iMedia Brands Inc (IMBI) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the EVINE Live Inc. FY15 first-quarter earnings call. My name is Tony and I will be your operator for today.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Russell Nuce, Chief Strategy Officer and interim General Counsel. Please proceed.

Thank you, Tony. I'm joined today by CEO, Mark Bozek; CFO, Tim Peterman; and VP of Finance, Bess McCartin. 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, 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 are complete contained in EVINE Live'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'd 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.

I'll now turn the call over to Mark.

Thanks, Russell and good morning, everyone. Thank you for joining this call to discuss our fiscal first-quarter results. I'd like to first acknowledge the tireless efforts of our teams here in Minneapolis and in Bowling Green. I'm encouraged by their willingness to try new things and dare to be contrarians to business as usual.

While the quarter did not turn out as we had previously expected and despite this morning's reaction, I remain convinced, I remain confident and I remain energized more than ever that the initiatives we began last June have the Company on the right path to deliver sustainable growth and profitability. As I know only too well, the variables of a business model based on dollars per minute are many. We missed our revenue forecast as we were aggressive on three primary fronts in Q1.

First, to remain competitive with our peers in the electronic retailing space we needed to increase shipping and handling promotions beyond our earlier expectations, which contributed to lower revenue. Second, we overbought home textiles in 2014. As a result we had to reduce our margins and utilize valuable air time to clear excessive textile inventory. This negatively impacted our top and bottom lines.

And third, our watch business declined by 15% during the quarter, which was due in part to a reallocation of prime air time to launch certain new proprietary brands and the less than ideal average selling price. While I admit it is disappointing to us, the bigger story however is in all the other good work that's occurring at EVINE Live on many varied fronts. Despite the Company being in a period of transition, there was definitely good momentum in sales in several areas of the business this quarter.

For example, sales in fashion grew by 18% year over year. Similarly, sales in jewelry and beauty grew by 8% and 7%, respectively. During this transition period we've also made some significant changes to what was clearly a top-heavy and ineffective management structure. Among other things, we eliminated the President and Chief Operating Officer position, streamlining and flattening our reporting structure to allow a more cost effective way to manage the Company.

As we announced recently, after an extensive search process we completed our executive transition with the addition of Tim Peterman as our new Chief Financial Officer and Penny Burnett as our new Chief Merchandising Officer. Tim and Penny bring a much-needed level of experience and enthusiasm as we execute on EVINE Live's long-term growth plan. With their combined expertise, I'm confident that our forecasting will be more accurate going forward.

Now let's talk about products. Without great product, after all, there's really not much to talk about. Upon arriving at the Company last June, a cornerstone of our strategic vision was the development of a stable of new high-margin proprietary products. And we've successfully begun the process of doing just that. Brand building is a marathon, not a sprint.

An important measure of this success is the fact that since being launched, these new proprietary brands premiered at 22% higher average dollars per minute than our base business in the same categories and 8% higher average dollars per minute than our base business in the same categories over the course of the quarter. In addition, average purchase frequency has increased 15% over the same period last year and we attracted more than 26,000 new customers from all new brands during the quarter.

These numbers are very, very encouraging, but we are still in the early stages of this race. Some launches have been an outright success from the first airing, while others it will take time to identify the optimal configurations, price points and air time allocation to grow those brands.

This process is similar to when I first launched Joy Mangano and Andrew Lessman on another network over 15 years ago. And those brands have long since become two of the top performing brands in the industry.

We are very excited to have Penny now leading merchandising, programming and planning. Our team is energized by the quantum leap forward we've made in getting new products in the development pipeline and the success of many of our proprietary brand launches. Similarly, our ability to offer talented product makers greater exposure on all of our digital platforms has resulted in many of them who normally would make the trek to Westchester and St. Petersburg now visiting us in Minneapolis.

Here's some of the highlights from the quarter that give me the confidence that we are very, very much on the right track. Todd English Kitchen, which launched in March, has been a major success. Todd's previous on-air experience and product development acumen has made him an instant stable in our home and kitchen categories.

Paula Deen also launched a proprietary food line at EVINE Live in March. Paula's launch was among the most watched in our Company's 25-year history. Her online social network is among the most productive and interactive that we've ever seen.

In March, the Fabulous Beekman Boys premiered their Beekman 1802 bath and beauty line with us and we promptly sold out of every item, causing us to cut one of their scheduled hours in half. The skin-care brand, Consult Beauty with Dr. Terry Dubrow also launched in April. Terry and his wife from The Real Housewives of Orange County attracted tremendous interest and generated sales during the premiere hour that were more than double our forecast.

Similarly, our core customers continue to respond well to our established brands. And we're pleased to report that we've seen no customer drop off from our transition to EVINE Live. In fact, it's quite the opposite.

In the first quarter, our total customers and average purchase frequency were at new highs. Now we just need more of them; more customers and more product. Like nearly every retailer these days, our mobile sales as a percent of the total continue to accelerate.

