iMedia Brands Inc (IMBI) 2010 Q3 法說會逐字稿

Welcome to the ShopNBC third quarter 2010 teleconference. Following today's presentation, there will be a formal question-and-answer session.

(Operator Instructions)

At the request of ShopNBC, today's call will be recorded for instant replay.

(Operator Instructions)

I would now like to turn the call over to Nathan Fagre of ShopNBC. You may begin.

Good morning. Comments made on today's conference call and our prepared remarks 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 ValueVision Media's filings with the Securities and Exchange Commission.

On today's conference call from ShopNBC will be Keith Stewart, CEO; Bob Ayd, President; Bill McGrath, Senior Vice President and Chief Financial Officer; and select members of the Company's senior management. I would now like to turn the call over to Mr. Keith Stewart.

Good morning, and thank you for joining us today.

We achieved another consecutive quarter of overall improved performance by our talented and committed team. Sales growth of 11%, healthy gross growth margin rates, and lower transactional costs contributed to a $600,000 adjusted EBITDA profit in the third quarter, compared to a year ago negative adjusted EBITDA of $5.6 million. New and active customers in the third quarter continued to engage, interact, and shop across our multiple channels, with e-commerce sales penetration reaching 40.5%, a 680 basis point increase compared to last year. Our third-quarter progress was a validation of the strategies we put in place this past year to improve our business and financial performance.

Although we are pleased with the topline growth and operational improvements, we recognize there is much more work to be done. Our goal is to deliver long-term shareholder value.

With that, I would like to turn the call over to Bill, who will provide a financial and operational review of the quarter. Bob will then provide a more detailed review of our sales performance, and I will close with an update on current initiatives prior to opening the call for your questions. Bill.

Thanks, Keith.

Third quarter revenues were $132.3 million, an increase of 11% compared with revenues of $119.4 million last year. And net e-commerce sales in the quarter increased 33% to $53.6 million versus $40.2 million last year. First profit dollars increased 19% to $47 million, and gross profit margin improved 240 basis points, a 35.6% versus 33.2% last year. Improvements in merchandise margins were driven by target increases and key product categories.

However, an increase in consumer electronics mix resulted in a sequential decline in overall gross profit percentage versus Q2 2010. That average selling price in the third quarter declined modestly to $93 versus $95 in the year-ago period and $97 in the second quarter of this year. That shift units increased by 11% versus last year's quarter and were up 10% over the second quarter of this year. Return rates decreased 110 basis points to 20.8% in the quarter versus 21.9% last year, a 20 basis points higher than in Q2 2010. Transactional cost per unit decreased by 20% to $2.63, compared to $3.29 per unit in the year-ago quarter and by 8% compared to $2.87 in the Q2 2010.

The improvement was primarily driven by increased online sales and streamlined -- streamlining in order entry, customer service and fulfillment operations, and systems automation. Operating expenses for the quarter were $50.6 million, a decrease of approximately 1% versus last year, driven by lower transaction costs and prior year itemized nonrecurring expenses. Operating expenses declined by 5% on a sequential basis from $53.4 million in Q2 2010. As adjusted EBITDA was a positive $600,000 in the third quarter. This compares to an as adjusted EBITDA loss of $5.6 million in the year-ago period and an adjusted EBITDA loss of $1.9 million in Q2 2010.

The year-to-date adjusted EBITDA loss represents a $12.5 million improvement versus last year. The driver of the EBITDA improvement was higher sales, lower transactional costs, and decreased program distribution fees. Net loss for the quarter was reduced to $5.8 million compared to a net loss of $12.9 million for the same quarter last year.

I will now provide an update on key balance sheet metrics. The Company ended the third quarter with $20.6 million in cash and cash equivalents, including $5 million of restricted cash. This compares to 20 point -- $22.9 million of cash and cash equivalents in Q2 2010, of which $5 million was restricted cash. The $2.3 million decrease in our cash balance funded working capital related to higher sales. On a year-to-date basis, cash and cash equivalents were down $1.4 million.

Additionally, the Company announced yesterday that it has expanded its working capital availability through a new $25 million term loan with a lending group led by Crystal Financial LLC. The loan has a five-year maturity. There is a variable interest rate tied to LIBOR, which will initially be set at 11% and will be used to finance general working capital needs. The loan replaces a previous $20 million revolving credit facility and is secured primarily by the Company's inventory and accounts receivable.

