iMedia Brands Inc (IMBI) 2009 Q1 法說會逐字稿

Good morning. Welcome to ShopNBC's fiscal first quarter 2009 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 ShopNBC, today's call will be recorded for instant replay. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Ms. Nancy McGrath of ShopNBC. You may begin.

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 effect 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. Keith Stewart, ShopNBC's President and Chief Executive Officer.

Good morning, and thank you for joining us, and thank you, Nancy. As you can see from the first quarter press release, and from the update of our cable and satellite negotiations press release last week, the turnaround of ShopNBC's business is headed in the right direction.

We continue to swiftly implement meaningful changes to the fundamentals of our business, which are leading to improved efficiencies and positive business metrics across all areas of the Company.

We successfully negotiated an agreement with GE to restructure and extend the majority of our $44.3 million payment obligation by five years. This gives us necessary time and resources to execute our turnaround.

We completed a significant number of cable and satellite negotiations. Regarding negotiations completed to date, we expect to realize a 33% rate reduction. This is expected to result in a cost savings of approximately $22 million to $25 million in fiscal 2009. As part of these negotiations, we also expect to preserve 100% of our 72 million home distribution footprint, while improving our channel positions in many markets.

We reduced our overall cost structure by 21% in the quarter, as part of an ongoing initiative to tightly manage cost. We continue to improve customer trends in the first quarter with new and active customers up by 60% and 23%, respectively.

Return and cancel rates decreased by double digits. Customer service inquiries were down by 20% in Q1.

Our gross profit margin increased to 31.5% versus 29% in the previous quarter. We expect margins will gradually improve throughout the year, as we shift and grow our merchandise mix in the key categories of home, fashion and beauty. At the same time, we'll continue to reposition our core jewelry business, with more moderate price points and higher margins.

Finally, we gave you ShopNBC Anywhere in the quarter. As part of our mobile platform strategy, we launched ShopNBC application for the iPHONE and iPod touch devices. This is a first of its kind in the TV shopping industry, and provides access to over 30 million potential mobile users.

As these accomplishments indicate, I hope you'll agree with me when I say it's a whole new ball game at ShopNBC, and we're seeing excellence in our everyday execution toward our future road map.

Before continuing, I would like to turn the call over to Frank Elsenbast, our CFO, who will provide a more detailed financial overview of the first quarter. Then I'll spend a few minutes talking about the strategies and initiatives being implemented in Q2 to improve sales performance and merchandise margins for the balance of the year, of which I am optimistic about achieving.

Thanks, Keith. Today I would like to provide an overview of our financial results for the first quarter. In addition, I'll provide a review of our cash position and an update on other key balance sheet items.

First quarter revenues were $134 million, a 14% decrease compared with revenues of $156 million in the last year quarter. The shortfall in the quarter was due to an approximate 26% decline in the average selling price, offset by a 10% increase in units, and a modest increase in shipping and handling revenue.

From a product category perspective, our gemstone and gold categories experienced significant declines because these businesses are being repositioned at lower price points to broaden their appeal, reduce return rates and improve the sales consistency for these categories. Our watch and consumer electronics business offset some of the decline experienced in our jewelry business.

Gross margin in the first quarter was 31.5%, which is up from 29% in the previous quarter but still slightly down from the 32% in the first quarter of last year. The decline in margins was driven by a negative mix impact, from increased sales in lower margin consumer electronics, and lower merchandise margins in certain categories, as we continue to take aggressive pricing actions on slower moving inventory.

The company remains focused on tight control of our operating expenses. In the first quarter, total operating expenses were down 21% versus the prior year period. Significant reductions were seen across all areas of the business, with the most significant reductions driven by the cable and satellite fees, and lower payroll expenses due to the reductions in our salaried work force.

Distribution and selling cost for the quarter were $45.2 million, down 21% or nearly $12 million from the prior year quarter. The largest reduction was due to our successful renegotiation of cable and satellite fees, as Keith referenced earlier.

The second major cost reduction came in the area of headcount, with our salaried work force down 11% versus prior year at nearly 30% from fiscal 2007. The Company is operating with a lean and focused work force.

