hold for ValueVision? We remain optimistic about our future prospects. Our internet business continues to grow quickly. Internet now accounts for 28% of total sales and is coincidentally growing 28% year-over-year. We expect Internet revenues to exceed $200 million this year. Many of you noticed our launch of ShopNBC.TV last week. Any of you who have gone to the site and experienced the quality of the video recognize that this is the State-of-the-Art in the television network being broadcast on the Internet. We describe this as a beta launch because it is still early in our development there are many enhancements that we plan to add aver coming months. Ultimately, ShopNBC.TV represents a new paradigm. This is a way for consumers to see our network even if they are outside our distribution footprint. One way to think about this is that we are now available in 33 million additional homes that we were not in just one month ago. This video stream is imminently watchable and consumers can transact right from the video stream. What will be interesting to see evolve is where the screen time comes from for ShopNBC.TV.

Today our customers watch us on television. They spend many hours a day watching television and we are a part of that, an important part of that for our best customers. But we compete with a lot of high quality television programming. I wish we had our customers undivided attention, but the truth is that we do not. They channel surf and sadly they are sometimes drawn to high quality programming other than our own. But think about this. Our customers also have significant time allocated to their PCs. This is their Internet screen time. Their typical behaviors are daily or more than daily check of their e-mail, coupled with substantial Internet shopping, perusing the e-Commerce sites that they like. I know that ShopNBC.TV looks great by comparison with any other e-Commerce site. The production values are higher. It's structurally more animated and dynamic and we think that ShopNBC.TV will do very well competing for screen time against virtually all other e-Commerce retailers. We've not yet begun promoting ShopNBC.TV, but we will. Moving now to another subject, I'm pleased to report that our board of directors has authorized a substantial share buyback, $25 million on top of the 5 million left from the prior authorization. Why are we doing this? I'm sure that most of this audience does not need to be persuaded, but it is worth noting that we believe our stock is a particularly good value at its current level and that we have ample cash reserves, significantly in excess of what we need to fund operations. So we're taking steps to improve the efficiency of our balance sheet and to improve our return on capital.

Let me summarize and then I'll take your questions. One, we're in a challenging retail environment and our taking significant cost reduction steps to insure that we can remain EBITDA profitable. Two, we're excited about our Internet business and especially about ShopNBC.TV, which we think represents the very best of our television and internet businesses combined, and three, we are initiated a substantial stock buyback to improve our capital efficiency. On that note, I'll stop and take your questions.

Thank you. (OPERATOR INSTRUCTIONS) At this time, our first question comes from Michael Kelman. Please state your company.

It's Susquehanna Financial Group. I have two questions. The first one, can you talk about the 6 million shares that NBC had recently registered in March and maybe can you tell us if either you or the board have discussed the possibility of potentially using your balance sheet to buy that stock, and then secondly on the operational side, looked like distribution and selling costs this quarter were roughly comparable to what they were in the fourth quarter, despite obviously a lower level revenue because of seasonality. Can you talk about the dynamics there and what distribution and selling costs should look like over the next few quarters.

First, with respect to the NBC shares, as you know we announce order March 29, that NBC had asked us to register their 6.4 million shares of common stock with the SEC so that they can sell them in the market. We have complied with that request. We are complying with that request. And beyond that, we have no information as to NBC's plans once the shares have been registered. I'm told by my counsel that we're not permitted to comment further on, under SEC rules on those shares. I'm sorry. I can't give you more on that. With respect to the distribution and selling expense, I would say that we continue to ratchet up our internet marketing spend because it's highly efficient for us and working really well and I think that's what you're seeing is the, is the quarter to quarter sequential increases in our marketing spend ramping up.

Mike, this is Frank. There's also continued growth in the program distribution fees.

Okay. So then we should expect that cost to continue to trend up throughout the year?

Yes. We saw 6% growth in our FTE's this quarter versus last year and that's up versus Q4 as well. That will continue to trend upward for the balance of the year.

Okay, and then one last question. Although I didn't see it in the press release, are you still expecting the year to be positive on a free cash flow basis as you discussed on the fourth quarter, obviously excluding the $40 million from Polo.com?

Yes, the cash flow forecast hasn't changed, but just exclude the Polo sale and the, and also any impact from the buyback or one-time costs associated with the restructuring. So kind of from operations cash flow positive.

Okay, great. And when should the restructuring charges flow through? Would that be in the second or third quarter?

