iMedia Brands Inc (IMBI) 2016 Q3 法說會逐字稿

Greetings, and welcome to the EVINE Live third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Porter, Vice President of Finance for EVINE Live. Thank you. You may begin.

Thank you. I am joined today by our CEO, Bob Rosenblatt; and our CFO, Tim Peterman.

Comments on today's conference call contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 our SEC filings.

Comments on today's call will also refer to non-GAAP financial measures, such as adjusted EBITDA. 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 investor relations section of our website. I'd like to remind you that all information in this conference call is as of today, and the Company undertakes no obligation to update these statements in the future.

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

Thanks, Michael. Good morning, everyone, and thank you for joining our call today. Despite the third quarter's choppy retail environment, that was saddled with many consumer distractions, I'm pleased with our team's progress on the following key priorities:

First and foremost, our continued improvement this quarter in profitability, gross profit margin rate, and balance sheet strength were important successes. Net loss for the quarter was $3.9 million which is a 25% improvement year over year, with an adjusted EBITDA of a positive $2.5 million, also a significant improvement.

Gross profit as a percentage of sales increased 210 basis points to 36.6%. We ended the quarter with approximately $40 million in cash, and our inventory growth of 9% year-over-year was important as we appropriately stocked this holiday season with proprietary products rather than the lower-margin drop ship consumer electronic products we offered last holiday.

Second, our disciplined product mix this quarter successfully drove 3% growth in our most popular wearable categories of beauty, fashion, jewelry and watches, and almost completely absorbed the 66% reduction in our lower-margin consumer electronics category. Let me be clear here, though. I'm certainly not happy that our total Company revenue for the quarter declined 7% year over year, however, I am pleased with the progress toward establishing a disciplined merchandising mix this year, that sets up a base business model that we can repeat and improve upon going forward.

As I stated back in March, this year we are balancing our revenue mix, and that is not an easy thing to do. This quarter we purposely reduced the air time for our consumer electronics category because this lower margin commoditized business was much too big a part of our mix last year. However, in hindsight, I see that the air time reduction caused an over-rotation of a few of our more popular categories, which in turn lowered their productivity. These learnings are part of our development as a team, all good.

A significant new priority that we kicked off in the third quarter is our interactive content strategy, and I'm happy to report that it is ahead of schedule. Our goal is to improve how we tie together our live on-location entertainment with our social, online, mobile, and television platforms to produce a more exciting and interactive experience for our customers. We want to create tent pole programming events that our customers can engage with, and transact on each week, based on whatever platform that they prefer: on their PC, mobile, or TV, through social or on the phone, or any combination that they prefer.

Let me give you a few examples of our progress so far this quarter. Vanessa Williams. In October we created a live event at the Mall of America here in Minnesota, where we filmed the live Vanessa Williams' hosted fashion show, and hosted live auditions, where hundreds of people auditioned in the mall to try to become EVINE hosts.

We streamed it live on Facebook and on our website, as well as nationally broadcast live TV cut-ins during the day. Fans and aspiring talent showed up from all over the United States to try to become one of our show hosts, and to see Vanessa's fashion show. A great event for customers, for fans, employees, and personalities.

Paula Deen. Last week, we premiered the first-of-its kind weekly television and web series featuring Paula Deen and her family and friends live from her home in Savannah, Georgia. The series will air live every Tuesday on all platforms, giving the customer an intimate look at Paula's personal sense of style, southern charm and iconic recipes, and allow customers to interact and buy products from Paula and from EVINE. You can also see Paula on Fox and Friends when she appears as a celebrity chef, as well as on her new syndicated show, all of which will allow her to cross-promote her products that are only available on EVINE, and EVINE.com.

Conversion to high definition TV. Yes, our Company has been talking about converting to true HD for the past eight years, and we finally pulled the trigger this quarter. In fact, we just completed the first three phases in October, which was to purchase a full complement of new HD cameras, as well as changing of our broadcast signal aspect ratio from 4:3 to 16:9. Phase one already improves our customers' viewing experience today, and we expect to be broadcasting live in full high definition television by the middle of next year.

Another sign of gaining traction this quarter is in the development of our executive team. Our 2017 revenue growth strategy centers on gathering a world-class team to help us cultivate our products, attract the right new customers by better understanding their digital lifetime value, and create a culture that can drive sustainable revenue growth.

