iMedia Brands Inc (IMBI) 2013 Q1 法說會逐字稿

Good afternoon and welcome to the ValueVision Media's fiscal 2013 first-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.

Thank you, Operator, and good afternoon. I'm joined today by Keith Stewart, CEO; Bill McGrath, EVP and CFO; Bob Ayd, President; Carol Steinberg, COO; and other members of the Senior Management team.

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, believes, 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'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 Q1 2013 news release, available on 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.

Thank you, Teresa, and thank you all for joining us on the call today. We remain highly committed to continue improving our financial performance while at the same time positioning our Company for long-term sustained growth. During the first quarter, we built upon the momentum created in 2012 and continue to make solid progress across many key areas that drive our business, including posting the fourth consecutive quarter of positive adjusted EBITDA. I'm pleased with continued improvement in our financial results as well as our overall operations. The team will share more details and highlights from the first quarter in just a moment.

More than ever I'm energized about where we are today and the opportunities that lie ahead. Over the past few years there's been continued progress made in broadening the product mix, expanding and optimizing our distribution footprint, lowering our operating costs, elevating our customer experience and building a talented team of employees. Today, our network broadcasts into over 85 million homes. We have an active base of 1.2 million customers. Our retention rates are at an all-time high. Our customers are purchasing more frequently, we are digitally connected to them and they are more engaged than ever across our multi channel retailing platforms of television, internet, mobile and social media. Our focus on delivering exceptional customer experience has never been higher.

The progress made in these areas has paved the way to make this the right time to take control of our brand. After many months of research and preparation with brand consultants, today we announced the plans of the transition of ShopNBC to ShopHQ, occurring over the course of the fiscal year. Through this rebranding effort we will further reinforce our commitment to our customers as a trusted company and a trusted brand. We will continue to offer new and differentiated product, we'll inform, entertain and educate them. And most importantly, we'll continue to earn their trust and their loyalty. It's a time of positive change at our Company and we're committed to continuing the progress.

With that, I'll turn the call over to Bill, who will highlight our Q1 financial performance, Bob will address our sales and merchandising initiatives, Carol will provide an update on progress made to our operations and discuss the launch of the ShopHQ brand in more detail. Bill?

Thanks, Keith. First-quarter sales increased 11% to $151 million, from $137 million in the first quarter of 2012. Sales growth was driven by strong performance in the Home and Consumer Electronics and the Fashion & Accessories categories. Gross profit grew 12% to $57 million, versus $51 million in the same quarter last year. Gross margin for Q1 increased slightly to 37.7% from 37.4% in Q1, despite the higher mix of the Home and Consumer Electronics which carry lower gross margins than our other categories. The improvement in gross margin was driven by less mark-down activity and fewer shipping promotions during the quarter.

Operating expenses in Q1 were $55 million, a 2% decrease from Q1 last year. As a percentage of sales, operating expenses represented 37% of sales compared to 41% in the same quarter last year. Variable expenses as a percentage of sales decreased by 70 basis points to 7.5% in Q1 2013 versus 8.2% in Q1 2012. The improvement reflects favorable transaction costs and lower bad debt expense. Cable and satellite distribution expense declined during the quarter, reflecting lower rates on renewed distribution agreements that became effective on January 1 of this year. The primary impact is from revised rates on our largest TV distribution agreement. On an annual basis, the rate savings from this distribution agreement is around $15 million. The operating expense benefit of lower distribution costs provides us greater flexibility to invest in the personnel and infrastructure to help grow the business going forward. Our current quarter operating expenses reflect increased salary and recruiting expenses related to new hires, as well as accruals for incentive compensation.

Adjusted EBITDA improved to approximately $6 million in Q1 2013, versus a loss of $1 million in the same quarter last year. The improvement reflects higher sales, improved gross margin and lower operating expenses. ValueVision generated net income for the quarter of $1 million, or $0.02 a share, compared to a net loss of approximately $9 million, or $0.18 a share for the same quarter last year. Per-share figures are based on 54.7 million diluted shares outstanding in Q1 2013 versus 48.6 million basic shares outstanding in Q1 2012.

We also strengthened our balance sheet during the first quarter. Cash, including restricted cash, increased to $36 million at the end of Q1 2013 from $29 million at the end of Q4 2012. The change in cash reflects our first-quarter adjusted EBITDA results as well as the seasonal timing of cash receipts from fourth-quarter receivables, partially offset by increased investments in inventory. Earlier this month, we completed the expansion of our PNC line of credit to $50 million from $40 million, and were also able to extend its term to May 2, 2018. The additional $10 million in undrawn availability under the PNC facility improves our liquidity and supports continued investment in the growth of our business. With that, I'll turn the call over to Bob.

