iMedia Brands Inc (IMBI) 2010 Q4 法說會逐字稿

Good morning, and welcome to ShopNBC's fourth-quarter and fiscal 2010 teleconference. Following today's presentation, there will be a formal question-and-answer session 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 Teresa Dery, Interim General Counsel at ValueVision. You may begin.

Thank you, operator, and good morning. I am joined today by Keith Stewart, CEO; Bob Ayd, President; and Bill McGrath, SVP and CFO. Bill will open the call with a financial review of Q4 and the full year. Bob will then discuss the overall merchandise strategy, highlighting some of the drivers behind the Company's improving performance. Keith will then close the prepared remarks with an overview of the Company's progress, strategy, and goals, as well as observations on the interactive retail industry. We will then open the call to questions.

Before we get started, let me briefly go over the Safe Harbor language for forward-looking statements. Comments on today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipate, believe, estimate, expect, intend, predict, hope, or similar expressions. 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, and related cautionary statements, is contained in ValueVision Media's filings with the Securities and Exchange Commission.

In addition, comments on today's call may refer to adjusted EBITDA, a non-GAAP financial measure. For reconciliation of adjusted EBITDA to our GAAP results, and the description of why we use EBITDA, please refer to our Q4 news release which is available on our website.

All information in this conference call is as of today, and the Company undertakes no obligation to update these statements. I will now turn the call over to Bill McGrath.

Bill?

Thanks, Teresa, and good morning, everyone. We appreciate you joining us today. As most of you have had a chance to review our Q4 news release, I will focus my remarks on the highlights. After making substantial adjustments in both our average selling price and merchandise mix in 2009 and early 2010, we were able to drive double-digit sales growth in the second half of this year, which led to fiscal 2010 net sales growing 6.5% to $562.3 million. Underlying this performance were improvements in gross margins in both Q4 and for the full year, as we worked to broaden our merchandise mix and optimize product margins. Q4 margins did decline relative to those in Q3, largely due to strong performance of our consumer electronics and home categories, as well as our holiday gift focus. Bob and Keith will touch on factors that led to our net sales and margin improvements.

Of course, very positive news from Q4 and the full year was that we were able to achieve profitability on an adjusted EBITDA basis, as compared to losses throughout fiscal 2009 and the first half of 2010. In the fourth quarter, we achieved positive adjusted EBITDA of $8 million, a $9.3 million improvement over Q4 2009. This was the second largest quarterly adjusted EBITDA performance in our 20-year history.

The adjusted EBITDA improvements reflected higher sales and improved gross margin. At the same time, we were able to maintain our distribution, selling, and G&A expenses at basically flat dollar levels to prior year fourth quarter. These expense categories decreased as a percentage of net sales in both Q4 and for the full year.

Transactional expenses, which include order capture, fulfillment, and customer service operations decreased over 19% to $2.73 per unit and $2.90 per unit in Q4 and for the full-year 2010, respectively. A year ago, per-unit transaction expenses were $3.40 in Q4 and $3.60 for the full year of 2009. The improvement reflects the continued increase in the percentage of transactions that occurred via the Internet. Internet penetration was 44% of net sales in Q4 versus 38.9% last year. Internet orders have no call-center expenses, and have a lower level of customer service inquiries due to online account management.

Transactional expenses are reflected in the selling and distribution expense line on the P&L. These improvements led to a net loss of $1.4 million in Q4 2010, which is a $7.4 million improvement over last year. Our Q4 loss includes a charge of $1.2 million related to the extinguishment of debt. This charge was for accelerated accretion on the GE preferred stock, and related to a $2.5 million payment made to GE during Q4.

In connection with our execution of a $25 million term loan in the fourth quarter, we agreed to this $2.5 million payment to GE, reducing outstanding accrued dividends payable on the Series B Preferred. Net loss for the full-year 2010 improved by $16.1 million to a loss of $25.9 million versus a net loss of $42 million in the prior year.

Moving on to the balance sheet. An important outcome in Q4 2010 was securing around $39 million in net new capital. In November, we obtained a five-year, $25 million term loan bearing interest of around 11%, and in December, we executed a common stock offering. Net proceeds of the term loan were around $22 million after all costs. The net proceeds of the stock offering were around $17 million.