Our recent hire of Lori Riley, SVP, Chief Human Resources Officer is an important part of this progress. Lori comes to us from long tenures at Target and UnitedHealth Group.

We recently added two new Board members, Neal Grabell and Mark Holdsworth. Neal's legal and finance expertise, as well as his QVC experience, and Mark's financial expertise and small to mid-cap experience complement our existing Board team, as we position ourselves for growth.

In addition to strengthening of our senior management team and Board, this quarter we added two fashion and entertainment icons, Tommy Hilfiger and Tommy Mottola as advisers to the Company. As previously announced, Morris Goldfarb, Chairman and CEO of G-III, teamed up with Tommy and Tommy to lead a $10 million investment in EVINE on September 14 of this year. We're excited about the new brands, products and personalities that this new investment group can help bring to EVINE.

As you know, marketing is important, and up to this year, we didn't have a marketing strategy, or a marketing team to drive our brand strategy. We began to correct this gap by hiring Nicole Ostoya for our newly-created Chief Marketing Officer role. We then continued this effort with a significant increase in marketing spend this year, as we have worked to engage with our existing customers and potential new customers, in ways ranging from search engine marketing, social and traditional advertising, to other small but exciting new brand-building activities.

For example, EVINE hit the streets of New York and Atlanta this quarter with guerilla marketing campaigns featuring some of our biggest brands, including Todd English, Beekman 1802, Paula Deen, Vanessa Williams, Invicta, and Holly Robinson Peete, to name a few. Our social teams are also executing a geo-targeted digital campaign, to reinforce these regional efforts. Following these tests, we will measure the results closely, learn from them, and roll out more campaigns like this and others, in markets across the United States in 2017.

Another example is our EVINE credit card marketing efforts. In September, by strategically pairing our new credit card offerings with specific products, we created the largest new credit card acquisition day in EVINE history.

This quarter, we grew our 12-month wearable category's customer file by a combined 2%. However, we did take a step back on our total Company 12-month customer file. It was down 1%, which was a direct result of the large decrease in the less-productive consumer electronic customers this quarter.

I want to emphasize, though, our strategy is to focus on the long-term value of the customer, and in our video commerce medium, most consumer electronic customers tend to be doing one-and-done purchases, and therefore they are not as valuable for our future growth. We are confident our new marketing team and investment spending in marketing this year will bear fruit in 2017, as we build our brand and attract new customers across all platforms.

Sunil Verma, our recent-appointed Chief Digital Officer, is driving one of our biggest strategic priorities, creating a seamless digital experience for our customers to engage, with live video commerce on all screens. This means we will provide our customers the search and discovery video content in the forms, and at the times they most prefer. Our customers will interact with us in mobile, event marketing, and even strategically-located physical retail experiences, as we look for the right partners.

We believe our live video commerce expertise will help us build a bridge for customers between the traditional physical retail experience and the current one-dimensional e-commerce experience that most pure plays still inhabit. This effort will help us attract and retain more customers, and provide our internal teams a clearer road map for how to best build profitable, repeatable revenue programs, based on our customers' preferences.

In terms of our digital sales this quarter, they continued to grow to 49% of total sales, which is a 300 basis points increase year over year. Mobile sales, our biggest priority within digital, because of its increasing daily utility in consumers' hands, has increased as a component of digital sales to 46%, compared to 42% for the same period last year.

Now I'll speak to a couple of the merchandising categories. Our jewelry category is our largest and most successful category. We continue to perform well here.

We had several well-executed jewelry events during this quarter. This included our Brazilian carnival gemstone event, which was timed to coincide with the Rio Olympics, and delivered 60 hours of programming over eight days. It also included our Hong Kong jewelry event, and our first girls that rock event, which featured our female guest jewelry designers. Each of these events had strong productivity, and met or exceeded our financial performance expectations.

Our luxury diamond and gold businesses were again strong this quarter, both significantly improving productivity, with sales increase of 21% and 29% respectively. Driving the strong performance were brands like EFFY Jewelry, Beverly hills Elegance, Diamond Treasures, Gems of Distinction, Stefano Oro, Viale18K Italian Gold, and Pamela McCoy. We hit an exciting milestone in watches during this quarter, as we celebrated our 15th year with Invicta watches, which included event programming from locations in Florida and Cabo San Lucas.

The event was well received by our customers, as over 100,000 watches were sold. Our partnership with Invicta continues to be the standard for our Company to strive toward, as we work with existing and new brands. A great example of bringing world-class brands together in a unique way to deliver exciting programming to our customers was the Invicta Disney partnership that we premiered in August, which bodes well when we bring it back this holiday season.

