iMedia Brands Inc (IMBI) 2009 Q3 法說會逐字稿

Good morning and welcome to ShopNBC's fiscal third 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 Miss Jenna Lerfald 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 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'd now like to turn the call over to Mr. Keith Stewart, ShopNBC's President and CEO.

Good morning and thank you for joining us and thank you, Jenna.

As you can see from our third quarter press release merchandising initiatives at ShopNBC continued to strongly resonate with the customer. The last three months proved to be another solid step in the right direction in our turnaround with the continued focus on delivering a premium multichannel shopping experience. Throughout the quarter, a number of records were achieved across a number of leading indicators. Customer trends continue to accelerate in the quarter with new and active customers up a record 118% and 64% respectively. That equates to 1.1 new customers each and every minute of every day.

This is an acceleration of the Company's first half performance of new and active customer growth of 60%, and 29% respectively. We are building excitement trust through our new product mix, credible guest experts and event promotions. In fact, increased customer demand in the quarter led to 4% growth in net orders over last year, the Company's first increase in seven quarters.

Net average selling prices lowered to a record $95 during the quarter versus $187 a year ago quarter which is a 49% decline. This strategic initiative coupled with our new merchandising mix not only helped attract new customers, but also drove increased activity in our core customer base. Net units increased a record 90% in the quarter. In fact, we had a record 1.2 million units which equates to 9.1 units each and every minute of the day. This is 21% more units than Q2.

Return rates were down by 22% versus 29% in a year ago quarter, resulting from improvements in delivery time, continued focus on the customer, product quality and lower price points. I'm also pleased to report that the customer service contact rate decreased 24% in Q3 compared to an 18% decrease in Q2. To further establish ShopNBC as a destination and authority in home, beauty, fashion and jewelry, we added a record 122 new vendor partners to our community. We launched 58 new show titles, product categories and brands in the quarter. Through these additions we strengthened our networks talent ranks with a record 103 new guest experts including celebrity Hair Stylist Ted Gibson, Chef Marcus Samuelsson and American's favorite Shoe Expert, Miss Meghan Cleary.

On the distribution front we successfully concluded all our cable and satellite agreements that were up for renewal this past year. In doing so we achieved a cost savings of approximately $24 million this fiscal year, preserving 100% of the distribution footprint in 73 million homes. And improved our channel positioning in many markets.

Sales at ShopNBC.com were up 300 basis points in the quarter versus last year. Our Web penetration was an industry leading 34% of total Company sales. These strong results were achieved by tracking new and returning customers at an increasing rate with online content enhancements and extended product assortment. Use of live chat for sales assistance and extended social networking strengthened our customer engagement which substantially increased buyer conversion rates to an impressive 6.3%, and an increase in orders of 78% over last year's same period. Going forward we will enhance our line sales with a new commerce-enabled mobile site, expanded web assortment and targeted promotion incentives that drive customers to our website, thereby reducing transaction costs.

Finally our operating expenses decreased $12 million year over year, or 20% in the quarter, driven by a broad based reductions in the Company's overall cost structure. As these positive business metrics indicate, changes to the business and key merchandising efforts to unlock our growth potential showed continuing signs of progress in the third quarter. Record gains were made in new and active customer counts. Net shift units were at record levels. With our focus on delivering a premium shopping experience across our multichannel platform of TV, and the web, the customer is reacting strongly to our initiatives. What's more, year on year EBITDA as adjusted is $18.2 million better than last year. We are highly focused on delivering the high expectations that have grown during the turnaround of ShopNBC. And I remain confident about our go forward progress.

With that I'd like to turn the call over to Frank Elsenbast, our CFO who will provide a more detailed financial overview of the third quarter. Then I'll spend a few minutes talking about the initiatives being implemented in Q4 to improve our sales and EBITDA performance.

Thanks, Keith. Today I would like to provide an overview of our third quarter financial results, a review of our cash position and an update on other key balance sheet items.

Third quarter revenues were $119.4 million, a 4% decrease compared with revenues of $124.8 million last year. The shortfall in the quarter was due to the 49% decline in the average selling price of our merchandise versus last year. This reduction in our average selling price is an essential part of our strategy to increase viewership, rebuild our customer base and increase unit volume. Our customers continue to respond to our new offerings as we drove a 90% increase in unit volume for the quarter which nearly offset the significant decline in our average selling price. Sales for the quarter were also negatively impacted by a change in mix. As we allocated more air time to categories such as health and beauty and home. And reduced our air time dedicated to higher ticket consumer electronics products. While these categories drive lower topline sales their margin dollars per hour potential and new customer acquisition make them critical categories or ShopNBC as we reposition our merchandise offering.

