iMedia Brands Inc (IMBI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the EVINE Live Inc. third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded. Today, we have an hour of prepared remarks and questions. I would like to turn our conference over to Jason Iannazzo, Director of Investor Relations. You may begin.

Thank you, Nicole, and good morning. I'm joined today by CEO Mark Bozek and CFO Tim Peterman. Comments on today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipate, believe, estimate, expect, intend, predict, hope, should, plan, will or similar expressions.

Listeners are cautioned that these forward-looking statements may involve risks and uncertainties that could cause actual results to vary materially from those expressed in any such statements. More detailed information about these risks and uncertainties, and our latest cautionary statements, are contained in EVINE Live's SEC filings. Comments on today's call may also refer to adjusted EBITDA, which is a non-GAAP financial measure. For a reconciliation of this measure to our GAAP results, and for our explanation of why we use it, 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 on this conference call is as of today, and the Company undertakes no obligation to update these statements. I will now turn the call over to Mark.

Thank you, Jason, and good morning, everyone. We're pleased with our third-quarter results, as we witnessed a continuation of the momentum we experienced in Q2. We delivered top line sales growth of 3% and positive adjusted EBITDA in the quarter. These results were driven by the better-than-expected sales, with solid growth in all categories, with the exception of jewelry. We're encouraged by the improving trends we've seen in our business, and we believe we're well positioned to compete this holiday season.

During the quarter, our margins were more in line with industry averages, as we executed on our strategy to deliver long-term sustainable growth, through a more diversified product assortment, in a highly competitive retail environment. Tim will discuss our margins in more detail, but it is safe to say that our business model, a model with disproportionately high fixed costs related to distribution, is one that is built to scale. And as a result, our Company has the potential to drive long-term sustainable growth by growing the top line, even with more competitive margins.

Our digital sales during the quarter grew 250 basis points, to approximately 46% of total sales, fueled by a healthy increase in traffic. Mobile sales continued to make up a large percentage of our digital sales, and this quarter saw a 780 basis point increase in mobile sales, to roughly 42% of total digital sales. As I stated last quarter, our strategy of delivering long-term sustainable growth is twofold. First, we're focusing on offering our customers a more diverse assortment of proprietary brands. In essence, we're offering more in our store, with the goal of motivating customers to engage with our Shop, Share, Smile platform more frequently.

And, second, we're increasing the awareness of the EVINE Live brand, while at the same time augmenting our distribution footprint, with the goal of expanding our customer base. We believe that this quarter's result indicate that we're delivering on both fronts. As you know, a lot was made a year ago about the need to expand our stable of proprietary brands. I can confidently say that, during this transition year, our deliberate merchandising strategy of investing in new emerging brands, coupled with our ongoing commitment to increasing the productivity of our established brands, is working.

Emerging brands introduced over the past year, as a percentage of sales, have increased tenfold year over year, and proprietary brands now make up roughly 35% of our total product assortment, versus 25% last year. More than 10% of the brands introduced over the past year are currently among our top 10 best performing brands in FY15, with now at least four emerging brands on a run rate to crack the top 10 next year. During the quarter, certain emerging brands, such as Todd English, Consult Beaute and Beekman 1802, brands we consider to be potential anchor brands, saw decreased airtime from Q2, but increased productivity.

And because we have more in our store, we no longer need to devote as much airtime to our established brands, like Invicta, Waterford and Kate & Mallory. By having a more diversified product assortment, we've been able to decrease the airtime allocated to our established brands, while at the same time increasing their dollars per minute. We're also encouraged that several emerging brands are substantially outperforming other EVINE brands in their categories, on a dollars-per-minute basis. Nicole Curtis Home and Beekman 1802, for example, each out-indexed other brands in their respective categories by more than 50% in the quarter.

Improvements in our customer accounts are also encouraging. During the quarter, we saw a 3% increase in our active customer file, with our best customers, customers purchasing more than 40 times per year, growing by double digits. Clearly, our core customers are responding well to our more diverse product assortment. In the categories of fashion, beauty and home, categories that typically translate to high repeat purchases, we saw notable customer growth. Our customers are purchasing more frequently, with our average purchase frequency increasing 4% in the quarter.

Finally, during the quarter, we also improved our retained customer count, across all customer segments, by 7%. While we're pleased that our existing customers are responding to our more diverse product assortment, we continue to strive to expand our customer base. One prong of our strategy to expand our stable of customers is to engage potential customers in a way that causes them to stop, and then shop, with EVINE Live. While unique online visitors and TV viewership doesn't necessarily translate into immediate sales, they're a necessary and important first step to a future sale.

And on this front, our Brands With Fans strategy is working, as is evidenced by significant increases in both digital traffic, as well as television viewership. During the quarter, we saw an impressive increase in our traffic to our digital platforms, which grew 21% year over year, and we saw similar increases in television viewership. Our average hourly television viewership during the quarter increased 17% year over year, and we saw a 38% increase in viewership over the same quarter in 2013.