Thanks, Bill. Our performance in Q1 was solid across the board. We achieved double-digit sales growth, broadened the product mix and improved merchandise margins. Top line growth was largely driven by our ongoing effort to broaden our product assortment and strategically reallocate our multi-channel resources into other categories that have shown to deliver higher new customer growth and repeat purchase frequency. Through the ongoing expansion of our product mix, we've been expanding key merchandising categories. As examples in Beauty, Health and Fitness we're expanding color cosmetics, tools and hair. In Fashion & Accessories, we're building out footwear and apparel. In Home and Consumer Electronics, we're diversifying into household electrics and rugs as well as tablets and cameras. We believe each of these categories offers unique appeal that enhances engagement with our growing customer base.

Some comments at the category level. We reduced our exposure of Jewelry & Watches in Q1, and this reduction enabled us to strategically invest resources into other categories. In Home and Consumer Electronics, we achieved strong sales growth in Q1, while continuing to broaden the category at lower average selling prices. Consumer Electronics was our primary contributor, with a diverse product mix that provided broad customer appeal. We had success across a range of diverse products in the Home category as well. Beauty, Health and Fitness was another significant contributor to Q1 results, in an area we have actively expanded to capitalize on its potential for higher repeat customer purchase frequency. Sales performance in our Fashion & Accessories category improved significantly in Q1 versus last year. As I've stated in prior calls, this is a challenging category to grow, and I'm pleased that our dedicated efforts to broaden our offerings in this area our paying off.

Before concluding I want to underscore how pleased we are with the balanced progress made in Q1 and how far we've come over the last few years. While we remain focused on delivering consistent quarterly results, our top priority continues to be building the business for sustainable, long-term growth. To achieve this goal, we'll continue to invest in newer categories that may initially be less productive from a revenue standpoint but we believe will help drive purchase activity across a broader customer base. Carol?

Thanks, Bob. As I am sure many of you are aware, we made a press announcement earlier today introducing ShopHQ as the new brand for our multi channel consumer retail business. Beginning today, we start with the transition to ShopHQ occurring over the course of this fiscal year. Our corporate identity will remain ValueVision Media. Market research and consumer testing supports our decision to rebrand the business followed by meticulous planning over the timing, nature and execution of this transition. Throughout the process we have carefully considered the potential implications for our customers, vendors and distribution partners, as well as our ability to operate our business while minimizing any disruptions. With that in mind, we are very excited by the new brand name and creative identity and we are confident that the transition will be a seamless and enjoyable experience for our customers, our partners and owner operations.

Our current licensing agreement with NBC Universal runs through January 2014, and carried with it an annual license fee of $4 million. We made the final cash payment of $2.8 million on May 15, 2013 and have no further financial obligations under this agreement. To this end we will have additional capital to deploy for new initiatives to promote the growth of our business. I speak for all of us at the Company when I say that our strategic relationship and trademark license with NBC Universal is an integral and valuable part of ValueVision's history. However, we feel that we have progressed our business and financial performance to the point where owning our own brand is simply the next logical step in our evolution. Market research and consumer testing confirmed that the ShopHQ brand provides an empowering foundation for our Company and its future. Working from this new platform we are eager and excited to continue building our business, our customer base and vendor relationships to create long-term brand equity that will support our business.

With that, I have a few highlights to share about our Q1 '13 operations and customer productivity. Customer engagement via internet, smart phone and tablet devices continue to gain traction in the first quarter. Internet net sales penetration increased 30 basis points to 46.2% in Q1 from 45.9% last year as our customers continue to respond positively to our online and mobile channels. Of note, our mobile sales penetration increased to 23% of internet net sales in Q1 '13 from 13% in Q1 '12. This demonstrates the strong customer usage of this important new retail channel. An increase in web and mobile orders along with continued strong performance of our automated phone ordering system were key factors in lowering transaction costs in Q1 '13 to $2.51 from $2.81 in the first quarter last year.

And finally, we our pleased with the continued growth in our customer file. We remain committed to the fundamentals of excellence in everyday execution of our business and to an unwavering focus on the customer experience. Now before going to Q&A, I'd like to remind you that we are presenting at Piper Jaffray's Consumer Conference on Thursday, June 13 in New York and we hope to see there. Operator, let's take some questions.

Ladies and gentlemen.

(Operator Instructions)

Mark Smith, Feltl and Company.