This quarter, our mobile sales grew 26% over the same period last year to represent 40% of online sales. And similar to our peers, online sales now represent almost half of our total sales overall.

But beyond just using online to provide a more efficient way for our customers to make a purchase, we are reshaping the overall shopping experience into a multi-screen one spanning mobile, online and TV. To that end, our e-commerce team is working on two main fronts.

First, we are improving our outbound and inbound marketing capabilities in order to efficiently acquire new customers, convert traffic and better retain our loyal customer base. For example, we were able to improve our conversion rate on mobile by 230 basis points in Q1 versus the same quarter last year. And second, in addition to better blocking and tackling, we are creating new channels of incremental revenue online through live streaming events that both complement and extend our existing TV programming.

For example, in March we hosted a great live invitation-only online Invicta watch event all while we were selling Samsung TVs on-air. This online-only show, which we produced with inexpensive GoPro cameras and streamed live on Google Hangouts with no on-air promotion, produced very encouraging sales results. We strongly believe these live multi-screen events will enable us to acquire new customers as well as drive incremental sales in our core business beyond our existing live television broadcasts.

Also, I have for years believed there is an opportunity to leverage brands with fans of other television networks by launching exclusive products on our platforms that can be cross promoted on their platforms as well. Hollywood has long attempted to find the right balance between art and commerce and in my opinion, no one has done it well at scale. While our first effort with Discovery Channel's Deadliest Catch has proven quite successful, we believe it is only the beginning of more of these types of relationships.

Finally, I am confident that the new executive team we have put in place and the creative growth initiatives I've referenced and others going on behind the scenes should contribute to drive growth in the top and bottom line by the end of this year.

Now, I'm pleased to introduce to you our new CFO, Tim Peterman. Tim and I worked together back in the so-called Diller Days at IAC and I'm thrilled he's here with us in Minneapolis full time. He is smart, rigorous in his approach and we're benefiting from his unique background as a CFO with significant operational expertise.

Tim will provide some color on the numbers we released this morning as well as outline some of the additional efforts we are planning in distribution and warehouse management. Let me end by saying that I very much look forward to our Investor Day next week on May 28, where we will share more exciting details about our growth plan.

Tim?

Thanks, Mark and good morning to all. Thank you for your time today. I'm excited to be here at EVINE Live today working again with Mark and with the rest of the team. I look forward to meeting everyone or a lot of you in person on Investor Day. For now, let me walk you through a few of the financial and operating highlights from Q1.

Consolidated net sales for the first quarter were $158 million compared to $160 million for the first quarter last year, which represents a 1% decrease. In addition to what Mark just noted, I'd also like to add that I think this was an important testing period to the organization, with many of the learnings already being incorporated into our refined merchandising strategies. It's no secret the shipping model has changed for everyone, both merchants and customers.

Led by Amazon with some recent piling on from Walmart, all retailers including EVINE Live are moving fast to remain competitive and absorb the negative financial consequences of lower shipping margins. We are sober about this environment and will continue to evaluate ways to shop and ship at competitive rates.

Gross profit dollars decreased 5% to $57 million in Q1, resulting in a gross margin percentage of 36.2%. This was a decrease of 140 basis points versus last year.

While our merchandise margin was down 20 basis points due in part to the on-air textiles discounting, the majority of the decrease was driven by reduced shipping and handling margins from the higher use of promotions as well as higher freight costs associated with conventional shipping freight increases. First-quarter operating expenses totaled $61 million, compared to $59 million last year. Excluding unusual items in each year, operating expenses were up $733,000 or 1% versus prior year.

Operating expenses were affected by an increase in variable costs of $2 million. Variable costs as a percent of sales was 9.7% this year versus 8.4% last year, reflecting the impact of the 17% increase in net shipped units as well as less efficient warehouse as we completed this recent Bowling Green expansion. The increase in variable expenses were partially offset by lower salaries and related costs as a result of headcount reductions made to date.

Turning to the balance sheet, we ended the quarter with cash and restricted cash of $18 million compared to $22 million at the end of Q4. Net use of cash in the first quarter was $4 million, primarily due to positive adjusted EBITDA of $2 million, offset by working capital use of $6 million. Capital expense in the quarter was $8 million, of which $5 million related to the Bowling Green expansion, which was funded by our credit facility.

As a small company with aggressive goals, which we are, another vital component to our success is effective working capital management and that includes inventory. Our inventory for the quarter finished at $68 million, which was a 27% growth from this time last year and a 10% growth from Q4.

Most of this increase is simply the result of our evolving merchandising mix, as our new categories in home and fashion turn at a slower rate than watches, jewelry and beauty. The benefit of these new categories obviously is the customers in these new categories purchase more frequently.

