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HSN (NASDAQ:HSNI)

Q1 2013 Earnings Call

May 02, 2013 9:00 am ET

Executives

Felise Glantz Kissell - Vice President of Investor Relations

Judy A. Schmeling - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Mindy F. Grossman - Chief Executive Officer, Director and Member of Executive Committee

Analysts

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Thomas Forte - Telsey Advisory Group LLC

Jason B. Bazinet - Citigroup Inc, Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Victor B. Anthony - Topeka Capital Markets Inc., Research Division

Operator

Ladies and gentlemen, good morning, and welcome to the HSN, Inc. First Quarter 2013 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's discussion, the HSNi team will be taking your questions.

With that, I'd now like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations. Ms. Kissell, please go ahead.

Felise Glantz Kissell

Hello, everyone, and thank you for joining us. On this morning's call, we have Mindy Grossman, Chief Executive Officer of HSNi; and Judy Schmeling, Chief Financial Officer. Judy will initially review our financial performance. Mindy will then strategically discuss the business.

As always, some of the statements made on this call may be forward-looking and, as such, are subject to many factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements. Additional information regarding these factors, as well as various risks and uncertainties, can be found in HSNi's earnings release filed with the U.S. Securities and Exchange Commission and available on the company's website. HSNi does not undertake to publicly update or revise any forward-looking statements.

In addition, on today's call, there will be references to certain non-GAAP financial measures. These are described in more detail in the company's earnings release and SEC filings available on the HSNi website. You are encouraged to refer to the press release and the SEC filings and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results.

I would now like to turn the call over to Judy Schmeling, HSNi's CFO. Judy?

Judy A. Schmeling

Thanks, Felise. Good morning, everyone, and thank you for joining us. We continue to remain highly focused on driving financial performance while we strategically position the business for long-term success.

During the first quarter, this approach enabled us to reach unprecedented customer file levels for HSN and the Cornerstone Brands: Frontgate, Ballard Designs and Chasing Fireflies; drive digital sales growth of 10% with penetration up 200 basis points that contributed to overall net sales growth of 5%; launch our HSN digital site redesign across all HSN digital platforms; return value to shareholders through our share repurchase and cash dividend programs that included purchasing approximately 1.2 million shares in the first quarter; and grow earnings per share by 24% to $0.56 per share.

At HSN, sales increased 2% to $550 million. Last year's results included 1 extra day of sales because of the leap year. Excluding the extra day of sales in the prior year quarter, HSN sales growth was 3%. We had considerable growth in beauty, apparel and accessories and home offset by decreased sales in electronics and jewelry and a 3% decline in shipping and handling revenue.

Digital sales at HSN grew 4%, with digital sales penetration up 80 basis points to 36%. As we stated on the last earnings call, we expected that HSN digital sales will be tempered in the first quarter due to the launch of the digital site redesign, which is typical with any undertaking of this type. We continue to educate our customers on the unique attributes and functionalities of our platform in addition in making ongoing site enhancements and have recently seen improved performance.

HSN's unit shipped increased 12% reflecting our focused efforts to drive customer growth and resulting in a 5% increase in our customer file. HSN's average price point decreased 9%. This is largely due to price point compression in consumer electronics and home fitness driven by customer migration to lower price point products. Categories such as beauty, fashion and our own Joy Mangano business, which are important customer lifetime value areas for HSN, effectively maintains our group price points.

HSN's gross profit increased 2% to $192 million.

Gross profit margin increased 20 basis points to 35% as a result of product mix, partially offset by shipping and handling promotions.

Operating expenses, excluding noncash charges, were up 2% to $133 million.

HSN's adjusted EBITDA grew 3% to $59 million in the first quarter.

Turning now to Cornerstone. Sales in the first quarter increased 14% to $223 million and digital sales grew 19%, representing a 300-basis-point increase in digital penetration to 67%. Every Cornerstone Brand had a notable increase in digital penetration. The home segment drove Cornerstone's overall performance led by Ballard Designs, Grandin Road and Frontgate. The addition of Chasing Fireflies to the portfolio also contributed to the sales increase.