Principally reflecting these transactions, cash and cash equivalents rose nearly 150% to $51.4 million compared to Q3 ending balance. As a result of our strengthened financial position, we were more aggressive in supporting sales growth through the use of ValuePay, our interest-free installment payment program that allows consumers to pay for products over two to six monthly installments.

Our year-end accounts receivable was $90.2 million versus $68.9 million at prior year-end. This reflects our higher sales levels, along with the increased use of ValuePay. We continue to incur modest levels of bad debt expense on ValuePay, in the range of 2% of net sales, making ValuePay a cost-effective promotional method for stimulating sales.

Partially offsetting this use of cash, year-end inventory levels declined to $39.8 million from $52.3 million in Q3 2010, and $44.1 million at year-end 2009. This reflects continued active inventory management, effective clearance efforts, as well as a greater mix of drop-ship product. For drop-ship product, we are not responsible for inventory or fulfillment. Going forward, we anticipate some overall reductions in inventory turns as we broaden our product mix and assortment.

In summary, we are very pleased with the overall performance of the business, and our improved balance sheet position. We remain optimistic regarding our future growth prospects.

Let me now turn the call over to Bob Ayd who will review aspects of our merchandise strategy and some key initiatives. Bob?

Thank you, Bill. We were encouraged by customer response to our merchandise selection in Q4, and for the full year in 2010, as well as with our team's ability to drive margin improvements over the prior-year's periods. Let me now briefly highlight the performance of key categories in the business.

We achieved a complete turnaround in our jewelry and watch business in the second half of 2010, bringing in a range of new jewelry products with pricing and styling that resonated with the customer. Sales in jewelry and watches increased 1% in Q4 versus last year. Gross margins rose significantly, and gross margin dollars increased 10% in Q4 versus last year. We are excited about the jewelry and watch category being a strong driver of the business going forward.

Though increases in precious metal prices is impacting the overall jewelry sector, we're finding great products and bold styles that address this issue while still enabling us to hit our target. Our watch strategy has been to reduce air-time in favor of other products, though watches continues to be a strong component of the overall business, both in terms of revenue and gross profit. We are working on diversifying our watch business and product mix going forward in an effort to attract new customers, as well as please our core base of watch shoppers.

The health and beauty category, which also includes fitness, continued strong quarterly performance, with sales up 89% in Q4 versus last year. We introduced a number of great new products in the quarter, with an emphasis on skin-care appliances that were well received by the customer. We believe the health and beauty business is well positioned for continued growth, powered by recurring sales through our auto-delivery business that makes it easy for customers to maintain a steady supply of the products they enjoy.

In the home and electronics category, Q4 improved by 31% over Q4 last year, growing to 39% of our mix, as we emphasize value-priced holiday gift assortments. Sales in the home and electronics business increased 8% in 2010 versus last year, driven by strong sales in textiles and other home products. Going forward, we will continue to bring more national brands to our network while repositioning the category to allow for higher margin businesses to take the lead. Gross margin dollars in Q4 outperformed, up 26% versus last year. We are pleased with the progress made in this category, and are confident about its continued performance going forward.

Our fashion and accessories business, which we are in the process of repositioning, declined on absolute terms, and as a percentage of sales in Q4 and for the full year. But we have been making progress in growing gross margins in this business, and we are optimistic about this category going forward. We were able to improve gross margin over the prior quarter and full year, while still managing inventory levels, and including some clearance activity in Q4. However, on a sequential basis, margins fell due to our success with some lower margin items and categories in home and electronics.

Though we target a higher overall margin for the Company, we focus on sales and margin dollars per minute. And on those measures, we were pleased to identify compelling electronic items that strongly resonated with the customer. While raising our average sales price and weighing on all overall margins, these products earned their air-time with much higher sales and gross margin dollars per minute than other categories. Of additional importance, televisions are drop-shipped, and require no inventory funding and lower logistical expense.

