iMedia Brands Inc (IMBI) 2009 Q4 法說會逐字稿

Good morning, and welcome to ShopNBC's fiscal fourth quarter and full year 2009 teleconference. Following today's presentation, there will be a formal answer and question 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 objections you may disconnect at this time.

I would now like to turn the call over to Ms. [Genna Lierfold] of ShopNBC. You may begin.

Good morning. Today's prepared comments for the conference call may contain 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 filings with the Securities and Exchange Commission.

On today's conference call from ShopNBC will be, Keith Stewart, CEO, Bob Ayd, President, Bill McGrath, Interim CFO and Vice President of Quality Assurance, and select members of the Company's senior management.

I would like to turn the call over to Mr. Keith Stewart.

Good morning and thank you for joining us and thanks Genna.

The fourth quarter proved to be another positive step for ShopNBC toward achieving sustained growth and profitability. We crossed a threshold of positive sales growth in the quarter, the first time in two years. We achieved a Company milestone by surpassing the one million customer mark and our customer footprint continues to swell.

Leading indicators across our merchandising segments and operational units continued to gain positive traction in the quarter and our e-commerce business achieved industry leading sales penetration of 39%. Up 690 basis points versus last year, with order conversion at 9.1%. Q4 was certainly a turning point in many respects. Looking back at the quarter, and to a greater extent the beginning of fiscal 2009, with new and active customers up 63%, and 36% respectively. With net average -- with net average selling price lowered from $176 to $108 to broaden customer appeal. With net shift units up 47% for the full year, and with e-commerce order conversion at 9.2% versus 6.3% last year, it's fair to say that 2009 was indeed a transformational year for ShopNBC, and with each passing quarter our multichannel retailing strategies found firmer footing. We built excitement and trust with the customer through new product mix and expanded number of vendor guest experts, entertaining programming, and compelling event promotions. As we move forward into the new fiscal year, we remain confident about our prospects and broadening appeal of our business.

Before continuing, I would like to take a moment to introduce Bob Ayd, your new President and Bill McGrath, our Interim CFO who is also our Vice President of Quality Assurance. Both are on the call today and will have speaking roles.

Bob joined the Company in February as President. While he is new to ShopNBC, he is certainly not new to our industry. Bob is a multichannel retailing veteran, with more than 30 years of experience. He lives and breathes this space, and I know him well. We are excited to have him on the team, as his extensive background and proven track record of success precedes him, which includes executive leadership roles at QVC and Macy's.

Bill, our Interim CFO, is another industry veteran who intimately understands our space with nearly two decades of experience in the multichannel retailing industry, Bill is an accomplished financial and operations executive with global leadership experience. He joined ShopNBC in January as Vice President of the Quality Assurance having served most recently as Vice President of Global Sourcing and Finance at QVC. Previously served Subaru of America as Assistant Corporate Controller, and Arthur Anderson, as Senior Auditor. Bill is assuming financial management functions until a permanent CFO is named. On that note, global executive search firm's, Spencer Stuart, has been retained in the early stages of a search.

With that, I would like to conclude my opening remarks and turn the call over to Bill who will provide a more detailed financial and operations overview of the fourth quarter and full year. Then Bob will highlight the merchandising initiatives this past quarter as well as provide greater insight into our plans going forward to continue improving sales and increasing gross margins, which will drive EBITDA performance in 2010.

Bill?

Thanks, Keith. I'm delighted to be here. I would like to provide an overview of the fourth quarter financial and operational results, a review of our cash position, and an update on other key balance sheet items.

Fourth quarter revenues were $155.3 million, a 7% increase compared with revenues of $144.5 million last year. The sales percent in the quarter was driven by the strategic reduction in net average selling price by 31%, of ShopNBC's merchandise verses last year. Productivity improvements in the quarter in key categories of watches, health and beauty, and home, offset the airtime mix shift away from consumer electronics.

Return rates were 19%, versus 26% in the year ago quarter. For the full year, return rates were 21%, versus 31% last year. Gross margin in the fourth quarter was 32.4%, up 350 basis points compared with the year ago quarter. The margin increase was driven by improvements in the merchandise margin rates and key categories, and reduced consumer electronic mix. For the full year, gross margin was 32.9%, up 70 basis points from the year ago period. Net average selling price was down to $96 during the quarter, versus $139 in the year ago quarter. For the full year, the net average selling price was strategically lower to $108, versus $176 in the previous year.