The majority of them will come through in the second quarter as we pay our severance then, but there will be some additional costs that come through in the third and possibly the fourth quarter, depending on the exact closure dates of our facilities.

Okay. Thanks very much.

All right.

Thank you. Our next question comes from Bob Evans. Please state your company.

Hi, Craig hell lump capital. Good morning. Can you comment a little bit further on the cost reduction effort, where is the-- where is it coming from if we look at it, how much is cost of goods sold versus G&A and distribution and selling?

Well, if you think about the $10 million in savings that Will spoke of, I think the breakdown on that Bob, would be 20% coming through in improved gross margin, primarily driven by the shipping and handling.

All right.

And then about 50% of the savings will come through in selling and distribution. The remaining 30% in G&A.

Okay, and how much did you incrementally spend this quarter on marketing, Internet marketing, and/or kind of Internet infrastructure build to get the site up and so forth, I'm just trying to get a sense of what your incremental spend would have been, say, last year, versus last quarter.

Bob, the incremental A&P spend on Internet marketing and our affiliate group is probably about 1.5 to 1.7 million.

Okay.

I don't, I don't have the number for you on the investment made in the dot-TV initiative, but that would also be considerable.

Okay. Is that 1.5 to 1.7 million, is that a number that we should expect to continue kind of for the quarters going forward?

We are, we-- we have an open checkbook on internet marketing. Don't be frightened by that. What we do is we focus on the effectiveness of the programs and we spend as much money as we can profitably and so if we have the return on investment, we'll continue to increase the internet marketing spend. If the return on the investment falls off, we'll cut it back. There will be some-- I mean the general sense is that the cost of search words is going up and so there will be a little bit of increase there. But at the same time that happens, we continue to discover new (Inaudible) Internet marketing programs that are profitable and so we continue to expand our reach that way. So I think that's a long way of saying, yes, expect it to go up somewhat from where it is today.

Okay. Okay, and can you comment a little bit on the, the-- to clarify the previous question as it relates to the buyback, I assume the buyback that you're going to implement is to buy the stock in the open market, it's not necessarily ear marked for any NBC or GE Block that is out there?

That's correct. We intend to be in the open market.

Okay, and just one other question, as it relates to the results just announced, I believe your unit shipments were down somewhat, down about 11%, but your average price point was up. Could you just give us a little bit more color in terms of why kind of the mix shift?

Sure. We're up to our average selling price of about $225 this quarter. We focus on average selling price a bit, but our real focus is on the productivity of the air time on gross margin dollars per hour, on the margin dollars per minute, and the average selling price falls out of that because what we do is we substitute product on the margin based on where we think it, we can use the air time most productively. Things like LCD TV's obviously have higher price points than some other things and so more air time on electronics pulls the ASP up. We've also had a lot of strength on the jewelry side with our gemstones and that's also pulling up the average selling price this quarter. I would say that you'll see our average selling price fluctuate because we don't manage it that tightly. We really are managing to the profitability overall and not to just, say, get to a particular ASP. If you go back in time in 2004, the average selling price was $240.

In 2005, it was down in-- well below $200, down $160, $170 range. We've hovered around $200 most of the last year. This quarter we're at $225. I imagine it will continue to fluctuate and, you know, we're not worried about it. I think that it's a function of our mix, that I think probably obviously next question is what's going on with (Inaudible) TV's and where does that go? I think that the TV business is strong for '07 and probably into '08 we will start to cut back on the air time that we put against some of that product, only because there's so much price competition in that market and price compression that it will, it will be better for to us put the air time into other things. That's not to say we would leave the category. We certainly won't, but we'll probably manage down the amount of air time going against it.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Barton Crockett. Please state your affiliation, sir.

Hi. It's Barton Crockett with J.P. Morgan. Thanks for taking the question. I was wondering if you could talk a little bit about the growth outlook. You guys are guiding for 6 to 8% growth in sales for the year after 5% in the first quarter. So it seems that you see an acceleration over the back part of the year. I was wondering what's behind that and also, on a related note, is there any chance of cost cutting you're doing actually negatively effect sales? I mean that would in the big picture kind of normally be the case when you're cost cutting, maybe less focused on revenues. If you could kind of explain what's driving the growth and how does cost cutting effect that? Thanks.

