iMedia Brands Inc (IMBI) 2013 Q4 法說會逐字稿

[Welcome to] ValueVision Media's FY13 fourth-quarter conference call.

(Operator Instructions)

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 am 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, should, plan, 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. Comments on today's call may refer to adjusted EBITDA and adjusted net income or loss, which are both non-GAAP financial measures. For reconciliations of each of these measures to our GAAP results, and for a description of why we use them, please refer to our fourth-quarter 2013 news release, available on the Investor Relations section of our website.

Comparisons in today's call relate to pro forma comparisons. ValueVision follows a 4-5-4 retail calendar, and as a result, we had an extra week in our FY12 fourth quarter. We adjusted our 2012 fourth-quarter and full-year 2012 financial information to create pro forma 13- and 52-week periods because we believe that these pro formas are a more appropriate basis for comparison to current-year results. Our subsequent commentary will reference the 2012 pro forma results.

In the press release we issued today, there is a table showing ValueVision's summary results and key operating metrics for the fourth quarter and full year 2012 and 2013, on both pro forma and reported basis. As you may have seen in our recent press release, the special meeting of shareholders, previously scheduled for March 14, has been canceled in response to the activist shareholder abandoning its proposals and stating that it would not participate in the special meeting.

However, the activist shareholder has indicated that it intends to pursue proposals and nominate Directors at our regularly scheduled Annual Meeting. With that said, we are here, today, to talk about the business and ValueVision's fourth-quarter and full-year results. We do not intend to take any questions regarding the proposal by the activist shareholder. We thank you for your cooperation in that regard. All information on this conference call is as of today, and the Company undertakes no obligation to update these statements. I will now turn the call over to Keith.

Thanks, Teresa, and thank you, all, for joining us on the call today.

The team delivered strong operating results in Q4, a continuation of progress we made in the first three quarters of FY13. Bill will take you through the detail on our financial performance in the quarter and the full year. I do want to call out some of the pro forma financial highlights in the fourth quarter compared to the prior-year period.

Net sales were $193 million, an increase of 17%. Gross profit increased 14%. Net shipped units increased by 44% to a record $2.4 million. Adjusted EBITDA improved by 25% to $5 million, from $4 million in Q4 of last year. And, I'd like to point out that, on a full year basis, adjusted EBITDA increased to $18 million, compared to $4 million in 2012. We feel good about the momentum we've built up, and it's coming through in our financial performance.

From an operational perspective, we grew our total customer base by 30% in the fourth quarter over prior year. This helped us increase our 12-month rolling customer counts to a record 1.4 million, up 20% over last year. Our ability to successfully increase new customer counts by double-digits in each of the last three quarters has enabled us to exceed the largest customer base in our Company's history.

I am also pleased with the balanced customer growth within our customer base, each product category's customer base grew steadily, as we continue to implement our strategy in diversifying and broadening the product mix. Our focus on diversified growth has created a stronger, more resilient customer base, providing a better foundation to deliver financial results. In Q4, we continued our consecutive quarterly improvement of lowering the average price point, which was $74, a reduction of 20% versus the same period last year.

Our team focused and delivered on offering a broad base of gifts at appealing price points. This resulted in more new, existing, and reactivated customers purchasing gifts on all of our channels. We experienced the same progress on a yearly basis. The average price point was lowered to $81, a reduction of 16% compared to last year. This is accomplished across all categories, which is broadening our appeal to greater audiences in our 87 million homes and digital storefront.

We also continued to make improvements across all areas of operations to provide better customer service, more accessible programming, and faster order delivery, all with a relentless focus on customer experience. In addition to record customer growth in Q4, our customers bought more product than ever before in the fourth quarter and in the full year. 2013 was a transformational year for our Company. We took control of our brand and are now fully operational as ShopHQ.

We further strengthened our merchandise team to support long-term growth. Our product categories are more diversified with a much broader assortment at lower average prices. Our TV distribution footprint is gaining in size, quality, and productivity, appealing to wider audiences. Our customer experience continues to improve as we invest across all of the Business. Our online platforms continue to improve and adapt to embrace mobile shopping, and we achieved record customer growth and ended the year with 1.4 million total customers, a 20% increase over last year.