Frontgate's outdoor business was impacted by the extended cold weather this year compared to last year, but we do believe that we can capture these sales opportunities as we head into summer.

Gross profit increased 12% to $88 million with gross profit margins down 60 basis points to 39.5%, largely due to a higher frequency of shipping and handling promotions to stimulate additional demand, particularly at Frontgate.

Operating expenses excluding noncash charges increased 15% to $80 million and increased 40 basis points as a percent of sales. Excluding the impact of Chasing Fireflies, operating expenses as a percent of sales decreased 10 basis points from the prior year. There was also an increase in catalog and page count circulation specifically for Ballard Designs, Frontgate and Grandin Road as we showcase the product assortments for these brands.

Cornerstone's adjusted EBITDA was down $1 million to $8 million. The first quarter traditionally represents the lowest sales and EBITDA of the year for Cornerstone.

As I mentioned at the beginning of the call, we continue to drive HSNi's shareholder value through our share repurchase and cash dividend program. In the first quarter, we repurchased approximately 1.2 million shares. Year-to-date through yesterday's stock market close, we have repurchased nearly 2 million shares. Additionally, effective today, our Board approved a quarterly cash dividend of $0.18 per share payable June 19 to shareholders of record as of June 5.

We will continue to utilize technology, social networks and mobility to redefine shopping. We recognize that the economy reminds uncertain and that increased payroll taxes and fuel costs negatively impacts the consumers' wallets. As a result, the competition for consumer spend will continue to be fierce. We believe that we have a strong assortment of products across all of our brands. We will continue to leverage our unique position in the marketplace by offering great price value on products that you can't find anywhere else, in addition to effectively utilizing all of our demand levers where appropriate.

Before turning the call over to Mindy, I want to reiterate that we maintain a relentless focus to drive growth, profitability and shareholder value. Mindy?

Mindy F. Grossman

Thanks, Judy, and good morning, everyone. Thanks for joining us. I'm pleased with HSNi's first quarter performance and the progress we made in creating a powerful and differentiated retail experience. Across HSNi, we are reaching and engaging customers through content-rich immersive experiences on our multiple digital platform. These efforts contributed to our sales growth of 5%, digital sales growth of 10%, and EPS growth of 24%, and continue to return value to shareholders through our share repurchase and cash dividend program.

As Judy mentioned, during the quarter, we delivered record customer results at both HSN and several of the Cornerstone Brands. In addition, our increasing digital reach now represents nearly half of the HSNi business. At HSN, sales increased 2%. And as Judy mentioned, last year's results included 1 extra day of sales because of the leap year. This performance was relatively in line with our expectations given the significant launch of our digital site redesign, which we reviewed with you on our last earnings call.

We continued our dual-pronged focus on customers and digital expansion to capitalize on what we see is a significant sales growth opportunity that I'll review in more detail shortly.

Our strong customer activity during the quarter not only demonstrates the effectiveness of our customer prospecting strategy, but also positions us for future growth. HSN ended the quarter with our largest customer file and retention rate on record. New customer growth was the strongest we've seen in nearly 5 years. These additional customers are largely entering from lifestyle categories that historically have a greater lifetime value compared to categories where customers typically make onetime purchases.

We also had impressive growth in retained and reactivated customers. Best customers grew by 11% led by our loyalty-driven HSN credit card program, which now has over 1 million active credit card holders. With increases in penetration during the quarter, HSN credit card sales represent nearly 27% of total HSN sales.

Digital sales increased 4% during the quarter and sales penetration increased to 36%.

