iMedia Brands Inc (IMBI) 2016 Q2 法說會逐字稿

Greetings and welcome to the EVINE second-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Jason Iannazzo, Vice President of Investor Relations. Thank you, sir, you may begin.

Thank you and good morning. I'm joined today by CEO Bob Rosenblatt 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 related cautionary statements are contained in EVINE'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 an 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.

Now I'd like to introduce you to Bob Rosenblatt, our newly appointed CEO. Bob?

Thanks, Jason.

Good morning, everyone, and thank you for joining us. It is with great pleasure that I share with you that I have officially accepted the CEO position here at EVINE. I would like to thank the Board of Directors for trusting me to help lead this upcoming growth stage of our Company.

I'd also like to say to our shareholders, vendors, executive team and employees that I look forward to working side-by-side with all of you as we write a compelling new chapter for EVINE. As a passionate student of retail interactive video commerce, which continues to grow in all areas of television, mobile, social and streaming, my experience tells me EVINE is in the perfect position to capitalize on to future growth. In fact, the FCC's recent announcement seeking to sell additional digital spectrum to wireless carriers for $86 billion is just another example of consumers' future demand for digital content and our growth strategies center on capitalizing on this future demand.

Turning our attention to today's second-quarter earnings release, I am pleased with our results again this quarter as we continue to execute on our strategy announced in February to deliver improved profitability in 2016 in order to set the foundation for continued profitability going forward. Our approach centers on offering a balanced merchandising mix with a carefully planned use of promotional levers to engage our customers with exciting new and high-quality existing brands. I am pleased to report our successful execution of this effort allowed us to improve our gross margin by 160 basis points and to post an adjusted EBITDA of $3.8 million, which is a solid 52% growth year over year.

Tim is going to walk through the financial details with you momentarily but before he does, let me provide you with a little bit more color on the retail marketplace today and our strategy for the second quarter and the rest of 2016. It's no secret the second quarter was a challenging one for the macro retail sector and that each company has to determine based on their own specific characteristics and customer profiles how to best navigate under these pressures.

The two video commerce companies in our sector reported their quarterly results earlier in the month. While we feel our results are solid, it's not because we are any smarter than them. They are very smart people and I have a deep admiration and respect for the businesses that they have built over the past 10 years.

But our results are not by accident either. Six months ago we defined a 2016 strategy built on contribution margin discipline rather than revenue growth. We didn't have excess inventory from revenue shortfalls to promote this quarter and we pull backed on shipping promotions. That being said, revenue growth is clearly important and remains one of our top priorities.

As discussed on our last couple of calls we do not intend to repeat unprofitable revenue programs from the prior year. The benefits of successfully building our revenues in this balanced fashion are three-fold: increased contribution margin, better management of inventory, and more repeatable revenue programs for growth next year -- all three of which were accomplished this quarter by our merchandising, planning, programming and marketing teams executing a shared definition of success. Strategically our revenue game plan is to create profitable revenue growth through the successful execution of both organic internal initiatives, as well as external strategic partnerships that will collectively bring new brands, personalities and customers to EVINE.

We intend to complement this two-pronged merchandising strategy with a more aggressive distribution strategy, based on securing more accretive sales channels in television, mobile, social and over-the-top platforms that will offer consumers more choices and ways to engage with our personalities, programming and products, which the two other companies in our space began doing several years ago with much success. We will also explore partnerships in the general retail and entertainment landscape to help our customer file faster and smarter, which will build shareholder value.

Turning back to quarterly results, I'm excited to report two promising trends from our customer file for the quarter. Our 2016 year-to-date active customer file is up by 3%. Beauty, fashion and home customers were the most robust shoppers in the quarter, brought to EVINE through the efforts in our digital marketing area.

Customers were also motivated to shop at EVINE through incentive-based personal email marketing efforts in merchandising, planning and programming, and thoughtfully priced merchandise. The increased activity has contributed to a 1% growth in our rolling 12-month customer file. This is meaningful, as it reverses a challenging trend. Our 12-month customer file was flat in Q1 of 2016 and negative 1% in Q4 of 2015. Our teams feel good about the progress we're making.

I'd like to spend a few minutes to recognize and speak to our senior team. Michael Henry, our new Chief Merchandising Officer, is helping lead the way for us in the merchandising and customer growth agendas. Since joining the company last quarter, Mike has focused tirelessly on improving our current approaches to broaden our product assortment and increase the velocity of our product development.

Nicole Ostoya, our Chief Marketing Officer, is working on a number of projects aimed at improving brand awareness, maintaining relevancy with our existing customers, and driving new customers to various sales channels. The real advantage here is to have both Michael and Nicole's teams working together towards targeted common goals.

