HSN's (HSNI) CEO Mindy Grossman on Q2 2014 Results - Earnings Call Transcript

 |  About: HSN, Inc. (HSNI)
by: SA Transcripts


Ladies and gentlemen, good morning, and welcome to the HSN, Inc. Second Quarter 2014 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's discussion, the HSNi team will be taking your questions. With that, I would 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, 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 first 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.

Also 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 turn the call over to Judy Schmeling, HSNi's COO and CFO. Judy?

Judy A. Schmeling

Thanks, Felise. Good morning, and thank you for joining us. Our second quarter results at HSNi reflected our ability to significantly improve the financial performance of our HSN business, while navigating through a highly promotional retail environment that had a significant impact on our Cornerstone brand.

At HSNi, this resulted in sales growth of 5%, with digital sales up 9%, gross profit up 1% and adjusted EBITDA of $82 million compared to $85 million in the prior year.

We reached unprecedented customer file levels for HSN and record second quarter customer levels for the Cornerstone portfolio. We also returned $63 million to our shareholders through our capital return plan.

We were very pleased with our HSN segment. Sales increased 6% to $557 million, with digital sales growth of 11% and digital penetration creeping 180 basis points to 37%. Most merchandising divisions had notable sales growth in the quarter.

Strong sales growth in beauty, home design, health and culinary offset lower sales in electronics and jewelry, as we deliberately decreased airtime in both of these businesses. While we continue to manage the marketplace challenges within electronics, we are beginning to see signs of improvement in jewelry as non-clearant sales increased in the quarter.

HSN's unit ships increased 4% and return rates improved 50 basis points, largely result of favorable product mix. Average price point rose 2% primarily from lower clearance sales. Gross profit increased 5% to $196 million. Gross profit margin decreased 30 basis points to 35.3%, primarily due to investments and certain shipping and handling promotions. Operating expense leverage excluding noncash charges improved 80 basis points to 24% due to lower headcount and decrease in severance cost and efficiencies in our call centers. As a result of the drivers I just outlined, HSN's adjusted EBITDA grew 10% to $63 million in the second quarter.

Before reviewing the results for Cornerstone, I want to state that we are not satisfied with the financial performance at Cornerstone, particularly from Frontgate and our apparel brands, most notably, Garnet Hill. We articulated on our last earnings call that we expected our apparel related businesses to remain challenged in the near-term, but pressure on the overall business was compounded by the highly competitive home furnishings climate that occurred in late spring and early summer. Mindy will address the strategic initiatives that we're undertaking to improve our performance.

Sales in the second quarter for Cornerstone increased 4% to $299 million, and digital sales grew 6% representing 130-basis-point increase in digital penetration to 64%. All of our home brands reported sales growth for the quarter offset by lower sales in our apparel businesses.

However, gross profit at Cornerstone increased -- decreased 4% to $117 million and gross profit margin decreased to 39.1% from 42.4% as a result of increased promotional activity, largely in response to the highly competitive marketplace. We also took measures to ensure that we had appropriate inventory levels. We are in the process of retooling over brand strategy at Garnet Hill under the leadership of Claire Spofford, Garnet Hill's new President. These actions, coupled with marketplace softness in womens apparel, had sales and profitability implications at Garnet Hill, which were expected and articulated on our last earnings call. Claire is taking corrective action to position the business for success, and we believe that we will see improvement over the course of the remainder of the year.

Operating expenses as a percent of net sales improved 10 basis points to 32.5%. We are taking decisive actions across all of our Cornerstone brands as appropriate, including reduction in circulation and managing operating expenses and inventory levels. Cornerstone's adjusted EBITDA decreased $9 million to $19 million, largely due to the results at Frontgate and Garnet Hill that I just addressed. The teams are working very hard to improve their performance.

Turning now to our view of operations for HSNi. We are continuing to share best practices across the organization to scale opportunities for operational efficiencies and excellence. We've recently began integrating our call centers, where appropriate, between HSN and the Cornerstone brands. This included leveraging top-tier customer care talents. We have also began to more fully leverage economies of scale for transportation logistics, import compliance and fulfillment.

We remain highly committed to returning value to our shareholders. We've recently completed our $10 million share repurchase program by repurchasing 984,000 shares since the beginning of Q2. To date, we've returned $558 million to our shareholders through our balanced approach of share repurchases in cash dividend. Our capital return plans will continue to exhibit a shareholder minded approach.

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, our focus during the second quarter remained on engaging our customers, emphasizing our unique content and proprietary products, strengthening our digital platform and further leveraging opportunities and synergies across our HSN and Cornerstone brands. We maintain this focus while managing through what Judy mentioned was a highly promotional retail environment. During the quarter, we still have bifurcation within our businesses. HSN had strong results. Sales were up 6%, with growth across most categories, and EBITDA was up 10%.