This partnership created a new Disney-themed watch collection from Invicta, which was a fusion of Disney-inspired elements with Invicta's most iconic styles. Each timepiece embodies Disney's classic charm, with details such as Mickey Mouse hour markers, mother of pearl Mickey Mouse dials, and Disney case backs. In August, this line successfully produced a 58% lift over the category average.

Another exciting example is just last week, when we premiered Eva Longoria live from our studios, introducing her new watch collection. A collaboration with TechnoMarine to offer today's modern woman with timeless design and classic sophistication. Ahead of the premiere, Eva appeared on EVINE's Facebook Live show, dubbed Beyond Backstage, a candid, unscripted conversation with Eva, and will give fans a behind-the-scenes peek, just a great event that we will do more of soon.

Beauty continues to be one of our most profitable and growing categories. During the quarter, we successfully launched four new brands. This included SIROT in August, featuring Ellen Sirot, one of the top hand models in the country.

Cover FX in September, a prestige line that offers one of the most ethnically-diverse shade systems, made with good-for-you ingredients. As well as jane iredale and Sweet Emotions Soaptions and Potions in October. We also successfully expanded some of our existing brands with new item launches and visits.

For instance, our Beekman 1802 line grew 160% this quarter year over year, as we introduced new shampoo, conditioner, and lip balm to rave reviews, and good initial sales performance. This is a prime example of how we are building connections to our customers, whereby they become fans of our brands, and purchase new items from us because they trust EVINE and they trust our brands.

Our fashion and accessories business continues to perform, amid a competitive retail climate. We had great performance in our casual and sportswear lines, which grew 46%. This included strong performances from our proprietary and exclusive brands, Indigo Thread, OSO Casuals and One World.

Our celebrity collections and personality brands continue to perform well, growing in the high single digits. Like Beekman 1802 in beauty, our fashion customers are connecting to our celebrity lines, which include Paula Deen, Todd English, Vanessa Williams, and Holly Robinson Peete. We believe these personalities, who already have strong brand recognition and credibility with significant followings on social networks, along with our new marketing team and marketing initiatives, are critical to our long-term success.

In the seasonal apparel business, despite a warmer Q3 that affected early sales in fall-centric products, the wear now accessories offering saw a strong bump in sales with timely layering options. Shifting strategies in season to these lighter cover-ups versus true winter goods allowed our merchant team to offset potential missed sales in the cold-weather categories, which have performed well in the fourth quarter. I was particularly pleased with this pivot, as it shows our fashion team as both nimble and strategic.

While we intentionally pulled back on consumer electronics air time as part of our focus on improved contribution margin, industry softness in key categories like mobile phones and tablets, along with the declining ASPs in TVs compounded the sales pressure and decreased productivity. We will continue to look for ways to be opportunistic in these categories, and we still believe that CE should be an important part of a balanced merchandising mix.

The home business is a big growth priority for us, because we know how important breadth of product is. Our teams have been working hard, and we are all beginning to see the progress.

Waterford, one of our strongest home brands, increased sales 20% this quarter compared to prior year, as we broadened the assortment into lighting. Kitchen electrics were also strong in the quarter, growing 33% over prior year, driven by our proprietary brands such as Cooks Companion, as well as Todd English and Paula Deen. In the fourth quarter, we are debuting several new and established brands, including Tommy Copper, collectible items from the Franklin Mint, French Bull, Mark Roberts, Godinger and Bellezzina Candles.

It's exciting to see all this hard work come together as evidenced by our significant quarterly year-over-year growth in gross profit, adjusted EBITDA, and earnings per share. And I feel good that we are well-positioned for a great holiday season.

I will now hand the call over to our CFO, Tim Peterman, who will walk through our 2016 third-quarter financial, operational, and content distribution results in more detail. Tim?

Thanks, Bob, and good morning, everyone. Let me start with providing you with some additional financial details.

Consolidated net sales for the third quarter were $152 million, which was a 7% decrease year over year, as Bob mentioned earlier. Our return rate was 20.5% in the third quarter, which was an increase of 160 basis points year over year. This increase was driven by a shift in our product mix out of consumer electronics, and into our wearable categories, beauty, fashion, jewelry and watches.

Our gross margin percent improved 210 basis points during the quarter to 36.6%. Gross profit dollars decreased slightly by $500,000 to $55.4 million.

