iMedia Brands Inc (IMBI) 2017 Q1 法說會逐字稿

Greetings, and welcome to the EVINE Live First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Michael Porter, Vice President of Finance. Thank you, Mr. Porter, you may now begin.

Good morning, and thank you for joining us today. Joining me on today's call is our CEO, Bob Rosenblatt; and our CFO, Tim Peterman. Bob will provide his thoughts on our business, and Tim will follow with the highlights of our financial and operational performance. We issued our earnings release earlier this morning. If you do not have a copy of our earnings release, you may obtain a copy through the news section of our Investor Relations website at evine.com. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. We believe the expectations reflected in our forward-looking statements are reasonable, but give no assurance such expectations or any of our forward-looking statements will prove to be correct. Please refer to the Safe Harbor section in our earnings release today and our SEC filings for additional information. Finally, certain of the financial information disclosed on this call includes non-GAAP measures such as adjusted EBITDA. The information required to be disclosed about these measures, including a reconciliation to net income to the most comparable GAAP measures is included in the earnings release. The earnings release is also in exhibit to our Form 8-K that can be accessed through the SEC Filings section of our Investor Relations website. Now I would like to turn the call over to Bob.

Thanks, Michael. Good morning, everyone, and thank you for joining our call. As we all know, it is a choppy retail environment today for both investors and consumers, so I'm pleased that EVINE is off to a good start. We achieved the guidance we provided for both top line and bottom line, and we continue to improve our company's position both strategically and tactically to deliver on our stated goals for top line growth and improved profitability this year. Our growth strategy is based on continuing to build our stable of proprietary and exclusive brands as well as continuing to use our national multi-platform distribution to showcase lesser-known compelling merchandise that cannot replicate our kind of reach in today's retail landscape. Our merchandising team is continually in the markets seeking out these brands. In conjunction with our broadcasting and marketing teams, we then provide the expertise and support to help the vendors tell their stories in a way only interactive video commerce can. Before I walk through our first quarter business-by-business results, I'd like to update you on the 3 pillars of our growth strategy. The first pillar is to grow our stable of proprietary and exclusive product offerings and lesser-known but compelling brands that will further differentiate us from our competitors, whether on-air, online or brick-and-mortar. I'm happy with the progress we are making here. A perfect example of a compelling but lesser-known brand our merchants cultivated a relationship with was MacKenzie-Childs, which premiered on EVINE just a couple of weeks ago. Launching with a custom-branded set and graphics package via on-air, mobile and online, our ability to create an engaging story that brought this exclusive brand to life demonstrates the power of interactive video commerce. This premier beat our expectations by more than 200%, and we sold through virtually all products that was available to us from that vendor. But as I have said, to do this well at scale and at margins our shareholders expect, within a merchandise mix customers prefer, it is not a goal to be achieved overnight. The good news is that we did most of the emotionally difficult work last year of reducing our company's revenue in the ubiquitous low-margin Consumer Electronics business. It was the right thing to do for us for long-term shareholder growth. To help us build our future product pipeline, we established an important partnership last year with Tommy Hilfiger and Tommy Mottola, who continue to provide relationships, brands and ideas that give you even competitive advantage in securing the types of brands we seek. In addition, it enables us to build our product pipeline faster than the traditional approaches. In the first quarter alone, we launched 17 new brands, which is good progress, and you'll see even a more accelerated progress in the back half of the year. The second pillar is to create and deliver compelling live interactive content and commerce. This is our secret sauce that I believe we do better than anybody else. This is where we bring together our "live on location" entertainment content featuring compelling personalities, celebrities and hosts who interact on our multiple platforms to produce narrow cast personal shopping experiences. A great example from the first quarter was our Invicta Ocean Voyage live programming event that took our fans inside and behind the scenes of an Invicta themed 3-day Caribbean Cruise. It was both compelling entertainment and productive commerce. Another example in the first quarter was our launch of the EVINE Beauty Experience, featuring a new innovative and interactive studio that allows us to use of various forms of social media to communicate with guests and bring our full Beauty team in the conversation with the customers. Two final examples that are progressing nicely are our recent launched interactive warehouse sale and beyond backstage concepts that streamed live on Facebook and YouTube. This strategy