The third area of savings was lower transactional cost in the area of order capture, customer service and fulfillment. Operational improvements, lower return rates and the consolidation of facilities all contributed to these savings.

General and administrative expenses for the quarter were down 27% versus prior year to $4.6 million. These reductions were driven by lower headcount and the discontinuation of our Polo fulfillment business, which was included in our fiscal 2008 results and a variety of other cost reductions. All of these reductions were in place at the beginning of the first quarter, and will also benefit future quarters this year.

EBITDA as adjusted was a loss of $6.8 million in the first quarter, compared to an EBITDA loss of $12.4 million in the year ago period. The EBITDA improvement was driven by the $14 million reduction in operating expenses, which more than offset the 14% sales decline. Net loss for the first quarter was $12 million compared to a net loss for the same period last year of $17.6 million.

I will now provide an update on key balance sheet metrics. The Company ended the first quarter with $54.4 million in cash and securities. This balance includes $15.7 million of auction rate securities that are currently a liquid.

During the quarter, our cash balance declined by $18.6 million from the prior quarter, driven by the $6.8 million EBITDA loss, a $3 million use in the area of working capital, $2 million in capital spending, the $3.4 million cash payment to GE related to the renegotiation of our GE preferred stock announced earlier this quarter, and $900,000 of spending on our share buy back program. The Company repurchased 1.6 million shares in the quarter at an average cost of $0.58 per share.

One comment on our current inventory position. The Company has aggressively managed the inventory balances down over the last 12 months. Our ending inventory balance for the quarter is $44 million. This is the lowest our inventory has been in several years.

As we begin to grow new categories and reinvest in new jewelry inventory, we expect to see our inventory balance grow modestly over the next two quarters. This investment is critical for the Company to reposition its merchandise offering and improve our sales performance.

Finally, a quick comment about the GE preferred transaction. During the quarter, the Company renegotiated and extended its financial obligation under the series A preferred stock. The original 44.3 million preferred stock was exchanged for a new series B preferred stock issue. The primary impact of this transaction was to delay the majority of this payment for five years.

The accounting for this transaction generated a one-time, non--cash gain in this quarter's P&L in the amount of $27.9 million or $0.84 per share. This amount is the difference between the original preferred stock carrying value of $44.3 million, less the fair value of the new preferred stock and the $3.4 million cash payment made to GE as part of the restructuring.

That concludes my update. Now I'll turn the call over to Keith.

Thanks, Frank. The Q1 accomplishments accounted for in our financial overview put into context, I would like to talk about our Company's road map for continued success in Q2 through the balance of fiscal '09.

While I understand your desire for financial guidance, given the rapid changes we implemented to improve ongoing business operations, let me meet you halfway. In the next few minutes, I'll lay out our thoughts and plans going forward that are specifically designed to improve sales levels and merchandise margins in the quarters ahead.

First off, the Board and management recognize that in order to turn around the Company's financial results in fiscal '09, make us competitive in the marketplace, and restore ShopNBC to profitability, we can't do it through cost cutting alone. Just as important, we need to be successful in driving top line sales and better margins.

What gives me great confidence in our ability to achieve this success is rooted in what we've accomplished in such a short period of time. Our costs are well under control and being tightly managed. Our cable and satellite negotiations at competitive rates are all but complete.

Our leadership structure is in place. People that are TV shopping and dot com veterans, have come on board and hit the ground running. Our processes are in place to run an efficient organization.

We're improving trends in new and active customer accounts, while driving down our transactional costs, in return as well as cancel rates. These things are happening and are going to continue to happen, as we drive further progress within a solid business model.

Let's talk sales, and how we're going to improve them. You may recall that we entered Q1 with inventory levels very clean but also very lean. As part of our new merchandise strategy and direction, we successfully cleared over $20 million of inventory in Q4 across all product categories, with the largest reductions in high price gem and gold categories. Price points had to come down to reduce return rates and appeal to a broader audience.

We also had to make room for a broader product assortment. As we moved into Q1, inventory was at its lower level in six years. While we're pleased with our ability to tightly manage our inventory, the downside was, that it inversely impacted our sales performance in the quarter.