What's even more encouraging is that all of our 20 most viewed hours, year to date, are brands that were introduced in the last 12 months. Clearly, emerging brands like Paula Deen Kitchen, Nicole Curtis Home and Lisa Vanderpump Home are enticing potential customers to stop and then shop with EVINE Live. Events built around social media have also enabled us to introduce potential customers to our Shop, Share, Smile platform. In September, we aired a promotion with Skittles and Marshawn Lynch, in which the tight-lipped Seattle Seahawks running back pitched Skittles on EVINE Live, which resulted in 290 million social impressions, and placed the EVINE Live brand in the feed of over one-third of all Twitter users.

Similarly, we hosted an event in Los Angeles, honoring the women of EVINE Live, that was attended by Nancy O'Donnell, Paula Deen, Lisa Vanderpump, Heather Dubrow and Michelle Williams, among others. These exciting events -- this exciting event, celebrating a number of our emerging brands, resulted in over 300 million media impressions, including on people.com, usweekly.com and in the Daily Mail, again introducing new potential customers to EVINE Live. While promotions and events such as these are effective in building awareness of the EVINE Live brand, these efforts alone are not sufficient to grow our customer base in a way that we can truly leverage our scalable business model.

While peers in our space have offered their viewers a broader range of programming options and more relevant programming for viewers in different time zones, our Company had not yet completed a new distribution deal since 2013, until now. We've recently entered into a distribution deal that will launch in the fourth quarter, which we believe will enable us to expand our customer base and, in turn, drive meaningful revenue growth beginning in FY16. Tim will provide more details about these initiatives.

But as I indicated last quarter, we believe that increasing our distribution footprint, and improving the quality of the homes in which we are broadcast, are significant blocks of the foundation we're laying for long-term growth and profitability. Now let me share just a few highlights -- third-quarter highlights, by brand categories. During the quarter, we had a strong sales in the home and consumer electronics categories, which increased 18% over last year. As we launched our Share the Holidays campaign in October, we were thrilled to be named the number one retailer in the US for the Swagway Hoverboard, one of the hottest tech toys of the year, which contributed to strong performance in this category.

We also had success in the quarter with Samsung 4K televisions, automated electronics, holiday lighting and the launch of Dell computers, which had several sellout items in its first airing. During the quarter, we also had strong sales in our soft home brands, with the premiers of home lines from Nicole Curtis and Lisa Vanderpump. We also continued to lead the industry with new, unique offerings such as fresh, not frozen, premium meats from Andrew Zimmern, of Bizarre Foods on the Travel Channel.

Our beauty category continued to deliver strong results in the third quarter, with 4% growth over last year. As I mentioned, Beekman 1802 and Consult Beaute are among our best-performing emerging brands. During the quarter, Bravo's Real Housewives of Orange County featured a behind-the-scenes look at the launch of Terry and Heather Dubrow's Consult Beaute. The show on Bravo drove a 30% increase in traffic to EVINE.com during the segment, resulting in more than $200,000 in off-air sales of Consult Beaute. Cindy Crawford also launched her book, Becoming, on EVINE Live during the quarter.

These are just a few examples of our ongoing efforts to grow our business by offering customers not only great proprietary offerings and outstanding value, but also compelling content, which entices them to engage with our Shop, Share, Smile platform. Our fashion and accessories business continued to perform in the quarter, with 3% growth over last year. Kate & Mallory and One World remained anchors in the category. We also launched new proprietary brands from Nancy O'Dell and Karen Fairchild of Little Big Town. Both brands tapped into their social networks to promote their launches, and introduce EVINE Live to their extensive fan networks.

In the quarter, we also launched our first blogger brand, Bows & Sequins, from Jessica Sturdy, which not only exceeded our expectations but also tapped into a customer demographic not previously targeted by our Company. With sales in our jewelry and watches business decreased -- excuse me, while sales in our jewelry and watch business decreased 6% in the quarter, in large part due to industry-wide challenges in jewelry, we were encouraged by the performance of our watch category, which was led by our anchor brand, Invicta.

During the quarter, we celebrated our 14th anniversary with Invicta with a month-long event that launched in Miami, before moving on to our studios here in Minneapolis, and ended in Cabo, Mexico. During the Cabo event, Invicta introduced our customers to TechnoMarine, a brand recently inquired by Invicta, which we believe will become a strong performer in the category. Given that jewelry was soft in the quarter industry wide, we're pleased that we deliberately reduced jewelry as a percentage of total sales mix by 800 basis points, over the last two years, as part of our strategy of diversifying our product assortment. As a result, we were able to minimize the impact of the industry-wide slowdown in this category on our business in general.

Finally, we're optimistic that we're seeing real continued momentum as we head into the holiday season. As is evidenced by improvements in customer counts and average purchase frequency, as well as increased traffic to our digital platforms and television viewership in the third quarter. And despite operating in a highly competitive retail environment, we remain confident that this momentum, coupled with our efforts to improve the breadth and quality of our distribution footprint, are a solid foundation for top line growth and profitability in the fourth quarter.

I would also like to again acknowledge our EVINE Live team of retail warriors who continue to make all of us proud of their tenacity, scrappiness and overwhelming support of what we're building. In particular, the many of them who are working to share the holidays with us during this always important Thanksgiving weekend. To our broadcasting, planning, programming, merchandising team, our hosts, our customer service representatives, and the entire team at our Bowling Green distribution center, thank you and happy Thanksgiving.