EVINE's presence at last month's Cosmoprof tradeshow, which was one of the largest beauty trade events in North America, with over 30,000 attendees from 39 countries, is one such example of their unified intentions, which in this case was to solidify EVINE's place as the beauty destination for video commerce. From our enhanced presence this year to our live auditions with prospective new brands engaging our show hosts as our cameras rolled, we engaged with many new potential vendors offering products we know our customers will enjoy. We plan to replicate this formula at other upcoming appropriate trade shows.

In June the team brought in some of EVINE's top star power to launch a brand awareness campaign called The Stars Aligned. Paula Deen, Karen Fairchild of Little Big Town, and Todd English headlined that campaign, which included on-air programming, targeted direct marketing and online promotional events.

I should also mention for those of you that may have noticed, we're quietly beginning to refer to EVINE with a refreshed tagline -- Be good to yourself. This tagline was used by Shop NBC years ago and it perfectly fits the marketing message that we plan to roll out to our customers in the third quarter.

This week we also announced Sunil Verma as our new Chief Digital Officer. He comes to EVINE with over 20 years of experience in the retail industry, holding leadership positions at major retailers including Macy's, Children's Place, Ideeli.com and Vineyard Vines. I've known Sunil a long time and he has been consulting for us for the past six months. We're excited to bring him on on this permanent role.

One important e-commerce implementation that Sunil, in partnership with the creative team, led in the second quarter was to improve the look and feel of our website, improving the overall usability with an updated login and checkout experience. We expect Sunil will continue to lead us to great things in this digital world.

In terms of e-commerce digital sales, it continued to grow in the second quarter to 48%, which is a 200 basis point increase year over year. Mobile sales as a component of digital sales also increased to 45% compared to 42% for the same period last year.

Now let's jump into the performance of our categories. Consumer electronics was the big adjustment for us this quarter. During last year's second quarter we sold about $3 million worth of promotional-priced and expensive-to-ship televisions and electronic gadgets that we did not repeat this year because it did not meet our new contribution margin requirements.

Since we could not find suitable new consumer electronics in the marketplace this year that met our margin requirements, this category saw a significant reduction in air time this quarter. This business has always been either item driven or seasonal, with the holiday time being the biggest opportunity. Therefore, we will maintain strict discipline in our merchandising mix in today's choppy retail environment focused on products we know our customers will enjoy at margins that our shareholders will enjoy.

Beauty has been growing at double digits here for four years and continues to be our best growth category. Teresa Harris, VP of Health and Beauty, leads an innovative team constantly improving our game. For example, in May we launched the Sonya Dakar Beauty Boot Camp, an exclusive, affordable skincare line featuring her proprietary BioStem technology. During the premier launch alone, we celebrated four sellouts across five hours of programming.

We were also excited to launch butter LONDON, offering promotional pricing and kits that are exclusive to EVINE. ISOMERS Skincare, one of our core skincare brands for the past 19 years, just launched a new hair care line that was also very well received.

We can't talk about this category without talking about the Beekman 1802 bath and body brand. Launched just last year, this brand continues to grow in sales and its productivity increased 4% this quarter. Consult Beaute, with the Dubrows, launched just last year, was one of our big priorities this quarter and is already our third largest beauty brand. Skinn Cosmetics celebrated its eighth anniversary as part of the EVINE family and also recorded the largest single hour of sales across all categories in five years.

Fashion and accessories posted a positive performance metric for us this quarter, increasing by 2% and increasing productivity by 2% in this challenging environment. Celebrity collections was a big part of the success with sales, increasing by 55% and productivity increasing by 21%. New launches like the casual carpool chic by Holly Robinson Peete and great collections from Paula Deen and Vanessa Williams drove these results.

One of our proprietary apparel brands, OSO Casuals, posted a strong 11% growth in productivity this quarter, as well. And our big 24-hour fashion events continue to resonate with our customers, as did our One World anniversary shows.

Overall, in the seasonal apparel business we had solid top-line performance in the first half of the year, which will ensure that we will carry less spring merchandise into the fall. Proper balancing of fashion seasonal mix is critical to driving a profitable business, and we will once again start a new fall and holiday season, kicking off this coming weekend with a 48-hour fall fashion event to continue the sales momentum achieved in the first half of the year.

Turning to the jewelry category, our diamond designers collection was another success story, with sales growth of 89% year over year and productivity improvement of 40% year over year. Driving the strong performance were brands like EFFY Jewelry, Beverly Hills Elegance and Pamela McCoy, as well as Gems en Vogue, which celebrated the 10th anniversary with EVINE.

During the quarter we featured two big jewelry events from Las Vegas -- Vegas Live, live from the Strip; and Jewels of Vegas -- which together created over 30 hours of engaging live programming from Las Vegas for our customers to enjoy. In terms of new brand launches, Sunwest Silver was our best this quarter, premiering in July during our artisanal jewelry event.