Overall, these initiatives led to solid improvements in our top and bottom line performance as well as adjusted EBITDA. Looking ahead, our team culture remains focused on improving the customer experience. We have a stronger base to scale our operating infrastructure for long term sustained growth and profitability, as we build and inspire communities through shopping. With that, I will now turn the call over to Bill for a financial review.

Thanks, Keith.

Fourth-quarter sales of $193 million were up 17% over prior year, while full-year sales of $640 million were up 12% versus last year. Sales growth was driven by the categories of home and consumer electronics; fashion and accessories; and beauty, health, and fitness. Gross profit increased 14% in the fourth quarter, and as a percent of sales, was 32.1%, compared to 33.2% in Q4 2012. The gross margin rate decrease was primarily due to an increased sales mix in home and consumer electronics, a category that typically carries lower margins.

Fourth-quarter operating expenses of $63 million, compared to last year's 13-week pro forma operating expenses of $65 million. Prior-year operating expenses included an $11 million non-cash impairment charge related to the Company's FCC license. The increase in operating expense was influenced by variable costs in Q4. Variable expenses increased, as a percentage of sales, to 8% in the quarter, versus 7% in Q4 last year, reflecting the impact of a 44% increase in net shipped units.

Cable and TV distribution expense declined in Q4, versus last year's same quarter. Q4 operating expense growth, versus prior year, also reflects increased salary and recruiting expenses, employee benefit enhancements, as well as accruals for incentive compensation.

Finally, during the fourth quarter, the Company incurred $1.8 million in advisory fees and other costs related to the ongoing activist shareholder matter. We expect to incur additional costs associated with this issue in subsequent quarters. ValueVision is working to manage these expenses prudently, while ensuring that all shareholder interests are represented.

Adjusted EBITDA in Q4 improved to $5 million, from $4 million in Q4 last year, due to the sales and gross profit growth. On a full-year basis, adjusted EBITDA increased to $18 million, compared to $4 million in 2012. Our balance sheet remains strong. Cash, including restricted cash, totaled $31 million, in line with the third-quarter balance. For the full year of FY13, we generated $3 million in positive cash flow.

During the fourth quarter, we also expanded the size of our total credit facility with PNC Bank, from $50 million to $75 million. The additional liquidity better positions us to support future growth, as we evaluate options to increase our warehouse distribution capacity in 2014. I will now turn the call over to Bob.

Thank you, Bill. Q4 was a strong quarter for ShopHQ, with revenues up double-digits. And, I am pleased with how well our team continued to execute on the business, a much improved product assortment, and having the right holiday gifts for record new customers in the quarter.

Our customers sought style and warmth this season, in boots and faux fur, from vendors such as Matisse, MIA, and EMU making these categories holiday best sellers. Android tablets, as well as iPad Mini bundles, were hit gifts. ShopHQ customers also demonstrated keen interest in a range of skincare products, color cosmetics, and bath and body fragrances. Our assortment of attractive table-top items, including crystal, was also quite popular. Overall, we offered holiday shoppers a wide array of must-have gift-giving options, with many never before seen on our multi-channel platform.

Customers responded well to our merchandising initiatives, as we drove increased sales, gross profit dollars, and customer counts. We also had improvements in gross margin rates in almost every major category. In Q4, we achieved strong sales growth in the categories of home and consumer electronics; beauty, health and fitness; and fashion and accessories. Although sales in jewelry and watches declined, productivity was up approximately 20%, as we're repositioning the category.

In home and consumer electronics, we capitalized on seasonal trends in tablets, electronic accessories, and mobile phones. We also invested in our home decor, cook, and soft textile categories. Of note, we focused on capitalizing on changing market trends for fashion in the bedroom. Our growing proprietary brands of North Shore Linens and Cozelle sheets offered our customers more options to update the look of their bedroom, that not only feels good, but also makes a fashion statement.

