iMedia Brands Inc (IMBI) 2011 Q2 法說會逐字稿

Welcome to ValueVision Media cyclical 2011 second quarter conference call. Following today's presentation there be a formal question-and-answer session. Today's call is being recorded for instant replay. If you have any objections, you can disconnect at this time.

I would now like to turn the call over to Teresa Dery, General Counsel at ValueVision. You may begin.

Thank you, operator, and good morning. I'm joined today by Keith Stewart, CEO, Bob Ayd, President, Bill McGrath, EVP and CFO and Carol Steinberg, EVP of Internet Marketing and Human Resources. Before we begin, I will briefly review our 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 today's call may refer to adjusted EBITDA, a non-GAAP financial measure. For a reconciliation of adjusted EBITDA to our GAAP results and a description of why we use adjusted EBITDA, please refer to our Q2 news release, which is available on our website. All information on 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 Keith Stewart, CEO.

Thanks T, and good morning, everyone. We appreciate your participation on the call today and provide you with a better understanding of the business, our progress and our long-term potential. To give you a window on the deep [bench] we have assembled to ValueVision, I have asked Bill to provide a financial and operational review, then Bob will touch on our merchandising initiatives and Carol will give an update on our Internet performance and our evolving marketing initiatives with NBC Universal. We'll then open the call up for questions.

Bill, let's get started.

Thanks, Keith, and good morning, everyone. As you've had a chance to review our Q2 press release, I'll focus my remarks on just a few highlights.

Second quarter net sales increased 4.7% to $132.1milion. Sales growth in the quarter was below our plan. The variance is due primary to lower than expected results in the consumer electronics category. We experienced a reduction in demand for large televisions, categories that have performed well for us in prior quarters.

Beginning in the month of June, we were also impacted by a supply chain disruption with a major supplier within our consumer electronics business. We've already taken steps to revolve the supply chain issue.

In response to these circumstances, during the quarter we shifted our programming towards the higher margin categories of jewelry and health and beauty. The shift toward jewelry also contributed to an increase in our product return rate of 210 basis points to 22.7% along with lower new customer activity within the quarter. Both of these influences are normally associated with the jewelry category.

Our gross margin improved to 38.8% versus 37.4% in the year ago period. This reflects the positive mix impact of jewelry and beauty, as well as our continued reduction in the use of discounting and other markdown promotions. Operating expenses increased 3% over the year ago period to $54.8 million, reflecting the impact of higher compensation costs including merit increases, benefit changes and other compensation elements. Transaction costs per unit was $2.82 compared to $2.87 in the same period last year.

Adjusted EBITDA improved to $1.1 million, a gain of $3 million over Q2 2010. This marks our fourth consecutive quarter of positive adjusted EBITDA. On a trailing 12 month basis, adjusted EBITDA totaled $12.8 million.

Net loss improved by $3.2 million to a loss of $4.5 million in the second quarter, while our loss per share was $0.09 compared to $0.24 last year. Our weighted average shares outstanding rose to $48.1 million in Q2 2011. This reflects the impact of our stock offering, as well as the May issuance of 693,000 shares to NBC Universal as payment for the ShopNBC brand license extension.

Moving to the balance sheet, cash and cash equivalents, including restricted cash, declined to $42.5 million versus $45.3 million at the end of Q1 2011. Inventories rose to $52.7 million as compared to $42.2 million at the end of the first quarter, primarily reflecting a merchandise mix shift more towards in house versus drop ship product categories.

We also continued to make strategic use of our ValuePay installment program. ValuePay remains a cost-effective promotional tool and helps to reduce the level of discounts and other markdown promotions. Because of our continued strong operating performance, we're at a position to explore options on our $25 million term loan, which currently bears interest at around 11%. Before year-end, we anticipate replacing this term loan with a lower cost, higher availability facility.