Finally, the gold category, anchored by our Stefano Oro Italian jewelry brand, continues its growth trend by delivering a 57% growth in productivity. Gold customers continue to buy our extended assortment for online-only gold items, which helped drive the 14% growth in online jewelry sales.

The watch business, as always, was a solid contributor. Our two annual Invicta events this quarter were again popular. The first was our Invicta Toys of Summer event, live from the Marine Pavilion in Florida, which improved its productivity 5% over prior year. In July, our popular Invicta warehouse sale event also produced growth in productivity.

The big story in watches this quarter was our luxury watch brand business, which, on the strength of brands like Versus by Versace, Gevril and Gucci, delivered a 50% growth in sales and a 7% growth in productivity. Overall, what we call our base watch business did well. It is the biggest part of our watch business and continues to improve with a 3% increase in productivity year over year.

Our challenge in watches this quarter was within what we call our promotional item business. Specifically, the challenge came from how often we offer these items and in what dayparts. The biggest promotional item challenge was our once-only events which traditionally aired only in prime time. But this quarter we decided to test them by rotating them in multiple dayparts on the same day, which did not produce the results we hoped for and will not be part of our go-forward rotation strategy.

I plan on continuing to encourage our teams to test new concepts to maximize our business, with the confidence that, although not all concepts will work, the art of reading and reacting to smart tests will ultimately result in continuing to build the nimble entrepreneurial culture that we believe gives us an advantage over larger corporations.

Home is the strongest performing category, driven by merchandise margin and productivity this quarter. Paula Deen's kitchen electronics helped lead the way by producing a 53% increase in productivity for the quarter. I must say, she has been very well received on our network from our employees to our customers. Just a big success story.

Todd English is another consistent performer for us, increasing his cooking products productivity by 41% this quarter year over year. Textiles was also a strong-performing home category this quarter, with our core proprietary brand, North Shore Living, driving a 23% increase in productivity, and Cozelle Home driving double-digit sales growth.

As it relates to our Boston television station, WWDP, we have previously stated that we are participating in the FCC auction process. The reverse auction was completed in late spring and the forward auction began last week. Details and the timing and eventual outcome of this process are still being determined, but we are restricted by FCC regulations from commenting on this any further.

I will now hand the call over to our CFO Tim Peterman to walk through our 2016 second-quarter results in more detail. Tim?

Thanks, Bob. Good morning, everyone, and thank you for joining us today. I would like to discuss several financial results and update you on some key operational initiatives.

Consolidated net sales for the second quarter were $157 million compared to $161 million for the second quarter last year, which represented a 2% decrease year over year. Our return rate improved 160 basis points year over year in the second quarter from 21.4% to 19.8%. Lower return rates were primarily the result of improved quality of merchandise.

Gross profit dollars increased 1.7% to $59.8 million during the second quarter. And I'm happy to report that our gross profit as a percentage of sales increased 160 basis points to 38.1%. This is the second consecutive quarter of gross profit rate and dollar improvement.

In terms of other second-quarter takeaways, our average selling price in the second quarter was $57, a 5% decrease year over year. This was primarily attributable to mixing out of consumer electronics, jewelry and watches, and into beauty, fashion and home.

Second-quarter operating expenses totaled $60 million compared to $61 million last year, which is a 2% decrease over the prior year, driven primarily by reduced variable costs, stronger discipline with corporate expenses, and reduced distribution facility consolidation and technology upgrade costs. We made solid progress again this quarter in content distribution as we continued to strengthen our television distribution platform, build our second channel opportunity, and test new platforms to engage new and existing customers.

Our previously announced television strategy to add new channels in new neighborhoods within existing homes that we're already in is on track and doing well. EVINE 2, our second network, launched in an additional 1.4 million television households this quarter, while the total average number of television homes in Q2 decreased slightly by 1% to 87.2 million.

If you have Comcast, AT&T Uverse, Dish, Charter Cable, Verizon FiOS or other major distribution platforms, you will begin to encounter EVINE Live in additional neighborhoods, which we believe help drive our sales opportunity. Our Q4 Verizon launch in its HD neighborhood continues to perform better than our internal projections.

This month we announced the latest additions to our over-the-top platform, new apps for Apple TV, Amazon Fire and Samsung smart TVs. These apps join our Roku app launch two years ago. These small but important new distribution channels provide complement to our existing television, mobile, online and social platforms available today.

I am pleased with our performance this quarter in operations, as both our customer solutions teams and our fulfillment center teams again improved their service to our customers while reducing the cost to perform those services. Customer solutions continues to execute well. In fact, we were notified yesterday that EVINE has been selected as a finalist to win the Better Business Bureau's Torch Award for ethics in Minnesota.