As we continue to balance our merchandising mix this year, this is the third consecutive quarter of year-over-year gross profit rate improvement, and flat to increasing gross profit dollars. We do expect our gross margin improvement in the fourth quarter to be consistent with the year-to-date improvement trend, and then stabilize on a year-over-year basis going forward into 2017.

Third-quarter operating expenses totaled $57.5 million, which is a 4% decrease over the prior year. This was attributable primarily to lower content distribution costs, and decreased accrued incentive compensation, which were partially offset by higher investment spending in marketing and e-commerce, and higher variable expenses from increased credit costs, and increased labor costs in customer solutions and fulfillment center.

Our average selling price in the third quarter was $60, an 8% decrease year over year. This was primarily attributed to the mixing out of consumer electronics, as well as ASP declines within fashion and beauty categories.

As Bob mentioned earlier, our digital strategy is designed to create a seamless digital experience for our customers, which means our content distribution group is working hard to build additional content distribution platforms, beyond the wired television screen, and the online desktop experience. While we work on those initiatives, that include improving our interactivity and large social platforms such as Instagram and Facebook, and merging over-the-top platforms such as Apple TV, Roku, and Amazon Fire, we continue to pursue our television distribution strategy of more channels in the right homes, with a focus particularly on adding new HD channels, and new channels for our second network, EVINE 2.

For the third quarter, our total number of television households is about 87 million, which was flat to this time last year, and what we expected to see. It is an interesting time right now in the content distribution world, as major players reshuffle the landscape.

Charter combining with Time-Warner Cable and Bright House, AT&T's $85 billion offer to buy the content on Time Warner. Both are perfect examples of these. But that being said, we are confident we have the strong relationships with all of these major players to continue to execute on our plan.

I would now like to talk to you about three of our primary operational functions: our fulfillment center, customer solutions group and our credit and payments group, all of which continue to perform well by approving our service levels to our customers and our vendors. In the customer solutions group, one of our central KPIs is our live agent contact rate, which measures the post-sales support calls compared to units sold. I'm happy to report this quarter it improved 210 basis points.

This speaks to the overall operational aspects of our business being better year over year, meaning fewer problems lead to fewer reasons for folks to call us. Also on October 27, our CS group placed second in our category for the annual Better Business Bureau Torch Award for Business Ethics. This recognizes that we have built a culture here that supports a high level of accountability, transparency and trust.

In our fulfillment center, we remained focus on the continued design improvements to our new warehouse management system that will maximize our operational cost saving possibilities in Q1 of 2017. This fourth quarter will be the first quarter, the first full quarter we are live with this newly-designed system in place, having tweaked it in the prior two quarters, and we look forward to talking to you about these results in our Q4 call.

In our payments and credit group, we've experienced continued success by increasing our private label credit card penetration by 180 basis points over the same period last year. The utilization of this EVINE card drives customer engagement, and reduces our credit interchange and other processing fees. Our average Value Pay payment has decreased 3% over the prior year, driven by a decline in our ASP of 8%.

As a result, we've experienced an increase in our total credit interchange and other processing fees, due to the increased number of credit card swipes. Variable costs for the quarter increased by approximately $1.3 million, primarily driven by increased credit costs and increased labor costs in customer solutions and fulfillment center. Total variable expense as a percent of sales was approximately 10.6% for the third quarter, which was up about 150 basis points from the prior year. This increase in the variable rate is due to the reasons I just explained.

As for the balance sheet, we ended the quarter with cash and restricted cash of approximately $40 million, which was in line where we ended the second quarter. Along with our cash of $40 million, the Company ended the quarter with about $16 million in additional availability on the PNC credit line, which gave us a total liquidity position of approximately $56 million ahead of October 29, 2016.

Interest expense for the third quarter was $1.6 million, and we expect fourth-quarter interest expense to be in line with this quarter. Free cash flow in the third quarter of 2016 was negative $8.6 million compared to a negative $12.8 million in the third quarter of 2015. This $4.2 million improvement over the same period last year reflects our improved focus on working capital management, and the normalization in capital spending related to the technology and facility upgrade at our fulfillment center.

Our inventory for the quarter finished at $81.2 million, which is a 9% increase from this time last year. I'm comfortable with this increase in inventory, as it has allowed us to appropriately stock up with the right balance of proprietary products this holiday season, rather than relying on the lower margin drop ship consumer electronic products we offered last holiday season.

