iMedia Brands Inc (IMBI) 2014 Q2 法說會逐字稿

Good morning and welcome to ValueVision Media fiscal 2014 second-quarter conference call. Following today's presentation there will be a 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.

Thank you, operator. I'm joined today by CEO Mark Bozek and CFO Bill McGrath, who will be presenting, as well as President Bob Ayd, who will participate in the Q&A. Comments on today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipates, believes, estimates, expect, intend, predict, hope, 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 also 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 today's news release, available on the investor relations section of our website. I would like to remind you that all information in this conference call is as of today and the Company undertakes no obligation to update these statements.

As reported in June 23 of this year, ValueVision Media reconstituted its Board of Directors to include five new members including Mark Bozek, who was also named CEO, and Bob Rosenblatt, who was named Chairman of the Board. Mr. Bozek has more than 20 years of senior executive experience in the multichannel commerce, electronic retailing, and entertainment industry including roles as CEO of HSN, Senior Vice President of QVC, and as a producer of Fox Television. Mr. Rosenblatt has more than 25 years of experience leading retail organizations including Tommy Hilfiger, HSN, and Bloomingdale's. Most recently he was interim President of Ideeli, a flash e-commerce site that was recently sold to Groupon. Mr. Rosenblatt has been and is currently serving on several public and private boards in the retail and technology industry. I will now turn the call over to Mark.

Thanks, Teresa. Thank you all for joining today's call. I'm thrilled to be here and humbled to lead ShopHQ, working side-by-side with our newly formed and experienced board as well as our talented team of employees. I intend to keep my prepared remarks primarily focused on the future of the Company. However, I would like to say that despite the distractions of the past year, and there have been many, I am really quite pleased with how the Company performed in Q2 in delivering solid operating results. I'm grateful to the ShopHQ team for their focus and their fortitude.

I believe this performance demonstrates that our multichannel platforms, which span 87 million unique cable and satellite homes, as well as our digital and mobile fronts, have immense value and potential. I also believe that our shareholders share this view, and I am completely dedicated to realizing that full potential. I believe it starts with the people who work in our Company and the innovative entrepreneurs who make our products as well as the many others we hope to be in business with soon.

As this is day 59 on the job and my first quarterly investor call with you, I would like to take a few minutes to talk about our Company's new direction at a high level. We are still working to solidify more detailed plans, and I intend to share those with you as our thought process evolves in the coming months. In the meantime, I will do my best to convey my vision and some of the new, exciting and different things that you can expect.

Given our reach and potential, ShopHQ is well positioned today. We have the opportunity to build a unique offering of brands, products, and entertainment content that truly differentiate us from our others in the commerce space. I'm fortunate to have a wealth of experience to draw from on our Board, the management team and advisers in developing the foundation for all that comes next, and I am very excited about some ideas already being explored.

The platform for any successful company or business is, of course, its people. I am a big fan of creating an environment where people that work in your company, everyone that works there, feels a sense of relevancy. At the end of the day, who doesn't want to feel that their job plays an important role in the Company's success? I think there's great upside in creating more of it in our Company. Of course, discussing relevancy is one thing. Actually delivering it takes focus on hard work. But if we first get it right with the people who work here as well as the people who create, develop, and design what we sell, then the possibilities are endless.

Our senior executives are as determined as I am in these efforts. All of them are now fully committed to working a full week schedule on-site at our offices. In addition, in the last few days we have made certain senior management changes that I believe will better enable us to achieve my vision for the Company. Of note, we have eliminated the chief operating officer position. We are also replacing the chief merchandising officer role and are working with national executive search firm, Karen Harvey Consulting, on a replacement.

While we intend to create some unique and disruptive ways to differentiate ourselves from others in the multichannel, e-commerce, and entertainment spaces, I think there are certain fundamentals of our business that don't need to be reinvented. Namely, the creation and development of truly proprietary brands and products. Those are brands and product that are not available anywhere else, ever. A diverse portfolio of proprietary brands and products is at the core of what drives revenue, real margin, and real profit in our industry. I've had a number of successes on this front of my career, and I see opportunities at ShopHQ for us to do the same.

Here's what is great about right now. I believe there has never been a better time to develop proprietary brands and products. It's no longer just about going to trade shows and scouring the aisle for the new brands and the new products, nor is it about competing solely by offering the lowest flash sale price available. There are smart ideas and smart fledgling businesses that are just a few clever clicks away in the commerce world online. So, we are going to be surfing in those worlds as well.

