ValueVision Media Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 6.13 | About: EVINE Live (EVLV)

ValueVision Media (VVTV) Q4 2012 Earnings Call March 6, 2013 4:30 PM ET

Executives

Teresa Dery - Senior Vice President, General Counsel and Corporate Secretary

Keith R. Stewart - Chief Executive Officer, Director, Member of Special Committee, Chief Executive Officer of ShopNBC, President of ShopNBC and Director of ShopNBC

William J. McGrath - Chief Financial Officer and Executive Vice President

G. Robert Ayd - President

Carol Steinberg - Chief Operating Officer

Analysts

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Operator

Good afternoon, and welcome to ValueVision Media Fiscal 2012 Fourth Quarter and Full Year Conference Call. [Operator Instructions] This call is being recorded for replay purposes. I would now like to turn the call over to Ms. Teresa Dery, Senior Vice President and General Counsel at ValueVision Media. You may begin.

Teresa Dery

Thank you, operator, and good afternoon. I'm joined today by Keith Stewart, CEO; Bill McGrath, EVP and CFO; Bob Ayd, President; Carol Steinberg, COO; and other members of the senior management team.

Comments on today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipates, believes, estimates, expects, intends, predicts, hope or similar expressions. Listeners are cautioned that these forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such statements. More detailed information about these risks and uncertainties and related cautionary statements is contained in ValueVision's SEC filings.

In addition, comments on today's call may refer to adjusted EBITDA, a non-GAAP financial measure. For reconciliation of adjusted EBITDA to our GAAP results and a description of why we use adjusted EBITDA, please refer to our Q4 and full year 2012 news release available on the Investor Relations section of our website. All information in this conference call is as of today, and the company undertakes no obligation to update these statements.

I'll now turn the call over to Keith.

Keith R. Stewart

Thanks, Teresa, and good afternoon, everyone. We appreciate your participation on the call today. Prior to taking your questions, Bill will highlight our Q4 and full year 2012 financial performance. Bob will discuss key merchandising and sales initiatives, followed by Carol, who will provide an update on progress made to our operations and multichannel customer experience. Bill?

William J. McGrath

Thanks, Keith. Since ValueVision follows a 4-5-4 calendar, every 5 to 6 years, we end up with an extra week in our fiscal year. This results in a 14-week period for the fourth quarter and a 53-week year for fiscal 2012 versus our typical 13- and 52-week periods. In order to have comparable year-over-year comparisons, we've adjusted our Q4 and full year 2012 net sales and adjusted EBITDA to create pro forma 13- and 52-week periods. Q4 pro forma comparables were derived by dividing the company's Q4 results by 14 and by multiplying the quotient by 13. The 52-week pro forma was derived by adding the Q4 13-week pro forma to actual year-to-date Q3 results. The pro forma comparables are included in the overview table at the top of today's press release, and the percentage changes in the table are based on the pro formas versus last year.

For your reference, the income statement in our press release reflects the company's actual results from the 14- and 53-week full periods. However, management believes that the pro forma results provide a more appropriate basis for prior year comparisons, and that will be the basis for our discussion in today's call.

As outlined in our last earnings call, the start of Q4 coincided with the impact of Superstorm Sandy on the Northeast. In our third quarter 10-Q filing, we stated that sales were down approximately 16% in the first week of the fourth quarter and down approximately 8% in the second week of the fourth quarter. This was followed by flat sales comparisons in week 3 and a resumption of growth thereafter. Despite the rough start, fourth quarter pro forma sales rose 11.7% to $164.8 million, driven by strong results in the Home & Consumer Electronics category, as well as in the Beauty, Health & Fitness category.

Pro forma gross profits increased 11.1% to $54.7 million. Gross margin percent decreased 10 basis points to 33.2% versus 33.3% last year. The current quarter gross margin reflects a higher mix of Home & Consumer Electronics products, which have lower gross margin percentages. This mix effect was offset by improved product margins in other categories, as well as reduced markdown activity and fewer shipping discounts than occurred in the prior year.

Pro forma operating expenses were $65.7 million versus $56.5 million for the same quarter last year. This includes an $11 million impairment charge related to the company's FCC license. In connection with ValueVision's ownership of a full power television station serving the Boston, Massachusetts market, the company has an FCC broadcast license that is accounted for as an indefinite-lived intangible asset.

During the fourth quarter, the company conducted its annual estimate and appraisal of the fair value of its Boston TV station and FCC broadcast license with the assistance of an independent consulting firm. The company annually estimates the fair value of its FCC broadcast license, primarily using income-based discounted cash flow models. Due to a decline in independent television station industry revenues and operating margins resulting from TV station rating declines, the company adjusted certain assumptions for revenue and operating profit margin. These assumption changes resulted in estimated cash flows that did not support the $23.1 million carrying value for the license.