The smaller portion of this inventory increase is related to our on-air efficiency. In order to improve our inventory lifecycle, we plan to establish an outlet center close to our Bowling Green distribution center, which will provide an avenue to move our higher-quality merchandise that may no longer meet minimum performance levels for on-air allocation. This avoids a situation we experienced this quarter that negatively impacted our sales and margins due to the discounting of lower performing textiles.

I'm happy to report we have completed the construction of our Bowling Green distribution center and to date have spent $20 million of the $25 million total projected. This building phase is on budget and on time with the remaining $5 million to be spent over the next six months as we finish the equipment installation.

This project has increased our fulfillment capacity by more than 100%. Both Mark and I were at the ribbon-cutting event last week and it is truly a best in class facility in an excellent location in the middle of the country.

Accordingly, the rollout of our new warehouse management system is now in full swing. We expect it will go live Q1 of 2016. This is about two quarters later than we were previously anticipating, which means we will have to wait a bit longer for the anticipated cost efficiencies that will result.

But based on these complexities at hand, we want to make sure this conversion doesn't impact our readiness for the robust 2015 holiday season we are anticipating. So we are moving at a conservative pace.

In terms of our cable and satellite distribution footprint, we consider it among our biggest strategic opportunities in 2015. Our philosophy is it is not just how many homes we are in, it is also how many channels we are on in each home. Our peers have launched second channels over the past several years with great success.

We believe the growth in these second channel distribution platforms is an important factor to fuel revenue growth at EVINE Live. As such, we expect to launch our own second channel in the near term and we will follow this strategic effort with new channel placement initiatives as well.

So with that, let me turn it over to the operator and we'll be happy to answer your questions.

(Operator Instructions)

Neely Tamminga, Piper Jaffray.

Mark, could you help us step back a little bit? Here's what we're hearing over here: you guys are making great progress in adding content to the channel, but the product isn't yet caught up with that content in terms of who your target market is and what have you. And obviously, Penny's hire has been a huge part of that, given her background in product development.

But could you bridge for us a little bit about what we can be expecting over the next six months of how that product development cycle, can it catch up with the content in that short period of time? I ask this fully understanding every personality and every brand is like a fingerprint. It's very different. But if you could help us understand that catch-up cycle, that would be helpful.

Yes. Thanks for the question.

If you look at the timeline here, and my point of this being a marathon and not a sprint. I think that if you look at this as a completely different story; had we not launched what we've done over the last six months, our sitting here trying to explain the quarter that we had would have been a much more difficult challenge, but it's the opposite of that.

I think that we hit the perfect storm of launching these new brands, pulling back perhaps a little too aggressively on giving them the air time that normally would have gone to the Invicta watch group and that balancing and the learning that comes from that and giving up that air time. Although they've launched really well, this 22% increase on the premiers of these brands is really a great number and 8% overall for the quarter is just having more of them. Right?

We have 168 hours a week of programming to fill and you can't fill them all in one quarter or one period of time. And I think certainly, with the addition of Penny here and the increased pipeline and these 12 that we've talked about in this last quarter and the few that we launched before that, like The Deadliest Catch, are really just the beginnings of that. We've said it from day one, that the launch of these new proprietary brands was going to be the main factor that made the difference here.

That the only way to go forward was to create these new brands so that you could at some point, create this balance where your established brands can continue to grow. In the first quarter clearly, particularly in the textile area, we bought a lot of textiles last year and we used a lot of air time that was not productive and that hurt us.

Same thing with the watch business. The watch business overall was down by 15%, due in part because we lowered too aggressively some of their pricing and we also took away some of their air time from prime time that we gave to these proprietary brands. So it is this learning period.

I think in retrospect, we probably wouldn't have gone as quickly as we did. But make no mistake, it's the notion of having these new proprietary brands and more of them that begin to create these anchors, if you will, for Q3 and Q4 and going forward. So that coming next fall that we are not continuously relying on the same three or four proprietary brands that we have for years done and I think there's really no going back on this. And that's the notion of where we are in this timeline.

There's a lot of really good news. Again, mindful that what we've just delivered, but it does not lessen our enthusiasm that we have. The amount of people in the pipeline now with Penny here, and who want to create product for us and develop products with us has not abated at all. In fact it increases by the week.

So bringing it back to the year and Tim, I have a question for you related to this as well. So Penny's working today, you're working today, everyone's working today. Is it really for the bulk of what you're working on today in product development pipeline is for what happens in two months from now or two quarters from now? Can you give us a sense of what that physical timeline actually looks like as it relates to some of the guidance that you put out there about needing a little bit of space at the top line?

I think the responses on some of the new launches have been really, really strong. Right? They clearly have. I think this timeline of having these next couple of quarters of still learning what that balance is; how do you mix in the new with the existing brands. I think the existing brands have hit a wall in some cases. And I've said to all of them and they're terrific brands that we have, that the only way we're going to be able to grow you is if you're supported by more better stuff: more selection, more depth and breadth in our merchandising offerings.

