ValueVision Media's (VVTV) CEO Mark Bozek on Q2 2014 Results - Earnings Call Transcript

Aug.20.14 | About: EVINE Live (EVLV)

ValueVision Media Inc. (VVTV) Q2 2014 Earnings Conference Call August 20, 2014 11:00 AM ET

Executives

Teresa Dery - SVP and General Counsel

Mark Bozek - CEO

Bill McGrath - EVP and CFO

Bob Ayd - President

Analysts

Neely Tamminga - Piper Jaffray

Mark Argento - Lake Street Capital Markets

Alex Fuhrman - Craig-Hallum

Greg McKinley - Dougherty

Shannon Richter - Feltl

Robert Routh - National Alliance Capital Markets

Justin Ruiss - Sidoti

Operator

Good morning, and welcome to the ValueVision Media's Fiscal 2014 Second Quarter Conference Call. Following today's presentation, there will be a question-and-answer session. 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.

Teresa Dery

Thank you, operator. I'm joined today by CEO, Mark Bozek and CFO, Bill McGrath who will be presenting as well as President, Bob Ayd who will participate in the Q&A. 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, should, plan 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.

Comments on today's call may refer to adjusted EBITDA and adjusted net income or loss, which are both non-GAAP financial measures. For reconciliations of each of these measures to our GAAP results and for a description of why we use them, please refer to today’s news release available on the Investor Relations section of our Web-site.

I’d like to remind you that all information in this conference call is as of today and the company undertakes no obligation to update these statements. As reported on June 23rd of this year, ValueVision Media reconstituted its Board of Directors to include five new members, including Mark Bozek, who is also new CEO and Bob Rosenblatt, who is named Chairman of the Board. Mr. Bozek has more than 20 years of senior executive experience in the multi-channel commerce, electronic retailing and entertainment industry, including roles as CEO of HSN, Senior Vice President of QVC and as a producer at Fox Television.

Mr. Rosenblatt has more than 25 years of experience leading retail organization including Tommy Hilfiger, HSN and Bloomingdale. Most recently, he was Interim President of Ideeli, a flash e-commerce site that was recently sold to Groupon. Mr. Rosenblatt has been and is currently serving on several public and private boards in the retail and technology industries. I will now turn the call over to Mark.

Mark Bozek

Thanks, Teresa, and thank you all for joining today’s call. I'm thrilled to be here and humbled to lead ShopHQ working side by side with our newly formed and experienced Board as well as our talented team of employees. I intend to keep my prepared remarks primarily focused on the future of the Company. However, I would like to say that despite the distraction of the past year, and there have been many, I'm really quite pleased with how the Company performed in Q2 in delivering solid operating results.

I am grateful to the ShopHQ team for their focus and their fortitude. I believe this performance demonstrates that our multi-channel platforms which span 87 million unique cable and satellite homes as well as our digital and mobile fronts have immense value and potential. I also believe that our shareholders share that view and I am completely dedicated to realizing that full potential.

I believe it starts with the people who work in our Company and the innovative entrepreneurs who make our products as well as many others we hope to be in business with soon. And this is day 59 on the job and my first quarterly investor call with you, I’d like to take a few minutes to talk about our Company’s new direction at a high level.

We're still working to solidify more detailed plans and I intend to share those with our as our thought process evolves in the coming months. In the mean time, I will do my best to convey my vision and some of the new exciting and different things that you can expect.

Given our reach and potential, ShopHQ is well positioned today. We have the opportunity to build a unique offering of brands, products and entertainment content that truly differentiates us from our others in the commerce space. I am fortunate to have a wealth of experience to draw upon, on our Board, the management team and advisors in developing the foundation for all that comes next and I'm very excited about some ideas already being explored.

The platform for any successful company or business is of course its people. I am a big fan of creating an environment where people that work in our company, everyone that works there, feels a sense of relevancy. At the end of the day, who doesn’t want to feel that their job plays an important role in the Company’s success? I think there is great upside in creating more of it in our Company. Of course discussing relevancy is one thing; actually delivering it takes focus and hard work. But if we first get it right with the people who work here as well as the people who create, develop and design what we sell, then the possibilities are endless.

Our senior executives are as determined as I am in these efforts. All of them are now fully committed to working a full week schedule onsite at our offices. In addition, the in the last few days, we’ve made certain senior management changes that I believe will better enable us to achieve my vision for the Company. Off note, we have eliminated the Chief Operating Officer position. We are also replacing the Chief Merchandising Officer role and are working with national executive search firm Karen Harvey Consulting on a replacement.