A couple quick ones. First, Bill, for modeling purposes, the $4 million in that NBC agreement we would expect that not to recur starting in 2014?

That's right, Mark, and thanks for the question. Yes, in -- we will anniversary that $4 million in rate reduction savings beginning January 1 of 2014.

Perfect. Can you guys give us an update on HD channels in the markets where you're at there? I know it's still a little bit early, but how that's progressing? And also, any insight on the returns and what you're seeing in markets where you've had additional channel placement?

Yes, Mark, this is Bill, I'll take that. The HD is still early for us. We're pleased with the placement and the revenue activity but, too early to really speak to it as creating a lift. And on the HD, particularly, our intention is to be patient with those results. We think it's good to have that presence and that familiarity, and we're -- we wouldn't -- we didn't anticipate a material change in our sales position, any normally -- or any earlier than we would in a second channel placement. So yes, we feel pretty good about that direction. And I'm sorry, Mark the second part your question, please?

Just additional channels, where you've added additional channels and how you feel about the return on that?

Yes. And we're anniversarying the largest tranche of additional channels that we had a year ago and what we've seen is that we had gotten a material rise on that or discernable rise on that in the 9 to 12 month window. And we've anniversaried those -- that largest tranche that we had initially. We did, however, add about 19 million homes on a second channel effective January 1 relative to that large distribution agreement that we had in place. We've seen a modest uptick in the sales per home in those systems, and again not surprising to us because it takes some period of time before you start garnering those additional exposures. But we have positive expectations for that, but as of the end of the first quarter, nothing material to speak to.

Okay. Then last question for me. Return rate did come up a little bit this quarter, was that due to mix of products sold or was there anything that we should be looking at on that number?

No, Mark, in fact, as you think about the dynamics of our return rate, mix would actually be a little bit of a favorable influence because our mix of Jewelry & Watches were lower than they were in the year-ago period. We -- and although that mix is lower, we did see somewhat of a rise in our return rates in watches which I'll say primarily price point driven although our air time and our volume in that category was a little bit lower, we were selling somewhat of a higher price point. So no concerns there other than a normal movement with price. And I'd say additionally, we did see a higher mix of the Fashion category as a percentage of our total business and that tends to carry somewhat of a higher return rate but, no nothing abnormal in the period.

All right, perfect, great. Thanks, guys.

Alex Fuhrman, Piper Jaffray.

I would love to talk a little more about this new rebranding into ShopHQ. Specifically, was very encouraged to hear your prepared remarks that this is going to be a gradual transition over the course of the year. If you could talk a little bit more about specifically how you're going to be making this a smooth transition in terms of showing the logos both at the same time and really what we should expect to see one week from now, three months from now, six months from now as we move through that transition and prepare for the complete switch over?

Alex, this is Carol, thanks for the question. Yes, this is going to be a transition through the remainder of our fiscal year beginning at 4 o'clock today actually, 4 o'clock Central Time in 10 minutes from now. Our customers will start to see this on our on-air presence and across all of our channels including the internet, social channels, they'll get e-mails. We have a lot of communications planned not only for our customers but for all of our business partners and our cable affiliates, so that we can inform everybody as to what we are doing. And really of most important, as you mentioned, is really how we do this for the customer. So while we roll these changes out, we start showing the logos, dual logos in as many places of possible. We've also set up a monitoring system activated just this afternoon with the press release and we capture all customer feedback across all channels. And then what we're going to do is we're going to use this data to modify our plans and make sure that we are communicating in really the clearest, simplest way and ensure that everybody does understand. So this is going to be a continuous process and we are definitely going to keep our ears and eyes focused on our external partners.

Great, that's really helpful. And if you could give us a sense of what really gives you the confidence to do this today that you weren't seeing a year ago? And is it a function of the response you've had building out a wider range of categories and this is really the next step of leveraging that? Or is it more that the newer customers that have been coming into the platform through the mobile and tablet devices and things like that have had less of an attachment to the brand? Would love to get more color on the overall thinking behind why now.

Thank you, Alex, it's Keith. It is the right time, we're seeing it as Bob had mentioned in broadening the product mix. Bill had talked a little bit about our distribution footprint, we continue to get in better spots, in better locations which will certainly help productivity in the future but also new traffic and new viewers. We've really right sized the business as it relates to the operating costs. Our customer experience is really elevated significantly, so as a result our retention rates are higher. Bill has talked historically about some of the projects that he's worked on to clean the balance sheet. So for a lot of different reasons, a multitude of reasons, this is the right time to do it. We have another eight months until the NBC license expires, so as Carol alluded we're going to be slow, methodical, careful and listen to the customer.