We also have Ron Frasch, one of the most respected retail merchants of the past 20 years, as one of our new Board members to help us in these efforts. There's also opportunities for us to work with known personalities like Mark Cuban, who last week premiered his American Dream show on ShopHQ. Nine entrepreneurs that he backed as investor on ABC's Shark Tank presented their products in two fun, dynamic hours on ShopHQ. Many of the products sold out within minutes of going on air and we doubled our viewership as well.

It's really just the beginning of what we intend to do. Our very own true blend of commerce and entertainment. To symbolize our focus on relevancy within the vendor community, we mentioned in this morning's earnings release that we opened an office in New York City. This office will give us a more prominent and continuous presence in the marketplace than we've ever had.

Two final relevant points -- one, I believe there are real opportunities for us to grow by using our comparatively smaller size to our advantage. We have whitespace on all of our platforms where perhaps our competitors may not. As we adopt a competitive think nimble, act nimble approach to doing business, I am confident that we can be more successful. Two, we have a terrific newly formed Board of Directors, each of whom it brings a really different skill set to the table. Last week we met for the first time at our studios in Minnesota, the first such meeting at the Company in many, many years. Their enthusiasm, their presence, and their support were immediately felt throughout the studio, the halls, and our offices.

First, our existing three directors, John Buck, Landel Hobbs, and Lowell Robinson, each of whom bring solid business experience to the Company. Mr. Buck, a longtime member of our Board, brings a career of senior executive leadership and public board experience a company such as Medica, Fingerhut, Graco, Honeywell, and Alliant Techsystems. Mr. Hobbs is a cable TV and media executive, most recently at Time Warner Cable and previously with AOL Time Warner and Turner Broadcasting. Mr. Robinson brings us substantial online advertising and brand expertise from 10 years at Jones New York and HotJobs as well as Citicorp and Kraft Foods.

Our new board members include Bob Rosenblatt, who is our new Chairman. Bob's 12 five years of diverse retail and financial discipline and leadership experience at Bloomingdale's, with me at HSN, as well as Tommy Hilfiger and Ideeli, will serve as well.

As I mentioned earlier, Ron Frasch Ron is a former President and Chief Merchant at Saks Fifth Avenue as well as the former CEO of Bergdorf Goodman. I can't say enough about how lucky we are to have someone with his depth and breadth of merchant relationships throughout the world.

Also Thom Beers, the CEO of Fremantle North America. Thom's storied success and experience in television, especially with the live entertainment shows he oversees like American Idol and America's Got Talent and as the creator of shows such as Deadliest Catch and Storage Wars, will be invaluable in our efforts to create a far more dynamic and engaging commerce experience with our customers.

Finally, Fred Siegel. Fred was Senior Vice President and Head of Marketing at QVC for nearly six years, overseeing all off-air consumer touch points. He then headed marketing and communications at Excite and Excite @ Home in the Silicon Valley, where he led many Internet firsts. His relevant knowledge and the digital space will also serve as well.

In closing, I am very, very mindful of the history of our Company and I am keenly aware of the challenges that lie ahead. But it's those same challenges coupled with the incredibly fluid nature of all things commerce and all things digital that present us with so many more possibilities. My goal is to keep us focused in a measured, forward-thinking way that is all about a process of evolution, not revolution.

I am grateful to the strong support of our shareholders who have spoken by their actions. I really look forward to meeting with our current and potential investors at our studios, on the road, and in various investment conferences in the near future.

And with that I will turn it over to my colleague, Bill, for a more detailed overview on the quarter. Bill?

Second-quarter sales of $157 million were up 5% over prior year. Sales growth was driven by strong results in fashion & accessories as well as the beauty and health & fitness categories. This growth offset airtime reduction in jewelry & watches and a sales decrease in the consumer electronics segment. Although jewelry & watch aggregate revenues were lower as a result of the airtime reduction, sales productivity permitted in the category was strong, up 13% over prior year.

Net shipped units in the second quarter increased 30% versus last year as our average selling price declines to $67 from $83 prior year, principally influenced by the strong performance in our fashion and our beauty businesses. Fashion represented 18% of our merchandise mix compared to 12% last year, while the beauty, health & fitness category represented 15% of the merchant mix compared to 12%.

The successful broadening of our product assortment at lower average selling prices continued to foster growth in our customer base. Our rolling 12-month customer count of 1.4 million customers is up 18% over the comparable prior year.

