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Executives

Felise Glantz Kissell - Senior Vice President of Investor Relations and Strategy

Judy A. Schmeling - Chief Financial Officer and Chief Operating Officer

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

Analysts

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Thomas Forte - Telsey Advisory Group LLC

Anthony C. Lebiedzinski - Sidoti & Company, LLC

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

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

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

HSN (HSNI) Q2 2013 Earnings Call August 1, 2013 9:00 AM ET

Operator

Ladies and gentlemen, good morning, and welcome to the HSN, Inc. Second Quarter 2013 Earnings Conference Call and Webcast. This call is being recorded for future play, if desired. Following the conclusion of today's remarks, 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 Operating Officer and 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 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 COO and CFO. Judy?

Judy A. Schmeling

Thanks, Felise. Good morning, everyone, and thank you for joining us. We are pleased with our overall financial performance in the second quarter, which reflected our focus to drive growth, profitability and shareholder value. Our strategic actions resulted in continued momentum in growing our customer file, achieving digital sales growth of 10%, with penetration up 170 basis points that contributed to overall net sales growth of 6%; returning value to shareholders through our share repurchase and cash dividend programs that included purchasing over 900,000 shares in the second quarter; and growing our earnings per share by 30% to $0.79 per share.

At HSN, sales increased 5% to $526 million. We had strong sales growth in home design, household and electronics, offset by lower sales in jewelry and culinary, as well as a 3% decline in shipping and handling revenue. HSN also experienced higher clearance sales in the second quarter and lower returns.

Digital sales at HSN grew 10%, with digital sales penetration up 160 basis points to 35%. We are pleased with these results following the launch of our digital site redesign earlier this year and the ongoing site enhancements we have made since that time.

HSN's unit shipped increased 7%, and the average price point decreased 4%. Excluding clearance, both units shipped and price point relatively unchanged in the second quarter. We continued our focused efforts to drive customer growth, resulting in a 5% increase in our customer file.

HSN's gross profit increased 3% to $188 million. Gross profit margin decreased 60 basis points to 35.6%, primarily from shipping and handling promotions. Our clearance sales did not notably impact gross margins as we had inventory reserves associated with those products sold.

Operating expenses, excluding noncash charges, were up 1% to $130 million and improved 90 basis points as a percent of sales. Operating expenses were favorably impacted by the timing of certain marketing programs, offset by higher employee-related costs.

HSN's adjusted EBITDA grew 8% to $57 million in the second quarter.

Turning now to Cornerstone. Sales in the second quarter increased 8% to $286 million, and digital sales grew 10%, representing a 120-basis-point increase in digital penetration to 63%, with every brand increasing with digital penetration. The home segment drove Cornerstone performance, led by Frontgate and Grandin Road. Frontgate's outdoor business was exceptionally strong in the second quarter. We acquired Chasing Fireflies on April 1, 2012, and as a result, this is the first quarter in which Chasing Fireflies sales are reflected in both the current quarter and comparable prior year period.

Gross profit increased 9% to $121 million, with gross profit margin increasing 30 basis points to 42.4%. This improvement was largely driven by higher product margins, somewhat offset by higher inbound freight costs and select promotional activity.

Operating expenses, excluding noncash charges, increased 10% to $93 million and increased 60 basis points as a percent of sales. Excluding the impact of reorganization costs, primarily related to severance, operating expenses as a percent of sales remained unchanged from the prior year.

Cornerstone's adjusted EBITDA grew 4% to $28 million, and excluding the impact of reorganization costs that I just mentioned, adjusted EBITDA increased 10%.

As I stated at the beginning of the call, we continue to drive HSNi's shareholder value through our share repurchase and cash dividend program. In the second quarter, we repurchased over 900,000 shares. Year-to-date, through yesterday's stock market close, we repurchased nearly 2.2 million shares. Additionally, effective today, our board approved a quarterly cash dividend of $0.18 per share payable September 18 to shareholders of record as of September 4.