Gross margin in the third quarter finished at 33.2% which is down 160 basis points versus our second quarter margin of 34.8%. The margin decline was driven by an increase in shipping and handling promotions as well as lower merchandise margins in certain categories as we continue to test and promote our new growth categories. Ongoing operating expenses for the quarter were $49.5 million, a reduction of 20% or $12 million versus last year. The reduction was primarily driven by the significant reduction in our cable and satellite feeds that the Company achieved in our renegotiation process completed earlier this year. Additional savings versus prior year are driven by lower salary headcount, continued reductions in discretionary spending and favorable trends in our variable operating expenses.

EBITDA as adjusted was a loss of $5.6 million in the third quarter compared with an EBITDA loss of $13.3 million in the year ago period. With the improvement being driven by the overall reduction in operating expenses. I will now provide an update on key balance sheet metrics. The Company ended the third quarter with $32.5 million in cash and securities, including $10.5 million of restricted cash. This balance is a decrease of $3.9 million versus the prior quarter, driven by the EBITDA loss of $5.6 million, capital spending of $2.3 million in the quarter, and a $4.3 million improvement in working capital.

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

Thanks Frank. Now I would like to address our go forward plans and in doing so express why I remain very confident about the fourth quarter prospects.

In each quarter and every quarter that we presented so far this year our business performance has steadily improved. It's been a rebuilding process across many fronts at the hands of incredibly talented and committed base of team members. At this stage in the Company's turnaround it's all about delighting the customer. This past quarter the rebuilding of the customer base delivered it's most impressive gains to date. Year-to-date new and active customer growth is up 78%, and 41% respectively versus last year. Net shift units in Q3 were 21% higher than Q2. Year-to-date, it's up 49% versus last year.

These are many other leading indicators mentioned earlier and are not only gaining traction but in some cases they are actually accelerating, especially in our product categories. For example, in watches we continued to outperform and lead the industry in this category. Watch sales were up 66% in Q3, driven by strong events and promotions across our multichannel platform. Year-to-date new customers are up 105% versus last year. As for the definitive destination for watches we will continues to engage the customer with universal appeal and increase our productivity by building the audience through premium brands, informative presentations and design innovations.

As for beauty it was another outperformer in the quarter. And it's firing on all cylinders. We continue to build momentum in this category by increasing Q3 sales -- 77% over last year. 29 new brands were launched including Ted Gibson Beauty, Dr. Robert Rey Sensual Solutions, and Sensa Weight Loss systems. Special events like Beauty and Style Week helped drive significant customer activity with new customers up 206% year-to-date. Active customers are up 103% year-to-date. ShopNBC's beauty community is now larger than ever. Many are participating in auto delivery of these beauty products as well, which means we are all making money while we sleep.

Going forward we are excited about bringing them many new health and fitness products in Q4 and beyond as we work on expanding this segment of our business. In addition to watches and beauty we are starting to gain real traction in some of the other business units we haven't experienced before. In the home category, customer response is starting to accelerate with sales up 55% in Q3 driven by increases in textiles, holiday collectibles, housewares, mattresses, outdoor living, lighting and gourmet food. These increases are a result of strong promotions, new launches and events such as Oktoberfest German collectibles, the big Christmas Countdown and the ShopNBC cook event which featured the Culinary Institute of America. Year-to-date new customers are up 86% for the home category.

Consumer electronics sales were soft in Q3 due to a strategic decrease in air time and a repositioning of category. However, this business is starting to catch fire. On November 8th, the Company achieved its single largest sales dates since June of 2008 during an event titled the 24-Hour Electronic Gift Celebration. This one day sales event generated approximately $3.6 million in revenue, while driving significant customer activity with a 37% new customer count. In Q4 plans for extended assortment on the web will increase by over 400 items, including the launches of our cellular store and the ShopNBC Music Cafe.