Fashion and accessories in Q4 continued its strong momentum from Q3, as we continued to invest in our proprietary apparel brands. Kate & Mallory, which is our largest growing apparel brand, targets those who want to stay relevant and on trend with fashion. Our OSO Casuals denim-friendly brand, which is a strong performer, is geared toward classic styling, and of course, casual fashion choices. Moreover, our footwear segment continued strong growth in Q4 and benefited from the introduction of new brands that were launched in Q3, including Sanita footwear and Durango boots.

Within beauty, health, and fitness we continued to build out the category in Q4. We broadened our product assortment, in part with introductions from Silk Oil of Morocco and DevaCurl hair products. We also successfully launched new and upcoming brands from Juice Beauty and Rodial Skincare. Overall, the beauty segment achieved strong quarterly growth. Sales increases in skincare and color cosmetics offset softness in the health segment.

As Keith mentioned earlier, our customers bought more product than ever before in Q4, and throughout the year. During the holiday season, we were focused on delivering great gifts for the customer, and our team introduced approximately 7,000 new styles and added over 60 new suppliers. Looking back, our efforts throughout 2013 to prepare for the all-important holiday season paid off. On the TV distribution front, we continued to make progress in improving our channel position.

ShopHQ's updated studios and sets allowed us to appropriately showcase our broader and more diverse product assortment, especially with respect to our fashion, home, kitchen, and consumer electronic segments. Key initiatives to improve the customer experience during the year also played a role in our Q4 performance. Overall, these customer experience improvements were born and executed by actively listening to the customer. As a result, our customer satisfaction levels have markedly improved, which is designed to build loyalty and purchase frequency.

With that, I will turn the call over to Carol.

Thanks, Bob.

Our fourth quarter included a number of key initiatives that improved our operating metrics and enhanced our digital storefront. Fourth-quarter and rolling 12-month metrics surrounding new customer accounts, customer purchase frequency, and the total customer base improved to record levels. We are making the customer experience simpler and more convenient across all of our retailing platforms. We are also bringing our content to life, with rich media, credibility, and authority.

Operationally, despite a 44% increase in shipped units and our expanded use of offsite storage for inventory, we successfully managed to increased demand on our distribution operations. Our transaction costs were up slightly to $2.46 per unit in Q4, versus the year-ago quarter. During the quarter, we continued to make progress in faster order receipt to delivery, getting packages to our customers in a shorter time frame, and making the returns process easier.

In 2014, we plan to expand our distribution fulfillment capabilities, likely with an expansion of our Bowling Green, Kentucky facility. This is to meet the needs of our growing customer base and higher shipped unit volume. Benefits expected from this expansion include: reduced expense from elimination of offsite storage, more streamlined shipping operations, and an improved customer experience. We expect construction to begin during the back half of Q1. The initial building expansion should be in place for the Q4 holiday season, with the remainder of the infrastructure completed in Q1 2015.

Turning to our digital initiatives, the customer continued to engage across our online channels, with a substantial shift to mobile shopping. Mobile net sales, using Smartphone and tablet devices, was up 77% in Q4, and increased to 29% of internet sales, versus 20% during last year's same quarter. Internet sales, as a percentage of total sales, increased slightly to 47% in Q4 2013, versus last year's quarter.

During Q4, we introduced several mobile enhancements for iOS and Android devices. Enhancements were made to the live viewing functionality of our ShopHQ programming that offers synchronized content to our live broadcasts. Our tablet and smartphone apps offer a dynamic and complimentary experience to both the website and our broadcasts. We are pleased with the steady progress in downloads, viewership, and orders.

Finally, we successfully completed a smooth transition to the new ShopHQ brand by the end of FY13. Overall, we are very pleased with the results of our fourth-quarter operating and digital performance, especially with customer growth and engagement being at record levels. Looking ahead at FY14, we are focused on a number of key initiatives to drive the business and continue building on the platforms we have created.

First, we are focused on implementing systems initiatives designed to drive increased purchase frequency and customer engagement. To meet growing customer demand, we are seeking to expand and upgrade our fulfillment capabilities, infrastructure, and call center technologies. Our mobile focus will remain on simplicity, ease of use, relevant content, and a more personalized shop-anytime-anywhere experience.

