iMedia Brands Inc (IMBI) 2011 Q3 法說會逐字稿

Welcome to the ValueVision third-quarter conference call. Today's call is being recorded for instant replay. 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; and Bill McGrath, EVP and CFO.

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 anticipates, believes, estimates, 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's SEC filings.

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 a description of why we use adjusted EBITDA, please refer to our Q2 news release, 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 Keith.

Thanks, Teresa, and good morning, everyone. We made substantial progress over the past two years in fundamentally repositioning the business and restructuring our distribution and operations. We brought in key personnel, diversified the product mix to be less dependent on jewelry and watches, and introduced a growing number of new and prominent brands.

We have also increased our Internet sales penetration, lowered our transaction costs, improved our channel positioning as our national footprint has grown, and strengthened the overall health of our balance sheet.

When rebuilding any business, setbacks occur, as they did in the third quarter. Despite double-digit sales performance in four of our six business categories during Q3, sales declines in our consumer electronics and watch segments overshadowed these gains and resulted in a disappointing quarterly result.

In taking a step back from our recent performance, progress towards our longer-term goal becomes more apparent with a wider perspective from our trailing 12-month performance. Specifically, [deliver] a 9.5% increase in revenues [won't run] into merchandise mix, and move adjusted EBITDA into the black with a $19 million improvement to a positive $11.7 million. Operationally, improve gross profit margins by 105 basis points from 35.3% to 36.4%. Increase Internet sales penetration by 510 basis points from 39.6% to 44.7%. And expanded our distribution footprint by 4% while improving our channel position in many markets.

To continue this progress we recognize there is still much more to be done. We have a substantial business and a wealth of product and vendor opportunities. Our experienced management team has identified the challenges and opportunities, and we have a specific action plan underway to address them.

Looking ahead, we remain confident in our electronic multi-channel retailing platform and the strategies in place to achieve sustainable, long-term growth. Bill?

Thanks, Keith, and good morning, everyone. Third-quarter net sales was $135 million were up 2.2% over prior year. Revenues during the first two months of the quarter were up around 9%. However, during the month of October, net sales declined around 10%.

The October shortfall was primarily due to consumer electronics, which performed sharply below our expectations. Sales in our watch business also declined in the quarter, coinciding with the reduction in air time. Revenue shortfalls in consumer electronics and watches offset gains across the jewelry, health and beauty, fashion, and home segments.

Our gross margin improved to 37.2% versus 35.6% in the year-ago period. This reflects the positive mix impact of increased jewelry and health and beauty. Gross profit dollars increased 7% to $50.2 million.

Operating expenses increased 10% over the year-ago period to $55.6 million. Distribution and selling expense increased approximately $4.8 million over last year.

Compared to prior-year third quarter, our total household footprint increased approximately 5% to 80.7 million homes. As we described previously, during the current quarter we recognized the addition of around 2 million of those homes. We also improved our channel position in approximately 2.5 million homes.

It's important to note that while investments in distribution help drive long-term revenue, we expect it to take several quarters before new homes become fully productive.

Additionally, our transaction cost per unit in Q3, which is the cost of taking and fulfilling a customer order, was $2.99 compared to $2.67 in the same period last year. Our unfavorable result in transaction cost per unit in Q3 was primarily impacted by lower shipped units as well as increased customer return rates.

Adjusted EBITDA was a loss of $500,000 compared to positive adjusted EBITDA of $600,000 in the year-ago period.

Regarding some of the key underlying metrics, average selling price rose in Q3 by 12.9% to $105 versus last year, reflecting a higher mix of jewelry products. In line with the increased ASP, units decreased 10% in the period. Return rate in Q3 increased to 24.6% from year-ago return rate of 20.8%, primarily due to the increase in jewelry mix and the higher average selling price.

Average homes grew 5.2% in the period, reflecting the third-quarter addition of approximately 2 million homes described previously, as well as the overall subscriber growth within our distribution providers footprint. Our annual average annual cost per home is approximately $1.35.

Let me remind everyone that we are no longer reporting on new or active customers, given the sensitivity surrounding these numbers from a competitive standpoint.

Cash and cash equivalents including restricted cash at the end of Q3 were $32.7 million versus $42.5 million in Q2 of this year. The use of cash reflects planned increases in inventory in advance of the holiday season, continued use of ValuePay as a cost-effective promotional tool, and normal IT-related investments and capital expenditures.