is intended to increase the number of regularly scheduled programs we offer. Appointment viewing concepts like style forecast on Monday nights; Paula Deen Sweet Home Savannah on Tuesday evenings; Wake Up in Style on Saturday mornings; and The Sizzle on Sunday mornings work in tandem with our live event strategy to offer our customers something personal and unique. And the third pillar to our growth strategy is to aggressively expand the quality, quantity and technology of our content distribution, which will help drive customer growth and purchase frequency. Our 12-month customer file remains relatively flat as we continue to increase our composition of higher purchase frequency and higher lifetime value customers. We are making progress here as well, which bodes well for long-term value creation. For first quarter, although our total customer base was down slightly, our average purchase frequency increased to 4.8 items during the quarter, which was a 12% increase over the same period last year. In addition, we grew our 12-month wearable categories active customer file by 1.4%. That category has the highest lifetime value for our company. We have several tactics in play helping us to build on those successes. Tactic 1 is to improve and expand our online mobile and social distribution platforms. In the first quarter, 50.6% of our sales were digital. This is an increase year-over-year of 180 basis points. Our mobile sales, again, have increased as a percentage of digital sales to 48% for the first quarter compared to 45.6% for the same period last year. We also continue to improve our engagement on all social platforms, including Facebook, Instagram, Pinterest and YouTube; and our sales from emerging over-the-top platforms like Apple TV, Roku and Amazon Fire continue to grow. We also continue to explore partnerships with the newer and still nascent but important platforms for online distribution that will help us engage with the millennials who consume videos differently from earlier generations. In summary, our online distribution strategy remains focused on engaging all age groups using targeted data and machine learning. There was a recent research report that highlighted that the Gen Xers' and Boomers' combined buying power in luxury goods in 2016 was still estimated to be about 4x that of the millennial age group. We understand that personal video consumption preferences are evolving, and our goal is to remain nimble to engage with all customers using the platforms that they prefer. Tactic 2 is to add new targeted television distribution while reducing pockets of underperforming television distribution. Much like balancing our merchandising mix, we continue to balance the quality of our distribution on television. Our goal is to reach more targeted customers based on the data we have. This is our "more channels in the right home" strategy with a focus on adding secondary channel opportunities if the categories or personalities we are partnering with warrant such a targeted focus. Now in terms of our first quarter performance, our top line revenue was down 6.3%. And although we provided guidance to our stakeholders last quarter to expect this revenue decline, I want to make sure we're all clear as to why it did so. The driver continues to be a result of our strategy to grow the number of customers who have a high-lifetime value and reduce the number of customers who have low-lifetime value. That is why we continue to rebalance the size and composition of our Consumer Electronics category, and why we tested lower price points in our Watch category this quarter were all to increase composition of higher-lifetime value customers as a percent of our total file. In terms of a more detailed merchandising category-by-category review for the first quarter, let me begin with our Jewelry & Watches category, which represented 41% of total merchandise sales.

Our success in Jewelry is primarily driven by our proprietary brands and well-executed events and that was again true this quarter. These brands include Gems en Vogue, the Gem Insider, NYC II jewelry, Artisan Silver by Samuel B, Gem Treasures and Diamond Treasures. Jewelry events allow us to tell the stories behind the different Jewelry brands and pieces in a way that resonates with our customers and drives strong productivity. Our first quarter events included our Tucson Live and Chinese New Year events in February; Diamond Day in March; and Gem Week and Artisan Day in April. These events continue to produce strong results and showcase our strengths in creating unique and exciting video. Within Watches, we had some puts and takes during the quarter. On the positive front, our Invicta, Ocean Voyage, live event in February was immensely successful as I mentioned before. This event gave us the opportunity to interact in person with some of our best customers while also offering more than 100 new designs and styles. The new products were well received by our customers and the event produced our best productivity for this category in the quarter. However, as previously mentioned, we also tested a new Watch strategy based on a lower price point selections designed to grow high-lifetime value customers. Unfortunately, this test did not resonate as much as we had hoped with our higher price point collector customers. And as a result, in the back half of the quarter, we needed to work through some of the excess inventory, which hurt us both from a productivity and margin rate standpoint when compared to last year.