In January, we launched our comprehensive digital redesign across all our digital platforms, including mobile and tablet. These platforms now share with television the same consistent, seamless elevated brand experience that is optimized by screen. This content-rich experience brings the brand to life and now has over 50,000 products and how-to videos. HSN is the first multi-category retailer to build out aspirational content-driven vertical that compete directly in their categories. Our ability to provide a customized site visit relative to what the customer is looking for, means we offer a platform that doesn't exist anywhere else. And in addition, by integrating our social communities directly into the site, we're making shopping online more social, encouraging customers to share their product finds, thoughts and reviews directly on the site with their friends via Facebook, Twitter, Pinterest and Instagram.

It did take some time for a segment of our customers to get acclimated to our enhanced user experience. By March, our improved digital performance reflected increased new and repeat customer conversion, strong customer satisfaction scores, especially for new and mobile users and an increasing number of site visits. We expect to optimize this experience in the second half of the year and believe the digital redesign will position HSN for digital growth as the year progresses.

Mobile extended its impressive growth with a sales increase of 78% to $55 million and is on pace to show another year of dramatic progress. Once again, mobile penetration increased as both sessions and sales hit new all-time highs. Mobile penetration now represents more than 10% of the overall HSN business and a number of unique customers making a mobile purchase during the first quarter was more than half of those for all of 2012.

During the quarter, we expanded our use of social media to further engage with our customers. For example, we partnered with influential Pinterest user, Christine Martinez, with nearly 6 million followers to launch the India Hicks Island Living home decor collection. It provided us with the opportunity to expose our brand to her large online community.

We also held more events in the HSN Lounge, which we launched last fall as a way to continue the conversation with our customers through digital and tap into the extensive fan base of our on-air personalities and events. In addition to Josh Groban's video chat I mentioned on the last call, in March, we hosted our first ever Google Hangout in the HSN Lounge with style experts Giuliana Rancic, June Ambrose and Robert Verdi to wrap up our spring fashion event. The discussion focused on trends, style inspiration and fashion tips as these on-air personalities answer questions from fans and fashion bloggers.

With more than $100 million plays since its launch in 2011, HSN Arcade is contributing to HSN in meaningful ways. Arcade customers spend more time on sites, purchase more units, outspend non-players and have greater overall satisfaction. By integrating products and gaming, we're increasing engagement with specific product categories. For example, our spring fashion Flip Out game was customized to support HSN's spring fashion initiatives. This memory-matching game which features spring fashion products resulted in a 72% increase in gameplay.

The first quarter featured several high-profile partnerships. As I discussed on our last call, we partnered with Coke to support HSN Cares' Heart Truth. We're very excited about the ongoing opportunities from our long-term relationship with Coke, including offering the world's largest online assortment of Coke-branded products. Our innovative marketing collaboration with the Walt Disney studios on Oz, The Great and Powerful, included 400 products from 50 brands and resulted in the best sales of any movie event for us to date with more than 100 sellouts. We also experienced the best pre- and post-sales for any movie event with significant engagement beyond the 48 hours of the event itself. In addition to what was showcased on air, we held pre and post digital events, capitalized on the buzz generated by Disney's extensive prerelease marketing campaign and the fan excitement that intensified once the movie premiered nationwide.

From a social media standpoint, we partnered with Disney on a co-branded campaign on Pinterest. The effort was the biggest community builder ever executed on our Pinterest page.

Our partnership with TNT, Warner Bros. on the second season of Dallas, is creating additional brand awareness for our fashion and jewelry businesses and driving customers to HSN from millions of engaged Dallas fans.

Now I'll review the key product categories that influenced the quarter. We saw a particularly strong performance in beauty, apparel and accessories and home. We remain an aspirational destination for beauty. Contributing to our success in the quarter were appointments to view weekly beauty reports and events such as our 24-Hour Spring Beauty Event. As a result, we'll be intensifying the programming allotted to these types of effective strategies. Areas of particular strength included makeup and beauty tools.

In apparel and accessories, we leveraged the successful launch of our digital Dress Shop by introducing Shoe Shop, which produced strong growth compared to the prior year. During our spring fashion series, we were a resource to our customers by providing relevant and timely insights into products and trends, not simply offering a portfolio of brands. We attribute this category of success to a terrific assortment, elevated experience and digital marketing support.