As we look forward, we will maintain our focus of driving profitable growth, expanding our digital presence and strategically investing for the future. At the same time, we recognize the challenges facing the consumer, including higher payroll taxes and a tenuous economic environment. With that, we will continue to identify opportunities to leverage our unique position in the marketplace by offering great price value on products that our customers can't find anywhere else, in addition to effectively utilizing all of our demand levers where appropriate and necessary.

I will now turn the call over to Mindy for a strategic review of the business.

Mindy F. Grossman

Thanks, Judy. Good morning, everyone. Our strong financial performance during the second quarter was a result of the uniqueness of our customer experiences, the power of our digital platforms and the quality of our brands and products. Sales increased 6%, EBITDA increased 7% and earnings per share grew 30%. In addition, the strength of our overall brand experience resulted in substantial increases in our customer file at both HSN and Cornerstone.

Digital sales increased 10% and digital penetration grew 170 basis points, as digital moves even closer to comprising half of the HSNi business. Mobile remains our fastest-growing platform, with growth of 71% during the quarter and mobile penetration now representing over 10% of total HSNi's sales. We continue to leverage the synergies between HSN and Cornerstone, positioning us to capitalize on our strong brand and reshape the landscape of retail commerce.

HSN sales increased 5%, with adjusted EBITDA growing 8%, as we delivered on our overall strategy of more experiential shopping, that means offering rich content experiences, optimize each touchpoint then inform, educate, inspire and entertain our customers. We finished the second quarter with our highest active customer file size on record and experienced the highest quarterly new customer growth in 5 years. Nearly half of the new customer growth was driven to our digital platform with mobile as a key contributor. We also reached a 10-year high for our 12-month retention rate. Best customers were up 7%, with their engagement up across nearly all categories. Our loyalty-driven HSN credit card program also contributed to our best customer growth and now represents 28% of total HSN sales.

Last quarter, we indicated that we expected improved digital sales in the second quarter, as the comprehensive digital redesign we launched in January became fully implemented. We are pleased to report that digital sales at HSN increased 10%, with sales penetration reaching 35%, up 150 basis points.

Total digital unique visitor traffic notably increased over the previous year. We're also seeing improved customer satisfaction scores that are equivalent to prelaunch levels as we continue to optimize the digital experience across all platforms. We're extremely pleased with the site redesign and the progress we've made with our ongoing site enhancements.

Mobile was exceptionally strong this quarter, with a 70% increase in sales compared to the prior year. Our momentum is accelerating. By mid-June, mobile sales for 2013 had eclipsed $100 million, a milestone that wasn't reached until the end of the third quarter last year. Once again, mobile sessions and sales reached all-time highs, as did mobile sales penetration, which now represents over 10% of HSN sales.

Social media continues to be a core strategy around engagement, loyalty and consumer awareness, as well as an effective way to communicate with our customers. All of our social community showed strong growth in the quarter, led by an increased number of Pinterest followers. Applying smart and creative content enabled us to triple our reach and double our engagement on Facebook. We also launched our first Twitter Vine Series with Tyson Beckford, which drove his fans to HSN on Twitter. And we've been very successful integrating social TV for our beauty report, also on Twitter.

HSN Arcade hit new levels of customer engagement, reaching over 140 million game plays, with nearly 0.75 million members. We're increasingly using Arcade to promote cross-marketing initiatives. For example, as part of our Toyota partnership, we had 8 million impressions of Toyota-related promotional material on Arcade. We also reached 11 million impressions of our Norwegian Cruise Line partnership and received more than 70,000 entries for the Norwegian Cruise Line sweepstakes via the Arcade.

The Arcade is just one way we extended our strategic collaboration with these world-class brands. During the quarter, we featured a month-long promotion in May from Norwegian Cruise Line. We promoted their newest and largest ships, while they promoted HSN to their extensive database of customers through a series of targeted communications. Toyota promoted their all-new RAV4, Camry and Prius models through 3 1-hour shows, with special offers for HSN customers. The successful event resulted in more than 60,000 Toyota information packets sent to customers.