Next is our Beauty category, which represented 15% of merchandise sales for the first quarter. Our core exclusive brands like Skinn Cosmetics, Isomers, Beekman 1802 and Consult Beaute continued to perform well. Beekman 1802 celebrated its second anniversary with us in March with many sellouts and continues to grow into one of our most exciting brands. Consult Beaute also celebrated its second anniversary with us in April by adding Consult health products to the assortment. We are excited to see the solid results of this new product launch, and think it represents a strong opportunity for the brand by leveraging off-air opportunities such as continuity programs.

Next is our Fashion & Accessories category, which represented 22% of merchandise sales for the first quarter and was the best performing category during the quarter. Our strongest brands continue to be our proprietary brands, such as Kate & Mallory, Indigo Thread and OSO Casuals. Combined during the quarter, proprietary apparel grew 14% compared to last year, and that was on top of the 39% growth in the first quarter of 2016. This was truly exceptional work done by the Fashion team. In the first quarter, we launched a new proprietary accessories brand called Firenze Bella that exceeded expectations and filled wide space to this high ASP product group. The last product category is our Home & Consumer Electronics category, which represented 22% of merchandise sales for the first quarter. The Home business continues to be a priority for us with its potential to serve our customer base and attract a wide range of new customers. We had a number of new concepts launched during the quarter and feel confident that we have added some new brands into our mix that we can grow. In February, we launched Pet Shop with John O'Hurley; In March, we launched Julia Knight Entertaining; and in April, we launched Donny Osmond Home, Dann Foley Decor and Lindsay Soko Home Solutions. We are gaining significant traction in our Home business, and I'm excited about the opportunity and potential we have in this category. Our Consumer Electronics business continues to be strategically reduced from a top line perspective as we eliminate lower contribution margins typical of the branded and commoditized product offerings within this category. Our revenue performance was in line with our reduced air time in the quarter, which was down 38%. We believe we are near the end of the rightsizing our Consumer Electronics business. The second quarter is planned to be the last quarter of heavy pressure caused by a reduction of lower-margin Consumer Electronic products on some revenue. We are off to a good start in fiscal 2017. We expect to grow the top line of our company in the second half of the year. We expect to do this while continuing to strengthen our balance sheet and improve profitability. I will now hand the call over to Tim, to walk through our financial operational and content distribution results in more detail.

Thanks, Bob. And good morning, everyone. I'll start with providing some additional financial details. Consolidated net sales for the first quarter were $156.3 million, which was a 6.3% decrease year-over-year and on the high end of our expectations we set for the quarter, as Bob mentioned earlier. Our return rate was 18.8% in the first quarter, which was an improvement of 40 basis points year-over-year. This improvement was driven by decreased return rates within our Fashion and Beauty categories. Our average selling price in the first quarter was $54, a 13% decrease year-over-year. This was primarily attributable to lower ASPs experienced in the Watch category test and the strong performance of our Fashion category in the quarter that added mix pressure. Our gross margin percentage declined 80 basis points during the quarter to 36%. Gross profit dollars decreased $5.2 million in the first quarter. This decline in gross margin dollars and rate was primarily driven by the softness in our Watch category due to the previously mentioned test and a resulting markdown activity on this inventory in the back half of the quarter. We expect another quarter of sales and margin rate softness in our Watch category as we work through the rest of this inventory but not to the extent of what was experienced in the first quarter. First quarter operating expenses totaled $56.9 million, which was an $8.1 million or 12% decrease over the prior year. This was attributable primarily due to reduced content distribution costs, reduced management transition costs and other reductions from our continued profit improvement initiatives. Also included in operating expenses are costs related to our primary operational functions. Our fulfillment center, customer solutions group and the credit and payments group. We started off the year well in all 3 functions. In the customer solutions group, our most important KPI is our live agent contact rate, which measures the post-sales support calls compared to units sold. We again improved this metric during the quarter. This time by 230 basis points over last year. This improvement continued to be driven by better execution on the front end, which resulted in reduced customer service problems on the back end, as well as a focus on first call resolution by the customer service team. This improvement helped drive a 12% reduction in transaction cost per unit in the quarter compared to last year.

