QVC Group Inc (QVCGA) 2013 Q2 法說會逐字稿

Good day everyone, and welcome to Liberty Interactive Corporation Q2 2013 earnings call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Courtnee Ulrich, VP of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about financial guidance, business strategies, market potential, future financial performance, new service and product launches, and other matters that are not historical facts. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Liberty Interactive. These forward-looking statements speak only as of the date of this call, and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein, to reflect any change in Liberty Interactive's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary note and Schedules 1 through 3 can be found at the end of this presentation. Now I would like to introduce Greg Maffei, Liberty's President and CEO.

Thank you, Courtnee, and good morning to all of you. Today, speaking on the call besides myself, we will have Liberty's CFO, Chris Shean, QVC's CEO, Mike George, and QVC US CEO, Claire Watts.

On to some of the highlights. At QVC, we had reasonable US results, with more challenging results in the international markets. We were negatively impacted by currency moves in Japan, and less so in the UK. Notably, Q2 dot-com penetration in the US was 42%, and within that, 28% of that volume was mobile. In the e-comm group, we had continued momentum in Q1, good results overall, with a few one-time events in last year's results, and a fewer number in this year's results. Adjusted OIBDA grew 13%. Notably, bodybuilding set records around its 14th anniversary promotions. We had impressive order growth at CommerceHub, driven by many new accounts. Provide Commerce's RedEnvelope is implementing a new product strategy with a redesigned merchandise offering, and we believe it's showing promise. Notably, we also repurchased $220 million of stock in the quarter. That was somewhat reduced by the rise in the stock price during the quarter and relatively low trading volumes, including such periods as July 4.

Looking at Liberty Ventures, TripAdvisor posted very strong results. Across the board, it had robust metrics and excellent traffic results, traffic growth, rather. Metasearch, its new offering, resonated with users, and had improving monetization. With that, let me turn it over to Chris Shean, to talk about the financials in more detail.

Liberty Interactive Group's revenue increased 1% in the second quarter, while its adjusted OIBDA was flat. QVC's net revenue and adjusted OIBDA decreased 1% for the quarter. Liberty Interactive's other e-commerce businesses grew revenue 12% for the quarter, while adjusted OIBDA increased 13%.

Now, let's take a quick look at the liquidity picture. At the end of the quarter, Liberty Interactive Group had contributed cash of $591 million, and $4.7 billion in principal amount of attributed debt. QVC's total debt to adjusted OIBDA ratio, as was defined in their credit agreement, was approximately 2.1 times, as compared to the maximum allowable leverage ratio of 3.5 times. Now, with that, I will hand the call over to Mike George for additional comments on QVC.

Thank you, Chris. In Q2, our consolidated revenue and adjusted OIBDA grew 2% on a constant currency basis. However, due to the continued FX headwinds, and most notably the 19% drop in the value of the yen, our dollar-denominated results declined 1% in both revenue and OIBDA. We experienced a somewhat more cautious and promotional consumer spending environment, which coupled with an increase in international return rates, due primarily to the growth of our fashion businesses, caused constant currency revenue growth to moderate somewhat from the pace of the last several quarters. Nonetheless, we remain very confident in our direction and in our growth potential.

We are encouraged by several positive developments, as we continue to build a highly engaging, immersive, digital shopping experience around the world. We were especially pleased with the strong performance of both new and reactivated customers, with sales up 6% and 11%, respectively, in constant currency. This is the strongest growth we've seen in new customer sales since the fourth quarter of 2011, clear evidence of our ability to continue expanding the relevance and the reach of our brand. The growth in our digital platforms also remains strong. E-commerce increased 12% worldwide on a constant currency basis to 37% of revenue, up from 34% a year ago. Mobile continues to grow at a rapid clip, up 64% worldwide in constant currency to 30% of e-commerce orders.