Once again, we had strong performance in our home category. In partnership with HGTV, we also debuted our HGTV HOME Outdoor Living across HSN in HGTV's multiple platforms. This initiative features HGTV experts offering advice and showcasing an inclusive assortment of HGTV-curated outdoor products and uniquely-branded items. We're excited about the opportunities with this partnership.

We did experience lower sales in consumer electronics and jewelry. While we remain a destination for consumer electronics and our units shipped in the first quarter were unchanged, we continue to see a shift in the business to lower price point products, such as tablets, mobile. That said, we do see opportunities in certain categories such as mobile, audio and accessories. While sales were down in jewelry, we're closely managing air time to maximize productivity.

Moving to Cornerstone. We remain focused on our strategic pillars of frictionless commerce, digital innovation, authoritative content, relative personalization and search marketing.

First quarter sales increased 14%, driven by the success in our home businesses of Ballard Designs, Frontgate and Grandin Road, combined with incremental revenue from the acquisition of Chasing Fireflies. Some of the brands, particularly Frontgate, were impacted by the unseasonably cold weather. Last year, if you remember, milder temperatures early in the year pulled sales forward for Frontgate. We expect sales to normalize as we move forward.

Cornerstone also extended its digital reach with digital representing over 2/3 of our business. Digital penetration increased as customer engagement intensified across multiple touch points, including desktop, tablets, smartphones and social. Mobile also accelerated both in usage and demand.

As HSN Inc. continues to evolve and we pursue strategies to accelerate growth, we are strengthening the collaboration between HSN and Cornerstone. And as part of this evolution, Cornerstone CEO, Marc Eithier has recently departed. We thank him for his many contributions to the company. We will be seeking someone with specific expertise in brand building to fill this role.

I'm excited to share some projects we have underway in Q2 and beyond. A few weeks ago, we launched our new HSN brand campaign, It's Funnier, which is designed to appeal to both our loyal customers and prospects. The Deustch agency supported us with this initiative.

Our initial efforts include national print ads through our partnership with Conde Nast and launches in digital display media that lead to dedicated landing pages on all our digital platforms. We are already seeing a strong response.

In terms of strategic partnerships, after a successful collaboration on One for the Money, in January 2012, Lions Gate returned to HSN to be a marketing resource for its new movie, The Big Wedding, which was released on April 26. Norwegian Cruise Lines is back for another month-long promotion in May. Through this partnership, HSN is showcasing Norwegian Cruise Line's newest ship and offering a number of chances to include this in the HSN Arcade. Toyota was extremely pleased with our initial partnership and has committed to additional events in 2013. The first one is scheduled for June and will feature several new Toyota models. As with our initial event, HSN customers will receive information and exclusive offers. We will be giving away a new Toyota each week during our coveted July birthday celebration, offering our customers the largest sweepstakes in HSN history.

Looking ahead at Cornerstone, Frontgate is leveraging its success in the outdoor and pool categories to introduce a broader lifestyle approach celebrating coastal living. We believe this will enable Frontgate to capture a larger share of wallet from high-value customers and our capitalizing on our expensive database and ability to target these customers to both print and digital channels. This new effort called the Summer Playbook, just launched today and it's targeting nearly 2 million households.

We continue to enhance the Cornerstone digital experience, including on-site search, faster navigation and page layout. In Q2, we'll also be adding international shipping capabilities across Ballard Designs, Frontgate and Improvements.