In the month that followed, we took action to increase inventory levels across most of our categories, by broadening our vendor base, developing new air time strategies and concepts, determining new product categories, and testing this new product with our customers. Even though it's taking a little longer to bring in fresh inventory, I'm pleased to say that we brought on board 94 new vendors and launched 64 new concepts in the quarter.

So when you ask how sales will improve, here is how the actions are being taken. One, increase the inventory levels . We expect to significantly increase our inventory and receipt flow in Q2, with new merchandise in home, fashion, beauty and jewelry. We're confident in our ability to get it in, and out the door.

Two, increase reorders. Fundamental to success in TV shopping is a strong reorder business. Reorders have an established track record of sales performance, consisting of product that customers have accepted. This product is better air time productivity, higher margins compared to new product. Presently, we're buying more reorders and making it a much bigger part of our business.

Three, speed of innovation. We're rapidly bringing in more new ideas, brands, products, collections and concepts. In Q1, 64 new launches occurred. In Q2, 90 are planned.

For instance, on May 14, we launched a gourmet food category with four of the industry's top meat, seafood and dessert vendors. On May 29, we'll launch a new beauty vendor, Intelligent Nutrients, created by the founder of Aveda. This innovation is coming from new merchants brought on board this past quarter, new vendors and our core merchandising team.

Momentum is building, and quickly. All this product innovation is expected to lead to a much improved sales growth, as we reallocate our air time from the core business, and make those hours more productive.

Four, maximize on air productivity. Our sales and product planning department is reacting quickly when the new product meets our required productivity and sell-through goals. Product that the customer likes will be reordered. This keeps our inventory clean, maximizes air time and productivity. This is important for our reorder business.

Five, stronger daily sales promotions. Our daily sales promotion, what we call our top value of the day, is a big driver of viewership and sales from new and existing customers. Going forward, we expect these daily promotions to be bigger and more productive.

Finally, new blockbuster sales events. New and relevant sales events are planned throughout the year that are expected to drive incremental sales over what the base business would have achieved in the same time frame. Examples of upcoming events include our Founder's Day in June, featuring the best of ShopNBC, Christmas in July, featuring Mr. Thomas Pekoni and Mr. Thomas Kincade, to mention a few.

If you bring to market an event that is timely, relevant, and appeals to the customer, coupled with the right promotional handles, sales will experience a significant lift.

Overall, as we increase our receipt flow, and lay a foundation of new products, brands and collections, we expect to see the gradual progression throughout the fiscal year with sales increasing more significantly in Q3 and Q4, as we hit our stride in time for the holiday shopping season with a robust gift strategy.

Margins. Increased sales and merchandise margins in the low 30s is not a formula for success in our business. Even though we increased margins in Q1, it's nowhere near where we need to be.

Bottom line, we need to be in the mid to high 30s. At these levels, we'll be able to deliver the kind of positive EBITDA results that the Company is capable of achieving.

Let's talk gross merchandise margins and how we plan to improve them. First off, as Frank touched on earlier, margins in Q1 were in the low 30s for a couple of reasons. Some of it had to do with product mix, computers and electronics, which has margin in the low 20s, were a bigger part of our overall sales mix in the quarter than anticipated. We're changing that with a more balanced approach going forward.

Another factor, some of the new product launched in the quarter didn't sell through as quickly as planned. As a result, we decided to take a markdown of the new merchandise rather than return it to the vendor. This presented a bittersweet cycle in the first quarter. Because we didn't have the reorders, we had to test more new product. While we learned more from the customer, this led to more risk, more mark downs on product that didn't test successfully.

This is precisely why we want to build up the reorder business, and that's exactly what we're going to do. We're building up our reorder business so that it represents a much greater percentage of our total sales mix. This will lead to a more predictable sales model at higher merchandise margins.

In addition, as new product tests successfully with the customer, our sales and product planning department is reacting very quickly to reorder this merchandise, and move it in, and out the door. Improvements in sell through mean taking fewer markdowns, which means better margins.

Third, our merchandise assortment continues to broaden. As we bring in new product, we'll have less air time at the lower margin computers and electronics, and more air time devoted to higher margin categories of home, fashion, beauty and jewelry.

