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ValueVision (NASDAQ:VVTV)

Q2 2009 Earnings Call

August 19, 2009 11:00 am ET

Executives

Nancy McGrath - IR

Keith Stewart - President and CEO

Frank Elsenbast - SVP and CFO

Analysts

Bob Johnson

Charles Burnside

Operator

Welcome to ShopNBC's fiscal second quarter 2009 teleconference. (Operator Instructions)

I would now like to turn the call over to Ms. Nancy McGrath of ShopNBC.

Nancy McGrath

Good morning. Today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 is contained in ShopNBC's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Mr. Keith Stewart, ShopNBC's President and Chief Executive Officer.

Keith Stewart

Good morning and thank you for joining us and thank you, Nancy. As you could see from our second quarter press release, ShopNBC's multi-channel retailing business continued to make progress in its turnaround. The second quarter was another solid foundation building period for us, another step in the right direction, with a number of positive business metrics taking form.

We continued to strengthen our leadership team in the quarter. The Board of Directors unanimously appointed Randy Ronning, a retail and TV shopping veteran of 36 years, as our Chairman of the Board. The Board also appointed Ed Garrubbo, a direct response veteran as a Director. We are so very pleased to be benefiting from their expertise, insight, and instrumental guidance to advance our strategies during this period of transition to the company.

In the quarter, we also added another TV industry expert to the senior management team with the appointment of Carol Steinberg as Senior Vice President E-Commerce. Carol has strong leadership experience in the world of electronic retailing and is adding tremendous value to our Internet business.

Suzanne Somers, it gives me great pleasure to say that this renowned TV personality and home-shopping icon has found a new home at ShopNBC. She will debut on our network in less than one month, on September 18. She has tremendous media interest and a loyal fan base. We look forward to Suzanne bringing her story and product line to life on ShopNBC with a sense of style that is aspirational and a sense of humor that is truly endearing, while entertaining.

Customer trends continued to improve in the second quarter. New and active customers were up 59% and 32% respectively. We are building excitement and trust with our customer base through our premium product quality, tremendous value, and highly critical guest experts. In the quarter, we added a record 106 new vendors, a record 60 new launches, and a record 32 expert guests, such as TV shopping veteran Dave King and gem expert Paul Deasy.

Margins increased to 34.8% in Q2 versus 31.5% in Q1. Inventory levels are being tightly managed and margins are expected to gradually improve throughout the year as we increase the number of higher-margin reorders and expand our merchandise assortment into higher-margin categories of home, fashion, jewelry, and beauty.

Return and cancel rates decreased by double-digits in the quarter versus last year's same period, reflecting continued operational improvements in delivery time, customer service, product quality, and lower price points. Complementing this success, customer service inquiries decreased 18% in the quarter.

Our Internet business, ShopNBC.com, is attracting new and returning customers at an increasing rate as online product assortments expand. Year-to-date conversion is up 36%. The use of live chat for sales assistance and enhanced email retention programs allowed for stronger visitor engagement, customer education, and overall site penetration. Going forward, we will optimize ShopNBC.com with the next phase of its mobile strategy, expand our social networking initiatives, and improve our website's natural search presence in key merchandise categories.

Finally, the company's overall cost structure was reduced by 19% in the second quarter versus last year as part of an ongoing initiative to tightly manage costs.

As these business metrics indicate, we are now in the early innings of a whole new ballgame at ShopNBC. We have the right leadership team in place. We are buying the right merchandise and building up our reorder business. With improved inventory levels, higher margins, and lower price points, positive business metrics continued to take form. In fact, weekly sales trends improved sequentially at the company during the second quarter to the extent that we achieved positive EBITDA in the month of July. We are very happy about this strong finish to Q2.

Now that said, by no means are we close to being done. We still have a lot of work to do, but the critical building blocks are in place and these improved fundamentals are very good signs for our business. I am highly encouraged about the progress made during the first half of the year, especially the fact that year-to-date EBITDA, as adjusted, is $10.5 million better than last year.

With that, I would like to turn the call over to Frank Elsenbast, our CFO, who will provide more detailed financial overview of the second quarter. Then I will spend a few minutes talking about initiatives being implemented in Q3, to improve our sales performance for the balance of the year, as these steps are a necessary precursor to improve sales and profits.