As a result, we recorded an $11.1 million noncash impairment charge in the fourth quarter of fiscal 2012, reducing the company's FCC license asset carrying value to $12 million estimated fair value. We also considered independent market data of recent comparable transactions for standalone TV broadcasting stations to assist in determining fair value. Variable expenses decreased as a percentage of sales by 130 basis points to 7% versus 8.3% last year. This reflects favorable credit card and debit card rates, lower bad debt expense, as well as lower transaction costs in the quarter. Transaction costs in the fourth quarter decreased to $2.41 per unit versus $2.88 last year.

Distribution costs in the fourth quarter reflect revised rates on our largest TV distribution agreement, which became effective on January 1, 2013. With this agreement in place, we estimate our average cost per household will decline to $1.15 in fiscal 2013 versus $1.33 in fiscal 2012. The company recognized 1 month of this cost reduction during the fourth quarter.

We previously discussed the net $15 million rate reduction that we will achieve this year from our revised distribution agreements. This operating expense benefit provides us with greater flexibility to both invest in people, systems and other elements of our infrastructure during 2013 and to improve our overall financial performance. Pro forma adjusted EBITDA improved to $3.9 million in Q4 2012 versus a loss of $2.7 million in the same quarter last year, reflecting higher sales and lower operating expenses.

Moving to the balance sheet. We had a net use of cash of $4 million during the fourth quarter. Cash, including restricted cash, was $28.6 million at the end of Q4 2012 versus $32.6 million at the close of the third quarter. Use of cash for working capital reflects the anticipated seasonal increase in accounts receivable. The company's year-end accounts receivable balance of $98 million compares to $83 million at the end of Q3 2012. This was higher than the $80 million in accounts receivable on our balance sheet at the end of Q4 2011. The increase compared to last year reflects higher sales and increased use of ValuePay. Our year-end inventory of $37 million compares to the third quarter balance of $54 million and prior year ending inventory position of $43 million.

With that, I'll turn the call over to Bob.

G. Robert Ayd

Thanks, Bill. We made progress across many key areas of our business during Q4, which contributed to the increase in overall sales. Our Q4 performance points to the success we're achieving in executing our long-term strategy to drive top line sales, optimize merchandise margins and broaden the product mix. Central to this long-term strategy is our continued investment in categories such as Home, Beauty and Health & Fitness and Fashion & Accessories, which are proven to be very productive in driving new customer activity and encouraging repeat purchase activity. Moreover, these categories tend to have lower average price points and make our Shop Anywhere, Anytime experience more accessible and appealing to a greater percentage of our growing customer file.

During Q4, our average selling price of $92 was in line with $93 last year despite a greater mix of higher ticket items such as Consumer Electronics. On a pro forma basis, net shipped units totaled 1.6 million in Q4, an increase of almost 12% compared to last year. Net shipped units increased by 11% on a full year basis for total 2012. At the merchandise level, 3 of our 4 product categories achieved growth in the fourth quarter compared to last year.

But one exemption was in the Jewelry & Watch category. We strategically reallocated airtime from this segment in Q4 to nurture the Home & Consumer Electronics categories. By further diversifying our merchandise mix and reducing airtime in the Jewelry & Watch category, we are also creating more demand for these products. To this point, we achieved increased productivity in both sales and gross margin dollars on a permanent basis in the Jewelry & Watch category in Q4 versus the prior year.

As further evidence of this airtime reallocation strategy working, I'm pleased to announce that on Saturday, February 23, we held a 24-hour Jewelry event, which achieved one of the best sales and margin days in our company's history. Beauty, Health & Fitness was a solid performer in Q4, boosted [ph] by continued growth in skincare, as well as further expansion into color cosmetics, nail care and hair. Home & Consumer Electronics achieved strong growth in the fourth quarter. We increased the number of brands and expanded both the product mix and assortment in cameras, tablets, computer accessories and other electronic peripherals.

Fashion & Accessories achieved a small increase in sales over last year. We made progress in further developing our merchandise and brand assortment in this category, especially with our expansion into footwear. Fashion & Accessories remains a key category for us, and we're confident in its development and prospects for long-term growth.

Finally, let me talk about the improvements we made to our distribution platform. During fiscal 2012, we increased our footprint by approximately 4% over fiscal 2011. And we ended the year with 84 million homes. Moving into calendar 2013, effective January 1, we added a second channel of exposure for our programming in 19 million homes. This brings us to 70% of our total households that have 2 channels, which should improve our chances of attracting more customers to shop with us. Our research shows that it can take as many as 50 separate viewings of our programming prior to a new customer making a purchase. It takes time for this new exposure to be found by viewers, but we believe it is an important part of our long-term strategy.

