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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

Thomas Forte - Telsey Advisory Group LLC

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Barton E. Crockett - FBR Capital Markets & Co., Research Division

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

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

HSN (HSNI) Q3 2013 Earnings Call November 6, 2013 9:00 AM ET

Operator

Ladies and gentlemen, good morning, and welcome to the HSN, Inc. Third Quarter 2013 Earnings Conference Call and Webcast. This call is being recorded for future play if needed. 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

Good morning, 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 statement.

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. Our performance in the third quarter reflected our ability to leverage a diverse portfolio of direct-to-consumer brands, particularly in an environment where the consumer was gravitating to specific product categories. Our highlights included a strong growth in our customer file; digital sales growth of 8% with penetration up 230 basis points, contributing to overall net sales growth of 3%; adjusted earnings per share growth of 19% to $0.70 per share; and we returned value to shareholders, including a 39% increase in our quarterly dividend just announced this morning in addition to our ongoing share repurchase program.

At HSN, sales were relatively unchanged at $539 million. We had sales growth in home design, household and beauty. Sales were down in jewelry, apparel and accessories and culinary. As we stated on the last earnings call, we are in a process of repositioning our jewelry and culinary businesses. Apparel, in general, continues to be challenged similar to what is occurring in the broader retail market. Digital sales at HSN grew 7%, with digital sales penetration up 220 basis points to 37%. We continue to identify opportunities to optimize hsn.com, following the launch of our extensive digital site redesign earlier this year.

HSN's units shipped increased 3%, reflecting our focused efforts to drive customer growth, resulting in a 5% increase in customer file. HSN's price point decreased 5%, primarily as a result of 3 factors: Strategically utilizing compelling price points drive new customer acquisitions, the price point compression in consumer electronics and the actions we are taking to reposition our culinary business that I just mentioned.

Our return rate improved 180 basis points due to the product mix shift to categories with lower returns, as well as lower return rates within many product categories overall. HSN's gross profit decreased 3% to $186 million. Gross profit margin decreased 110 basis points to 34.6%, largely due to product mix shift and increased promotional activity, including clearance in culinary and jewelry due to our product repositioning. HSN's inventory levels are down 10% compared to September 2012.

Operating expenses, excluding noncash charges, were down 4% to $129 million, and improved 110 basis points as a percent of sales. Operating expenses decreased primarily due the timing of certain marketing events and lower bad debt expense related to FlexPay. During the quarter, we restructured our business by consolidating resources in several areas. We eliminated approximately 60 positions at HSN, and incurred severance-related costs of these actions. We continually review our organizational structure to ensure we are aligning our investment in talent against our biggest opportunity. HSN's adjusted EBITDA grew 1% to $57 million in the third quarter. While we experienced a challenging sales and gross profit quarter at HSN, we are pleased with our focus on containing operating costs and our strong inventory management.

Turning now to Cornerstone. Sales in the second quarter increased 8% to $260 million, and digital sales grew 10%, representing 110 -- 100-basis-point increase in digital penetration to 67%, with every brand increasing its digital penetration. The home segment drove Cornerstone's performance led by Frontgate, Grandin Road and Ballard Designs. The outdoor business was exceptionally strong in the third quarter for both Frontgate and Ballard. Grandin Road had particular success in seasonal decor, which included a unique Halloween product assortment. Gross profit increased 9% to $102 million, with gross profit margin increasing 50 basis points to 39.3%. This improvement was largely driven by higher product margins.

Operating expenses, excluding noncash charges and a $7.8 million sales tax settlement in the prior year, increased 8% to $85 million, and were relatively unchanged as a percent of sales. The increase in expenses was related to higher catalog and page count circulation at certain brands, including Grandin Road and Ballard Designs. Cornerstone's adjusted EBITDA grew 16% to $17 million. Cornerstone's operating income was $13 million, compared to $2 million the prior quarter, an increase of $11 million or 477%. The significant improvement in operating income was due to the increase in EBITDA and the prior quarter's sales tax settlement of $8 million.

HSNi's GAAP net income increased 140% to $42 million, compared to $18 million in the prior year. There were several significant items that impacted the comparative results, including $18 million of bond redemption costs, an $8 million sales tax settlement last year, as well as $4 million of discrete tax benefits recognized in the current quarter. Excluding these items, HSNi's adjusted net income increased 13% to $38 million, compared to $34 million last year. As a result of the discrete tax benefits, HSNi's effective tax rate was 29% for the third quarter, compared to 36% last year. Excluding the impact of these benefits, our third quarter effective tax rate would have been 36%, and we expect our annual 2013 effective tax rate will remain approximately 36%.

