iMedia Brands Inc (IMBI) 2008 Q3 法說會逐字稿

Good morning and welcome to ShopNBC's third quarter fiscal 2008 financial results teleconference. At the request of the ShopNBC, today's call will be recorded for instant replay. Anyone who objects may disconnect at this time. I would now like to turn the call over to Ms. Nancy [McGrath] with ShopNBC.

Good morning. 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 these forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such statements. More detailed information about these risks and uncertainties is contained in ShopNBC's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. John Buck, Chairman and CEO of ShopNBC.

Thank you, Nancy. Good morning and thank you for joining us.

As you can see from the results we released yesterday, ShopNBC experienced a very difficult third quarter. With our third quarter results and our stock price below $1, I can only imagine how frustrated and concerned you are, as we are. This is unacceptable. I can assure you that the Board and management fully recognize the challenges this Company is facing, and we are taking decisive action across a number of fronts to allow this business to get through a very difficult period while at the same time improving our fundamentals.

The Company is currently working on three strategic initiatives on parallel paths. First, we continue to protect our balance sheet through a tight control of expenses and working capital with our cash and securities balanced now at $81 million. This is an improvement of $2 million over the previous quarter. Right now the best thing we can do is manage this business to improve its performance and conserve current cash on hand.

Second, we remain highly focused on executing key operational efficiencies and initiatives that are more in line with our control -- that are within our control to improve the fundamentals of our business model. This includes improving gross margins, increasing the number of new customers, reducing return and cancel rates, to mention a few. Our distribution costs continue to be our biggest challenge. And, therefore, our priority is to achieve a significant reduction in these costs next year.

Despite the head winds before us, we remain positive and confident about the future of our multichannel electronic retailing business, which Keith Stewart, our recently appointed President and COO, will talk more about. In particular, he will touch on how we have continued to make progress in rebuilding a number of core areas at the Company that are positioning us for long-term sustained growth and profitability. And third, a special committee of independent Board Directors is actively reviewing strategic alternatives, and we will provide an update on where we are at in that process today as well.

In summary, we are determined to find out what the best outcome is for the Company and do what's best in the interim. We are being careful with our cash. We are improving ongoing business operations and we are exploring a full range of strategic alternatives. With that our remarks today will focus on the three key strategic areas I've outlined.

Beginning with an update on the strategic alternatives review process by George Vandeman, who is a member of our Board of Directors and Chairman of the special committee leading this review process. Following this update, Frank Elsenbast, our CFO will provide a more detailed financial review of the third quarter. Keith will then give an operational update as well as talk about our near-term priorities for the business for the all-important holiday season. Given that we are in the midst of the strategic alternatives review process, we have decided to postpone the Q-and-A portion of this investor call to a later date, which will be before the end of the fiscal year.

I know you have a lot of questions and are anxious for more details. I promise that you we will hold another investor call as soon as we are able to communicate the outcome of the strategic review process and the future of this business. Now I would like to turn the call over to George Vandeman.

Thank you, John. Good morning, everyone.

The special committee of independent directors was created and I was appointed its Chairman in September in order to review strategic alternatives to maximize value for ShopNBC stockholders. I want to take this opportunity to provide you all with a brief update. Due to the confidentiality of the process we will not be able to go any further than what I report.

The committee has been working closely with its financial advisor, Piper Jaffray & Company, to evaluate the full range of options to enhance shareholder value. Through that process, Piper Jaffray has provided information to a wide range of prospective bidders. And as a result the Company has received a number of indications of interest from both prospective strategic and financial buyers for the acquisition of all or part of ShopNBC.

As you may or may not be aware, General Electric equity filed a 13-D yesterday, publicly disclosing the GE equity and NBC are evaluating how they might participate in this process. We have instructed Piper Jaffray to invite several of the prospective buyers to participate in the next stage of the overall process, which will include management presentations as well as access to additional due diligence information. Following that stage, they will be invited to submit final and binding proposals.

The Board is also aware of other considerations that have been raised by our stockholders, including a stock buyback, paying a large dividend to shareholders, or monetizing the balance sheet of the Company. The special committee and its financial advisers continue to review the full range of strategic alternatives available to the Company. We anticipate that the special committee will conclude its review by the end of the fiscal year. At that point, we believe we will be at a position to communicate the future direction of the Company.

Especially in today's economic environment, it is important to understand that we cannot be sure that this process will ultimately result in a transaction that we the special committee or the Company's Board of Directors will determine is in the best interest of the Company or its shareholders. This concludes my update. We are taking this process very seriously and working very diligently on it with Piper Jaffray.

Thank you very much. Now I will turn the call over to Frank for a financial review of ShopNBC's third quarter results.

Thanks, George. Our third quarter revenues were $125 million. This is 32% below the $185 million reported last year. The shortfall was due to a 27% decline in shipped units and a 12% decline in the average selling price. This was partially offset by lower return rates, as they decreased by over 300 basis points versus last year. Gross margin in the third quarter was 34.5%, which is down slightly from 35.2% last year.

Controlling our operating expenses continues to be a top priority for ShopNBC. In the third quarter, total operating expenses were down 12% versus the prior year. Selling and distribution expenses, excluding equity compensation, were down 13% versus last year. The main drivers of the decrease were lower headcount, lower variable costs due to lower sales, and reduced marketing expenses. In the quarter the Company also saw 4% growth in our FTEs, and accordingly our cable distribution fees increased slightly in the quarter.

EBITDA as adjusted was a negative $13.3 million compared with a nearly $1 million EBITDA profit last year, driven by the significant sales shortfall and slightly lower gross margin. This was partially offset by the reduced operating expenses at the Company. We remain highly focused on maintaining a strong balance sheet. The quarter ended with over $81 million in cash and securities, which is up approximately $2 million from the second quarter balance. Disciplined management of working capital generated over $18 million of cash in the quarter and offset the EBITDA loss for the quarter.