While we intend to create some unique and disruptive ways to differentiate ourselves from others in the multi-channel, e-commerce and entertainment spaces, I think there is certain fundamentals of our business that don’t need to be reinvented namely, the creation and development a truly proprietary brands and products. Those are brands and products that are not available anywhere else ever. A diverse portfolio of proprietary brand and product is at the core of what drives real revenue, real margin and real profit in our industry.

I had a number of success on this front in my career and I see opportunities at ShopHQ for us to do the same. Here is what rates about right now. I believe there is never been a better time to develop proprietary brands and products. It’s no longer just about going to trade shows and scouring the aisles for the brands and the new products nor is it about competing solely by offering the lowest flash sale price available. There are smart ideas and smart fledgling businesses that are just a few clever clicks away in the commerce world online. So we’re going to be surfing in those worlds as well.

We also have Ron Frasch, one of the most respected retail merchants of the past 20 years as one of our new board members to help us in these efforts. There is also opportunity for us work with known personalities like Mark Cuban, who last week premier his American Dream Show on ShopHQ. Nine entrepreneurs that he backed as investor on ABC’s Shark Tank presented their products in two fun, dynamic hours on ShopHQ.

Many of the products sold out within minutes of going on air and we doubled our viewership as well. It’s really just a beginning of what we intend to do, our very own true blend of commerce and entertainment. And to summarize our focus on relevancy within the vendor community, we mentioned in this morning’s earnings release that we opened an office in New York City. This office will give us a more prominent and continuous presence in the marketplace than we’ve ever had.

Two final relevant points. One, I believe there are real opportunities for us to grow by using our comparatively smaller size to our advantage. We have white space on all of our platforms where perhaps our competitors may not. As we adopt a competitive think nimble, act nimble approach to doing business I am confident that we can be more successful.

Two, we have a terrific newly formed Board of Directors each of whom brings the really different skill set to the table. Last week we met for the first time in our studio at Minnesota. It was the first such meeting at the Company in many years. Their enthusiasm their presence and their support were immediately felt throughout the studios, the halls and our offices.

First, our existing three directors John Buck, Landel Hobbs and Lowell Robinson, each of whom bring solid business experience to the company. Mr. Buck a long time member of our board brings a career or Senior Executive leadership in public board experience at Companies such as Medica, Fingerhut, Graco, Honeywell, and Alliant Techsystems. Mr. Hobbs in a cable TV and media executive, most recently at Time Warner Cable and previously with AOL Time Warner and Turner Broadcasting. Mr. Robinson brings us substantial online advertising and brand expertise from 10 years at Jones New York and HotJobs as well as Citicorp and Kraft Foods.

Our new board members include Bob Rosenblatt, who is our new Chairman. Bob's 25 years of diverse retail and financial discipline and leadership experience at Bloomingdale's, with me at HSN as well as Tommy Hilfiger and Ideeli will serve us well.

As I mentioned earlier Ron Frasch, Ron is the former President and Chief Merchant at Saks Fifth Avenue as well as the former CEO of Bergdorf Goodman. I can’t say enough about how lucky we are to have someone with his depth and breadth of merchant relationships throughout the world.

Also Thom Beers, the CEO of Fremantle North America. Thom's storied success and experience in television, especially with the live entertainment shows he oversees like American Idol and America’s Got Talent and as the creator of shows such as Deadliest Catch and Storage Wars will be invaluable in our efforts to create a far more dynamic and engaging commerce experience with our customers.

Finally, Fred Siegel. Fred was Senior Vice President ahead of marketing at QVC for nearly six years, overseeing all off-air consumer touch points. He then headed marketing and communications at Excite and Excite @ Home in Silicon Valley where he led many Internet firsts. His relevant knowledge in the digital space was also served as well.

In closing I am very, very mindful of the history of our Company and I’m keenly aware of the challenges that lie ahead, but it's those same challenges, coupled with the incredibly fluid nature of all things commerce and all things digital that present us with so many more possibilities. My goal is to keep us focused in a measured forward thinking way that's all about the process of evolution, not revolution. I am grateful to the strong support of our shareholders who have spoken by their actions. I really look forward to meeting with our current and potential investors at our studios, on the road and at various investment conferences in the near future.

And with that I’ll turn it over to my colleague Bill for a more detailed overview on the quarter.

Bill McGrath

Thanks, Mark. Second quarter sales of $157 million were up 5% over prior year. Sales growth was driven by strong results in fashion and accessories, as well as the beauty and health and fitness categories. This growth offset airtime reduction in jewelry and watches and the sales decrease in the consumer electronics segment.