On a Company-wide basis, we continued to expand our product assortment in Q4, adding over 4,700 new products, nearly 50 new vendors, and 20 new programming concepts. We continue to provide newness, excitement, and build community, and view this as the best way to drive greater productivity from our TV households. We also delivered more predictable performance in the quarter by continuing to shift our product mix towards products that have already proven successful. We call such products, reorder products, which relates to our reordering them from our vendors. Revenue in Q4 from such products was approximately 48% of the total business, versus 34% last year, versus 51% in Q3 of this year. Note, we did revise the classification for reorder products to include larger ticket products that were not previously included; and we will be providing revised year-ago performance for comparison purposes.

Entering 2011, we remain focused on building on the progress made in 2010. We will work to cultivate a more balanced and diversified business by focusing on the jewelry, and health and beauty businesses, where we have had strong product and brand assortments at attractive margins, as well as a consumer that has responded favorably to our offerings. Attract great new brands, and utilizing special events and innovative promotions to entertain and connect with our viewers, we believe in our ability to continue delivering strong gross margins and top-line sales.

Given the nature of retail, and our ability to respond very quickly to customer demand, we do anticipate some variability in our quarterly performance going forward, and within each category. Just as we found strong demand in home and electronics during Q4, we were able to respond to that with the right product assortment and increased air-time. We look to be opportunistic in each category as we identify and pursue merchandising opportunities that meet our customers' needs. Of course, the development of new categories, combined with the nature of our business, can cause some quarterly fluctuations in our performance. But ultimately, our objective is to maximize our financial returns from our air-time, and drive growth on an annual basis.

In summary, our 2010 results have strengthened our belief in our merchandising programming strategies and execution, which are all focused on driving the top line, enhancing margins, and delivering improved bottom line and adjusted EBITDA performance. And with additional capital, we are in a far stronger position to opportunistically pursue new brands, products, and promotions, as well as to differentiate our offerings and support sales.

I will now turn the call over to Keith. Keith?

Thanks, Bob. As you've heard from Bill and Bob, continued operational and financial improvements at the Company enabled us to reach the key goal of profitability on an adjusted EBITDA basis for the full-year 2010, as well as achieve the second-best quarter of adjusted EBITDA in the Company's history. We have an incredible team of interactive retailing professionals whose expertise and dedication have powered the turnaround and the resurgence of the business. Armed with a stronger balance sheet, improving merchandise selection, and a lower operating overhead, we feel we are well positioned for the future growth and improved bottom-line performance in 2011 and beyond.

With much of the business rebuilding behind us, we are now able to put our full focus on sales execution across an expanded base of product segments. We are continuing to evolve our product and content offerings in many ways. Adding high profile national brands, increasing our product assortment, offering product exclusives, and special promotions in enhancing our broadcast and online content offerings and talent to create a more exciting, interactive, and rewarding customer experience. As Bob mentioned, we are focusing on jewelry and watches, health and beauty, and home and electronics categories as growth drivers for 2011, at the same time we develop the fashion and accessories businesses. We are excited about our product plans, and we feel we have the right team of product specialists for success.

The key goal of the Company is to improve the sales penetration of the approximately 78 million TV homes we had at year-end, thereby increase the return we receive from this substantial reach. To accomplish this, as we've said previously, we have reduced our overall price point to a level that makes our products more accessible to a broader base of consumers, while still maintaining premium pricing, expanded our product offering to include more categories in expanded selection of both on-air and online. Focused on leveraging our interactive shopping platform across the Internet and mobile platforms, in addition to traditional television and telephone. And work to enhance the quality and value of our on-air, online content and programming.

Recall just two years ago, our average price point was $176, and 56% of our sales were in jewelry and watches. At that point, the new management team began to reformulate the Company's sales strategy to focus on a broader merchandise assortment. We also began to lower our average price point to expand our mass appeal without sacrificing product quality or value. In the fourth quarter of 2010, our average price point was $105. Jewelry and watches had declined to 45% of a bigger overall sales base. Our average selling price will, of course, fluctuate, as it did in Q4 2010, according to our product mix and consumer demand. We are not averse to shifting mix when we find things that really resonate with our customers.

Though we do expect that our average price point will continue to trend lower over the next few years, we do plan to remain at the average prices well in excess of our larger interactive shopping peers. This price differential will let us deliver high quality products and greater value to a broader base of customers.