Gross profit dollars increased 9% to $60 million in Q2 from $56 million last year. Gross margin percentage of 38.6% is up 110 basis points. The improved gross margin percentage reflects the increase in fashion and beauty mix as well as margin rate improvements implied across multiple merchandise categories.

Second-quarter operating expenses totaled $64 million compared to $56 million last year. Q2 included $5 million in unusual items including $2.5 million in costs related to the conclusion of the proxy contest and around $2.6 million in CEO transition costs. Additionally, we incurred incremental stock option and restricted stock expense related to the CEO transition and to the new board of directors, totaling $1.2 million. Excluding these unusual items, operating expenses increased $2 million or 4% compared to the same quarter last year.

Operating expenses were affected by an increase in variable cost of $1.7 million. Variable cost as a percentage of sales were 9% versus 8.3% last year, reflecting the impact of the 30% increase in net shipped units. We anticipate that variable expenses as a percentage of sales will be between 8.5% and 9% for the remainder of 2014.

Cable and satellite distribution expenses increased $2 million in the quarter, reflecting a 1% increase in home count as well as investments to further improve the channel positions that begin in the second half of 2013. Our annualized cost per home in the second quarter was $1.13 compared to $1.06 and prior-year Q2. We anticipate that by year-end our annualized cost per household could increase slightly to around a $1.15, depending on whether additional channel moves occur.

Depreciation and amortization expense decreased $1 million in the prior-year second quarter, due to the conclusion of the NBC brand licensing agreement in January 2014. Adjusted EBITDA increased to $5.5 million versus $3.8 million last year, reflecting a 9% increase in gross profit dollars partially offset by the higher operating expenses I just described.

We ended the quarter with cash and restricted cash of $23 million compared to $27 million end of Q1. Net use of cash includes $5 million in working capital use and $3 million in capital expenditures, partially offset by the adjusted EBIT of $6 million in the quarter.

Finally, regarding the expansion of our new distribution and fulfillment center, we broke ground on construction in May. We anticipate phase 1 of our 337,000-square-foot expansion of the completed by the end of Q4. We plan to have a partial use of this facility for storage during the fourth quarter as well. We expect to complete internal configuration during Q1 2015. Aggregate cost of the expansion will be around $25 million, the majority of which will be incurred during 2014. The cost of the Bowling Green distribution center project will be funded through the $25 million expansion of the PNC credit facility, which we announced in February of this year.

The warehouse expansion project, along with the 2015 implementation of material handling upgrades, as well as the Manhattan warehouse management system should significantly upgrade the capacity and the efficiency of our distribution infrastructure. We anticipate improvements in our order to shipment cycle time and reductions in our transaction processing costs upon full implementation in the second half of next year.

With that, operator, let's open the line up for questions.

(Operator Instructions) Neely Tamminga from Piper Jaffray.

Welcome, Mark, and really appreciate hearing your perspective out of the gate. And it will be good to hear how that evolves as you continue your onboarding process. So just would love to have a little bit of perspective on how we should think about the back half, Bill, in terms of gross margin and ASP and conceptually what's going on with the product assortment that could help influence some of those line items, just any sort of guidance or guardrails you can provide would be really helpful for us.

As I mentioned, the second quarter reflected a very, very strong performance in two key categories, fashion at about 18% of the mix and beauty at close to 15% of our mix. Fashion reflected, I'll call it a strong seasonal performance for us, particularly the spring fashion components within the quarter. As we look ahead to Q3 I would say that you will see not as strong an element of mix of fashion within that area. We would expect to see an increase in the growth in our home side of the business, continued penetration in beauty, and a little bit more balance on the jewelry & watch side. We don't see a substantial reduction in airtime in jewelry & watches as we saw in Q2.

That being said, relative to the point in margins, margins were very strong for us in Q2, around 38.6%. I think in Q3 you would see a little bit of a reduction on that. We should be around last year's levels, which I think were around 37.5% in total. Looking ahead to Q4, of course that's more seasonally promotional with more shipping and handling activity and also with higher mix of gift-oriented items. That being said, our margins a year ago were about 32.5% in Q4. I think we will be slightly better than that because last year's Q4 had a very, very strong influence of consumer electronics in that period. So, we would anticipate in the range of 33% to 34% total margins in Q4.

That's really helpful. Thanks, Bill. Good luck out there.

Mark Argento from Lake Street Capital Markets.

First question, thinking about some of the initiatives, Mark, that you laid out, just try to get your perspective on the timing of some of this, in particular the merchandising and branded product. Obviously takes a while to conceive and build a brand, so that's probably longer-term goals. But maybe you could walk us through some of the high-level timing in terms of new merchandise, the start of the process of building some brands, how this works, how you have done it before in the past at a high level so we can start figuring out what to pay attention to.