In addition, in the first half of 2016 our speed of answer in customer service improved by 59% over the same period last year. Also, our after call total satisfaction customer survey rating is up 10% year over year.

Variable costs for the quarter decreased by approximately $300,000, primarily driven by decreased customer service costs, offset by increased fulfillment costs. Total variable expense as a percent of sales was approximately 9.6% for the second quarter versus 9.5% for the same quarter last year. This slight increase in the variable rate was primarily due to a 1% increase in net shipped units this quarter compared to last year. This increase in net shipped units this quarter was a result of the 2% decrease in net sales offset by the 5% decline in our average selling price during the quarter.

In terms of an update on our warehouse management project, costs associated with our distribution facility consolidation, a technology upgrade effort, decreased $672,000 during the quarter as compared to those costs in prior year. We're also seeing slight labor cost benefits this quarter from the earlier 2015 inventory conversion of jewelry into the new warehouse management system, and, therefore, remain very focused on the continued design improvements and detailed integration work still necessary to maximize our operational cost savings possibilities within this new system.

As for the balance sheet, we ended the quarter with cash and restricted cash of approximately $40 million compared with $33.2 million at the end of the first quarter. Net cash increased in the second quarter by approximately $6.9 million, primarily driven by adjusted EBITDA of $3.8 million and a net working capital decrease of $8.3 million, partially offset by capital expenditures of $2.3 million and $700,000 of term loan debt payments. Along with our cash of $40 million the Company ended the quarter with about $11 million in additional availability on the P&C credit line, which gave us a total liquidity position of approximately $51 million.

Interest expense for the second quarter was $1.6 million, and we expect third of fourth quarter interest expense to be in line with this quarter. Free cash flow in the second quarter of 2016 was $7.9 million compared to a negative $1.7 million in the second quarter of 2015. This $10 million improvement over the same period last year reflects our improved focus on working capital management and a normalization in capital spending related to the technology and facility upgrade at our fulfillment center.

Our inventory for the quarter finished at $59 million, which is a 1% decrease from this time last year. As a comparable, the inventory for the first quarter 2016 decreased 6% year over year. This decrease in inventory levels for the past two quarters, when compared to last year, illustrates a proactive approach to managing a more balanced merchandising mix. The overall quality of our inventory remains good, and we will continue to proactively manage the inventory to meet the demands of the business at that time.

Executing on our 2016 priority of improving profitability, the Company expects revenue growth in the back half of the year to be similar to the low single-digit revenue growth achieved in the first half of 2016. We expect third-quarter adjusted EBITDA to be similar to the first and second-quarter 2016 adjusted EBITDA results, driven primarily by improved margins and a well-balanced merchandising mix. In addition, the Company expects increased adjusted EBITDA in the fourth quarter on both a year-over-year and previous quarter basis.

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

(Operator Instructions)

Alex Fuhrman, Craig Hallum.

Great, thanks for taking my question. Congratulations on continued progress here and special congratulations to Bob for getting the full time CEO role.

A couple questions I wanted to ask here on the quarter.

First of all, it looks like gross margin obviously was quite strong, and it sounds like there's a few different things that are driving it. If you could give us a sense of the relative magnitude of the better return rates and some of the efficiencies you're getting in your distribution center. Product mix is obviously helping that, as well, and it sounds like just cleaner inventories and the discontinuation of some programs that didn't meet your contribution hurdles for last year. How should we be thinking about the relative magnitude of those different things? And what really led to the increase in the second quarter?

And then related to that, it looks like your third-quarter guidance would call for a very nice increase in adjusted EBITDA year over year in the third quarter, with just low single-digit revenue growth. Is it fair to assume that the bulk of that improvement is going to come from gross margin? And how much more legs could there be there as you continue to tackle on those initiatives?

Hi, Alex. It's Bob. Thanks so much. We really appreciate it.

I almost feel like I don't want to say anything because you did such a good job of summarizing all the things that we're working on. But the truth is it is a lot of everything.

When we took on, starting in February, the contribution margin approach and we started breaking down every component of gross margin and every component of expense to determine what the best way to drive towards profitability was, and when we looked at whatever retail disciplines that we always look at, which has to do with turns, and which has to do with the lifetime of the inventory, we put all of that on our own little matrix here. And we made sure that there was a communication between every one of the groups here to ensure that what we were doing was driving towards profitability and making sure that we were looking at both profitability and driving -- first of all, having our customers that shop with us continue to shop with us, as well as making sure that we are able to attract new customers, as well as we are able to get customers who may have left us a year or so ago and be able to get them back.