Frank Elsenbast

Today I would like to provide an overview of our second-quarter financial results, a review of our cash position, and an update on other key balance sheet items.

Second quarter revenues were $119.3 million, a 16% decrease compared with revenue of $142 million last year. The shortfall in the quarter was due to the 42% decline in the average selling price of our merchandise versus last year. This reduction in our price point is an essential part of our strategy to increase viewership, rebuild our customer base, and increase unit volume. During the second quarter, we grew our active customer base by 32% and drove a 40% increase in unit volume, which partially offset the decline in our average selling price.

Gross margin in the second quarter increased to 34.8%, which is up 330 basis points versus our first quarter margin of 31.5%. The margin increase was driven by less product discounting and a favorable mix change as we reduced our sales of consumer electronics. We are focused on continuing margin improvement throughout the second half of the year.

Operating expenses for the quarter were $52.3 million, a reduction of 19% or $12 million versus last year. The reduction was driven by continued focus on all discretionary spending, significant reductions in salaried headcount over the last year, efficiency gains in our warehouse and call centers, reduced marketing spend, as well as a significant reduction in our cable and satellite fees.

EBITDA, as adjusted, was a loss of $5.7 million in the second quarter, compared with an EBITDA loss of $10.7 million in the year-ago period. The EBITDA improvement was driven by higher gross margins, as well as the operating expense savings.

I will now provide an update on the balance sheet. We successfully monetized our portfolio of auction-rate securities this quarter for $19.4 million in cash. The portfolio had a carrying value of $15.7 million and the sale resulted in a non-operating gain of $3.7 million. The company ended the second quarter with $36.3 million in cash and securities, including $8.5 million of restricted cash. This balance is a decrease of $18.1 million versus the prior quarter, driven by the EBITDA loss of $5.7 million and a $13.5 million investment in working capital.

The $8.5 million of restricted cash is related to our increased direct importing. These dollars support overseas letters of credit on merchandise imports for the third and fourth quarters.

A final note on our balance sheet. We end the second quarter with a strong balance sheet. In addition to our cash resources, ShopNBC has over $100 million in assets that could be monetized to raise additional capital if needed. These assets include our accounts receivable portfolio, real estate in Eden Prairie, our Bowling Green fulfillment center, and our full power TV station in Boston.

That concludes my update. Now, I will turn the call back to Keith.

Keith Stewart

Since our last quarterly update, we've not only been focused on improving our multi-channel electronic retailing business, but we've also been getting out in front of our investor community at a few conferences. We have very much enjoyed sharing our vision and story while looking at the audience square in the eyes and getting their feedback.

I firmly believe that I am part of one of the most exciting retail turnarounds in the world today. Even though our company is 18 years old, it very much feels like an 18-year old start-up. The energy in the building, the excitement about the opportunity at hand, it's electric. To provide greater insight into what lies ahead in Q3 and the balance of the year, I'd like to offer some color on the merchant categories and upcoming new launches, how to use our promotional drivers, who will increasingly bring in more new customers and active base, and how through the launch of our major customer service initiative in October, we expect to see customers buying more and shop more frequently.

In short, when the customer shops ShopNBC, they will have to pay one shipping and handling fee for multiple purchases made throughout the day. No one else in our industry is offering this. So let's talk some shop.

In our watch business, we are the leader in our industry when it comes to selling watches on TV and the Internet. Let me share with you some record-breaking stats in the category. The business is up 39% year-to-date. New customers are up 136%. Net units are up 90%. This level of success is simply unheard of and we expect to build on this momentum going forward with margins at 40%.

Beauty, there's a movement going on in this category at ShopNBC, as we are developing this category into a destination for new beauty and [indi] brands such as Intelligent Nutrients, Vapour Organic Beauty, and Janson Beckett Cosmeceuticals. In Q2, we had seven new launches. In Q3, 30 are planned. At present, this category has an 82% customer retention rate with an average margin of 52%. New customers are up 95% year-to-date. Net units are up 39% and return rates are a mere 10%. We are going to keep discovering all the wonderful things going on in the beauty industry and bring them to the customer.

In our fashion business, a new foundation is being laid for the business with a refocused merchandise strategy. We are casting a wide net with our fashion business at ShopNBC, so that whatever our customers' life demands, we've got their style. 50 new launches are planned in Q3, including Sag Harbor apparel, Esprit outerwear, Via Spiga shoes, Laundry by Shelli Segal, O by Oscar handbags, and Geoffrey Beene. So stay tuned.