At HSNi, we continue to drive shareholder value through our share repurchase and cash dividend programs. In the third quarter, we repurchased almost 400,000 shares. Year-to-date through yesterday's stock market close, we have repurchased approximately 2.7 million shares. Additionally, effective today, as I mentioned earlier, our board approved a 39% increase in our quarterly cash dividend to $0.25 per share, payable December 18 to shareholders of record as of December 4. This dividend increase demonstrates our continued confidence in HSNi's long-term growth and cash generation.

While changes in consumer demand for certain product categories, as well as our product repositioning has certainly impacted our results this quarter, we believe that we have a strong assortment of products and a variety of promotions that position us well for the upcoming holiday season. We'll maintain our focus of driving profitable growth, expanding our digital presence and strategically investing for the future, while continuing to pursue our balanced approach of returning value to shareholders.

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

Mindy F. Grossman

Thank you, Judy. Good morning, everyone. At HSNi, we've built a powerful portfolio of brands and products that appeal to diverse customer demographics. This approach enables us to capitalize on consumer trends, manage marketplace dynamics and position the company for long-term success. During the third quarter, in particular, we saw a divergence across our portfolio similar to the overall marketplace, including strength in home-related categories and beauty, challenges in women's apparel and price point compression in consumer electronics. We demonstrated resiliency as we managed through these sensitivities in the quarter with record customer levels at HSNi, increased digital penetration of 230 basis points and adjusted EPS growth of 19%. We also continue to be at the forefront of digital, with mobile now representing 12% of our total business. Our strategic focus at HSNi remains consistent: Engage customers by leveraging our direct-to-consumer reach; our exclusive content; our strong digital platform; and our unique ability to create immersive retail experiences, all while building on the synergies between HSN and the Cornerstone brand.

Turning now to HSN. We articulated on our last earnings call that we were taking specific steps to repositioning our jewelry and culinary businesses. These actions did have short-term implications on our third quarter performance. However, we did have strong performance in several key categories, including home decor, home solutions and beauty. Once again, our intense focus on the customer resulted in record customer numbers, and we finished the third quarter with the largest customer file on record. In addition, new customers reached the highest level in 5 years, and our retention rate was the best in recent history. Our biggest customer acquisition increases came through digital, including mobile, with digital accounting for nearly half of the new customers we added in the quarter. Thus, customers continued to increase, up 7%.

Currently, nearly 30% of HSN's sales are now placed on our exclusive HSN credit card, which has driven high levels of loyalty and assimilation. We build long-term relationships with our customers by creating unique experiences and integrating entertainment with retail congress. When I spoke at the World Retail Congress in Paris last month, I was honored to accept the Customer Loyalty Initiative of the Year Award on behalf of HSN, recognizing HSN for building and maintaining customer loyalty through our entertainment partnership with Disney for Oz the Great and Powerful and the ongoing evolution of HSN's Arcade to fully integrate gamification into our e-commerce platform.

We continue to optimize our comprehensive digital experience, which contributed to HSN's digital sales growth of 7%, with digital penetration up 220 basis points to 37%, and a double-digit increase in unique visitor traffic over the prior year. Our mobile performance was strong during the quarter, with mobile sales up 50% compared to last year. By mid-September, we had eclipsed total mobile sales for all of 2012, with mobile penetration reaching nearly 12%. Mobile is also a large part of our customer acquisition effort, with 22% of mobile purchasers in 2013 new to HSN. Our efforts to continually enhance the HSN mobile experience are getting recognized. HSN was just ranked 9th in the 2014 Internet Retailer Mobile 500 Index, compared to 14th last year.

We continue to extend and deepen our relationship with the customer through social media. We now have over 1 million fans on Facebook, and had notable increases in Instagram and Google+ fans during the quarter, with engagement metrics increasing as well. In August, HSN Live from the Venetian Hotel in Las Vegas featured Earth, Wind and Fire, which had the highest community growth and engagement for any concert to date. HSN Arcade, our unique gaming portal, has had more than 160 million game plays, including nearly 20 million during third quarter. There are now over 800,000 Arcade members, and more than 17 million entries have been submitted for chances to win prizes in the reward store, once again, reflecting a heightened level of consumer engagement.