As we mentioned on our last call, we recently launched our external HSN brand campaign around our new tagline, "It's Fun Here." The campaign includes national print ads through our partnership with Condé Nast, as well as digital display media, all with a new look and feel emphasizing the experience of shopping at HSN. We've had very strong response, with click-through rates nearly double the industry average. The brand campaign will affect all consumer touchpoints through the remainder of the year as we bring the campaign to life across all our platforms, including television, which just launched last month.

Now I'd like to discuss the performance of our key product categories. We have merchandising success in important product areas during the quarter, with sales growth driven by home design, household, electronics and fashion and accessories. And as Judy mentioned, HSN experienced higher clearance sales in the second quarter, driven by our successful semi-annual clearance event in June.

Sales in home design were led by organization in textiles. Our partnership with HGTV has proven to be one of our strongest to date in terms of traffic. We are leveraging this by expanding our product assortment and creating new content with various HGTV personalities. Household contributed to our performance with solution-oriented products. Electronics had sales and unit growth, with continued performance in mobile, audio and accessories.

The quarter also included our innovation event, which featured 9 U.S. launches. In fashion and accessories, we saw increased sales in dresses and accessories, as we sought to use accessories, including footwear, as an entry point for new apparel customers. This included success in both our digital dress shop and our enhanced footwear digital experience.

We're encouraged about the opportunities in our jewelry business, which, despite lower sales, had improved productivity on lower airtime. We're expanding the variety of the collection, and our event-driven strategy is creating new appointments to view. We also see opportunities with fine jewelry and expect to see the overall business performance of this category improve.

We're also in the process of repositioning our culinary business. We're focusing on leveraging the success of our key chefs, particularly Wolfgang Puck and Curtis Stone. In the second half of the year, we'll also be introducing new premier chefs such as Ingrid Hoffman, Lorena Garcia and Ming Tsai, as well as expanding our successful food assortment.

Moving to Cornerstone. Our second quarter financial results reflect our focus on intensifying our brands' authority across our family and home lifestyle portfolio. Second quarter sales increased 8%, with outstanding performance from Frontgate and Grandin Road. Frontgate strength was a result of its highly successful outdoor business. The brand has expanded and customized its outdoor collection and given customers the ability to shop by lifestyle themes. Grandin Road's success came from home and outdoor living inspired by vibrant color designs. We also continue to be enthused about Chasing Fireflies, given its strong performance in the quarter.

Cornerstone's digital penetration increased 120 basis points to 63%, with particular success in mobile and tablet. Mobile now represents over 10% of Cornerstone's sales. The combination of consumer engagement and frictionless commerce is at the core of our efforts, which emphasized generating a heightened immersive experience for our users while eliminating barriers to product discovery and purchase. Examples of this heightened immersive experience include Threads by Garnet Hill, a blog that takes customers behind the scenes and gives them a preview of upcoming collections. Threads, which launched at the end of the first quarter, has already seen a high frequency of visitors and increased user engagement. Frontgate launched a digital lookbook optimized for both iPad and desktop. But lookbook strongly conveys the aspirational and inspirational emotion of Frontgate's outdoor collection while allowing customers to share their photos of the product on their social network, create favorite lists and make purchases. Ballard Designs and Grandin Road also engaged in high levels of social interactions with their customers. Ballard ran a Nifty Gifty Facebook campaign that successfully added highly engaged new fans, while Grandin Road ran a huge design challenge on Pinterest. In response to the growth of our mobile user base, we redesigned and relaunched smartphone-optimized sites for Frontgate, Ballard Designs, Garnet Hill and Improvements, eliminating barriers to product discovery and purchase. We also added Frontgate, Ballard Designs, Grandin Road and Improvements for our international shipping program, which we launched with Garnet Hill last year. This program ships to more than 100 countries.