So, the reality of it is -- and this goes back to my old days at Bloomingdale's when we used to look at how to manage square footage in the stores -- is really we look at it from a holistic standpoint in terms of profitability and in terms of growth rate. So, it really is not one thing. It really is a mixture of all the different components that you talked about.

I would say probably product mix is the biggest driver of it because we know what the customers like, we know how to get the customers in, and which customers buy in which category first, and then we know how to drive them to buy from other categories. So, product mix is definitely key.

But Tim has talked in the past about balance, and really what we're doing here is this is a balanced approach. And it's mostly, frankly, around the culture of making sure that everybody has the same definition of success.

Great, that's really helpful. Thanks, Bob.

And then just thinking about the growth in the customer file that you've been seeing this year, are there any particular brands or categories that have been driving that? And what's your outlook for being able to continue to grow that customer file?

Sure. I think the key piece of it is that we've been driving our marketing group. We've invested in our marketing group to make sure that we have the appropriate people working on social and working on e-commerce, and working on who the brands are that drive the most customers.

So, when you look at the Todd Englishes and the Paula Deens, and a lot of the beauty brands, we're just getting much more sophisticated in terms of being able to drive people over from customers based on really the e-commerce component of it and the social component of it. So, if we have somebody like a Todd English or a Paula Deen that we know has a big following, then what we make sure is that we invest the right amount of money of letting people know when Paula or when Todd is on.

And once we do that, it makes it a lot easier because customers then read and react to it, especially those that have the credibility. And both Paula and Todd have the credibility, but we have 10s and 15 and 20 more brands that people know about and drive to that.

For us, and one of the things that I think we're doing a better job this year than last year, is actually focusing on -- we have some great brands but unless you actually let the people know who love those brands, like Beekman 1802, where to find them, it's like yelling at an audience that's not there. So, you really have to find the audience. We've spent a lot of time on social and actually in some of the old direct marketing ways of driving, and email traffic, to be able to get people to come to the shows.

That's terrific. Thank you very much.

Tom Forte, Maxim.

Great. Good morning. Thanks for taking my questions.

I had two questions. First is, how should we think about the role of consumer electronics in your merchandise strategy going forward? And how important is consumer electronics to driving new customer growth?

And then, second, I recognize it's still early days, but given that a lot of investors focus on cord-cutting and over the top, how should we think about your over-the-top efforts, including Amazon and Apple and others, as far as how they will impact your long-term sales and your distribution costs? Thanks.

Sure.

In terms of new customers -- I will take the CE question and I'll let Tim talk about the cord-cutting component of it. But on the CE part of it, the truth is there's just not a lot of newness out there right now in consumer electronics. And consumer electronics is and always will be an important category for us because, especially when it comes to, let's say, the internet of things that's out there, there's lots of new and interesting products that are coming out that, frankly, if you go to a store you really can't get the experience of understanding how those products work.

So, we actually work very well hand in hand with the vendors to actually explain to the audience how an item works. We're in the early throes now on CE as the internet of things takes over, especially in the CE category, to actually be able to work with the vendors and get better margin deals to be able to have those products and the people that actually made the products, and the experts, show how easy it is for the customers to buy that.

And we're happy with the fact that we know we are not going to get everybody to buy from us. The vendors are happy because they are getting a chance to actually show how great their product is on air. Our customers are happy because they're getting an early look at what's out there. Really, it works out for everybody because customers who may not yet feel comfortable buying through video commerce might go to a bricks-and-mortar store to be able to buy it.

We are going to take the discipline that if things are demonstrable, if things are appropriate, and if we can be able to do it the correct way, we will continue to look at the hot items in CE. As I mentioned earlier, it's really an item business. So, to the degree that we can be able to drive that, it's a key portion of what we're doing.

But for me, the most important discipline is that if it's not going to make any money, and it's only going to bring a customer that's going to come once, because not every customer has the same value -- if a customer comes and we expect that customer to continue to shop with us, I don't mind giving up a little bit on the margin on the front end as long as we can get them into our pipeline. But if a customer comes and buys something once and then never buys again, frankly, and we lose money on that deal, that doesn't really work for us.

So, we're going to stick to our guns in terms of making sure that we do the right balance there and actually take advantage of the fact that video commerce is one of the best, if not the best, platform right now to be able to explain to people how all of these new products work that, frankly, if you go into a bricks-and-mortar store, try getting a salesperson to actually explain to you how something works. Good luck with that. So, I think that's where we bridge the gap.

I'm going to let Tim answer the question on cord cutting.

Tom, nice to talk to you again this morning.

On OTT, or over the platform, over the air, we think of it as a nice complement, a strategic part of our distribution platform that includes TV, social and mobile. And although it's strategic today for us to get into those platforms so we can continue to introduce ourselves to those early adopters that are using it, we don't view it yet economically meaningful in terms of the distribution dollars we hope to sell on it, if that makes sense.