Great. Well this is all very exciting, thanks, and excited to see the new website in about nine minutes here.

We're excited too. Thank you, Alex.

Greg McKinley, Dougherty.

If we can dig into a few metrics on your business, guys. Bob, I wonder, can you share with us a little bit some growth rates that you noticed in your business on those key categories you talked about? And then set that up in terms of what you did with air time so we can get a sense, it sounded to me like you felt there was some productivity gains to be had by moving air time away from Jewelry & Watches into other categories. Any important trends or data points you'd highlight for us there?

Sure, thank you for the question. First, we had broad increases in productivity across every major merchandising category, and we're very pleased with that. In terms of sales growth, three of the four major categories increased in revenue and the one that didn't, which was Jewelry & Watches, didn't because we took a substantial amount of air time away from it. But that being said, it still increased in productivity. So we're very, very pleased with the results. So we took assets from Jewelry & Watches, inventory, internet assets, promotion assets and we sprinkled them into the other areas of the Company which have a higher propensity to generate new names, new customers. And it worked, and it worked well. So as I reflect back on the quarter, I look at every major business growing in productivity and three of the major businesses growing in revenue and we had a broad, stable growth and I'm very pleased.

Okay, thank you. And then from a modeling standpoint, what line item do we see your license fee expense showing up within distribution selling or where does that get recorded?

Actually, Greg, it flows through depreciation and amortization. The reason for that is it's a capital license fee that we amortize there, it's roughly $1 million per quarter.

Okay.

That would flow through that line.

Okay. And then Bill, you had talked about variable expenses as a percentage of revenues. I think you said in the prior-year quarter they were 8.2%, I didn't quite catch what you said they were for this quarter, 7 point something, I wonder if you could repeat that number? And then I want to make sure I understand exactly what expenses are included in that.

Sure, Greg, the variable expenses as a percentage of sales were 8.1% prior year ,declined to about 7.5% in the current year. And what our variable expenses consider is one, the elements of our transaction costs. And Carol had referenced that and for us the transaction cost is the cost to take a customer order, the labor cost, not the freight cost, but the labor cost of processing the customer order through our distribution centers. And then any backend handling of the customer transaction whether that's customer service calls or returns processing, things of that nature. And our decline there reflected a couple of elements. One, it reflected a decrease in our customer contact rate. So we had done a better job of our customer experience and so there's less of a burden in the back end calls and transactions. And two, the higher volume enabled us to have more efficiencies particularly within our distribution center. So we were able to -- want to leverage that. And then also there's a small portion of fixed costs that are considered and we amortize those within that. And then finally, the other driver, primary driver within the variable expenses is that we ran a little bit more -- we ran a little bit favorably to our bad debt expense within the quarter. And that's a function somewhat of product mix but also we have enhanced credit screening and collection processes.

Okay, is credit card fees also in there, then?

Yes it is, absolutely.

So those are the three main buckets, credit card transaction, costs, bad debt, okay. And then G&A structure, those G&A expenses are a little higher than I had modeled, I'm guessing some of it is headcount or infrastructure build, part of it's a strong start to the year and earning or qualifying so far for incentive compensation. Wondering if you could help us out understanding what caused the year-over-year increase and what you think about your expense there on a run-rate basis?

Sure, Greg, thanks for the question there. Yes, you hit the nail on the head. We had a number of new additions to our team that we added between the end of the first quarter last year and the current period that includes various areas of the business, customer-related and operationally. We also did -- any recruiting fees that we had related to that staff would be reflected there. And then the other element you made reference to is the accrual for Management incentives and we're -- we have an accrual for that in the current period as we look ahead to our position relative to our performance targets and we did not have any such accrual in the prior year.

Okay. And then lastly, I wonder if you guys could talk bigger picture about -- so Bob mentioned broader strength in the business. My guess is as a result if you feel you have more categories you can go to with a bigger customer base, hopefully that means less volatility in the business, more options for you guys as you see changing customer response to what you have on air? How do you think that sets up for overall predictability, or less volatility in your quarterly results in 2013? And then any color you might be willing to offer in terms of cadence of the business throughout the quarter and how things have gone so far in the July quarter?

Thank you, Greg, it's Keith, I'll start with it then I'll turn it over to Bob. The real answer is within the customer mix, and we're seeing our overall customer accounts grow. And within that, we're seeing the purchase frequency continue to increase and so we're seeing that on all different strata and groups across our customer files. That's broad -- a broad-based growth and that's driven by the product mix and some of the other things that Bob has talked about.