Our leadership in social commerce will accelerate with the launch of toGather, a highly innovative social platform developed from our Oodle acquisition. This new platform is currently being tested in a beta release, and will be launched for general availability in the US in September, Claire will share more on this in a moment. We are delighted with the continued success of our newest markets, Italy and China, and we are exploring several other markets for potential intrigue. We were pleased with our ability to maintain high and stable OIBDA margins in the face of the soft economy, and while also continuing to invest in the business, in building our leading digital platforms and experiences, in creating destination programming, operating new headquarter and broadcasting facilities in some of our markets, and driving global expansion. Despite the heavy promotional environment, we actually reduced clearance activities below last year's level in most of our markets. Although, this did, we think, contribute to softer sales in June, especially in the US, as promotional activity elsewhere heated up.

Finally, we were thrilled to welcome a new senior executive to our team. Ted Jastrzebski joined us as our Chief Financial Officer a couple of weeks ago. Ted comes to us from the Hershey Company, where he spent the last eight years in global leadership positions, most recently as President of Hershey Americas. He also spent 14 years at Procter & Gamble, in various financial leadership roles in the US and internationally. Ted brings a wealth of global, financial and general management experience to QVC, and we are excited to have him on the team, and to have him help lead our global growth strategy.

Now, turning to the results by market. The US increased revenue 3%, with strength in beauty, home improvement, home decor and apparel, partially offset by softness in jewelry, and health and fitness. Our e-commerce growth in the US remains very strong, up 10% to 42% of total revenue, a 3 point improvement. Mobile grew 72%, and that represents 28% of our total e-commerce orders. Adjusted OIBDA grew 2%, with a slight margin decline of 22 basis points. We had improvements in product margins, due in part to the slower clearance activity, and gains in warehouse and customer service productivity. These were offset by a decrease in credit card income on our Q card, due to increased reserve requirements associated with the US regulatory environment. We also faced an increase in inventory obsolescence expense, as we anniversaried the benefits of cleaning up the inventory last year, and the cost of absorbing the Oodle acquisition.

In Japan, shipped sales grew 6% in local currency, but 160 basis points increase in return rates lowered net revenue growth to 3%. We saw strong gains in fashion and in health, beauty and electronics. Similar to Q1, the growth in our fashion mix, along with the shift away from make-to-order jewelry, largely contributed to the increase in return rates. Our adjusted OIBDA in local currency was up 1%. As I shared on our last call, we are incurring greater operating expenses for our new facility, as well as a step-up in one of our major carriage contracts. Adjusted OIBDA growth would have been up 4.3% without these impacts, which we will anniversary early next year. Excluding these one-time factors, adjusted OIBDA margins expanded on strong fixed cost management, partially offset by some pressures on product margins and freight.

Our results in Germany were disappointing. While we are pleased with improved fundamentals in many areas, we are not yet seeing this translate into consistent earnings momentum. As you may recall, in Q1, the team's efforts drove improved results, but in Q2, net revenue declined 3% in local currency, despite a healthy 5% shipped sales growth. Our return rates increased over 500 basis points, due primarily to a significant increase in our fashion mix, along with 165 basis point true-up from prior periods. Sales were also hurt by flooding, the flooding that impacted of the country in June, with over 25% of our customer base affected.

Now, the growth in fashion did contribute to a 100 basis point improvement in product margins, but this was more than offset by increased freight costs associated with the higher returns, higher inventory obsolescence, and higher IT personnel expenses associated with the development of our European technology platform, resulting in a 14% decline in adjusted OIBDA. A bright spot in the quarter in Germany, we continue to see a very rapid shift to digital, with e-commerce revenue up over 20%, and mobile up nearly 300%. The continued strong growth in e-commerce, now that we have fully anniversaried the rollout of our global Websphere platform, is especially encouraging. As we've shared in prior calls, we are highly focused in Germany on the fundamentals. We've made good progress this quarter, increasing the count of new items and new shows, increasing product rotation, and increasing the proportion of business done at non-promotional pricing. We do believe these efforts, along with thriving e-commerce and mobile commerce will pay off in the financial results. However we need to bring more category balance to the business, as well. This, along with tight expense management and stabilizing returns, remains a strong focus for our team.