And while Cornerstone maintained topline growth of 4%, margins were impacted by the promotional marketplace, particularly in the home categories, coupled with the actions we're taking to reposition our apparel businesses.

HSNi hit a number of key accomplishments this quarter including digital sales growth of 9% with penetration now at 47%, mobile sales growth of 46% now representing 15% of our total business and the return of value to shareholders through our share repurchasing cash dividend program. We remain highly committed and deliberate on maximizing value for our shareholders and are taking the necessary actions to position us for long-term success.

As I mentioned, at HSN, we were extremely pleased with our performance in the quarter with a sales increase of 6% and EBITDA growth of 10%. We also had double-digit growth in digital sales of 11%. As we had indicated on our last call, we saw improved performance as demand strengthened throughout March and continued into the second quarter. Our success at HSN was driven by engaging and retaining customers. Our 12-month active file continues to be at record levels, growing another 3% in the quarter.

All customer buying segments were up. While continuing to bring new customers into the HSN experience, we still grew back customers by 4%, and we saw a particularly strong customer growth in mobile. We are very encouraged by the improvements to date in customer assimilation, an important metric that we have articulated as a key driver for our next stage of growth. This progress reflects both the strategic investments we've made in data analytics, segmentation and campaign management and our efforts surrounding product assortment and price point. We have also reconfigured our marketing team based on the life cycle of each customer segment, including last and prospects.

To deepen our understanding in both loyalty with our best customers, we recently developed a program called HSN Insiders. This innovative invitation only online community functions as a very high level focus group that comprises some 250 high-value customers who are rotated quarterly. The program gives our customers a voice in the community, enables them to become brand advocates and offers them an opportunity to provide testimonials and product reviews.

In digital, we are elevating our efforts to provide our customers with a frictionless and seamless experience with HSN. Second quarter digital sales growth was very strong at 11% and penetration increased 180 basis points to 37%. Session traffic is up as more visitors, particularly repeat visitors, come to our site.

Mobile grew 51% and now represents 15% of HSN's total sales. We recently launched responsive design for a desktop and mobile websites to provide users with a consistent experience across devices and leverage content and promotional offers seamlessly. We're in the process of extending responsive designs to our mobile applications. We've expanded our social media presence, particularly to our partnership with Pinterest. In our Pinterest Maleficent promotion, we lunched the Pinterest Maleficent Look Book on the HSN Pinterest board and nearly all e-mail options were new to HSN. Earlier this spring, HSN introduced a list of Colleen Lopez, which resulted in a substantial increase in sessions from Pinterest to HSN.com.

We continue to be the retail and entertainment destination. Our partnerships in this area are important growth drivers for HSN, as we seek to increase our audience and drive heightened engagement. Our partnerships foster innovation, synergy and the creation of original content across brands. One such partnership was the unprecedented 3-movie agreement between HSN and Disney to kick offed in May with a successful 24-hour event built around the movie, Maleficent. Our curated product collection is a perfect example of movie tie-ins that we can elevate beyond the expected. The trust that we built with Disney enabled us to extend our partnership to include Chasing Fireflies, securing children's costumes for Maleficent. We're also very excited about our exclusive designs for costumes based on Disney's Frozen, the most successful animated film in recent history.

In our last call, we mentioned that we were looking forward to an encore performance from Keith Urban, following his sellout debut launch last November. In May, Keith returned to HSN and sold more than 22,000 of his limited edition urban guitar sets, beating his previous record. He will be returning in the fourth quarter with 2 special holiday events.

Creating an impact through our enhanced boundary-less experiences of focus of HSN's new partnership with AOL 24-hour curated video platform. A great example of our use of this platform was the integration of Sofia Vergara's fragrance lunch and our partnership with AOL as well as Univision. It resulted in one of our most successful fragrance launches ever with nearly 50,000 units sold.

Turning now to the key HSN product categories that drove the quarter with growth in nearly all of them. Our strategy is building beauty with a focus on beauty tools and makeup produced promised strong sales. We also continue to develop themed beauty reports and mixed beauty events including our recent 24-hour beauty event.

The growth in our apparel and accessories business was led by dresses and footwear, as well as strong performance from our exclusive brands including IMAN and Diane Gilman.

In home, our emphasis on textiles included a focus on proprietary brands that was highly successful. Our DIY and lawn and garden offerings also extends the categories growth. The assortment have the largest number of exclusive HDTV products to date, and customers responded positively to the new knits in this collection.

During the quarter, we expanded our improved brand assortment on HSN as we capitalize on our cross brand opportunities.