Average selling price rose 8.2% to $105 versus $97 in Q2 of last year, also influenced by the higher mix of jewelry products. We expect variability in our average selling price coinciding with our changes in our merchandising mix. Longer term, however, as we build out our mix in the fashion and home categories, average selling price will trend towards the $80 level.

Average homes grew 4.4% over prior year Q2 reflecting a subscriber growth within our distribution partners' footprints. Our average annual cost per home is approximately $1.34.

For the six months of 2011, sales were up approximately 10% versus last year, and gross profit dollars were up 12.7%. Adjusted EBITDA of $4.2 million during the first two quarters was the best the Company has achieved in over five years.

In summary, we're pleased with our operating discipline, continued growth in net sales, improvements in gross margin and gains in adjusted EBITDA. With that, I'll now turn the call over to Bob.

Thank you, Bill. I'll briefly review each of our segments before offering some remarks on the business as a whole.

Beginning with jewelry, this is a segment that we really like for its high margins and the potential for increased spend from current customers. Jewelry was again a stellar performer in Q2 with strong top line growth, compelling margins and a very high degree of product acceptance across a broader number of products. We saw sales growth across almost all jewelry product lines, and we completed successful product testing which sets us up very well for the second half of the year.

In the watch category, we continue to strategically reposition the category in Q2 through a planned reduction in airtime and an increase in new product launches. This led to strong productivity increases in the quarter. We look to drive added sales velocity from the watch category on modestly lower exposure, which will free up airtime to grow our other businesses.

Turning to consumer electronics. As Bill mentioned, we experienced a temporary, I'll characterize it as a speed bump in June due to a supply chain disruption as well as a shift in consumer demand towards jewelry, health and beauty products. Importantly, as of July, we have returned the category to its prior growth plan, and we are confident about its outlook for the balance of 2011.

Our home category represents a broad range of merchandise. This includes home -- hard home, which spans kitchen equipment, table top and appliances and also represents soft home, which includes bed linens and mattresses. The home business is a strategic growth category for us. Although it has been a slow building process, we are pleased of the growth achieved so far driven by great brands such as [Silvertab] and Cuisinart, as well as Simmons and Serta. We are focused on expanding home sales and our merchandise assortment in this segment as it delivers high levels of new customers and migration into other categories.

We continue to grow our health and beauty segment during the second quarter with the successful launch of eight new exciting brands. In May we hosted the summer edition of NBC's Beauty Day featuring three new show premiers, the largest variety of beauty products in our history and the premier of nationally makeup artist, Christie Harris' color cosmetic line. Our customers also responded favorable to beauty appliances in our overall beauty offerings. We're focused on further developing and expanding this segment in the second half of the year, including making increases of our auto delivery revenue component.

The fashion and accessories business is still in the early stages of development, but we have been successful in partnering with prestigious high quality accessory brands. Overall, the segment met our expectations, bolstered by a few stand out brands including Ghurka luxury hand bags and America West accessories, both of which exceeded our expectations. As we continue to test products and diversify our offerings, we expect fashion and accessories' contribution to total sales to remain in the mid single digit range during the second half of the year.

In our previous call, we referenced a possible merchandising relationship with a prominent retailer, as well as the addition of some high-profile brands. We were hoping to make an announcement today about this merchandising agreement; however, we still have some work to do on crafting the details. Our talks are going well, and we expect to announce something in the very near future.

In summary, our overall merchandising strategy is focused on three key goals. Increasing our sales, diversifying our product offering and brand assortment, and optimizing our merchandising margins. We're confident in our ability to execute against these goals and as we evolve our merchandising strategies and incorporate new concepts planned for the remainder of the year. For the introduction of new high-profile, exciting brands and a continued focus on building customer loyalty, we are confident that we will be able to grow our new and existing customer base.

I'll now turn the call over to Carol.

Thanks, Bob. Internet sales continued to expand during the second quarter, up 23% versus last year. Orders placed on personal computers, mobile and tablet devices now represent 46% of total sales versus 39% in the same period last year. We're extremely proud that ShopNBC's Internet sales penetration continues to lead the TV shopping industry by a significant margin.