In our fulfillment center, we had our first full quarter of using our new warehouse management system, which went fully live in the fourth quarter of fiscal 2016. I am pleased with our performance to date as our Bowling Green, Kentucky fulfilment center is experiencing the best productivity that we have seen in recent years with a 10% improvement over first quarter of 2016. In our payments and credit group, we increased our private label credit card penetration during the quarter by 220 basis points compared to the same period last year. In addition to helping build a stronger affinity with our customer, the use of the EVINE card help to reduce our credit interchange and other credit card processing fees. Variable costs for the quarter were down compared to last year as a combination of lower credit card fees and bad debt expense, coupled with improved efficiencies at our fulfillment center, offset slightly by a decline in ASP, which drove a 7% increase in net shipped units. Total variable expense as a percent of sales was approximately 9.6% for the first quarter, which was down 40 basis points from the prior year. Our content distribution has remained stable, as EVINE's reach continues to be about 87 million homes as of the end of the first quarter. However, we reduced our distribution expense in the quarter by $3.2 million year-over-year, driven by continued contract negotiations. In addition, we are proceeding on plan with our previously announced fall transition to broadcasting in full HDTV. As Bob noted earlier, our content distribution strategy is to engage both our core customers and the Gen X and Boomer age groups and our emerging customers in the millennial age group. As a virtual MSOs like YouTube TV, Hulu Live TV and DirecTV now grow, we are working to be there. As our phone customers transition to the Internet, we will engage them with our mobile app on their smartphones. And while Nielsen's third quarter 2016 audience report noted television viewerships in ages below 49 declined slightly, Nielsen also noted viewership in our core customer ages of 50-plus slightly increased. Our plan is to grow targeted video distribution using the most popular technologies of today. We generated adjusted EBITDA of approximately $3.1 million in the quarter. This was a slight decrease year-over-year because of the declines in revenue and gross margin that we discussed were mostly offset by the decreases in operating expenses. As for the balance sheet, we ended the quarter with cash and restricted cash of approximately $26 million, which was a decrease from the $33 million at the end of fiscal 2016. The decrease in cash was driven by 2 opportunistic transactions we executed that were previously announced. First, on January 31, 2017, we used cash on hand to buyback 4.4 million shares of our common stock for approximately $4.9 million or $1.12 per share in a private transaction with NBC Universal Media, a subsidiary of Comcast Corp.

Second, on March 21, 2017, we paid down $9.5 million or approximately 60% of our Great American Capital Partners high-interest term loan using a combination of cash on hand and our lower interest PNC credit facility. Along with our cash, we ended the quarter with approximately $12 million in additional availability on our PNC credit line, which gives us a total liquidity position of approximately $38 million as of the end of the first quarter. Our inventory for the quarter finished at $75.6 million, which is up from our first quarter 2016 balance of $63.6 million. This increase in inventory is slightly more than planned as a result of early receipts at the end of the quarter. Primarily the growth is a result of shifting out of the dropship Consumer Electronics category from prior year that did not require inventory investment. We will be through this year-over-year inventory change by the third quarter. In terms of outlook for the second quarter of 2017, we expect revenues to decline in the 3% to 5% range. This expected sequential improvement reflects the completion in the second quarter of our rebalancing of our merchandising mix to reduce lower-margin Consumer Electronics that we begin to do in the second quarter of 2016. From a bottom line perspective, we expect to post net income and EPS, which is also in line with the second quarter of last year. For the full year 2017, we continue to expect sales growth in the low single digits, which will show sequential improvement in each quarter so that revenues will be down mid-single digits in the first half of the year and show growth in low single digits in the second half of the year. We continue to expect adjusted EBITDA to be in the $18 million to $22 million range, which will be a growth of 11% to 36% year-over-year. Our fiscal year expectations include a 53rd week in fiscal 2017. For full year 2017, we also expect to invest approximately $8 million in capital expenditures weighted heavier in the first half of the year related to our transition to HDTV. Lastly, we mentioned previously that we are considering several channels share proposals to monetize a portion of our Boston channel spectrum while preserving our ability to distribute EVINE programming in Boston VR station, and that process continues. With that, I'd like to turn it back over to the operator so we can take your questions.