Net shift units increased by 54%, in the quarter, which offset the significant decline in the average selling price. For the full year, net shift units were up 47% versus the prior year. Transactional cost in the fourth quarter decreased to $3.38 per unit compared with $4.50 per unit in the year ago quarter. For the full year, transactional cost were reduced to $3.60 per unit versus $4.82 per unit in the prior year, primarily driven by the streamlining of operations and systems automation.

Operating expenses for the quarter were $57.5 million, a reduction of 23% or $17.4 million versus last year. The reduction was driven by lower cable and satellite fees, lower salaried head count, continued reductions in discretionary spending, and favorable trends in variable operating expenses. For the full year, operating expenses decreased $56.3 million, or 21%, versus the prior year period. As Adjusted EBITDA, was a loss of $1.3 million in the fourth quarter, compared with an EBITDA loss of $15.1 million in the year ago period. The improvement was driven by higher sales, better margins, and lower operational expenses. Full year As Adjusted EBITDA loss, was $19.4 million, compared to an As Adjusted EBITDA loss of $51.4 million last year.

I will now provide an update on key balance sheet metrics. The Company ended the fourth quarter with $22.1 million in cash, and cash equivalence including $5.1 million of restricted cash. This compares to $32.5 million of cash and cash equivalents at the end of the third quarter, of which $10.5 million was restricted cash. This cash balance is a decrease of $10.4 million, versus third quarter driven by the EBITDA loss of $1.3 million, capital spending of $1.8 million in the quarter, and the $7.3 million use of cash in working capital.

In the fourth quarter, the Company entered in to a three-year revolving credit facility for up to $20 million to finance working capital investment, and to fund other Company growth initiatives.

This concludes my update. I will now turn the call over to Bob.

Thanks, Bill. And thank you Keith. I'm very happy to be here today and to be talking with everyone on the call, as well as to be part of the opportunity that ShopNBC represents.

To help maximize ShopNBC's potential, initially I'm focused on three priorities, drive the topline, increase gross margins, and deliver predictable performance. And like Keith I'm very familiar with the industry. I've been in the multichannel industry for over 30 years. And even though I've been at ShopNBC only a short time, I already have a very strong understanding of the business. I know many of the people working here. We have clearly defined initiatives in place and we are already seeing improvements.

I would like to now provide greater insight into our merchandise performance in Q4, as well as to talk about our initiatives going forward. Overall, ShopNBC continued to make progress in the fourth quarter in the many leading indicators that drive our business. Compared to the year ago quarter, new and active customer counts were up 38% and 32% respectively. A continuous flow of new vendors, guest experts, and new programming concepts were added to ShopNBC in the fourth quarter.

Gross margin improved 350 basis points to 32.4%, in the quarter and, while this is an improvement over last year's same period, it is not where it needs to be. But, we have clearly defined strategies in place to ensure our margins continue to improve. As a net average selling price was lowered over the course of the year to $96 in the fourth quarter, which greatly broadened customer appeal, return rates progressively decreased and we are now at 19%, another leading indicator of customer of satisfaction. Net shift units were up an impressive 54%, while our transactional costs were down to $3.60.

And lastly our multichannel retailing initiatives drove new and returning customers to ShopNBC.com at an increasing rate this quarter, with orders up 70% over the same period last year. Extended online product assortment contributed to the success with new suppliers adding products across categories. Also during the quarter we successfully mobile-enabled our web site to include transactional capabilities, and we released Version 2 of ShopNBC's iPhone application. These factors, in combination, all contributed to the positive sales and improved gross margin performance in the quarter.

At the category level, our watch business continued to expand in the fourth quarter and remains the industry leader. Watch sales were up 61% in Q4, driven by successful events, new products, and great values. For the full year, new customers in watches were up 83% verses last year, and going forward we will continue to build the watch community and introduce new brands and products across our multi-channel platform.

In beauty, customer productivity was strong in the fourth quarter with new customers up 48%. For the full year new customers in health and beauty were up 130%, and what is especially exciting about our beauty business is that we've established the strong auto-delivery component, and our established brands remain strong with a growing and loyal following. As we keep adding more beauty, health and fitness brands to the category, we will also cultivate new categories such as hair care and personal care. This business is poised for accelerated growth in 2010.

In the home category, sales were up 138% in Q4, driven by strong customer activity in textiles, home furnishings, collectibles and mattresses. For the full year, new customers were up 103%. And in 2010, our focus will be on growing key national and proprietary brands, in-home decor, home furniture while we offer unique and differentiated products, along with a strong reorder base.

Conversely, consumer electronic sales were soft in Q4 as we decreased air time. For the full year however, new customers were up 17%. Going forward, electronics remains strategic opportunity for us and we are focused on improving its performance with more timely items at better values to present to the customer.