In terms of refinancing our 11% $25 million term loan, we are exploring with our banking partners securing an expanded and lower-cost facility. It is possible that we will be able to provide more details on this initiative within the fourth quarter. That concludes my update. Bob?

Thank you, Bill. I will briefly review the performance of each category before making some comments on the business as a whole. Beginning with consumer electronics, our challenges in Q3 were related to organization, product, and execution. We simply didn't have enough of the right products.

For the products that did resonate with the customer, inventories were insufficient to capitalize on customer demand. In addition, a primary merchant in consumer electronics left the Company in the quarter, which impacted our execution capabilities.

To return this category to growth, we have specific actions under way, particularly with strengthening and expanding the consumer electronics merchandising team. And as part of these efforts we have retained a prominent New York-based recruiter to aggressively add talent to the organization. We're also focused on developing a stronger product assortment and building a deeper inventory on key items.

Because these initiatives take time to yield results, we anticipate continued weakness in the consumer electronics category through the fourth quarter and, to a lesser degree, into the first quarter of 2012.

In watches, another core category, the sales decline of 13% was partially due to reduced air time in this segment, allowing us to better support our other emerging businesses such as home, fashion, and health and beauty. In an effort to balance and diversify the watch category, we introduced 12 new brands through the first three quarters of this year, most of which have great potential.

We expect to have over 20 new brand introductions in total by year end. So as these new brands develop and build consumer recognition, they will gain added traction with our strong watch customer base and help us drive improved performance in this business going forward.

Turning to jewelry, this segment had double-digit sales gains of approximately 11% and strong margins in the quarter. We have built a solid base of customers and made significant improvements in its profitability and operational performance.

To keep customers engaged, we plan to add exciting new designers and products and a range of compelling price points. The jewelry category remains a core business for us and continues to enjoy a high degree of product acceptance among our loyal customers.

In home, health and beauty, and fashion and accessories, we also achieved double-digit sales increases and strong margin performance in Q3, with health and beauty delivering over 30% increase over the prior year. Of note, in health and beauty we have already established a strong base of skin care products. From that base of credibility we successfully expanded into hair care products and beauty tools, which bring salon-caliber treatment into the home at attractive price points.

Importantly, the auto-delivery element of this category can relay consistency and visibility as the business develops.

In our fashion and accessories business, we have built a solid foundation with handbags and we are now layering on outerwear and sportswear, with good initial response. New brand introductions including the classic American look of Brooks Brothers for women also play an important role in providing excitement and differentiation for our offerings.

Given our growing strength in these emerging categories, we expect to continue attracting new products and vendors as well as build out these categories over time. With that, I'll turn the call over to Keith.

Thanks, Bob. In closing, our goal is to build a strong multichannel electronic retailer that provides predictability and sustainability. Over the last two years we have been fundamentally repositioning our business. As I stated earlier, setbacks occur, and we are disappointed with our recent results.

Despite some identified challenges in Q3, we remain encouraged by the progress made in the Company as a whole. We have a strong understanding of what is working and what needs to be addressed to drive improved performance. We clearly have more work to do and significant opportunities ahead to grow the business, improve our operations, expand our infrastructure, and further differentiate our brand.

It is because of these opportunities and our confidence in our ability to leverage them with specific action plans that we are positive about our future. As always, we value maintaining an active dialogue with our shareholders and the investment community at large. We appreciate your time this morning and will now take your questions.

(Operator Instructions) Neely Tamminga, Piper Jaffray.

Great, thank you, and good morning. Hey, I've got a question for Bill and one for Keith. First for Bill, how are you measuring the success of this strategy to improve channel placement? We are just trying to get a sense as to some of those metrics that you might look at. If you can give us any sort of qualitative or quantitative ways that you are seeing success with the channel placement strategy and initiative, and maybe how far along you are in that process from a three-, five-year perspective.

And then for Keith, could you talk a little bit about what that pipeline of collaboration might still look like within the house of NBC, and how talks have progressed in terms of using more and more cross-property promotions, that would be great. Thanks, you guys.