And so as we begin to look ahead to the end of the year, we feel much, much more confident by that period of time that the new that we've already launched, which will be coming back and making second and third and fourth appearances, which are generally better even than some of the premiers because they're now established. That mix along with our established brands gives us a more confident level by the end of the year that we can affect our sales and that we can sell more product and deliver more sustainable growth than this perhaps choppy growth that has existed.

And then Tim, related to the guidance, not guidance but your general outlook, I think you're talking about the next two quarters of sales anticipating to be relatively flat with prior-year results. To be very specific, is that aggregate over the next two quarters? Like you could be down a lot next quarter and then up a lot in the following quarter? Or is it in each of?

I'd say it's in each of. As Mark explained, there's a variety of things moving through the system increasing the newness. The proprietary launches, as well as moving through some of some of the existing inventory as well as better defining what we do with merchandise when it was off air. All those different elements are working together as Penny gets all these things in motion.

And on the bottom line, should we expect things to possibly get a little bit worse relative to what we just saw in Q1 or would it be similar activity on the bottom line for Q2 and Q3?

I would say it's similar relationships. I'm not really providing any guidance on bottom line, but I would say that we think that it's a very similar relationship.

Okay. Thank you. Good luck out there.

(Operator Instructions).

Tom Forte, Brean Capital.

So I had one on shipping and handling and product mix and then a second on the second channel. So for shipping and handling and product mix, I'm trying to determine if your efforts to expand in certain categories like fashion is having a greater impact on your changes in shipping and handling revenue.

Meaning that you're expanding into categories where there is greater competition to offer low rate or free shipping and handling. And then second for the second channel, is this going to be a retransmission of content from the first channel on a delayed basis like one of your peers is doing, or is this going to be entirely new content or a combination of both? How should we think about the content for the second channel?

Okay. Tom, this is Tim.

To your first question, the shipping and handling, I think certainly fashion represents the biggest departure from what we've historically done in terms of shipping rates and packaging and items being bought together. So on both sides, both offering more competitive rates, but also on net units shipped, those are the biggest migration in terms of merchandising mix of where we were historically and where we're going. So I think what you're seeing right now is a small correction period.

I don't think you're going to see -- once it's baked into the model, then it will start to stabilize in that respect. In terms of the second channel, the second channel as our peers have done, they all started slightly differently and we are considering all of those elements in ours, whether it's just a three-hour delay or whether it starts the three-hour delay and introduces new content. There's a variety of things that we're considering in that regard, but we think it's just a very smart, thoughtful way to increase the number of channels that we are in in each home.

Great. If I may, a quick follow-up question. So as your mix of merchandises changes and your number of units sold continues to materially increase, are there opportunities for you to go back to some of your shipping suppliers and renegotiate better rates perhaps?

Absolutely. We are doing that live right now and have been. As every credible answer is, there are 15 different things that we're moving in a variety of different fashions. For example, with the Bowling Green facility, we started two years ago at putting in a new warehousing management system, designing it.

And it takes a little while to put in place, but that in and of itself will introduce efficiencies that we haven't had before, renegotiating on the freight side, renegotiating on all sorts of efficiencies internally on how we do things.

We do think there's a correction out there in shipping and in shipping margin that doesn't relate to the EVINE alone. And what I think all retailers have to do is be smart about how their organization is going to absorb them and streamline or work differently or smarter to make sure that they can still continue to produce profitable results.

Great. Thank you.

Thank you for your question. Alex Fuhrman, Craig Hallum Capital.

I was surprised to see, given the magnitude of the revenue shortfall here, I was surprised to see nice growth in customer additions. And Mark, I think you alluded to on the call some numbers about what some of these individual brands brought in in terms of the customer file. Was this what you were expecting in terms of growth of your customer base? And would it be fair to say that some of these new brands are really carrying more than their weight bringing in new customers?

And then I guess building on that, is that what gives you the confidence in your business's ability to rebound in Q4 and thereafter? Is it that you're building the pipeline of customers now and once you have more product that should catch on? Or is there something else that you're expecting to recover later in the year?

Yes. Thanks, Alex. Good question.

If you look at the number, particularly on the sales side, we're not talking about a big miss here. And so if we look at our customer base expanding, if you look at the amount of new customers, that 26,000 new customers that came from the launch of the new brands in Q1, we look at that extension and those possibilities as all very, very good leading indicators for us that as these new brands are coming in that we're not necessarily taking wallet share away from our existing customers, but we're bringing more into the pipeline.

So as we launch new brands, that you're launching them with new customers and these brands that are coming to us, are coming with fans. The Deadliest Catch show on Discovery Channel; I've talked about it every call since we launched it, is really, really popular. So the amount of people that we are migrating from those shows and from those social networking aspects are working very, very much to our favor.