At HSNi, we're expanding our share in the best practices across our organization to identify opportunities for integration. We intend to leverage the combined power of our consumer reach through our databases, partnerships, digital efforts and cross-brand marketing strategies. As I mentioned, we're also reinforcing and integrating with synergies between HSN and Cornerstone. These actions will allow us to take advantage of the power of our direct-to-consumer reach, our creative content, our growing digital platform and our ability to create immersive experiences that engage customers across all of HSNi. As part of this effort and as many of you saw in the press release, we appointed Bill Brand as Chief Marketing and Business Development Officer for HSNi. Bill was EVP of Programming, Marketing and Business Development at HSN. Additionally, Andy Sheldon was named Chief Creative Officer for HSNi and General Manager of HSN Productions, focusing on our entertainment strategy. Andy, formerly, was EVP of TV Live Events and Creative at HSN. Bill and Andy have the vision and expertise to help us to continue to redefine the shopping experience and drive growth across all our businesses. Many of you met them at our Investor Day late last year.

This is an exciting time for our organization. We remain committed to our objectives to grow the business and drive operating efficiencies as we position ourselves for growth. Thank you. Now we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alex Fuhrman of Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Would like to ask a little bit about the new customer acquisition in the quarter. If I'm hearing you correctly, it sounds like the actual -- the growth in the customer file was actually the strongest you've seen in 5 years. Was that, in any way due, to the new website and higher engagement that was coming out of that? I mean, it sounds like conversion was up kind of in the back half of the quarter as customers got used to the new website. Is that a big driver of the new customer acquisition? Or is it really just more of what we're seeing with the increased mobile and tablet penetration and the shift towards beauty and other lifestyle categories?

Mindy F. Grossman

Great question. And I think it's a combination of all of the things that you mentioned. Certainly, our focus on those customer acquisition categories, such as beauty, elements of home, accessories, et cetera, is definitely a driver of long-term value customer growth, which is really what we're focused on. Secondly, even with the site redesign, new customer acquisition through mobile platforms, as well as digital platforms, is definitely a driver of that growth as well. And then, certainly, our efforts in marketing, combined with all of those things, and then lastly our strategic collaborations and partnerships that extends our reach. So it definitely was a combination of all of those things.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Okay. And as a follow-up, I guess, as you think about extensions of the e-commerce business in mobile and tablet, could you talk a little bit more about the HSN Lounge? It sounds like this is almost kind of like a second channel that's being born out just on the online experience here? I mean, can you talk about maybe some of the, maybe which types of promotions are really working better on the HSN Lounge? Is it really the celebrity partnerships? Or does it have to do with certain product categories? Or is it really just a matter of when the execution is good on the Lounge side and the post follow-up activities there?

Mindy F. Grossman

We're definitely testing a broad range of things through the Lounge. The goal of the HSN Lounge with live streaming, let's call it, dialogue, is really about extending the engagement. How could we leverage, post the live shows, and keeping our customer engaged through conversation, dialogue, product interest, et cetera. And it's everything from, certainly, a celebrity conversation where we're able to have a different dialogue than we can create in the live show when we're literally measuring that sales volume by minute. And what we saw with our recent test, when we had all of the stylists on, and the amount of customers that were really engaged in live chat, to hear what these authorities had to say. We think it's an opportunity for our customers to engage with their personalities and that would even include our hosts which we tested dialogue with them, too. And it just really speaks to how engaged our customer is, which is why, I think, we have seen that, that customer growth, that loyalty to our credit cards, they really like the idea of this extended engagement and we're going to continue to test a lot of things through the Lounge.

Operator

Our next question comes from Ben Mogil from Stifel.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

So on the shipping and handling side, I think you noted that you were down around 3% on that front. Is that tied to the pressures that you're seeing on pricing and consumer electronics that you've got to sort of continue that free shipping there given how competitive that particular vertical is? Or are you seeing some of the pressure on shipping and handling sort of pervasive across all categories?

Mindy F. Grossman

I think shipping and handling and promotional pressures, I mean, they just exist in the marketplace. I mean, clearly, you didn't see it to the degree that you saw it in the fourth quarter. And we're trying to be very strategic about where we offer that to be able to maximize sales. And it's very different by category. But I wouldn't say that it's specifically related to electronics.