I will now turn the call over to Tim, and he'll take you through our financial results. Tim?

Thanks, Mark. Good morning, and thank you for joining us today. I would like to discuss several financial and operational initiatives, as we continue to build a strong foundation for long-term sustainable growth. Consolidated net sales for the third quarter were $162 million, compared to $157 million for the third quarter last year, which represents a 3.3% increase year over year, and a more than 40 basis point growth acceleration from the second quarter. In addition, our return rate improved 230 basis points in Q3, from 21.2% to 18.9%, a five-year low for our Company, and a benefit of a more balanced merchandising mix and better quality merchandise.

Not unlike the margin pressures we experienced in the second quarter, as we continued to roll out our new merchandising strategy, we expected similar pressures this quarter, as we create margins more in line with industry averages, to drive the strategy of growing our customer base and top line sales to scale our business. Gross profit decreased 5.3%, to $56 million. Gross profit as a percent of sales decreased 310 basis points, to 34.5%, primarily related to the following decreases.

180 basis points of gross margin percentage decrease was attributable to reduced margins in jewelry and watches, and home and consumer electronics, as we continue to execute on our merchandise strategy. 90 basis points of gross margin percentage decrease was attributable to mixing out of the jewelry category, on decreased airtime, and into the lower-margin consumer electronics category. 30 basis points of gross margin percentage decrease was attributable to reduced shipping and handling margins. Now, let's walk through each one individually.

As you heard Mark -- as you heard from Mark, the jewelry category was pressured and competitive in the third quarter. As a result, we made necessary adjustments throughout the quarter to remain competitive, from a sales and market share standpoint. This resulted in increased promotional activity to drive jewelry sales, and a reduction and reallocation of airtime from jewelry to our consumer electronics category. Although the lower profit margin of consumer electronics impacted our overall rate, our strategy of broadening our product mix enabled us to drive considerable sales in consumer electronics. And that velocity enabled us to offset a portion of the margin dollar losses from reduced jewelry sales.

We believe that our more diversified product assortments positions us well for overall revenue growth in what has been an otherwise challenging quarter for retailers, and would have been a similarly challenging quarter for us, given our historical reliance on our jewelry business. Shipping and handling margins continue to adversely impact our margins. We know this issue is not going away anytime soon, and we, like all other retailers in our space, continue to adjust to the marketplace demand for less expensive shipping.

This is a key priority for the business as we head into 2016, and we are making progress, as we implement smarter pricing, more measured promotions and lower negotiated shipping costs with our vendors. In terms of other third-quarter take-aways, coming off a 10% reduction in average selling price year over year in the second quarter, we are pleased with our ASP this quarter, especially given our more diversified merchandising. Our ASP in the third quarter was $65, only a 3% decrease from prior year. We still believe a more stable ASP will be good for the business, long term.

Third-quarter operating expenses were $60 million, compared to $59 million last year. Operating expenses were up 2% over the prior year. Operating expenses were affected by an increase in variable costs of $1 million. Variable costs as a percent of sales were 9.1% versus 8.9% last year, reflecting the impact of the 7% increase in net shipped units, as well as a less efficient warehouse, as we complete the expansion at our Bowling Green distribution center.

As a result of our distribution facility consolidation and technology upgrade initiatives, the Company incurred approximately $300,000 in incremental expenses during the quarter, relating primarily to increased labor, warehouse equipment rental, training expense, and other costs associated with our warehouse consolidation efforts. As we've discussed, we're constantly evaluating our business and leadership structure, and we are continually considering ways to simplify our organization, to drive quality decision-making faster, and build sustainable shareholder value on an ongoing basis.

To that end, we incurred about $800,000 in executive management and transition costs in Q3. The rollout of our new warehouse management system in our Bowling Green distribution center continues to be a primary operational focus. We are currently in the implementation phase, and have begun moving orders for select merchandise categories through the system. We are still expecting to phase in the implementation through the first half of 2016. The completed rollout is expected to result in both improved labor and productivity and shipping efficiencies that should result in variable rate decline in 2016, and improving the speed and accuracy of our shipments to our customers.

As for the balance sheet, we ended the quarter with cash and restricted cash of $12.6 million, compared to $16.2 million at the end of the second quarter. Net use of cash and restricted cash in the third quarter was $3.6 million, primarily driven by flat adjusted EBITDA of $0.2 million, net working capital investments of $6.9 million, and capital expenditures of $4.3 million, of which $1.1 million is related to the equipment installation in the new Bowling Green distribution center. All this was offset by the revolving credit facility [advantage] of $10 million.

To strengthen our balance sheet as we prepare for growth in 2016, in the quarter, we signed an amendment to our existing credit facility with PNC Bank to exercise our $15 million accordion provision that increases our total revolver facility to $90 million. Under this amendment, we also established a new $25 million accordion provision for future additional liquidity. As of the end of Q3, we have drawn down $55 million on the $90 million facility. In terms of total liquidity, as of the end of October 31, we had approximately $12 million of cash and approximately $24 million in availability of the PNC revolving credit line, which totals about $36 million in liquidity.