(Operator Instructions) Our first question is from Eric Wold of B. Riley.

A couple of questions. I guess, one, we've now seen your ASP kind of hover around this $54 level, I guess it's only been 2 quarters. But knowing there's some issue with lower-priced watches in Q1. You're still going to work through some of that Consumer Electronics transition during Q2. Do you see this as kind of the right level to drive more trials in APS, especially, on the shift to mobile? Or is it still going to move this lower? And then I have got a follow-up after that.

Hey, Eric, it's Bob. Thanks for the question. My guess is that, you may see -- we may see it move up a little bit. We'll be opportunistic with it. We have a new GMM in CE. And one of the things we're working through with that is as opposed to doing a lot of the stuff that we've done in the past that were available in other distribution channels. We are looking at doing some more private label and things in that area. So we hope to be able to lift -- we expect to be able to lift the average retail there as well as the average margin there. So there is good work going to that. Rob, who is responsible for CE and Home, has only joined us a couple of months ago. So we should start seeing the fruits of his labor relatively quickly. So I think overall -- and overall, we have a plan that we're working on to start driving up ASPs in general. However, we are also looking at that in order to be able to also be able to continue to drive higher margin versus what we were at last year. So all in all, I would say we probably will see for part of the third quarter -- sorry, second quarter and definitely in the third and fourth quarter we will start seeing ASP increase.

And then any updated comments around the outlook for HD second channel penetration this year, kind of what you've seen so far from those markets you've done this in terms of purchase frequency, new customer acquisition?

Hey, Eric. This is Tim. I'll take that question. Yes, in terms of HD distribution, we know from our internal experience that we experience about a 30% lift when we move into those new neighborhoods. Now it matures over time. 8 to 16 to 18 months. But we know that there is lift. And so it continues to be one of our priorities to add new distribution. Obviously, we're launching with full broadcast HDTV this fall. So we're going to complement that with more HD distribution. And so it's very important for us.

Have you got any thoughts on penetration levels into your end going to next year?

Nothing that we can forecast for you today. Just (inaudible)

Okay. And then the final question. On the Boston TV station, when you do come to a decision to kind of monetize some of that capacity, is that something that would be a onetime event to the P&L balance sheet? Or is it something that you expect to be kind of an ongoing lease or ongoing of recurring revenue from that opportunity?

Well, we're looking at couple of different scenarios. It would definitely affect the balance sheet more -- in other words, we're looking to monetize to take in cash and whether that's a onetime or recurring fee, that is our plan. In terms of expense or hitting the P&L. It really wouldn't hit the P&L because we're going to continue broadcast on that station, our signal.

The next question is from Mark Argento of Lake Street Capital Markets.

Couple of questions. First off, maybe Tim, could you help me think about what the guidance or revenue growth would look like if you backed the CE out of the full year? So basically, isolating CE kind of pro forma, what type of growth would you expect that the business non-CE like to grow out for the year?

Hey, Mark, this is Tim. We haven't really provided that kind of detail to our revenue model. But I can tell you this in terms of trending, we began to reduce the category in those lower contribution margin items in Q2 of last year. And as you can imagine, Q3 and Q4 are the heaviest quarters for CE. So when you think about this year, the biggest deltas are going to be in Q3 and then Q4. And so Q2, I think you can think about the sequential percent of CE moving to the year Q2, Q3 and then the most in Q4, and that's what we'll be lapping over this year.