Our partnerships and collaborations are another important part of our customer engagement strategy, and during the quarter, Toyota once again partnered with HSN, this time to launch the new 2014 Tundra and Corolla models. We had the highest customer response to date, with 67,000 information packets redeemed. Hsn.com hosted an interactive page to complement the on-air shows, with expanded content, including videos, polls and tips for buying a new car. The digital experience extended across platforms to mobile and tablet as well.

And now I'd like to discuss the performance of HSN's key product categories during the quarter. In home design, the quarter was driven by textiles, storage and organization. This category also had a successful NFL launch to kick off the football season. Household saw success with solutions-oriented household products. And in the beauty category, we continued to emphasize new innovation and technology, with both existing products and new launches. The recently expanded beauty report with Amy Morrison has been a key contributor to this category's success. The Beauty Report is an important launch path for new and innovative products and will be expanded to all our digital platforms.

In consumer electronics, we continue to see strong growth in mobile and accessories, offset by declines in computers, televisions and digital imaging. This product mix shift resulted in lower price point but higher unit volume. Our innovation event, anchored by Samsung, provided insight into what resonates with the customer, which we are capitalizing on for the holiday season. Although the marketplace continues to experience price compression and product mix shifts, we expect it to moderate for our business in the fourth quarter.

As I mentioned earlier, we are focusing and repositioning our jewelry and culinary businesses for long-term success. In jewelry, we are expanding the variety of the collections and maximizing airtime effectiveness. In culinary, we are leveraging the success of our key chefs, while introducing new premier chefs to the portfolio. This portfolio adjustment included strategically exiting certain brands, while building on the success of some of our key chefs, notably Wolfgang Puck and Curtis Stone. During the third quarter, we successfully launched Ming Tsai, who had a sellout debut, and was the best chef brand launch in recent history. We also introduced Donatella Arpaia and Ingrid Hoffmann, and are launching new chefs, including Lorena Garcia during the fourth quarter. This new portfolio, which we will be expanding, reflects the diversity of our customer base and the strong appeal of ethnic cuisines.

Similar to the overall marketplace, we experienced some pressure in the apparel category in the quarter. However, we also saw success in key designer launches, which is Hal Rubenstein, Betsey Johnson and David Meister. And just last week, HSN had the successful launch of the exclusive N Natori by Josie Natori Collection. We will be expanding these brands in 2014.

Finally, as Judy mentioned, we took another step in our strategic reorganization, restructuring some areas to be able to invest in other critical areas, such as digital, data analytics and marketing. As we discussed throughout the year, the changes that we've made in operations, finance, marketing, digital, and new business development, as well as strategic investments across HSNi, HSN and Cornerstone, are focused on efficiency, leverage and growth potential.

Turning now to Cornerstone. Driven by growth in the home brands, Cornerstone sales increased 8% in the third quarter, and EBITDA increased 17%. We saw a particularly strong performance from Frontgate, Grandin Road and Ballard Designs. Frontgate and Grandin Road's strength came from outdoor home and seasonal decor, particularly Halloween. Ballard Designs' success was the result of its ongoing emphasis on expanding the outdoor category and transitioning to fresh new products in the indoor segment.

Cornerstone's digital performance was strong during the quarter, with traction across all digital platforms. Digital sales grew 10% and penetration increased 100 basis points to 67%. Our mobile business grew 70%, with mobile penetration now over 12%. Frontgate and Grandin Road launched 2 additional digital lookbooks optimized for both iPad and desktop. These lookbooks strongly convey the inspirational emotion of the Frontgate collections, and allowed customers to share the photos on their social networks, create favorites lists and make purchases. Grandin Road launched the new Buy the Scene feature that gives customers the ability to more easily decorate their home by purchasing a complete motif.

Looking ahead at HSNi, notwithstanding the consumer environment, we believe we are well positioned as we embark on the holiday season. We're planning a number of unique holiday events, some have which already begun. For the first time ever, HSNi is leveraging the cumulative power of our diverse portfolio of brands to launch its More The Merrier holiday campaign, which offers customers a curated assortment of highly giftable items at our online gift stores. At HSN, the campaign will also include a sweepstakes presented by Toyota, giving customers the chance to win an array of prices, including a Toyota Camry Hybrid. Customers can enter through HSN Arcade or via our other digital platforms.

We are also excited about these fourth quarter initiatives. We are focused on culinary. Last month, Wolfgang Puck had one of his biggest sales day ever, fueled by unique innovations in giftable products, and he will be back again throughout the quarter. As I previously mentioned, celebrity chef, Lorena Garcia, will debut a kitchenware collection to launch exclusively on HSN this November, in time for the holiday entertaining season. And to round out our culinary experience, we just launched the HSN wine cellar, powered by wine.com, a microsite with wines and gifts from around the world, including HSN exclusives.