The UK posted a strong quarter, with revenue growth of 2% and adjusted OIBDA growth of 29% in local currency. We saw strength in beauty and most home categories, partially offset by continued weak jewelry results. The OIBDA expansion was driven, in large part, by anniversarying last year's lease cancellation costs and double running costs from the move to our new headquarters. We also saw higher product margins, as we shifted a greater proportion of the business to non-promotional pricing. Improvements in warehouse and customer service productivity, and lower obsolescence expense. These are partially offset by severance costs related to several efficiency initiatives the team is pursuing.

We continue to be encouraged by our performance in Italy, with strong sustained growth, despite the weak economic situation, coupled with high customer loyalty and repeat purchase rates. Revenue increased 59% in local currency and adjusted OIBDA loss fell 51% to EUR3 million. We also achieved a major milestone in July, as we began receiving the first shipments at our new, third-party logistics operation in Italy. Previously, as you may recall, we had handled product distribution out of our German facility. With this transition, which will be completed in the fall, we expect to reduce our delivery time by up to three days to our customers, and in 2014, we expect to reduce our fulfillment costs by about EUR3.5 million.

Finally, we are delighted with the continued strong performance of our newest market, China. Our CNR Mall joint venture increased revenue 42% in local currency, and the adjusted OIBDA loss declined 9%, to just over $2 million. Last month marked the one-year anniversary of the launch of our JV, and we are now really beginning to see the impact of our efforts to instill QVC operating fundamentals. Our sales margins are up over 1,000 basis points, and our return rates are down nearly 900 basis points. We are also bringing the customer enhanced product offerings, with 26 international brands launched in just the last three months, and over 40 more on tap for the remainder of the year. Including both domestic and international products, the number of new items we're introducing weekly has doubled over the rate from a year ago. With the strong support of our partners at China National Radio, we've expanded our distribution to 61 million homes, up from 22 million at the end of Q1, and just 41 million at launch. Now, I will turn it over to Claire to discuss the US results in more detail.

Thank you, Mike. QVC US remains focused on reimagining the world of shopping, entertainment and social as one, by offering our customers a unique, ever-changing duration of products and programming through our integration of broadcast, website, e-marketing, mobile and social platforms. In the US, we achieved strong growth in our overall initial product margins. We experienced favorable return rates compared to last year. Our inventory remains very well controlled. We actually have 25% less distressed inventory than we did at this time last year.

We are delighted with the results of our efforts to engage new customers. Our count has increased by 4%, with sales to new customers increasing 12%, compared to the prior year. We saw great momentum in our beauty business. Our customers responded to our first ever beauty with benefits event in partnership with cosmetic executive women, with participating brands including Laura Geller, Mally Beauty, philosophy, bare essentials, Clinique, WEN hair care and StriVectin. As a result of this multimedia event, QVC donated $650,000 to Cancer and Careers as part of our ongoing commitment to promote the success and wellness of women, through the power of real relationships.

Our home division generated very strong results, particularly in home decor and home improvement. Stand-out brands included Serta, Cottage Farms, Northern Nights, KitchenAid and Vitamix. We are seeing continued strength in the home business, as we just wrapped up our Christmas in July event, to help our customers get a head start on their holiday shopping. Our customers responded and we saw strong sales and deals shipped, lead customers, and an enhanced social engagement. Our proprietary design lines such as Susan Graver, Isaac Mizrahi Live! and LOGO by Lori Goldstein are driving our apparel business.