We have been able to achieve such a high percentage percent of our business via Internet and mobile channels due to our continued focus in creating easy to use interface on our Internet channels that are consistent with our on-air presentation, thereby encouraging a multi-channel experience. Going forward, we believe e-commerce sales will grow to represent over 50% of our revenue with strong integrated promotions among our TV, internet, mobile and social media channels, along with the new features and functionality for Internet and mobile users, we're confident in our ability to drive additional customer engagement through a compelling shopping experience.

On the social media front, we are encouraged with the results received so far. For example, the promotion of our Facebook page has proven to be an effective viral strategy to introduce our brands to new customers while cost effectively driving incremental traffic to our site. We view social medias a key component of our ShopNBC community and look for it to play an even larger role in generating customer satisfaction while driving new visitors to our site.

In addition, we are seeing healthy sales growth in our Internet-only product offerings. This business segment achieved a threefold increase in sales versus last year's second quarter, and we're optimistic about its potential for continued scale and growth.

And finally, with regard to NBC Universal, we continue to expand our dialog across our base of entertainment properties. We have been working closely to promote the high-profile entertainment property such as NBC prime time shows The Voice and America's Got Talent. We've also been part of promoting Universal Picture feature film releases including Bridesmaids and The Changeup. And we're in discussion with Bravo and Style network to help cross-promote some of their new shows including Most Eligible Dallas and Tia & Tamera. And lastly, we have also begun to benefit from initial cross-promotions in which online display ads for ShopNBC products have been featured on NBC Universal websites. We couldn't be happier with how positive the relationship is, the direction of our partnership and how welcomed we have been made to feel in the Comcast NBC Universal family.

That concludes our prepared remarks. We will now open the call to questions. Operator?

(Operator Instructions) And your first question comes from the line of Neely Tamminga with Piper Jaffray, please proceed.

Great, good morning you guys. We think it's great progress, regardless of what the stock does today. I have a couple of questions, and thanks for making Carol particularly available on the call. I think it's great to have her on.

Carol, could you talk a little bit more about some of the collaboration efforts in terms of leveraging -- do you leverage today's special value? Do you guys to specially created product for some of these properties whether it's Bravo, Style or some of the other NBC properties? I'm just trying to get a sense of where the leverage really is on the product side.

Well, right now we're really working on promotional opportunities, more global with both of the brands. We are speaking with them about product opportunities whether it be integration, promotion, et cetera. Right now, we're just in discussions. We kind of took the low-hanging fruit and went with straight banner ads, promotions on our broadcast using one-third lower graphic areas, promoting on our Facebook, promoting on our website. And then as I just mentioned, we have now had promotions some of the NBC U property websites as well, which is nice.

And I'll add to that. It's still very much, Neely, in its infancy, and it should, to your point, manifest itself where we have the ability to put product on 35 different platforms, utilize the power of their Internet platforms, which believe is somewhere in the zip code of 124 million hits a month.

That's fantastic of an opportunity. I have a question for Bob and also for Bill. Bob, you had referenced jewelries as being strong, and we're right in the middle of gem week. Just trying to get a sense of how you're thinking about gem week this year versus last year. How strong are you feeling about the assortment in general in terms of the innovation or brand ideas? Concepts this year versus last year, Q3, Q4 where we are right now. That would be helpful.

Sure, thank you. Well, listen, I feel very, very strongly about Jewelry. Obviously, if you go back, Jewelry has been a very strong business for us for I think 4 quarters in a row now. Q1 very strong, Q2 very strong. I don't see that changing. When I do my [plans this fall] and I look out over the next 6 months, Jewelry is a key player. We're able to get a lot of new concepts in Jewelry, and a lot of new brands in Jewelry, and I feel very strongly about it. We'll see how gem week turns out, but there's no reason for me to believe that it wouldn't be as successful as it has been. But it's a powerhouse business for us with strong top-line growth and very strong gross margin per minute growth.

