iMedia Brands Inc (IMBI) 2007 Q2 法說會逐字稿

Good morning, and welcome to the ValueVision Media second quarter earnings release teleconference. Following today's presentation there will be a formal question-and-answer session. At that time instructions will be given. Until that time all lines will remain in a listen-only mode. At the request of ValueVision Media today's call will be recorded for instant replay purposes. Any objections, you may disconnect at this time. I would now like to turn the call over to Ms. Kahlow, Director of communications. Ma'am, you may begin.

Thank you. 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 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. Today I will discuss with you our second quarter results and the state of the ValueVision business. We continue to operate in a soft consumer environment. Our revenue was up 2% to $191 million. We were able to achieve positive EBITDA, $1.6 million excluding restructuring expense. This is primarily attributable to merchandise margin discipline and to benefit from our cost reduction initiatives. On our last call I shared with you some of the steps we took to reduce costs in this environment. We are beginning to benefit from this cost reduction and anticipate additional benefit through the balance of the year. Consolidating our fulfillment operations in our Bowling Green facility should be completed before we enter the holiday season.

Let's take a moment to review the revenue in the second quarter. We faced weakness in consumer demand throughout the quarter though our strategy of event promotion helps offset some of that pressure. Events are essential for sustaining good performance in today's retail environment. The key events in the quarter were 1, Memorial Day; 2, our All Star event; 3, July Fourth holiday; and 4, July clearance. Memorial Day was successful. Our All Star event produced record sales results for us; All Star is a five-day event showcasing all new product in an otherwise slow time of year. July Fourth performance was respectable, and our July clearance event strengthened what would otherwise have been a fairly soft July.

At the category level we saw increases and relative strength in watches and gems. Gold while down somewhat from a year ago, shows signs of stabilizing. Most notable change for us was a decrease in LCD TVs. General softening of demand for TVs led us to trim electronics hours with the resultant reduction in electronics sales. Of course electronics continues to be a major category for us, and we anticipate more demand for LCD TVs heading into the fall.

We remain committed to the product categories that we are in and anticipate shifting airtime mix on the margin to accommodate shifts in consumer preferences. Our gross margin was 35.3%, 40 basis points better than the same period one year ago. This reflects across all product category margin discipline.

Our Internet business continues to be very strong. Our Internet business grew 18% versus the prior period, and today represents 27% of total sales. We've added a number of site enhancements, one of which, customer product reviews, just launched last week. I am pleased to report that over 80% of the reviews todate are four or five stars. We will continue to expand the user generated content portion of our site because our happy and loyal customers provide us with such great testimonials.

On the marketing front our active customer base has grown to 867,000 customers, up 6% from a year ago. More importantly, our retention rate continues to climb. Retained customers represents 47.6% of the active customers, up from 45% a year ago. Historically our new customers have come from channel surfers coming across our television network and then giving us a try. It is with great pride that I tell you that over one-third of our new customers now come to us on the Internet.

Last quarter we launched ShopNBC.TV in stealth mode; it was in Beta, and we held back on promotion. It is attracting attention, however, and that isn't really a surprise given the quality. It does truly represent the state-of-the-art in television broadcast on the Internet today. For those of you who have not yet seen it and for those of you who have not watched our network on television, I urge you to put ShopNBC.TV into the address field on your browser and see what I'm talking about. We expect to release additional enhancements in November and then to begin promotion.

Let me just summarize where we are. We are in a challenging retail environment. While I'm not delighted with low single digit revenue growth and modest EBITDA, I am confident in the ValueVision team's ability to execute in this environment. We are taking short-term actions to ensure EBITDA profitability and deliver against our guidance for the second half of the year. We are also continuing to push ahead on our significant Internet growth potential and expect Internet video to produce meaningful results. We do have a very good business, and we have great growth prospects.

We did reaffirm our guidance; that is $15 million to $20 million adjusted EBITDA on 6 to 8% revenue growth. You might wonder why we believe that we will achieve that performance given the first half of the year. We don't know more than you do about consumer confidence going forward, but we have stacked the second half with incremental events that we feel will boost revenue, even in a soft environment events give customers a reason to buy, and events focus our organization's talents on flawless execution. In addition, we will continue to press on cost containment so that we can deliver solid EBITDA.

I will take your questions in a moment but first I think I will answer one of the questions that I expect you will ask. And that is, what is the status of the buyback? Will ValueVision undertake aggressive stock repurchase given the low share price? The answer to that question is that we have $23.6 million available under the currently authorized buyback, and we've been precluded from taking advantage of this low stock price buying opportunity because we've been in the pre-earnings release blackout period. That period ends 48 hours from now, and you can expect that the company will actively repurchase shares at these levels.

On that note I will open the floor for questions and discussion. Thank you.

(OPERATOR INSTRUCTIONS) Barton Crockett.

Thank you for taking the question. I wanted to ask first if you can give us any color on what you're seeing so far in August. I know that you cited consumer kind of macro conditions in the recent quarter and extra events coming up which we may not have seen yet. But I am just wondering if you can give us any kind of near-term color of what you're seeing right now. That is the first question.