That concludes my update. Bob?

Thanks, Bill.

I will now provide an overview of our sales performance in Q3. I will also highlight our business strategies that we believe will help drive the topline, enhance margins, and deliver more predictable performance. These continue to be our three key priorities.

In the third quarter, the Company achieved double digit sales growth, fueled by five business segments. As we added greater product variety across our multiple channels, TV, online, mobile, and social, we delivered year-over-year improvements in gross profit dollars and gross profit margins. As Bill stated, gross profit dollars were up 19% versus last year and gross profit margin rates increased 240 basis points versus last year.

In addition, the Company continued to expand its product assortment in the quarter, adding approximately 7,000 new products and over 50 new vendors, providing newness, excitement, and community to our customers. We also delivered more predictable product sales performance in the quarter by continuing to shift our product mix towards more reordered products -- that is, products that have already proven successful. Revenue in Q3 from reorders was approximately 45% of the total business versus 24% last year and 38% in Q2 of this year.

With respect to the Company's Internet performance, web traffic remains strong. Integrated multichannel marketing initiatives resonated strongly with our viewers, with e-commerce sales penetration up to 40.5%. Conversion rates for ShopNBC.com increased 170 basis points to 11.7% versus 10% last year. And the volume of online orders was up 15% in the quarter compared to last year.

I would now like to provide an update on the performance of our major merchandising categories in the third quarter. In the Jewelry category, sales increased 12% in Q3 versus last year. Gross margin dollars per minute in the business increased 54%. Gross margins were up significantly by approximately 680 basis points, and gross margin dollars increased 33% versus last year. The performance of our Jewelry category has rebounded significantly since the beginning of the year, with continued improvement in Q3 as the customers responded to our product offerings and programs.

The Health and Beauty categories had strong quarterly performance, with sales up 39% versus last year. In the quarter, we further expanded these categories by introducing a number of new brands to the customer, including eDiets (inaudible). We also saw increased growth in the autodelivery that makes it easy for our customers to maintain a steady supply of the products they enjoy.

In the Watch category, despite a topline sales decrease of 12% in Q3 versus last year, the Watch business continues to deliver the highest gross margin productivity of the Company. Our strategy is to introduce more new brands and further expand the online watch assortment. This category remains a key merchandising opportunity for us.

In the Home category, performance in Q3 was mixed versus last year, as we strategically shifted our focus to other higher-performing sales and margin categories. Sales in the Home business decreased 10% versus last year due to softness in textiles, which was partially offset by strong sales in mattresses. Performance in the hard Home category improved versus last year with gross margin dollars per minute up 73%. Our strategy is to bring in more national brands to our network while repositioning the category, allowing for higher-margin businesses to expand.

Performance in Consumer Electronics category continued to improve in Q3. Sales increased 49% versus last year, and the CE business showed substantial improvement over the previous quarter as well, with sales up 37% versus Q2. Gross margins increased 200 basis points over last year. Gross margin dollars outperformed up 61% versus last year, and gross margin dollars per minute increased 17%. The strategy is continue to focus on rebuilding this category. Overall, we were pleased with our sales growth and execution of multichannel retailing initiatives in the third quarter. By providing our viewers with greater product variety, we were able to achieve more balanced growth across our categories, which in turn drove more stable and predictable sales performance.

A year ago, our business was largely driven by the Watch category. Now we are seeing improved performance across most of our major business units, including Jewelry, Health, Beauty, and Consumer Electronics. The Fashion business, which is being repositioned, showed improvements in Q3 as well with gross margin dollars per minute up nearly 40%. A year ago, our business was light on additional revenue streams. Now, it's complemented by increased reorder and order delivery revenue streams, coupled with targeted cross-selling initiatives.

Entering Q4, we will remain highly focused on continuing the progress made in the second and third quarters. We achieved increased organic margin growth in most of our product categories while still prudently managing inventory levels. Special events and innovative programming concepts that connect and engage our customers is an important part of our strategy. And it's -- as is having an assortment of must-have gifts that are timely, relevant, and have broad appeal.

To go back to what I said at the outside -- at the outset -- these merchandising, programming, e-commerce, and marketing strategies are all designed to support the three key priorities of driving the topline, enhancing the margin line, and delivering more predictable performance.