In health, we have strong sales of both healthy lifestyle product offerings and Andrew Lessman's ProCaps Laboratories vitamins. We also saw success during our first fitness and health 24-hour event. We are extremely pleased with the sales growth in culinary and the success of our revamped portfolio. In addition to significant growth in the category, productivity increased, which supports the strategic decisions we made over the past year to divest as well as invest for growth.

During the quarter, we maintained our focus on building the key chef brands such as Wolfgang Puck, Ming Tsai, Lorena Garcia and Curtis Stone. We also leveraged national brands to drive awareness from a digital perspective. Our very own Joy Mangano reached new levels of performance with her Ingenious Designs, largely attributable to the flow of product innovation and an enhanced digital assortment.

Turning to electronics. While sales were down, productivity increased as we prudently managed our airtime in this business, given the environment for electronics. As we mentioned on our last call, we had success with our 24-hour innovation event, which featured several product launches as well as unique offerings in the connected health and smart home categories. We also introduced original content with digital to enhance the overall customer experience. We continue to decrease airtime strategically and focus on productivity, the caliber of programming and the quality of partners including HP, Samsung and Beats.

We continue to make good progress in repositioning our jewelry business during the quarter, which included significantly fewer clearance sales and increased price points. Our strategic focus is on driving more variety and newness in both our core proprietary and new brands. Fashion jewelry was particularly strong, with notable performance from both new brands, such as MS guy and [indiscernible] Manila and core brands including Jay King and Heidi Daus. As we work to position the business for long-term growth, we believe that recent changes we've made are having a positive impact.

Before turning to Cornerstone, I want to commend the teams at HSN with their strategic efforts in driving both units and price points while strategically pulling back airtime in certain areas such as electronics and accelerating other businesses to achieve our overall sales growth.

At Cornerstone, there were a number of factors that influenced our overall performance. Last quarter, we questioned whether we can recapture the lost sales that resulted from a severe weather. We and other retailers [indiscernible] sales is not shipped and therefore, we're not -- we're covered, which created a highly promotional climate. During the second quarter, our performance was largely impacted by our promotional activity in the marketplace, as retailers had an abundance of inventory following a weak spring. We're also affected by the softness in demand of women's apparel, combined with the deliberate actions we're taking to reposition this business.

So although Cornerstone's revenue increased 4%, driven by sales growth in the home brand. Margins were negatively impacted by the issues that I just outlined. Digital sales were up 6% and digital penetration increased to 64%, an increase of 130 basis points over the prior year. Mobile grew 35% and now represents 14% of total sales. Our mobile penetration across smartphone and tablets continue to grow at a significant rate.

Now I'd like to review the steps we are taking to improve our performance by brand and specific strategies that we believe will yield positive results.

I'll first discuss the initiatives for our Home brand, which represents over 2/3 of our business. Frontgate, which has experienced 5 consecutive years of EBITDA growth, is about to launch Master Suite, an expanded assortment of bedroom furniture, decor, textiles and bath products. This is just one of our strategy to take advantage of opportunities inside the home while continuing to capture outdoor year-round.

Grandin Road is harnessing the sizable customer growth that the brand has experienced. We will be expanding product assortment to leverage the historical success of the Halloween season. Capitalizing on its extensive partnership, Ballard Designs is currently being showcased in a Traditional Home Hampton Show House. They're also sponsoring the Haven Bloggers Conference with more than 300 DIY home bloggers and it's the featured brand in this month's issue of Southern Living Magazine. We are very pleased with improvement, which continues to expand its partnership with HSN. Most recently, Improvements were the key contributor to HSN's extremely successful Christmas and July event.

TravelSmith will also be debuting on HSN later in the year and extending HSN's existing relationship with the Travel Channel Samantha Brown. TravelSmith is partnering with Samantha as its editorial expert, and we'll be developing exclusive collections with her as we make TravelSmith a premier travel destination.

Moving onto the apparel related business. We feel good about the effort Garnet Hill has put into repositioning the brand. Garnet Hill has been about to developing alliance and programs with existing partners such as Eileen Fischer and Lily Pulitzer, as well as forming new strategic relationships. To reduce this dependence on seasonal offerings, the brand is also rationalizing skew counts and circulation and showcasing "Buy Now Wear Now", similar to what HSN is doing in apparel. This also renewed focus on the home assortment to make Garnet Hill more of a destination for home. Chasing Fireflies is positioned well heading into the remainder of the year. The brand just completed a large scale migration on to the Cornerstone back-end system, resulting in a new web platform, order management system, data warehouse, distribution center, customer service support operation and e-mail provider.