Hi, Neely, this is Bill. Relative to the success for the channel placement, we know generally speaking that lower is better. And in the case of the homes that we improved our channel placement within the second or the third quarter, we were previously at a very high channel position. And this was in major markets including Atlanta, Miami, Washington, DC, and Baltimore, as well as South Florida, Southern Virginia, and Central and Western Pennsylvania. Channel position was in the range of 250 or channel 283.

So in this case it was a precise decision to actually acquire a second channel. That channel position varied; in some markets it's channel 80, some markets channel 89, other markets channel 46.

Our measurement of the benefit of that is really a precise level of monitoring the performance within those areas in terms of incremental sales. The incremental sales have been substantial in those areas. Really what we look to achieve ultimately is the positive cash flow that comes from the premium that we would have paid for that second channel relative to incremental sales.

The progression has been very positive, and we are monitoring to that point. It will vary by markets and the demographic considerations within that market in terms of the turn on the performance.

Relative to the three- to five-year window, as we look at this, this was a decision to take advantage of an opportunity in the near term. So in both the number of homes that we have added and the acquisition of the second channel, it was a material investment for us because we viewed that as opportunistic within (technical difficulty) .

Our expectation is that we will be more targeted on a forward basis. You wouldn't see a tranche of this size added unless we determined that the payback and the timing of that payback that we are drawing out of the analysis of these individual markets is worth replicating in the near term. So -- but we will be more measured in the increments

Neely, this is Keith. I have got Carol Steinberg, our EVP of dot.com and marketing here with us today, so I will have her address your question regarding the pipeline of collaboration with NBCU.

Thank you.

Hi, Neely. As we have been continuing to do since April, there is a lot of cross-promotion activities that are going on. We are promoting a lot of NBCU's new movies, television properties, their Universal Theme Parks, and have been working in a very collaborative environment and -- where the promotions are going both directions.

We are appearing on some of their properties and they are appearing on ours, whether it be promotions for shows or using content as we show television tablet devices etc. on our products for sale.

Carol, how are you feeling about that pipeline as we look ahead? Do you think that there is a step function that can occur? Or is it just blocking and tackling on a weekly basis?

I would say right now we are involved in their marketing council and we participate in the calls every other week. And whatever we can do to help provide support for them in their top initiatives, we are out there helping them out.

Great. Thanks, you guys. Good luck.

Greg McKinley, Dougherty & Company.

Yes, thank you. Bob, could you just -- I didn't know if I caught all the details you shared. You talked about CE being down about 20% in the quarter. I think jewelry, did you indicate was up 20%, and health and beauty was up 30%?

Yes, sir.

And then watches was down 13%. Can you share the other categories?

Sure. Well, I can tell you that we had strength in jewelry and fashion, health and beauty, and home, all of which were up double-digits.

Okay.

The categories where we struggled, clearly CE was a surprise. And watches was down, and much of that was due to the fact that we pulled air time away in order to invest it in other businesses so that they could grow.

Okay. In terms of -- the Company made a comment that we think there is going to be a transition time here to get electronics back on track. Is that largely a function -- I know you indicated that the primary CE merchant is no longer with the Company. But is it also sort of the ship has already sailed in terms of being able to procure the product you would want to have over the holidays? Or is there anything that can be done in the interim meaningfully to enhance your ability to get the right product yet for December/January?

Well, clearly the ship has already sailed isn't part of my vocabulary.

Okay.

We are working as hard as we can to secure product every day. We have expanded our resource structure. So by no means has anyone given up or allowed the ship to sail.

So we are going to fight this every single day. I am just providing the fact that I want to be conservative in my outlook for CE, that's all.

Okay. Then in terms of category mix amongst these I think six categories that you articulate, can you just remind us real quickly what are the relative mixes of each of them?

For Q3?

Or just -- yes, Q3 or maybe even on a sort of how you -- on a 12-month basis or whatever is easiest.

Clearly in Q3, CE's mix dropped dramatically; and that was down around 13%. Jewelry was up close to 30%, with watches in the low 20%s.

Our fashion business, although low, was substantially ahead of where it has been year-to-date, high single digits. Health and beauty remains very, very strong, ahead of our target, in the low teens. And home grew to a mid teens mix.

Okay.

On an annualized basis, this may help frame everybody's thoughts. Jewelry and watches still remains half or a little bit more than our mix. The fashion accessories is the smallest with 6% to 7% of that mix.