And CE right now, or in Q1 as a percentage of total sales, I know you have lumped it together with Home, but if you were to break that out, what would that look like?

Well, it's very small, Mark. So it's not -- that's the whole purpose of what we're talking...

Right. So it's inconsequential at this point. So but backing that out though for the full year, you guys most likely would be -- your other businesses are effectively growing, I guess is what I'm trying to get at, if you backed up the CE exposure...

Yes. Just by the very nature of the opportunity of having more space, air space, if you will, shelf space, if you will, to be able to do that. As we're bringing in the incremental brands that we -- that as we said we have put a very big push on bringing in new brands, quadruple what we had last year. We very much expect to be able to have those start replacing and really kind of winning off of any of the low contribution margins CE items. But I do also want to say that, that being said, there are CE opportunities out there that we look at individually and if there is contribution margin, especially when you combine it with the accessory areas that CE provides as well as the warranty areas that there are winning formulas out there, but it's certainly, I don't believe is anywhere near what it used to be. What CE used to provide from that standpoint.

And Mark, just to follow up from that point. Yes, we do see our wearables category growing as you can see on our customer file. That group is growing 1.4%, which drives -- it is a good early predicator of growth for the future.

Great. And then, 2 things. Maybe Bob, you can touch on the 17 new brands you launched. Where are you able to source these brands? Are your merchandisers are the ones out, kicking tires on these. Is it Tommy and crew bringing new ideas to you guys? Where are you guys seeing the new activity from or the new brands sourcing from?

Sure. It's a mix of all those things. Tommy and Tommy -- and Morris Goldfarb as well, call me probably on a weekly basis to introduce me to brands that they speak with that they think are opportunities for us. And I've -- we've got a pretty great hit rate in terms of several of the brands that are coming on that we think are going to give us a lot of extra push in different categories that we're not in right now. But I have to say, the thing that is most exciting for me here and is been since day 1 is we have a merchandising group here that is the seasoned merchandising group that really takes me back to the days when I was in Bloomingdale's. When the merchants were truly entrepreneurial and truly ran their own businesses. And as opposed to, I'm going to say, perhaps some of the other video commerce areas where I kind of picture there's a line out the door where people that have potential products come into this mill and are either able to be able to hit their dollars per minute or not. And if they hit their dollars per minute, they are entitled -- they're allowed to have another shot at being on again. We have a real merchandising organization that builds brands, merchandising and marketing areas that build brands. So a lot of what we're getting now is there is a real big reception to the fact that we now have probably 5 or 10 brands that we took from almost scratch or almost not given the kind of platform that is available to most other companies. And while TV -- and while e-commerce and bricks-and-mortar suffer from being able to tell a story, what we're finding is brands, especially like Beekman 1802 as an example or MacKenzie-Childs that we mentioned earlier have an opportunity to be able to sell full-priced merchandise and be able to tell their story about why the product should be bought, how they source it. And I think that retailing is really about storytelling. And I think that we have a merchandising and marketing groups that really have -- that really are great at being able to do that. And I think that as bricks-and-mortar find it more challenging to be able to tell stories in a wide way without spending an awful lot of money, and e-commerce continues to struggle in terms of actually making profit, we seem to have figured out a formula to be able to bring in brands, nurture them, grow them and make them successful. So the corroboration has really allowed us almost through word-of-mouth as well as the Tommy, Tommy Morris connection as well as great merchants to really be able to drive the growth here.

And then last question for me. In terms of the Watch category, it sounds like you guys were experimenting with some lower price points, you didn't like the results. Didn't you guys try that about 1 year ago, if I'm not mistaken, I just wanted to juxtapose what you did this past quarter with 1 year ago?