As I mentioned previously, we have high expectations for our opportunity to offer exclusive designs with Disney's Frozen costumes and are very pleased with the trend of pre-orders. We also continue to drive strategic licensing partnerships, including Warner Bros. and see opportunities related to back-to-school.

Now let's look at upcoming highlights at HSN. As HSN moves into the second half of the year, we are continuing our strategic focus on experiences events. We just completed our birthday month of July and we're pleased with the results and continued momentum from the second quarter. Our 37th birthday celebration included ultimate shopping experiences, exclusive launches and daily surprise giveaways, including more than $50,000 worth of jewelry prizes. Our July birthday also featured a debut of reality star and actress, NeNe Leakes, who introduced her exclusive new fashion line for HSN. Reality phenom Melissa Gorga presenting an exclusive line of gold and glamorous fashion jewelry and NBA great turned entrepreneur Shaquille O'Neal capping off the month with a special appearance to present new innovations from Monster. Also during our birthday month, Joy Mangano shattered the HSN record for the most units of a single item in a single day, selling more than 216,000 sets of her patent pending company joined member club pillows.

In addition, our recent Christmas in July event was our most successful in over a decade and as I mentioned, features improvements as a key brand. We will be maximizing improvements in the seasonal category in the fourth quarter based on their strong results. We are enthusiastic about HSN's new fall fashion series called The Edit, which launches later this month and includes the premiere of Kelly Osbourne and Emma Fox handbags in addition to the return of our successful brands, such as Hal Rubenstein, Giuliana Rancic and IMAN. The Edit positions HSN as the relevant fashion destination for fall standing by the most of categories in fashion, jewelry and beauty. Focus on key pieces within each category to help customers get the look. And as part of fall fashion, we are launching both a closet and beauty bar, videos for how-tos and tips for the live show, digital, HSN's community blog and AOL, among others. We're also debuting a first-ever weeklong beauty mini-series featuring new products, innovations and inspiration with 2 hours of fixed beauty programming every night.

In July, we announced the debut of the widely popular Smashbox Cosmetics makeup brands [indiscernible] Beauty Report show and also in beauty, fashion and beauty vanguard global entertainer and multi-platinum recording artist, Nicki Minaj, launched her latest fragrance, Minajesty Nicki Minaj, exclusively on HSN, during her first-ever live appearance in July. The launch drove a tremendous amount of social conversation, exceeding any other launch in the last 2 years and attracted 28% new customers to HSN.

Our entertainment integration strategy continues with culinary anchoring our 24-hour Disney Hundred-Foot Journey event which debuted yesterday. This was our second event in our 3-movie Disney partnership. Chef Floyd Cardoz is the chef who created all the recipes for the movie, worked with Chef Bryan Scott to prepare some of the signature dishes. The event featured 2 themes, a global spice market and a French kitchen and also includes key launches from David Tutera, Nirmala Narine and Henckles Zwilling Knives. As a special July entertainment event, Grammy award-winning artist Jason Mraz performed at our latest HSN LIVE concert event, which was featured across all of the HSN's platforms.

We continue to leverage the power of integration across our brand portfolio. Part of the strategy late last month, we showcased our HSNi holiday gift collection that included unique products across our entire portfolio of brands. Hundreds of media, fashion editors and brand partners attended the event in New York. I'm also very excited about our American Dreams, mini-series later this month. It tells the personalized American dream stories behind the evolution of selected HSN core brands and personalities featured in Prime Time TV programs. We'll be enhancing and reinforcing HSN's storytelling for meaningful digital presence in social campaign.

In September, we will be presenting our second annual HSN Cares trick-or-treat for UNICEF prime time special supporting the 2014 trick-or-treat UNICEF campaign. I have the opportunity to join U.S. UNICEF's President and CEO, Caryl Stern, and author, Hilary Gumbel, in an on-air lunch of Hilary's cook book Unichef, which includes recipes from dozens of celebrated chefs, including 5 HSN personalities who will appear on-air. In July, I was very pleased to announce the promotion of Bill Brand to President of HSN, while retaining his role as Chief Marketing Officer at HSNi. Eight years ago, Bill was the first person I hired to join the HSN team, and he's been one of my key partners in transforming HSN into the full network of experiences that it is today. As we continue to innovate, collaborate and leverage the power of technology to create a compelling experience for consumers, Bill's leadership talent and unbridled passion will help ensure HSN remains the leading experiential retailer, and you'll be hearing a lot from him in the near future.

At HSNi, we expect every brand in our portfolio to perform at its highest level. We're extremely pleased with the momentum at HSN, and we strongly believe in our extensive brand building opportunities and go forward strategies within the Cornerstone portfolio. We'll capitalize on these opportunities by focusing on our core strengths and key competitive advantages, providing the customers unique immersive experiences and seeking out and developing proprietary products. This is our focus, not just for the rest of the year but as our day-to-day approach to the business, we strive to maximize value for all of our shareholders.