Home and consumer electronics is about a third of that mix. And we have a growing part in health and beauty, which is north of 10% of the mix.

So ideally as we stated in the past, over the long term we are going to be at our best when jewelry and watches is somewhere around a third; home and consumer electronics is north of 40%; health and beauty and fitness is in the 14% to 15% range; and then close to 9% or 10% on fashion accessories. That is our ideal balance.

Yes, okay, thank you. Then with the additional homes that you added during the quarter as well as the improved channel positioning, can you help us quantify the change in this fixed cable fee cost? If I recall correctly, you were maybe at about, call it $104 million annual, maybe $105 million annual with those cable access fees. Where has that run rate moved to after these changes?

Yes, Greg, using today's households around 81 million and the average cost per home, which even blended for these, for the second channel that was added in the markets I described, about $1.35 or so. So you are looking at about a $110 million run rate annually from today's household position.

Extrapolate out of that, if you had I will say normal organic or minor systems additions that would occur you would anticipate somewhere around 600,000 to 800,000 a home perhaps added.

Okay, so that $1.35 was maybe like $1.33, $1.32? Somewhere in that range?

Yes, it was a little bit lower, and the influence of the premium that was associated with that really had to do with the acquisition of second channel (multiple speakers) 0.5 million homes.

Thank you.

Before you leave, Greg, I just want to clarify. In the beginning of the call you had -- you have heard that jewelry was up around 20%. Jewelry was up almost 11% (technical difficulty). I just want to make sure everybody (multiple speakers).

Okay, thank you.

Mark Smith, Feltl & Company.

Hi, guys. First off, I guess I was a little surprised at how high the average selling price was with consumer electronics and watches being down. Was that purely a function of jewelry being up the percentage you just talked about, Keith? Or was there anything else moving that price?

This is Bob. Jewelry by far was the biggest factor. Both growth in the percent of the mix and their actual average selling price escalated. So, although not entirely the reason for the escalation in ASP, jewelry was by far the major factor.

And it sounds like -- I can't remember, Bob, if it was from your comments; but you are seeing better margins on some of your jewelry sales today?

Our jewelry margins are very healthy.

Okay, perfect. Then looking at the return rate moving higher, is this due to I guess just products that customers maybe didn't want or were dissatisfied with? Or is this a function of mix shift?

Yes -- okay, Bill.

Sure, Mark, it is almost entirely a function of mix shift. When you get into jewelry as a classification, similar to fashion as a classification there is a discretionary element of the purchase that is different than what you would see in the home side of the business or the cosmetics side of the business or even consumer electronics. The rates really are distinctly different and characteristic of those specific categories.

So as the mix moves, as it did in the current period, that is what drives the return rate. And even within categories there is a correlation to price points within categories. So you had those drivers, but -- so it's primarily a function of the product mix.

This is Bob. The two major factors again is you have jewelry escalating in sales and CE, which has a very low return rate, dropping as a percent mix.

Then I think lastly, just looking at online, you have shown nice sequential improvement quarter-to-quarter, up until this quarter. Is that a reason why this quarter was maybe weaker? Was it partially online being weak?

Then second, if so, can you fix it? And third, do CE and watches do more online business than other categories?

Mark, it's Keith. It certainly is not a lack of demand; it is more of a product mix. So some product categories are more efficient and fluent online than other product categories.

I would say that our jewelry category is not as productive as some of our other product categories online. That too will come along as we develop and grow, but it is entirely mix.

Is -- so I guess you do see more CE and watches perhaps in online business than you do in other categories.

Well, jewelry is weak. The other ones are -- the rest of the categories are pretty strong. But we are predominantly in the jewelry penetration of sales that explains the dip quarter-on-quarter.

Okay, is that I guess a function of gender? You know, males buying more online and women more watching the show? If so, is there something you can do to reach out to that maybe jewelry customer more online?

No, it's really not a demographic issue, Mark, at all. A lot of our jewelry customers are heavy [produce] customers. They purchase more frequently within a given year, and they connect with us in many, many different ways.

They know the operators, they speak with the operators, enjoy the conversations and it's part of shopping for them. So that is why we have call centers, because that is part of the connectivity that we create with our customer.

Okay, great. Thanks, guys.

Jim Devlin, Henley & Company.