Our inventory for the quarter finished at $75 million, which was a 10% increase from this time last year. While our inventory growth hadn't out-paced our sales, we believe that it is at an appropriate level that allows us to continue to test new brands and concepts, and fuel future growth for this important holiday season. As Mark mentioned, aside from our focus on diversifying the assortment of our proprietary brands, we believe growing our customer base is a key driver to scale our business. It's not just the number of homes that we are in that drive sales, but also, we believe it's the number and quality of channels in those homes.

As a result, we are exploring ways to not only broaden our distribution base, but also improve our adjacencies and channel placements in homes where we broadcast. We believe, as we talked about before, this is one of our biggest strategic opportunities for growth in Q4 and 2016 and beyond. We recently signed new distribution deals for carriage on Verizon and Time Warner that will launch throughout the fourth quarter. While we are carried on Verizon Fios, we are currently carried on their standard definition signal.

Under our new distribution deal, we will be carried on a Verizon high definition signal, which is in another neighborhood on the Verizon lineup, a neighborhood that will place EVINE Live in the neighborhood of peers in our space. In addition, we just launched EVINE Too, and that's spelled Too, our first second channel. EVINE Too is a three-hour delayed feed to certain Time Warner cable systems in the Western time zones. This initiative allows us to offer more relevant programming to our viewers.

As we enter 2016, we're continuing to explore additional ways to offer customers a broad range of programming options, as well as more relevant programming. We are reiterating our fourth-quarter guidance of positive revenue growth compared to the prior-year results, and we expect income profitability, as well.

With that, let me turn it over to the operator, and we'll be happy to take your questions.

Thank you.

(Operator Instructions)

Our first question comes from Neely Tamminga of Piper Jaffray. Your line is now open.

Great. Thank you. Good morning, and happy Thanksgiving to you guys, too. So question for you on the distribution deal. Could you just help us contextualize a little bit more as to how many homes that you're going to go into with this EVINE Too? I understand it's the Western time zone and what have you, so just a little bit more detail in and around that? When did you flip the switch on that?

Would you expect some revenue contribution already in Q4? Or is that much more about next year, coming from that initiative? So any more details around the distribution deal, that would be helpful. And then, Mark, I have a follow-up question for you on holiday, if I may.

So your question on Time Warner. So this is really the beginning for us, for this second channel, and we want to make sure we're very thoughtful about the rollout of this channel. And we measure the success as we go. This first distribution deal is about 2.5 million homes in California, West Texas and Hawaii. And if we -- it is live, and we are seeing encouraging results. But it's, as you can imagine, very early in the process to really be making any estimates about anything. We think it's a very important initiative for the Company, and we expect big things from this in the future.

Okay.

In addition to that -- Neely, this is Mark. In addition to that, there are other -- the other initiatives that Tim talked to, as well, in some of the other HD neighborhoods that we have just now launched at the end of Q3 and into Q4. They are all, as Tim said, early in the process, but they haven't officially switched on. And we're encouraged by the idea of expanding our customer base by having this increased distribution. I think the real upside is going to come, for us, in 2016.

Okay. That's helpful, Mark. And then, Mark, as I reflect on your last year, and you have been going 500 million miles per minute, which has been really encouraging to see. But a year ago, you had to be tactical, as you headed into holiday. And this year, you've had really the advantage of being more strategic, right, as well? So as you think about how you're bringing EVINE to your consumers over the next, call it, five to six weeks, what are some things that you're encouraged by, as you think about how you have had more time to plan for holiday, than where you've been a year ago? Thank you.

Okay. Great. Thank you, Neely, and happy Thanksgiving, as well, to you. I think that, if we look at the before and after of a year ago to now, and the whole notion of - as I said, and I continue to believe -- of the idea of having more in our store. And the fact of what more in our store means for our existing customers, as well as our new customers. And it's really -- and it really plays to the whole notion of building a model that's built to scale.

So if you look at where we were last year, and the reliability, and the over-reliability that we had on some of our existing brands, and the pressure it put them under compared to now, where their decrease in airtime is actually increasing their productivity, because they're surrounded with more better products. And the notion of that, combined, enables us to take our active customers and have them grow by 3% in the quarter, and our retained customers have grown by 7%. The average purchase frequency by 4%.

Those are really great signs for us, because we're not relying on one brand to carry a weekend. They're surrounded by a more diverse group of products that enables all of those metrics that I just outlined to really grow and give us the courage that we have, going forward, that the strategy of this diversity is working.

In addition to that, what it does, because we're creating these new, exciting brands, and that not only traffic online and traffic on -- and viewership on television, those are all really good signs for us. That the digital traffic has increased by 21%, and our on-air viewership traffic has increased by 17%.

Those are all great leading indicators. As you know, we don't make money from viewership, and we don't make money from click-throughs. But the idea that we're having more people come, and at least watch before they're going to shop, is a really encouraging sign for us.

The next step in all of this, as we've built this diversity in our brands, to what Tim was talking about, this two-pronged approach is diversify your product mix at a competitive margin, and broaden our distribution. And to that end is why we feel as encouraged as we do in Q4 and in 2016, is because we've acted on both of those initiatives very aggressively.

That's helpful. And just one more follow-up, housekeeping on that, if I may. Tim, back on the distribution expense. So is there any early indications you can offer to us, as we think about your distribution cost per home for next year? Given some of these announcements that you've made, which we would be thinking about, in terms of directional modeling (multiple speakers)?