Great, and Bill, as we think about the top-line choppiness here that we just saw, and understandably because of some product deliveries. How should we be thinking about some of your key planning assumptions into the back half? Is the double digit growth rate still on the table? Should we be taking that down but offsetting it with some of the gross margin expectations? Just trying to get a sense of how you guys are viewing your business in the back half.

Sure. Neely, I'll start by saying we remain committed to the long-term growth targets. We think from a structural standpoint and having built out the team and the developments of the businesses that we've planted the seeds for, we remain very, very confident in that long-term direction. Q2, obviously, points out that there's going to be have variability in the performance. That variability is going to come from mix shifts or other changes, expected or unexpected. But we also believe that Q2 reflected some distinct influences that won't have the same residual impact in the second half of the year. We're not providing top-line guidance. We're not providing guidance, I should say, for the second half. But we do expect to maintain continued strength in our gross margin. And as we've spoken about often, our driving metric as we look at the income statement is gross margin, and we drive that down by category in terms of the margin productivity per minute of airtime.

And I'll add to that. As you take a look at this last quarter and even the last couple of quarters, we're 4 years ahead of plan on the margin line. We had a hiccup on the top line because we had an interruption on 1 supplier, the Consumer Electronics business. I'm very pleased the team is able to shift to the Jewelry and some other higher margin businesses to drive a 9% gross profit increase. So, despite the 5% growth on the top line, I'm very pleased with the team's work in the quarter.

Thanks for elaborating just a little bit more on that, Keith. It just seems to me that of the key takeaways we have here is that the strength of the business on the adjusted EBITDA can be influenced on a lot of different factors beyond just the revenue growth. Is that -- as your model evolving as your team is gelling and coming together, is that some of the takeaways that you have as we round out of the second half into -- out of the first half and into the second half?

I'll get to the OpEx in a second, but please be mindful. Everyone needs to be mindful that particularly in the last 2.5, 3 months of the year, our product mix morphs completely. We focus more on the hard goods, Bob calls it Hard Home and Soft Home. That's where you get a lot of your new names. And despite we had a dip in new customer and active customer growth, this past quarter, that is merely a reflection of product mix. So, as you sell more Jewelry and as you sell more Apparel, not necessarily Accessories, but Apparel, you get much more productivity out of those customers. The flip side of that, is we saw much higher order values and average transactions this quarter than we did in any previous quarter. So, it is a true balance between new and active customers.

The other element that you are perhaps alluding to, Neely, is our operating line. And we're very unique Company in our space whereby we're highly leveraged on the fixed side. Our annualized distribution costs are about $106 million a year. And as Bill pointed out in his comments, they're $1.35 per home, by far the most cost effective distribution agreements in our space. It's highly a leveragable -- we have got a very strong brand. Carol's doing a great job with NBC. I'm very pleased with what Bob is doing on the merchandising side. And then controlling the operating costs, we're all about that. We'll continue to manage it very tightly.

Great, thanks, and good luck, you guys.

Thanks, Neely.

And your next question comes from the line of Murray Arenson with BGB Securities. Please proceed.

Thank you, good morning, everybody. I wanted to get a little bit more clarification, if I could. The supply chain disruption and the movement in large TVs, are those a single issue or related issues or separate issues?

The supply chain, what happened with the supply chain disruption is 1 of our major suppliers in CE started to have problems. We saw the problems coming in May. And so, getting a constant flow of new product from this supplier was quite difficult in May, even more difficult in June and as it turns out, this supplier liquidated, or went out of business I believe in July, maybe the beginning of August. But that hurt us dramatically. That was an isolated instance, however, because if you take a step back and you look at our CE business, in the first quarter it was very, very strong. But in May and especially in June, we got hammered. And we got hammered badly because of, specifically I would say, or to a large extent, because of this supply chain disruption. So, for the quarter, we ended up flat. However, if you look at July when we had the time to go back and we had already been working with new suppliers, but we were able to sign them up and started to get new product in, in July; and in July we had a stellar CE month. I characterize its a speed bump. Tough May, tough June, however, we returned back to very, very strong double digit growth in CE in July.