We are also particularly focused on a multi-channel customer, who tends to be more loyal-based, that generates more revenue and higher average order sizes. The beauty of transactions via the Internet or mobile is they cost less to capture and process than those that go through our call center. We are also available to showcase a greater number of products through our online storefront than we can via television, and we can cross-sell and up-sell these customers through direct marketing and digital retention initiatives.

Interactive has transformed our ability to forge much stronger relationships with our customers, and to better respond to their needs. It also enables us to provide a wealth of content, including photos, text, and video that clearly show and explain each product's unique attributes and value. And given the speed with which we can approve a product that makes it available on-air and online, which can be as little as only moments, our interactive retail model allows us unique flexibility to respond to consumer demand. Altogether, these factors enable us to offer a tremendous benefit to consumers who are on the move, pressed for time, and looking for retail sources they can trust.

With respect to the Company's Internet performance, our 1.1 million customers continued to become much more comfortable with engaging and interacting with us via online and mobile platforms. Web traffic continued to grow as our coordinated, cross-platform marketing initiatives and programming strategies resonated strongly with our viewers. Our e-commerce sales penetration increased to 44% of net sales in Q4, and rose to 41.2% for the full-year 2010. We believe there is more progress to be made on this front, as well. And though still a small portion of our online activity, sales volume mobile devices grew rapidly in Q4 and for the full year, with strong improvements in the number of orders and their size. Given these encouraging results, mobile also looks to be an important growth driver going forward.

We are also very encouraged by the potential of our growing array of Internet-only merchandise. Though also a small base, Internet-only sales grew at triple-digit rates in both Q4 and for the full year. This growth was supported by a significant expansion of our online-only vendor base, and substantial ramp-up of Internet-only items. We believe this segment offers an excellent opportunity for our Company, as we are able to drive more of our television audience to the Internet. Once there, we can deliver additional targeted products and offers to appeal to each customer's interest. And from a working capital standpoint, this business is particularly attractive as it's primarily supplier direct fulfillment, requiring no inventory or fulfillment with shipment being handled by the vendor.

Turning to overhead, we continue to make progress on our strategic focus to lower distribution costs, which remain a key component of our business. At year-end 2010, we entered into negotiation to renew approximately 25% of our cable and satellite contracts. Through these negotiations, we were able to continue to reduce our costs, yielding a lower average cost per home, and helping to offset a cost of an estimated 4% increase in total homes across our entire distribution network anticipated for this coming fiscal year.

Our team has made great progress in right-sizing the terms of our distribution agreements from bringing down our average cost per home. Since year-end 2008, and to date, we've been able to lower annual distribution costs by 22% before the impact of annual subscriber growth. Having moved the bulk of our distribution agreements to one- and two-year terms, our goal over the next two years is to hold distribution costs largely steady, while we benefit from low, single-digit organic subscriber growth across the national footprint.

Looking out to the end of 2012, approximately 30% of our distribution footprint will be up for renewal. And the bulk of these contracts are still priced based on higher cost, long-term agreements. These renewals create the potential for meaningful further reduction in our overall distribution overhead going forward into 2013.

We are also pleased with our efforts to hold G&A expense to a modest increase, well below our revenue growth rate in the full-year 2010. Through tight expense management, growth initiatives, we look to benefit from increasing operating leverage going forward. And as you've heard, we also see full-year 2011 benefiting from the capital we sourced in Q4. This additional capital helped support our Q4 results, and should play an important role in continuing our business progress, funding higher inventory levels to support new product launches and opportunistic buying, as well as supporting our ability to use ValuePay as a sales incentive.

Finally, with regard to the completion of the Comcast's purchase of NBC Universal, there's not much new we can really say regarding this relationship or our ShopNBC licensing agreement. As we announced back in November, we have an extension of our license with NBC Universal for the use of the ShopNBC brand across all of our customer-facing media outlets until May 15 of 2012. As consideration for the license extension, we will issue common stock in the market value of $4 million in May of 2011. We have begun initial dialogue with the new management team at Comcast NBCU, and we will update you in coming quarters as circumstances warrant.