Good questions, Barton. The way we feel about our business is we have a generally accelerating business. We get better and better at what we do with every, with every passing week, with every passing quarter. We broaden our product offerings. We, we-- we get more productive. We put more energy into the Internet and the Internet grows and gets more productive and so, with have all this positive momentum in our, in our revenue line set against the backdrop of consumer softness. And so that's a one way of saying, where we thought we would be pushing double-digit revenue growth this year against this backdrop, it won't be that good and that's why we scaled it back to the 6 to 8% range do. Do we think we'll do better than the first quarter? Yes, we do. We think we have a lot of good things coming. We have expansion in some of our businesses in the fall right now, our Watch business is extremely strong and getting stronger and we have big plans for it in the fall. Things like that will contribute to revenue growth.

In terms of the impact of the cost cuts on, on revenue, that is something that we, we certainly worry about and if you look at the nature of the cut, this is a really difficult one for us because when you cut costs, you know, the easiest thing to do is to not, not cut people, but to, you know, raise your prices. But when you raise prices, you clip sales. When you raise prices, you hurt the customer, and so we've really gone to extraordinary lengths in this, in the discipline that we're bringing to the business right now to keep the cost cutting as far away from the customer as we possibly can. We've gone deep into our own structure and tried to rearrange, re-engineer how we do the work internally so that the customer doesn't see the changes, and we believe that as a result of that kind of approach, we're going to wind up with negligible revenue impact from the cost cuts we've taken.

Okay, great. If I could switch gears and ask one other question on a different subject, could you give us your take on how you guys can navigate the end of the current NBC deal here in a couple of years? In other words, if you were to re-up with NBC and keep that brand, do you believe that you would have to pay them something additional? They had stock to where you are now and presumably they want something, stock or value cash to continue it. How do you kind of juggle the value of trying to continue that versus maybe going another route and what might those routes be?

A great question, Barton. We do think about it. For starters, I would say we have about 3.5 years left on the current brand deal and so it's not something that keeps us up at night in May 2007, though it's not something we ignore either. The ShopNBC brand is a good brand and we like it. Do we think that it would cost us something to get NBC to extend it in the future? Absolutely. It cost us dearly when we got it for the last ten years and if we wanted it into the future, assuming NBC were willing to go along with it, it would certainly cost us, equity or rev share or something going forward. That said, I think that we have lots of time to sort this out. We may acquire brands that work for us. We may be acquired by somebody with a great brand that works for us. We may launch our own new brand. There's a lot of variations on a theme and we believe that we can do a brand transition in about a year. It would take about a year to do an effective brand transition and since we have 3.5 years to work with, we're just not that pressed on it right now. But we, it's an open question, still an open question.

Okay. That's great. Very helpful. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from Ross Taylor. Please state your affiliation.

Jackson Associates. Will, could you talk to us about, I think it's the DIRECTV you have, what, 20 plus million homes you get through them and the cost efficiency of that arrangement and is there anything that can be done to drive that cost structure down?

15 million.

We have about 15 million DIRECTV homes and those homes are less productive than some of our other homes and we've always had, we've always had-- I shouldn't say always, in recent years we've had challenges in getting more productivity out of the DIRECTV homes. There are a couple of ideas. It doesn't look like DIRECTV is prepared to unilaterally reduce our rate and our contract with them runs through 2012, so within the constraints of the contract arrangement that we have today, we look at other things. One is potentially a channel change in channel position. When we went on to DIRECTV, we wound up on channel 370, which at the time we thought would be a pretty good place to be. It was close to some of the other NBC properties, like CNBC and MSNBC and so it felt like a good neighborhood at the time. What's happened since is that, that particular channel lineup has gotten less interesting and we have, we have some of the Bible channels up there and we're not really situated exactly where we would like to be. And so I think it's fair to say that sometime in the future we would like to see a channel change with DIRECTV and that's something that we're working on with them. We're also interested in doing more marketing. Part of our arrangement with DIRECTV calls for them to do some promotion of our channel and so we're working through that with them. So I think there's some steps we can take. I don't imagine that DIRECTV will, will rapidly become a lot more productive than it is today, although it will probably get better.

Is it possible, given the idea of particularly with GE looking at getting out of trading or taking down the GE stock and effectively creating an equity partnership with DIRECTV that would potentially substantially reduce the cost with 15 million homes, if you could drop the cost to a $1 a share would be a meaningful addition to your EBITDA valuation and would actually have a substantially positive effect on the Company's stock price valuation I would think.

Ross I think it's a great idea. It's one that we explored with DIRECTV several years ago and at the time we didn't reach closure, but I think your point is well taken, that there's a fresh block of equity to be worked with here and we would certainly be open to thinking that one through with DIRECTV.