When we look at our core customer demographically, they are older than most of the folks that are using those apps on TV, but we want to be available to them. And there was a recent Nielsen study out, I think it was probably published a month ago, on the TV viewership demographically over the last five years, and it moves along that same line.

Those customers 45 to 50 years and up are all watching, believe it or not, over the last five years, more TV hours per week. And as you move down from the genexers, millennials, to the 18 and 24s, they are actually watching less. So, it seems consistent with what Nielsen has polled and what we're seeing from our sales -- dollars per sales.

Thank you.

Mark Argento, Lake Street Capital.

Good morning, guys.

Just a couple questions in regards to, Bob, I think you mentioned in your prepared remarks that you guys pulled back on shipping promotions in the quarter. Maybe talk a little bit about that strategy, is it more of a seasonal strategy, and how you see shipping going forward in terms of promotional lever.

Sure, Mark. Hi, good morning.

I think when we talk about pulling back on shipping and handling is last year, and I think it showed very clearly in our results from the second to fourth quarter last year with our reduction in gross margin reduction, our reduction in margin overall, was because I think last year we went out of our way to try to drive revenue by doing lots of promotions. And many of the promotions that we did had to do with shipping and handling, and they were done on a more global basis and they were done more overall than to do it more strategically.

And what we found beginning, frankly, with the end of the fourth quarter and moving into the first quarter of this year -- fourth quarter last year and moving into the first quarter this year -- is that, as long as we're surgical with how we manage shipping and handling, and it is one of the promotional components that we could use along with flex pay, and along with any of the other promotions that we use, that if we are more surgical we could actually be able to drive more profitability. So, what we really did was we said -- okay, let's look at each one of the events, let's look at each one of the items, and look at the contribution margin of those items to determine, based on velocity, whether it makes sense or not to do a free shipping and handling promotional or reduced shipping and handling promotions.

So, our plan, really, and it's been pretty similar, it's been going on probably about five or six months now, is that we've been able to manage our shipping and handling component. And, frankly, what we've done is we've put controls into play so that people have to justify, that we have to justify, whether we're going to use that shipping and handling promotion on anything.

Frankly, we use that on any promotional now -- is that we have a control in place to make sure that, instead of it driving sales, we want to make sure that we drive contribution margin. And that's a different point of view than was taken last year. Last year -- and I think somebody else mentioned it -- in third quarter we actually were very liberal with shipping and handling.

And we don't really think we need to do that. It's not to mean that we're going to stop giving those promotions, but we're going to do those promotions in ways that we think don't train the customer that everything has to be free in terms of shipping and handling, because people look at things holistically, not just based on that component.

We have been evolving back onto this. And, frankly, with the warehouse that we finished doing now we are in a better opportunity to take advantage of more and different kinds of shipping and handling promotions to be able to do it.

That's helpful. And then shifting gears, I know you talked about the company files improving. Can you point to anything in particular in the quarter that you guys were doing that yielded you were able to activate the customer base or new customer base a little more in terms of Twitter, Facebook, any of the social, mobile? Any plans that you implemented that you saw from results of? Or was it just the seasonality of the business you were able to siphon additional customers, maybe some came from your competitors?

It's a good question. It's a real deliberate strategy that we have taken towards this. And we've taken a bunch of steps. And as I mentioned a little earlier, the key one is that our marketing area really was underdeveloped.

So, we hired Allison Brod Marketing, which is a pretty famous marketing company, really great marketing company in New York, to help us, and work with Nicole and the marketing group. We've done more SEM marketing, we've done more retargeting. And we really are trying to do it, again, in a surgical way that makes sense for us to be able to get to the customers that are most likely.

When I talk here at every weekly meeting, and we look at the KPIs every week, the number of customers is something that is a shared goal with all of the departments. There's not that many goals that -- first of all, we don't have that many goals because I don't think people are used to being able to be challenged to have more to be able to move the needle on more than three to five things at a time. And absolutely, besides contribution margin, being able to get new customers and being able to get back our customers that may have left us and to grow our file is probably number two in the most important things that we are working on. And I really believe that when you have 1,300, 1,400 people working in the same direction towards the same three targets, it makes it a lot easier to be able to get there.

Makes sense. And then last, for Tim, it looks like the balance sheet continues to improve. Obviously seasonality is in your favor right now just given the lesser need for working capital. But you are generating some cash. It looks like you have some more availability on the P&C line. Any thoughts if you string another couple decent quarters together in terms of your ability to go back and try to get some better rates on some of the debt, in particular some of the higher yield stuff that you guys put on earlier this year?

Mark, great question.

Certainly this quarter, with the $10 million free cash flow performance, that was strong, and the careful management of the inventory was also strong. But you're right, obviously our debt year over year has increased, and when we look at the cost of that debt.