Don't forget fashion -- we launched 50 new brands and concepts in Q3 with sales up 6% in the quarter, driven primarily by new items in apparel and footwear which offset a decrease in handbags. Two new promotional events -- Fashion Day and Beauty and Style Week -- were added to familiarize the customer with new brands and an increased assortment. These sales events and increases in apparel, accessories and footwear led to increased customer activity in the quarter. Year-to-date, new customer accounts are up 87%. Going forward, as we continue to reposition fashion, by finding a balance between core brands and newer lines we will rebuild the credible assortment that makes it easier for our customers to find head to toe fashions that work with their lifestyle. 17 new launches are planned for Q4 including Heys Luggage, Judy Kroll Collection, Sliminizer Shapewear, Bones and Roses Sleepwear, Megan Fox Handbags and Ed Hardy Accessories.

In jewelry, with a loyal fan base that has developed ShopNBC into a trusted source and resource for their lifestyle jewelry designers, we had 14 new launches in Q3 anchored by some strong key item wins. Year-to-date new customer counts are up 32%. In Q4 many new launches are planned as we continue to lower price points and grow the customer base while diversifying and developing new concepts, show titles and events that are unique and differentiated from our current assortment.

Lastly we launched our holiday gift strategy in Q3 titled ShopNBC with Confidence. Significant air time increases are planned in Q4 along with a larger assortment of gift products available on ShopNBC.com. As part of this holiday initiative we launched a one rate shipping initiative called Value Shipping. This is a major customer experience enhancement whereby customers pay one low shipping rate for all purchases made within one day. All additional orders are shipped free. Not only Value Shipping is first in our industry, it's also a differentiator for us in the market space. This one-rate shipping initiative helps us uniquely position ShopNBC to be more competitive and a true destination for gifts this holiday season.

In summary, we added a record 122 vendors and launched 58 new concepts in Q3. In Q4, we expect to continue this momentum by adding more new vendors and launching more new concepts across our multichannel platform. With a consistent flow of new product coming in, with increases in volume, productivity and variety in our daily sales promotions, with reorder product purchases continuing to increase as a percentage of total purchases which is expected to increase in Q4, you can see why I'm so optimistic about our future. We are rebuilding strategically, we are innovating, we are seeing results and, in some areas, we are clearly outperforming.

Now admittedly we haven't been able to put the ball in the basket yet in terms of delivering positive EBITDA results. However, our rebuilding efforts are starting to actualize. We are closing in on our goals and delivering positive financial results. With that let me conclude.

The turnaround at ShopNBC has gained traction. Changes to the business and merchandising efforts are starting to unlock our customer growth potential and once you have traction, it's full speed ahead. Many of our leading indicators show this progress is happening and in Q4 it is the right quarter to continue accelerating forward. New events are being layered in. We have the right promotional tools in place. Our promotions are getting stronger. E-commerce is providing to be a powerful complement for additional growth and the customer is reacting strongly to our initiatives.

And, while we see so many successes on so many fronts there is still much more opportunity. In fact one of our biggest opportunities we face now is satisfying customer demand. With phenomenal growth in customer activity and a sheer number of shift unit flowing, ShopNBC's management team is starting to focus on how to satisfy the customer demand being created. As part of our strategic plan, we are exploring ways to invest in customers through expanded IT, logistics, warehousing, call center capacities, interactive TV capabilities and a significant extended product assortment online at ShopNBC.com.

As we look ahead, it's all about harnessing our growth potential. We certainly appreciate your time this morning and will take your questions.

Thank you sir. (Operator Instructions) John Zupink, you may ask your question. Please state your company name.

My name is John Zupink, I am an individual investor and you discussed your beauty business. Can you comment specifically on matters related to your sales of skin care products in the past quarter as well as in the coming quarter and in the new year?

Thanks for your question, John. I can tell you that our skin care, our color cosmetics and our hair care continued to grow in Q3 over Q2. We certainly see great opportunity in that product category. And it is a prime candidate for our auto delivery program which I had mentioned earlier. And that is highly productive for our air time and online business. So we will continue to focus on accelerating our skin care, color and hair care business in Q4.

Thank you very much.

You're welcome, John.

Thank you. John Halberz, go ahead and please state your company name.

I'm also an individual investor. I had a few different questions. One, just to start was -- the GE-Comcast deal if in fact that happens would that have any impact on you given that if GE is getting out of the media business yet they have obviously a big stake in your Company. Do you see that having any impact?

First I'd like to state, if you read the Wall Street Journal you know about as much as I do about GE, Comcast and NBC. As for changing the landscape, I really don't see much of a change on landscape. They are a minority holder albeit around 30%, they are a minority. So I really don't anticipate any changes going forward.