We are also listening closely to our customers, understanding her preferences, and taking steps to enhance the shopping experience across all of our digital platforms. Today, mobile commerce represents more than 28% of total e-commerce orders, representing explosive growth over the last three years. This past quarter remains significant improvements to both our QVC for iPad and iPhone applications. We redesigned the QVC for iPad application with improved functionality, and an interactive customer experience. Customization, social interaction, video content, and an enhanced mobile shopping cart are just a few of the features offered on the updated app. It allows each customer to discover QVC content built around her unique preferences, while also providing quick access to familiar content such as today's special value, the live TV program and, of course, the program guide. In addition, our QVC for iPhone application now has the enhanced shopping cart functionality, with capabilities that mirror our shopping cart on QVC.com. These mobile enhancements allow us to sponsor deeper connection between our customers and our brand, and deliver a frictionless shopping experience.

We understand social shopping like no other retailer, and we are finding innovative ways to bring like-minded people discovering great finds together. As Mike mentioned, we've created toGather. It's a new social experience that brings the magic of what we do on TV every day into the digital space. It's an online gathering place for people who love to shop, with our passionate customers, program hosts, our designers, and inventors behind all of our brands. At allows our current customers and new customers to be entertained, discovering unique products, share what they love, and why they love it with their friends and followers. This groundbreaking differentiated online gathering site helps us capitalize on the growing consumer trend of discovering interesting finds via social, and allows QVC to leverage our brand essence of real relationships on all of our digital platforms. We are looking forward to the full release this fall.

We are also improving our service experience at every touch point. We have dedicated team members responding to questions our customers ask on social platforms, and helping our customers during their purchase experience. We've added features to our order status page to provide easier information or access to information, and are creating efficiencies to improve the speed of delivery of our products to our customers.

We have a number of exciting initiatives planned for third quarter. In July, we have QVC Presents Super Saturday Live From the Hamptons. It's a multi-platform programming event that raises money for the Ovarian Cancer Research fund. We are launching our second broadcast channel, QVC Plus. This is a distinct channel that offers the same programming as our main QVC channel, with a three hour delay. We believe QVC Plus will generate additional sales by bringing in viewers who are either new to us or who love QVC, and want to see the shows that they might have missed at another time during the day. And we are providing everything our customer needs to make fall come alive with Nonstop Fashion Day, a fall edition of Cooking on Q, which is one of our customer favorites, and accessories update her style for the season. With that, let me turn it back to Chris.

Thanks, Claire. Let's take a quick look at the liquidity at Liberty Ventures Group. At the end of the quarter, the group had attributed cash and liquid investments of $1.8 billion, and $2.5 billion principal amount of attributed debt, which includes $616 million of cash from TripAdvisor, cash and liquid investments from TripAdvisor, and $385 million of debt facilities. The value of our equity method securities and available for sale securities attributed to the group was $1.8 billion, and $917 million respectively at the end of the quarter.

During the quarter, we sold all of our AOL shares and some of our Time Warner shares to help fund the repayment of the 3.125% senior exchangeable debentures that were due 2023. We also issued new senior exchangeable debentures due 2043 with an interest rate of 0.75%, with an underlying basket of Time Warner, Inc. and Time Warner Cable securities. With that, I will hand the call back to Greg.

Great. Thanks to Mike, Claire and Chris. QVC faced some challenges this quarter, but we are confident with the management team's plan for the second half of the year. We are pleased with the results of our e-commerce group and TripAdvisor, and continue to see the outstanding job they do creating value for our shareholders and their users. Once again, we appreciate your continued interest in Liberty Interactive and Liberty Ventures and with that, I'd like to open up for questions. Operator?

(Operator Instructions)

Ben Mogil with Stifel Nicolaus.

Mike, your comments, I thought, were very interesting on the balancing act between margins and the promotional activity and the impact on sales. As you look out to the second half of the year and what you've seen since July started, any change to that strategy? Or, any new thoughts on where the consumer sits, and more importantly, how you react to those changes?

Ben, thanks for the question. I don't know that I see any fundamental changes in our strategy. We are fundamentally not a highly promotional retailer. June and early July is an interesting time for us because it's one of the most -- from a seasonal standpoint -- one of the most intense promotional times for most retailers. We generally sit that out. So, dependent in exactly on how aggressive the rest of retail is, it can have some impact on us. Certainly, when you move into new goods and fall selling, that's really our power alley.