Lastly, we're working with our new vendors to share the upfront risk on new product launches. What doesn't test successfully will be returned to the vendor. What does meet our productivity goals will turn into a reorder. This shared risk approach incents the vendor to provide us the better product and better values so that reorders are created.

The difference going forward with respect to the improved merchandise margins, we're obtaining more historical data, learning from our new orders, shifting our merchandising, and working with the vendors on return privileges. That said, we expect a slight margin improvement in Q2, with more gradual increases in Q3 and Q4 to historic levels.

In summary, we anticipate sales will gradually improve quarter by quarter through the end of the year, due to receipt flow, which is expected to be a combination of new product and reorders, both the gross merchandise margins in the mid to high 30s.

With that, let me conclude. The next three-quarters will be the most critical in our Company's history. I firmly believe we are headed in the right direction with the continued turnaround of our business. All of the organizational changes required to achieve a long-term sustained growth, with size and scale, are behind us. Now, it all goes through Main Street.

With this solid foundation and our strategic merchandise objectives in place, I remain very confident about the future of our multi-channel electronic retailing business, with ShopNBC as the authority and destination for home, fashion, beauty and jewelry shoppers. I am also confident in our execution capabilities to increase top line sales, and bring in new merchandise quickly and at higher margins, while tightly managing our operating expenses.

We certainly appreciate your time this morning, and hope you share our enthusiasm about ShopNBC's future. We'll now take your

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Bob Evans.

Hi. Bob Evans, Craig-Hallum Capital. Thanks for taking my questions.

First, can you comment a little bit more on the gross margins that you just discussed. When should we start to see the mid to high 30s from a ramp up standpoint? And maybe just give us a little bit more color in terms of how you get there.

Bob, this is Keith. Thanks for your question. And just to reiterate, the question was, can I color a little bit more on the expansion of our merchandise margins, and how and when we're going to achieve that.

Yes.

We're planning to continue the positive improvement throughout the rest of the year. It will be incremental through Q2, Q3 and Q4.

It's a combination of the following. We are shifting mix, lessening the amount of CE air time, and a little bit in our watches, and expanding some of the air time in more profitable categories at lower average selling prices.

Additionally, we've implemented a pricing model that incorporates improved margins across all product categories. It creates consistency and predictability throughout.

And finally, a higher reliance on the reorders, as I mentioned earlier. Those reorders are predictable. We know exactly what those margins and productivity are going to be. And we can plan them methodically throughout the year.

Okay. Are you, perhaps, the higher margin percentage, will you be giving up gross margin dollars, if you will? That net in an absolute sense by moving more and more away from the CE? I guess can you replace that is the question?

Sure can. Velocity cures all ills.

Okay. So the key is, can you get the velocity?

You've got it.

Also, can you comment in terms of, from a free cash flow standpoint, when might you be able to be free cash flow neutral on a quarterly basis? And I'm not looking for a specific quarter, but can you give us generally a ballpark idea.

Hey, Bob, this is Frank. As far as the remainder of the year and the cash flow in EBITDA performance, as you know we're not giving guidance for the rest of the year. Just kind of go back to what Keith said earlier. We expect both the EBITDA and the cash flow from operations to improve incrementally as we go through the year.

Okay. Okay. Can you comment as it relates to, I think you said you have to build more inventory because you're at a historically low level this quarter. How much more inventory would you expect to add on a dollar volume basis?

Bob, this is Keith. As I mentioned earlier in my comments, the inventory is at a six-year low. And is actually responsible for the shortfall in our expected sales plan. We're looking to, in the next quarter, to almost double the inventory levels that we currently have.

Okay. When you say double the volumes, where would you expect that to be end of Q2?

Somewhere north of $70 million.

Okay. So, should we expect then a fairly strong use of working capital then in Q2?

There will be an increase in working capital, but our turn is amazingly quick. In our industry, the turn is somewhere around four. Currently we're at a turn of around seven. So as we increase the inventory, we will increase the working capital. But we will manage the inventory in, and out the door.

And just one comment on the increase in inventory. What we expect to double Q1 to Q2, or come close to doubling, is the inventory receipts. And so the inventory that we bring into our warehouse. And part of that will be a replacement as we reduce our drop ship volume. And we actually are selling inventoried items instead of dropped ship items.