It's why we're very careful and selective in terms of launching some of these new brands so that they have an existing fan base like Paula Deen does, like Paula Deen has 4 million Facebook followers, like Todd English does and like the Beekman Boys do. If you look at Beekman, the Beekman 102 thing on Facebook, they have the most incredible social and social commerce brand out there and they were wildly successful with us. So it's a different scenario when you look at our place now and you look at the people who come into our Company who are here now every week and are on the air every single weekend.

The makeup of who we are putting on air and who we're putting into our platforms, mixing with these established brands is really creating an energy level and a consistency in terms of when the new are coming in that they're driving new customers. If you look at the overall purchase frequency, it's up 15%. So we look at those as really positive leading indicators. You can certainly ask of course, we are a public Company and you look at what were the reasons then, if you have all this exciting news.

But I think if you isolate them and they are isolated in this overbought textile scenario, this misplacement of watch air time, and the shipping and handling. Beyond that, there's a lot of really good things happening and there's a lot of really smart things happening in terms of our reaction to the customers and the new customers.

Thanks, Mark. That's helpful.

And then thinking about the Invicta watches, I know you mentioned them a few times in your prepared remarks as having been a big donor of air time. Were there any other of your perhaps less exciting brands that were also meaningful donors of air time? And then looking out over the next couple of years, is that mix of which brands you're taking air time away from going to be the same or could we see perhaps a few more hours being put back into the Invicta watches?

No. No. If you look at the Invicta watch customer, it's always been this anomaly. So we say as a Company that we have 75% women and 25% men who buy Invicta watches. That's really the mix.

So that's a really important brand to us. We want that brand to continue to grow and this test that we did back in March with GoPro cameras from a boat in the middle of the ocean in Miami while it was raining, and suddenly we were able to sell a really decent amount of product that had nothing to do with television.

Those begin to show us really positive signs that you could take existing established brands and grow them in ways that are not necessarily taking away from other brands and in fact, they're enhancing them. We were selling Invicta Watches during that online only event that we did with Google Hangouts and on air we were selling Samsung televisions.

That's where we get excited about how to take some of our established brands and figure out new incremental ways to grow them, while perhaps moving away from some of their, what would normally be given these endless amounts of prime time hours where we're selling a lot of watches and we're selling a lot of linens. And so it enables us to pull away from that while still growing the new brands.

Great. Thank you very much for your answers and looking forward to the Analyst Day next week.

And yours as well.

Mark Argento, Lake Street Capital.

Just a question around, you had mentioned inventory, been doing some discounting to move some textiles. How is the inventory going forward? Do you have other areas that you need to burn down some inventory? I know you'd mentioned starting an outlet store; maybe some thoughts around that.

Mark, this is Tim. The inventory is really, it's not so much that it's a challenge. It's just that we have to get things in place to move it besides just what's on air. So we're doing a lot of smart things right now including the outlet store. But I don't see anything in terms of a bulge there. It's all normal progression.

I think if you think back a couple years ago, when we went into the home and fashion industry as a segment, we were moving it all on air. And we are to a certain size now where we just need to have other avenues to move it once it reaches a certain threshold in terms of performance. So I think it's a natural evolution that we'll work through in the next two quarters.

When you think about what we're doing here and why Mark hired me, it's really about trying to create sustainable profitability and that's just not merchandising, it's just not programming, it's just not operations. We have to get all these things in sync in order to do a sustainable move on EPS.

And we look back and I've known this platform for quite some time. And I think it's been 13 years since we produced two quarters of EPS growth, two consecutive quarters. And really, what we're trying to do for our stakeholders and for ourselves, because we are all here spending our lives doing this and we really believe in it, is to create a situation where we can create sustainable, profitable growth. And that's going to take again, these two quarters, to get all those things working together.

All right. And then Mark, looking back at, I know Invicta is a decent part of your business and obviously will probably be a decent part of your business moving forward. But given the sensitivity I think that you saw in terms of moving, reallocating air time relative to the performance that we saw in the quarter, does that alter your plans in terms of allocating time to new brands?

Or do you have to maybe pivot back a little bit or has the bandage been ripped off so to speak and it really is not going to alter your plans in terms of how you're allocating and thinking about new brands, new launches?

Thanks, Mark. I think that's a very fair question.

I think we have to iterate our way through this process. I certainly don't view it as a band-aid being ripped off. I think that we very much believe in this business. There is no reason why we can't continue to grow the Invicta business.

We just think we can grow it in more unique, clever ways that include our other platforms while we make room for these new proprietary brands. You can't very well launch a new proprietary brand at 2:00 in the morning and expect for them to really grow.

And so we took some real stands with the Beekman Boys, with Todd English, with BoKU super foods. We put some of these brands in these prime time slots and they've been really successful, but we need more of them. And I think it's quite something, despite what we've released this morning. In these three or four months that we have, without a senior merchant, launched all of these new brands that created a real energy and a real excitement here for other people to want to come here, as well. And so it's an iterating process.