Okay, great. Thank you very much.

Thank you. Our next question comes from Jeff Bronchick. Please state your affiliation.

Jeff Bronchick, RCB Investment Management. Thank you. It seems to me, and just on the last few questions, I mean your issue is not necessarily at all cost cutting. Obviously you run efficiently, but you need some step function in distribution and marketing, and I guess my question is, is-- how long can you go along on this 8 or 9% sort of continuous improvement program? Does that get you to any sort of significant and material acceleration in profitability, or frankly, do you need a new deal like a DIRECTV deal, where someone is really going to substantially improve your carriage and provide not just the money, but the, frankly marketing distribution for you to get some traction, because you've been, the Company it seems to have been stuck on the order for a number of years on an operational basis. Maybe you can address this in a little bit more detail.

Yes, it's actually a great question because what it, what it really requires us to do is take a step back and look at our business model and our cost structure. I would say that the short answer to your question is can we get there from here organically without a step function increase? The answer is yes. This is a scale business and as we get bigger, we get more profitable and if you drew a line between our scale and HSN's scale and a line-- connect the dots between HSN's scale and QVC's scale, what you see is dramatically improved profitability that comes with scale and that's a function of selling more stuff against the same cost structure. Think about our business. We basically have one store. We have studios and producers and directors which are all, all lined up to, to run programming, 168 hours a week. It is the same for us, it is the same for HSN, it is the same QVC and yet we're much smaller. If we were much bigger, if we were running more sales through the exact same infrastructure, we would be wildly more profitable and we've grown more profitable. And what you see is that our business (Inaudible) something on the order of $700 million and you get up to $800 million and you're EBITDA profitable and $900 million and you're net income profitable and you get to a $1 billion and the EBITDA starts to become really meaningful and I do think that we can get there on an organic basis without a step function increase, without step function change.

That said, we shouldn't , rely just on that. We should obviously be looking at any kind of game changes that we can and I think that we have some true game changers right in front of us. I think that ShopNBC.TV is a game changer. I think that you have a situation today where, where Internet video is transforming, and you will watch it happen over the next 18 months. Internet video is transforming the way e-Commerce occurs and we are positioned as the best players in Internet video in the e-Commerce arena. Anyone who hasn't gone t ShopNBC.TV should go to ShopNBC.TV. Just type it into your address field on your browser and check it out, because it's as good as it gets on the Internet right now. We call it a beta, we're just getting started here, but even as a beta, it's better than anything else you'll find out there. I know that's a big claim. That's why you have to go type it into your browser and check it out, because I think you'll agree with me. Would it be nice to have a bunch more television homes, say, in contest markets where we're not-- where we have gaps in our coverage? Sure, it would.

Is it essential to our success? Absolutely not. I think we're beyond that point now. I think the distribution landscape is changing dramatically and we're in a position now where our Internet business is growing dramatically. The balance between television and Internet is changing, and the business is really-- it's becoming a different business. I mean we think of our business as a direct to consumer business with a big TV component and a big Internet component. I mean a way to think about it is the television business is a gigantic front end for a powerful Internet business. And that is where the lion's share of our Internet traffic still comes from, although increasingly we're getting traffic from the Internet at large. But television business is a great feeder front end for the Internet business. So these are things that are different from 2 and 3 and 5 years ago and I think that, I think that they all add up to us growing, growing nicely and achieving the scale that we need to be profitable, highly profitable in the future. Great. Thank you.

Thank you, sir. Our next question comes from Ed Ganges. Please state your affiliation.

I'm an investor and shareholder. I was former Chairman and CEO of Deloitte. Well, I just went to look at ShopNBC.TV. It's even better than you said. I tend to be skeptical. It is absolutely terrific and you can look at it and see everything that's been on in the last 24 hours. Great job.

Thank you very much. I appreciate the endorsement. I hope anyone on this call who has not checked it out goes and does it because it will really give you a sense of what the future of Television home shopping and Internet e-Commerce looks like. We started-- if you saw our announcement last week we started to call this area V-commerce, Video Commerce. I don't know if the term will catch on or not, but we certainly feel like we're on the the forefront of V-Commerce. Thanks, Ed.

Yes.

Thank you. Sir, at this time, I'm showing no further questions.

Okay. Well, thank you very much.

This concludes today's conference. Thank you so much for joining. You may disconnect at this time.