With that, we will now take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from the line of Eric Sheridan with UBS.

Eric James Sheridan - UBS Investment Bank, Research Division

First, Mindy, maybe on the capital allocation policy going forward, wanted to get some updated thoughts now that the repurchases done, how you think about the options that sit in the front of you to continue return capital to shareholders, and how you might go about with the boards for thinking through those options? And then, second, HSN's margins were -- and growth in EBITDA was one of the best we've seen in the last couple of years, wanted to tease out a little bit of some of the cost savings or efficiencies within HSN's EBITDA and how sustainable those are going forward?

Mindy F. Grossman

Okay. I'll take the second question, and I'll let Judy talk to the capital piece. As I mentioned, we were pleased on HSN and we have been talking about how we can derive the greatest leverage in the business, and that certainly has to come from sales growth and managing our operating expenses and keeping a sharp eye on margins while investing in shipping and handling. And that is our goal and what we're are focused on for going forward. But as I mentioned before, sales growth is key to being able to derive that leverage.

Judy A. Schmeling

Yes, on the capital return plan, we are very pleased with our share repurchase program life to date. As I mentioned on the call, we delivered $558 million in value to our shareholders, and our share repurchase program was a big part of that having just completed it. And we believe it was quite successful with an average share repurchase price of about $45. And of course, we continue to evaluate also our annual dividend, which last year we had increased about 40% as well. So we do recognize that we have the capacity to increase our leverage, as we've said before, to about 2x, which gives us substantial borrowing capacity to not only return value to our shareholders but also to reinvest back in the business and make strategic acquisitions. And since we have just completed it this month, we don't have any further capital plans to articulate at this time. And I just wanted to say, trust me, once we do everyone on this call will be the first to know. But all kidding aside, our situation is somewhat more complicated. And we will continue to work through that with our board, and we'll make sure that we consider all shareholders and that evaluations. Since we don't have any immediate plans that we can articulate, we won't speculate on how those might play out. But just want to reassure everyone that we are working with our board on the best capital return plan for all of our shareholders and for our business for the long-term.


Our next question comes from the line of Neely Tamminga of Piper Jaffray.

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

It's Neely Tamminga, Piper Jaffray. I do want to focus a little bit though on Cornerstone and get a sense from you as to a timeline on Garnet Hill specifically. And I guess the other thing I was contemplating as you're talking to the competitive landscape, which we have knowledge of with women's apparel, a lot of the people you're competing with actually have a physical store presence as well. I mean, would it ever make sense to put Garnet Hill and wholesale it out to a physical presence to acquire new customers to reinvigorate them into this brand?

Mindy F. Grossman

Okay, that's a good question. I want to talk to 2 things. I want to talk about women's apparel and then, I want to talk about physical retail. As I mentioned and we talked earlier that the first half of this year was to reposition Garnet Hill. And I feel very good. And I've spent a lot of time with that team. And if you look at the new book that just dropped for Garnet Hill, which is much more reflective of their go- forward, I think that you will see a difference and just all the work they've done, not just on the brand and product side, but on the operational side and the diligence on skews and focus and margin. We had said that back half is when we are really looking forward to see that. So part of it is, yes, we know the women's apparel world, but honest enough to know what was self-inflicted versus what was macro. And we feel good about the brand and the work that's being done. Now as far as physical retail goes, we've always said that we're not averse to having some physical presence to support our direct-to-consumer business. And actually, we are working right now on potential concept experiences for a number of our brands, and we can certainly talk about that at a future date. But when I say experiences, it's very important. The world does not need another store, but it does need new and exciting destinations and experiences for customers. And that's what we're working on are a number of new concepts that we think will be very exciting for a number of our brands in the future.


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

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Just a question on the sales acceleration at HSN. First of all, I think this is the first sequential uptick we've seen in sales from Q1 to Q2 in years. So just wondering if there are or any timing just to call out or anything else that cause that pattern to break trend or just a little more color on whether or not you think that acceleration feels sustainable?

