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ValueVision Media (NASDAQ:VVTV)

Q2 2013 Earnings Call

August 21, 2013 4:30 pm ET

Executives

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

Keith R. Stewart - Chief Executive Officer, Director, Chief Executive Officer of Shopnbc, President of Shopnbc and Director of Shopnbc

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

G. Robert Ayd - President

Carol Steinberg - Chief Operating Officer

Analysts

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

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

Operator

Good afternoon, and welcome to the ValueVision Media Fiscal 2013 Second Quarter Conference Call. [Operator Instructions] Today's call is being recorded for instant replay. I would now like to turn the call over to Teresa Dery, Senior Vice President and General Counsel at ValueVision. You may begin.

Teresa Dery

Thank you, operator, and good afternoon. I'm joined today by Keith Stewart, CEO; Bill McGrath, EVP and CFO; Bob Ayd, President; Carol Steinberg, COO; and other members of the senior management team. Comments on today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by words such as anticipate, believe, estimate, expect, intend, predict, hope or similar expressions. Listeners are cautioned that these forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such statements. More detailed information about these risks and uncertainties and related cautionary statements is contained in ValueVision's SEC filings.

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

Keith R. Stewart

Thanks, Teresa, and thank you, all, for joining us today. With the major elements of our business turnaround behind us, our team has been focusing their full attention and further improvements to what is now a solid operational base. Our second quarter performance demonstrated continued progress on 2 principal fronts and confirmed that our growth strategies are working. Our first area of focus is, of course, driving top and bottom line growth. We made further strides in growing revenue and with initiatives geared at building a broader customer base. We also delivered a solid year-over-year improvement in adjusted EBITDA, which represented our fifth consecutive quarter of positive adjusted EBITDA. The second major area of focus has been to attract and retain customers in order to improve customer penetration within our national footprint. Our strategies to achieve these goals are centered on 3 primary areas: One, diversifying our merchandise mix by increasing the breadth and depth of products and emerging categories, like Home & Consumer Electronics, Health & Beauty and Fashion & Accessories. To support this strategy, we are reallocating resources from our more established Jewelry & Watch category to these emerging product categories.

Bob will speak to this initiative and its performance later in the call. Two, investing in a range of customer-centric programs to enhance the customer experience, increase customer satisfaction and improve the likelihood they will shop with us again. Carol will speak about some of these efforts. And three, enhancing our TV distribution footprint through improved channel placement and the addition of a second channel of exposure, which we've accomplished in over 70% of our homes. Viewers and customers are responding to our initiatives. They are coming to us in greater numbers and voting with their wallets. Over the last 12 months, our total customer base rose 11% to 1.2 million.

More specifically, our total customer base in Q2 increased 22%. And our new customer growth increased 26% versus last year. We believe current trends indicate that more than 1/4 of the new customers will repurchase with us in the next 90 days. Our continued progress has brought us to the point where we're able to take control of our consumer brand. As we announced last quarter, and Carol will discuss, we are actively transitioning our consumer brand to ShopHQ, your shopping headquarters. The transition process is planned to accelerate in visibility over the remainder of the fiscal year.

In summary, we are past the turnaround phase of our company and are now focused on delivering long-term sustained growth. With that, I'll turn the call over to Bill.

William J. McGrath

Thanks, Keith. Second quarter net sales rose 10% to $149 million and year-to-date net sales are $300 million, also up 10% versus last year. Gross profit in Q2 increased 8% to $56 million on higher sales volume. Gross margin decreased 70 basis points to 37.5%. The margin decrease reflects the planned shift in our merchandise mix towards Home & Consumer Electronics. This category is integral to our strategy of increasing customer counts, but can carry lower margin rates. We anticipate continued growth in Home & Consumer Electronics during the third and fourth quarters. During Q2, average selling price declined to $83 versus $102 in the same period last year. This reflects strong growth in our Fashion & Accessories category, which typically has a lower average selling price, as well as a general shift towards lower price points in our other categories. Second quarter operating expenses increased 1% to $56 million and decreased as a percentage of sales to 37.6% compared to 40.8% last year. Variable cost in Q2 increased to 8.3% of sales from 7.1%, principally reflecting a 31% increase in net shipped units. We anticipate variable cost, as a percentage of sales, will be between 8% and 8.5% over the remainder of the fiscal year. Within variable cost, on a rate basis, transaction cost decreased to $2.49 per unit in the second quarter from $2.69 a unit a year ago.