Judy A. Schmeling

I'd say that you'd see more of that also in some of our home categories, our DIY and different categories like that. The same thing on the Cornerstone side and home as well. So it's not as much in your fashion accessories. But still, it is, as Mindy said, more broad-based than that.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

And is the return rate, the increase will it get a little bit tied to the mix that you saw in the quarter versus ...

Mindy F. Grossman

That's a 100% tied to mix.

Judy A. Schmeling

Yes. It's primarily because electronics was down in the quarter and electronics has a lower return rate than other categories.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

And then slipping over just to a broader question. We're now in May. As you sort of saw the quarter progress, you had payroll tax impacts, you've had gasoline come down, you obviously got a [indiscernible] released on April so far. Can you just give us a sense of what you saw those trends throughout the quarter look like? And then even into the current quarter?

Mindy F. Grossman

I would say, in the quarter, I'm kind of trying to balance the trends because we had such a massive impact with the digital redesign. I mean, it'd be difficult for me to pinpoint it exactly. And then on the Cornerstone side, really, the impact there is more weather-related relative to that Frontgate customer. I mean, having said that, we're always cognizant of anything that's going to affect the consumers' wallet. And so we continually believe that you've got to focus on share gain, share of wallet, et cetera, because, again, I don't think there's a lot of incremental spending out there.

Operator

Our next question comes from Tom Forte of Telsey Advisory Group.

Thomas Forte - Telsey Advisory Group LLC

I had one question and one follow-up. So can you talk a little in the -- about the performance in the quarter about your mobile revenue versus your e-commerce revenue? So you've had the slowdown in conversion on the upgrade but it didn't seem to affect mobile. So can you talk about how the 2 are related or how they're unrelated?

Mindy F. Grossman

Well, if you really look at the whole, I think with the tremendous increased usage just in tablet, I think a lot of people are just naturally gravitating to that as checkout, and we've obviously worked up a lot more engagement. And if you look at the digital redesign, it wasn't just our site itself, it was our other platforms. We've enhanced our marketing strategies for mobile. We see customers using multiple screens a lot more. So even if they're essentially watching the television, they are checking out or looking at a broader expanse of products on their mobile device. So again, we kind of look at the totality of the whole, but we absolutely see mobile utilization continuing to increase.

Thomas Forte - Telsey Advisory Group LLC

Great. And then my second question is for consumer electronics, it is my understanding that we had a transition from the TV cycle to the tablet cycle and that was why you saw the change in trends in sort of the ASPs and units. Are we now waiting for the next cycle on televisions, or are we waiting for the next generation of devices and tablets? How should we think about, I guess, the go forward for consumer electronics?

Mindy F. Grossman

We still feel good about the consumer electrics business. It's just that, to your point, we were lapping kind of the shift in what consumers are buying. That's not to say we're not selling any televisions. It's just not a huge amount of new renovation that's driving the customer for replacements. And what customers tend to be buying are things related to mobile, to audio, to tablet, which, by nature, just -- it's interesting though, we just had an innovation event, a 24-hour innovation event at HSN. And you see customers gravitating to new streaming devices, we saw some success with connected TVs, but they're really looking for newness. And so those areas that have newness and the customers' really reacting to it, we're certainly out there on the forefront. I think we launched like 7 new launches that we had in that event. So they're definitely reacting to consumer electronics, it's just a different mix.

Operator

Our next question comes from Jason Bazinet of Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I was just wondering if you might be able to help us with a sort of a clean revenue growth rate at Cornerstone year-over-year? I'm guessing -- I think from the numbers you -- given the disposition of Smith+Noble in territory head, you lowered the year-ago revenues. But I'm not sure if you added the Chasing Fireflies revenues that would've been in the year-ago period if you owned that asset last year?

Judy A. Schmeling

Yes. So the numbers that we released do not include the territory head in Smith+Noble in last year's results. They also don't include last year Chasing Fireflies so where it does this year because we had acquired it on April 1 last year. So the only variance is related to Chasing Fireflies. So there was some impact on top line but you don't really contribute anything from a bottom line perspective. The first quarter is not a big quarter for them at all.