These are not -- I would think about it this way. It's not a linear addition in expense, because these distribution arrangements are not as -- they are below our cost -- our average cost that we've quoted to the Street. So that's the -- these are incentives for additional channels in the home, rather than new homes. And so I think about it -- I think that's the best way I can provide information about it.

And one other follow-up to that. I think it's important -- and not to belabor, because it's a really important part of our strategy, in addition to the diversity. But the distribution piece is incredibly important for us, and it's the new normal of distribution, compared even to a year ago. That it's not just -- as we have said -- not just how many homes you're in, which for many, many years was the metric that we were all measured on. It was the quality and the number of homes you were in, in a channel.

Our HD presence is at about 12 million homes across the US, and our competitors are in 44 million and 56 million homes. So you see the upside potential for us to scale our business is very real. We have the ability now to scale and to reach those kinds of similar competitive numbers, because we have a comfort and a confidence in the product diversity that we're developing.

Excellent. Thank you so much, you guys. Best wishes out there this holiday season.

Thank you, Neely.

Thank you. And our next question comes from the line of Thomas Forte of Brean Capital. Your line is now open.

Great. Thanks for taking my questions. I had three, and the first is on gross margin. What I'm trying to figure out is, near-term gross margin story, long-term gross margin story. As you make the transition to new brands, it sounds like that's going to be -- put a damper on gross margin over the near term. But how should we think about when you'll lap that dampened gross margin? And then after that, I have another question. Thanks.

Okay. Thanks very much, Tom. This is Mark. I think that, as it relates to gross margin, we really believe that the long-term sustainable growth that we'll obtain by growing the top line will be done with much more competitive margins. It's why we've taken this initiative, deliberately, to be more competitive with our margins. The only way that we're going to sustainably grow our Company is to have that diversity. As we've talked about for many, many years, of not having sustainable growth for 14 quarters in a row, was because this high margin was simply not sustainable.

We believe this deliberate attempt, and this deliberate effort, to diversify our product assortment, and keep it more in line with industry averages, allows us to build the model to scale. I think it's really, really important.

And as you look at it, the whole notion of where we are with our fixed costs, et cetera, this scalable model, at these competitive margins, is something that you have to find. And certainly, we are in this searching process that we've been in this transitional year.

But in this quarter in particular, we're very confident that the competitive levels that we're at, and all of our margin categories, allows this model to be built to scale. And we see that scale coming because we're more competitive on the margins.

Okay. And then the two other questions, quickly. Do you feel like you have stability now in your watch sales? And you've done a lot of creative things to sustain your Invicta sales.

And then, second, from a cadence standpoint, you increased your proprietary SKUs by 10%, 35% from 25%. Should we anticipate that cadence, going forward? Thanks.

Yes. I think the -- we are very pleased with our relationship with Invicta. We've been with them for now 14 years, right? And as many of you know, in the first quarter, we did a lot of things that were probably not very smart. We course-corrected ourselves in the second quarter, and I think that course correction continues in the third quarter.

We're very excited to see their productivity has been increasing, and that's with decreased air time. And I think that we -- their airtime has decreased by 11%, but their dollars per minute has increased by 3%.

It's precisely what we had hoped a year ago, when we started this process, that we could surround the Invicta brand, and all of our other established brands, with new, emerging brands. And therefore, by doing so, increasing their productivity. And we feel really, really excited about it.

And we're excited -- for tomorrow, there's a 24-hour Invicta event leading into the holidays, and they haven't been on the air for a couple of weeks now, and we're really excited about that. So that relationship with Invicta is as strong as ever.

As I said, they're launching -- the TechnoMarine brand officially will be launched in the next week or so. We feel really good about the potential for that growth, as well. As for your second question -- please repeat the second question, Tom. I forgot.

Thanks, Mark. So on the cadence of the new brand, you went from 25% last year to 35% this year. Can we anticipate that would be the cadence, going forward? Thanks.

Yes, I think the goal overall -- and over a period of time, as I've said before -- is to increase that number to 75%. And so it's not so much necessarily that we have to increase the number of brands to get to 75%. It's increasing the productivity of the new brands that we've launched, as well as, in parallel, launching new brands on top of that. So to get from 35% to 75% is a combination of taking the existing -- or the emerging brands that we've launched, to increase their productivity, as well as introducing new brands into the mix.

We had said last quarter that there were going to be three that we had launched in Q2. That, by the end of 2016, three new brands that would hit the top 10 by the end of 2016. We now think it's at least four, and potentially more, that will crack the top 10 by the end of next year. So that combination is something that we feel really good about, but it will come from taking these emerging brands. It's as if a television show had a first good year, and then the second year, their ratings went down, and they got kicked off the air.

We look at it in a similar kind of way, that you have to take these emerging brands like Nancy O'Dell and Little Big Town and Beekman and Consult, and make sure that not only have they performed well in Q3, which they have, but also that they continue to perform, so that they become a sustainable, long-term anchor brand for us, going forward.

Thank you.

Thank you, Tom.

Thank you. Our next question comes from the line of Mark Argento of Lake Street Capital. Your line is now open.

