iMedia Brands Inc (IMBI) 2012 Q3 法說會逐字稿

Good morning and welcome to ValueVision Media's fiscal 2012 third quarter conference call. Following today's presentation, there will be a formal question-and-answer session. Today's call is being recorded for instant replay. I would now like to turn the call over to Teresa Dery, Senior Vice President and General Counsel at ValueVision. You may begin.

(Technical difficulty) and CFO; Bob Ayd, President; Carol Steinberg, COO, and other members of the senior management team. Comments on today's 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, expects, intends, predicts, 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 a reconciliation of adjusted EBITDA to our GAAP results and a description of why we use adjusted EBITDA, please refer to our Q3 news release, available in the investor relations section of 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 appreciate your participation on the call today. Prior to taking your questions, Bill will highlight our Q3 financial performance. Bob will discuss key merchandising and sales initiatives, followed by Carol, who was recently named Chief Operating Officer. Carol has 30 years of multichannel leadership experience, including 17 years of experience in information technology, putting her in a unique position to take on this role. Carol will provide an update on progress, [major] operations and multichannel customer experience. Bill?

Thanks, Keith. Good morning, everyone. Third-quarter sales were $137.6 million, a 2% increase versus Q3 last year. Gross margin percent decreased 30 basis points to 36.9% in Q3 '12, versus 37.2% in Q3 last year. The margin change primarily reflects increased shipping and handling promotions in the current period. Gross margin dollars increased 1.1% in the quarter.

Operating expenses decreased 3% in Q3 '12 versus Q3 last year, despite higher carriage distribution expenses related to a 3.1% increase in average homes. Higher distribution costs were offset by a reduction in variable expenses. Variable expense decreased by 12% in Q3 '12 versus Q3 last year, driven by more favorable credit card and debit card rates, as well as lower bad debt expense. Additionally, operating expenses decreased $800,000 in Q3 '12 versus Q3 last year due to lower stock option and restricted stock expense.

Aggregate transaction costs were down 7% from the prior year. The impact of the 7% increase in shipped units was offset by a 13% reduction in transaction costs to $2.59 per gross telemarketing order in Q3 '12 from $2.99 per gross telemarketing order in Q3 '11. The reduction in transaction costs primarily reflects higher use of our automated voice response system for order entry and customer service inquiries, as well as the impact of lower customer return rates.

ValueVision reported an adjusted EBITDA gain of $600,000 in Q3 '12 compared to an adjusted EBITDA loss of $500,000 in Q3 '11. Net loss for the quarter improved to $3.7 million or a loss of $0.08 per share compared to a year ago Q3 net loss of $6.3 million or $0.13 per share.

Relative to the balance sheet, during the third quarter we had a net use of cash of around $8 million. Cash, including restricted cash, totaled $32.6 million at the end of the third quarter, compared to $40.3 million in Q2 '12. The $8 million reduction in cash was used to finance planned inventory investment during the quarter in preparation for the holiday season. Total inventory at the close of Q3 '12 increased to $54 million from $46 million at the end of Q2 '12.

In addition, accounts receivable increased in the quarter due to increased usage of our ValuePay installment program. A quick reminder -- looking forward to Q4 and next year, ValueVision operates on a 364 day, 4-5-4 retail calendar, a format that includes a 53rd week every five or six years. Our fourth quarter and fiscal year 2012 will therefore include an extra week of reported sales as compared to the prior year. Our fiscal year ends on February 2, 2013 versus January 28, 2012 last year.

Finally, with respect to Superstorm Sandy, first our thoughts are with all those who were impacted by this event. We wish them the best as they recover. Second, our sales performance in the first two weeks of the fourth quarter was impacted by Superstorm Sandy and we wanted to communicate this information. With that I'll turn the call over to Bob.

Thanks, Bill. Our merchandise and sales growth strategy remains focused on three priorities -- drive topline sales, optimize merchandise margins, and broaden the product mix. We made progress across many key areas of our business during the third quarter which contributed to an increase in overall sales. A continuous flow of 68 new vendors and 30 new programming concepts were added in Q3.

We are also encouraged by progress made in the quarter on new and active customer accounts, particularly in the subset of our best customers -- those who purchased more than 52 times a year, where we saw a significant increase. We are equally pleased with the steady improvements made year-to-date in increasing customer retention rates across our entire customer base.