Jason B. Bazinet - Citigroup Inc, Research Division

But in terms of a clean revenue number, in other words, if we stated it all pro forma, can you give us a sense of how fast Cornerstone was growing?

Judy A. Schmeling

Yes, it was still double-digit.

Operator

Our next question comes from Anthony Lebiedzinski of Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

First of all, just looking at your G&A expenses. They were down about $1.8 million in the quarter. Was there anything unusual here in the quarter? And also, is this a sustainable trend going forward for expenses?

Mindy F. Grossman

No, I think that most of that is timing related. There's not anything that's -- any significance, so I'd look at it broader over the period of the year. But I would say that expenses, in general, we will continue to manage as tightly as we can while we continue to invest in appropriate areas of growth for the company, but trying to recognize where we're at from a revenue perspective as well. So we're trying to balance all of those levers.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Got it. Got it, okay. And as far as the HSN gross margin, can you just give us a breakdown of the components of that? The mix shift. How much did that help and how much was the free shipping promotions offsetting that?

Mindy F. Grossman

Well, the vast majority of that is the product mix. So what we had -- we had an improvement in our product mix slightly declined by the shipping and handling promotions. I would say, from a product mix standpoint -- I mean, from a product standpoint, it was primarily mix-related. That was the primary driver of that. Though not any significant -- what you see is -- it's not -- wasn't significant. Shipping and handling revenue did decline 3%, so it have a negative, but not huge.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. And going forward, I mean, what would you expect as far as the mix shift changes and free shipping for the rest of the year?

Mindy F. Grossman

Yes, again, I think you have to -- you can't derive anything from any one quarter, because each quarter is different based upon the type of product mix that we are selling. So, again, we're trying to look at our overall gross profit margin for the entire year. You will still continue to see some quarters that might have gross profit margins decline, particularly in the fourth quarter, as that mix shifts more to electronics, more promotional environments.

Operator

Our next question comes from Barton Crockett of Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I was curious about the weather impact in Cornerstone. Can you -- is there any way you can attempt to quantify that? How much of a drag it was this in this quarter? And how much of a lift it might be to the top line next quarter?

Judy A. Schmeling

Well, I would say, more importantly, it was probably just more of a benefit last year. If you recall, we really did call that out because we had such a very large quarter for Frontgate last year. So we can't really quantify it. But we do feel really good about the product mix that we have at Frontgate. They've added 15 new outdoor sets -- yes, and we have the new book that Mindy had mentioned. I mean, the product looks great. It's going to be, early on, weather-related. So they continue to have a very large months in May and June. So it's still too early to say. But I think we're definitely locked and loaded for, hopefully, the weather to improve. It continues to be choppy around the country.

Mindy F. Grossman

And it's not just Frontgate, it's Grandin Road as well.

Judy A. Schmeling

Grandin, too. That's right. I'm sorry.

Mindy F. Grossman

Which we have seen very strong results in that business.

Judy A. Schmeling

I would say though that from an overall standpoint, we did experience higher back orders than normal -- at several of our businesses, particularly Ballard and Garnet Hill. So some of our products had a lot more additional demand than we were -- had the inventory for, so...

Mindy F. Grossman

It's a good and bad problem.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then if I could follow up with a little bit longer-term question perhaps. One of the opportunities, I think, people would see, particularly with your Cornerstone catalogs like Frontgate and others, is that as the housing market recovers, your catalogs are in categories that might particularly benefit from that. And I'm just wondering if you're seeing any evidence of any lift from a recovering housing market and what you see in your business?

Judy A. Schmeling

I can't say I'm attributing anything specifically to the housing market. Because if I really look by brand, and if I look at a brand like Ballard whose business is extremely strong, I truly believe it's because of their strategies and their products and what they're doing. Now, I'll certainly take the lift as the housing market recovers, but I think it's important that they had natural growth based on the strategies that they're implementing.

