ValueVision's Q1 Shows Signs of a Turnaround

May.21.09 | About: EVINE Live (EVLV)

ValueVision Media Inc (VVTV) released their Q1 results on the 19th after hours and the conference call was held on Wed May 20th. There was a lot going on with VVTV this quarter and my previous overly pessimistic attitude about its retail business has now changed. As VVTV starts or continues to turn around, this cheap company really is one of the best stocks under $1.

VVTV Spider Graph Quick Overview

VVTV Business Valuation Overview

First Quarter Highlights

All the highlights and operation results can be read from the original press release.

GE Preferred Stock

The big obvious one worth mentioning was that VVTV managed to negotiate its preferred stock with GE.

Negotiated with GE to restructure and extend the majority of its payment obligation of $44.3 million Series A preferred stock by five years. This extension provides the company with the time, flexibility and financial resources to execute the turnaround of its business. The impact of this transaction on the financial statements for the quarter include a $3.4 million cash payment of principal, interest expense of $743,000, and the newly issued Series B preferred stock with a valuation of $10 million on the balance sheet.

This was not that good of a deal for VVTV but they needed the extra time. When I reflect a few months back regarding the restructuring of preferred stock, I realize the short term may not be so good, but the long term is much better with the deal - rather than no deal and having to pay out a large cash redemption.

Cable and Satellite Distribution

The company stated that it expects to preserve 100% of its footprint [72 million homes], and with regard to negotiations completed to date, it expects to realize a 33% rate reduction. This is expected to result in a cost savings in the range of $22 million to $25 million in fiscal 2009.

A 33% rate reduction is a huge drop from its current levels. It isn’t enough to suddenly make VVTV profitable or ultra competitive, but it does allow VVTV to test new products.

Although VVTV will not be FCF positive anytime soon, the decrease in $22-25 million will make a big difference once it starts to take effect.

Insider Buying and Share Buy Backs

VVTV bought back 1.6 million shares for $900,000 at an average price of $0.58 per share which is around the price I first started buying. Although $900,000 isn’t a large sum, it’s finally good to see them increasing shareholder value.

The CEO insider buying has also been very positive with buyback prices ranging from the $0.20’s to $0.70’s.

Conference Call Notes and Thoughts

On a side note, a hunch I have about this CEO is that he is determined to see the company turn around. Although he was reading off a prepared statement, I felt that he knew what had to be done and how it was going to be done in a cool and collected manner.

Here are my thoughts on specific topics I was keen on.

Margins Increase Strategy

  • Current gross margins crept over 30% this quarter but management is not satisfied. They are working towards a consistent gross margin of mid to high 30’s [35%-38%?]
  • Shifting product mix around. When I first started following VVTV it was all about the asset play. I was skeptical about its strategy to change up its product portfolio, but they have shown, with numbers, that the strategy is beginning to work.
  • Margins will slowly move up as Q3 and Q4 approach, as predictable sales increase.

Re-order Business, Predictability of Sales and Product Mix

  • VVTV is trying to increase repeat sales. A strategy of getting the consumer to re-order items rather than selling one time high price products such as consumer electronics where the margins are only in the mid 20% range.
  • Additionally, an improved re-order business will provide some predictability in revenue with fewer markdowns since they do not have to test which products sell well or not. This should also reduce operating costs driving up the margins higher.
  • Electronics are low margin one time purchases so VVTV is trying to diversify into more predictable products.
  • The problem with the current model is having to introduce new products constantly to generate sales. This introduces risk since the products have to be either returned or marked down and sold if it doesn’t sell well. These non selling products also take up airtime which could be better used for popular products.

Inventory

  • I was surprised that VVTV used drop shipping method to store inventory. Drop shipping is where the retailer does not keep stock but transfers the order details to the wholesaler or manufacturer. The good thing with this supply chain management technique is that it will keep inventory low but to truly maintain a healthy and reputable retailing business, I believe drop shipping isn’t the answer.
  • VVTV will not keep inventory in their warehouse rather than drop shipping now. (Good!) This move should turn out to be efficient and cut some additional costs.
  • They also mentioned that their current inventory levels are at their 6 year low so in the next quarter, they will be doubling the amount of inventory to keep up with sales and to transfer to the inventoried supply chain management technique. With their inventory turnover slightly above 7, VVTV is doing an excellent job of churning inventory.
  • VVTV has also informed their suppliers that they will be extending payment due dates by 15 days.

In the beginning of my investment with VVTV, I placed no hope on the retailer, but with new leadership and direction, it seems like the strategy VVTV is implementing is working. Strong insider buying, stock buy backs at cheap prices and numbers showing that their new strategy and focus is working keeps VVTV as the best stock under $1 in my books.

Disclosure: I hold VVTV at the time of writing.