In terms of our outlook for Q4, we expect revenue growth in the fourth quarter to be negative by low- to mid-single digits on a year-over-year basis. We expect adjusted EBITDA to increase in the fourth quarter on both a sequential and year-over-year basis.

And finally a quick update on our Boston television station, WWDP, which is participating in the FCC auction process. The reverse auction was completed in late spring, and the forward auction is still in process. As we have said, we are restricted by the FCC regulations from commenting further on this process.

With that, let me turn it over to the operator, and Bob and I will be happy to take your questions.

(Operator Instructions)

The first question comes from the line of Tom Forte with Maxim Group. Please proceed with your question.

Two, one I wanted to talk about consumer electronics, and how should we think about your strategy for that category on a go-forward basis? And then number two, can you talk about shipping and handling revenue both in the quarter and your thoughts on a go-forward basis? The notion being that in the quarter, when you had a lot less consumer electronics sales it seems like on a year-over-year basis, your shipping and handling revenue improved. But -- so electronics and shipping and handling. Thanks.

Tom, it's Bob. Thanks for the questions. Let me start with the first one on the consumer electronics, and I'm going to let Tim talk to the shipping and handling question that you had asked.

On the consumer electronics area, we made a decision that we were going to go, based on looking at our contribution margin reports, we made a decision fairly early on that we didn't want to have products that were easily available everywhere else, and we wanted to continue to go with the proprietary and exclusive products that we had. So we actually, we did a reduction of about $13.6 million in consumer electronics in revenue, and the total revenue reduction for the quarter was actually $10.6 million. So as I said in my comments earlier, I would have now -- in retrospect, I probably would not have wanted to shift it that much, because what happened was I ended up over rotating a little bit on such of the other categories, which is a tactical error, it wasn't a strategic error.

But the way we feel about consumer electronics going forward is we're going to be opportunistic. When we get a good buy, when we think we can make contribution margin on the item, we're going to drive towards contribution margin, and we're going to drive towards profitability. But we're not going to -- we're not going to sell merchandise just for the sake of getting a revenue that's not going to give us any incremental EBITDA. And I'll let Tim handle the question on shipping and handling.

Tom, to your question on shipping and handling, we don't obviously go into the detail of what shipping and handling revenue was. But think of it this way, we did not do a lot of promotion. We stayed on grid most of Q3, because we weren't chasing after volume on revenue, and we didn't feel that need from an inventory perspective, either. So we stayed pat and just executed on the game plan of moving out of CE. And so the shipping and handling wasn't something that we used as a promotional lever.

Thank you.

Thank you. Our next question comes from the line of Mark Argento with Lake Street Capital Markets. Please proceed with your question.

Just a couple questions. First on the new content strategy, Bob, it seems like that's a heightened focus for you here over the last quarter or two. Could you talk a little bit more about -- I know the Paula Deen thing you announced in the last week or two, what we should expect to see in terms of additional off-studio or out-of-studio opportunities? And maybe talk about how you can weave your new high-def strategy into that?

Absolutely. Thanks, Mark, for the question. There's no question that what we would like to do, and Paula Deen is a perfect example, I think, of being able to set up some fixed programming, with somebody that has a lot of followers and has a following. And is able to get a lot of attention in the press and has a lot of merchandise, cross merchandise categories to be able to sell with, because she's iconic in her own right.

And so what I think is going to be one of our big wins going forward is to be able to essentially -- because the price has gone down so much in terms of being able to do remotes and setting up studios, is that we really want to be wherever we think we have the best opportunity to have the people that we want, the guests that are going to be on. So because the price has gone down so much, we think if we continue to set up these uber hosts, if you will, to be able to have fixed programming on a weekly basis that drives and continues to be able to drive more tune-in.

And we use proprietary and exclusive brand merchandise, and we use the social content to be able to drive people to it, that over time, we feel this is going to be able to drive even more profitability in that area. And as long as we choose the right people and we have the fixed programming, I think you'll find that we're going to drive this significantly up.

Do you anticipate at any point putting in some fixed facilities on either of the coasts, or are you just continuing to be opportunistic?

Yes. I mean, we're looking on both coasts, and we are finding, frankly, that because the expense, it's not so bad to be able to put together a studio, and you can do things remotely fairly inexpensively, that if we find a good deal, in terms of being able to set up a fixed location in either New York or LA, we certainly are going to be opportunistic to do that.