With that, I will now turn the call over to Keith.

Thanks, Bob and Bill. Before concluding today's prepared remarks, I would like to touch on a few key topics before taking your questions.

First, our goal is to continue evolving our highly customer-centric business model to that of an interactive multichannel retailer. Our national TV distribution footprint gives us a broad audience-gathering device that can be used to drive interest across TV, Internet, mobile, and social platforms. By offering today's shoppers compelling digital content through integrated multimedia retailing strategies, we believe that we are well-positioned to build on our existing customer base as well as continue building communities, heightened engagement, and trust for the customer.

Second, we are very pleased to announce today a one-year extension of our license agreement with NBC Universal for the use of the ShopNBC brand across all of our customer-facing media outlets. As consideration for the license extension, we will issue common stock valued at $4 million to NBCU in May of 2011. There is also potential for a further one-year extension of the license to May 2013, subject to mutual agreement. The extension of the NBC trademark license enables our talented multichannel team to remain focused on our goals to consistent profitability and long-term sustained growth. We believe that this is where our focus is best placed and believe the consideration to extend the license is well worth the benefits to the Company and our shareholders.

Third, I am pleased that we are able to add liquidity to our balance sheet and expand our working capital access via a new $25 million term loan. These additional financial resources will provide us greater operating flexibility and leverage to support our working capital needs.

Fourth, as the year comes to a close, we'll be entering into several cable and satellite contract renewal negotiations with the goal to further reduce our distribution costs while improving our channel position.

Fifth, we've decided to embark on a proactive investor relations outreach program and have retained the New York-based investor firm -- relations firm Jaffoni & Collins to assist us. Given the progress we've made over the past two years, we believe now is the right time to engage in a more robust outreach program to introduce and raise our profile with Wall Street. In coming months and quarters, we plan to be more active in getting out to meet with new and existing investors, and we certainly look forward to seeing those of you on today's call in person.

In conclusion, we have seen quarter-over-quarter improvements this year in both our business and financial performance. We have a talented, committed, and highly experienced multichannel team, and we are focused on the goal of delivering long-term shareholder value. We certainly appreciate your time this morning. We look forward to speaking with you about our continued progress during the next call. We will now open the call to questions. Operator.

Thank you.

(Operator Instructions)

Our first question comes from Robert Routh, Phoenix Partners Group. Your line is open.

Yes, good morning, guys. Great quarter. Getting back to profitability is a good thing to see. A few quick questions. First, as far as the renewal of the NBC logo goes. I know a while ago you guys weren't going to go that route, and now I guess that's changed, I guess which makes sense given the Comcast/NBCU deal and all of that. I'm just wondering, can you give us a little bit more insight as to why you decided to retain that branding for the channel?

As then as far as the payment in May of 2011 of $4 million in stock -- is that stock valued as of today or is that going to be stock value as -- where the stock is in May of 2011, because given the way your progress has been, I would think the stock would be at a different level in May than it is now.

Robert, it's Keith. Thank you very much for your comments.

I am very pleased with the results and the progress of Q3. As it pertains to the branding, I just made the comments previously as to why we did that. The only thing I can really add to, is strategically, it's the right time for us to do that. Unfortunately, I really can't comment on any further on that.

As it pertains to the valuation of stock, the stock is going to be valued next year. We issue the stock in May of 2011. It's based off the six-month average price of the preceding six months of the date of initiation renewal. So, it will be an average price over the period.

Okay, great. So it wouldn't be fair for people to take the price today and use that -- I mean, it's -- if the stock goes up or what have you it's going to be more in line with what would be reasonable as of that date based on your performance. Great, that makes a lot of sense.

The other question I had is, with respect to the capital structure, I mean, obviously, one of the issues that people have always looked at with this company has been the preferred stock, which I know has been restructured a few times in the past. Just curious as to what management's intentions or goals would be, short and longer-term with respect to that preferred stock. Do you want to keep it there, try and get rid of common, get rid of it, buy it back, or is there nothing on the table on that front?