I guess my concern specifically would be that the leverage of that relationship might have helped you maintain your footprint and would there be any risk that that relationship changing affect that footprint?

No, I really couldn't possibly say that would impact us negatively or positively. We have a very good relationship with Comcast as it is. And what we pay them for distribution and the last time I checked, they still need a revenue stream, so.

Understood. I appreciate that. One other was that you brought in a lot of exciting brand name people like Ms. Somers, for instance.

One of the questions that I had was, how you're able to attract the high quality talent. Is there an incentive structure that's unique or are you issuing shares? What is the economic incentive for them to come on board?

Well, it's really the long-term potential that all of these new vendors see at ShopNBC. They know how big this industry is and how fast this business is growing. And it again has incredible potential. So they basically get -- most of them -- we buy the product through them and they get paid basically through invoicing and their margins to us.

So these are smart, smart people. We also have a very talented energetic team. These team members have been in the business for a long time and have worked with me or for me in another life. They are all very, very connected in all of their businesses and well respected within their industries. So to that end they know, they, too, are very smart people and know there's a bright future at ShopNBC.

Understand. And, I'm excited about what you're doing. I guess what I didn't understand intuitively was if by choice you or a competitor with maybe a larger distribution or eyeball at this time, then was there an economic incentive other than -- that attracted them to -- I'm an investor, so our platform, that was my question.

And it sounds like -- A good question, yes, thank you.

And your point is that the economics are no different.

The economics are no different than any other vendor.

Understood. The last thing -- two more quick ones -- from a cashflow standpoint you did mention, do you have any guidance in that regard as to when you are going to reach cashflow break even.

Hi John, this is Frank Elsenbast and right now we are not providing any go-forward guidance. We will reconsider this at the end of the fiscal year when we announce our Q4 and full year results.

Understood. The last question and again as a guy who also eats your cooking I appreciate that all of you all are -- I just happen to be because I do check the channel when I'm on TV, I like to see the product, I notice -- have you cleaned up all of the legacy inventory at this point, or are there still inventory issues that you're dealing with from a legacy standpoint?

Hey, John, this is Frank again. No, all of the inventory, it's all turning very rapidly right now and we've cleaned up all of the older inventory. And what we have in stock now is a very high percentage of it is less than 45 days old. And we continue to test and promote new categories, new vendors, and that's all part of our strategy to build a reordered pipeline in our new merchandise categories.

I'm all set. Guys, listen, I wish you all the luck. I am a shareholder and excited about what you guys are doing.

Thanks for your comments.

Thank you. Arnold Brief, you may go ahead. Please state your company name

Goldsmith & Harris. Can you give us some idea with all of the changes you've made in product, vendors, pricing, et cetera, has there been any change in your customer profile at all?

As far as demographics, no, I would just say, it's expanded dramatically. We have generally a younger, more affluent customer. That continues. We don't see changes there. The customer activity as it relates to orders per customer continue to accelerate and all different categories -- our new customers and our core customers that we define as customers that buy at least once a week from us. So as we depress the ASPs which we are about done for the year, it may go down a little bit more -- we will see continued activity particularly accelerated through the gifts season. And that will also accelerate through our Value Shipping program which is unique to ShopNBC.

How about given again, all the new vendors you've added -- the impact on inventories, inventory turns and working capital requirements?

If you look at the balance sheet our inventory ended the quarter just over $61 million. So it is a significant increase versus prior quarter which is to be expected as we build inventory going into the holiday season. We expect that to come down during the fourth quarter and end up quite a bit below the $61 million. As far as new vendor impact on that, we manage the new vendors inline with our overall inventory requirements that the business has.

Last question. I'm new to taking a look at this Company and so I'd like a little perspective. Give me some feel for what the secular trend has been in terms of the impact of retailers having their own websites and people being able to go direct to a website and not having to bother with home shopping TV -- whether it's being able to bypass that and being able to go directly to the retail websites.

It's a very good question and there certainly is much more competition than there used to be years ago because of the innovation of the web in itself. However, ShopNBC along with our prime competitors have a significant advantage in that we are a multichannel platform. Meaning that we promote and advertise 24 hours a day, seven days a week. And we drive customers to the web. We also drive customers to our mobile phone activity. To the extent -- unless you have a marketing budget of a Nike or a McDonald's -- to really invest that much in advertising we have a tremendous strategic advantage of driving traffic online and on television through our own television channel. I like our odds.