With respect to our other distribution providers, we continue to work with them to achieve optimal and cost-effective channel placement. At the same time, we are exploring alternative forms of distribution via the Internet and mobile. We are also in early stages of a pilot initiative for HD distribution. In November of 2012, we watched HD quality programming in around 500,000 homes in Seattle. And later in the fourth quarter, we added an additional 1.2 million homes primarily in the Tampa and Orlando markets.

With that, I've concluded my remarks. I do want to underscore how pleased we are with the improvements in our business and how far we've come over the past few years. Carol?

Carol Steinberg

Thanks, Bob. I'll focus my remarks today on some key areas of operational improvement and opportunities in the business. First and foremost is the progress we are making in the area of customer satisfaction and engagement. We strive to provide our connected customers a consistent experience across all our channels for a more convenient shopping experience. And our customers continue to engage with ShopNBC via multiple platforms, as evidenced by our industry high rate of web penetration and related growth in mobile penetration. This is also apparent in the customer order activity via our automated ordering options, which include the Internet, phone, tablet and our automated telephone ordering system.

In Q4, our Internet net sales penetration grew by 160 basis points versus last year to 46.3%. Mobile, which is included within this segment, grew to 19.5% of online sales from 10.1% in Q4 fiscal 2011. We expect customer adoption of mobile to continue to rise and to likely take share from PC-based transactions, and to a lesser extent, from telephone and automated phone ordering. So to support this trend, we have enhanced our mobile checkout experience and continued to optimize development of our online channels.

During Q4, our automated phone order usage rose to 27% versus 23% last year, reflecting enhancements delivered in Q3 of this year. The increase in automated phone order usage has been a key factor in decreasing our transaction costs to $2.41 for Q4 versus $2.88 less year. In aggregate, approximately 73% of our sales in Q4 were transacted via automated means compared to 67% in the fourth quarter last year.

Automated ordering improves order efficiencies, post-sales communications and customer service response. This also facilitates cost marketing initiatives targeted to the customers' interest. To drive traffic to our mobile offerings, we continue to actively engage our customers through a variety of posts and messages on our social media platforms, notably Facebook, Twitter, YouTube and Pinterest. Through these and other social networking avenues, we showcase dynamic content that fosters closer customer relationships and a shared sense of community.

And finally, we are pleased with our continued progress in customer productivity. New and active customer counts rose to an all-time high in Q4 and in fiscal 2012 over last year. We are equally encouraged by the improvement in our customer retention trends during the year as well. While we still have more progress to make, we believe these customer productivity improvements demonstrate our efforts are proving successful.

Before going to Q&A, I'd like to remind you that we will be presenting at Piper Jaffray's Technology, Media and Telecommunications Conference on Wednesday, March 13, in New York. We hope to see you there.

Operator, let's take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is coming from the line of Alex Fuhrman from Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

I wanted to talk a little bit about some of the different categories that you're building out as you think about your optimal merchandise assortment and how some of the puts and takes are going to be impacted here. So in particular, shipping was something that struck me from your prepared remarks, that your shipping promotions were actually down year-over-year. I mean, that's definitely counter to what we've heard from a lot of other e-commerce retailers during the holiday season. I'm curious, are you seeing that there are certain categories that the customer is willing to pay for shipping more so than others? Or is it really just a function of a more compelling merchandise offering?

William J. McGrath

Alex, this is Bill. Thanks for the question. Let me start off with the comments on the shipping. We did see less shipping promotions for us in the current quarter than we did 1 year ago, and a couple of things influenced that. One is when we look at our portfolio promotions, we look at shipping and handling promotions, price promotions, and we consider ValuePay as a component of our promotional strategy. And we're really looking to optimize which of those levers we push based on the effectiveness that we're seeing. And while we did a fair amount of shipping promotion, it was considerably less than last year, and we found that ValuePay continues to be, I'll say, our primary choice in terms of sales promotions in and it continued to work well for us so much so that it enabled us to do both fewer shipping promotions, as well as less product discounting on the surface. And we were also against, let's say, a higher level, and I'll say that last year fourth quarter, frankly, was a more promotional period, particularly for us across-the-board when it came to price discounting, shipping and handling promotions and less ValuePay. Bob can comment on components of growth in the product categories. Bob?