Mindy F. Grossman

Well, I think that, as I said before, there's a tipping point in everything. And there is a lot of whether a strategic investments or focus or decisions we made to retool businesses and they all contributed to that sales growth. It was not a timing issue. And it's a combination of the things that we know are critical to the business. Delivering a balance of average selling price and unit growth. You remember in the past, we were driving a customer, but it was having an impact on our ASP. This was what we talk about is a discrete balance. I think leveraging our investments and systems to give us improved capabilities in both acquisition and assimilation while still having customer file growth and spend, I think, stronger growth in digital, as you know that was a bit of a frustration point for me and we've gotten that to where we are seeing that growth, and it's really being driven by mobile, strategic marketing, expanded assortments, as well as new content strategies that are prolific across the site. I think it's the combination of these entertainment and proprietary events and the re-acceleration of culinary, the improvement in jewelry and how we're managing electronics. So I think it's not one thing. It's the cumulative combination of those things working in tandem to accelerate that growth.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Okay. And just one follow-up, if I could, on digital. You saw really strong acceleration there in the quarter. Just wondering if the bulk of those sales are still coming from products that were recently featured on-air, or if you're seeing a big increase in the sales of web only items and maybe that has something to do with the better flow-through of that revenue to operate the system.

Mindy F. Grossman

So let me explain it. It's not -- I'm not -- I don't want to talk about web-only items. I mean, certainly, we have some of those in expanded assortments, but where we are seeing that combination of growth, which is to your point, is not just the products that are currently on-air, within 48 hours, prior 48 hours after, what we are seeing growth is what we call off-air, which are products that were either marketing or where the customers coming to us for those products that are not related to a television airing. So yes, it's a combination of both of those things.


Our next question comes from the line of Jason Bazinet of Citi.

Jason B. Bazinet - Citigroup Inc, Research Division

I just had a clarifying question on some of the opening remarks you made. If I heard you correctly, I think you said at Cornerstone, you're planning on diving back the catalog circulation, which is been on a upward trend since I think the middle of '08. When I look at the numbers, it seems like your gross profit per catalog, even though it was a challenging quarter, still very robust and well above your marginal cost to print and ship a catalog. So can you just expand on that? Is it -- just explain to it...

Mindy F. Grossman

Sure. Let me explain, again, you really have to look at by brand and our aggregate portfolio because we have different circulation strategies by brand at any given time. So for example, at Garnet Hill, as we're looking to re-accelerate growth, but do it profitably, we're going to be conservative on circulation until we see that we want to reinvest. At Grandin Road, strong sales growth, we'll continue to strategically invest. In some of our other businesses, we really want to focus on maximizing our profitability and our margin. So it's really very kind of laser focused. It's not just looking at things in the aggregate. But to your point, where we still see prospecting as a profitable method in a brand, we're still going to do so.


Our next question comes on the line of Alex Fuhrman from Craig-Hallum.

Alex J. Fuhrman - Craig-Hallum Capital Group LLC, Research Division

I want to talk a little bit about the media partnerships that you're doing with Disney and with some other films and saw the promotion event you guys did yesterday for 24 hours. I'm curious how these events impact your customer acquisition. Are they as powerful or less powerful than bringing in a big brand or an exclusive product? And I'm curious about the merchandise profit dollars per minute. Are events like that competitive with the rest of your programming or marketing be the pretty big part of what makes events like that profitable? Just trying to get a better sense of how these events work given that they seem to becoming a bigger part of your programming mix.

Mindy F. Grossman

That's a great question. So let me just define events because they're very, very diverse in what they contribute and to how we plan that. So what you're talking about with Disney, that is a very discrete marketing pinnacle event. And that would be a Maleficent, The Hundred-Foot Journey or Cinderella next year, where we will create all proprietary products. That is very much focused on PR, acquisition, social buzz, et cetera. And just like anything else, we plan our dollars per minute relative to the categories, the products and what we feel we can generate. It's the other event day in, day out that's still continue to be very important and whether that -- our 2-hour Beauty Reports, our 1-hour list report, our 24-Hour Beauty Event, I mentioned we had our first 24-Hour health and fitness event. What we're really just trying to do is break the monotony of programming and give the customer a reason to get excited about curation, what we can offer them, the storytelling and the contexts that we're trying to create. So you will continue to see things like American Dream series that we're doing or any of this other programming to create, most importantly, engagement. So it really is going to be a balance of all of those things. But I will say that entertainment as a point of differentiation for us will remain at the forefront of what we do.

Alex J. Fuhrman - Craig-Hallum Capital Group LLC, Research Division

That's very helpful. And then I guess, as a real quick follow-up to Trisha's question, the growth in the off-air sales that you're seeing, how many of the markets that you're in from a TV distribution standpoint, are you actually benefiting from that growth on the margin? Is that something that structured into a large number of your cable and satellite agreements at this point that you have to pay a flow-through over certain amount on, on-air sales, but not on off-air? Just curious to how that dynamic will benefit you over time.

Mindy F. Grossman

So, basically, our agreements, they're all slightly different, but we do pay a per sub fee with commissions on top. So it's relatively by and large more of a fixed cost per sub, so as our sales grow, you will see that benefit flow through to the bottom line. On-air, off-air, is not as is important at this point in time.