And I think that likely, had we perhaps at the beginning of the first quarter where we were starting to see that some of the beginnings of that, that perhaps we went a little too quickly. But there is no going back to just giving Invicta all their hours and doing business as usual. Because I believe we'll be sitting here a year from now having the same conversation about our attempt and likely failed attempts then to lunch proprietary brands. Our batting average so far on the launch of these new brands has been quite good.

All right. Fair enough.

And then one last one for Tim. I want to better understand the whole shipping margin. You talked about almost like a paradigm shift out there. Is it that other merchants are being aggressive in discounting shipping? Or what's the core of the issue that you guys are seeing?

It started probably three or four years ago and it was a slow migration with Amazon Prime. And customers began to be trained to expect less and less shipping costs as it relates to their purchases online. And then from, if you saw recently Walmart's testing a very similar process for their best customers. And so when people begin to add that as a consequence of shopping at a particular merchant, everybody has to compete and offer similar shipping type charges.

So what I think, if you look across the landscape, I think you'll see a consistent theme that shipping margins have changed dramatically over the last 24 months with a certain acceleration over the last 6. I think it's just level setting that when you look back historically, the margins will shrink, but I think it is leveling out. I think it's a small correction period and I do think it's a broader industry issue.

Great. Appreciate the color. Thank you.

Greg McKinley, Dougherty & Company.

I wonder if we could talk a little bit more about the watches business. Can you remind us first of all, what portion of your sales watches represent? And then I wonder if you can comment on the category as a whole? So we understand air time was taken away from it as you're testing new brands, but are you seeing any broader pressures in the category?

I don't know if it's Apple Watch-related. Any comments you could provide there? I know Fossil and Movato for example, have been struggling brands of late. Can you give us some context for that please?

Sure. Yes. Thanks for the question, Greg. I think that on the watch scenario, I think a number of factors occurred in Q1 in addition to the reallocation of some of the air time. But I think the watch category overall, not so much from the Apple Watch, because I think that's a different customer, but I think watches in general to the two names that you mentioned as well as others, those categories have slowed down a bit.

So I think that was kind of a confluence of a couple of different factors as it related to the watch business happening all at once. And I think that they represent a good portion of the -- well, they represent the majority portion of our overall watch business. They are 24% or 21% of our overall mix as a category in watches right now. So I think a number of those things happened, but we're not overly concerned with it.

I think it's just sort of temporary momentary correction. I will say the lower price that we went on the Invicta Watches, the less dollars per minute that they delivered. So in fact, the Invicta customer, our Invicta customer, our watch customer is very much a collectible one. And they're much more interested in the collectible watches than they are necessarily in a low-priced, value-driven type of watch.

Okay. So is it fair to say that maybe the category as a whole is sluggish, but to the extent that sustains here into Q3 and Q2 rather, that you probably won't be as aggressive with ASPs, but maybe the category demand just is going through a soft patch? Is that how we should think about that?

I think it's a combination of both of those things. I really do. But what's clear is, even in the last month or so here, that as we start to look at these higher price points and deliver on more collectible things, that that collectible customer is there and they are responding. So to that end, without being specific of course, I think some of the course corrections that we learned in Q1 we are now applying now and we are seeing that they're working.

On your comments on textiles, can you be more specific exactly, give us some examples of types of products and how you're feeling about inventory positions in those today?

Yes. So I think we bought enough textiles to bed every country in America to be honest. And not to be glib, but every time I walked in in the morning, we were showing linens. And last year, last summer there was an issue where X amount of styles had to be ordered and so both boatloads of textiles came through. And at some point, you keep airing them, your productivity is going to diminish. And they diminished really dramatically because they were just on the air all the time.

And despite the variety of 20 different color sheets and pillows and different patterns, at some point, it's going to slow down. And that hurt us and we had up until now, to what Tim was talking about, we had no real way of displacing them or selling them elsewhere, so we have to use this valuable air time. That's a mistake that ideally, we won't do again. And not buy so aggressively as we did last summer and then have to sell them in what would otherwise have been more productive air time.

Okay. And so for us to understand how you're thinking about margins, gross margins over the next six months or so, that still is a remaining element of how you're going to move the product until we can get the outlet center opened up? I'm just curious if we should be thinking about some gross margin pressure sustaining from that. And maybe, Tim, could you comment about the different moving parts in gross margin this quarter?

Well, there are a lot of them, right? So let's think about them piece by piece. You have the shipping margin and the efficiencies and changes around that. And we expect, like we said, that's a permanent shift that we are organizing to absorb. In terms of the margin on product in the first quarter, certainly there are a lot of moving pieces. We've mentioned by category, by mix.

I don't see a material change in terms of how we're planning for Q2 and Q3. So I would likely set it at the beginning of level setting that Q2 and Q3 are relatively flat. Those are, if you follow the linear argument there, the margins we expect to be very consistent, as well. Again, we've been working on all these issues and correcting all these issues from the learnings in Q1, but we think that the relativity cycle last year applies to those metrics, as well.