I think that, obviously, we are in the retail business. Right? And we make our money and our profit based on the products on the merchandise that we sell. And I think that the opportunities here in creating, as I said in my opening remarks, about our true proprietary brands, is the real opportunity here. And I think in order to do it you have to have the right -- you have to open the pipeline, if you will, at the Company so that we are, when we are developing these brands and developing relationships with people who make the products, who design the products, and the entrepreneurs that we work with, that you have to have the right basis for them to come into our plays.

I think that the advantage that we have -- and there is a lot of work to be done, I think and everybody here would agree -- but the advantage that we have is that we have 168 hours of programming, like our competitors do, on the electronic retailing side of things. We have a lot of whitespace and a lot of opportunities to create anchor positions, anchor brand, if you will, much like a television network has anchor shows that anchor in a particular night. I think we have a lot of opportunity to do that both on the product side of things, meaning individual products as well as these proprietary brands.

And I think that organizing ourselves here at the Company on the merchandising side is something that is the number one focus for me and myself working really closely with Bob Ayd on having a team of merchants and relationships in the vendor community that are relative, that make this a place where they want to come to sell their products, perhaps, and launch their products and perhaps not necessarily being, as it has in sometimes in the past, being the last place they come to sell their products. I think opportunity going forward for us being the launch pad are really, really terrific.

And again, the 87 million homes in all of our platforms that we have -- it gives an opportunity for newer brands. And they're not all famous celebrity-driven kinds of brands but discovering new brands and giving them this opportunity to grow versus perhaps just growing on an Internet-only kind of situation that we have this great platform to launch them on. So the timing of it is always -- in our world a lot of it is an art and not a science of finding that great personality and attaching to that great product. And what is that niche that makes it work on air and what enables that person to sell who may have a past personality or celebrity-driven experience, but then putting them on in television and online in our worlds, creating that connection with the consumer.

Again, I think what will afford us in terms of timing to begin the process -- we have actually already begun the process in a pretty big way, it's just a matter of the testing of it. And I think that more ability that we have to test products, starting fourth quarter, first quarter of next year, will enable us -- the bobbing and weaving of the process in determining which one of those will become these anchor proprietary brands. That really is, if you look at the mix of what we currently sell, our competitors are at about 75% of what they do is proprietary. Ours is only about 25% of proprietary brands. So therein lies just great opportunity, assuming that the merchants have a mandate and they, working, as I said, with Bob and myself, very much of that mandate to work on developing these exclusive brands is really the number one thing.

All the other things that we talked about and all of our social platforms and all the things that we will do digitally and all the mobility that we want to create in terms of our -- all our platforms -- you have to start with the merchandise. Right? As I said earlier, I don't think it has ever been a better time to create new brands. There are some avenues available at our fingertips if you are smart and you look in the right kind of places to accomplish that.

I know you mentioned in your prepared remarks and in the press release that you guys are opening a New York office. Will that predominantly be merchandising or will you have some studio functionality, the opportunity to do some things remote from New York?

Initially, it's really just to have a presence there. I think that it won't necessarily -- it's not studio driven. It's really just to have a presence both from the merchandising and the marketing side of what we are going to do so that we are in the marketplace on much more consistent basis than perhaps we've been in the past. I think doing that and if you want to get hit by lightning you got to stand out in the rain a lot. So we plan on standing out in the rain a lot more in New York and having those opportunities available to us and being able to react to them in a much more nimble way.

Last question from me, in terms of number of hours of programming and your homes passed or number of subs -- so earlier in the quarter or I guess probably back in July you guys looked like you expanded your presence with a couple cable operators. What do you think the opportunity is to get up into the 90s in terms of millions of homes passed? And then also number of hours on the air, any thoughts in terms of cranking that up a little bit as you bring the merchandise in?

Mark, this is Bill. Let me first speak to the number of homes passed, then I'll deflect to Mark relative to the number of hours of the specific programming. We had increased in the second half of the year partially our home counts, but I will say more our channel position within the cable systems within which we operate today, roughly 11 million total homes had moved from a channel position that was well above channel 50 to below channel 50. And I'd say that was the primary driver of the increase in home counts as well because that really drives you are programming tier where you are in, if you're in a basic tier that gets more coverage than a preferred tier, where the higher channel positions might be found.