G. Robert Ayd

Sure. Thank you for the question. So we have opportunity across all categories, and it's really a function of building the organization, and I think we've done a pretty good job of that this year. So as I go through the categories, obviously, Consumer Electronics has weighed us down for the first 3 quarters of the year. Obviously, it didn't weigh us down and in Consumer Electronics, because we had a good, talented team, we were able to expand into cameras, Ultrabooks, tablets, high-tech accessories, and we had a real fully functioning Electronics business. In Beauty, historically, we've been very strong in the skincare department, but this year, again, with a new leader, we were able to branch out into nails and color. And she's done a very, very strong job there, and I expect that to continue to grow. The Fashion business -- and we're in conversation with David Miller coming over. We've all worked with at QVC. Our Fashion business has historically been the Handbag business. But now we're expanding our Apparel business, our Underwear business, our Shoe business and our Accessories business. The same conversation can be had in the Home store. And there we're building our organization again, and we are going to expand that business. And we started in cookware. We're expanding home electrics and kitchen electrics, and now collectibles. So there's opportunity everywhere. It's not -- as I've said in the past, it's not about the opportunity, it's about execution. And we intend to continue to execute at a much higher level.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Great. That's really helpful. And then, Bob, if I could just ask one more on some of these individual categories. Curious as to how the HD pilot was received in those markets in Seattle, in Tampa, and specifically, especially as you mentioned some things like Beauty and especially skincare being such a strong category presumably because seeing it demonstrated is a big lift to conversion. Was there a difference in how you saw the customer metrics going in those HD markets by category? And was maybe something like the color cosmetics, would have been a little bit more compelling in HD versus non-HD?

Keith R. Stewart

Alex, at this point, we're still reading the HD results. I'll tell you, it's too early to tell. You make a good point, and that is categories such as Beauty, but frankly, all products, I mean, Jewelry shows better. Watches show with greater resolution in an HD mode. It's -- but in terms of evaluating the performance of the pilot market and indexing them relative to what we'll call them -- what would be the baseline comparison. We don't -- it's too early for us to make a judgment on that.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Right, okay. Well, we're certainly excited to see how that turns out and congratulations on a good fourth quarter.

Operator

Your next question is from the line of Greg McKinley, Dougherty.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Bob, you had talked a little bit about the timing of additional channel positions added late in the year. Can you just remind us what those facts were again, please?

William J. McGrath

Greg, the main additional channel position that took place really was the large contract that renewed and which provided us with the rate reduction. And coinciding with that cost reduction, we added a second channel placement at a much lower channel position than what our main positioning was. So that's on about 19 million homes, and that took effective -- took effect, I should say, January 1.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And is that the kind of thing where it makes almost no difference from the sales standpoint initially, but you sort of expect it to ramp over a year or 2 period as people learn that you guys have content on that channel? Or how would you characterize the early experience with that?

Keith R. Stewart

Once again, Greg, you're right in that the ramp-up on that is slow and gradual. We liken it to basically having a second storefront in a mall, and not a lot of people know initially that you're in that second storefront. And so we'll get some additional true traffic through there, and then it will build gradually. Our measurement window when we were looking very precisely at some markets where we had added a second channel in a lower position about 1 year or 1.5 years ago was primarily a mid-Atlantic market. And we found that after about 9 months, we were seeing a discernible lift in sales and additional contribution margin. So I kind of look at -- this is a broader footprint and it's national so it's not as concentrated as those markets were -- or areas that were favorable to us. But I'd expect roughly the same ramp-up period.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

So just as a framework, so if you're in 84 million homes, how many channels -- how many home channels are you on? Maybe you were at one point something channels per home previously. Where are you now?

Keith R. Stewart

Yes, of those 84 million homes, Greg, about 70% of those have us on 2 channels.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay, okay, second question. Bob, you talked a little bit about some of the accomplishments in Home, Fashion, Beauty, CE. I was just wondering if you can give us a little framework for how you view the stability of the merchandise planning, ability to procure proprietary and compelling product versus maybe where the company has been 12 or 24 months ago. There have been certainly periods of big successes. There's also been a few execution hiccups along the way. And I'm wondering if you could just characterize how you feel the planning team, the talent that you have today, does that change the way you view how stable your developing a compelling value to the customer will be going forward and what it may have been in the past.

G. Robert Ayd

Thank you for the question. I'm very confident with our team, and I think that in the last 12 months, we've done a really good job putting key people into key jobs. I mean, there's no question that the Consumer Electronics turnaround, which had dogged us for 3 quarters, is a function of having a better organization. We've invested people most recently into the Home store, into Beauty, into Fashion and into CE, additional people. And so I do, I have every confidence that we'll be more stable than in the past and that we will capture more opportunities.