Our fashion business was slightly down in the fourth quarter as we continued to reposition the category. Increased sales of accessories and footwear offset a decrease in hand bags and apparel. However increased customer activity in the fourth quarter led new customers up 97%, and for the full year, new customers were up 98%. Going into the new fiscal year, fashions inventory is very clean and the business is in good shape to rebuild with some exciting new launches planned this spring.

In the jewelry category, sales were also soft in Q4 and again we've strategically reduced the air time of gold and gem stones, and we launched new products with lower price points in simulated diamonds plated and stainless steel to grow the customer base. New customers in the fourth quarter were up 74%, for the full year, new customer counts were up 54%. Jewelry continues to be a key opportunity for growth. With a clean inventory position entering Q1 we are poised for much better performance.

Very importantly, ShopNBC's reorder business was 26% of volume in Q4. For the full year it was 22.5% of the total business versus only 1% in 2008. This is a key metric. This trend is highly encouraging. The greater the reorder percentage of our business, the more predictable our performance becomes. As we continue to focus on increasing the reorder percentage, we are also implementing strategies to enhance the customer shopping experience, by identifying individual items that will drive volume and incremental sales.

So, entering in to the new fiscal year, our inventory is clean, we are buying with stronger discipline and moving the product in and out the door, we're managing inventory levels tightly through strict planning and financial analysis, and we're highly focused on improving gross margins by increasing sell through, adjusting merchandise margins in select categories, and adhering to a strict pricing model that will relies less on promotional programming and more on entertaining, vibrant, and event-themed programming. By capturing the imagination of the customer, ShopNBC will continue to attract an even larger multi-channel audience and continue to drive sales and customer activity.

To satisfy the appetite of ShopNBC's growing customer base of over one million customers, our Q1 and 2010 merchandising initiatives will focus on offering more of what the customer already desires, in clearly defined growth categories. At the same time, we will be getting credible national brands, differentiated product, and timely big key driver items. At each step, we will build deeper trust with the customer, drive stronger customer engagement, and present more compelling content across our TV, web, social, and mobile platforms. And with everything we do, the customer is at the epicenter. We will not only provide great everyday values for the customer, but also great value for the shareholder, by delivering higher margin for the business and continued topline growth.

With that I will turn the call over to Keith.

Thanks Bob.

ShopNBC is truly the turning point in its 19 year history. This past year we transformed the business by executing our proven fundamentals. We are in the ballpark across many a leading indicators. With a more solid foundation in place we are in a much better position to evolve our business to the next level and deliver improved performance this coming year. While we are not providing guidance for 2010 at this time, we have clearly defined short-term initiatives in place, and a longer term five-year strategic plan to drive continued sales growth, increase margins, and predictable performance. Once more I'm confident that any barriers that stand in the way of achieving our goals and objectives all lie within our control, and execution capabilities.

In the year ahead, with an already strong national footprint of 75 million homes for leverage multichannel market, we expect modest household growth. Our strategic focus in this area will be on increasing productivity and continued negotiations with cable and satellite affiliates. Because we expect an increasing percentage of our business to be proven reorders and new incremental revenue streams, we expect gross margins to improve while tightly managing our operating expenses.

Our e-commerce business will continue to compliment broadcast sales strategies for the leveraged online video content, extended web product assortment, and increased social networking interactivity. E-commerce sales penetration is expected to be as strong, and we expect higher contribution margins from capturing the e-commerce sale due to lower associated costs.

Lastly we continue to attract new customers to ShopNBC across all our product categories. We also focus on driving repeat purchase activity with existing customers. With a clear vision, a talented and committed organization and a lean cost structure, I remain confident in our future plans and our ability to deliver on the expectations of the shareholders.

We certainly appreciate your time this morning, and will now take your questions.

Thank you, we will now begin the question-and-answer session. (Operator Instructions) One moment please for our first question. Our first question comes from Peter Cardillo of Avalon partners.

Yes, good morning gentlemen. Could you kindly elaborate on your three-year revolving credit facility versus your restrictive capital?

Yes, we can. Our restricted cash, starting there, is cash that's utilized for letters of credit. That, that's the primary use for the restricted cash. As it relates to our revolver in our credit facility, we entered in to a three-year agreement with PNC. It provides up to a $20 million credit facility that's available if we decide to draw down upon that.

I see. Okay, thank you.

Thank you.

Our next question comes from Doug Thomas from Jet Investment Research.

Good morning. Great quarter.

Thank you.

Thank you, very much, Doug.

I just wondered, just on the heels of the last question, the only issue that you know really people are -- I mean I know we are talking about growth and lot of different categories and you can measure it and so forth, when -- Keith, when do you think you will be in a position to be able to want to give guidance? Do you think that would happen sometime later on this year, or what's your thinking on that?