In closing, 2010 was a great year for ValueVision, though we see opportunities to improve and do better. As the consumer landscape becomes more complex, we believe the value proposition and shopping experience we will offer, will be increasing demand by consumers of today and tomorrow. We are also confident that the growth initiatives we are pursuing to target this demand represents an attractive path to value creation for our shareholders.

Of course, none of this would be possible were it not for the talent and dedication of our team members who are committed to making ValueVision the best possible Company we can be. We have an active Investor Relations calendar planned for the remainder of the year, as we work to reintroduce ValueVision to the investment community, and we hope to see you in many of our marketing trips or at conferences throughout the year. Thank you for your continued interest in our Company, and for your participation today.

Operator, let's now open the call to questions.

(Operator Instructions) Our first question comes from Neely Tamminga with Piper Jaffray. Your line is new open.

Great. Good morning, and congratulations on a fabulous end to a good year.

Thank you, Neely.

Just a couple questions if I may. I'm looking to get a little bit more clarity on the gross margin commentary. It's great that you can be opportunistic, but as we model out the year, would you still expect the overall gross margin rate to be positive year-over-year in each quarter? Or do you think there is going to be some quarters in which you are going to see declines. Maybe related to that, Keith, if you are willing to share with us how you are feeling about Q1 trends both from a sales and possibly a margin perspective? That would be really helpful.

Yes. Thank you, Neely. We typically in our industry have a shift in mix toward home goods and consumer electronics in Q4. So, it's going to be more of the same next year and years to come. Overall, gross margin for the year we expect to be very strong. We expect in the next 3 to 5 years to grow our gross margin line from 35.5% to a range of 36% to 38%. As for Q1, although we are not providing formal guidance, we're about halfway through the quarter. What we see so far we like. We are seeing strong -- and expecting strong top line, strong gross margin growth. And further, we are seeing broad-based growth across many, many categories as we continue to accelerate our business. Bob, do you have any other thoughts?

No, again, the margin aberration in Q4 -- the margin was still higher than the previous year was due primarily -- maybe even exclusively, but primarily due to the fact that the proportion of consumer electronics in Q4 was about 22% of our total the previous year. And for year-to-date it had been around 17%. That forced the percent to be less than the previous quarters, but the gross margin dollars that are generated per minute from CE are one of the highest in the Company. So the customer embraced what we had. We had a great, great growth rate in CE in Q4. The margin rate may not have been as attractive. The rate may not have been attractive as in previous quarters, but clearly that was purely a function of mix.

And one final comment on Q1. Again, it's very broad-based. I am very pleased with the merchandising development and the sales execution of the team. And we are actually a little bit ahead of plan.

Okay. That's helpful. And could I just have one follow-up then for Bob here? Thank you. It's really helpful. How do you feel -- it's more of a qualitative question. But how do you feel about the pipeline of innovation for the categories that you do plan to grow this year? Whether it's health and beauty, as you mentioned. Or the jewelry, et cetera. How are you feeling about the overall pipeline of innovation? If you can try to characterize that for us?

I would say even stronger than last year. As we have gained traction as this business has turned around, we have more and more people joining us. Last -- two years ago, we had one strong business. This year, by the end of the year, we had five of six strong businesses. And I expect those businesses to continue to grow at an accelerated rate. But we are seeing more vendors and more brands than ever before. So I'm more than confident.

We are very pleased, Neely, that we have a tremendous advantage in the first three quarters that we didn't have last year. And that is working capital. As we went through the first three quarters, we did not have enough merchandise. We continued to sell out of merchandise, or we had a much bigger upside to sell, but we just didn't have the cash to invest in the inventory. Now we have the cash. And we are investing in inventory, and that's going to drive the top and the bottom lines.

That's fantastic. Good luck in 2011.

Thank you.

Our next question comes from Greg McKinley with Dougherty. Your line is now open.

Yes, thank you. Could you -- you just got done talking about the benefits that you may enjoy here the first nine months of this year due to a little more flexibility in working capital. Can you describe for us the degree to which you use ValuePay? Call it, during the non-peak retail selling seasons versus traditional holiday and winter shopping? Does that tend to represent just as large of a percentage of transactions? Or -- I'm just trying to gauge whether there is a bigger seasonal benefit from that working capital that we may not expect to recur here in the first nine months.