Yes. I don't know. I guess, I think this was probably a little bit before my time. But I can tell you that there was -- that as we are using much more research and much more deep analysis in terms of our brands, there was a drive in some of the Watch categories to try to drive new customers based on doing specifically lower pricing and what we found through the analysis that we did and this is really the first time we've gotten into the data as deep as we have. We have a unique opportunity and position in the Watch area where pricing, lower pricing is not as important. There's almost -- as though these pricing, actually, almost gets in the way that our focus is really to find more customers that are like our current watch customers who have no problems spending $300 to $400 average retail on a product. And so although there was a drive trying to figure out how low can you go to be able -- and see what the return on investment is from lifetime value. We found that there's just not -- it just doesn't -- it does not work for us as well. And if there's an example today, we have on Disney and Invicta joined together to do a Pirates of the Caribbean Watch today, which we've had as our today's special and is almost completely sold out already. And I think that average price is over $200. So it seems that our customer is much more willing to spend more money and those are the customers that we're focused on getting more of.

Your next question is from Tom Forte of Maxim Group.

I want to talk about gross margin and your gross margin profile. So when the dust settles in this transition out of Consumer Electronics, I think you had a good quarter, in fact. And I know that there's some short-term issues going on with watches. But on a longer-term basis, what could your gross margin look like? Is it too optimistic to think you can get closer to 40%? But -- so when you cycle out of low-margin consumer electronics, what could your longer-term gross margin profile look like?

Well, hey, Tom, this is Tim. When you think about our margin migration and how we reestablish margins last year, particularly in Q3 as we mixed out of the CE category, I think those are about steady stay. I don't think you're going to see us moving more than 100 basis points above those over the period of time. So when you think about how we're going to close the gap on our bottom line margin as it relates to our other competitors in the area in the 11% to 12%, from a bottom line perspective, one of the things that will change for us is our distribution cost as a percent of net sales. That will continue to go down as we've evidenced in Q1 and Q4 of last year. As both we renegotiate pockets of TV distribution that isn't as productive as we'd like and as we grow the top line. And I think that's going to be a big difference for us in terms of profitability over the next 12 to 24 months.

I think that probably -- it's Bob. The biggest opportunity that we have on the gross margin line is the efficiencies that we're doing that we started about 1 year ago with the lifetime -- with the merchandise itself and figuring out how to optimize the lifetime of a product. And we're doing really well in terms of being able to drive optimal order quantities and -- all the way through how much merchandise we have left at the end in terms of how to be able to dispose of it at the optimum gross margin. So I think Tim's point, we're probably in those areas, we're in a good place. I'd like to believe that through the hard work that we're doing in terms of figuring out the right order quantities and also being able to make sure that the merchandise -- we get the best pricing we can throughout the process and have the least amount left over that we have to figure out how to give away at a discount. I think that, hopefully, we'll be able to continue to maintain the higher margins that, as you know, went up last year a really significant amount.

Okay. Then my second question is, capital expenditure looks like it was higher in a year-over-year basis. What was the difference and spend versus last year? And how should we think about CapEx for full year this year?

Hey, Tom. The capital spend that we talked about, it's $8 million for the full year. And it's going to be a bit heavier in Q1 and Q2. As the heavier spending is related to the HD conversion that's launching in the fall. So that is the heavier component. But year-over-year, it will be about 20-plus percent below capital spend from last year.

The next question is from Alex Fuhrman of Craig-Hallum.

Something I'd like to get a little bit more color on that, that you talked about on the conference call, Bob. Just the notion of trying to have the categories that are going to bring in customers with a higher lifetime value versus maybe some of the Watch or CE customers who had a lower lifetime value. Can you give it a little bit more color on what that specifically means? Is that customers who tend to stay longer or spend more frequently? And when and exactly how we should start to see this impact the numbers going forward?