Well, it's something we discussed very seriously in our recent management meetings and Board meetings, and we decided at this time not to provide guidance, Doug. But looking forward it is a distinct possibility that we could provide guidance later on this year.

Okay. Then pre-supposing that the performance of the Company is going to continue to improve, can you -- would you be willing, you or Bill, be willing to give an idea as to what the cash use would be, what the rate of cash usage would be for the remainder of the year? And at what point would you want to tap the credit facility?

Well, the fist question, Doug, we would obviously disclose that if we were providing guidance. But as it relates to our current cash situation I'm comfortable with our current cash position and available cash to fuel the business for, for this year.

Okay. All right. Well I will say as a recent new customer, I understand the compelling opportunities particularly on the e-commerce side. I do -- I am glad that I've tried to use the site and so forth. I'm not much of a TV watcher, but I do think that the web site is terrific.

Thank you very much, Doug.

(Operator Instructions) Michael Buck of Driehaus Capital Management, you may ask your question.

I had a question on the flow through of gross profit to adjusted EBITDA, when looking at the fourth quarter compared to the third quarter Q3. I was wondering -- so it looks like $11.5 million of incremental gross profit sequentially led to $4.3 million of adjusted EBITDA sequentially. I was just wondering if that is a typical flow through rate, or if you guys are looking at potentially bringing that higher, and how that would happen? Thank you.

The -- I think, I think most importantly for us to focus on, is that we are, as Bob mentioned, continued on focusing increasing our gross margins. We did see some, obviously, some great success in Q4 this last year compared to Q4 in the previous year. And as we move forward in to this quarter, we are seeing continued improvement in our gross margin lines. So a lot of what we've seen in the past is not going to be reoccurring. We are just going to see continued progress as we execute the turn around.

Michael, one additional point, fourth quarter, the drop of gross margin to EBITDA also reflects a more highly leveraged situation relative to fixed cost given that that's the highest volume quarter. So there is an element of that influence in Q4.

Okay. So the rate of the gross profit dropping down the adjusted EBITDA line, those are well over a third it seems when comparing with the third quarter, that's about typical, you would expect?

Yes. Given again the influence of the leverage of fixed cost in the fourth quarter. So, it's typical given that factor, I haven't calculated what that influence would be. But recognizing that fourth quarter does have your higher volume in the period, that's somewhat representative. Again, you would have to recognize the leveraging of fixed cost.

Okay, thank you.

You're welcome.

Our next question is from Doug Thomas, Jet Investment Research.

Just a couple of quick follow ups. Keith can you remind us what the, what your expectations are with respect to the transition from -- of NBC Universal to Comcast from General Electric and what the near to midterm implications would be for you guys?

Well, Doug, I have to admit if you read the Wall Street Journal you know about as much about the transaction as I do. As it pertains to a transaction, obviously it's going to take almost a year for Comcast to complete that transaction. From that point on, if Comcast were to complete the transaction, Comcast would have available two Board seats and 18% of the common, whereby General Electric would have one Board seat and 13% of the common.

Okay. The only other follow up is in terms of reorder business, that seems to be something fairly new I guess, or at least from an emphasis perspective. Can you sort of give some color in to how -- what, what's the opportunity is on that side of the business, and where you think you guys can take that?

Sure, this is Bob. Reorders present a stable and predictable platform for growth with enhanced margin. So the more recorders we can have, the better and more stable our business becomes. So in 2008 we really weren't in the reorder business, and we were at 1%. And in 2009 there was dramatic acceleration of reorders, and my suggestion is in 2010 without providing guidance, I expect that to continue to expand. It's something we're really focused on. We have the Planning Team focused on, and we're seeing strong results.

Okay. I lied, I guess I have two more questions. One is sort of related to, I mean, the fourth quarter to me seems like, it was last year, but it was a long time ago. And so I just wondered number one, how the first quarter seems to be trending and what you think? Is anything meaningfully changed? Are the trends continue to sort of be in place? And then, Keith, I always stress to clients that you and the rest of the management team there have taken quite a bit of equity almost instead of, in most cases, cash compensation. I'm hoping maybe you can talk about what this year, what the proxy will talk about in terms of going forward, how you intend to tie performance directly to compensation.