So, there's a little bit of an organic piece of that that moves in tandem with our moves and channel position. And while we do anticipate -- we will continue to look for opportunities to improve our channel position, we want to be thoughtful about those moves because the moves to come with a premium cost. We have had a chance to digest roughly six or seven months worth of performance assessments of the 10 million or 11 million homes that we did move in and some markets are doing extremely well for us, very, very substantial increases in productivity that more than offsets the premium cost of distribution that we are paying.

In other markets, however, the sales growth is there but we are not quite yet at breakeven in terms of the contribution margin associated with those premium distribution costs. So, we are going to be thoughtful and measured about when we move and how we move and that will direct the overall growth in the households.

But I would say that we had a modest growth in the quarter, just about a 1% increase. I'd say looking forward that we would be in the range of maybe 2% on a roll-forward basis over the next four quarters.

Okay. Mark, pertaining to your question about the number of hours of programming, I think it's pretty clear for people that know our industry and people like yourselves who cover us and some that will, ideally, be covering us, to see that by watching us that there are opportunities, that we have some really solid relationships with some really solid vendors who do a lot of business with us. But you can watch our shows in which us online and watch as on your phone or listen to us on your phone and see that there is perhaps some repetitiveness there and some openings that we plan to take full advantage of.

So in order to do that -- of course, as it goes back to the notion of proprietary brands and having much more selection and much more variety, at the point where I feel like we are there, and it's likely going to be beginning in first quarter of next year to the point where we go back to 24 hours of live programming, I think it's absolutely essential in our world. It's one of the hallmarks of this industry that you are live. As my colleagues know now in the company and I have been speaking a lot to it is the notion of we are live. And live should be out live. And if you are going to be a live, you need to create dynamic experiences that come and start with product but also in the experiences that you are doing both online, on television, on your phone, on your tablet, all of those elements that have to be beating and pulsing in a live kind of way.

And I think that for us to just instantly, because we talked about prior to coming here, but just switching on to 24/7 is not necessarily prudent until we have more of a selection and depth and breadth of merchandise to present. And at that point I'm actually, frankly, excited about the notion of going back live in the overnights because I think that could also be a really special place for us to test new and exciting things, from brands and products and ways of selling of our merchandise and creating the so-called art and commerce of what we are going to be doing in the future.

Great, thanks, everybody.

Alex Fuhrman from Craig-Hallum.

Mark, I was hoping to talk a bit about some of the programming we've seen since you arrived at ShopHQ. Specifically, I was really interested in the Mark Cuban event you guys did recently. And kind of -- well, first off, you referred to it as the premiere of Mark Cuban's American Dream. I'm wondering if that is going to be a recurring show that you are going to do, and then thinking more about some of the results of the show -- I know you mentioned the viewership. I wasn't surprised to hear that that was pretty significant for the show. Do you think a lot of that viewership was new viewers? Was that a meaningful period of time that evening in terms of new customer acquisition? And also curious how the e-commerce versus phone orders for a big collaboration like that, sort of look.

And thinking more broadly, you mentioned a lot of very high-quality Board members and a lot of relationships they bring to the table. Certainly that event, in particular the Mark Cuban event, involved a lot of merchandising media tie-ins and things that I was surprised to see that was able to be put together in such short order. Are there specific relationships from the Board that really played into that and are helping to drive getting some things together really quickly? And just curious as to what those relationships could be bringing in the future.

Thanks for the question, Alex. First and foremost, Mark Cuban's -- the relationship that began with Mark Cuban began before I got here. And kudos to Teresa Harris, who is our director of beauty, who made that relationship happen. That said, he came here last week. And the whole notion of the timing of it as it related to all the things that I've talked about in terms of the ways in the future that I think it can become much more exciting way of selling and presenting -- at the end of the day it still has to be entertaining. Right? And a lot of people who watch our kinds of businesses are in fact entertained by it. I think the opportunities for us to be more entertaining certainly began with that show last week, where it was really a live and it was fun and it was funny and it was fun to watch. And guess what? We had some really great products that sold really well and in many cases sold out before they ever went online.

And so, the notion of that kind of presentation and those kinds of relationships are very much a part of what I see in the future being in terms of relationship certainly with the members of our Board that I mentioned. There are some obvious connections to those worlds that make it really exciting for us. And I think, again, it was Mark Cuban as the personality, but nobody has ever heard of those eight or nine entrepreneurs that we had on the air. They might have seen them on Shark Tank. But we had that ability to present them in 87 million television homes and online and on our tablet. And that is an opportunity that many, many people launching products in little cottage industries around the world don't have that opportunity. So it's really exciting.