We were, as Claire mentioned, encouraged by the performance of our Christmas in July, which you never know for sure if it's an early indicator of holiday, but you hope it is. We felt good that when we started to talk about new product, the customer was there. So, we feel good about our strategy. Recognize that depending on the environment at retail, sometimes it plays better and sometimes it impacts our sales momentum. Generally, we would stick to it. Claire, if you have any thoughts.

That's exactly right.

Thanks. On the QVC Plus, the new channel being launched, should we expect any SG&A increases? Or is this a part of your existing carriage deals?

From an SG&A perspective, it is a delayed signal. So, very minimal cost from operating it. There will be cost that we'll incur from carriage fees, and we are working through that now.

So, do we see most carriage fees already in the second quarter? Or that will be more third-quarter time?

That would be more third-quarter.

Third quarter.

That's great. That's it for me. Thank you.

David Gober with Morgan Stanley.

Greg, one for you on the buyback. I know you mentioned that there were a couple of things holding you back in 2Q. As it relates to the first half in totality, and you've got $500 million, a little bit less of buyback, seems like you are running a bit below the pace that you talked about at the analyst day last year, understanding that wasn't necessarily hard and fast guidance or anything. Just curious as you think about the back half, do you think about making up the distance between the $1.3 billion, $1.4 billion pace that you guys talked about previously, versus some of the one-time stuff you had in the first half? Or, do you think you'd continue on at around the same pace?

I don't think we've mapped a hard and fast number. I think we will continue to believe that return of capital via share repurchase is the right strategy for the length of stock, and I'm sure we'll be at these numbers or higher between now and year-end.

Understood. Thanks. For Mike and Claire, the commentary on 2Q was very helpful, in terms of the promotional environment. I was just wondering if you could kind of compare and contrast 1Q versus 2Q. 1Q seemed like you are really gaining some momentum, in terms of just domestic sales growth. 2Q, obviously, was a little bit slower. Outside of the promotional environment, was there anything out that you could point to, in terms of the strategy that really changed there?

Thank you for the question. This is Claire. I would say, so Q1 we had a strong performance. We had early seasonal response that was very good, compared to most retailers, who would struggle through the cold weather. So, we pull a lot of regular price and early sale. Q2 was really a mixed bag for us, domestically. I would tell you that there was swings within the quarter. In April, it really felt like more external pressure. We had softness that started to occur across the board and we heard that in retailing in general. In May, again, a strong performance. All of our seasonal categories worked very, very well.

As we hit June, we had a disappointing June, according to our standards. Some of it definitely was clearance. We do have 25% less distressed inventory than we had last year, which is good news and bad news. It puts us in a very good position to receive the fall receipts, but it does hurt a little bit of the top line. We also had some missteps on a couple of our bigger items, our today's special value in June, that was softer than we expected. So, a little bit of up and down, some external pressure, some internal pressure. Overall, feel fine about where we are going.

Got you. Claire, just a quick follow-up. The new customer metrics that you talked about, obviously, were very strong, relative to what we've seen recently. Is there anything more you could tell us about the characteristics of new customers? Are you seeing improved performance with younger demographics, with more males? Anything that you could kind of point to, in terms of where you've been having success?

Maybe three points of insight. First, is electronics and some of our home categories, which are typically strong performers for us, and really delivered in the second quarter. So, that was good to see that come back. The other thing of interest is that the delta, the increase of new names actually coming from the mobile platforms. The mobile platform customer tends to be a little bit younger, a little bit more fluent. I'm not going to tell you that every new name is younger, because it's not. That growth in new names did come from mobile in the second quarter. Just a little bit of insight. Does that help you?

Very much. Thank you.

Matt Nemer with Wells Fargo Securities.