(multiple speakers) I got a new last name, but, hey. (laughter) Just a quick question on the -- now that the merchandise is really starting to perform and take hold, and obviously, you got the new distribution deal, you signed, and probably more to come. I know one thing that's been talked about was potentially cutting over, or adding some high definition capability.

And just wanted to get some thoughts around, is that a 2016 opportunity and event? And how does that fit in with, when you're looking at channel placement, adjacent channels, and your strategy on the distribution side?

Hey, Mark, this is Tim. How are you?

Hey, Tim.

The -- regarding the signal, and us moving into more and more HD channel placement opportunities, like we've done in the fourth quarter with Verizon. The signal we have, which is our standard HD up-converted signal, looks remarkably good. And we feel comfortable that, from a consumer perspective, when we've talked with a lot of folks that are looking at this signal, that it is in the right place in the HD band.

That being said, as a normal part of our capital process, we will be upgrading our equipment, but that's in normal course. We don't see any anomaly sticking up, from a capital perspective, about the equipment regarding HD.

Great. And when you're thinking about the launching of some of the new brands, and some of the, call it, nontraditional channels or mobile, or online in particular. I know the Invicta, you'd done some stuff with some periscoping, and launching some Invicta products. And you talk a little bit more about the cadence of those types of opportunities? And how you see that fitting into the strategy in 2016?

Thank you. This is Mark, Mark. I think that, like all of us in the digital space, and particularly in the mobile space, we're always looking at opportunities. And I think, because of our size, it affords us the ability to be much more scrappy and experimental. And we talked about that, certainly, with Invicta. The Invicta power plays show that we do every Monday night live on television, and live online after that.

There's a number of initiatives we have begun in Q4, where we are creating additional live content with some of our other brands, as well as additional taped content that will be running on our other -- on our second channel. As well as running online as content, if you will, that are drivers to future sales that don't necessarily come directly from the television. I think that is the -- for us, in 2016, we believe very strongly in the ability for us to, via digital initiatives, to grow our customer base, that does not rely necessarily on the 90% of what happens on digital that was aired on television, on any given day.

And then last question. In terms of the cutover in the warehouse management system, Tim, you'd mentioned, is that going live in 2016, after the holidays? Or where are you in that transition?

The transition, we think about it -- or we're working it in two phases. In phase one, that was just completed in October, is where we went live with jewelry in the warehouse, to make sure that we tested all the competencies of the new warehouse management system. And we've had very encouraging results from that.

In addition to that milestone in phase one, we have also gone through RF scanners on the receiving side, and really developed and implemented a new SOP on the receiving side. Those three milestones were accomplished in phase one, and we're now officially in phase two.

Phase two is the on-boarding and phasing in of all the other categories, through Q1 and Q2 of next year. It's going well, it's on plan, it's on scope. Manhattan and [Talent Created] are both great partners. The Bowling Green team is doing fantastic work, along with our IT teams. So we're in good shape right there.

Great. Thanks, guys, and good luck over the holidays.

Thank you, Mark.

Thank you. Our next question comes from the line of Alex Fuhrman of Craig-Hallum Capital. Your line is now open.

Great. Thanks, guys. I wanted to ask you about that 17% increase in viewership that you mentioned in the third quarter. Curious to how that compares to what you saw in the first and in the second quarter? And at what point would you expect that to start translating into more revenue growth?

I think your predecessors, at one point, mentioned that new customers will typically watch the television programming somewhere in the ballpark of 30 to 50 times before making a first purchase. Is that more or less what you've seen with new customers acquired over the last year or two, as well? And just curious to when you would really expect to see that viewership start to translate into higher sales?

Thank you very much for the question, Alex. I think that, again, as we've looked at it -- and we've never really looked at it -- certainly, day to day, in our business model of dollars per minute, we don't make any money from viewership or from ratings. But obviously, we look at it as leading indicators. And the reason why we feel as confident as we do, particularly going into the fourth quarter, and reestablishing the guidance that we've given for being profitable in the fourth quarter.

So when you see the -- of the top 25 most watched shows over the last year, all 25 of them have been new brands that we've launched. And if you look at the brands like Paula Deen and Todd English and Nicole Curtis, it's the transformation of them increasing that viewership by really big numbers. And then measuring, once that viewership happens, how long the path is before they actually convert to customers.

Because this has been such a unique year for the Company -- the most unique year, if you ask me, in the 25 years that we've been in existence -- is that certain conversions have happened almost immediately. When Nicole Curtis launched at the end of October -- excuse me, at the end of August, Nicole -- and in the world of social media, she shot a little 20 second video while she was on her way to the stage, and she posted it on Facebook. 220,000 people watched that video.

Within 12 hours, we did over $1 million worth of sales of that product. Half of the business that came from us were converted customers. Not people who liked, not people who viewed, but actually people who converted to EVINE Live customers for the first time.

That is one example of where we feel really strongly of those conversions happening. Social commerce has to be something where, at the end, there is a return on the investment. And we feel that example, the example of what we talked about with The Real Housewives of Orange County, that one-hour show that they did where EVINE Live was featured on that show, we had a 30% increase in our viewership on EVINE Live on our air, and on our digital networking. We did, as we said, over $200,000 in incremental sales, without any air time whatsoever.