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

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I had a couple of questions. First, just wondering if the bifurcation that you discussed for the second quarter, has that continued into the third quarter so far?

Mindy F. Grossman

No. I think that the extreme nature of kind of what we saw in the inventors and all that in second quarter were definitely more heightened. Our big expansion in the, call it home category, is going into the third quarter, really end August, September, but we're not seeing any dramatic differences.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Got you, okay. And then, you talked about call center efficiencies, can you talk about where you are with that? Are you halfway done or more than that? Can you just give us a sense of where you are? And how should we expect also warehouse efficiencies to play into your expectations for improvements in margins next year?

Mindy F. Grossman

Yes. We continue to look at all areas of the combined HSNi business to drive cost efficiencies and again, not only cost efficiencies but also improve the customer experience. So we do plan on continuing to drive efficiencies in our business going forward over the next couple of years, but we're more than likely also reinvest some of those savings back into the customer experience. So I did mention the call center efficiencies that we're working on for HSNi, but it's also about elevating the brand experience that our Cornerstone brands to a higher level. So -- but again, our focus is on driving improvements, as well as over the next couple of years. But some of those are larger initiatives, that will take more time as like a warehouse automation project will happen over the course of a number of years. Some of those will be longer-term investments. We're very, very pleased with the progress that the teams are making in really driving that efficiencies as well as the experience.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Got you. And lastly, what are your thoughts on electronics, especially heading into the fourth quarter?

Mindy F. Grossman

Look, we feel good about the brands that we have partnerships with in electronics. We still think it's good and strong category. We still have plans for it in Q4. What I'm pleased about is that we have a much more balanced, call it assortment, approach within each of our categories. So we're not overly dependent on any one and we're seeing strength. So certainly, we are going to maximize all the opportunities we have in electronics. We've been working with our core vendors on building exclusive products and configurations for us way in advance of the fourth quarter and that's what we will continue to do. But it's really about being able to lever our mix, particularly in the higher margin categories, that we can still see accelerated growth from.


Our next question comes the line of Barton Crockett at FBR Capital Markets.

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

Mindy, I wanted to ask you about this question, which is -- obviously, you're very well respected in retail. And which I think explains why your name comes up in so many of these articles about big pretty model retailers looking for a new CEO. But I was wondering if you could comment on that and talk about your desire to stay where you are versus contemplating other opportunities.

Mindy F. Grossman

Yes, I would love to do that. So a number of years ago, rumors circulated and I -- my quote was that reports of my desk have been greatly exaggerated and that has not changed. I mean anyone that knows me knows that my commitment to this business is unparalleled. This is not a job for me, this is a passion play. I love the direct-to-consumer business. I love the fact that we're at this cross-section of media, entertainment and commerce. And unfortunately, I think it's a sad state that we have so many of these positions open, so the same 5 people or whatever it is, keep being circulated like bad rainwater. And -- so I was joking around with someone the other day. They said, "What are you doing at HSN?" and I said, "Well, I guess I'm just going to be buried here" because that's the only thing. But we have an incredible team, a talented team and I think many of you know, we've all been together for the last 8 years, certainly since I've been here, Judy for 20 years and many of you have been kind of whether it's anyone of our Cornerstone businesses or HSN, I kind of take it as a compliment when we're called a cult because that's really have everybody feels about the business. And I think that -- again, I can't control the press. I'd like to. It's actually annoying and distracting, but the reality is this is certainly where my commitment is both personally and professionally.

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

Okay, that's great to hear. If I could follow-up with one other just more business related question. I wanted to be clear about the promotional pressure in the Cornerstone. Do you see that -- I didn't quite -- I'm not sure I quite understood your response earlier, are you saying that you see promotional pressure continuing into the third quarter on gross margins in Cornerstone or is that abating?

Mindy F. Grossman

Well, let me give you twofold. It was exacerbated in the second quarter because -- I remember when I was talking in the first quarter, particularly in the outer segment, could we make the sales up and it was just clear, I mean we saw unprecedented promotional activity in the home area where 15% used to be kind of a normal discount and all of a sudden, there were people coming out with offers of 40% and 50% to try and kind of get through the season. So that piece was unprecedented. Having said that, we're just living in a promotional environment and we're going to have to be cognizant about. We're going to have to compete, but we're going to have to be discreet in what we do, which is why we're looking at everything from how rebalancing our stock, what are we doing with margins and that's kind of how we see it going forward.