As part of our continued emphasis on our entertainment integration strategy, a few days ago, 4-time Grammy Award winner, Keith Urban, had a sellout debut of his new URBAN Guitar Collection exclusively on HSN, an early sellout of more than 20,000 guitars. This marked the largest guitar premier in HSN's history. We have Randy Jackson coming back in December with his unique line of guitars, and we hope for similar success. Today in the HSN studio, Mary J. Blige is visiting us once again to perform seasonal favorites from her first-ever Christmas album. The production is sponsored by the Venetian Las Vegas. And as part of our gamification strategy of driving engagement and seamless integration across platforms, we're extending HSN Arcade to tablets and mobile devices. This gives customers more opportunities to visit anywhere, anytime. They can play games, win and redeem tickets on any screen. We'll also be adding the Arcade to our mobile apps in early '14.

HSN Care kicked off the holiday shopping season on October 15 with the return of our popular HSN heART Designer Ornament Collection, which features ornaments that -- specially designed by our partners. We will donate 100% of the profits from the sale of these ornaments to St. Jude Children's Research Hospital. We're proud that over the past 8 years, we've raised more than $7.5 million for this outstanding organization.

And now to Cornerstone. The brands are intensifying their gifting initiatives for the holiday season, including specific gifting catalogs from Frontgate and Grandin Road, a new holiday launch for the Suzanne Kasler line at Ballard Designs, and more than 70 new items in Garnet Hill's Our Gift To You promotion. Cornerstone is also embarking on brand awareness programs that drive incremental demand through magazine placements and digital placements in Lucky, Real Simple and InStyle. In addition, we recently launched the Frontgate Estate Wine Club, hosted by Laithwaites Wines. This natural extension of the Frontgate lifestyle has been very well received. There were 1,000 new members in the first few weeks after its launch.

Before taking your questions, I want to reiterate the importance of the strategic investments we are making in the business. We continue to explore opportunities that enable us to expand our demographic reach and leverage our unique blend of content and commerce. Our ongoing digital innovations extend and deepen our relationships with our customers, and strengthen our concept of boundaryless retail. And we continue to explore new and better ways to communicate with and serve our customer. It's all part of our mission to redefine retail and maximize the HSNi business.

And with that, love to take 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 have a question for Mindy and one for Judy, if I may. So first, Mindy, for you, can we get a little bit more into the product repositioning? I think you guys are on a good path here. But just wondering more specifically from a timing perspective, whether it's culinary or jewelry, when we should start to see some of those improvements in the numbers? I think you're hinting to it in the -- in your transcript, but I just want to get a sense of more specifically some initiatives on timing.

Mindy F. Grossman

Absolutely. This is really the big quarter of repositioning. So you should see, going forward and in the fourth quarter, improvement in those businesses, and as we said, moderation within the consumer electronics as well. So we feel good for how we are positioned in the fourth quarter.

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

That's helpful. And, Judy, in a related fashion, the inventory was down year-over-year. I think you mentioned it, but I don't know if we discussed exactly what is behind the declines here in the inventory. Could you break that down a little bit for us? And being down in inventory year-over-year, does that challenge your opportunity for upside in Q4? The holiday quarter...

Judy A. Schmeling

Okay. So good question, Neely. Let me answer those in -- for both businesses separately, because I did mention inventory being down for HSN. Inventory is actually up for Cornerstone. So we -- one of the reasons why our inventory is down, because we did really, over the past 2 quarters, really get our inventory lean and clean on the HSN side of the business. Earlier this year, we had mentioned the apparel and accessories that we were repositioning, and jewelry and culinary this quarter. So we feel really good about the content of our inventory going into the fourth quarter, and that it's very healthy. We do feel like we're positioned well, and bringing in more inventory for the fourth quarter to meet that demand. So I think part of that is timing, but we really wanted to be very strong going into the fourth quarter without having any hangover. So that's on the HSN side. On the Cornerstone side, our inventory is up. That's primarily up because we were having such a fantastic quarter, particularly at Frontgate, Grandin Road and Chasing Fireflies going into the Halloween season. And then we'll be shifting our inventory gears as those product mix shifts change from the outdoor to collectibles, seasonal types of stuff for the other businesses. So overall, we feel like we're in a -- we're positioned very well.

Operator

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

Thomas Forte - Telsey Advisory Group LLC

Just one question, one follow. Can you talk about your plans to use free shipping mailing promotions for both HSN and for the Cornerstone brands in the holidays? And how that will compare against last year, if you plan to do it more or less than last year?