Cable and satellite TV distribution expense declined relative to Q2 last year, reflecting lower rates on renewed distribution agreements that were effective January 1 of this year. The primary rate reduction was our largest TV distribution agreement. On an annual basis, the rate savings from this distribution agreement is around $15 million. Improving the quality of our TV distribution platform is integral to our growth strategy. We will continue to seek lower channel positions in markets that have higher potential for improved long-term revenue performance. The impact of such changes could increase our TV distribution cost over the second half of the fiscal year, in the range of $750,000 to $1 million per quarter. As mentioned on previous calls, we continue to invest in improving our organization to support the long-term sustained growth of our business.

Operating expense growth in Q2 reflects increased salary expense and recruiting cost, accruals for incentive compensation, as well as employee benefit enhancements. During the second quarter, we incurred incremental expense of approximately $500,000 relative to the rebranding initiative announced last quarter. We anticipate rebranding expenses of approximately $700,000 during the second half of the fiscal year. Adjusted EBITDA improved to $3.8 million in Q2 2013, from $700,000 in Q2 last year due to sales and gross profit growth. Year-to-date adjusted EBITDA is $9.6 million, a $9.8 million increase over last year.

ValueVision recorded a Q2 net loss of $800,000 or $0.02 a share, versus a net loss of $3.8 million or $0.08 a share for the same quarter last year. Year-to-date net income is $200,000. Per share figures are based on 49.4 million shares outstanding in Q2 2013 and 48.9 million shares outstanding in Q2 2012. Our balance sheet condition remained strong in Q2. At the end of the quarter, with a cash balance including restricted cash of $34.5 million, major cash expenditures in the quarter included the final payment under our trademark license agreement with NBC Universal of $2.8 million, as well as $2.5 million in capital expenditures.

ValueVision continues to maintain $12 million in undrawn availability under its $50 million credit facility with PNC. This availability further strengthens our balance sheet condition. I'll now turn the call over to Bob.

G. Robert Ayd

Thank you, Bill. With a continued focus on delivering long-term sustained growth, our business performed very well in the second quarter. We continue to execute the strategy of reallocating our resources and expanding our merchandising categories to better support customer growth and repeat purchase activity.

At the category level, Fashion & Accessories delivered strong and balanced growth in Q2. Handbag, shoes and apparel all achieved solid performance. Home & Consumer Electronics also made a significant contribution to our top line in Q2. Strong sales in household and kitchen electrics, as well as a solid performance in tablets and peripherals, drove the improvement. We also continued to broaden our product assortment in this category, which included the introduction of smartphones through a new relationship with T-Mobile. Jewelry & Watches performed well in Q2. As part of our strategy to reallocate resources to our emerging categories, sales performance in Jewelry & Watches declined modestly as expected.

Finally, over the course of the fiscal year, we plan to expand and invest in our merchandise and broadcast teams. Strengthening our organization and enhancing our broadcast delivery will allow us to further surprise and delight the customer with an ever-broadening product assortment. Carol?

Carol Steinberg

Thanks, Bob. I'm pleased to say that the introduction last quarter of our new consumer brand, ShopHQ, has been very well received. A recent survey of our customers indicates that over 71% are aware of the brand transition and over 85% are comfortable with the change. Our operational transition to ShopHQ is going better than expected. As a result, in September, we plan to increase the visibility of the new ShopHQ brand across all of our channels while diminishing the presence of the ShopNBC brand over the remaining fiscal year. The net result for our company and shareholders is that we are actively in control of our brand and are now creating brand equity.

Customer metrics in Q2, relative to acquisition and retention, continued to improve. During the second quarter, we continued a positive trend in purchase frequency at every grouping of our customer base. Customer engagement in Q2, across our online channels of Internet, smartphone and tablet devices, remained strong. Mobile is becoming a preferred channel for our customers as evidenced by mobile net sales growth of 56% in Q2 '13, increasing to 23% of Internet sales compared to 16% in Q2 '12.

In response to our customer preferences, we have remained focused on our mobile, more specifically, tablet strategy. During Q3, we expect to launch an all-new ShopHQ iPad app, which will provide the live stream of our broadcast, compelling content and access to enhanced transactional experiences. Following the launch, we plan to add second screen functionality to enhance the TV viewers' experience by providing real-time, integrated content, which is relevant and synchronized to each of our TV shows. The wide variety of content, relative to the TV show, enhances but does not duplicate what is used during the show. Our complementary second screen will further engage our customers and enhance their experience with ShopHQ.

Second quarter customer experience improvements included the launch of a new single-page checkout capability on our website, resulting in increased conversion rates. We also improved our order-processing capabilities, ultimately reducing the time between placing an order and receipt by the customer. Our customers are proving to be very receptive to these service level changes.