So that's why we're encouraged. It's all well and good, when we talk about brands with fans, but if the fans just stay fans, and they don't convert to customers, it's not very good for us. So our whole goal, and the entire strategy, from the beginning, on that, as a driver of new customers, was how to convert them. And we're finding, through all of these types of initiatives, and some that we're going to be doing in fourth quarter and in 2016, are enabling us to convert them to actual customers.

That's something that we feel really strongly about. So that increase, and that strategy for us, we have this 1.4 million customer base. We need to increase that. We believe, by doing those initiatives, as well as, and even more importantly, the increased distribution, will enable our customer base to grow dramatically in the coming year.

Great. That's really helpful, Mark. Thank you. And then if I could just circle back, also, to the distribution costs. It looks like your cost per household kicked up in Q3, from $1.13 to $1.14. Presumably, I would think, with the launch of the second channel, and you increasing your position on the dial with Fios, are we talking about $1.17 next year, or $1.20? How high would you expect distribution costs per home to reach next year?

Yes. This is Tim, Alex. The -- we really can't provide that clarity that I know you're seeking. But we can say that, in normal course, these distribution costs are a lot less than the averages that you've just expressed. So if that's helpful, I hope it is.

Thanks, Tim.

(multiple speakers) Thank you.

(Operator Instructions)

Our next question comes from the line of Greg McKinley of Dougherty. Your line is now open.

Yes, thank you. Wonder if we could -- I want to better understand your customer retention, and you had mentioned a 7% improvement in retention rates. Can you tell us where that takes us from, and where it takes us to? And when you say retention, how is that being measured, or what exactly does that mean?

So retention means that, of our 1.4 million customers that they're retaining, and the churn that we had experienced in Q1, and historically we've experienced, that it's reversing that trend now. So that their retention, that we are retaining 7% more customers than we used to turn away, on a quarter-to-quarter basis.

So the core customers that we have now are actually buying more from us. And so that, for us, it's not necessarily about just the new names, particularly in these transformations, and changing the name of the brand, et cetera, are the core staying with you?

And we look at this very, very carefully on a weekly basis, not even on a quarterly basis, to make sure that the core are continuing to buy. And the reason they are continuing to buy is because they have more choice. And that choice is something that has been part of our strategy -- or increased choice, from the beginning.

Okay. Thank you, Mark. And what -- so what is -- with that 7% improvement, what is your retention rate at? Can you share that?

What is our retention rate at? So I guess, if you look at it overall in the quarter, the retention rate is at 7%, right? So it's more than --

Okay.

We look at what we used to be at, of 50% churn, on our 1.4 million customers, it's now 7% greater than that, in terms of our overall churn.

Understood. Okay. Thank you.

The whole piece of this is that when we -- because of the consistency over the years, we have consistently churned through 50% of our customers, and we are now, in these last two quarters, churning through a lot less. And that's a really good sign for us, as it relates to our product diversity.

Yes. Okay. Now, in terms of households that are receiving your content, what should we be looking for there? It seems like there was a slight sequential dip in the number of households receiving your content. How are you thinking about that, going forward?

And then, do these new distribution [pacts] actually increase the number of households? Or it sounds more like it's number of channels per.

Yes. If you think about the top of the trees analysis for distribution, you can see that we're fairly well distributed. And what Mark talked about at the beginning of the call was, we're really focused on the quality and number of channels in the home. And that distribution growth is significant for EVINE.

And when we look at our competitors, they've been very active in this area for quite some time, and we're just getting started. So when you think about modeling, it's really about the number of HD homes we're in, compared to where we are today. The number of distribution for our second channel, that would be in homes that we're already in. And those are the near-term and long-term, say 36 months, opportunities that we think will make a significant difference, as we build the brand to acquire more customers and scale the business. An important part of that is the customers that are acquired from the distribution growth.

Yes. Okay. In terms of product return rates, so that was -- that dipped a fair amount. Are you seeing that across product categories? Or is there -- is the decline at all due to shifting sales mix? Or how would you have us think about that?

Yes. This is Mark, Greg. I think that it's encouraging on many different levels. It's never one thing, right? I think certainly, because we've lessened the amount of jewelry in the quarter, that that helped affect the return rate in a positive way.

But I think it's also, overall, the diversity and the quality of the merchandise that we're selling, that it's not coming back as dramatically as it has historically. That's the lowest return that we've had in five years. And so we looked at that very encouragingly, particularly as it relates to our bottom line.

Same for the ASP, frankly, as well. The ASP has plateaued. We've talked many -- the Company has talked for many years about that. Just like the margin mix, we are very comfortable where our average selling price is, in this transitional phase, that it's a much more competitive number than it had been historically.

Yes. Okay. And then last question. On the variable costs, at 9.1%, as -- for the companies identified, we have to be more competitive with our gross margins, in order to grow revenues the way we want to long-term. Of course, an opportunity to offset some of that lower gross margin rate comes with operational efficiency.

And how -- or what can you tell us about how we should be thinking about variable operating costs, that 9.1%, as your systems and your distribution center come fully online? What are the opportunities there for leverage?