Looking ahead, from a strategic standpoint, we remain focused on our customer, product, digital and marketing initiatives that create our point of differentiation in the marketplace. At HSN, we just concluded our birthday month. As part of that celebration, HSN and Toyota gave away for 4 RAV4s throughout the month, offering our customers the largest and most valuable sweepstakes in HSN history.

We're enthusiastic about HSN's new fall fashion series, which launches later this month, and includes the premiere of style icon Hal Rubenstein's first fashion collection, designers David Meister and Gryson handbags.

We are also introducing our first interactive shoppable lookbook and are days away from launching our jeans shop, which includes expanded brands and the ability to shop by style and fit. For the first time on HSN, this series will integrate fashion and technology to product and user experiences. We'll have an expanded assortment of fashionable tech products and accessories such as handbags turned iPad cases and headphones in expressive fall colors and textures.

Our Condé Nast partnership welcomes Wired Magazine to the event as our tech expert, along with Lucky and Allure for fashion and beauty. Music will also be integrated as part of the web experience through our partnership with Songza, who is curating custom playlists. A social campaign will allow customers to upload photos of their HSN fall look. Also, as a part of the HSN Live series, later this month, we're presenting Earth, Wind & Fire as part of our partnership with The Venetian Las Vegas. The event will also feature a number of additional contemporary artists.

At Cornerstone, Frontgate will leverage its success in the outdoor segment throughout the remainder of the summer to capitalize on recent demand strengths. We're also conducting some highly visible brand-building efforts. Frontgate has a major presence at this year's America's Cup, which is currently underway off the coast of San Francisco. Frontgate's also providing the outdoor furniture for the Hampton Designer Showhouse presented by Traditional Home. We're working to strengthen Garnet Hill to a merchandising intensifications in certain key categories, customer engagement and brand awareness. And from a digital standpoint, Cornerstone will build upon its success in frictionless commerce and innovation.

We continue to leverage the power of integration across our total brand portfolio. As part of this strategy, we recently showcased our first ever HSNi holiday gift collection curated by style visionary, Eva Jeanbart-Lorenzotti. The collection included unique products across our entire portfolio of brands. Hundreds of media, fashion editors and brand partners attended the kickoff event in New York. The gift collection will launch to consumers in October, plus all of our brands, and will include a complete digital experience. Also in the fall, we will strengthen this collaboration with a major integrated Halloween campaign that will include HSN, Chasing Fireflies and Grandin Road.

As you know, the retail industry is undergoing a transformation, one that revolves around creating a seamless customer experience across all platforms. At HSNi, we're at the heart of this transformation as we work to redefine the experience of shopping. Everything we do influences that experience and our ability to compete in today's world. And how we organize ourselves to grow the business and drive operating efficiencies is critical.

In May, we announced that Judy was named HSNi's Chief Operating Officer in addition to her CFO responsibility. This reflects our commitment to creating company-wide centers of excellence in finance, technology, customer care and supply chain and logistics. These changes demonstrate our continued drive to integrate key functions across all of our brands, maximize efficiency and deliver an immersive, seamless end-to-end experience for customers. We've also made changes to integrate all customer, marketing and digital touchpoints under the leadership of Bill Brand. Jill Braff, who headed up HSN's digital initiative, has recently left the company, and we wish her much success.

I am very excited to welcome Ryan Roth [ph] as our new Senior Vice President of Digital Commerce. Ryan [ph], who brings 20 years of digital and retail experience in building brands that bring the consumer product content experience to life, will be reporting to Bill. I believe this new organization will enable us to more fully leverage our growing customer base and the power of our digital platform.

We've made great progress in the first half of the year. These accomplishments, from strengthening our digital platforms to implementing customer growth initiatives to making strategic investments, positions us well for the future. While we appreciate the highly competitive retail environment, we believe in our ability to redefine commerce. We look forward to updating you on our progress.