In conclusion, it's an exciting time in our company's history, particularly as we are now able to clearly see the benefits of the initiatives we have been implementing over the past several quarters. Our rebranding is proceeding smoothly; our focus on the customer remains high; our drive to continually improve our mobile strategy remains strong; and we remain committed to delivering an immersive, media-rich customer experience while developing an enhanced comprehensive CRM strategy to drive our business for long-term sustained growth.

With that, operator, please open the line for questions.

Question-and-Answer Session

Operator

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

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

I just wanted to -- maybe Carol or Keith, could you talk a little bit more about your mobile strategy in your customer engagement? That's clearly a phenomenal turning point for you guys in this transition. I'm just wondering what your experience has been in this area. Any specific metrics you can point to? And kind of, what are you doing to further support what's clearly an avenue of growth? And then I'll have a follow-up.

Carol Steinberg

Well, as you heard on the call, our mobile sales this quarter increased 56% from last year. It increased to 23% of our Internet sales compared to 16% last year. So what we are offering the customer in terms of mobile is resonating. I would say that there is especially a lot of resonance with our tablet features and functionality that we have offered to our customers. And we expect this to continue as in September -- September, October timeframe, we'll be releasing our all-new ShopHQ tablet app for the iPad. And shortly after that, we're going to be launching a second screen functionality, which is a companion to somebody watching the broadcast, and we'll give them all kinds of related content to the show that they're watching, and it will change every hour as we put on a new show. We expect that, that will greatly enhance the experience for somebody watching the show, or for somebody just wanting to find out more about the brand and the products, all in 1 place. We'll have a lot of content in terms of video, brand positioning, feeds that will allow a customer to ask questions of a show host, will be able to ask their friends and other ShopHQ customers what they think about the product. And again, we're expecting this to really resonate with our customers. We're really excited about this. So we'll be seeing that probably during Q3 this year.

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

Great. That's helpful. And then Keith, could you talk a little bit about your customer accounts? Those are some staggering statistics that you just put out there about the Q2 trends. Just wondering kind of what are you doing to kind of influence these customer accounts, and how are you retaining them? And it sounds like the repurchase rate is pretty high. Is that where some of the enthusiasm on the top line is coming from here?

Keith R. Stewart

Yes. I'll start it off and then I'll turn it over to Carol. The -- there's 2 primary things that have increased the customer accounts. First of which, Bob commented on, and that's the improvement of the product mix. As we continue to increase the penetration of Home and CE, Fashion & Accessories, Health & Beauty, really non-Jewelry and non-Watch product categories, our new customer accounts are skyrocketing, as you can see within the quarter. These accounts, as I mentioned, are going to speak well for Q3 sales and Q4 sales. The other element, which I'll turn over to Carol to speak about, is the improved customer service. The improved customer service amongst other initiatives are increasing the -- improving our retention rates. So as we continue to hang on to more customers, as we continue to add more customers, it's the secret sauce to growing the overall file and therefore, the overall business.

Carol Steinberg

And to the customer experience initiatives that Keith was referring to, I'll just throw out a few of them, but you'll immediately see why this is important to the customer, and why these improvements keep the customers with us and have brought our retention rate up to 52% and growing. So a few examples are, we recently completed the 1-page checkout across all of our automated ordering channels, and the last one that we did was on the HTML Internet site, reducing from several pages to a 1-page experience. This, in the last quarter alone, reduced core abandonment rate by 560 basis points. So...

Keith R. Stewart

That increased conversion rate.

Carol Steinberg

Yes, it increases conversion, and the people are not bailing out in the middle of making a purchase, really important. We've reduced the amount of time it takes between a customer placing an order and when they receive their product, very important. What that also does is it reduces the number of calls that we get into customer service, asking for information on their order status or their shipping status. So in regard to that, we have been able to reduce our call resolution time, or the amount of calls to resolve a problem, from 1.5 calls down to -- per customer, to 1.2 calls per customer, which is huge. And then lastly, we have decreased our transaction cost as a result of a lot of these experience initiatives, from $2.69 last year to $2.49 per unit. And net-net, our customer purchase frequency over the last rolling 12 months for our 1.2 million customers, actually, the frequency has increased by 3.5% and over 1.2 million customers, that's pretty significant.

Operator

And your next question comes from the line of Greg McKinley from Dougherty.

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

Bob, could you talk a little bit about productivity trends as you guys have tested different merchandise mix? Was there anything that stood out in particular with either new or some of the old categories in terms of how much gross profit dollars you're able to generate per minute?