What's your year-to-date?

Year-to-date because there's an off -- thank you, Keith. Year-to-date, despite a zero growth rate in Q2, year-to-date, CE's up 23%. And in July, as I said, an enormously successful month in CE. So, I have characterized it as a speed bump, and to me, that's what it is. As far as big screen TVs, what we found in late July, was that if we have the right value, and we do, they'll sell. We had 1 of our best big screen TV launches ever. It could have been our best, but we did extraordinarily well with a 46-inch and 55-inch big screen TV. I think the business is there, but I think the difference is you have to be very, very sharp on the value.

Okay. Thanks, I appreciate that color. I wanted to also get your comment maybe a little further. You talked about your confidence for the second half, and if I have the numbers right, I think from the release that I remember, the months that were working for you during the quarter, you were seeing revenues up 10% year-over-year. Is that on plan as you're looking at it for the remainder of the year? As I look through the remainder of the year, it looks like the comps might be a little tougher in the second half. Can you just kind of speak to that and set the table for us?

Yes, Murray, we think that as we look at May and June -- or May and July, as Bob reference. They were months of transition for us in terms of the category performance within CE overall and then, particularly with the disruptions that we had seen. So, bear that in mind as you look out the remainder of the year that we were in a transition state, and we expect to be putting that further behind us as we get into third and fourth quarter. And yes, our comps did get stronger in the second half of the year, last year. But I'll also say that, in terms of the organization, the team overall and the merchandise mix, we feel we were much stronger than we were this time a year ago.

I would -- Murray, this is Bob. My comment on this year, last year. Last year's business was driven very much by 1 business, and that was Consumer Electronics. This year it's a very different outlook. We have tremendous strength year-to-date and I think going forward, we're looking at an explosive Jewelry business. We're looking at an explosive Beauty business and improving watch business. CE still will be a part of it, but we have more cylinders, more stable cylinders flying this year than we did last year. So, I'm confident.

Okay, very good. And then 2 other quick questions, if I might. 1 is I wanted you to speak to inventory management. I think we had discussed this about, perhaps, having to put more capital use to buildup additional inventory. If you could update us on that. And secondly, given where we're at in the stock, any thought to taking a look at a potential share repurchase authorization?

Hey Murray, this is Bill. From an inventory standpoint, we did build inventory from end of first quarter to second. I think we were up about $10 million in total inventory. That concentration is in the categories of Jewelry and in the categories of Beauty. And in both of those areas, we began the year, and I think we've been express about this, with the intention of slowing our turns down. We felt that we weren't aggressive enough in reorder positions and buying into categories that we think have high upside performance -- I should say items that have upside performance for us. We feel very, very good about the quality of the inventory in those categories and are confident in the inventory position in total. I will mention as well, when you look at a change in the composite mix of the business and say Q1 versus Q2, we were leveraging the drop ship inventory because CE was a much larger percentage of the business in Q1. In Q2 and going into the first couple of month, the first month of Q3, we're looking at more of an owned inventory position. So, that really puts the balance sheet in context there. From the standpoint of stock repurchase, no considerations at this time.

Okay, great. Thanks very much, guys.

You're welcome.

And your next question comes from the line of Greg McKinley with Dougherty. Please proceed.

Yes, thank you. Guys, wondering if you could talk a little bit more about anticipated product mix in the second half of the year. Bob, you indicated a high degree of confidence in Jewelry in the second half, and I guess wondering what that means about your view on how quickly we can ramp into some of these new product categories that we might associate with an expansion in your customer base. Does the fact that Jewelry is likely to continue to play a larger role, is that airtime that might otherwise have been spent in Home, Fashion Apparel, Health and Beauty, and might that act as a little bit a governor on new customer growth in the near term? Some thoughts there would be appreciated. And then maybe if you could talk about how that lines up with what you might have expected your second half product mix to look like when this year started.