And then a final question -- with respect to what you are doing, given how QVC and HSN has done, they're obviously getting closer, you guys are different in terms of your demographics and what you have and obviously the relationships you have. Is there any strategic things you should be looking at with respect to other types of businesses you could partner with that would have actual brick-and-mortar locations in addition to what you have? Or any type of time sharing where you'd give blocks to certain companies like Bed, Bath & Beyond or whatever as a way to change what you are doing? Or is there nothing else strategic that you're kind of -- you have in the kimono still?

Thank you, Robert. As it pertains to the preferred stock, we have no intentions on taking action at all pertaining to that. As you know, at the beginning of 2009, we extended the maturity, which changed from a Class A to a Series B, one third due four years from the time of the extension, two thirds in year five. So at this point, that is how it remains.

The follow-up question as it pertains to strategic partners -- we are always open to new strategic partners and new ways of thinking of things. This is an incredibly progressive management team, and that is always something that we'll listen to. But first and foremost, please let me leave you with this message. We are focused on shoveling the coal, and we're focusing on organic growth.

Okay, great, thank you very much.

Thank you. Our next question comes from Barton Crockett. Please state your company name.

Hi there. It's Barton Crockett with Lazard Capital Markets.

I wanted to ask a very basic question about the Comcast/NBC merger and if you can just help us kind of, perhaps just me, understand what is happening to you guys in terms of the fallout of this merger in terms of transfer of ownership stakes that GE or NBC has of debt and equities. And also if you could outline for us what the kind of price status is of your distribution deal with Comcast, whether that's something that would be renegotiated anytime soon or not. And, if there's been any talk about perhaps as a result of the merger or brought a relationship or in some way working more with Comcast. Thank you.

Barton, thank you. Thank you for your comments, and thank you for joining the call this morning.

As it pertains to the capital structure, NBCU owns 18% of the common value. As part of that, they have two potential board seats. Assuming that the DOJ and the FCC approve that deal, we would assume the capital structure wouldn't change. Other than that, I really couldn't speculate, Barton.

And pertaining to our current status of distribution, if there is one gaping hole within our distribution, it's Comcast homes. So I would say, regardless of the comments made previously, that would -- we would always look to fill out our household distribution, providing it is cost-effective and profitable.

And regarding any other comments pertaining to that merger -- NBCU and Comcast, if you read the Wall Street Journal, you know about as much as I do.

Okay. Well, just to make sure I understand what you mean by gaping hole? So, you guys are not carried on Comcast?

We are carried on Comcast. We have about -- I don't know the exact numbers, 10-plus million homes that are not carried with Comcast. So we generally use overbuilders to cover that distribution. We take a look at cable distribution, that's our largest scale.

Okay. So you are in a portion of the Comcast homes but 10 million Comcast homes are not in.

That's correct.

Okay, great. Thank you.

You're welcome.

Our next question comes from Greg McKinley, Your line is open. Please state your company name.

Yes, good morning. Dougherty & Company.

You disclosed that you are going to be looking into renegotiating cable carriage contracts for about 25% of your homes with the intention of better channel positioning and lower distribution costs. Can you give us any framework for understanding how expensive that 25% is, relative to the rest of your distribution today? Maybe to the degree that you can -- how much progress you think you might be able to get out of that renegotiation? And then how -- are these in terrible channel positions moving to great channel positions? Just any sort of framework for how impactful you think that could be on both the cost side as well as attracting viewership.

Greg, thank you. Thank you for joining the call.

Yes, we have 25% of our MSO to be renegotiated at the end of this year. For the broader audience, perhaps a moment just to frame this.

At the end of 2008, we had two thirds of our distribution households that were to be renegotiated. Those were renegotiated 100% successfully, and we reduced operating costs by $24 million.

At that point in time, opposed to a long-term contracts which ShopNBC had with service providers, we decided to change our approach to one- and two-year deals. And we did that because we firmly believe the next 20 years will be nothing like the last 20 years. So, as digital continues to grow and capacity continues to grow, expenses, as it pertains to distribution, will continue to drop. That's why we did that.

So as a result of that strategic move, we have 25% of our homes coming due on December 31. We do plan on improving our operating costs and improving our channel position, as we do with each and every conversation with our MSO partners. That will be reoccurring for years to come. And that opportunity will continue throughout 2011 and 2012, as well.

Okay, thank you. You know, perhaps you don't want to get to this level of detail, but I'm, as a ballpark, assuming you have about $100 million of fixed cable distribution costs. Is there any guidance you can give us for what that could become, post-renegotiation?

