iMedia Brands Inc (IMBI) 2013 Q2 法說會逐字稿

Good afternoon and welcome to the ValueVision Media's fiscal 2013 second-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, 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 the 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 quarterly 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.

Thanks, Teresa, and thank you all for joining us today. With the major elements of our business turnaround behind us, our team has been focusing their full attention on further improvements to what is now a solid operational base. Our second-quarter performance demonstrated continued progress on two principal fronts and confirmed that our growth strategies are working.

Our first area of focus is of course driving top and bottom line growth. We made further strides in growing revenue and with initiatives geared to building a broader customer base. We also delivered a solid year-over-year improvement in adjusted EBITDA, which represented our fifth consecutive quarter of positive adjusted EBITDA.

The second major area of focus has been to attract and retain customers in order to improve customer penetration within our national footprint.

Our strategies to achieve these goals are centered on three primary areas -- one, diversifying our merchandise mix by increasing the breadth and depth of product in emerging categories like Home & Consumer Electronics, Health and Beauty, and Fashion & Accessories. To support this strategy, we are reallocating resources from our more established jewelry and watch category to these emerging product categories. Bob will speak to this initiative and its performance later in the call.

Two, investing in a range of customer-centric programs to enhance the customer experience, increase customer satisfaction, and improve the likelihood they will shop with us again. Carol will speak about some of these efforts.

And three, enhancing our TV distribution footprint through improved channel placement and the addition of a second channel of exposure, which we've accomplished in over 70% of our homes.

Viewers and customers are responding to our initiatives. They are coming to us in greater numbers and voting with their wallets. Over the last 12 months, our total customer base rose 11% to 1.2 million. More specifically, our total customer base in Q2 increased 22%, and our new customer growth increased 26% versus last year. We believe current trends indicate that more than a quarter of the new customers will repurchase with us in the next 90 days.

Our continued progress has brought us to the point where we are able to take control of our consumer brand. As we announced last quarter and Carol will discuss, we are actively transitioning our consumer brand to ShopHQ, your shopping headquarters. The transition process is planned to accelerate in visibility over the remainder of the fiscal year.

In summary, we are past the turnaround phase of our Company and are now focused on delivering long-term sustained growth. With that, I'll turn the call over to Bill.

Thanks Keith. Second-quarter net sales rose 10% to $149 million and year-to-date net sales are $300 million, also up 10% versus last year. Gross profit in Q2 increased 8% to $56 million on higher sales volume. Gross margin decreased 70 basis points to 37.5%. The margin decrease reflects the planned shift in our merchandise mix towards Home & Consumer Electronics. This category is integral to our strategy of increasing customer counts, but can carry lower margin rates. We anticipate continued growth in Home & Consumer Electronics during the third and fourth quarters.

During Q2, average selling price declined to $83 versus $102 in the same period last year. This reflects strong growth in our Fashion and Accessories category which typically has a lower than average selling price, as well as a general shift towards lower price points in our other categories.

Second-quarter operating expenses increased 1% to $56 million and decreased as a percentage of sales to 37.6% compared to 40.8% last year. Variable costs in Q2 increased to 8.3% of sales from 7.1%, principally reflecting a 31% increase in net shipped units. We anticipate variable costs as a percentage of sales will be between 8% and 8.5% over the remainder of the fiscal year. Within variable costs, on a rate basis, transaction costs decreased to $2.49 per unit in the second quarter from $2.69 a unit a year ago.

Cable and satellite TV distribution expense declined relative to Q2 last year, reflecting lower rates and renewed distribution agreements that were effective January 1 of this year. The primary rate reduction was our largest TV distribution agreement. On an annual basis, the rate savings from this distribution agreement is around $15 million.

Improving the quality of our TV distribution platform is integral to our growth strategy. We will continue to seek lower channel positions in markets that have higher potential for improved long-term revenue performance. The impact of such changes could increase our TV distribution costs over the second half of the fiscal year in the range of $750,000 to $1 million per quarter. As mentioned on previous calls, we continue to invest in improving our organization to support the long-term sustained growth of our business.

Operating expense growth in Q2 reflects increased salary expense and recruiting costs, accruals for incentive compensation, as well as employee benefit enhancements. During the second quarter, we incurred incremental expense of approximately $500,000 relative to the rebranding initiative announced last quarter. We anticipate rebranding expenses of approximately $700,000 during the second half of the fiscal year.