Okay, here's without giving away the secrets -- the secret sauce. When I look at the next 6 months, when I look at out fall season, we have tremendous strength in Jewelry. That will continue. It's highly, highly productive, highly, highly profitable. We will continue with Beauty, highly, highly productive, highly profitable. I look for improvement in Watches. As everyone knows, in the first quarter, Watches was a very difficult business for us. We are pulling airtime back and in the second quarter, we saw improvement in its productivity. So, those are 3 workhorses for us.

I look at CE, and I don't need CE, nor have I planned for CE to have enormous increases this fall. But the real key to the sauce is the Home business. As Keith mentioned, as you go into the fall season, your Home business can generate a great new deal of new names. I have plans to be very aggressive in Home, both in Hard Home and Soft Home. We have a number of new products coming and a number of new brands. Home for the first half of the season had slow growth. For the second half of the season, I see it as very strong growth.

Okay, thank you. And in terms of how you feel around -- you just alluded to it, but do you feel like you've positioned yourself from a brand and vendor standpoint to cause that big -- part of it sounds like it's a seasonal inflection with Home, and the other part is what ValueVision brings to the table in terms of products and perceived value from the customer. Do you feel like you've got yourself positioned from that standpoint the way you had hoped to be heading into the second half?

I feel confident -- are you talking specifically Home?

Yes.

I think that -- listen, Home has tremendous opportunity for growth, and I know what's on order. I know what's coming. I know what brands are coming, and I'm very pleased with it. Could we do better? We could always do better, but I'm confident for the outlook of Home over the next 6 months, and beyond, I might add.

Yes, okay, great. And then Bill, could you just maybe remind us, high levels, how we should think about the various, we'll call it variable unfixed cost components within distribution and selling. I know Keith said $106 million of that is fixed cable fees, but then the other cost buckets within there, help us better understand how some of those will or won't vary with revenue performance?

Yes, Greg, happy to. When you look at our total operating expenses and you think of the variable component that would be within that, it's roughly 7.5% to 8% of sales. And what that consists of is the aggregate of the transaction costs that we made reference to as well as associated credit card fees and bad debt expense. As we've spoken about previously, bad debt expense for us runs about 2% of sales in total. So, if you look at the aggregation of that transaction cost and then, call it transaction fees including credit card and bad debt, about 7.5% to 8% of net sales as your cost component.

Your fixed elements within that are going to be primarily the distribution cost and again, $106 million. Or even more specifically, if you model that at about $1.34 per home, our blended cost. And then that differential essentially is the fixed cost of running the business. Our broadcast studios, our teams in merchandising and throughout the organization are incorporated into that. And then as you -- so if you were modeling that period to period, you could back into what those other fixed costs are if you recognize the other 2 variables of distribution and variable expenses. And then in the back end, Greg, depending upon performance, if there's any additional compensation incentives that are associated with performance, you would see that typically layered into third and fourth quarter which would be the determination of whether or not objectives have been met.

Perfect, thank you, and then just last question. Keith, you've obviously built out your team rather substantially from your industry relationships. Are there other areas in the organization that you feel you've yet to address and would expect additional skills being brought in? Or do you feel like the team is largely in place at this point?

We have a constant upgrade business process. We actually -- it's actually turnover 10% to 15% of our organization each and every year, and we elevate that talent throughout the organization. We're looking to invest in our merchandising planning departments. We're going to be investing in our call center and call center activities to continue to elevate our customer service. And we're just basically going to stick to the knitting, Greg.

Thank you.

You're welcome.

And your next question comes from the line of Mark Smith with Feltl and Company. Please proceed.