Operator

Our next question comes from Trisha Dill with Wells Fargo.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

I just had a couple on the digital business. First of all, did digital business get better throughout the quarter as customers got used to the new site? Or do you think this will take another couple of quarters or so before customers get used to...

Mindy F. Grossman

As we mentioned, we saw, after let's call it, the 6-week period going into March, improvement. I mean, as you know, we have a very tried, true, loyal customer and you got to walk her through change maybe a little bit more than somebody who's just kind of a hunt-and-peck sort of customer. We saw that come back in March. And we still have enhancements that are going in. Obviously, we launched January 8, but that wasn't where we stopped. I mean, we have other implementations going in across the second quarter and we expect improvement as we continue. And we're seeing our scores certainly in a great place. It's a pretty unique experience.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Okay. And then digital sales have been growing below the overall e-commerce market. Do you think you can grow this business above market rates? And what do you think you need to do to get there?

Mindy F. Grossman

Well, I think you've seen in other quarters, for example, fourth quarter, strong digital sales that were more akin to the market. And certainly, that's our intent and goal and was part of our reasoning for the relaunch -- and if you remember, the relaunch was not just the experience itself, but we really needed to rebuild the core fundamental technology to give us the type of flexibility to do things that we felt were going to be more competitive. So certainly, that is our intent.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

And then one last one on the digital business. As we think about online tax, the legislation moving forward and ultimately, passing at some point, how do you think about this impacting the digital business? And have you seen in states where you do collect sales tax, lower growth than in other states? Or maybe did you see initial reactions in states like New York when sales tax was implemented several years ago?

Judy A. Schmeling

Yes. With about overall of our business, about 60% of our sales are subject to some type of sales tax collection across HSN Inc. I think we've stated that previously. So there is a portion of our sales that we don't collect sales tax on. And you're referring to the state of New York, I think, it was in 2008. That particular state -- there was definitely an impact in New York in 2008, but for me to say it was definitively related to the sales tax and it was in 2008, would not be a fair assumption. However, there have been some other smaller states that we do see initial impacts related to that sales tax collection. There haven't been a lot of those changes. I can't really give you a good number on that. But I would say that, yes, that I think there is a reaction to the consumer when you start collecting sales tax. But if it's widespread and everyone collects sales tax, I can't say exactly what would occur in that instance. However, anytime you take money out of the consumers' wallet, there will be some impact most definitively.

Operator

Our next question comes from Victor Anthony of Topeka Market.

Victor B. Anthony - Topeka Capital Markets Inc., Research Division

Two quick questions. The first one. Several retailers have been talking up the benefits of Mother's Day, graduation and Father's Day in this particular quarter. Haven't heard the TV shopping networks actually talk about these days. I wonder if you could give us a sense of how those events impact sales?

Mindy F. Grossman

We don't tend, other than Christmas, obviously, which is -- and holiday. We don't have the same kind of shifts in our business, things like Easter, Mother's Day, Father's Day. We actually do have a nice Mother's Day business and promotion. But a lot of our customers, she's buying for her, so she's getting herself a gift for Mother's Day. We have some Father's Day shows, but that's more electronics. But we don't have those kind of peaks and shifts in promotions for those holidays.

Victor B. Anthony - Topeka Capital Markets Inc., Research Division

Okay. And the second is really with your contracts with your distributors. I wonder if you could just give us a quick update of where you stand in terms of any sort of renewals that's coming up? Anything we need to be concerned about?

Judy A. Schmeling

We still have the same contracts that are renewed or not renewed from our filing at our 10-K. So there's been no changes since that time.

Operator

There appears to be no further questions. I will now turn the call back over to Ms. Grossman.

Mindy F. Grossman

Well, thanks, everyone. And thanks for being with us this morning.

Operator

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.

Mindy F. Grossman

Thank you.

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