Hey, Alex. I would -- let me start with -- we'd like to start with the CE component of it. A lot of this has to do, as you know, with the fact that CE is pretty much available just about everywhere at this point in time. And it's really commoditized. So we saw, I guess, a year ago, we saw a lot of -- as we studied our customer file, there's a lot of one and dones on the CE side. So people will come in, they will essentially price shop on the web, and they will essentially just try to choose whatever's the cheapest item because it's a branded item that's available everywhere. And that customer, although might have a big unit retail for the first item that they buy, what we find is that the reoccurrence of them coming back and buying from us because there aren't alternatives for them to buy from is not great. I will say on the Watch side, the Watch side is a very large lifetime value customer and that both on Watches and Jewelry that once customers engage with us and like what they see, they are customers that have huge lifetime value. They continue to come back several times a year usually on average. And it's much easier as we continue to narrow cash the way that we're focusing on the customer to be able to through e-mails, and through social media, and through all the new ways of being able to use SCM and SCO, to be able to really drive an individual experience to those customers and also through our website and through our mobile app. So we are getting really good at being able to say, well, if this customer bought this, then there's a likelihood that they're going to want to buy that. And the first step of that was being able to put the analytics together to determine who those customers were and what's the best way to target them. And we think we've done a lot of the hard work on that already. The next part of that is to be able to actually look at it as closely to instead of doing, let's say, an e-mail blast to all of our customers or to many of our customers is to really use the analytics that we have and the analytical science that we own to be able to figure out who's the best people to send what to based on what they've looked at before and to be able to drive to that. So while CE is definitely one of those, at least CE in the terms of merchandise that's available everywhere else, and I guess, I would say that of almost all the brands, if people are going to price -- are going to buy just based on price, which a lot of people do, then I don't think that's necessarily the game that we need to be in. I think that we need to be in the game of being able to get fans. Now whether they're fans of a certain product or certain type of product or personality or even a show host, what we need to do is make sure to find the right people to be able to do that with. So it's kind of -- as we discussed in the beginning of each year, what the most important priorities are for the company, what we try to look at is how do we figure out as opposed to getting just the highest retail or the highest unit sale on something, it's how do we build the product. So in Beekman 1802, as an example, we know that people that like to watch the Beekman 1802 show, we know a lot about how they live, what they like, when they want to be replenished. And what we're doing is we're literally using the machine learning and science to be able to focus in on those customers.

Okay, that's really helpful. If I could ask secondly on distribution and selling expense. Tim, I think, you mentioned that the lower expense there were some contract negotiations. Can you give us a little bit more color on that? Was that related to the cable and satellite fees that you pay? And if so, was this like a one-off legacy agreement that was just getting to market rates for the first time? Or is this maybe indicative of a trend that some of these rates could be moving lower as the contracts come up for negotiation?

Hey, Alex. It's a variety of different elements at work in that line item. It's a pretty big line item. So not only do you have the efficiencies and cost reductions that we've been able to accomplish in the fulfillment center and in the customer solutions from a transaction per order and from a productivity perspective by increasing that by 10%. We've also had some sturdy progress in the credit and payments group, which -- those are big numbers in there. In addition, the area around content distribution that you described, there's a variety of many, many different contracts moving in at many different places of maturity. But I can tell you that over all, our strategy is to look at our distribution on a market-by-market basis. And as Bob talked about, this targeting data and this machine learning, we have a tremendous amount of historical evidence on what should perform well and what categories perform well and why. And when we find anomalies to those patterns, we go in and we try to figure out if they can be improved. And if they can't be improved for one reason or another then we sit down and talk to the distributor about a cost that make sense for us. And so what you're seeing in these subsequent quarters is the yield from that process.

There are no further questions in the queue at this time. I'd like to turn the conference back over to management for closing remarks.

Thank you. I just want to take a moment to thank our shareholders, our employees and our customers. We're working as hard as we can to build the company that you're proud of. I think you've seen some good results. We've seen some good results over the last 4 or 5 quarters. We are going to continue to work as hard as possible. This job is never ending in terms of finding improvements. Our excitement and passion continues as it should. And we're always working to deliver the shareholder values. So thanks for joining the call this morning. And I hope all of you have a great rest of the week.

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