Hi, guys. First, I guess just maybe a concern as I look at it. The units shipped coming down. Can you talk about -- was that a function of CE and the supplier issue and just taking some time to really fix the mix shift? Or how did the unit ship maybe outside of CE look during the quarter?

Based on your expectations, I believe it's volume. To the extent that we had 5% top line and we missed in the CE, that's where the unit shift went down.

Okay. Is there anything that you learned? You had some problems in being able to shift your mix and your programming. Did that take some time? Are there ways you could improve that in the future?

It's not easy to build the right vendor base. We're constantly upgrading as we go. Some businesses are different than others, particularly in Consumer Electronics. It's primarily wholesale distributors that service our sector. The other areas of the business that aren't, as I would say, risky from a profit margin line, we buy and hold that inventory. So, that would be the aberration and the CE. As Bob had mentioned, we were already working on a couple of new partnerships and the -- we pull those partnerships in, and we'll continue to build on those and new ones moving forward.

Okay. And then second, maybe this is a question for Carol. Can you talk about the ASP in Internet sales versus kind of traditional sales, and is that kind of changing kind of the overall ASP?

Well, generally what happens is someone will watch the broadcast, come to the Internet, make the purchase there. The ASP actually increases on the Internet because there's seeing other items that are of interest, or maybe they're seeing other opportunities for them in purchasing the same type of product. We typically see a larger ASP on the Internet than on the broadcast through the phones, and that's intentional. We want to bring to the attention of the shopper some of the other products that maybe work nicely with the product that they're buying and also some other categories of merchandise that, perhaps, they haven't seen on air.

As we've seen more of a shift in it, sounds like in the second half, more of an emphasis on Home or maybe Beauty, is there an opportunity to kind of upsell or have some add-ons more on the Internet sales than we typically would in broadcast?

Absolutely. Not only do you have the recommendations for this specific product that's being shown on the broadcast, but there are other recommendations in other upsells to that product and then other recommendations of other items that you might like that are slightly different from that 1 product that may be showing on air at this time. So, we have associations with every product that is shown on the Internet; we associate with other items that are relevant to that product.

Okay, and then last question. Should we be looking -- the as we look at adding homes, is there anything over the next 12 months we should be looking at? Will it be the steady 4% growth? Are there an opportunity to add more homes, en masse at 1 point? And then the other question is if so, how can you get your penetration rate up in these new homes?

Well, the -- we're really just budgeting, Mark. 3% to 4% a year for the new homes. As you probably know, Comcast has got a very large subsection of homes that we're currently not in. That's about 7 million to 8 million homes. Our contract is being renegotiated as we speak, but I don't expect it to conclude until December 31. These are pretty much last-minute things. And also, as part of the renegotiations, we're talking about HD and illumination within HD areas, which would certainly help our productivity.

And is there anything as we look at -- if you can add these homes and maybe see more growth in homes to make sure that you're getting that penetration and turning them into productive homes?

Well, generally speaking, Mark, it takes about a year for a certain set of channels to become productive, and after a year, they're generally on a cash flow positive.

Perfect, thank you.

You're welcome. Thanks, Mark.

And your next question comes from the line of Charles Nichols with Swiftwater Capital. Please proceed.

Good morning. Thanks for taking my call.

You're welcome.

We've covered a bunch of the specifics that I had, so I had sort of 1 broader question, especially given today's price action. Could you just run through how you think about the intrinsic value of the Company at this point?

Well, just look at the assets and the balance sheet in itself, it's more or less the black and white of it. But when you look at the intrinsics, I think you have to take a look at the brand. And when you look at us and comparison to the rest of the industry, you have to say, where is that value? Where can it be unlocked? And we believe that NBC and its relationship is among the strongest, certainly within our industry. And then we take a look at the margin potential that we're currently at, which is industry [of] leading and as I mentioned earlier, we're about 4 years ahead of plan at our margin line.