Jewelry, the category that ShopNBC we are known for, we have been repositioning this business with lower price points to broaden its appeal, while smartly diversifying into the right jewelry categories, such as Fashion jewelry, gold, gemstones, silver, platinum, designer jewelry and our own Brilliante collection of simulated diamond jewelry. 14 new launches are planned in Q3. New customers counts are up 24%, year-to-date.

The category of home and consumer electronics is one of our biggest and remains one of our biggest opportunities. New customers are up 50% in this category, year-to-date. What's more, in our Electronics business, we are launching a new service and installation initiative in Q3 that will be a major added value to the customer. When a customer orders a TV, for example, they will also be offered installation. On the home front, the number of hours planned in Q3 for domestics will quadruple due to the great assortment due to increased customer demand. In total, 25 new launches are planned for the third quarter in home and electronics and we are excited about our continuing efforts to bring in the new and repeat customers through our premium and differentiated value proposition.

In summary, across all these categories, a record 121 new show titles, concepts, and brands are planned for launch in Q3. In Q2, we launched 64. Let me just add that the brands we are launching now weren't here one year ago or even six months ago. Now we are being sought out. Buzz is building in the industry and they want to be part of it. So with more new product coming in the door, with more reorders being made, and with a robust holiday strategy planned to drive incremental sales, it is fair to say that we aren't even close to hitting our peak.

Couple all this with our broad-based customer service initiatives, ShopNBC will be well positioned as a true destination for gifts this holiday season with the unique customer experience that is a major differentiator in the marketplace. If our merchandising is driving the sales strategy, what's the outlook for margins?

Q1 margins were 31.5%. In Q2, they were 34.8%. We intend to keep our margins up through buying right and knowing how to mitigate risk. On new merchandise, we are dipping our toe in the water to see how the customer will respond. Then with proven product, we are building up the reorder business where margins are safe. This is why we are so focused on ramping up this part of our business.

The other way to keep margins strong is to keep our inventory clean. We have a real partnership with our merchants and product planning organizations. Merchants are bringing in the new. Planners identify the risk. We are being careful on the risk. Where product tests well with the customer, it's full speed ahead. This approach keeps the customer happy, while we manage the financial responsibility around the inventory and keep margins higher.

As we expand the merchandise mix into higher-margin businesses across the home, fashion, beauty, and health and wellness as we bring on new guest experts to build a greater sense of community and credibility with the customer, our new and active customer trends are indicating that the viewer is tuning in for more.

Now to keep bringing in more new customers and to keep activating our customer base of repeat customers, the use of daily sales promotions and sales events need to be bigger and they are. Throughout it all, we will be holding operating costs steady.

With that, let me conclude. As I said in the outset, the turnaround at ShopNBC is gaining momentum. Q2 was another solid building block quarter. We are executing the business better and continue to make progress in many areas. We tested and added dimension to our product portfolio. We are buying with better discipline and our inventory and margins are being well managed so that reorders are a bigger percentage of our overall business. We are past the pain, and while there still will be some growing pains, which is a natural part of evolution and growth, I remain highly encouraged about the progress made during the first half of the year and hope you share our enthusiasm about ShopNBC's future.

We certainly appreciate your time this morning, we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [Bob Johnson]. Sir your line is now open.

Bob Johnson

The question I have is, you mentioned that EBITDA was positive in July. Do you think that trend is going to continue in Q3 and Q4?

Keith Stewart

We are not providing guidance at this time. However, as I mentioned during the comments on the call, we are very pleased with the building blocks that we have laid in Q2 and we've seen sequential improvement in the topline, but don't get too excited. We have got a lot of work to do and thanks to the great team here at ShopNBC and the vendor community, we will continue our progress throughout.

Operator

Our next question comes from Mr. [Charles Burnside].

Charles Burnside

The question I have is I noticed an awful lot of inside buying in the month of July. Was that a reflection of confidence or were there other mitigating circumstances?

Keith Stewart

I cannot speak for others, but I can speak for myself that I would eat my own cooking. Thank you very much for your questions and I hope you enjoy the rest of your summer.

Operator

Thank you for joining today's conference call. You may disconnect at this time.

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