Thank you.

Thank you, Garrett King, you may go ahead. Please state your company name.

My question has been answered. Thank you.

Thank you. Bill Gordon, you may go ahead. Please state your company name.

Gordon Capital. Good morning. A couple questions here. On the internet stuff, it basically said it resulted in 31% of the Company's new customers. Do I read that to mean that one out of every three customers was new to the Company through the internet, and two-thirds came out of the television home shopping?

That is correct, Bill.

The obvious question then is since we drive down from TV to the internet, we are picking up one-third away from the TV. How are we doing that? Is it just basically Google searches or do we have something else going?

No, we -- a lot of people use the internet as an ordering mechanism which does a couple of things. As television drives customers to the internet we don't have the cost in the call center in handling that call. It reduces our transaction costs and our costs per order. Big advantage.

The second advantage is when they go to the internet they have options to look at other items. So whereby we specialize in one item of television making it very special and unique, online they could look at assortments. And as a result that type of multichannel strategy we have a leading amount of items per order. Customers are buying roughly 1.6 items for each and every order. Which is a very, very strong performance in comparison to buying historical references.

You mentioned that you had a 90% increase in net orders or so overall and 78% on the internet. If I read this right, increase in order 78% over same time last year as opposed to 90%. We are seeing a larger increase if I read this right from a total sales including TV as opposed to the internet? When I would think intuitively I would see since we are starting off with a lower basis on the internet that we would be seeing a higher rate of net orders unless the price of the orders are still expensive on the internet, can you help me out with that?

Yes, Bill, this is Frank. They are not quite apples-to-apples. The 90% increase in net units, that's for the entire Company -- what we achieved for the third quarter.

On the internet the 78%, that is about the number of orders that were placed. And many of the orders have multiple units included within that order. I don't have at my fingertips what the unit increase was for the internet. But it would be bigger than the 90% for the Company average.

It would seem that way because you increase your penetration to 34%.

Yes, that is exactly the case.

Okay. And you mentioned that the sales, it seems to be conspicuously absent with regard to internet. In other words, I recognize overall business was down 4% total Company but in terms of the internet I have no indications as to what the sales were compared to the same time last year. Can you give us some insight into that in dollar bills, I mean in terms of percentages at least?

The internet, the overall business was down 4%. Our internet channel did grow versus prior year and I believe the percentage growth was in the 3% to 4% range versus prior year internet sales for the quarter.

Why so little? Why not -- we are reducing the ASP -- the selling price -- dramatically. We should be opening up a joint universe of new people even in the face of a large recession as long as we have the product that's exciting people. Shouldn't that be helpful?

Very good observation and this too is a journey. Let's not forget that the internet has been down along with the rest of the Company for several quarters. So seeing growth in this last quarter is a very positive trend. And I can attribute that to a very, very strong team that we have and we continue to expect very good hype and strong performance from both television and dotcom.

Question. Overall we got the price down to around $95 which is better than your $100 estimate by year end. Volume was down. You also mentioned margins are down and you attribute that to some promotional expenses. Adding on watches and HBA and home accessories, one would assume cosmetics -- that these things are reasonably good margined items and the 33% is low even with promotion unless you are giving away the product compared to QVC and some of the other guys and even from your own lips you basically expected a higher margin number. And just the fact that we are lowering prices doesn't mean you have to give away the margins. It seems to me that cosmetics are higher margin than even some of the large TVs which are a higher commodity item -- and computers. Can you help me out with that inconsistency -- at least to me.

It really wasn't product, it was shipping and handling costs increased and that was because free shipping and handling promotions drove some of the sales in the categories. Now, with Value Shipping being launched in the last couple of weeks, free shipping and handling will not have the promotional power that it once had because the customers that buys more than one item in a given day gets free shipping and handling on those additional units which is baked into the cost structure. So just by virtue of having that vehicle and that tool in place, that will reduce the amount of free shipping and handling offered to the customer.

So, in other words, we will as long as the customer orders within the same day we are going to put it all together and not charge them anything for it.

One box, one day, one shipment.

How does that save us money?

Bill, there will be one fee that they charge -- that we charge for shipping and handling. The difference is in the past if people bought multiple items during the day they would receive multiple shipping and handling charges.

They would but not us. Again how does that save us money by that type of response. I'm lost.