Adjusted EBITDA improved to $3.8 million in Q2 2013 from $700,000 in Q2 last year, due to sales and gross profit growth. Year-to-date adjusted EBITDA is $9.6 million, a $9.8 million increase over last year.

ValueVision recorded a Q2 net loss of $800,000 or $0.02 a share versus the net loss of $3.8 million or $0.08 a share for the same quarter last year. Year-to-date net income is $200,000. Per-share figures are based on 49.4 million shares outstanding in Q2 2013 and 48.9 million shares outstanding in Q2 2012.

Our balance sheet condition remained strong in Q2. We ended the quarter with a cash balance, including restricted cash, of $34.5 million. Major cash expenditures in the quarter included the final payment under our trademark license agreement with NBC Universal of $2.8 million as well as $2.5 million in capital expenditures. ValueVision continues to maintain $12 million in undrawn availability under its $50 million credit facility with N&C. This availability further strengthens our balance sheet condition.

I'll now turn the call over to Bob.

Thank you, Bill. With a continued focus on delivering long-term sustained growth, our business performed very well in the second quarter. We continued to execute the strategy of reallocating our resources and expanding our merchandising categories to better support customer growth and repeat purchase activity.

At the category level, fashion and accessories delivered strong and balanced growth in Q2. Handbags, shoes and apparel all achieved solid performance. Home & Consumer Electronics also made a significant contribution to our topline in Q2. Strong sales in household and kitchen electrics, as well as a solid performance in tablets and peripherals, drove the improvement. We also continued to broaden our product assortment in this category, which included the introduction of smartphones through a new relationship with T-Mobile.

Jewelry and watches performed well in Q2. As part of our strategy to reallocate resources to our emerging categories, sales performance in jewelry and watches declined modestly, as expected.

Finally, over the course of the fiscal year, we plan to expand and invest in our merchandise and broadcast teams. Strengthening our organization and enhancing our broadcast delivery will allow us to further surprise and delight the customer with an ever-broadening product assortment. Carol?

Thanks Bob. I'm pleased to say that the introduction last quarter of our new consumer brand, ShopHQ, has been very well received. A recent survey of our customers indicates that over 71% are aware of the brand transition, and over 85% are comfortable with the change.

Our operational transition to ShopHQ is going better than expected. As a result, in September, we plan to increase the visibility of the new ShopHQ brand across all of our channels while diminishing the presence of the ShopNBC brand over the remaining fiscal year. The net result for our Company and shareholders is that we are actively in control of our brand and are now creating brand equity.

Customer metrics in Q2, relative to acquisition and retention, continued to improve. During the second quarter, we continued the positive trend in purchase frequency at every grouping of our customer base. Customer engagement in Q2 across our online channels of Internet, smartphone and tablet devices remains strong. Mobile is becoming a preferred channel for our customers as evidenced by mobile net sales growth of 56% in Q2 2013, increasing to 23% of Internet sales compared to 16% in Q2 2012.

In response to our customer preferences, we have remained focused on our mobile, more specifically tablet strategy. During Q3, we expect to launch an all new ShopHQ iPad app which will provide the live stream of our broadcast, compelling content and access to enhanced transactional experiences. Following the launch, we plan to add second screen functionality to enhance the TV viewers' experience by providing real-time integrated content which is relevant and synchronized to each of our TV shows. The wide variety of content relative to the TV show enhances but does not duplicate what is viewed during the show. Our complementary second screen will further engage our customers and enhance their experience with ShopHQ.

Second-quarter customer experience improvements included the launch of a new single page checkout capability on our website, resulting in increased conversion rates. We also improved our order processing capabilities, ultimately reducing the time between placing an order and receipt by the customer. Our customers are proving to be very receptive to these service level changes.

In conclusion, it's an exciting time in our Company's history, particularly as we are now able to clearly see the benefits of the initiatives we have been implementing over the past several quarters. Our rebranding is proceeding smoothly, our focus on the customer remains high, our drive to continually improve our mobile strategy remain strong, and we remain committed to delivering an immersive media-rich customer experience while developing an enhanced comprehensive CRM strategy to drive our business for long-term sustained growth.