At the end of the year we think we will be looking at how to improve some of the -- when you think about the new debt we took on in the first quarter, the $17 million, that is at a higher cost, and we think that by the end of the year certainly we will be able to look at what is the best use of a broader debt facility. So, it is something we're looking at.

Thanks. Congratulations on a good quarter.

Mark Smith, Feltl and Company.

Good morning. First off, I'm sorry if I missed this, can you just walk through the distribution cost per home?

Sure. This is Tim, Mark.

If you think about it, at the top of the tree we have on average about $1.15 per home per year for the 87 million homes that we have. So, when we talk about the number of homes we are in, that's a metric that we report.

Now, as we've talked about also, as we add the number of channels in those homes, we've talked about those costs actually being much cheaper than it would be to get into a new home. So, the idea that what we talked about is that we are going to focus on increasing the number of channels in the homes that we view are already productive.

So, that cost of $1.15 for us is in the low teens in terms of percent of net sales. And as we go through time over the next 12 to 18 months, introducing the additional channels at a much lower cost will bring our overall percent of distribution costs as it relates to net sales down, similar -- or, not yet similar, but closer to the percent that our competitors have in the space.

That brings me to the next one, just looking at the average homes was down for the third consecutive quarter, do you think this flattens out here or does it continue to lower? Is this strategic and within plan where the homes number is today?

Yes, it's certainly within plan as we looked at last year and launching this new strategy of improving the neighborhoods that we're in, not just the sheer number of homes. We think that it's going to stay relatively flat.

We are not abandoning the idea that new homes is a great thing, as long as they're productive homes in areas that we think we have at least a pretty good idea that we're going to do well in. But, again, you will see from us this year more activity around HD distribution, better channel position and more channels for our second channel.

Okay. And then, next, just wanted to look at the average selling price trends. It's certainly come down. Any idea long term maybe where the right level is for this? Do you expect it maybe over the next 12 months to continue ticking lower as your mix changes?

We don't see any large pendulum swings going on with our average selling price. What you have seen in Q2 was really a mixing out of what we talked about at the beginning of some of the higher-priced CE items.

We think we're in the right area. That being said, I will turn it over to Bob because certainly Michael and Bob and John, they're all talking about the best ways to balance the mix within the categories, and Bob might be able to add more to that.

Thanks, Tim. We feel pretty good about the numbers for this past quarter. But that being said, this art, if you will, of being able to get new customers into our pipeline, and then be able to get them to be passionate fans of ours and buy from other families of business, is really what we try to do for a living.

For instance, this past quarter, the second quarter, we had a great deal on sheets. And the sheets did tremendously well and we were able to sell out much quicker than we thought we were going to be able to be in. And it was at an introduction price. So, that clearly lowered our average price.

It was done in a way that we wanted it to do. In fact, it surpassed our expectations in terms of the sheets. But at the same time, we are finding -- and it really goes by family of business, so depending on what the area is, we're happy to bring people in at a lower price because it's a pretty cheap cost of customer acquisition, but it gives you a pretty long-time value of the customer.

But as an example opposite that, I will tell you that in our jewelry area, Michael and I have been working towards being able to skew a little higher with some of our customers who actually like to be able to buy merchandise that's more highly priced. And those are customers that are, I will call, better customers, they have more of a lifetime value. So, once they buy into the proposition that we are credible, then it's easy for us to be able to figure that out.

We like the high-low strategy of bringing people in, especially the newer people in, to bring them in at a lower priced item because it's a cheap cost of acquisition. They're usually delighted and satisfied and we bounce back to them. And since we have all their information, we can try to figure out how to be able to move them into different categories.

So, to answer your question we feel pretty good about where we are. I'd like to move it to be a little bit higher but it's really going to be based on this testing response and reaction, and judging it based on that. It's all about what the customer wants and for me we will continue to read and react to what the customer's responded to.

And one of the nice things about our arena is that -- and I've been doing this for a long time in this arena -- we are a bit recession resistant in that we can read and react and move much quicker than a lot of the brick-and-mortar stores. That helps us a lot interest of being able to smooth out any of the rough edges that might happen in general retail.

And then last for me, and it's a broad question, but just wanted your view on the state of the consumer. Throughout this last quarter we've seen, it seems like, throughout the consumer environment or retailers, the consumer opting out or cutting price. Have you guys seen similar trends? Or do you feel like your customers may be a little more different and they are a little more healthy than others?

I think that we've seen that -- I think it's fair to say that the US is over stored. I think that there is a lot more stores than there needs to be. And I think we see that with a lot of the closing of stores that are going around.