Thank you. And now we'll be happy to take all of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Neely Tamminga from Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

I just want to offer my congratulations again to Judy and Bill on just much-deserved promotions here within the organization. Mindy, if you could help us understand, mobile, obviously, has been a big success for you guys, overall. And I'm just wondering -- it sounds like the traffic is also up, but I think what I'm also hearing is the conversion on mobile is also up. If you could also talk maybe some -- through some specific initiatives that are driving mobile conversion, that would be helpful. And I just had a follow-up question for Judy on the Cornerstone businesses. Congratulations all around on that one, too. It sounds like the average price point is up, your gross margin is up. I would think that your average price point is up because of furniture, which would inherently be a lower-margin business. Can you just reconcile for me a little bit like what's going on there and what the product mix looks like that's driving the margins higher?

Mindy F. Grossman

Great. Thanks. So I think one of the major things for us in mobile across all our businesses is that, philosophically, the way we look at it is mobile first and knowing that, that is really where the customer is living and breathing and interacting with us. So, really, the efforts around engagement seamless ability to shop and everything we implemented in the HSN redesign was really focused on creating a very rich mobile experience, and that's both speed, efficiency and, certainly, the experience as a whole. And I think that's why we're seeing both the engagement and the conversion there. We also have some very specific mobile strategies and whether that be around impulse buying or whether it be around games and spin to win and getting the customers to come in, but they're very specifically focused there. And on the HSN side, in particular, it's very much both smartphone and tablet, where on the Cornerstone side, it's much more significantly a tablet experience, which makes sense, given the nature of the products that they sell. As I mentioned, 4 of our brands have completely new mobile-optimized experience on the Cornerstone side, and that's definitely helped their conversion there as well. And we will continue to optimize all our mobile platforms and create new marketing experiences.

Judy A. Schmeling

Yes. And on the Cornerstone side, yes, the sales volume was driven by the home brands, but we have very strong margins in all of our home brands. So while Frontgate definitely really excelled in outdoor furniture this quarter, they also had success in many other product categories and also outdoor furniture accessories like cushions, et cetera. And our Grandin Road business has been extremely strong, which also carries very nice margin. So even though those are home brands in general, because the product is proprietary, they do carry higher margins.

Operator

Our next question comes from the line of Matt Nemer from Wells Fargo Securities.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

I was just curious in terms of the new digital platform at HSN, if you could talk to metrics like conversion and cart abandonment during the quarter. Do you think that all of the cobwebs are out of the new platform? Or is there still room for that to improve going forward?

Mindy F. Grossman

So we're certainly pleased to get it on trend and back to prelaunch level, but I would say, as you know, the reason why we relaunched the platform was to accelerate growth. So definitely, we have more opportunity, and we're optimizing the site. I mean, we are now just really utilizing a lot of the new technology that's enabling us to do a significant amount more A/B testing, as well as a much more nimble approach to changes. So yes, we are looking for more growth going forward based on the relaunch.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

And in terms of your best customer growth, can you just talk to what's driving that strength? Is that primarily migration from existing customers up the continuum? Or are those sort of newer customers that are coming in at a very high spend rate?

Mindy F. Grossman

It's definitely a combination of things. Number one, we continue to see will [ph] engagement with our loyalty program and our private label credit cards, so that definitely has an impact. Two, as you mentioned, we're definitely seeing that migration across categories, which is creating additional spend. And then, as we said, our retention rate is at a high, so that's also contributed to that.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

And actually, just to follow up on the credit card, are there limits around -- is there an opportunity to drive that penetration a lot higher? Could you just kind of talk to the appetite from your partner to, I guess, increase new accounts and credit lines, et cetera?

Mindy F. Grossman

We have a fantastic partnership with AVS [ph], and I think both us and they have been very pleased with the performance, with the creditworthiness of our customer. And we are continuing to look to invest in growing that percentage.