Yes, hi. Good morning, guys. You addressed the cash side; I guess it is slightly more than $32 million for the quarter. Can you discuss the debt line at the end of Q3?

Sure. Our dept position is $25 million and it consists of the term loan, the five-year term loan which carries interest at 11%, which remains on the balance sheet.

Okay.

That is due for repayment five years from the initiation, which was (technical difficulty) 2000.

Okay, so we are talking net enterprise value currently of about $80 million, and a 12-month revenue run rate of about $590 million.

So the enterprise right now is selling for about $0.13, $0.14 on the dollar priced to sales, with 30-some-odd-million outstanding -- $30-some-odd-million in cash, do you guys have any flexibility to initiate some sort of a stock buyback program?

Stock buyback is not in our plans. Our real focus is investing in the business, certainly in terms of the elements (technical difficulty) restructure, working capital, and other elements to drive revenue. In the near-term horizon, we don't have any intention of buying back shares.

Okay, thank you.

Gunnar Hansen, Sidoti.

Hey, guys; I just had a couple quick questions. I guess the first one in terms of the consumer electronics, obviously the lost spend there hurt you guys there. Obviously you guys haven't -- that will take some time. But is there any way you guys are going to be able to recoup any of that decline there in the next quarter or two?

This is Bob --

We are really not providing guidance in the next quarter or two. I think Bob was explicit that we have some organizational expansion to work through. We're really focused on hiring the right talent to put into the merchandising (technical difficulty).

And we will continue too the other nurturing business, as Bob characterized (technical difficulty) focused on growing the overall size of the business and the customer [file].

Okay, all right. Then I guess in terms of some of the lower air time for some of the watch categories and stuff, is that -- are you guys expecting to continue with that trend and get some of the other categories up and running a little bit better? Or do you guys see giving some air time back to the watches category?

What we do, Gunnar, is we take air -- watch productivity this year has been tough for us. So as a matter of course what you would normally do is take back some air time until the productivity starts to get better. So that is what we have been doing.

We're just going to watch the productivity in watches and adjust it as we see fit. But productivity will dictate what we do with air time.

All right.

The encouraging thing in the watch business -- Bob had mentioned that he has brought in 12 new brands this year and up to 20 by the end of this fiscal year. These brands are new. You nurture these brands, and now you have a wider base of vendors and brands to offer to the customers.

The more selection that you have, the more productive and strong and robust it becomes. So all these actions are the right things to do for the business.

All right. That's all I had. Thanks so much.

Greg McKinley, Dougherty & Company.

Thanks. Just a quick follow-up on the balance sheet. Accounts receivable were up quite substantially I think year-over-year. Some of that is not surprising, because you have a little more capital to work with in using the ValuePay system. But I was still surprised by maybe how high it got.

Can you talk a little bit about the use of the ValuePay system during the course of the quarter, and how we should think about receivable balance going forward? Is there any collectability risk on some of those balances?

Sure, Greg. This is Bill. We were at in our AR balance around 60 days if you use the trailing quarterly sales in accounts receivable. That has certainly upticked relative to third quarter of last year.

But third quarter of last year we were running with a very low cash balance, so there was an element of recognition that that was inhibiting our growth relative to our willingness (technical difficulty) ValuePay as a strategy.

And ValuePay as a strategy, as we look at it, it is among I will say three primary promotional techniques that we use. One is the ValuePay approach; and with that we like the cost effectiveness of the ValuePay program.

To your point on the bad debt exposure, our bad debt experience as a percentage of credit sales runs anywhere between 2% and 2.5%. That is a relatively less expensive -- including the carrying cost of the receivable, it is a relatively less expensive alternative than the other two primary options that we look at in terms of owning our promotions; and that would be either discounting or free shipping and handling.

So ValuePay it certainly is a higher influence as you comp into the same period a year ago. We have been running pretty much through the fourth quarter to now at or around maybe slightly higher day sales in receivables; but we have been using ValuePay in a (technical difficulty) level, and it kind of remains cost-effective for us. We are very, very comfortable with the quality of the receivable portfolio.

Okay, thank you.

Well, we are running a few minutes long, so with that I would like to wish everyone a happy holiday. And with that we will conclude the call today.

Ladies and gentlemen, that concludes today's conference. Thank you for your presentation and your presence. You may now disconnect and have a great day.