Thank you, Greg. I can't really provide guidance. I will just let you use history as a guide to the future.

Okay. Thank you, nice quarter.

Thank you very much, Greg.

Our next question comes from Charlie Nichols. Please state your company name.

Yes, this is Charlie Nichols with South Florida Capital. Good morning.

Good morning.

This sort of is a follow-up to the capital structure and use of funds and preferred payout and so forth. I wanted to -- I wondered if you could discuss your thinking behind the structure and pricing of the new senior debt. Specifically, if it's for working capital, why is it a draw in term, why the pricing is as aggressive as it seems to be with these levels of collateral, and finally whether there are any covenants on this in your debt.

Thanks, Charlie. This is Bill. And we felt that it was an appropriate amount to add to the balance sheet, given the flexibility that we are looking forward to in terms of growing the business at -- in future periods, particularly flexibility in terms of inventory levels and accounts receivable. Regarding the pricing, it, frankly, was market pricing relative to our shopping of the term and our conclusion on the negotiations.

Okay. Any comment with regard to covenants?

There are no financial covenants involved with these deals. No.

So, this is good money for five years, one way or another?

Yes.

I understand. All right. Thanks, guys.

Our next question comes from Wilson Jaeggli. Your line is open. Please state your company name.

Southwell. Gentlemen, congratulations on EBITDA positive. We've taken a while to get there, and we are very, very happy to see it.

Thank you, Wilson.

Just to follow up on the renegotiations here with the MSOs. Bill, of the 40 -- let me get the number here, what is it -- $43 million in distribution cost in the quarter, could you tell us about what percent of that is for MSO costs or distribution costs through cable?

I would say, Wilson, about 60% of that number is distribution cost for cable.

Okay, so about 60%. And let me ask you this. Of the 25% of distribution we are seeing up for negotiation here, is Comcast a part of that 25%?

No. Not this year, Wilson.

Not this year. Okay. Comcast owned just under or through NBCU, here, 6.4 million shares, which is just under 19%. And with the agreement you've just reached with them on extension of the brand, that ownership is going to go over 20%, and they will be our largest shareholder, is that correct?

That is correct.

Okay. And just, while I haven't been reading the Wall Street Journal that much about this merger with, or the acquisition of Comcast and GE in this joint venture, they are going to have a joint venture with relatively equal ownership. But Comcast is going to be the managing partner, is that basically correct?

That's the way I understand it, Wilson.

Okay, so Comcast, in a sense, is going to be our largest shareholder and the controller of the largest block of stock and also a potential extension here of maybe up, if we are truly successful, 10 million additional households.

Providing DOJ and SEC approval, that would be correct.

That would be good. And Comcast obviously is maintaining the NBC name, right?

To our knowledge.

Right. But that brand will not go away, obviously. Okay, well then I understand why you did what you did on your brand here and that extension.

Let's see, one other question I had here. Could you tell us who Crystal Financial is? Bill?

Yes. Crystal Financial is a debt fund based out of Boston that has been in place for years.

Okay. And basically they are taking inventories and receivables as collateral?

Yes. That is right. The debt is primarily secured with the inventory and the accounts receivable position.

And it -- will it vary on your position, so the total availability of $25 million depends on how much accounts receivable and inventory you have on stock, on hand, right?

Yes, it does. It's a calculated borrowing base. But we are -- the total borrowings are well below the calculated borrowing base.

Okay. All right. Well, congratulations on getting that done here for some working capital flexibility. And gentlemen, thanks again. Thanks again on a great operation -- operational results, here.

Thanks, Wilson.

Thank you. Our final question comes from Robert Kirkham. Your line is open.

Thank you. I'm just an individual investor. And I just wanted to clarify -- I might've missed this earlier -- that the NBCU ownership is going into this new JV with Comcast. But I was wondering if the GE stake, the six million that they have is also going into that new JV as well. If you could just provide a little color on that.

No, it's completely separate. You have to look at GE and NBC separately.

Okay. So they will not be going into this new JV?

That's correct.

Okay. Thank you very much.

Thank you. I would like to wish you and yours a happy holidays, and with that we will conclude the call.

Thank you. That concludes today's conference. Thank you for your participation.