First, I just wanted to piggyback on that last question, and see if you could isolate some of the factors that you think led to the accelerated new customer growth, beyond mobile and the electronics mix shift. Is there anything else in terms of marketing, et cetera, that's driving the accelerated level of growth? Then, can you comment at all on best customer performance during the quarter?

Sure. So, there are some things that we've been piloting in our marketing area. I would prefer to hold back on that until we meet again. But, we've been doing some outreach to new customers, and we have a model that we've been looking at from a category predictability standpoint. So, not a lot of science around it. Some of the early reads from the response of marketing, we were encouraged with. It is the category, it is the events that we have put into play. It is the mobile platforms and there is some piloting, some exercises going around on outreach and marketing that once I have more solid numbers, I will be glad to fill that back in. And, I'm sorry, what was the?

Best customer performance?

Best customers, we did see spend increase. It's in the categories that you would expect, the softer categories. We are pleased with our best customers. We've had expanded spend with them in the quarter.

Okay. Then, secondly, just following up on mobile. There's been a lot of chatter in retail about higher mobile growth rates and increased penetration to mobile. Could you just provide a little big picture view on the financial implications of that? Beyond the carrier commission, how are the order economics different for a mobile order? Do you think this is mainly a channel shift? Or are we getting some truly incremental sales and profit dollars?

So, from a cost perspective, obviously, the major difference is the phone call that we don't take, which is the same as QVC.com. We have not completely proven incrementality. We know that there is some. Again, we'd like to get through a full-year cycle of really studying that. But, we do see incrementality for our best customers. As you know, our customers that use all of our platforms spend the most of any of the segments that we have. So cost savings from saving phone call, and it does look like some activity of incrementality.

The other insight that we have from mobile is, we put the full cart into our app. That has driven significant conversion and initial sales lift. So, whether that's all incremental at this point, I would not commit to that. But, we've definitely seen an increase in sales and conversion with the full cart.

Okay. That's helpful. Just one last question on the LINTA structure. Which is, given the improved public market values for some internet companies and some eCommerce related companies. Just wanted to get your current thoughts on the structure of LINTA, and potentially separating the eCommerce assets from QVC.

Well, as you know, we are never loath to reshuffle the portfolio and look at new ways to provide better transparency and clarity on our operating assets and divisions. So, certainly, we do notice that and pay attention. It's something that we've talked about in the past as potentially something we might execute on, but we have nothing to announce today.

Okay. Good luck in the second half.

Barton Crockett with Lazard Capital Markets.

I wanted to ask a question about Liberty Ventures. Some of the context, the very divergent performance we have seen very recently from Expedia, Trip. Does that have any influence on your consideration of relative weighting of those two stocks and ventures? Any impact on your consideration of ways to maybe address those investments over time?

Well, Barton, I think, overall, a lot of our investment decisions there are not pure, because they are weighted by the factors around having low tax base in the assets and control deferred in the assets. So, we weigh all the factors around where the economic prospects of the business versus what our alternatives on an after-tax basis to realize on those and reinvest. And, what is the potential to eventually achieve control, as we were successfully able to do so in Trip. So I think we were -- when we steeped and bought the incremental Trip shares, we were pleased that not only did we feel that we got rewarded for control, but the operating performance accelerated. We watch Expedia closely. It's a valuable asset, it's a business which has improved a lot over the last couple of years, barring last quarter. We root for them. We do recognize that in some ways Expedia and Trip are increasingly moving from a cooperation phase into coopetition phase and we weigh all those factors.

Okay. Great. And then if I could follow-up with a question on Liberty Interactive. Could you just walk us through how you see the bridge going from EBITDA to free cash flow, in terms of CapEx, working capital, cash taxes, what should we expect in terms of those lines?

I think that's complicated. Partly because the working capital swings all over the place. That is the biggest moving item. Perhaps, why don't we take that off-line and have IR walk you through that. Because, we have pretty good knowledge of CapEx on an annual basis. We have pretty good knowledge of the other items.