With that, operator, please open the line for questions.

(Operator Instructions). Neely Tamminga, Piper Jaffray.

Great. Good afternoon. I just wanted to say congratulations you guys on the progress you are making. It's really very compelling. I just wanted to maybe, Carol or Keith, could you talk about your mobile strategy and your customer engagement? That's clearly a phenomenal turning point for you guys in this transition. Just wondering what your experience has been in this area, any specific metrics you can point to and what are you doing further to support what's clearly an avenue of growth? And then I'll have a follow-up. Thanks.

Well, as you heard on the call, our mobile sales this quarter increased 56% from last year. It increased to 23% of our Internet sales compared to 16% last year. So, what we are offering the customer in terms of mobile is resonating. I would say that there is especially a lot of resonance with our tablet features and functionality that we have offered to our customers. And we expect this to continue as in September/October timeframe we will be releasing our all new ShopHQ tablet app for the iPad. And shortly after that, we are going to be launching a second screen functionality, which is a companion to somebody watching the broadcast, and we'll give them all kinds of related content to the show that they're watching. And it will change every hour as we put on a new show. We expect that that will greatly enhance the experience for somebody watching the show, or for somebody just wanting to find out more about the brand and the products all in one place. We'll have a lot of content in terms of video, brand positioning feeds that will allow the customer to ask questions of a show host, will be able to ask their friends and other ShopHQ customers what they think about the product. And again, we are expecting this to really resonate with our customers. We are really excited about this. So we will be seeing that probably during Q3 this year.

Great, that's helpful. Thanks Carol. Then Keith, could you talk a little bit about your customer accounts. Those are some staggering statistics that you just put out there about the Q2 trends. Just wondering kind of what are you doing to kind of influence these customer accounts and how you're retaining them? And it sounds like the repurchase rate is pretty high. Is that where some of the enthusiasm on the top line is coming from here? Thanks.

Thanks Neely. I'll start off and then I'll turn it over to Carol. There's two primary things that have increased the customer accounts, the first of which Bob commented on, and that's the improvement of the product mix as we continue to increase the penetration of home and CE, Fashion & Accessories, health and beauty, really non-jewelry non-watch product categories. Our new customer accounts are skyrocketing as you can see within the quarter. These accounts as I mentioned are going to speak well for Q3 sales and Q4 sales.

The other element which I'll turn over to Carol to speak about is the improved customer service. The improved customer service, amongst other initiatives, are increasing -- improving our retention rates. So as we continue to hang onto more customers, as we continue to add more customers, it's the secret sauce to growing the overall file and therefore the overall business.

And to the customer experience initiatives that Keith was referring to, I'll just throw out a few of them, but you will immediately see why this is important to the customer and why these improvements keep the customers with us and have brought our retention rate up to 52% and growing. So, a few examples are we recently completed the one page checkout across all of our automated ordering channels. And the last one that we did was on the HTML Internet site, reducing from several pages to a one-page experience. This in the last quarter alone reduced cart abandonment rate by 560 basis points. So --

That increased conversion rate.

Yes, it increases conversion that the people are not bailing out in the middle of making a purchase. Really important.

We've reduced the amount of time it takes between a customer placing an order and when they receive their products. Very important. What that also does is it reduces the number of calls that we get into customer service asking for information on their order status or their shipping status. So, in regard to that, we have been able to reduce our call resolution time, or the amount of calls to resolve a problem from 1.5 calls down to -- per customer to 1.2 calls per customer, which is huge.

And then lastly, we have decreased our transaction costs as a result of a lot of these experience initiatives from $2.69 last year to $2.49 per unit. And net-net, our customer purchase frequency over the last rolling 12 months for our 1.2 million customers, actually the frequency has increased by 3.5% and over 1.2 million customers. That's pretty significant.

Happy customers, happy company. All right. Congratulations you guys, and looking forward to seeing the second half. Good luck.

Greg McKinley, Dougherty.

Yes, thank you. Bob, could you talk a little bit about productivity trends as you guys have tested different merchandise mix? Was there anything that stood out in particular with either new or some of the old categories in terms of how much gross profit dollars you are able to generate per minute?