But at this point we think that the most important thing is to be able to just be able to have a place to be able to call home, if you will, in both areas, to do so. So at this point, we're reviewing the different options that we have. I very much would like to be able to have us placed in New York and LA, but it's not going to be a big expense that's associated with it.

Got it. And then one quick one for Tim. In terms of -- looks like return rates are up a little bit, can you talk to that? Was that mix of product, or what's going on there?

Yes. Mark, the return rate was up a bit, and that is directly moving out of CE, and going a little bit heavier into the wearable categories, our best performing products. And that would be in jewelry, watches, fashion and beauty, but in particular, the higher-priced items in jewelry, watches, would have brought that out.

Great. Thanks.

Thank you. Our next question comes from the line of Eric Wold with B. Riley. Please proceed with your question.

Couple questions. One, followup on Q3. I know you mentioned you throttled back air time around consumer electronics and reallocated this. Was any of the shortfall in the period due to underperformance of the categories where you reallocated the air time into, or merely just the loss of the CE revenue flowing through?

And then on the comments around gross margins looking into next year, stabilizing around current levels, is that an indication that this is the gross margin level you feel is optimal to drive new customer engagement and sales? Or is there still an opportunity to move gross margin even higher from these levels over time?

Thanks, Eric. On the productivity question which I think is what you're focusing on is, yes, I think that we saw -- I don't think, I know that we probably over rotated a couple of brands in filling up the space that we dropped out of on the consumer electronics. And so I think we over rotated some of our major brands, and therefore we saw some productivity drops on that.

And as I said earlier, I think that the good news is that is a tactical thing that we'll be able to adapt to appropriately, and be able to get even more profitable on, since we're going to continue to look at the contribution margin and drive towards incremental profitability. But I think by doing the drop as quickly as we did, I didn't anticipate, as well as I probably should have, the fact that we were going to over rotate some of the other families of business.

Eric, this is Tim. Regarding your gross profit question, as Bob talked about in his prepared remarks, building this base case model this year, which is around balancing the mix, has produced a natural lift in the gross profit each of the quarters.

And so what I was saying in my prepared remarks around it stabilizing, we do think that these are sustainable margins, where we are today, particularly as we are going to be growing these revenue programs we have in place next year. We feel good about the growth in Q1, Q2, Q3, and how we're focusing in on Q4. So the answer to your question is, yes, we think these are the normalized rates for going forward.

Perfect. Thank you, both.

Thank you. Our next question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.

Great. Thanks for taking my question. Just big picture here, obviously there's a lot of moving pieces, as you grow some of the higher margin categories, and pull back on some business that had perhaps been chased at low margins in the past, when do you see the mix really balancing out to a point where there will be more sustainable, normalized growth? I mean, the first quarter obviously this year, revenue was up, was up pretty nicely. Does that mean that potentially the first half of next year, we could continue to see revenue be flat to down a little bit as you retool the categories?

And then, just a quick followup on private label credit cards. I was hoping to just get an update on where your penetration is now, and where you think that can go? And specifically, where is the benefits from that coming from? Is it typically higher spend for customers once they move on to the private label credit card, or is the bigger benefit from some lower transaction costs? I'd just be curious about that. Thank you.

Alex, this is Tim. Why don't we start with the last question first, which is around the credit card. Certainly we do see more productivity from the customers, once they start using the credit card. They engage more frequently with us, at higher basket values, so they're buying -- their average bucket is a little bit higher.

In terms of costs, yes, I mean, obviously we're saving on the lower transaction fees, for not having to pay some of the other card costs associated with swiping. So we like it for a multitude of reasons. It brings a loyalty and a sense of community to the customer, they have special communications from us around this program, and then from a cost perspective, it certainly helps us lower our variable rate.

And, Alex, it's Bob. And just to -- what also is really great about it is, now that we actually have a marketing department that's going to be driving this program here, is that we finally have the opportunity to be able to start working on a program to be able to target those customer in special ways. And frankly moving into at some point in 2017, a loyalty program, which we think we'll even be able to maximize our customers even more.

So the loyalty piece of it is really important, and, frankly, we wouldn't have been able to do it until we were able to have the muscle of having a marketing department, which was not here last year. And now your first question?

Not to hold you to any Q1 guidance or anything, but, obviously the back half of this year, looking at decent sized revenue declines, and clearly making up for it with the gross margin as you shift the categories. How should we just be thinking about the first half of next year? I mean, is there more work to be done, getting the mix to where you feel it needs to be?