Cash taxes. Cash taxes have had their own issues because in various years, we have had cases where we had capital gain or capital loss and it impacted the current year's results. So, there's some variables in there. We be probably better to walk off-line.

Okay. Great. Thank you.

Tom Forte with Telsey Advisory Group.

I had two questions. One was, I was hoping, Mike, you could give us a little more detail on international expansion and where you stand with France, Spain and Brazil. The other question is on Germany. When you think about QVC Germany, have you finished rolling out your playbook there? And it's a matter of waiting time for to take place? Or, there still more levers you can pull to get the performance where you wanted to be? Thank you.

Tom, thanks for the questions. On international expansion, we continue to work away at France, Spain, and Brazil. These always tend to be difficult to predict with any precision when we might be ready to move forward. I do think we are making progress and certainly would love to be able to announce a new market over the next several months. When and which one is a bit hard to read. But, I would say, all are kind of in play. We are starting to kind of slightly broaden the lens and start to look at other markets, more developing markets. Turkey, revisiting Mexico. So, the three you mentioned, I would say, are still highest on the list, maybe most likely for near-term action, but we are also starting to sort of broaden the view, as well.

On Germany, I don't know that we ever totally finished the playbook. The joy and challenge of this business is you are always finding a way to do better. I do think they've been on this nice -- even though we haven't seen it in the results, clearly -- I do think they've been on this nice trajectory of getting what we call the fundamentals. The rate of new product introduction, the rate of product rotation. The mix of the business, the diversity in the business, getting those to levels that we feel better. Sometimes, it actually hurts your sales. For example, we've taken our top 10 brands and reduced the frequency of TS fees for our best brands. That tends to hurt sales in the short-term, but we think it's healthier in the long term.

This is an ongoing process. There's about a three quarters to maybe not quite a year of momentum in that, and the bigger -- so, therefore, that will continue and the bigger challenge is just -- partly due to our actions and partly due to consumer response, we just found the business shifting much too rapidly to fashion. Keep in mind that Germany, as a country, not just QVC, has extremely high return rates, it's true of all distance retailers in Germany. Fashion is the highest return rates within our business. So, when the shift moves rapidly to those categories, you can have the kind of double and triple hits on it that you've heard us talk about on today's call.

So, it's a process. We are working to try to shift to other categories. I think that will take some time. We may have some bumps along the way. But, I would certainly hope that you are going to see at least a moderation of the trend that you saw in Q2 of a big spike in fashion and the big spike in return rates. I would expect to see that moderate to at least some degree.

Thank you.

Matthew Harrigan with Wunderlich Securities.

There's been a tremendous expansion interest in Mexican retailing with Pena Nieto, and deregulation down there. I know you mentioned it in passing. But one thing that Televisa and Univision and some other companies have had is really addressing even larger US markets, Hispanic markets, as far as buying power. It seems like that could be a natural, almost a little bit more aggressive than QVC Plus. But, is the framework down there getting easier? Have the regulatory changes down there made Mexico more attractive or interesting?

Secondly, the growth in new customer activity was tremendous. I was curious if you could talk a little bit more about ratings for some of the event programming, and, even, how some of your theme shows like cooking compared to say some comparable shows on something like Food Network.

Thanks, Matthew. Let me take the first one and I will have Claire pick up your second question. So, I do think Mexico is looking more interesting for the reasons you've touched on. I wouldn't tell you that we put in a lot of work against that right now, but that's an area of a little bit of focus and a growing focus for us. We still think Brazil, in terms of sheer size and near-term potential is maybe a notch more interesting. Then, I think there's this big wildcard you touched on, which are bigger Spanish language strategies then just entering Mexico. We are in very early stages of discussion on some partnerships and some ideas in that area, very early, a lot of question marks. But, something we will continue to pay attention to. Claire, do want to touch on the second?