As far as it being a premiere, everything that we launch on ShopHQ in our world is a premiere. Whether becomes an ongoing weekly series or what I think is to be determined. But Mark Cuban certainly left here with a great feeling and a real enthusiasm of presenting something in a dollars-per-minute world that he hadn't -- he's done a lot of things in his career, but this was the first of being involved in a dollars-per-minute business. And again, if you watch the show or listen to it, it was really exciting. And I think it's the beginning of what you'll see a lot more of us, from us a lot in the future.

It's interesting what you said about cottage industries because I feel like something I've noticed from your peers out there at QVC and HSN has been a lot more focus on smaller products, presenting more products in different categories within a given hour. And I feel like in many regards the event you did with Mark Cuban mirrored that in the sense that you had nine products across different categories in a two-hour window. Do you feel that's an opportunity at either ShopHQ or just the industry in general has been slow to get on, is more vendors, more products, smaller things that may be don't need a national marketing platform of their own but can just hop into 10 or 15 minutes of airtime?

I think it's accommodation of both of those things. I think you won't necessarily be just focused on those. But absolutely, it's that excitement of having -- of discovering. And it's not just about the lowest price or the last cycle of the selling of a particular item. It's that discovery piece that makes it an exciting experience for the customer. And that's really where I think there's a lot of opportunity. And for us, as I said in my comments, I think the smaller size that we are comparatively to our direct competitors is a real advantage if we do it right.

We do it right by saying, wow, we have got a lot of airtime here. It's not unlike it was 15 or so years ago when I joined HSN. We had a lot of airspace and a lot of airtime to fill. We begin to fill it and then build a real sizable $50 million to $100 million proprietary brands. There's no reason why that opportunity can't exist here as well. That's where I think and that's where we are having a lot of discussion about. If we are going to be the size that we are, let's act the size that we are and perhaps not act like we are five times bigger than we are. I think that if we do that and that nimbleness, as I said earlier, thinking nimble and acting nimble, or more nimble, really gives us that opportunity and we go into the marketplace and the vendor community and say, hey, we know who we are. But here's what we can be. Imagine if you launched your brands with us in our 87 million homes and we gave you X amount of airtime and X amount of time online and X amount of time digitally and on mobile platforms -- that's a really great way for us to present ourselves now, where perhaps it wasn't done so much like that in the past.

That's really exciting. Thanks, good luck, and welcome to the Twin Cities.

Greg McKinley from Dougherty.

So you announced a couple of executive leadership changes, Mark. I wonder if you can talk a little bit about the roles and responsibilities those previous positions held and what your strategy is with are you going to take ownership of those responsibilities going forward. And maybe we'll just start with that, please.

I think that anybody in my position that comes into this situation that I'm now in had the opportunity at the beginning to look at the team of people that work with him or her and see where there's perhaps opportunities to tweak it, if you will. And I think, as I just mentioned earlier, in terms of our size, I think that perhaps the way we were organized was perhaps too siloed and too heavy, if you will, at the top. And that there's a way to, in our think nimble, act nimble kind of way, approach it from having more direct access to the different divisions. So in the case of the COO position, the chief operating officer position, that covered operations, it covered e-commerce, it covered HR, it covered all different kind of rather disparate areas. And that's just what it was organized before, not for better or for worse. It's just I think we can be more nimble by having less of that organizational structure at the top, if you will, to have more direct access to the people work in those divisions. And I think that that's really what drives that, in particular, on the merchandising side of things.

Again, when you are in the position of coming into a company that I am, that you have to look at what the opportunities are and how you are organized and who are the best people that you have around you that are smarter than you in all the ways that you want them to be smarter than you, surrounding you. And I think that's the reason why we have begun this process of looking at that team. I don't anticipate drastic changes or any other movements in any big ways going forward. But they were, out of the gate, opportunities that I saw for us to begin to be a lot more nimble and act our size.

Okay, thank you. And then maybe just a numbers question behind that -- with the elimination of the COO role, and I'm not sure -- I think you indicated the CMO role will be replaced. I both that actually means adding a body or people taking on additional responsibilities within your existing merchandising team. But how should we expect that to impact administrative and operating expenses going forward? One of the things that was a little higher than I had expected was G&A after pulling out some of those nonrecurring items you had identified. And maybe part of that G&A was a stock comp catch-up on the new Board members. But wondering if you could right-set the table on that expense run rate going forward?