Because we will now have Value Shipping on a day in and day out basis. We will not have promotions that convert to free shipping and handling on everything. The frequency of free shipping and handling promotions will be greatly reduced going forward.

I see. Okay. Thank you much.

You're welcome. Thank you.

Doug Thomas you may go ahead. Please state your company name.

Yes, good morning, Keith.

Good morning Doug.

Good morning Frank. JET Investment Research. I just wanted to say I think a lot of what you guys quoted today was fairly encouraging and I just wanted to basically ask you, Keith, what do you think the big -- how would you help people understand what your targets are in terms of getting to that EBIT break even over the next I would assume couple of quarters?

Well, as Frank had mentioned earlier we are not really providing guidance at this time although we will reevaluate it at the end of the fourth quarter. But at the end of the day it's all going through Main Street. It's all about increased volume associated with the units and accelerating the growth of these new product categories.

As in any business you have leaders and laggards and the first thing you need is customers. As reported our new and active customer count is up tremendously. You need to be able to reduce the return rates to add to the net, you have to reduce the cancellation rates, these are all the operating metrics that are the leaders. The laggards, thing that come last, are the sales and the EBITDA number. If you track our Q4, Q1, Q2 and Q3, you see continued improvements. As the units continue to increase at a higher level you stabilize the average selling price -- you can run the math.

We also have stated previously that we will double our sales every five years. Now without providing guidance it doesn't take you a long leap to figure out that we are going to have at least 15% compound growth quarterly in the next fiscal year to achieve that target.

Okay. So you haven't found any new impediments in the last couple of quarters, it's really a matter of continuing to execute the way you've been executing and as far as I'm concerned, you've got the people to do it, you have an improving economy. I suspect that that's probably not going to hurt and then I guess some of the stuff you talked about too in terms of merchandising. It appears like retailers are talking about going back to basics for this holiday season and so forth and you're aligning yourself a little bit with that trend as well.

So I guess, I don't know if I have a question in there but it seems like you're headed in the right direction. Again, with possibly some pick up in some consumer sentiment and improved conditions out there from retailers in general.

Thanks Doug. We agree with all those comments.

Okay. Thanks, guys, good quarter.

Thank you.

Thanks, Doug.

(Operator Instructions) Arnold Brief, you may go ahead. Please state your company name.

I'm still with Goldsmith and Harris. With a lack of guidance maybe give us a little more guidance on the metrics or go into it -- starting with gross margin, would you expect the gross margin, again, not trying to adjust for seasonal but just on run rate basis over time -- your gross margin more or less start to stabilize at this point with price cuts in back of you, mix changes in back of you, or should we look for further declines in gross margin if we are trying to build a model? How would you give the outlook for gross margins.

We are very optimistic about the growth of our margins. Now there are several components obviously into the margins. One first and foremost is the product margins. We will expect to see continued increases in our product margins. Historically we were in the 31%, 32% range on a product basis. We are pegging around a 35% right now and our target is somewhere around 37% which is not too far away. And, we will lead the industry as it relates to product markets.

Another very large components of margins is shipping and handling costs associated with the sale of a product. And as mentioned previously in the call with the addition of Value Shipping that will create reduced free shipping and handling promotions which will add to the overall gross profit. So, in other words, we'll have less shipping and handling losses. Further you'll have greater economies of scale through multi-line ordering. In other words, grabbing more than one order per transaction. There's just an awful lot of scale as you build that into the model.

In terms of operating expenses have you realized the efficiencies that you've been aiming at or is there still more in front of us. How much of the gains there have you actually realized?

Right now when you take a look at the infrastructure of ShopNBC on departmental or headcount we are about as skinny as you can get. And we are not looking to grow that percentage tremendously in the future. The big part of the OpEx, Arnold, is the distribution costs. We did have a savings of roughly $24 million. Now that was a tremendous leap from where we were last year. We continue because, let me digress for a second -- we historically have long-term distribution contracts, 10 to 15 years. As we renegotiated these contracts at lower costs we did them on short term contracts. One and two-year contracts. As soon as we sign these agreements we are already renegotiating. We expect if digital television continues to proliferate the cost of those distribution contracts can continue to decline at a much faster rate than we've seen in the past. With the largest piece of the OpEx there we see opportunity -- great opportunity.