Keith R. Stewart

And I think, additionally, as Bob alluded to earlier, Greg, we're seeing a broader base of product categories underneath those major categories that he references, both skincare and nail care, color, hair, those types of things in the Beauty category. Those are all businesses we didn't have a year ago or certainly more than a year ago. In the Home store, we really didn't have a kitchen business, and we didn't have a robust Home textiles business. And those businesses are very big within our industry but yet very quite infant at ShopNBC. The Apparel business, all those categories have expanded. So we're very, very pleased with the progress.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

And then just a question on cost structure. So we're continuing to grow households, but we've substantially reduced cost per -- fixed cost per household. Can you just walk us through how we should think of distribution costs overall, the fixed and variable components of that, and how we might think of G&A cost infrastructure in '13?

William J. McGrath

Yes, certainly, Greg. Thanks for the question. If you look at our P&L, on a full year basis, our selling and distribution and G&A costs aggregate to about $211 million. Now within that, variable expenses, which for us, represent credit card fees, bad debt expense and transaction costs, in aggregate, they come out to around 7% to 7.5% of sales. So as a modeling consideration, it's roughly that. We stay within those parameters per quarter. The distribution cost built within that number I described, the $211 million, was about $1.33 per home in 2012. Looking ahead on distribution cost, we mentioned that we've got the rate reduction that we'll realize that we'll be going from a run rate of about $1.33 per home to $1.15. So a pure rate savings, I'll describe it of about $15 million in OpEx. But I want to point out that we will expect to see some organic growth in our footprint, and we're anticipating somewhere around 3% growth. So say another 2.5 million homes would be added and assume an average cost of that same $1.15 that we carry forward. So a little bit of an offset to that of about $3 million. And then all other fixed costs within selling and distribution, G&A are about $55 million. And that's primarily salaries and other non-manpower expenses. But I did want to comment as well on the $55 million. As we look ahead to next year, Bob had mentioned that we're going to look to continue to improve the organization in key areas. And so we intend to make investments from a personnel and an organizational standpoint. And also, when you're looking at our expenses for 2012, we did not achieve our bonus targets for 2012, and therefore, there's no additional compensation that would be related to achieving those targets in 2012. And so where we to achieve -- if we are to achieve our objectives next year, then bonus would be another element of -- that compensation cost would be built into our cost structure.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And are you able to offer a sense of magnitude of that at all? Or I guess it depends on total performance but...

William J. McGrath

Yes -- no, it's triggered by achieving EBITDA targets and other financial metrics and individual departmental metrics for the business. So no, I don't have a -- I can't provide any guidance, Greg, as to what those trigger points are or the order of magnitude of the bonus dollars.

Operator

The next question is from the line of Mark Smith, Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

First, can you just talk a little bit about your inventory levels and your comfort with that today?

William J. McGrath

Yes, sure, Mark, this is Bill. I'll take that. Inventory levels at $37 million, frankly, is low. We had -- I mentioned that we had the effect of Sandy early on in the fourth quarter. And the timing of that event, actually, it coincided with our peak inventory position, which at that time was around $60 million in stock. We were, frankly, very mindful through the quarter of not knowing how long that residual impact was going to be to make sure that we were managing the balance sheet carefully. And frankly, we did manage it very carefully. We ended with about $37 million in inventory, which is light for us going into the fourth quarter. We were comfortable, however, with the scheduling of our order flow into the first quarter.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And then secondly, just with some high accounts receivables, have you guys had any issues with bad debt or kind of collection as we look at cash flow here into Q1?

William J. McGrath

No, in fact, our metrics continue to be a positive as we look at bad debt expense. For us, as a percentage of our total credit sales, it runs in the range of 2% to 2.25%. And we're continuing to realize that experience, and it makes us very, very comfortable with the collection of that $98 million going into the first quarter.

Mark E. Smith - Feltl and Company, Inc., Research Division

Okay. And then lastly, just as we look at Internet sales and kind of a nice trend there, how high can that go? Is there an optimal level for your Internet net sales?

Carol Steinberg

Mark, this is Carol. Our Internet sales, interestingly enough, our customers are really moving towards tablet and mobile. So we do expect to see more of the growth coming in from tablet sales moving forward. With that said, we like to have every channel available to our customers and let them decide how they're going to interact and engage with us. So we continue developments across all channels to make the experience as good as we can possibly make it.

Keith R. Stewart

Thank you, Mark. And with that, we'll conclude our call today. Thanks for joining us.

Operator

Ladies and gentlemen, that conclude today's conference. We thank you for your participation. You may now disconnect. Have a great day.

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