This is Bill. First of all, with G&A you did hit the nail on the head. And the primary component of the driver of G&A cost or the increase in G&A costs in the quarter -- we wound up at about $6.8 million, about $1 million -- $1.1 million or $1.2 million of that work what I described as nonrecurring components. But a flow of cost within our stock options and restricted stock expense, one tranche being the element that relates to new board members that have joined us and the stock awards associated with that. And then the second being the recognition of accelerated vesting associated with the CEO transition.

So absent that, we are in that range of around $6 million or so, actually a little bit less than last year, primarily influenced with less -- the absence of rebranding cost that occurred in the prior year. So I think as a run rate going forward, if you equate for that roughly $6 million or so would be what you'd anticipate with a little bit of range around that in terms of Q3 and Q4 G&A, exclusive of unusual items.

You referenced the salaries associated with the previous role of the chief operating officer and how that would influence -- that was a named executive officer role so that salary was disclosed in our proxy. It's around $450,000 that would be the nonrecurring component of that. We did mention in the 8-K associated with the personnel changes that those moves or those individuals are eligible to be paid a severance in accordance with the executive severance benefit land that was approved by the Board in the early part of this year. So those costs would be recognized as a below-the-line adjusted EBITDA cost within the third quarter, the event itself, the personnel change, and the approval of that occurred within the third quarter. So you will see that as below the adjusted EBITDA line calculation within Q3.

Greg, just to add to that -- it's Mark again -- I think, again, the being nimble and acting nimble -- that there's opportunities for us. I don't think we are quite ready to say overall what the number is. But I think just in terms of how we are organized as a company in all the different divisions both on the digital side of operating side and on the television side and certainly on the merchandising and the programming and planning side of it that there's opportunities for us to just organize ourselves in a way that we can be more reactive and scrappier, if you will, as a $600 million company that will enable us to grow and be more successful in a scrappier, more aggressive kind of way.

Thank you.

Mark Smith from Feltl and Company.

This is Shannon Richter on for Mark Smith. Just a few numbers questions for him. Could you give us a sales by segment for Q2?

This is Bob. Thank you for the question. You want a mix breakdown?

Yes, please.

So our jewelry & watch business was 43% of our business, fashion was at 18%, health & beauty was at 15%, and home & consumer electronics was a 24%, with home growing but consumer electronics decreasing.

Perfect. And then just one more question here -- the return rate came in a bit higher this quarter. Is there anything that we should be worried about there?

No. This is Bill. No concerns there. That was primarily a function of mix, although our jewelry mix was down somewhat slightly from prior-year Q3. The real strong rise in our sales base within Q3 -- or Q2, I should say, was within the fashion category. And that carries a return rate with it that is somewhat higher than our overall average. So the influence on return rates within the second quarter was almost exclusively a function of the product mix within the period.

Perfect. Thank you so much for taking my questions.

Robert Routh from National Alliance Capital Market.

First, obviously when it comes to home shopping the household names are QVC and HSN. Everybody knows them. ShopHQ -- for years it was ShopNBC -- it's one of those names that people either know or they don't know. And given you are in 87 million homes, you got great operating leverage inherent in the model, the biggest problem it would seem is getting more eyeballs and more people to know who you are, what you are doing, and what you're going to do going forward. And obviously, the Cuban show helps along those lines. But I'm curious what other types of things could you do to get the general public more aware of who you are and what you are doing so that ShopHQ becomes a household name like QVC or HSN when people ask, name a home shopping company. Obviously, it's not on the tip of everyone's tongue but you would think it should be, given what you are doing, what you could do, and the number of homes that you are in. Just curious what else you plan to do to drive eyeballs to that network and to the brand.

Thanks, Robert. This is Mark. Obviously it's the figuring out, if you will, that we have to do in terms of what we are going to do. At the end of the day it starts with more, better stuff. It starts with that broader mix and broader depth and breadth of merchandise. And the Cuban show was a perfect example of it. We launched eight new brands that had never been on our air before and we had an audience of people that doubled more than what we usually had. And so, it's the beginning of those kinds of things that really enable you to define your brand. I think you can define and we will define our brand by the products and way that we sell them. I think we will define our brand -- I know that's the effort, it has to be the effort for us.

The way for us to define our brand and be as recognizable as those two other companies -- and by the way, not just those two other companies but everyone that plays in the commerce space. I think that's a much better, bigger opportunity for us and it's certainly what we are setting our sights. But obviously, in the category as we are compared to HSN and QVC, and in regards to your question I think that it starts with the brands that you develop and the way that you sell them and the way that you present them. I think once you do that, that your ability then to market your brand name in all the incredibly ubiquitous ways there are to market these days both online and on television and through grassroots marketing, etc., that there's ways that you can do it.