Operator

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

Thomas Forte - Telsey Advisory Group LLC

I had 2 questions. The first was, I want to know if you could talk about new customer growth as it pertains to category. In the first quarter, you said that you were seeing particular strength in home and beauty as a means to drive new customers, whereas historically, it's come from consumer electronics. And then the second question is, on consumer electronics and gross margin, selling more mobile and accessories in audio, is that superior in gross margin to televisions and things you were selling, I guess, 1 year or 18 months ago?

Mindy F. Grossman

So on both of those sides. So new customer growth, there's definitely category, so just by nature of the category, bring in more new customers. Beauty definitely is one. Home, especially in strong price point, solution-driven items, businesses like our Joy Mangano Ingenious Designs businesses and others like that. In terms of electronics, as you saw, we had growth in the quarter, and it's definitely unit-driven because we're obviously selling different price points based on the mix. As far as margin goes, in mobile, really not an increase in margin. We're selling everything from iPads to tablets, and that's equivalent. However, in audio, yes, that's a slightly higher margin than we would get from the bigger TV, computer items.

Operator

Our next question comes from the line of Anthony Lebiedzinski from Sidoti.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I was wondering if you could comment on the opportunities for synergies between the Cornerstone and HSN segments.

Mindy F. Grossman

So I'll speak to it from the front-end of the business, and I'll let Judy speak to it from the back-end of the business. I definitely believe that we have a very powerful portfolio of brands. And if you think about, across our brands, with almost 75% of our business being proprietary product, that's a very powerful assortment. As I mentioned, for the first time this year, we're bringing a number of our brands together around 2 specific efforts. One will be in -- around Halloween. We've partnered Chasing Fireflies, Grandin Road and HSN to have one of the broadest aspirational Halloween assortment digitally. We're also partnering there with UNICEF. We will have a Halloween store, and we're partnering with their trick-or-treat campaign together. We will be doing Halloween haunted house shows on HSN television live shows that we will be able to showcase products across the board. So that's one. The second, which we just had the press launch in New York, is we're taking across our entire brand portfolio a very extensive gift assortment. And when I say extensive, it's everything from a $15,000 customized Frontgate pool table in a sports car to a $29 stocking stuffer and everything in between. It'll be a very powerful digital assortment. And when you look at it, no one brand could have the power of that assortment on its own. So we're excited about those opportunities. And we think that if we do that strategically and also leverage the HSN digital platform for improvement stores on HSN, which we have today with Ballard, there's a lot of cross-leverage that we can get to expose our brand more broadly to our total customer base.

Judy A. Schmeling

Yes. In terms of back-office, we see a lot of potential over the next couple of years, whether it's in relooking at our IT infrastructure across both businesses, really reassessing our supply chain and logistics while we really already maximized all of our contracts, like with UPS. But how can we really look at best practices, relooking at our warehouses, things like that? And on customer care, really elevating our customer experience across all of our brands and doing so at a more efficient cost. We recently just did something within customer care and starting to see some of the benefits of that by really looking at a unified telecom platform. So we took the knowledge at -- and the vision of the Cornerstone team and combined it with the technical expertise that we have here at HSN to be able to provide longer-term benefits for us and our customers. So we're very excited about this. We're just starting on the cusp of it. And we have some great subject matter experts in charge of each one of those areas, and they're digging in. And we look forward to continue to report on our progress.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. So it sounds like a lot of good opportunities. So as far as the whole reassessment of the supply chain and logistics, how long of a process will that be before you can actually implement some changes, that you can actually see some meaningful savings?

Judy A. Schmeling

Well, that would be a longer-term issue because you are talking about warehousing and things like that. But certainly, one of the things that we're looking at is just from a process standpoint or the things that we can do in QA or returns to improve the overall experience. That would be more of a shorter term. But true, significant cost differences would be over a longer term.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. And also, just looking at the Cornerstone segment, you did say that a part of your expense increase was due to reorganization costs. Can you quantify the impact of that? And are these onetime items?