I'll take that question as well on mix. If you think about it on a quarterly basis, certainly the biggest corrections on the mix are going to be in Q3 and Q4, as those last year were some of the heaviest in some of the lower margin items that we've just talked about, particularly around CE.

So when you think about Q1 and Q2, the mixes aren't as big of changes, but they are small tweaks. So I think you're seeing, 2016 is certainly the correcting year for establishing that balance, and reestablishing the profitability priority in the organization. And then in 2017, we should be lapping the mix that we put in place this year. So I don't think you will see big mix changes taking place in 2017, like you're seeing this year.

Great. That's helpful. Thanks, guys.

(Operator Instructions)

Our next question comes from the line of Mark Smith with Feltl and Company. Please proceed with your question.

Can you give us a total homes number?

Sure. Mark, this is Tim, how are you? We gave that -- I gave that in my remarks of 87 million which is about flat to last year.

87 million, okay. And then distribution costs per home during the quarter?

We haven't released that number, Mark, but nothing unusual happened. So there's -- as you think about what we're doing, there are two things. One, we're building more channels in each of the homes that we feel are productive already, and we're being quite aggressive with our distribution partners today.

When we have channel placement or we're in neighborhoods that are productive, we're having a serious conversation with them about costs. We're not -- we're not afraid of bringing that up and having that dialogue, because we want to make sure that each one of the homes we are in are productive and accretive for the Company and that has been -- those discussions have been very productive for us.

Is it safe to assume that they were flattish on a sequential basis?

Certainly.

Perfect. And then lastly, just maybe walk us through your balance sheet and cash burn here. You raised $10 million during the quarter, but here at the end of the quarter we're sitting at same cash balance, and same debt balance basically, quarter over quarter. Walk us through -- are you going to use the balance sheet and more leverage as you burn cash here over the next few quarters, or what's your thought on cash flow?

Sure, Mark. Let's start at the top. In Q3, obviously we benefited from the $10 million investment from Tommy, Tommy and Morris, so that was a nice investment for us, that we think that relationship is going to be big value to the Company.

But from a balance sheet perspective, the $10 million adds into the $40 million that we ended cash with at the end of the quarter, which was quite a bit more than the $11 million, $12 million that was on the balance sheet the quarter before. So the balance sheet -- the debt has stayed relatively flat, we're at about I think $88 million, and on the balance sheet for debt, obviously you remember the mezzanine debt that we took out at the beginning of the year, that was the more expensive debt that has coupled with our line of credit which is in the 3% to 4% cost.

And as we look at how we're managing our balance sheet, we're really looking for the absolute best return to deploy that capital. So if we think -- we've had several questions about are we going to pay off the mezzanine debt with the new investment that we just received, and we're certainly looking at all the options there, and then the returns associated with them. One thing to factor in around the thinking of the mezzanine debt is that we took it out in March, and the prepayment penalty in year one is obviously more than in year two, and so we're looking at the best return, and ideally when the right time is to pay off that debt.

We feel good from a liquidity perspective. Sitting, again, around the $50 million range in total liquidity is something that we feel is plenty of room for us to be both opportunistic around merchandising and ideas that we've talked about just on this call, around remote studios, and the interactive content strategy, so we feel good about the balance sheet. We think it's improving every single quarter.

Okay. And then just looking at inventory is up a little bit here, but guidance for sales to be down a little bit in Q4, how comfortable are you with your inventory levels today?

We always think about them as it relates to what we're doing with the business. So in Q1 and Q2 and Q3, you saw relatively flat inventory, as we moved and balanced the mix. And then you saw a 9% growth here in Q3 as we prepare for a different Q4.

So we had to bring in more inventory as the drop ship percent in Q4 has gone down, and the CE has gone down, and is planning to go down. So we're bringing in these fresh inventories, to make sure that we have the opportunity to maximize our holiday season. So I feel good about where we are today.

Great. Thank you.

You're very welcome.

Thank you. Mr. Rosenblatt, there are no further questions at this time. I'd like to turn the floor back to you for any final remarks.

Thank you so much. Thanks for your time and for your attention. It's going to be an exciting fourth quarter, and I think we are on a road to profitability, and that is what we're driving towards. So look forward to having these calls in the future, and we'll be speaking with you soon. Thanks again, bye. Have a happy holiday season.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.