Although jewelry and watch aggregate revenues were lower as a result of the airtime reduction, sales productivity per minute in the category was strong, up 13% over prior year. Net shipped units in the second quarter increased 30% versus last year as our average selling price declined to $67 from $83 to prior year, principally influenced by the strong performance in our fashion and our beauty businesses. Fashion represented 18% our merchandise mix, compared to 12% last year while the beauty health and fitness category represented 15% of the merchandise mix compared to 12%.

The successful broadening of our product assortment at lower average selling prices continued to foster growth in our customer base. Our rolling 12 month customer counts of 1.4 million customers is up 18% over the comparable prior year. Gross profit dollars increased 9% to $60 million in Q2 from $56 million last year. Gross margin percentage of 38.6% is up 110 basis points. The improved gross margin percentage reflects the increase in fashion and beauty mix, as well as the margin rate improves applied across multiple merchandise categories.

Second quarter operating expenses totaled $64 million, compared to $56 million last year. Q2 included $5 million in unusual items, including $2.5 million in costs related to the conclusion of the proxy contest and around $2.6 million in CEO transition cost. Additionally, we incurred incremental stock option and restricted stock expense related to the CEO transition and to the new Board of Directors, totaling $1.2 million. Excluding these unusual items, operating expenses increased $2 million or 4%, compared to the same quarter last year.

Operating expenses were affected by an increase in variable cost of $1.7 million. Variable costs as a percentage of sales were 9% versus 8.3% last year, reflecting the impact of the 30% increase in net shipped units. We anticipate that variable expenses as a percentage of sales will be between 8.5% and 9% for the remainder of 2014.

Cable and satellite distribution expenses increased $2 million in the quarter, reflecting a 1% increase in home count as well as investments to further improve the channel positions that began in the second half of 2013. Our annualized cost per home in the second quarter was $1.13 compared to $1.06 in prior year Q2. We anticipate that by year end, our annualized cost per household could increase slightly to around a $1.15, depending upon whether additional channel moves occur.

Depreciation and amortization expense decreased $1 million from the prior year second quarter, due to the conclusion of the NBC brand licensing agreement in January 2014. Adjusted EBITDA increased to $5.5 million versus $3.8 million last year, reflecting the 9% increase in gross profit dollars, partially offset by the higher operating expenses I just described. We ended the quarter with cash and restricted cash of $23 million, compared to $27 million at the end of Q1. Net use of cash includes $5 million in working capital use and $3 million in capital expenditures, partially offset by the adjusted EBITDA of $6 million in the quarter.

Finally, regarding the expansion of our new distribution and fulfillment center, we broke ground on construction in May. We anticipate Phase 1 of our 337,000 square foot expansion will be completed by the end of Q4. We plan to have a partial use of this facility for storage during the fourth quarter as well; and we expect to complete the internal configuration during Q1, 2015. Aggregate cost of the expansion will be around $25 million, the majority of which will be incurred during 2014. The cost of the Bowling Green distribution center project will be funded through the $25 million expansion of the PNC credit facility which we announced in February of this year.

The warehouse expansion project along with the 2015 implementation of material handling upgrades, as well as the Manhattan warehouse management system should significantly upgrade the capacity and the efficiency of our distribution infrastructure. We anticipate improvements in our order-to-shipment cycle time and reductions in our transaction processing cost upon full implementation in the second half of next year.

With that operator, let’s open the lineup for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Neely Tamminga from Piper Jaffray. Please proceed.

Neely Tamminga - Piper Jaffray

Welcome Mark and really appreciate hearing your perspective out of the gate and it will be good to hear how that evolves as you continue your onboarding process. So just would love to have a little bit of perspective on how we should think about the back half. Bill, in terms of gross margin and ASP and kind of conceptually what’s going on with the product assortment that could help influence some of those line items, just any sort of guidance you can or guard rails you can provide would be really helpful for us? Thanks.

Bill McGrath

Sure, Neely, thanks for the question. As I mentioned, the second quarter reflected a very, very strong performance in two key categories. Fashion at about 18% of the mix and beauty at close to 15% of our mix. Fashion reflected I’ll call it a strong seasonal performance for us particularly with the spring fashion components within the quarter. As we look ahead to Q3, I would say that you’ll see not a strong in elements of mix of fashion within that period. We would expect to see an increase in the growth in our home side of the business, continued penetration in beauty and a little bit more balance on the jewelry and watch side. We don’t see a substantial reduction in airtime in jewelry and watches as we saw in Q2. That being said relative to the point on margins, our margins are very strong for us in Q2 around 38.6%. I think in Q3 you see a little bit of reduction on that. We should be around last year’s levels which I think around 37.5% in total.