Judy A. Schmeling

Sure. So for – are you talking about going into Q4 or for Q3, just to clarify?

Thomas Forte - Telsey Advisory Group LLC

Yes, for the holidays, for fourth quarter.

Judy A. Schmeling

For the holidays, okay. So we are planning similar promotions on the Cornerstone side that were very successful last year. We did have promotions on the Cornerstone side that weren't successful. We will continue to replicate those and adjust as appropriate. But right now, we feel good about our promotional cadence with those promotions, and don't anticipate any huge incremental promotions on top of that. On the HSN side, actually, our shipping and handling revenue increased this past quarter by about 3%, versus where we had been on a decline. Now we did have some incremental weight costs because some of those items were slightly heavier, but we feel that, that should be moderating somewhat in the fourth quarter, and similar to last year, but a little bit more moderation.

Thomas Forte - Telsey Advisory Group LLC

And then my second question, do you know if there's anything you can do to drive apparel sales? In the past, you've talked about the innovative work you've done with dresses on the HSN website. Do you have other initiatives like that at play that could help stimulate the apparel sales?

Mindy F. Grossman

Yes. We definitely had successes in certain areas in apparel, particularly as I mentioned with a number of the new brands that we launched. We continue to maximize dress shops, and look at our overall assortment. And as Judy mentioned, we're in very good shape from an inventory perspective in the quality of the assortments that we have in both apparel and accessories. One strong category has been footwear, and we'll look to maximize that throughout shoe shop, our boot salons and we're really going to go after specific categories where we're seeing strength.

Operator

Our next question comes from the line of Trisha Dill with Wells Fargo Securities.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Just wondering if you saw pronounced softness in September? Some other retailers have reported that maybe brought down results for the whole quarter at HSN, and if you then saw that tick back up in October.

Judy A. Schmeling

We saw some pullback in September. I wouldn't say it was substantial, but some. But that was primarily on the HSN side, not on the Cornerstone side.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

And then you mentioned strategically reducing prices to acquire new customers. How much did this impact gross margin at HSN versus just mix? And then if you could just provide a little more color on whether this is more of a philosophical change in strategy or just sort of a response to maybe some of the softer sales in particular categories?

Mindy F. Grossman

No. This is not a change in strategy at all. It's very consistent with what we've been articulating around investment in customer growth for future sales growth. And we've had very focused strategies. The only difference in this quarter was in culinary and jewelry in terms of some of that repositioning. But that was not part and parcel to the customer growth strategies that we've very specifically been articulating.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

And the impact gross margin, just given the second quarter of decline year-over-year at HSN? Is that just mostly mix?

Judy A. Schmeling

Yes, that was more of the mix shift versus the price point having an issue with it, other than on the clearance of culinary and jewelry, definitely impacted, but there was a mix shift as well. We expect that to moderate back in the fourth quarter, like I mentioned earlier.

Operator

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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

If I heard correctly, I think you're expecting less price compression in the consumer electronics? I just wanted to clarify that for the fourth quarter.

Judy A. Schmeling

Yes, in the fourth quarter.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Okay. And what gives you that optimism?

Mindy F. Grossman

Well, it was really last fourth quarter that you started seeing the bigger decline, and we feel we're really positioned with our assortment of products and categories in the fourth quarter year-on-year. So we don't see any further degradation.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

That's helpful. And as a kind of follow-up, just seguing into expenses. You mentioned that the quarter benefited from timing of certain marketing programs. I was hoping that you could quantify or give us a little bit, at least color on the extent of the shift of those marketing dollars. And also, just looking at the bad debt expenses, just wondering if you think this level is sustainable going forward?

Judy A. Schmeling

Sure. On the marketing expenses, some of them were just shifting from Q3 to Q4 with just timing some of those initiatives this year versus last year. We did continue to invest in our digital marketing. We'll probably continue to ramp that up in Q4 as well. So there is some element of that. Can't really quantify exactly on the phone call, but we feel good about where our expense level will be going forward. It won't be significantly down like it was in the third quarter, but overall, should be relatively moderate. On the FlexPay, we have continued to see lower bad debt expense. Part of that is going to be relative to the shift in mix with the lower price point, not having as much exposure out there on any individual items. Certainly, the continued mix shift without having computers and televisions, which have higher bad debt write-offs, are benefiting us. So those components we'll continue to see benefiting us on a go forward basis. You won't see quite the same improvement that we saw this quarter though, because there was a timing difference on just the accounting on accrual basis. Last year, we had booked it up slightly to where we were trending versus this year. So that was a little -- part of that is more of a timing basis.