Greg, it's Bob. Yes clearly we were able to have all cylinders firing, and that to me is a result of broadening the product mix within each major category. And I don't want to get to granular but we could touch on a couple of them and see we've expanded into tablets, cameras, peripherals, battery chargers, home security, et cetera. Our Home business now is being driven by household electrics and most currently air conditioners. Tabletop has come and is a very productive business now. And we have other emerging categories there in Fashion, our footwear business has taken off for us. Our intimate apparel business is just starting, we've expanded our apparel business and I could continue and continue. But within each major category, we knew there was opportunity and now we're capitalizing on it.

Okay. And then, any color you're able or willing to share in terms of any fluctuations in the cadence of the business as the quarter progressed or how things have started for you here in May?

No, we're really not going to provide any information about Q2. And does it pertain to the cadence within the quarter, it's really -- you can take it steadily. And when you look at your models in this business you bring in a lot of your customers into Q4. Then you have a run rate until it clips up again Q4 as it pertains to customer accounts.

Yes, thank you.

Gunnar Hansen, Sidoti.

Just a couple quick questions. Regarding to air time, are you guys -- how do you guys view the mix shift now? Is this where it's going to stay going forward or are you guys still looking to reallocate some of the Jewelry & Watches into some of the other categories there?

We're going to -- thank you, Gunnar, it's Keith, we're going to continue to invest in new businesses. We're going to clip away some of the air time from the older businesses, the more mature businesses here at the Company. And in addition to the investment businesses that Bob talked about, we'll continue to invest into new businesses and nurture those. And I will offer one caution to everyone, these new businesses have over productivity because they are new. And it does take an investment in air time, but as Bob pointed out, the reason why you want to do that is to broaden the strength A, and B it brings in a lot more customers.

Got you, great. And then in terms of the CE contribution, talk about some of the particular customers there. Is some of the greater customer retention or anything you can attribute to including some of the Consumer Electronics back into the mix now? Any significant or material changes within the customer mix that you guys have noticed?

Yes, there is one material change that we've seen as we broaden that product mix that Bob referenced in a lot of those products categories, is we've lowered the average selling price in the different CE categories, we're seeing the purchase activity change at that customer file. So as we get into the lower price tablets or some of the accessories that Bob talked about, they're more apt to come back and purchase more frequently. That adds to overall lifetime valuation to the customers. And as we've said before, when you get a customer to purchase 3.6 times in a year, pretty much have them. And we'll continue to go up the strata as time goes on.

Great, thanks so much, guys.

Thank you, we have time for one more call, Operator.

Wilson Jaeggli, Southwell.

Keith, great quarter, really nice to see the operating leverage here. You obviously have put Bob and Carol in charge? (laughter) A couple questions here, the $2 million difference in distribution and selling between this quarter and last quarter, is that a reflection of the lower cable costs?

Yes it is Wilson, primarily the lower cable costs offset by some salary and other activity.

Okay. And the net, I know the gross saving is $15 million, I think the net savings is a little less?

Well referring to the net meaning that you'd have an influence of higher household footprint.

Yes.

Yes, on that particular agreement, yes that's the case, that we would have -- it would be -- the net savings is about the $15 million. We'd expect some expansion in the size of that particular agreement so we'd have a slight offset on volume.

Okay, Carol, you're going to save us $4 million next year, what is your budgeted cost this year for making the transition and the name?

Actually, we are not going to change the way that we communicate, market or advertise our brand. We still rely very heavily on our television programming, 24/7 we're there for our customers. So we don't feel the need to change anything in the way that we promote ourselves.

Oh, good, okay. The -- Bob, when you talk about the growth in productivity in your different segments there, you're talking about gross dollars per minute or per hour?

Yes, your dollars per minute.

Okay. And you mentioned some newer products, at least they're newer to me, can you give us a feel for percent of revenues in this quarter that are new products, ones that you didn't have a year ago, or a quarter ago, a rough estimate? Are they 5% of revs, 10% of revs or what's the traction here on these newer offerings you have?

Don't take this literally, but I think it's probably closer to 10%.

Around 10%? Okay, interesting. So the new categories are obviously very meaningful?

They are as are reorders.

Okay and I don't know if you mentioned it on the call, may have missed it, the average selling price this quarter?

The average selling price came down about $2 to I think $93.

$93 or so, okay. Let's see, okay I got that, those are my questions. Again, everybody, thank you very much, good quarter.

Thank you.

Thank you.

Thanks, Wilson.

And thank you everyone else for joining us on the call today. With that, we'll conclude the call.

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