Adding to that, our higher average selling price, which allow us to sell better goods that our competitors can't sell and arguably makes that market much larger than a market that would have a $50 average selling price. And the final thing I think I alluded to earlier, we have a highly fixed cost operating line, and to the extent that we continue to drive the top line, our EBITDA potential in the long-term is certainly much more powerful than our competitors within our space. So, I would look at those key points, in addition to the obvious things on the balance sheet where you kind of value the intrinsic value of the Company.

Great, thanks very much.

And your next question comes from the line of Doug Thomas with JET Investment Research. Please proceed.

We have time for 1 more question.

Hey, Doug, how are you doing?

Hey Keith, good, how are you?

Good.

Yes, I am a little perplexed, I guess, as to the maybe not today's stock price action, but certainly the weakness in the last several weeks. And I think -- obviously, I think people are over reacting to something, but most of my questions have been answered. I guess it does seem like you have been picking up some Comcast channels. In fact, I think even where I live there's -- ShopNBC's now on the air, which is a positive sign. Can you -- would you talk about some of the negotiations with respect, or your thought process with respect to getting second placement -- second station placements around the country?

Yes Doug, we obviously look at a lot of things in negotiations. Those costs in distribution have come down over the years, and we expect they will continue to go down. But all that said, we'll take up, for the most part, with the exception of 1 major distribution agreement in 2013, we'll take those savings and reinvest them back into the channel, and we'll do it in a variety of ways. We'll do it for improved adjacencies, meaning who we're sitting next to in the channel, a highly trafficked station channel or the channel positioning, a lower number. And then, the third thing would be potentially multi-elimination where we have more than 1 channel or perhaps in the future, even more than 2 channels on 1 given system, and it's more -- I liken it to a store in a mall. You're next to the best stores in the mall, you're going to get more traffic and more sales.

And then maybe for Bill, maybe people -- I don't know exactly what people -- what's on people's minds, but in terms of the system that you have got in place for supply chain. This is, I guess the second time that some people might say there's been bit of a hiccup. And I'm just wondering, does this change your view with respect to who gets qualified to provide ShopNBC with product and how does -- you go back now and look, because obviously nobody wants to deal with companies that are going to file for bankruptcy if it's easy to -- Monday morning quarter backing, it's easy to tell. But how does this effect the way you look at supply chain?

We have a business process in place, a very high quality assurance process, not only on the product side, but the finance side. We run through quality assurance cycles on a quarterly basis with all of our vendors. This is 1 of those things that popped up. It popped up on everybody. We were not the only retailers affected. I wish I could say there is something we could have done that was more diligent to make sure that didn't happen, but anything more than a quarterly scrub of our top vendors would probably be a waste of our time.

And again, maybe to put in context, and I know you're short of time, but this stuff that's happening, it's part of growing a Company, I imagine. In other words, there's nothing that you're experiencing now that you guys didn't experience in your previous life at QVC. And just to sort of follow-up on that, it's probably better that this happened this quarter than next quarter. I think people are losing sight of some of the context here too.

You're right, it cycles. It happens to every retailer. It's certainly happened to us in our past at QVC. It's in the context of us being a 20-year-old startup, as I call it. We were in a position where we didn't have enough Consumer Electronics vendors, and this big 1 hurt. But what I'm very pleased with is how Bob and his team reacted. They've got Electronics product out on the [internet line], right now. It's producing very, very well, and it's almost back to normal.

Okay. And then just finally, Bill, maybe in terms of interest rate on the refinance of the term. Are you -- I imagine, you're going to get a pretty good rate. Any idea of what you think that rate might be around?

We've had discussions, and they're ongoing. And as I think as I've mentioned before, we do have a yield revenue consideration with the term loan as it exists now. But yes, we think we will be close to -- we will be at market rates for that, Doug. It would be -- my expectation is that we'll be at the current market rates for ABL revolvers.

Okay, alright. Listen guys, thank you very much, I appreciate it.

Thanks, Doug. Okay, operator -- thank you very much, everybody for joining us, and with that, we'll conclude our call today.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day