Yes, Barton, so far in August and obviously August is early, it is early to say because our -- we spilled into August with our last quarter, but August so far is very good. We are plus 8% revenue month todate, and I would say a part of that is continued pressing on execution. Part of that is the events we have -- in this period we have a luxury event, and we have our top value anniversary. And as I mentioned earlier, events are kind of critical for us to focus the attention of the organization on this flawless execution and they do give the customers a reason to buy. So although we are plus 8% I am not sure that you can assume the consumer is a happier consumer in general on the basis of that.

Then secondly on this concept of events helping you, if it is a help I guess the question is why don't you do them all the time. Clearly there is some offset; I don't know if it is in margin or maybe it is just unsustainable year after year, because if it is always events it is never an event then.

It is a great question, Barton. And actually when I joined the Company my first question was whether events were worth it all. Were we robbing from Peter to pay Paul? We've put a lot of energy in the organization into making a few days special and then the days before, the days after get clipped because the customers have been saving their money for the event. And are you just trading dollars? That was the first question I asked.

And I came to the conclusion based on a lot of data and analysis that it is truly incremental, that events, there may be a little bit of dollar trading around the edges but events really are incremental. That is assuming they are quality events and they are not just kind of made up events. But assuming a quality event we do get incremental lift out of it. So then you quickly get to your question, which is well, if they are so good how come we don't do them 365 days a year?

And the answer to that is someday I hope we can do something like 365 event days a year, because what goes into an event is really, really superior execution on every function in the Company. I mean the buyers, the merchandising organization plans many, many months in advance for an event. There is product that is bought with a particular focus on the event. The media team puts a lot of energy into making sure that the presentation is flawless. The performance of all the individuals in the Company at the event, the host and everyone else are totally on top of their game because of the extra focus that goes into an event.

So you do get this -- you get the lift partly from better execution, partly because you give the customer a reason to buy. And a very long answer to your question; we don't do 365 events a year because we can't. We can't get that level of execution all the time. And what we don't want to do is make an event just an event in name and not an event in fact. And so what we have done is increase the number of event days per year every year over the last several years and our strategy is to continue to do that. And I assume we will asymptotically approach 365 event days a year.

Okay, and then just one final question, I am switching gears a little bit to the Internet part of the business; could you elaborate a bit more on how much of the Internet revenues in your belief are incremental revenues to the organization versus kind of a replacement of orders that would have come in by the telephone? People watching TV, going to the Internet? And within that kind of give us some sense of the contribution maybe you're getting from eBay and Amazon. Thanks.

Another great question. It is for sure a lot of the Internet orders and traffic are driven from the television business. And when we think about it and I will do very rough numbers here because they are always -- they move around, and reasonable people could disagree on how to interpret some of the data. But I would say that purely, purely Internet customers who have never heard of the television network, who don't have a television in their house or if they do they don't know that we are available in their home, that probably represents something like 20%. And that is based on all of our incremental Internet marketing efforts. That's what gets them there.

It is affiliates or affiliate marketing and paid search and shopping engine comparison sites and the like. Beyond that, we believe it is at least 20%, I should say. And it is somewhere between 20 and 35% -- we don't know exactly how much. I don't know how helpful that is to you. That is up from zero three years ago. So clearly we are becoming more of an Internet Company in fact and not just in appearance.

I guess I mean as part of that the TV shopping revenues obviously were down in the quarter and the Internet was up a lot. How much of that decline in TV was just people moving to the Internet to place their orders?

Some of it was, for sure, because we -- and we expect that as use of computers becomes more widespread, it gets easier and easier to place your order online. More of our customers are behaving that way. So for sure some of the -- the decline in TV revenues is overstated based on that.

Michael Kelman.

Thanks very much. It looked like distribution and selling costs were still running relatively high this quarter while G&A expenses saw a nice quarter-over-quarter decline. Can you help us understand where we will see the greatest impact from your cost restructuring efforts? And then maybe also touch on a little bit why distribution and selling costs seem to be running higher as a percentage of revenue this year relative to last year?

Yes, I can give you an answer to that. The distribution costs, you know we have two kinds of distribution costs, those that are handed to us because of the contracts that we are in and those that we add incrementally because we believe that they are profitable to add. And so we have under our existing contracts with the MSOs and with the satellite companies we get new homes every quarter, and we don't have a choice in whether we take them or not. Some of those homes are good homes; some of those homes are not good homes and we just take them all and that cost is a little bit out of our control.

We do also add incrementally on ad sales deals, on short-term deals, incremental homes and those we have lots of control over and those we only add if we believe them to be profitable. And we have added some of those as well over the period. So our distribution costs are going up partly in our control, which is a good thing; partly out of our control, which isn't a good thing but it is what it is.

With respect to the other costs, we are working it pretty hard. Our shipping and handling costs like those for anyone who is in the shipping and handling business are up because the carriers have raised costs for all kinds of reasons, fuel and otherwise. And they changed the way they treat cube and weight, and so there have been a number of changes in the schedules that have resulted in higher costs for us. And we have tried to pass on some of those costs to the customer but we have not passed on 100% of those cost increases to the customer. And that is just the competitive reality we live in. There are limits to how far we can push it.