Judy A. Schmeling

Yes, that's a onetime cost primarily related to severance of some individuals that we did as part of this reorganization.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Right. And is that a number you can quantify?

Judy A. Schmeling

No. We're not releasing that.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. All right. Got it. Okay. And as far as the lower return rate, is that just a function of product mix or is anything else there?

Judy A. Schmeling

Well, let me talk about the lower return rates because we had lower return rates on both HSN and Cornerstone. So on the HSN side of the business, lower return rates in a lot of our categories. So it's pretty much widespread that we saw lower return rates, part of that is going to be related to price point that is driven by lower price points as well. On the Cornerstone side of the business, it's primarily related to product mix shift. The home brands do have lower return rates, and that did dominate our sales part of the business.

Operator

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

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

One is, just looking at the strength in the Frontgate business tied to the outdoor stuff, how correlated is this to the housing market? I mean, back in '08, as we all recall, I mean, you had troubles here when the housing market imploded. And now it's strong, and the housing market seems like it's coming back. So on the surface, it would seem to be correlated. But I'm just wondering how you see it at this point.

Mindy F. Grossman

Well, I think there's a couple of things you have to take into consideration. First of all, if you remember last year, given the weather patterns, we had more pull forward in the first quarter, and we said we were going to see that normalize and come back in the second quarter. So that definitely was part of it. And I really think part of it is the strength of the product. I think there's about 17 new collections. Clearly, if the housing market is strong, it's going to be just positive across the board for any of the home businesses. But as you may recall, we work really hard to diversify the merchandising portfolio to allow for greater breadth of products across price points, indoor, not just outdoor, so we would be able to balance the business regardless of what was happening in the marketplace.

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

Okay. And then switching gears on the share repurchase. You guys are within $1.5 million or so, I guess, based on what you said post-quarter that you've done of the $10 million authorization. Can you talk to us about how you see the share repurchase in terms of the timing for that $10 million authorization to be potentially addressed and, just generally, what you think are the merits and demerits of going that $10 million, particularly as it relates to your largest shareholder, Liberty, whether there's any inputs there or things you think about there relative to Liberty?

Mindy F. Grossman

So in terms of our capital structure, in general, we continually look at our share repurchase program and our dividend program with our board on an ongoing basis, and we'll continue to do so. We are aware that we're getting closer to utilizing our share repurchase program and we'll continue to address that with our board on a go forward basis, as well as our cash dividends and other options as well. So -- and, again, I think that we've articulated this before. We don't look at something just in the view of the lens of one particular shareholder but what's in the best view of all of our shareholders, and we'll continue to do so.

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

But it sounds like you've been -- you like the share repurchase program. So there's no reason to think that your favorable view of share repurchase is changing at this point.

Mindy F. Grossman

We've been very pleased with our share repurchase to date, and we'll continue to evaluate that in the context of everything else in our strategic initiatives with the board.

Operator

Our next question comes from the line of Matthew Harrigan from Wunderlich Securities.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

I was interested in HGTV venture. I mean, obviously, for years, people have talked about EBIF and interactive TV and just how it changes the template for transactional activity on traditional TV. Are you very involved in that with them? I mean, how does -- is there any commentary on how that affects your model? And then secondly, in a lot of the European luxury houses, in particular -- I think I asked you this at your Analyst Meeting in Florida, have been much more active engaging in-house media directors for long-form programming, event programming and all that. I know that's kind of isolated to a few very recognizable brands like Burberry and all that. But do you see that as an opportunity and an issue for you, just a testimonial to the efficacy of your business model?

Mindy F. Grossman

Okay. So you were talking about HD TV as opposed to what we were talking about...

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

There's something called EBIF, which Enhanced Binary Interactive Format, for TV, and basically, just think of it as interactive TV. It enables a lot of transactional activity...

Mindy F. Grossman

No, no, no.