The final piece is the transaction costs. And transaction costs can be defined by those costs associated with taking an order in a call center, a customer service call and costs associated with returns in the warehouse. As stated our customer contact rate was down 24% this quarter compared to 18% in the previous quarter. That drops the transaction costs. The call volume is up but also what is up is our automated ordering and our IVR. You don't have the cost of taking an order in a phone center. Our penetration of 34% at dotcom is industry leading. It doesn't cost that much to take an order on dotcom. Our return rates are down 22%. Those costs associated with the transaction costs are down. So we see not only great progress in the last couple of quarters but continued progress in those transaction costs which will continue to [whinny] down our OpEx.

Very good. Finally on doubling your revenues over five years -- how much of that is industry growth versus your market share?

To be candid we really haven't dissected that. But it stands to reason that rising tides raises all ships and I hope our competitors continue to flourish and grow. This industry in itself will continue to grow over brick and mortar and it's just -- it's not that anyone else in the sector are smarter than anybody else -- it's just that the internet, the gravity, the power of the internet and television is pretty tough to beat. And it's awfully convenient. It's an easy way to shop and I don't know about you but I hate lines in the stores at Christmas.

Thank you.

You're welcome.

Thank you. George Tomissey, go ahead and please state your company name.

Private investor. You've talked in the past about liquefying some of the noncore assets. Is there any updates or any comments on that?

No, George, this is Frank. The Company continues to work on various options there on how we can most efficiently monetize some of these assets and we are talking about a Boston TV station, potential sale lease-back on certain real estate assets. Or a secured line of credit on our inventory or receivables. These are things we've all talked about in the past and the Company continues to move forward on several of these and we will update the investors as soon as we have anything definitive to say.

Okay. And then you also talked about Suzanne Somers. Has she met your expectations or what can you add any color to how she's done?

We are very pleased with the results -- the sales results -- of Suzanne and the products that Suzanne has brought to us. In fact, she has a very high new customer count for the sectors in which she operates -- primarily beauty and fitness and apparel. And just most recently in her last visit, 32% of her orders came from new customers. For someone that has been in the industry for so long that's an amazing statistic in itself. We also anecdotally believe that Suzanne brings tremendous viewership opportunities. That's how we pull in new customers. When you see Suzanne on the air, you stop, you want to listen to her and she's a very, very bright woman. We are pleased to have Suzanne aboard.

Thank you.

You're welcome.

Robert Gates, you may go ahead and please state your company name.

I'm a shareholder. I have a question. For the Christmas season do you have any plans for an advertising campaign on the major networks to bring more eyeballs to the internet and your other station?

Thank you for your question, Robert. We don't have any plans to invest in advertising outside of our channel. Our channel in itself is very, very strong as it relates to an advertising vehicle. If you were a standalone dotcom website, you would have to invest an awful lot of money to drive viewership into your website whereby we are 24/7, 364 days a year. With the traction that we had talked about with new customers and the growth of active customers, investing in the external advertising on top of the things that we have now I would say I would be wasting your money.

Because I notice that your competitor HSN is doing that and that's why I asked the question. The other question I have is on with this -- with ShopNBC and that -- is there any reason why NBC itself doesn't take advantage of this asset more by doing some advertising or doing something to bring more eyeballs to you?

Well, I can't speak for NBC but I do talk to them quite frequently and we are in active conversations to work with some of their properties like Bravo. To the extent that we can sell some of the Bravo content and also be on some of their channels. That would be a cost-effective way to do that.

Now, all that said, NBC is a standalone unit and they need to make money and we unquestionably need to make money. So to the extent it compromises our margins to you it would not be a good business decision. But to the extent it does work for both of us, we will launch some of the content that NBC will offer.

I guess my final question is when do you see us breaking even?

Well, we are really not providing guidance at all. I do thank you for the question. We are going to reevaluate that at the end of Q4. But I do like our odds.

All right. Thank you very much.

Bob Johnson, you may go ahead and please state your company name.

Hi, I'm Bob Johnson, individual investor. Keith, congratulations on the great quarter that you had.

Thanks, Bob.

Really well. I have a question on all these new active customers that you're bringing on board, obviously the ability to monetize those customers with repeat purchases is critical. Do you track the number of increased transactions that your repeat customers are doing as opposed to the past and also do you attract dotcom value of your customers. Can you give us some insight into that?