Accounts receivable declined by $13 million in the quarter driven by reduced value pay promotions and lower sales volumes. Like many retailers we have tightened our credit standards as a precautionary step in the current environment. Inventories increased in the third quarter but remain 13% below last year as we head into the fourth quarter. Capital spending for the quarter was $2 million, and there was no stock buyback activity during the quarter.

Finally, we hear and understand your questions and concerns about GE's current ownership and the potential redemption of their preferred stock in March 2009. This is a key focus for us, and we continue to have discussions with GE to explore the renegotiation of these securities. That concludes my update.

Now I will turn the call over to Keith for an operational update on Q3 and a discussion of our near term operational priorities.

Thanks, Frank. Hello, everyone. In our last call I shared I was very excited to be here. Let me tell you, in the last ten short weeks since I've been on board, there's no question that we're making meaningful progress. Let me highlight what we've accomplished in the last 10 weeks. Then I will talk about what our plans are for the balance of the quarter to drive further progress within a solid business model. So let's get to it.

My first step was to develop a vision for the Company. Our envisioned future is to be the premium lifestyle brand in the TV shopping and broadband industry. As a multichannel electronic retailer we are going to surprise and delight our customers with brands and products that are meaningful, unique, and relevant. ShopNBC's merchandise brand positioning will aim to be the destination and authority for home, fashion, and jewelry shoppers. Our focus and commitment to the customer will be second to none, as we strive to change the face of electronic retailing and its related customer experience.

The second step was to determine if we had the right business processes and talent required to drive the electronic retailing business. To the latter, I am delighted to report we have a talented, energetic and passionate team. I did discover, however, that we did not have the business processes and structure in place inherent in a successful electronic retailing businesses. Further, we said we were customer-centric. But acted differently. We relied on heavy discounts, free shipping and handling, leveraging our sales heavily on extended credit. We did not view our air time and web space as one of our most important financial assets. We were focused only on the short term, hour by hour.

Most sales and profits in these short-term actions result in an operational shortfalls, higher return rates; higher cancellation rates were generated. And with the highest sense of urgency we structured key departments and accountabilities in the front end continues. In addition to these operational changes our merchandising, our broadcast operations, sales planning, calendar and events, e-commerce teams, along with our vendors, are now all in total alignment. This realignment allows us to make good decisions deeper into the organization, that allows us to be closer to the customer. For that we are faster, more responsive, and laser focused on our daily operations. With this foundation laid operational efficiencies began to take form. Positive results followed.

Our gross margins increased from 33.7% in Q2 last quarter to 34.5% in Q3, while return rates decreased from 31.5% in last year's Q3, to 29.2% in Q3 of this year. I have every confidence these metrics will continue to improve until we are commensurate with our industry peers. We have $67 million of inventory at old margin rates and most of it will be moved by year's end. All new inventory purchases will be at our new and significantly improved margin percentage.

With regard to the changes in our merchandising mix and air time strategy, I'd like to first point out that a new ShopNBC customer and an active ShopNBC customer historically purchased from different product categories. That's why it's necessary for us to rebalance our air time with the right mix of home and beauty products to drive new customers while using jewelry, apparel, and accessories to drive repeat purchases from our active customer base. So it's so important to shift our product mix over time to continue customer growth while still providing exciting content for our loyal, active core customers. It's a journey, not a sprint.

In the last ten weeks, we did reverse a declining trend of new and active customers by leveraging our multichannel shopping experience by using sales drivers like Our Top Value, Once Only's, and Spotlight promotions. In fact, on October 25th we ran a well coordinated gift event and saw one of our biggest shopping days ever of the year generating $3.5 million of net sales and almost two new customers each and every minute of the day.

We're headed in the right direction, but our volume has to build. We're confident that it will, driven by smart merchandising buys, integrated marketing efforts, that appeal to multichannel shoppers, which is our ideal customer. This concludes my update on what is accomplished in the past ten weeks. The majority of big changes to infrastructure are complete. Most of the key metrics that are within our control are trending in the right direction. We are committed to running this business lean and mean during this challenging business environment.

Looking ahead to the balance of the fourth quarter and beyond, our priorities will be as follows. We'll continue to tightly manage our operating expenses. In fact, we will explore even more cost saving measures and fixed costs improvements. We will continue to build our merchandise mix so it's broader, more stable, more predictable and more meaningful and relevant to the customer. With variety comes new customers.

We will continue to bring in merchandise and content that is more timely, topical, and even news worthy. We will continue our merchandise and planning strategies that will build new customer growth while satisfying our loyal and active valuable customer base. We will continue to improve our logistics infrastructure to drive down costs, improve efficiency, and our customers' experience. We're aggressively pursuing affiliate marketing relationships to bring in new eyeballs and new customers. In short, we will continue to build on this new platform for sustained growth and profitability.

Before turning the call over to John, let me say that I remain optimistic about our future and confident that we are taking the right action.

Keith, thank you very much. And as heard today, we are highly focused on managing the business thoughtfully yet decisively in this difficult climate by protecting our balance sheet for the long term while improving the fundamentals of our business and exploring a full range of strategic alternatives.

Looking ahead now to the fourth quarter, given the uncertainty of the economic environment impacting consumer spending patterns for the holiday season, we have decided that the prudent course is not to provide guidance at this time.

With that, we certainly appreciate your time this morning. We know we have a lot to do. We are focused on doing it. And we'll come back to you with an update before the end of fiscal year, and we look forward to speaking with you then and taking your questions at that time.

Thanks and thank you again for taking time with us this morning. Have a good day.

This concludes today's conference call. You may disconnect at this time.