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

Benjamin E. Mogil - Stifel, Nicolaus & Company, Incorporated, Research Division

So on the Cornerstone front, this is more from a third-party -- from a outsider perspective. You could really have a lot of lumpiness, there's not a ton of brands and you have these seasonality shifts from time to time. Is it sort of in your thoughts that may be adding more brands would sort of -- I mean would obviously reduce the lumpiness, or do you feel sort of what you have is what you want to work with now?

Mindy F. Grossman

So, here's what I think. We love the brands that we have, and we're continuing to look to develop them, accelerate them. I mentioned some of the concepts that we're working on in terms of retail. But having said that, we definitely want to grow our portfolio of brands, and we are looking at doing that in the marketplace. And where we see something that we feel fit our criteria, we're certainly going to be opportunistic and be able to expand our total brand portfolio.


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

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

Maybe you could discuss the importance of the Hispanic demographic to the TV shopping business in particular and the other efforts you are having to wait to at least attract that segment. And second is a piggyback of some of the comments you made earlier about data warehouse, customer repository. I mean, what are you hoping to achieve in terms of customer growth and purchase frequency from these investments over time?

Mindy F. Grossman

Sure, that's a great question. I think that the focus on the Hispanic customer is not necessarily specific to TV shopping. It is an important demographic that is going to scale significantly over the next number of years and in particular, is extremely engaged in the mobile segment and growth. So when we did a lot of analysis around that, we said this has to be a focus for us. So we need to look at the diversification of our products and our personalities, which we have added, for example, in our culinary space, with Lorena and Ingrid and then other areas like our launch with Sofia Vergara. We also established our partnership with Univision, which is really to give awareness to HSN to attract that demographic in a very authentic way. And we will continue to focus those efforts over the next years because we do feel. And the other thing is if you look at mobile in particular, where we're having growth, that mobile acquisition, that customer is our youngest, most affluent and most diverse. So it's very important to have very specific mobile strategies around acquisition. To your point about our investments in systems and data analytics, what we have said is that in today's world, really being able to use our data and insights to create meaning, relevant and personalization with the customer is going to more and more important. So what we serve up in terms of content or in terms of communication has to be much more targeted. As I mentioned on the call, we've been pleased because one of the things that we've talked about over the last couple of years is that one of the areas that we knew was an opportunity was our assimilation, which is taking our first time customer and turning them into a second time customer within 90 days. And we are seeing improvement in that area for the first time in quite some time. So we know that those efforts are working. They're in initial stages and we're still working them out and doing a lot of testing, but we're very encouraged by the results and we see that being able to improve as we continue to learnings and those targeted messaging.


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

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

Couple of things. One, it really feels like the pace of innovation has accelerated. Some of that is IT, I think you got some think -- good things in queue, at the warehouse automation and all that. But when you've done it without blowing up your cost structure, which is kudos to you. But do you feel now like you can do more things in terms of genre specific, micro-channels and maybe even you touched earlier on Hispanic demographic, but something that's dedicated even just as Hispanic just so you don't have recirculated rainwater problem. And then, secondly, there's been so much change in your business in terms of things like gamification and entertainment and all of that. And you're still 85% female demographic, I mean, would ever think about trying to do something to bring in more males? Or do you think that's just DNA wise, that's just a very difficult segment to grow? I mean that's something that it seems to be for proboden and for both of you and your friends are over at Q to talk about.

Mindy F. Grossman

Well, I don't think it's proboden and we do have some categories where a little bit more male friendly, for example, in culinary and electronics. However, I do think that you have to focus and target, and I think that we still have so much opportunity within the segments that we think are most opportunistic for us to attract and those prospects and getting those prospects to come in and engage with us through mobile and through digital. And there's a big population out there of diverse women between ages of 30 and 45. You think about our customer base, our active customer base, although it's at the highest it's been, it still just over 5 million active customers. So we think that right now, we have to use the tools and what we have to focus on our most opportunistic audiences. That does not mean that down the road, we might diversify. Now as it relates innovation, exactly to your point, we have to take advantage of all opportunities that are out there and whether that looking at some of our big brands and maybe creating more in-depth micro-site experiences or working on more, what I would call, distributed commerce, like our partnership with AOL or Univision for the continued expansion of Shop by Remote and video-on-demand. So we have a team that's always looking at advanced opportunities relative to innovation or gamification. So what you're seeing is we have arcades, but now we're trying to integrate gamification much more embedded into the site with rewards, et cetera, and we've just started testing a number of those things as well. So we've got to be cognizant of all things on the landscape that we could take advantage of because the level of engagement of our customer, the shopping behaviors, as well as the social behaviors of what she does. So all of that is part and parcel of our growth strategy.


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

Mindy F. Grossman

Well, thank you, everyone. We look forward to following up and speaking with you soon.


Ladies and gentlemen, thanks for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

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