Sure. On programming, it tends to be our events that we put on have very strong viewership for the most part. You asked about kitchen. One of our most popular shows Is In the Kitchen with David every Sunday. It has high viewership every single Sunday. When we do a Cooking on Q event, we also have tremendous viewership. I don't have the latest in how it compares to the other channels, it's something I can get for you. Those tend to have lots of eyeballs.

Same thing with -- we recently had two major events. One was Christmas in July, where viewership was very, very strong. Our fashion-based event over the weekend, we had a two-day fashion event, same thing. Very strong viewership, very strong sales. But, we tend to put together these destination events, that's where we see particular strength in viewership. Also, some of our -- what we call -- statics. So, PM Style is a fashion show that we have every Monday night. Very strong viewership, very strong repeat viewership. Same thing -- we anchor another fashion show on Saturday mornings called AM Style. So, again, where there's some predictability and a mix of merchandise in the category, we have very strong viewership there.

Thanks, Mike, thanks, Claire.

Victor Anthony with Topeka Capital Markets.

Two questions. One on international, specifically China, and your exposure to China through the JV. Maybe you can help us on frame how big of an opportunity you see in that market over the next several years. Is that an opportunity for you to own more than 50% of that asset?

Second, just want to go back to an old question with regards to your ownership stake in HSN. Is there an opportunity for you to extract value out of that asset outside of an outright purchase? Following on that, maybe you could just give us an updated view where you stand on pulling that asset in. Thanks.

Mike, why don't you talk about China, and I will cover HSN.

Great. So, China, we are just very bullish on China. I think it has substantial opportunity. We feel a little uncomfortable a year into it to make any predictions to try to size that opportunity. We just feel like we've got to get more experience. Certainly, if you think about dimension of the opportunity, simply homes reached, the fact that we are up from 41 million homes a year ago to 62 million right now, is very encouraging. We certainly think that having 100 million homes within the next three to four years is very doable. Many things could intercede with that. From what we can see today, we think 100 million homes over the next three to four years is very doable.

The hard one to predict for us is the sales per home. It's a developing market. Obviously, they have lower incomes. But, so, it's a little hard to read exactly where we can get the repeat purchase rate and the sales per home. We are pretty good at that. How are our experience translates into the emerging market is the harder one to read. Certainly, you could envision that as several hundred million in revenue over the next several years.

We think that the economics also look attractive, in terms of the P&L structure. You heard us -- heard me mention, we see a strong improvement in product margin, we had fairly low product margins when we began the joint venture. Those have moved up nicely. The expense structure is fairly modest, other than the cost of carriage. The cost of carriage is fixed, as you add in more carriage. As the revenue ramps, you will see a lot of leverage on that.

So, we like the business quite a bit. We think it has a lot of potential, but it's a little early to be more specific than that. In terms of ownership, it really isn't feasible. It is, by China law, that we can only own 49%. I think the likelihood of that changing is fairly low. We are thrilled with the partnership and that's working very well for us. But, I think it's unlikely that we would own more than 49%.

Turning to HSN, not sure what you have ideas for extracting other value. I would comment the nature of our agreement, at the time that we spun, prohibited us from buying more than 35%. We did buy that, we've actually increased our percentage, to maybe 36%, maybe 37%, somewhere in that range, because of their share repurchases. As far as taking it in, we can make an offer for the whole company. They have the opportunity to say no.

We are probably reluctant on a bunch of reasons. We are not sure of the synergy levels between the two businesses. We think there are some, but we don't really know the totality. They are already trading at a couple multiple point premium to us. While this last quarter, there probably have better results in the US than we did, some of it promotional. Over the last several years, they really haven't had significantly different results in our US business.

So, we have been reluctant and to look at incremental capital, particularly the premium for the market when the market is already 2 multiple points higher than us. We have been reluctant to look at the incremental [capital base] just versus our own share repurchase. I think that remains our position today. We like the relationship. We like having the equity ownership, but we are probably happy where it stands today. That may change in the future.

Thank you.

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