Hey, Craig, this is Tim. I'll take that question. The -- as Mark has talked about, this -- our transition year has been very productive, but it's been multi-pronged. So we started last fall, with the merchandise development, offering of broader breadth of products and higher quality products.

All those things are yielding themselves, like in lower return rates and higher out-indexing of new brands compared to category DPM. But on the operational side, it's also been very heavy lifting.

So this plan of introducing the new WMS system is no small matter. And it's been in the planning phase for probably a year, and now we're in the implementation phase. And it's going well, but it is a long process. And we believe that all the attributes of savings and efficiency regarding the WMS, we're seeing encouraging signs of, just from phase one, with adding in jewelry.

So we do expect the variable rate to decline in 2016, as we bring this fully online. But it's not a right turn; it's a bend. So we have to get through the process, and go live with it, and then tweak that. And so we think 2016 is going to be an important year for the beginning of the mining of the operational efficiencies.

And if you think about 2016, you think about the merchandising, and how that's developing now, and we're beginning to see signs of that. The operation efficiencies, on the cost side, will be coming through in Q1 and Q2 of next year. And then when you see the distribution growth, those are the things that, in this important transition period, that we're trying to accomplish. And we feel good about the progress we're making.

Okay. Thank you. And then I did think of one other thing I just wanted to clarify. On the HD side, where were you, versus where will you be, pre- and post-Verizon?

Verizon Fios has about 5 million subscribers, and so that's where they are today. And they'll grow over time, I'm sure, as their business model provides. The -- we are in about 12 million HD home -- HD band now. In terms of guidance, we don't provide that kind of guidance on that metric. But we find HD to be a very productive band for us, and one of our key priorities for 2016.

And what we just launched in the Verizon neighborhood, as Tim had indicated, is in the same neighborhood as our competitors, in the deal that we've initially signed for carriage on Verizon.

Very good, guys. Thank you.

Thanks very much, Greg.

Thank you. Our next question comes from the line of Mark Smith of Feltl and Company. Your line is now open.

Hi, guys. This is Aaron Steele filling in for Mark Smith. I just --

Hello, Aaron.

Hi. I just want to know the impact of the textile business on gross profit margin? And then how much of the textile inventory is left? And how long will it take to get rid of it?

Aaron, how are you, sir? This is Tim Peterman. The textile issue is a non-issue at this point. We've moved through it. As we've talked about in the last quarter, it was a bit of a drag in the second quarter, and it's not really an impact in Q3. We expect, as we discussed in the past, to move through it by Q1.

Okay. Thank you. And then any update on an outlet store, or other ways maybe to move inventory?

We -- inventory is at $75 million now, and that's about a 10% increase over prior-year period. And that has been considerably lower than the year-over-year growth that we've had over the last, probably, 16 months. As you recall, in late fall, year-over-year growths were in the 20%, and [deep in] Q1, more in the high 20%s. And we're now down to 10%. So we've done a lot of good work around the inventory life cycle. Yes, the outlet store is something we're still considering, and looking at locations, as well as a variety of other things, to make sure we improve the velocity of merchandise out the door, once it moves off the air.

All right. Thank you.

Thank you. Our next question come from the line of Jeff Bronchick with CFC Investment Management. Your line is now open.

Good morning, guys. Just a quick question on the -- can you just update on the broadcast spectrum that you guys hold? There's been, obviously, some regulatory movements, and some pretty big values put out there, particularly relative to the size of your Company. And maybe just talk through what you can about, how are you thinking about all this? And what has changed, maybe, as the year has gone by?

Hi, Jeff, this is Tim. Nice to -- thank you for the question. The FCC auction, as you can imagine, and seems like, is a very fluid process. We've been following this -- I've been personally following this for 15 years, and it's moved into the fall season, now, with a lot of velocity. As you know, the FCC came out with their auction procedures recently. And they also came out with a lot of different valuations about stations in all the DMAs across the US.

We expect, based on the information we've received from the FCC and our advisers, that the bidding would begin in the spring of 2016, and it would move through a [big] conclusion later next fall. We've -- there's been a lot of different information coming out. And the -- we sit a lot with our advisers, and the experts in the area, and we plan on being opportunistically inclined, and move into this auction, and to see what it yields.

So in other words --

(technical difficulty) It's not intentionally vague, necessarily. But it is that the numbers that are being thrown out there are so diverse, and it's something, as to Tim's point, we have smart people that are following it for us, and it's something that we will look at opportunistically.

But to use it in any way as a positive -- it's certainly not a negative for us right now -- is not something that we're considering, particularly as we go into this holiday season. But we are looking at it, as are plenty of the people like yourself, who are seeing the potential there. But it's just not something, because of its fluidity, that we're banking on in a big way.

Okay. Thank you very much.

Jeff, thank you.

Thank you. I'm showing no further questions at this time. I'd like to hand the call back over to Management for any closing remarks.

Okay. Thank you very much. Again, I think that, given the holiday competitive market that we're in, and some of the challenges of our -- of other retailers in our space, I just wanted to reiterate that we remained confident that the momentum that we've established over these last couple of quarters. With the breadth and quality of our distribution footprint, and the solid foundation for top line growth and profitability, is something that we feel very good about for the fourth quarter. Thank you all very much, and I wish everyone a very happy Thanksgiving.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.