G. Robert Ayd

Greg, it's Bob. I could tell you that in terms of our productivity, I was very pleased with productivity growth across almost all of the categories that we had. Clearly, Home & Computer Electronics, in terms of revenue growth, was excellent. Beauty, Health, Fitness, Fashion showed very, very strong double-digit productivity growth, as did Jewelry & Watches, showed strong productivity growth. The dollars per minute is a reflection of the margins and our margins haven't changed that much in the last few quarters. So generally, I was very, very pleased. I'm more concerned, as you know, about investing, airtime and our assets, into categories that can drive new customer growth. And I think, with the new customer growth of 26%, we're very, very pleased. We were able to generate high new customer growth and double-digit revenue growth. So I think that's where we wanted to be.

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

And then, Bill, you called out some rebranding expenses. I'm wondering if you could just repeat what those were, and then help us understand maybe where they show up in your P&L? And what the anticipated expense will be going forward, just so we can understand maybe what a pro forma operating expense structure is for the company after we get through the rebranding?

William J. McGrath

Sure, Greg. Within the quarter, the second quarter, we had about $500,000 in rebranding expenses. And broadly, in terms of the categories that, that represents, it's some outside agency fees, but it's largely IT and other investments that we're making in terms of facilitating the transition to the new logo. In the second half of the year, we'll have about $700,000 in similar expenses, and that's going to be roughly ratable in the third and fourth quarter.

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

And where are those showing up? Is that part of G&A?

William J. McGrath

Yes, in fact, it is a component of the G&A expense, yes.

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

Okay. And so is it accurate to say that once we get through this fourth fiscal quarter, are those recurring costs, or those sort of one-and-done expenses?

William J. McGrath

No, that component of cost, Greg, would be done at the end of this fourth quarter. So once we are fully transitioned to the new brands within the fourth quarter, those related costs would not be part of our ongoing cost structure.

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

Okay. Just -- did we incur much of those in Q1?

William J. McGrath

A very small amount, about $100,000.

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

Okay. So -- and then you'd also -- I just wanted to understand it. It sounds like you're having a lot of success driving customer growth, and companies, as it's seeing that growth opportunity, the company is probably stepping up some investment back into the business. Maybe you feel like you were under-invested, would be my, I guess, my perception over the last year or so as you turned around the top line. How are you looking at your, I guess, your G&A cost structure in terms of what kind of headcount or talent you need to bring into the business to continue supporting that growth? Do you feel like you have most of the key people in place right now? And then, I guess, the second part is, Bill, it sounds like variable costs within distribution and selling might be a little bit higher than was the case last year. And I just want to better understand that.

Keith R. Stewart

That's a really good call-out. Greg, we've really been under-invested in the infrastructure and the people for over a decade. And we're fortunately in a position this year, and certainly more next year, to start reinvesting into the infrastructure. Carol cited a few of the examples, and I, too, am very excited about the second screen because that will create further engagement, certainly, further sales that are incremental to what our plan happens to be. As far as the headcount, we are relatively skinny. We're talking about 400 fixed employees, and roughly 600 temporary employees. We will be growing that slightly greater than inflation. We'll be focused on revenue-generating areas first. We'll be looking at dot-com, certainly, a merchandising part of our planning organization; marketing, as we start to build out some of the magazine-like content that we're going to be posting on our Web and our Home channel. So we've got a lot of work up ahead of us to do, but it's a very exciting future.

William J. McGrath

And Greg, on the variable expenses, it reflects a similar theme of investing in the business. Bob had described the direction that you saw in Q2 relative to prior year in terms of shifting the airtime assets of the business into Fashion & Accessories and the Home & Consumer Electronics categories. And also, broadly across the business segments, we had, by virtue of our merchandise selection, lower price points in aggregate. We were at $83 average selling price within this quarter, a year ago at $103. So translating that with the top line growth, we shipped 31% more units than we did in the year-ago quarter. And as a result of that, the transaction cost -- our transaction cost themselves per unit were more efficient, but variable expenses on an overall basis increased. We were at 7.1% a year ago, I think about 8.3% in the current quarter. And in terms of thinking about the expense structure going forward, that product mix direction, we're going to continue to maintain. And that average selling price, I think, is going to remain in that $80 level. So as a result, our expectations are that variable costs in aggregate are probably going to be in that range. I'd say, 8% to 8.5% of sales, as you look out for the remainder of the year.

Keith R. Stewart

And to put variable expenses and context, as Bill had mentioned, the units went up 31%, but our operating expenses only went up 1%. And so it's certainly leveragable.

Operator

And I'd like to thank you all for joining us today. And with that, we will conclude the call today.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, and you may now disconnect. Have a wonderful day.

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