Total gross profit margins in Q3 remain strong. Within total gross margin, merchandise margin, the largest component, also rose compared to Q3 last year. Average selling price declined by 5% to $100 in Q3 '12 versus $105 in Q3 last year, consistent with our long-term strategy to further reduce the ASP by building our array of products in product categories that carry lower average prices.

By emphasizing product lines with lower average selling prices, we are able to make our shopping experience accessible to a larger base of potential shoppers. We believe this trend should help us increase the penetration of our household footprint in the coming years.

Net shipped units rose 7% in Q3 '12 to $1.3 million versus $1.2 million in Q3 last year. Return rates decreased by 110 basis points to 23.5% in Q3 '12 versus 24.6% in Q3 last year, another leading indicator of customer satisfaction. Furthermore, an overarching indicator of favorable customer response to our team merchandise content and especially customer focused policy initiatives implemented over the past year, is an 11% increase in a metric called net promoter score.

That promoter score, or NPS, is a nationally-recognized third-party customer satisfaction metric. Our NPS has increased to 47% this year versus 36% last year. We view this new metric as a positive indication of the progress we've made. Going forward, we have the opportunity to use NPS as an additional tool to measure changes we are making as policies are implemented.

At the merchandise category level, performance in Jewelry and Watches was up modestly in Q3, with strength in the watch business offsetting relatively flat jewelry sales, an encouraging sign given that we shifted airtime away from the Jewelry and Watch category this quarter so we could invest in the growth of the Beauty, Health, and Fitness categories.

Home and Consumer Electronics declined slightly in the third quarter. Strong performance in the home business offset continued softness in Consumer Electronics. While the Consumer Electronics business remained challenged, it achieved its highest sales performance in the past four quarters as we press forward with its turnaround under new leadership.

Moreover, we'll be concluding our pilot with Macy's, but the sales impact in our business of this pilot was negligible, and normally it wouldn't rise to the level of comment, but we felt the visibility of this particular vendor warranted an update on our call. As a whole in Q3, Home and Consumer Electronics has benefited from a more diversified merchandise mix in home electric, textiles, computers, tablets and cameras.

The Beauty, Health and Fitness category was a solid performer in Q3, bolstered by continued growth in skincare as well as further expansion into color cosmetics, hair and fashion nail care. And, finally, sales performance in the Fashion and Accessory category declined in the third quarter versus last year. We did, however, achieve further diversification by expanding our footwear business and some further broadening of our sportswear business.

The fashion business remained a key category for us and we are confident in its development and prospects for growth. During the quarter we also launched our first test of HD programming in Seattle with approximately 500,000 homes. We are optimistic that the added exposure this multi-elimination strategy provides will help attract new customers. That concludes my overview; I'll now pass the call to Carol.

Thanks, Bob. I am very happy to be speaking with everyone on the call today. I'm also excited to be a part of the wonderful opportunity as COO that lies ahead for ShopNBC. In my new role I will for further harness our potential by focusing on three key priorities to drive our business. I'll review those priorities and then I will speak to the progress made in Q3.

The first priority is driving customer engagement through continued improvements in our online and mobile penetration and growing its share of our business. The second is to increase customer productivity through further development of our customer relationship management strategy, and the third priority is to enhance our customer experience and improve operational efficiency with a continued focus on leveraging technology.

With regard to the first priority of customer engagement, we made solid progress in advancing our Watch and Shop Anytime, Anywhere initiative. We released update to our mobile sites and iPhone and Android apps in Q3 2012, and we completed upgrades that enable our customers to watch our live broadcast on all devices.

We strive to provide our connected customers a consistent experience across all our channels. This allows for a convenient shopping experience. Our Internet and mobile purchases trend higher compared to phone orders in the number of items per order, as well as the average order value. [The] reflecting these initiatives, our Internet sales penetration rose 70 basis points to 44.8% in Q3 '12 versus 44.1% in Q3 last year.

Mobile continues to strongly resonate with our customers as we ended the quarter with 18% of Internet sales transacted on a mobile device. That's compared to 8% last year. Additionally, we find that customers purchasing via these self-service channels tend to seek customer service in the same automated fashion, which allows for improved customer satisfaction and reduced transaction costs.