Hello, Greg. This is bill.

Hello.

Greg, you do see some influence in the fourth quarter of higher ValuePay, and I will say that's somewhat of a function of mix. We talked about consumer electronics, and for us, particularly the higher ticket consumer electronics products were strong within fourth quarter. So you'll see somewhat of a seasonal down tick in the use of ValuePay in the -- we'll call it the non-peak periods. But I would say slightly. We look at ValuePay from a couple of perspectives. One is, related to the price point on the product. But we also look at ValuePay opportunistically. ValuePay is a -- it's one of three broad promotional tools in our arsenal. And that's -- the other two being discounting pricing or free shipping and handling as promotional tools. ValuePay is among those tools -- highly cost effective. And it's also effective in creating sales lift. So while we would expect some seasonal influence that would be driven by mix, we are constantly looking at those three options, and ValuePay continues to be among those options that we use.

In terms of the accounts receivable that were extended at the end of year? Have you felt pretty comfortable with the collections of that thus far? Any unexpected bad debt arose out of that?

Yes, Greg. In fact, that's really a primary consideration that falls into the economics of ValuePay being a cost effective promotional tool. Our bad debt experience has stayed right at that 2% level of credit sales throughout. Even as we look at it within categories on an aggregate basis, we stay at that 2% experience. And all of our leading indicators as we look at our collections experience tells us that number is holding up very, very well.

It's highly reliable and predictable.

Okay, great. And then, I guess one of the things I thought stood out in the quarter was we know that there's fairly high fixed cost infrastructure in the business so there should be good leverage when sales grow. But pro forma operating expenses really didn't grow at all, despite 15% revenue growth. Can you frame up for us -- given your cost control efforts, necessary investments back into the business to support revenue growth. How should we -- should we think of your operating expenses remaining that fixed through the remainder of 2011? Or should we expect some more variability?

Other than Bill is a rock star, we have some [fixed]. (laughter).

No, we have -- I think you'll expect a little bit more variability as you look ahead to 2011, Greg. One, we want to invest more in people. Keith had mentioned that the benefit of having additional capital in the business -- within fourth quarter, certainly we did invest in the working capital components and particularly the accounts receivable. We have been operating lean for a period of time. And we'll continue to operate lean. But in terms of rewarding our employees for hard work, it's a consideration that is built into our cost structure for next year. So you'll see some rise in that component of fixed cost. We are still very targeted and selective about adding new staff in terms of supporting initiatives, but we've got a little bit more freedom to do that as we look ahead in 2011.

Okay, great. And then last question, cable fees. Thanks for the color on that, Keith. Could you maybe just tell us what were your dollar amounts spent there this year so we can have a better sense for what portion of distribution and selling costs were represented by that?

Greg, about $103 million in total is distribution costs within the selling and distribution line.

Thank you.

Thank you.

Thanks, Greg.

(Operator Instructions) Our next question comes from Robert Routh with Phoenix Partners Group. Your line is now open.

Yes, good morning. And congratulations -- seems you're really turning things around there after years of what it was. First, just curious as far as to clarify the NBCU transaction you did where you extended the license, and you are paying them $4 million of your common stock on May 15 of 2011. I just wanted to clarify -- that would be based on not at the time you signed the deal, but if your stock is $10 then, it's based on the value of the stock as of that date. Is that correct, or is it -- how does that work?

No, no. That's not correct. The way it works out is we have a six-month look back, and we take the average of the six-month look back and issue that amount of units to equal $4 million.

Okay, but it's certainly not at the price the stock was at back when you signed the deal when it was much lower.

No, very cost effective use of capital.

Great. And if you could comment a little bit I know it's -- you've had it on your balance sheet for long time, the Boston TV station and its value. At some point, it seems like you don't need it. Especially now with your relationship with Comcast and given they own that cable market when they bought it from Cable Vision. I'm curious if at some point -- you clearly don't get any value on the stock for it. Would you consider monetizing it? If so, do you have any sense of what it could be worth in terms of getting to an adjusted enterprise value that more actually reflects what it is as opposed to what it looks like for ValueVision.