Operator

Our next question comes from the line of Barton Crockett with FBR Capital.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Great. I wanted to ask about the cash returns. So you spent a little bit less this quarter, $21.9 million on share repurchase than you did the previous quarter, like $50 million. At the same time, you really increased your dividend. And I was just wondering, what drove your kind of preference now for dividend over share repurchase? I guess that's the first part of the question. And then kind of secondly, related to that, you have a large owner, obviously, Liberty Interactive, who has a history of kind of preferring share repurchase over dividend. I was just wondering if they've kind of endorsed your strategy here of pushing dividend over share repurchase?

Judy A. Schmeling

So we review our capital return plan to our shareholders every quarter with our board. And we, last year, at this time, we also increased our cash dividend at the September board meeting. This year, when we reviewed it again in September, the board said, based upon the continued cash flow that this business can generate, we believe that we should increase a substantial dividend to our shareholders. So we look at that in terms of all of our shareholders, and the board makes that decision. So this increase in our annual outflow from approximately $38 million to $53 million, so an increase of $15 million based on current shares outstanding, we feel that this is something that's a great benefit to all of our shareholders. We don't consult with anyone other than the board making that decision, and they have board representation as well. So I can't comment on what they think. In terms of the share repurchase program, we simply slowed down our share repurchase program based upon where our stock was trending, and are going to continue to be opportunistic on a go-forward basis. We weren't consciously favoring, saying we're going to do a dividend this quarter versus not. The dividend was related to an annual relook at our cash flow.

Operator

Our next question comes from the line of Ben Mogil with Stifel.

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

So on – you already got my question on capital returns. So maybe just a couple questions on the operational side. In terms of the lower return rate, Mindy, that I think -- or Judy, that you had mentioned, even within the category, forget about mix change, so even within the category, any sort of color you can give on what's driving that?

Judy A. Schmeling

Sure. So part of it is simply in addition to mix shift, you do have lower price points; generally, the lower the price point, the lower the return rate. So there's that impact as well. But in addition, I think that we continue to really monitor our product categories, which ones have higher return rates. What can we do to shift that? Working with our different partners if we see products that have higher return rate. So we have a very stringent quality review process. We have a feedback loop, and we have continued to refine that over the past couple of years. So I do believe there's just a multitude of things that are contributing to that. Mindy, is there anything else you want to add to that?

Mindy F. Grossman

Yes. We have had a maniacal focus on quality, consistency and price value. And we're definitely seeing the consumer response to that in the acceptance of their products when they get them home. They are what we say they are. We've also spent a lot of time pre any kind of airing of our products, that we're very consistent that the consumer understands exactly what they're getting. And I think that's had an impact as well.

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

Okay. Then sort of just a last question. We've seen gasoline prices kind of trend down pretty nicely in the month of October. Are you seeing any sort of uptick in sales that you -- I mean, I know it's always hard to attribute sales upticks to anything. But are you seeing sort of any kind of feedback loop on that front?

Mindy F. Grossman

Yes, we've seen improved performance in October and going into the quarter. I can't tell you that it's because of gas prices. I actually think it's because of our product offering and what we're doing, but having said that, anything that gives the customer more dollars in their pocket, we love.

Operator

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

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

Most of my questions were answered, so maybe I'll just ask for clarification, and for you, Mindy, on, I think you said 30% of sales were placed on exclusive credit cards.

Mindy F. Grossman

Yes.

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

I believe that's what you said. So if that was the case, maybe you could just tell me what the difference is in purchase patterns from consumers who use their credit cards to those who do not.

Mindy F. Grossman

Yes. So when we launched our private label credit card, a little over 5 years ago, we were very underpenetrated, and we also wanted to launch it as part of a loyalty program to really develop our best customers going forward. So we're at the highest penetration of private label credit card. And what we do see is those customers tend to buy more, more often, and definitely are in that loyal best customer status. So it definitely continues to be both an acquisition source for us and an assimilation source. And we've added VIP programs, separate customer portal for them to manage their purchases and their purchase history. So we definitely are continuing our work with ADS, and we're constantly going to be looking to grow that program.

Operator

There appear to be no further questions. I'll now turn the call back over to Ms. Grossman.

Mindy F. Grossman

Thank you, everyone. Thank you for being here this morning. We look forward to talking to you, and have a great holiday season.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a good day.

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