Okay. Thank you. And then regarding variable costs, maybe if you could go back to why are we having the delay in the warehouse management system? And is that the main factor that's going to help drive lower variable costs when it comes online?

There's a series of things that we are doing around lowering the variable costs. Not only just working smarter, but certainly the processes and technologies of the WMS will be helpful. But the WMS, the Manhattan -- it is a very complex system involving 500 employees and lots of packages. And we just want to be mindful that we don't overstress the existing operations that we're doing and the metrics that we are already reaching with an overly aggressive timeline.

I've been involved in these in the past and I've seen other ones go wrong when the timelines are just not realistic and you have an entire organization still trying to meet them. So we just want to be thoughtful. I've been here for a lifetime of 35 days, but I could tell you that we're making good progress and we will move according to our progress, and I just want to manage expectations that we are not going to be overly aggressive to stick to some schedule.

Okay. Within the transaction costs themselves, it is that warehouse transition? Or is it the nature of the products, is there more I don't know, split shipments for the type of product that's being sold or it doesn't sound like it's the way the call is being handled. More of it keeps moving toward Internet or mobile. I'm just trying to figure out how much of this is a change in the type of product or the way the customer's interacting with you versus how much of it gets resolved with some of your warehouse projects.

Well, there's certainly the cost side, which we just talked about, but I think you have a great question. One of the core drivers on the revenue side is the ASP. And with the ASP and then if you think about the revenue impact, ASP is the largest and then it gets down to merchandising mix. And certainly with, for example on fashion, you're going to have two or three items put in a box together with instead of jewelry, which is traditionally one item, sometimes within fashion you have a pair of shoes and a blouse and there are different elements that go into that.

But I think if you think about those two items, ASP and mix, those are what are driving the variable costs. And we are very mindful of those and that's why you heard Mark talk about at the very beginning, managing the price point by category is a key initiative that Mark introduced in the first quarter that we're really pushing through in the next two quarters to make sure that we have a firm handle on our variable costs.

Okay. Okay. Thank you.

Just last question, your second channel, first of all, when should we expect that to be launched? Secondly, what kind of resources need to be invested in that to bring that to reality?

Good judgment, fast operations, I think there's a variety of things. I don't think it's a large, it's not what would we would consider something that we're going to be, like a Bowling Green investment to launch this channel. In terms of timing, we are working hard to make this happen as quickly as we can. And we'll release timing when it becomes more clear. I think that certainly we are focused on a 2015 launch and are working hard to make that happen now.

Thank you.

(Operator Instructions)

Mark Smith, Feltl and Company.

Let's hit watches once again. Can you quantify how much air time you took away from watches?

I'm sorry, could you say the question again, Mark?

Can you quantify how much air time you took away from watches?

Not specifically. I think they're all sort of moving targets in terms of moving them from prime time to fringe or prime time to during the day, prime time to Saturday mornings; all the different inflection points where we deliver higher sales at any given time of the day. So it's really just been this movement, kind of moving of chess pieces if you will, around our programming schedules to see where they really take. So that's really the scenario with what we're doing strategically with watches.

But if they are any moving targets, the lower ASPs that I talked about earlier certainly have an effect and this displacement of air time also. So it's now moving some of it back into prime time so we don't see the results that we necessarily have. But certainly not going back to where we were because we'll end up being in the same situation a year from now, having the same discussion about watches.

We were just a little too aggressive, Mark. There's no question about it. We pulled away too quickly and it caused what it caused.

Is it safe to say over the last few quarters, as you've reduced some of the air time in watches, that that business has maybe held up better than you'd expected, but now maybe that caught up here --

I can't really say it's held up better than expected. It's a strong business, right? It has a really loyal customer base. It still drives a tremendous amount of new names. And so I think a lot more has to happen for us to get worried about our Invicta watch business being a real negative to us. We look at, as you know, it is our leading brand and we look at all kinds of ways that I've already talked about in terms of how to grow it. We just have to be smarter about it.

And turning to home and consumer electronics being down a little bit as a percent of your mix, was that largely the textile business or what did you see in consumer electronics during the quarter?

Well, let's talk about the home part of it exclusive of consumer electronics. I think that exclusive of textiles, the home business was up. It really was that one category of home textiles that caused us to have this negative impact on that category. You look at the other categories, the Todd English, and if you look at BoKU super foods, you look at Paula Deen, you look at Cook's Companions and some of these other brands, they've all driven nicely in terms of increases.

It got completely overshadowed unfortunately by the textile business. But we see the other growth in these categories and we're encouraged by that. As it relates to consumer electronics, it's really flat. I think the mix is flat. I think we are trying, like everybody in this space to be as opportunistic as one can possibly be.