That said, there is lots of opportunity for us to be more innovative in the way we reduce our costs, and we are working on it. And everything from freight consolidators to other techniques. And we are working on those and we are starting to experience a benefit from that, and we will probably experience more benefit from that going forward.

Finally, in terms of the fulfillment piece we are consolidating the Eden Prairie facility with our Bowling Green facility. We have a lower cost structure in Bowling Green, and we think that when that is complete in October, that will start to really kick in with lower costs for us.

Okay. I have one other follow-up question. Can you give us an update on the NBC registration rights for their shares?

Within the limits of what I can give you, the shares have been registered -- they have announced an intent to register them and they are not yet registered, and we don't know when they will go ahead and do that. That is kind of out of our hands. That is up to them. They will let us know when they are ready to do that. They have not done that yet.

Bob Evans.

Good morning. Can you comment a little bit more as it relates to the Internet customers that you're getting? I think you said about one-third are coming through the Internet of new customers. What is the demographic of those customers that you would say kind of are pure play Internet, not just those customers shifting for convenience buying from Internet revenue and TV?

That is a great question, Bob. It is not all that different from the rest of our customer base. It is a little bit skewed math, and that is partly because our watch business is so big on the Internet and that tends to be male business. But at the end of the day our product is our product. And so the people who buy our product whether they buy it because they saw it on TV or whether they buy it because they found it through a search or through an affiliate on the Internet, they are the same kind of people. If you are interested in a gemstone necklace -- Internet customer or TV customer -- it is the same kind of a person that is buying that product. And so there is not as big a difference in the demographic as you might think based on channel. There is a subtle shift there, for sure it is a little more male and also skews a little bit younger.

All right. That is helpful. then just to clarify on the cost reductions that we've seen this quarter, is this a level that we should think about going forward? I know you didn't get quite the full quarter's benefit; just trying to see where that might shakeout as it relates to G&A.

The cost savings that we realized in this quarter were probably a little short of $2 million and we would expect that to grow slightly as we go through the third and fourth quarter.

Okay, so you might see a bit more savings yet then?

Right. And that is the total savings. And the split between G&A and S&D on those is probably approximately 50/50.

Oh really, okay. So the increase in the S&D I know you have some control over it, some you don't. But how much of that increase is also just -- I know your marketing spend and how much of your "discretionary marketing spend" that you referred to at the beginning of the year kind of has occurred or will occur?

For the quarter the increase was about $4.5 million and a little under $2 million of that was an increase in our marketing spend. That is a big driver of the year on your increase in our S&D. I would say selling and distribution is down versus prior quarter as we've taken some of these steps to reduce our spending. But you are still seeing year on year up about 8%.

And how about the second half of the year? Are you seeing that marketing spend about the same, lower, higher?

I think the marketing spend will continue to be up versus the prior year because we continue to see it as incrementally profitable. Where we hit the wall on that we haven't found out for sure, but we will continue to spend on the marketing front.

Okay, so kind of in that ballpark, $2 million per quarter or could you see that accelerate?

You know, Bob, the year-over-year difference may change because we started to ramp up our spending pretty considerably in the second half of last year so the year on year increase might not be as great.

[Frank Burr]

Thank you, and good morning. I had one question and one thing that I would like to suggest. The question really relates to where we are with respect to numerically in terms of the downsizing and how you feel about kind of the ability of reduced force to continue to deliver at the rate that is appropriate here.

We have not finished all the headcount reduction associated with the consolidation of our facilities in Bowling Green. That is not complete but we would anticipate that would be done in October. With respect to what we have done last quarter, we did everything that we had an intention to do within the headquarters area. In terms of our ability to get work done, I can't tell you that we will operate at 100% with a smaller workforce because the fact is we didn't have any dead wood hanging around here. That said, I think we are smart about how we go at restructuring the work and the stuff that gets pushed out is always the marginal stuff and I think we are working smarter for having done it. And so I have reasonably high level of confidence that we're going to be able to execute well despite of the reductions.

Thank you for that. What I wanted to suggest is that the coverage, as you know, is pretty minimal on the Company. And particularly minimal in terms of information flows about kind of what's happening within the quarters. And I think that the lack of communications both from the Company during the quarter as well as the lack of coverage, kind of implies particularly in an environment as difficult as the one we're going through generally and the fact that some of your competitors aren't doing very well, the conclusions are very negative over a long period of time. And I think it weighs on psychology and I think it weighs on the stock. I think it is something that really there is really no stream of investor information coming out of your firm at all other than the quarterlies. And whatever people are able to glean through an occasional call to the Company. But I would suggest that there is an opportunity here that would benefit everyone.

Point taken, Frank, and we will do what we can to improve the communication flow from the Company. And we certainly share your interest in greater coverage. We would love to have greater coverage; we're very proud of this story, we're not trying to hide here. We would like more people to know about what's going on so we're working on that actively.

Great. I agree with all of that.

I see there are no more questions, so I am going to stop and just say thank you for your perseverance here, and we are not thrilled about the stock price but we will executing on the things that are within our control and hope to see that improve. Thank you.

This will conclude today's conference call. You may now disconnect.