In conclusion, we have made much progress in laying the digital building blocks and creating a sound operational foundation for leveraging our multi-channel retailing platform. We remain confident in our ability to deliver on the fundamentals, and we remain focused on delivering long-term sustainable growth.

Operator, please open the line for questions.

(Operator Instructions)

Your first question comes from the line of Neely Tamminga, Piper Jaffray.

Great, thank you. Just want to offer some congratulations, a fantastic execution on this quarter, particularly how difficult it is out in the retail environment, so congratulations all around.

Thank you, Neely.

Yes, you bet. So, a couple questions, if I may.

I would love to know, Keith, considering how tough the environment is out there, are there any comments you can make about how things have trended so far this quarter, and how we should be thinking about it? I think February has brought some mixed reads, broadly.

And then, if Bob could talk a little bit about the timeline of the jewelry conversion? It sounds like you guys are reworking that category. When should we start seeing some, I guess regain momentum, relative to what you guys are aligning it to be? That would be helpful.

And then, just lastly for Carol, if you wouldn't mind talking a little bit about mobile -- it sounds like it grew a lot. Did we hear what the penetration of mobile is yet, and what you think that can grow up to, based on what you're seeing from consumer demand as you make these enhancements? Thanks, guys.

Thanks, Neely. I'll take that first question.

As we look at Q1, despite the retail climate in the retail marketplace, we do see headwinds with a pronounced lowering of the average selling price. Q1 of 2013 was roughly flat to the prior year, while if we go back to Q2, Q3, and Q4, we have made significant progress in reducing our average selling prices. They ranged 17% to 20% in reductions.

We do expect previous the run rate from the three quarters to continue going into the first quarter. So, more specifically, our Q1 average selling price was $93, whereby Q2 and Q3 were closer to $80. As disclosed a few minutes ago, our average selling price is somewhere around -- we're looking to continue that run rate of somewhere around $80. So, the headwinds of the reduction in the average selling price is really what we're looking at in Q1.

Other than that, I'm very pleased with the broadening of the merchandise mix, complete expansion throughout each and every product category. That expansion, along with the other initiatives of the team, are doing two significant things: it's growing our customer file in a very meaningful way, that not only pays dividends today, but most certainly in the future. And secondly, because of the broader mix and some of the other initiatives, the purchase frequency from our customers continued to increase.

So, as we grow our customer file, we engage the customer even more and they buy more from us, it will certainly pay dividends in the future. Thanks for the question, Neely. I'll turn it over to Bob.

Hello, Neely. Thank you for the question.

I was very pleased with the jewelry performance in Q4. The productivity of jewelry, or jewelry and watches, was up close to 20%, so we continue to reposition the brand. I expect that to stabilize, this quarter or early next quarter, and I expect to see the productivity continue to increase.

Okay, Neely, it's Carol. Thank you for the question.

To give you a little color on our digital strategies, basically, we now have iOS and Android apps on tablets and smartphones, in addition to our HTML site, which renders really well on laptops and tablets. We launched, on the tablet apps, that live functionality that synchronizes and changes content on an hourly basis, so we're consistent with the live broadcast.

Checkout processes have been simplified. The desired live experience is available on all of the devices on all channels. So, our Internet penetration is now at 47% for the full year, with a considerable shift to tablet devices, as what we find is our customers are able to and enjoy taking us along for their shop anytime, anywhere experience.

In summary, the mobile sales accounted for 29% of our online sales in Q4, an increase of 77%, bringing us to full year 25%, versus 16.9% last year. And, our Internet sales were at 47% for Q4, up 70 basis points, 46.4% for the full year, again up 70 basis points.

Good job. Well done.

Thanks, you guys. Good luck out there.

Thank you, Neely.

Your next question comes from the line of Alex Fuhrman, Craig-Hallum Capital Group.

Thanks, guys, congratulations on another good quarter. Really just a couple questions here. Firstly, for Carol, this distribution center that you guys are going to be building, I'm curious to how many units you think you'll be able to fulfill from that facility?