Judy A. Schmeling

We know that.

Mindy F. Grossman

We're confused. You were talking about HD TV. Well, I'm sorry, we didn't understand the first part...

Judy A. Schmeling

I thought you were saying HD TV.

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

I'm sorry. Maybe I'm slurring my words.

Mindy F. Grossman

Are you talking about Home and Garden Television or...

Matthew J. Harrigan - Wunderlich Securities Inc., Research Division

Yes, exactly, what you're doing with Scripps.

Mindy F. Grossman

Okay. That's what I thought. All right. Our partnership with HGTV was obviously just launched this year. We have a lot of plans with them going forward. So for this year, they were really the halo over our outdoor and lawn and garden business at HSN. So it's HGTV Presents. Next year, we will actually have a full portfolio of products under the HGTV and branded HGTV, and we will be working with them to how to market those products using both their air, as well as hours. And coming up, you'll actually see violators actually on the HGTV network talking to HGTV on HSN, and there's a lot more plans for that going forward. So we see it being very interactive. Now as far as what you were talking about in terms of, let's call it, live programming, we definitely believe that digital content is going to be a very key cornerstone of what we continue to do. And whether that's content that we're creating on our site that's digitally digestible or content that we're creating potentially from our live music events and that content could potentially live somewhere else, you're going to see a lot of content focus from us, not just the live TV content.

Operator

Our next question comes from the line of Victor Anthony from Topeka Capital Markets.

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

A question on your partnerships, which seems to me to be a key differentiated aspect of your strategy. So are there figures you could share on a number of customers that are driven by HSN -- to HSN by the partnerships? And how are these customers different from your existing or your core customer base? And also, maybe you can give us a sense of what the upcoming partnership with Disney will entail.

Mindy F. Grossman

Okay. We don't split out specifically the number of customers through partnerships, but what I can talk to is the strategy around why the partnerships and why the alignment. So if you look at specifically the ones that we've talked about most recently, Coca-Cola, Toyota, Norwegian Cruise Line and Disney, particularly on the movie side, we really feel that partnering with great brands, you have a very broad constituency, which definitely has segments that would appeal and look like, let's call it, the customer we have that may not know about us or may not understand what we do. So with Coca-Cola, how do we get exposure to their Coke Rewards loyalty members or their Facebook fans? Toyota, how do we get exposure on their homepage driving to us, which we know brings in a lot of new viewership and potential customers to HSN? And then Norwegian Cruise Line, we know enough about our customer to know that she's 2x to 3x more likely to actually cruise, so we know that there's affinity base right there. And so we're very strategic about those partnerships, and we are looking to build longer-term sustainable partnerships. So all of these are ongoing. As far as Disney goes, we do have a partnership with them. As you know, we did Oz The Great and Powerful. And we do have future commitments to partner with them on their next big releases, but they haven't been announced yet.

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

Okay. Just a follow-up on -- in your prepared remarks, you -- on social media, you mentioned Pinterest, as well as Twitter. You did not mention Facebook. I was -- just wanted to get a sense of how you view Facebook as a marketing channel.

Mindy F. Grossman

Facebook is a terrific marketing channel. I mean, we currently, I think, at HSN have about 800,000 Facebook fans. We use it very much as an engagement tool. We don't measure numbers as much as we really do measure engagement because we think that's the important metric there, and we have definitely seen significant and continued engagement through Facebook. So we're very specific in how we use each one of these social platforms. It's not a peanut butter approach. They're very specific to what we're doing. We did a big Pinterest campaign with Oz The Great and Powerful, as well as with our home brands, and it's a very strong traffic driver as well. So they've all been very strong across all our brands.

Operator

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

Mindy F. Grossman

Well, thank you. As I said, we're pleased with our performance in the quarter and look forward to continue to update you on our progress on all fronts. Thank you.

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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Source: HSN Management Discusses Q2 2013 Results - Earnings Call Transcript
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