Good questions, Bob. And I don't have the exact numbers with me but we do track the amount of transactions our customers have, has. We do track the average spend per customer. We do look at the customer which is different from this Company in the past -- as a lifetime value of the customer. Some product categories like beauty, the customers make many, many transactions in a given month and year. But there are other product categories like consumer electronics where they are not as frequent. But certainly with an average selling price in beauty of somewhere around $50 and an average selling price in electronics above $200 you have to look at the two together.

So you feel that your customers are probably staying with you longer and engaging in more transactions?

Bob, this is Frank. I think what we are seeing so far is a growth in all of the customer segments. We are seeing those customers that are buying weekly from us, is growing nearly 20%. And I think we need to give the earlier segments -- the segments where there's slightly less purchase frequencies -- more time to mature. A lot of these customers are very new in their relationship with ShopNBC but what we are seeing is across all the different categories, we are seeing double-digit growth in all of those categories and we are very happy with the growth, both in the customer counts and the purchase frequency that we are seeing from the new customers.

Okay. Great. Thank you.

Bob Evans, you may ask your question and please state your company name.

Craig Hallum Capital. I apologize if you already answered this but I wanted to -- I got interrupted during the call. Can you talk about just quarter linearity of the sales and what strength on a monthly basis and how has that trended after the quarter?

Thank, Bob. What I can say is within the quarter sequentially September was better than August. October was better than September. We had a significant sales increase October year over year. We had a record amount of units in a month. A record amount of units in a week and a record amount of units in a day. And I can say that we are seeing accelerated momentum in November thus far -- it's still early -- from our results, very good results, that we saw in October.

Okay. All right. Thank you.

Thank you.

Richard Mayer you may go ahead and please state your company name.

Hi, good morning. I am an investor. I had to get off the phone also so I apologize if you've done this and I'm concerned about GEs holdings. If GE is -- if NBC is going to be sold to Comcast and GE has a holding of 30% of the Company, with representation on the board, what is the incentive for -- except possibly capital gains -- what is the incentive for GE to continue to hold the stock and maintain representation on the board?

I don't know really know how to answer that question.

I'm not sure if I know how to ask it either.

I think I understand your concern -- between GE and NBC they have three seats. The independents that represent the common have certainly the voting power.

Correct.

And you pretty much have to look at GE and NBC as a passive investor.

Just to be clear, the ownership between NBC and GE in total it is roughly 33% of the Company. NBC owns 20% with GE owning the remainder so even in the event there was an NBC transaction with Comcast we still would have a very significant investor in GE owning 13% of the Company.

Yes. And GE, and GE -- why would GE if they are divesting themselves of NBC, and they see NBC as not part of their overall plan, what would benefit them from holding the 13% then?

You'd have to call GE and ask them.

All right. It's more of a curiosity because what I think with the growth of the Company in the past period of time and with the potential with everything you guys are doing -- which I think is terrific -- we really don't need from an investors point of view especially from a stock value point of view -- a disruption of sorts. And I think that GE stands out there as that possible disruption. So I guess that's what my concern is.

Difficult to speculate what GE is going to do.

Thank you.

Thanks for your question.

Thank you and our last question comes from Robert Gice. You may go ahead and please state your company name.

Just a shareholder. Just a follow up. What's your, right now is your take on this stock buy back. Have we did anything with that? Do we still intend to do anything with that in the future? I guess just a little color on that?

This is Frank Elsenbast. We do have an authorized share buy-back of $1.5 million. In the first quarter we spent just over $900,000 of that. So we have an open authorization of $600,000. And we will, we always consider the market conditions and the potential to reopen that buy back program. But at this point we are not making any comments on our specific plans.

Within a couple of days, Robert, the quiet period will be up, the employees and management will have an opportunity to buy stock again. As you could see from the percentage of ownership of the Company, the management certainly believes in the business.

Right. I was just wondering when Frank was going to by some but that's another thing. Is there a plan maybe to extend that or increase that at all in the future?

No, there's no plans to extend it or increase it.

Would the board ever consider that?

We talk about that periodically. It certain is a consideration but certainly not something that is top of mind right now.

I would say with the price the way it is right now it would sure increase the earnings if more shares were taken on.

Yes.

All right, well, thank you very much.

Thank you very much. And I would like to thank everybody for your confidence. I want to wish everybody a happy Thanksgiving and happy holidays and with that we will conclude our call.

Thank you. This does conclude today's conference call. Have a nice day. Thank you for participating and you may disconnect at this time.