Yes, the TV station certainly is a non-strategic asset. It's just a matter of timing, Rob, when we sell this. There are currently -- and we look at this every quarter. There are currently two other TV stations up for sale in the Boston market. It's really not an ideal time to do it. Once the commercial real estate market turns, we will certainly monetize that.

Okay, great. And then, just two more if I may. In terms of what you've done, you've built the brand. You've got the NBCU thing done, the Comcast relationship, and all the others that you have. You're suddenly generating cash flow, and soon earnings, it looks like, will be on the way. Have you considered doing anything -- any partnerships with any other types of partnerships with potentially big box retailers that want a television presence and want to have a couple hours on your particular network or something? Or are you prohibited from doing that with NBC Universal? Is there anything strategic? You are looking at anything to do that you haven't done yet? But none that QVC and HSN also haven't done? But given your niche in where you are, you are pretty well positioned to do that. I would think the demand from that from the Home Depots and Bed Bath and Beyond and all that in this world would be fairly high. I just don't know if that's something you ever considered, or would?

Yes, we have. We've talked to many people. Although I can't disclose anything today, we will have a really, pretty exciting announcement in the short-term future.

Great. It seems like that would make tons of sense given what's going on and the nature of your business and the way your positioned. And finally, I don't know if I missed this. Obviously, the capital structure which you have improved materially over the last 12 to 18 months. Still, there's the issue of the Series B Preferred and the warrants and all of that. And at some point, I know some investors just don't like that there. They would rather that be common stock or something else. Is there any update as to that? And what you could do, and timing as far as that is concerned?

Of course, we're talking about it at the management and the Board level. As we continue to improve the business and as you point to -- pointed to earlier -- come close to generating net income, that qualifies us to get some adult debt, if you will, from some legitimate banks at highly cost-effective rates based off of floating LIBOR. So we are probably a couple quarters away, but that's certainly in the near future.

Okay, so it's [imagined] clearly, in addition to the operational improvements which you obviously had to focus on first, and you've done. The capital structure still very -- you're focused on really making it in the best interest of all the shareholders as of now. I know it's not your fault you came in -- you kind of inherited this position. But you're open to that, and you think they would be as well in the relatively near-term? Next year or two?

Bill and I are very much focused on the balance sheet this year with a goal to improve and unlock shareholder value.

Great. Just one last question. In terms of your product mix. Obviously, you talked a lot about it already. And proprietary products, especially. Could you give a little bit more color as far as how many -- what percentage of your total product offering could be proprietary versus national versus other? And all that kind of stuff?

Yes, this is Bob. Where we really focused on proprietary brands -- now that we have some capital, we can do that in the short-term. And we are interviewing a number of people. But I expect by the second quarter to have more proprietary brands in jewelry. Hopefully, apparel. We're working on proprietary brands in home as we speak and also in health and beauty. In a perfect scenario, when I laid out the five-year plan, I thought proprietary brands would drive about one third of our business. Now, we're obviously not there yet, but I do expect to capitalize on that this year.

Okay. Great. Thank you very much. Quite a turnaround you have done in a very short amount of time. Congrats.

Thank you, Robert.

Our next question comes from Bill Lennan with MCH. Your line is now open.

Good morning, everyone. I've got a couple. I'll just throw them out there all in one go. This idea of customers migrating to the Internet. It's easy to say will it be great if we go to 100%. We don't have call centers anymore. It got me to thinking Blue Nile, Amazon, Overstock -- these people aren't talking to their customers on the phone quite a lot. So is there some value in retaining some portion of the customer base that always goes through television and the call centers? In other words, if you pick up any intelligence or valuable feedback by retaining some portion of the customer base in phone contact versus web only? Second question is on electronics. Do you have evidence either from ShopNBC or your prior experience that first-time buyers of electronics migrate to other categories and they become broader purchasers? Or do people tend to buy -- do you have a big portion of electronics only buyers ? And then the last question, do have any broad strokes you can give us on where customers are coming from? Whether it's merchant category? Or whether proprietary brands are driving new -- first-time customers or dormant customers who come back after a long time? Thanks.