It's Bob. I could tell you, in terms of our productivity, I was very pleased with productivity growth across almost all of the categories that we had. Clearly, home and computer electronics in terms of revenue growth was excellent. Beauty, health, fitness, fashion showed very, very strong double-digit productivity growth, as did jewelry and watches show strong productivity growth. The dollars per minute is a reflection of the margins and our margins haven't changed that much in the last few quarters. So generally I was very, very pleased.

I am more concerned, as you know, about investing air time and our assets into categories that can drive new customer growth. And I think, with a new customer growth of 26%, we were very, very pleased. We are able to generate high new customer growth and double-digit revenue growth. So, I think that's where we wanted to be.

Thank you. And then, Bill, you called out some rebranding expenses. I'm wondering if you could just repeat what those were, and then help us understand maybe where they show up in your P&L, and what the anticipated expense will be going forward, just so we can understand maybe what the pro forma operating expense structure is for the Company after we get through the rebranding.

Sure, Greg. Within the quarter, the second quarter, we had about $500,000 in rebranding expenses. And broadly, in terms of the categories that that represents, it's some outside agency fees, but it's largely IT and other investments that we are making in terms of facilitating the transition to the new logo. In the second half of the year, we'll have about $700,000 in similar expenses, and that's going to be roughly ratable in the third and fourth quarter.

And where are those showing up? Is that part of G&A?

Yes, in fact, it is a component of the G&A expense, yes.

Okay. And so is it accurate to say that once we get through this fourth fiscal quarter, are those recurring costs, or are those sort of one-and-done expenses?

No, that component of cost would be done at the end of this fourth quarter. So once we are fully transitioned to the new brands within the fourth quarter, those related costs would not be part of our ongoing cost structure.

Okay. Did we incur much of those in Q1?

A very small amount, about $100,000.

Okay. And then you had also -- I just want to understand it. It sounds like you are having a lot of success driving customer growth and companies -- as it's seeing that growth opportunity, the Company's probably stepping up some investment back into the business. Maybe you feel like you were underinvested would be I guess my perception over the last year or so as you turned around the top line.

How are you looking at your, I guess your G&A cost structure in terms of what kind of headcount or talent you need to bring into the business to continue supporting that growth. Do you feel like you have most of the key people in place right now?

And then I guess the second part is, Bill, it sounds like variable costs within distribution and selling might be a little bit higher than was the case last year, and I just want to better understand that.

That's a really good call-out. We've really been under-invested in the infrastructure and the people for over a decade. And we are fortunately in a position this year and certainly more next year to start reinvesting into the infrastructure. Carol cited a few of the examples, and I too am very excited about the second screen because that will create further engagement and certainly further sales that are incremental to what our plan happens to be.

As far as the headcount, we are relatively skinny. We're talking about 400 fixed employees, roughly 600 temporary employees. We will be growing that slightly greater than inflation. We will be focused on revenue generating areas first. We'll be looking at .com certainly merchandising part of our planning organization marketing as we start to build out some of the magazine-like content that we're going to be posting on our web and our home channel. So we've got a lot of work ahead of us to do, but it's a very exciting future.

On the variable expenses, it reflects a similar theme of investing in the business. Bob had described the direction that you saw in Q2 relative to prior year in terms of shifting the airtime assets of the business into Fashion & Accessories and to Home & Consumer Electronics categories.

And also broadly across the business segments, we had, by virtue of our merchandise selection, lower price points in aggregate. We were at a $83 average selling price within this quarter, a year ago at $103. So translating that with the topline growth, we shipped 31% more units than we did in the year-ago quarter. And as a result of that, the transaction costs -- our transaction costs themselves per unit were more efficient, but variable expenses on an overall basis increased. We were at 7.1% a year ago, I think about 8.3% in the current quarter.

And in terms of thinking about the expense structure going forward, that product mix direction we're going to continue to maintain. And that average selling price I think is going to remain in that $80 level. So, as a result, our expectations are that variable costs in aggregate are probably going to be in that range. I'd say 8% to 8.5% of sales as you look out for the remainder of the year.

And to put variable expenses into context, as Bill had mentioned, the units went up 31% but our operating expenses only went up 1%. So it's certainly leverageable.

Yes. Okay, thank you guys.

Thank you very much Greg. I'd like to thank you all for joining us today. And with that, we will conclude the call today.

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