So, I think there's no question that based on traffic patterns that we will read about that people are shopping less at home. And clearly people are opting to shop more online and through TV perhaps than they did before. So, I think there is definitely a shift that is going on and I think that will continue. What I think is that what we see is that video commerce becomes the bridge in the sense that, whereby you read a lot about different bricks-and-mortar stores and vendors that usually sell to those bricks-and-mortar stores, and the fact that they are backing off selling in some of those department stores and in general.

And that's because, at least in my belief, I feel that the brands are not getting their just share in terms of what makes brand special. And in my mind, video commerce is the bridge to be able to do that because if you have somebody come on air and actually speak to why something should be bought and what goes into it and what the creative process is, the storytelling behind the brand -- and we see that with Beekman 1802, we see that with a bunch of different brands we have.

We have Betsey Johnson on today. She is a world-renowned designer. And for her to talk about what her influences are is something that you can't do in the flat e-commerce world today. And it's something that you have to go out to a store to look at merchandise. I don't think that story is being told the way it used to be.

So, I actually believe that we end up being the bridge to that. That's what I'm going to be working on, along with making sure that we are shored up to be able to do what we need to do to be able to be profitable quarter by quarter. I think where we need to play is in that area where we actually get to be able to do the storytelling to show why brands became brands in the first place.

Great, thank you.

Robert Rouse, FBN Securities.

Thanks for taking my questions and congratulations. First, can you give an update as to the size of your NOLs for federal tax purposes, especially given the pending SEC reverse auction? In the event you do succeed in selling the station you have, I'm just curious as to what percentage of the proceeds you guys would be able to use to possibly pay down your debt and use for other purposes.

Rob, this is Tim. Nice to talk to you.

It might be a dubious honor but, yes, we have federal NOLs in the neighborhood of $312 million, with states in the neighborhood of $200 million. So, all in, $500 million and those expire over the next 20 years. We're in pretty good position to minimize any tax burden from any potential transactions that we are looking at, as well as profitability that we are focused on building.

Okay, great. And, second, some of the others in your industry last quarter highlighted the bad debt expense because loose credit policies had gotten a little out of hand and they were changing the way that they were extending credit to their customers. I'm just curious if you saw any of that in the quarter.

And what do you plan to do going forward as far as the industry? Is there some kind of a problem with bad expense and reserves or is that something that is not affecting you, given others in your industry that have seemed to have had some difficulty with that?

I think each company handles them differently. And I certainly don't think it's an industry-wide phenomenon going on. I think it has to do with certain product categories. They're really smart people and I think whatever they are facing is unique to whatever challenges or products that they had at the time.

Regarding us, we're in really good shape. We have not seen any spikes. Certainly we were very careful on our credit scores and what we allowed into our value pay ecosystem last fall because we were selling a lot of big consumer electronics, which is where you see most of those challenges in bad debt coming from. New customers that only buy once and they're only there to get the season's biggest product, which last fall happen to be in the swagway arena.

We were very diligent, our finance team, our credit team, on making sure that we were properly reserved and the gates were properly leveled to ensure that the customers we did get in paid their bills.

We will keep watching it, but the truth is that as far as we can see so far, we've really been steady. We haven't changed our credit disciplines here, and we don't plan on it, at least, changing. But of course we will look at it every item that comes in to make sure that we do the right thing.

Okay, great.

And just one last question, if I may, given the management changes to this Company over this last several years -- and Bob congratulations on your recent appointment, the fact that you have now taken that seat -- could you give us an update as to management incentives as far as how do we know you are going to stay there in terms of how much of the Company do you own, how incentivized are you with options, how vested are you and incentivized going forward as that relates to other shareholders?

All that information is public, and I think you'll probably be relatively pleased about the amount of stock I own. I bought, along with the management team and the Board of Directors, six months or five months ago we bought a chunk of stock. Everybody bought. I bought a big chunk of stock.

I firmly believe that this Company is an amazing opportunity. We are, at least the last I looked, in terms of -- we get reviewed on that every year by the different regulatory groups, and we are very strict and we are in very good shape in terms of everybody being driven based on, whether it be RSUs or PSUs or stock options. We are all aligned that if the shareholders do well we do well. That's just a great opportunity for all of us to be rowing in the same direction. Again, I think when you look at the information, which is all public, you will be really happy with where we are and where we continue to be, where we will be.

Great, thank you very much and congratulations.

It appears we have no further questions at this time. Mr. Rosenblatt, I would now like to turn the floor back over to you for closing remarks.

Thanks so much. I just want to say thank you for everybody that's been supportive of me and the team during the last several months. It's not been an easy task and certainly there is more work to be done. But I think you can feel comfortable that the team we have is committed and dedicated to making sure that we optimize the value of this Company that we have. And we look forward to continuing to work with you in the future. So, thanks and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.