To this point, inbound customer service calls regarding their orders declined by 6% in Q3 '12 versus Q3 last year and the number of customer service calls to resolve potential issues decreased by 10% in Q3 '12 versus Q3 last year.

In the second priority of improving customer productivity, we are focused on enhancing our CRM strategy. Developing a bond and a lasting relationship with our customer is critical. We know from experience that once the customer purchases three times a year with us, they are more likely to become a core customer. The annual revenue of a core customer is four times that of a new customer.

Our social media presence on Facebook, Pinterest, Twitter and YouTube continues to drive customer engagement as we add dynamic content, contests and promotions that foster enhanced customer relationships and a shared sense of community. By better understanding our customers and engaging them with a compelling multichannel shopping experience, we are in a position to successfully increase our active customers' annual purchase frequency.

And, finally, in the third key priority of enhancing customer experience and operational efficiency, we further leveraged technology this year with upgrades to our automated phone system. Orders placed through our automated phone system increased to 22% in Q3 '12 versus 12% in Q3 last year. So, in aggregate, approximately 67% of our sales in Q3 '12 were transacted via electronic means, up from 56% from the year-ago period.

These scalable technology solutions offer our customers ways to shop and engage with us that better suit their evolving preferences while also providing reduced cost to the Company. And that concludes today's prepared remarks. Operator, please begin the Q-and-A session.

(Operator Instructions). Alex Fuhrman, Piper Jaffray.

Thanks, guys, for taking my question. I would love to talk a little bit more about the Watch and Shop Anytime, Anywhere initiative. Especially, Carol, I would love to get your thoughts, having a little bit of a fresher perspective here, on how you're really going to marry the rollout of more tablet and mobile applications with the new CRM that you've been talking about.

I'd be curious to see if you are really attracting a younger customer or really anything substantially different about new customers who are coming in through those other channels. And then, if you could maybe talk about -- you mentioned something about if you hit three transactions per year, that really increases the likeliness of turning into a core customer.

How does the purchasing frequency differ between customers who shop online or through the mobile tablet channel or over the phone or across all three of those channels?

Thanks, Alex, for your questions. Let me first address the questions that you have about the Watch Anytime, Anywhere. What we've really found is that our customer is very connected and our customer also wants a very consistent experience. So, they want to engage with us wherever they are whenever they feel that engagement is necessary, and they want a consistent experience that gives them all of those touch points that they love with us.

So, what we're focused on doing is delivering that experience on any device. So, whether it be a smart phone with a smaller screen, a mini-tablet, a full-size tablet, your television or your computer, what we want to do is we want to make sure that all of the features and functions that are important to the customer are there and available and easy to find.

As far as your second question, about -- which I think you were asking about which channels customers would prefer to shop on, it's very interesting, is that as we are really researching and collecting the data on our customers, they are choosing to purchase on many channels. And, really, the value here is in the value of the order, the value of the customer as they increase their purchase frequency.

And then there's the other dimension of the value of that customer as they shop on -- through the different channels and create truly this multichannel experience where they are not only seeing products that they see on air, but they are also exploring our entire assortment of inventory, getting more information and making a very informed purchase.

Great, that's really hopeful, thank you. And then if we could also touch on Jewelry and Watches, we're very encouraged to see that. That revenue in that category was up despite rotating some airtime away from that into some other categories. Do you think that's really being driven by better product offering, or is it that some of the time that came out of that category just wasn't very productive in prior quarters? I would love to get a sense of really what's been driving the strength in that category.

Hi, thank you for the question, Alex, this is Bob. Clearly, I think it's product driven. We took airtime away, consciously, and redistributed it, and the volume was up. And when I look at the categories, we have certain categories that did very, very well, that resonated with the customer. So to me, my answer is, it's all about merchandise and the customer did embrace, in that category, the merchandise.

That's helpful, thanks a lot, guys, and good luck in Q4.

Thanks, Alex.

Mark Smith, Feltl and Company.

Hi, guys. First question, maybe for Bill. I don't know if you can quantify at all the impact of the extra week and then at all -- if you can talk at all about maybe more detail on the impact of Sandy. And if you guys get hit at all on election in Q3 with debates and conventions and other things going on.

Sure, Mark. Thanks for the question. First of all, relative to the extra week, we would expect at that time sales volume to be in the area of $9.5 million to $10.5 million in sales. And, of course, you would have all of the associated variable costs and allocation of fixed costs that would continue to be incurred in that extra week.