And then, imagining with kind of a resurgence of tablets and things like that in the merchandise mix, is there going to be a need for as much units shipped from your DCs? Or is some of that consumer electronics that have been growing drop ships from the manufacturers?

And then, more broadly, just thinking about some of the homes that you've added distribution to or added a second channel to over the past six months. Are you starting to see the early stages of what you would have expected to see with those channel position upgrades, or is that something that more you would expect to see over the next couple years?

I'll pick up the first part for Carol, as it relates to our distribution center. The expansion that she referenced earlier has some different levers to look at.

We have a reduction of average selling price, and then a shift into product categories that are generally larger queue, so really processing within the warehouse is a little bit different. It's a sizeable expansion for us. We believe it's going to continue to scale for quite some time.

The benefits that we see from, as Carol mentioned, that we see from the expansion, most certainly have everything to do with improved shipping quality and shipping times. But other capital expenses, in the form of IT systems to automate our shipping and collating a lot of packaging, is going to improve our efficiency throughout.

So, it's going to do a lot for our operation. We're, quite frankly, Alex, a lot of it's manual today in the leased operations that we have outside of Bowling Green. So, it's a needed investment into the business, and our customer will be rewarded with faster shipping and better quality.

Alex, this is Bill. I'll address the question you had raised relative to the changes and channel position. Over the course of the year, we do look for opportunities, if there is an opportunity that we view as a cost-effective movement of our channel position to either add a second channel or to lower it.

At the end of the third quarter, we had mentioned that, in November, about 5 million homes, where we were carried on a very high channel, we had the opportunity to maintain that channel. And then to add a second channel position in standard def, below Channel 50. And then, we added HD coverage in about 3.5 million of those 5 million homes.

And, in that particular move, we liked the marketplace in which those homes were in, and we did see a very quick response, in terms of performance within those markets. We evaluate these channel changes really on the basis of expected contribution margin turning positive. You have an incremental investment, in terms of the distribution costs. And then what you're looking at, relative to that incremental investment, is the improved contribution margin you get out of higher sales productivity.

And generally as a run rate, it can take us as long as nine months before we see those households turn positive. But, in this particular move that we had in the fourth quarter, we were very encouraged. We saw a quick response in those homes, and so it was a little bit out of the norm for us, in terms of that typical duration of about nine months.

And, I'll add, just as importantly, to improve contribution margin in revenues, the access to customers that frequent us in a different spot within the channel position to drive new customers is very important. So, it is about channel positioning for customer acquisition, on top of the product diversity that Bob referenced before.

That's actually -- that's really interesting. When you say you're getting a better lift than you would have normally gotten, this 5 million homes with the increased channel position being a higher ROI, do you attribute that more to the type of upgrades you've had? Is it more because of the HD versus the non-HD? Is it more something special about those channels under 50?

Or, is there something different about the type of channel upgrades you have within those 5 million homes that maybe represents a better, sort of what's more important to you, as you think about those channel attributes? Or, is that maybe something that you wouldn't expect to see with future channel upgrades?

I could start with -- HD has nothing to do with it. Quite candidly, with HD homes that we've seen, we're not seeing an increase that's meaningful in productivity. However, all metropolitan service areas, they call them MSAs in the industry, are not created equal. So, we have some highly populated areas that generally are gravitating towards our medium.

In this specific case that Bill had mentioned, they're very good areas. But again, not all MSAs, certainly as it relates to systems, are created equal. And certainly, cable, satellite, and over-the-top providers are also different. So, that's why we're very cautious with our forecast, as it relates to improved productivity, because they all are very different.

Great, that's helpful. Thanks a lot, guys, and excited to see what 2014 brings.

Thank you.

Your next question comes from the line of Mark Smith with Feltl and Company.

Hi, good afternoon, guys. I've got a handful of questions for you. First, Bill, was the activist shareholder response cost, was that all or largely in G&A?

Yes, Mark. It's accounted for exclusively within G&A.

Okay, and then, can you give us any insight into G&A as we look forward to this next year, excluding some of these one-time items?