We have to do it, obviously. I think that going from ShopNBC to ShopHQ, that there's not a whole lot of brand equity necessarily in the names. I think there's some real opportunity going forward for us to develop those. But I believe that it starts with -- I know, I strongly believe that it starts with the brands that we are going to be introducing and the ways in which we are going to be presenting these products. I would rather not, competitively speaking and the competitor in me, not necessarily lay them all out on this call, but rather just show by doing them and hopefully some more than others will be or more than -- let me put it in different way. Hopefully, more of them that we try will be successful than not.

And just one follow-up to that -- obviously, given your equity cap and given your 87 million homes, you couldn't launch a basic cable network and get in 87 million homes for less than what your total capitalization is. It would cost multiples of that, as we all know. You look at companies like zulily out there, you look at your valuation and your revenues and it's a disconnect in terms of either these things are way overvalued or you guys are way undervalued given the operating leverage inherent in the model, the infrastructure you have built, what it would cost for someone else to build it from the ground up. And I'm curious could you talk a little bit as to why you think the public markets seem to put that valuation differential on the equities because it doesn't seem to make a lot of sense to me, given what you have and what some of these other, in theory, competitors don't have, and yet they are seeming to capture multiple and a valuation that is light years ahead of where ShopHQ is, which doesn't seem to make any sense. [Could answer] if you could explain what you think that is the case.

Thanks for question, Robert. And I second that emotion in a big way. I think that zulily and the valuation -- they are $4.5 billion and they have done -- they are doing slightly larger numbers than us. And obviously, they're growing much more rapidly because of the nature of how they have begun from scratch. But I would be -- frankly, I'm much more excited about being in 87 million unique television homes than I am necessarily about 6.7 million unique visitors because, as we all know, a unique visitor does not a margin make unless they buy something from you, and then they have to buy again and then again and again and become an actual customer, much like our 87 million households are only relevant if they are buying and then, of course, if they are watching.

So I think that it's my goal in raising the awareness and perhaps evolving the dialogue and the discussion to the comparisons that we are this commerce company that happens to be in 87 million television homes and has a real presence online. And is our presence great and is it the best mobile site going? No. Everybody here in our Company knows that. But the opportunity for what we have to build all that and the framework that we have by having these 87 million homes should, if we do it right and create the right amount of relevance for our Company and for our brand that perhaps in the efforts of what we are going to be doing and the unique ways that we think we can disrupt this world as it relates to what companies such as zulily come about and are perceived as they are with these incredibly large valuations compared to ours, I think there's real tremendous opportunity, and I hope very much -- it's what got me most excited about being involved in this Company -- was the opportunity to do exactly that, is to perceive us much more as we grow, and it's not going to happen overnight, none of this does, but be perceived in a much more relative kind of way and comparative kind of way to the entire commerce world, not necessarily just to the companies in Pennsylvania and in Florida.

Thank you very much.

(Operator Instructions) Justin Ruiss from Sidoti.

I just had a quick question when it came to -- I guess what you have been harping on the entire time is the proprietary-ness. Are you going to be looking to expand product verticals at this point? Are you going to be adding more verticals? Is that something that would behoove you guys in the future?

Yes, Justin. I think that we are covered in the area of watches. We have great relationships with our watch vendors. I think that you open up all the other categories that we are going to compete in. The verticals as they exist are the ones that are fairly well-known in our industry in terms of beauty and home and food and fitness and ingestibles and all of those categories that are the anchors of our competitors that are high-margin, real revenue-driving categories that we are absolutely going to be in. Again, it speaks to the hold whitespace that we have in our 168-hour-a-week programming schedule that will enable us to fill those spaces in those hours and those times online and what we do digitally in a much more buoyant kind of way. I also believe that there will be other categories that perhaps we will play in as well that are competitors do not.

Perfect. Thank you.

Okay, I think that just about does it. I wanted to, again, because this is my first call with all of you, to reiterate that I am extremely mindful, as are my colleagues in the Company, aware of the history of the Company and that we are keenly aware of all the challenges that lie ahead and what it takes to make these businesses successful. But again, it bears repeating that it's those challenges and it's coupled with to the point about zulily and those questions, that the incredibly fuel nature that are all things commerce all things digital at present us with really great, exciting opportunities. And I am wildly excited to be here working amongst this team. Thank you very much.

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