Thank you, Doug. As I mentioned, again, we are not providing guidance s at this time for Q1. But I will repeat the one comment that I made earlier that, based on the initiatives that Bob outlined and his part of the conversations this morning, we are seeing tremendous traction in all those initiatives to improve, to include improved gross margin. So it's something we are all very very focused on and we know it's important to the business. As you know, the management team along with me self is very much aligned with the shareholders. If we look at equity stake of the management that's been purchased on the open market it's somewhere in the area of probably a little less than 12%. So that's a significant alignment throughout the ranks and it's just not one person, it's many, many people across the ranks. I can't speak for any purchases that they may decide to make in the open market. But our compensation program moving forward is all performance based. So unless this management team delivers the number to the shareholders there will be no merit increases, there will be no bonuses, and there will be no equity. So it is all about complete alignment to drive results from top and bottom line.

Okay. All right. I appreciate that.

You're welcome.

Our next question comes from Jeffrey Raff of Gilford.

Yes, hi guys. I know you are not giving any guidance, but I'm trying to understand sort of the business model, and it's very clear that you guys have done an excellent job of increasing traffic and customer count, you've lowered our average selling price as lot, gross margins have gone up, expense issues come down and yet you're still burning cash. And if I understand what you are saying that the fourth quarter is your highest volume revenue quarter, then what has to happen? In other words, how high do you have to drive the gross margins, or how much more do you need to cut expenses to get yourself into positive territory?

Well the --

Because clearly your revenues in the quarter coming up are going to be lower than they were in the fourth quarter.

Yes. The working capital use that Bill had mentioned earlier, Jeffrey, at $10.4 million, most of that working capital use was a function of increased credit use. In the form of our value pay. And that credit use was utilized in the fourth quarter to offset, or sell merchandise in lieu of markdowns, hence an increase of 350 basis points. So, as we move forward, we are going to continue to drop that percentage in use of value pay going throughout the year. And as I said earlier we are seeing margin improvements already in this quarter.

Okay. Thank you.

You're welcome.

Our next question come from Arnold Brief of Goldsmith and Harris.

Just a couple of questions. One, looking at your initiatives and plans for changes in mix and what have you, do you see prices, average unit prices stabilizing at 2010, or do you further declines, or increases or how does that look?

Our thank you Arnold our average selling price we had planned a year ago to drop to around $100, by the end of this year. And we will have a modest erosion of average selling price this coming year. We are planning to land it somewhere around $75 to $80, so the decline is much less than what we experienced this last year and certainly much less than the growth that Bob had mentioned, Bill had mentioned in unit growth.

Okay. Could you -- I'm not pushing you on the guidance for 2010, that's your decision, but you have given guidance in the past on the longer term outlook. Is there any change in that guidance?

No, we fully expect the, to double the business over the three to five year period. That's published, certainly, on our investor web site.

Yes, the rest of that I have. Two other questions, short ones, you mentioned the seasonality of the business is a little hard for us to quantify. You can't just take the fourth quarter percent of the years because prices have gone down, mix has changed. What would the fourth quarter normally account for as a percent of your year's sales?

Normally the fourth quarter will account for somewhere around 28% to -- 28%-ish, I'll just say, in that ballpark. of the mix.

Okay. And the last question, I haven't had a chance to go through all your numbers. I don't know if it's published yet or not. But, what would the year-end inventory be versus the third quarter and last year?

Our end inventory, Bill will look up the third quarter and last year, but our year end finished (inaudible) $44 million.

44? I'm sorry.

$44 million. And the composition is as clean as it has ever been. So, that's about a $17 million decrease.

From what, Q3?

From Q3, right.

(inaudible) Last year? I will look up last year. I will look up last year.

Versus last year, Arnold, it's down about $7 million.

Thank you.

You're welcome.

Our next question come from Bob Evans of Craig Hallum Capital.

Good morning and thanks for taking my questions.

Good morning, Bob.

Most of them asked. But as you look at product mix if you could fast forward a year, can you, in your ideal world, what would you like to have that product mix look like?

This is Bob. I would like, and I totally expect, the home store has to come up the curb and we have to develop our home business, jewelry should basically be the same as it is today, watches is the same, but we want to develop our home business and our CE business for a number of reasons. So as a percent share you could look for an increase there, watches would be stable, and the fashion businesses would probably even go down a couple of notches as a percent share. I also look at health and beauty as to be explosive.

And along the same lines, how would that have an impact on gross margin? How should we view gross margin?

I thoroughly expect our gross margin to continue to increase.

Is, is that because of mix or because of other internal things you are doing?

As we mentioned earlier, there is a key strategy to improved margin it and involves three or four key initiatives, and part of it, though very little of it, is mix. Very little of it mix.

Thank you.

Okay. Thank you Bob. Thank you even for your questions. We really appreciate your time. This morning on the call. And with that, we will conclude the call.

This concludes today's conference.