So we don't expect the absolute inventory listed on the balance sheet to double in Q2. A lot of it is just a different composition of the inventory purchases, drop ship versus inventory items, in the quarter.

A final comment to that point is, we have requested and notified our vendors that we'll be extending our payment terms from historical levels by an additional 15 days.

Okay. The question I'm getting to is, given you used cash this quarter, should we see, given the use of working capital, a similar use of cash next quarter or can you give some color?

Bob, again, I guess we don't want to get into too much specifics on the future quarters, but we would anticipate to use cash again in the second quarter as we do build inventory.

Okay. All right. And then as it relates to new customer accounts, very good progress this quarter. Can you give us a sense of what you're trying to do in terms of new customer acquisition, and kind of what's working there.

The new customer acquisition merely comes from product mix. The more you broaden the product mix away from the core categories mentioned earlier, attract new viewers and customers. We have, in our 72 million homes, we have millions of viewers that tune in and tune out of our store every minute or two. Those viewers are captured by product demonstration that we present on air.

They're also drawn to dot com. And that allows them to see additional product that they don't have an opportunity to see on television. So it's more basic blocking and tackling, to get the job done. And that will continue to grow our new customer and active customer base in future quarters at a similar rate.

Okay. And sorry if I missed it, but what percent of your revenue was dot com this quarter.

It was 30% this quarter.

And how did that compare versus last year.

Last year's first quarter it was pretty similar.

Okay. All right. Thank you.

Our next question comes from John Telmer, your line is open.

Hi. I was just interested, I'm an individual investor and a long-term value oriented guy, and I guess, Keith, what I would be interested in, I've seen you buying a lot of stock in the open market and obviously used Company cash to purchase stock. I know you're not comfortable giving immediate guidance. But how do you look at the long-term value proposition that the stock represents?

I know, just to add, there's certain investors out there that have considered the asset play and the idea of dividending out stock and arguably going into runoff. And I guess when you look at the ongoing franchise, how do you think about the long-term value here?

Well, I have a background in this industry and there are a couple of other players that we have modeled our cost structure after. You can look at and expect that we'll have similar metrics as others, and you could relatively predict that long-term our return EBITDA will be at a similar ratio to sales.

As it relates to my own purchases and the management team's purchases, I can only offer that we're going to continue to eat our own cooking.

I certainly respect that, and I guess one of the issues or I guess concerns with regard to looking at some of the competitors is the obvious scale issue long-term that they have and you don't have. Typically, obviously the competitor with the largest scale seems to be able to consistently run at dramatically higher metrics, and it seems to be staggered -- it seems like you have some serious structural hurdles to reach those type of levels. Would you disagree with that?

Yes, I respectfully disagree. We have the necessary scale to continue to grow for several years. I'll just touch on this lightly. We have a strategic advantage, whereby we have one very large warehouse in Bowling Green, Kentucky. This warehouse houses all of our non-drop ship inventory. It's 267,000 square feet, which we can expand several times at a very low cost.

We continue to plan to stock our inventory there. Again, it is a multi-incumbent as it relates to our commodity base, and we will have the ability this fall to introduce something called multi-line shipping. Uniquely, ShopNBC will allow the customer to buy or purchase product across any product category, given the right size, we'll be able to put all of the product into one box and ship it to the customer for only one shipping and handling cost.

Some of our other competitors have multi-warehouses. It's commodity based. And they have a lot of capital invested in those. I have no idea what their plans are, but that is a strategic advantage for size and scale of our Company.

I tell you what, I'm all set. And I very much, as an investor, appreciate you guys eating your own cooking, as you said. And one last thing, I had a bit of trouble getting a call direct with management or with IR. I don't know if that's an ongoing issue or if related to the quiet period, but I would love to have a meeting with you guys. Come up to Minnesota and see you.

It may have been related to the quiet period, but my phone and door is always open.

Beautiful. Thank you.

Thank you, sir. I want to thank everybody for their questions and their time this morning. And if there is nothing further, we'll conclude our call.

Thank you for participating in today's conference. You may disconnect at this time.