So, it's a full recognition of all the fiscal events that would take place during the period. And regarding Sandy, yes. I know you prefaced the comments by saying, first of all, our thoughts remain with all those that are affected by Sandy and the extent to which the recovery for those individuals is still underway. But as I mentioned, our sales were impacted for the first two weeks of the quarter, it's the fourth quarter for us.

And to put it in context, if you look at the home footprint from Connecticut to Virginia, for us that's roughly 18 million homes that we distribute to within those states. And then, particularly, if you focus within the states of New York, New Jersey and Pennsylvania, which were hardest hit, we broadcast into about 12 million homes.

And a subset of those homes, particularly in New York, New Jersey and Pennsylvania were hit for extended periods with power outages and the intensity of the recovery there is longest. For the first two weeks of the fourth quarter, our sales were off trend and off of our expectation. Our revenue, on a demand basis, declined about 12% during the period.

In the first week, which was the week of the storm, we were down about 16%. In our second week, down about 8%. Regarding in the second week would have been the time period in which the election occurred, and yes, that may have had some secondary impact as well, certainly to viewership. And, I think, the public was certainly preoccupied, nationally, over that period of time with the election.

And, certainly, even those that were not directly affected by Sandy were preoccupied turning the period of time as well. But I would want to comment that we are seeing continued improvement in terms of -- I'll call it, from our standpoint, our sales recovery from the Sandy impact, and we believe that sales are going to return to a more normalized trend over the fourth quarter.

At this point, however, it would be too early for us to provide any further commentary on the quarter, but we do expect a continued trend in a positive direction.

Great. Second question, can you talk about the impact of shipping promotions and what you look for as far as the use of those going forward?

Sure. The shipping promotions, Mark, are becoming certainly a more visible and consistent promotional tool in our space and certainly in terms of the overall electronic retailing space, including e-commerce, other e-commerce segments.

And we look to ensure that we are providing, one, that we are consistent and competitive in terms of responding to those market considerations, and ensure that we are providing the right value to our customers. So, we foresee that that will continue to become -- will remain part of our overall promotional strategy along with the use of ValuePay.

Great, thank you.

Greg McKinley, Dougherty.

Yes, thank you. Could you talk a little bit about -- you've made a fair amount of progress on the cost structure. I think you indicated very well expenses declined 12% in the quarter, and then we saw, I think within that you have credit cards fees. My guess is the transaction costs went from $2.99 to $2.59 is also part of that. I wonder if you could talk about where you expect those to be headed going forward, how much legs is left in the credit card fee reductions, etc.

Greg, I don't expect that we are going to change much beyond the current level. I think, as we look at our variable expenses in aggregate, when I combine the effect of credit card fees, bad debt expense and then transaction costs, my anticipation is that we will continue to operate in a range of about 7.5% to 8% of sales. I don't foresee any material change in our cost structure that will move us out of that range.

Okay. And then, can you walk us through, again, your cable distribution costs? Obviously, you have a major cost concession, $15 million or so, that you will begin to enjoy, I think, January 1 of '13. Then, partially offsetting that, you're growing your home base. So, can you remind us, if you isolate that bucket of costs within distribution and selling, where will those all come in in 2012, and then how do you think the home growth and cost savings net out for that line item in '13?

Sure, Greg. Our home base footprint right now is a little over 83 million homes and our cost structure, as it exists today, has us at about $1.35 per household. Beginning January 1, with the lower rates on our largest distribution contract, that average cost will decrease to about $1.15 per home. And we anticipate that will have growth, and that's roughly the $15 million differential that we would expect to see from a rate standpoint. From a volume standpoint, we are modeling about 3% growth in our footprint, would continue into next year. So, it would be the offsetting influence of that 3% base of homes, say, 2.5 million additional homes at the $1.15 rate.

Okay. So you think the full system will be at about $1.15 next year after growth, per home?

Yes, that's right.

Thank you.

(Operator Instructions).

I will continue with Greg's question and state that throughout the year we do expect continued improvement in channel positioning and adjacencies while maintaining those costs. And we will be looking at additional HD homes and over and above what Bob had mentioned previously in the transcript. So, with that said, I'd like to wish everybody a happy holidays. Thank you for joining us and we'll talk to you in the next call.