Thank you. The call center element -- there's two elements to that. We have order capture, and we have customer service. We will always have some element of human being talking to a customer on a customer service. We believe it's important to stay close to that customer. Listen to that customer. And then act on those customers' wishes. So as long as I'm here, we are going to have customer service.

Now the OE -- the order entry site is very, very different. Currently, we are 44% penetration which I think is still industry-leading. We look to very much -- potentially by the end of this year, half of our business could be done through the Internet. And we also look for our automated ordering system enhancements to continue to grow. We believe that by the end of this year it could be 30% to 35%. So right there, 80% of your costs are really consumed by the automated ordering system and by dot-com. So we will continue to drive the OE but protect the customer service element.

As far as consumer electronics, I would not characterize all consumer electronic customers to be the same. And that's actually an industry misnomer. You may have somebody that buys a large screen television set, and they don't come back and buy anything for quite some time. That customer seems to -- or a computer. That customer is different from the small electronics business where you're selling the GPS systems and particularly the gift-giving areas. Those customers tend to come back and repurchase within the category. And we've noticed a large migration from electronics to our mail watch business. So I would not characterize electronics as one big category.

And as far as broad strokes where the customer is coming from, we clearly have a [lilelaline] through. We are reactivating customers constantly that were old ShopNBC customers, and they like our offerings and our merchandise and where we've taken the Company. That's been an awful lot of resurgent growth. Within the sector , if you look at our sector, 60% plus of those customers buy from all three of us. Now that said, you have 40% of those customers that don't buy from all three of us. And thanks to the likes of Amazon and the popularity of the Internet, those customers are new customers to the sector. So we very much see this as the hot category -- multi-channel retail. And the hot sector moving forward, thanks to the Internet.

All right, thanks.

You're welcome.

Our next question comes from Greg McKinley with Dougherty. Your line is open.

Thanks, just a quick follow-up. Could you talk a little bit -- you've talked about your three- to five-year plan. I think one of the key elements of that is what you've called improving penetration rate -- number of households that you broadcast into who actually do business with you. Where do see your penetration rate at today? And can you give us a sense for how that informs your next couple year top line growth ? I don't know if you care to quantify what that view might be? But if you would, I would like to hear.

And then also, I think a previous caller asked about perhaps any sort of alliance with a big box partner. I didn't quite catch all that, but I wonder if you could fill us in on the strategic rationale behind why you'd pursue such a relationship? And I know you can't give details, but what would be the driver behind it? And how would a relationship like that look?

Yes, you really hit on a key element, Greg, to our growth strategy. Although we have an opportunity to grow homes, our plan is only to grow household by rates of inflation. Call it, 3% to 4%. So in five years, this management team will deliver $1 billion in sales and EBITDA returns of 8% to 12%. So the secret sauce, if you will, is the penetration. So currently, our penetration is somewhere around 1%. Not nearly the levels of our competitor -- prime competitor, which is 8%. And further, to hit $1 billion and 8% to 12% EBITDA, we don't need to go from 1% to 8%. Don't even need to go to 4%. We just need to go from 1% to 2%.

Then is -- to get to that $1 billion -- ? I could do the math, but is that low teens compounded revenue growth, mid-teens? What is your couple year view there?

It's mid-teens, Greg.

Okay.

And we feel very, very strongly about our business plan. Again, we like what we see thus far in the first quarter, and we are very, very confident in our ability to drive results and shareholder value this year.

As it relates to the other question about a retailer that Rob had brought up previously. We really cannot disclose who it is at this time. But there are synergistic opportunities that would clearly differentiate us even further from the rest of the market. To the extent that we can have a ShopNBC customer buy from us via telephone, via the Internet, and via mobile phone. And then ultimately, brick-and-mortar stores. That's a very, very interesting operational viewpoint. You have customers uniquely take customer returns and send it back to the brick-and-mortar stores is a strategic asset. And then to the extent that there are merchandise assets, particularly as Bob had pointed to, within proprietary brands that are big, popular, and exciting brands where we can add a lot of entertainment and [vigor] to what we do on air and online is another strategic differentiator that we are excited about.

Thank you.

You are very welcome. Well thank you, everyone, for joining us today, and I hope you all enjoy your spring.

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