Given the pricing and margin challenges that exist, some of our competitors have done well with it recently, some haven't. And as a smaller player for now in this mix, I think that it will remain a challenge. We don't see a lot of growth. We don't see a lot of negative. We just see it flat from where we were.

Okay. And that's pretty much according to plan in consumer electronics? That's not a business that you were planning on boosting significantly here?

Correct. If you remember, we were still drafting off of that one year in 2013 where the tablets were high, high, high on sales and low, low, low on margins. And so we were still drafting off of that, but I think it's flat now and we don't anticipate it changing negatively or positively.

And then looking at gross profit margins, excluding impact from shipping, is there any reason that those should be flat to down? Or is the product mix, is it hitting your plan of the new products driving higher-margin, at least expectations for the next 12 months here?

I think that you can assume flat. There's certainly not -- our plan and the new proprietary launches and the newness that we're introducing, which again, those work in concert together, will be flat. It's not intended, it won't we don't believe.

And I think you'll see as we move into the second quarter here with some of the new launches that are coming, particularly in the ingestible sides of things, that we are very encouraged about. Particularly since they drive huge amounts of new names and they're very high margin categories.

So there's going to be some upcoming, as part of our overall initial proprietary brand launch, but certainly in those categories, that are big gaping holes if you ask me in our programming schedule and opportunities for incremental sales, repeat customers, auto shipment, auto deliveries all those things that are big pluses for us as we go forward.

Okay. And then moving down the P&L here a little bit, G&A expectations as we look throughout the year, is there any reason that we should see increases excluding a lot of the one-time stuff over the last year or so? Or is that something you can leverage as we get into Q4 and beyond?

Mark, this is Bess McCartin. And it's similar to what we've said before on the G&A front, which is we expect that to be up inflationary against last year when you exclude the one-time item. So same expectations as we had before.

Okay. Excellent. Thank you.

Mark Riley, Media Group Investors.

I've got a nonoperating question for you. There's been a lot of discussion in the broadcasting industry about the upcoming TV spectrum auction, which is now scheduled to take place early next year or projected to take place early next year. The FCC has put out some studies on the expected auction results by market. And the numbers are pretty fancy all across the country. But in Boston I noticed that they expected a median auction value per station of close to $100 million. I know you carry your station on the books quite a bit less. I think $12 million.

$13 million.

$13 million?

Yes.

I'll answer a part of this then I'll let Tim. I have a sense that boy, if it sold for $100 million that this would be really, really great for EVINE Live. But I also have a sense that it's a really fluid discussion scenario as to what valuation would really come from that. We follow it very carefully. We have advisors in that world who are advising us on it.

Obviously, there's a value number and now put on it by the government agencies that think it's worth X. I think at some point in Q1 or Q2 of 2016 that that's going to come to pass, and we are following it very closely as a potential really great upside for us at that period of time. But we're certainly not counting on it. Tim?

In terms of organizing, we certainly like the productivity of our Boston station. I've been in the broadcast business for a long time with Tribune and Sinclair and I've seen a lot of these valuations versus digital spectrum and the thing has evolved to where it is today. We are certainly interested in the outcomes, but we are not optimistic it's going to stick to the timeline or the valuations that are being floated around today.

Okay. Fine. Thanks.

Ladies and gentlemen, thank you for your questions. We will now turn the remainder of the session back over to Mr. Mark for closing remarks. Please proceed.

Okay. Thank you and thank you again, everyone for listening in. Thanks for the calls. Again, I think that there's a lot of thought and time that went into how we were going to deliver this message here. I think what the opportunities and the enthusiasm that we have shared, ideally on this call are very real. I remain wildly excited to be here. The idea that we could launch what we've launched over the last couple of months and the conditions under which we launched them, we are a different Company.

The before and after from EVINE Live, from ShopHQ from last year to this year is dramatically different. You can only walk the halls here and see and feel from the employees both here and in Bowling Green, the level of excitement and the level of enthusiasm. If you're a planner at EVINE Live and you have to plan certain things or if you're in television and you're programming network shows, you need more stuff. You need more better stuff. Right now, we have more better stuff. We just need more of it and it's really that opportunity that makes it exciting for them.

That the more of these things that we put into the pipeline that creates the ability for us to not only grow our customer base, but have this breadth and depth of proprietary merchandise that at some point down the road, 80% to 85% of what we're going to be selling is only available on EVINE Live. I think despite these numbers that we are really very much on that pass. And having those sorts of opportunities from not only from the vendor community but the investor community, it's a completely different Company and we are not looking back.

We are only looking forward because we can and because we should. And I really am excited about that. I'm thrilled to have Tim here. I'm thrilled to have Penny and I'm thrilled to have the team that's been here for a while and some of the newer members that have joined here to help me in this effort. So with that, I thank you all very much and I look forward to seeing many of you, ideally, next Thursday here in our studios. Thanks very much.

Ladies and gentlemen, that concludes today's presentation. Thank you so much for your patience. You may now disconnect and everyone, have a great day.