Mark, I think as you look at the G&A roll into next year, it would be -- if you can exclude the one-time item that -- particularly the shareholder activist cost, I think you'll look at a run rate increase somewhere in the range of about 4%. So, you had a step-function increase in G&A cost that incurred in the current year, largely related to investments that we had made on the people side. As I mentioned, additional salary and recruiting expenses, enhancements of our benefits program, as well as incentive-compensation accruals. So, that was a step-function increase that you saw in those level of costs that, basically, would be in line to a moderate increase as you roll forward into next year.

And then, I think Carol talked about transaction costs being up a little bit here. Any insight you can give us as what you're seeing today and kind of your outlook for the year?

Mark, it was up a little bit over last year, and that's basically a variance from where we had been in prior years, where we had been running favorably. And, Carol had described the fact that we had a lot of activity that was taking place outside of the four walls of our main distribution center in Bowling Green, Kentucky. So we were leasing some proximate space in order to handle the higher volume. We were basically beyond capacity in our facility.

And, when you expand outside of those four walls, your operating efficiency is not as strong as it is when you're operating within the main facility of the operations. And, that was really the primary driver, in terms of the operating efficiency.

Mark, it was 2%, so it was really a very small amount.

Okay, and then, maybe for Keith, looking at the ASP, now in the low mid-$70s, let's call it, is this the new normal, or are we going to see some fluctuations?

You do see fluctuations, Mark, going into Q4 with our gift-giving season. We expect that we're going to have a reduction in ASP, a meaningful one, we'll call it in the mid-teens area, in Q1. And, it should moderate, certainly within Q2 and Q3, because we did the heavy lifting in Q2 and Q3 of last year. And, as we look at Q4, it should level off into the low $70s.

So, as I characterize the headwinds, Q1 was the quarter where we didn't make as much progress as we had in the rest of the year. And we're going to continue to strive to make progress in broadening our mix and moderating our ASPs.

Okay. And then, looking at the gross profit margin, I think you guys talked about mix, heard a little bit as you had some more home and CE primarily. Was there anything else going on in gross profit margin, as we saw that -- that's the lowest we've seen in a little while?

No, Mark, it's almost completely driven by the changing mix. Our other cost of goods influences, year on year, were comparable.

And then, I think my last question, just looking at shipping -- I guess shipping and kind of other revenue, it looks like. How much of a lever did you use to drive transactions during the quarter, as it looks like it's down a bit, kind of on a units-shipped basis?

We had a little bit more activity in terms of shipping promotions, free shipping, in Q4 than we had in our prior three quarters of 2013, in terms of a mix of the total units. It was a more promotional period for us.

But, I'll say it was in line with where we were a year ago. We weren't higher than the -- we didn't have a higher level of shipping promotion than we did in Q4 of last year.

Okay, perfect. Thank you.

Thanks, Mark.

Operator, we can take one more call.

Your next question comes from the line of Justin Ruiss with Sidoti.

Good afternoon. I just had a quick question on the inventory levels and kind of the makeup of how that's going -- I know it's kind of taking up a lot. Could you just delve into where those dollar amounts coincide with what your stocking levels would be?

Sure, Justin, this is Bill. We ended the year at about $51 million in inventory. A year ago, we were at about $37 million.

And, I'll qualify one element of the growth, year on year, was the fact that we actually ended Q4, I'll say leaner, certainly, than we anticipated. And our weeks of supply, going into the first quarter, were lighter than we would have normally.

Part of the reason for that is we wound up being, I'll say, more aggressive in Q4 of last year because of the impact of Sandy in the early part of the quarter. So we were more responsive, I'll say, in terms of concerns about an early fourth-quarter inventory build up and responding to that, in terms of order flow and other activity.

We're comfortable with the turns. If you extrapolate out our turns were at about 6 times, and that's a pretty good position for us.

As Bob had described, one element of growth that's important to our business is growing the apparel side. And as that becomes a larger segment of our total mix, turns in that category are slower than what you would see in the home or the watch or jewelry area. So, you have a little bit of a mix influence. We're still very comfortable with the quality of the inventory and the appropriateness of the investment, relative to our sales expectations.

Perfect, thank you.

Thank you, everybody, for your time and interest today, and we look forward to speaking with you next quarter.

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