Looking ahead to Q4, of course that’s more seasonally promotional with more shipping and handling activity and also with higher mix of gift oriented items. That being said, our margins a year ago were about 32.5% in Q4. I think we'll be slightly better than that because last year’s Q4 had a very, very strong influence of consumer electronics in that period. So we’d anticipate being in the range of 33% to 34% total margins in Q4.

Operator

Our next question comes from the line of Mark Argento of Lake Street Capital Markets.

Mark Argento - Lake Street Capital Markets

First question, thinking about some of the initiatives, Mark that you laid out, just trying to get your perspective on the timing of some of this, in particular the merchandising and branded product. Obviously it takes a while to conceive and build a brand. So that’s probably longer-term goals. But maybe you could walk us through some of the just high-level timing in terms of new merchandise, the start of the process of building some brands, how this works, how you have done it before in the past at a high level, so we can start figuring out what to pay attention to.

Mark Bozek

Great. Thanks for the question Mark. I think that obviously we are in the retail business right, and we make our money and our profit based on the products and the merchandise that we sell and I think that the opportunities here in creating as I said in my opening remarks about true proprietary brands is the real opportunity here and I think in order to do it, you have to have the right -- you have to open the pipeline if you will at the Company so that we are, when we are developing these brands and developing relationships with people who make the products, who design the products and the entrepreneurs that we work with, that you have to have the right basis for them to come into our place. I think the advantage that we have and there is a lot of work to be done I think and everybody here would agree, but the advantages that we have is that we have 168 hours of programming like our competitors do on the electronic retailing side of things, we have a lot on white space and lot of opportunities to create anchor position, anchor brands if you will, much like a television network has anchor shows that anchor a particular night.

I think we have a lot of opportunity to do that, both on the product side of things, meaning individual products, as well as these proprietary brands and I think that organizing ourselves here at the Company on the merchandising side is something that is the number one focus for me and myself, working really closely with Bob Ayd on having a team of merchants and relationships in the vendor community that are relative, that make this a place where they want to come to sell their products perhaps and launch their products and perhaps not necessarily being as it has sometimes in the past being the last place they come to sell their products. I think the opportunity going forward for us being the launch pad are really, really terrific and again the 87 million homes and all of our platforms that we have, it gives an opportunity for newer brands and they’re not all famous celebrity driven kinds of brands but discovering new brands and giving them this opportunity to really grow versus perhaps just growing on Internet only kind of situation, we have this great platform to launch them on.

So the timing of it is always in -- in our world it's -- a lot of it is an art and not a science of finding that great personality and attaching to that great product. And what’s that mix that makes it work on air and what enables that person to sell who may have a past personality or celebrity driven experience but then putting them on television and online in all worlds of creating that connection with the consumer.

Again I think what will afford us in terms of timing to being the process, we’ve actually already begun the process in a pretty big way. It’s just a matter of the testing of it and I think that the more ability that we have to test products, starting fourth quarter, first quarter of next year will enable us those -- the bobbing and weaving of the process and determining which one of those will become these anchor proprietary brands. That really is, if you look at the mix of what we currently sell, our competitors are up about 75% of what they do as proprietary. Ours is only about 25% of proprietary brand. So therein lies just great opportunity assuming that the merchants have a mandate and they working as I said with Bob and myself very much have that mandate to work on developing these exclusive brands is really the number one thing.

All of the other things that we talked about, all of our social platforms and all the things that we will do digitally and all the mobility that we want to create in terms of all of our platforms, you have to start with the merchandise. And as I said earlier, I don’t think it’s ever been a better time to create new brands. There are so many avenues available at our fingertips. If you're smart and you look in the right kind of places to accomplish that.

Mark Argento - Lake Street Capital Markets

I know you mentioned in your prepared remarks that and in the press release that you guys are opening a New York office. Would that predominantly be merchandising or will you have some studio functionality or the opportunity to do some things remote from New York?

Mark Bozek

Initially it’s really just a heavy presence in there. I think that it won’t necessarily -- it’s not studio driven. It’s really just to have a presence, both from the merchandising and the marketing side of what we're going to do, so that we're in the marketplace on a much more consistent basis than perhaps we’ve been in the past. I think doing that and if you want to get hit by lightning, you’ve got to stand out in the rain a lot. And so we plan on standing out in the rain a lot more in New York and having those opportunities available to us and being able to react to them in a much more nimble way.

Mark Argento - Lake Street Capital Markets

Last question from me, in terms of number of hours of programming and your kind of homes passed or number of subs -- earlier in the quarter or I guess as probably back in July, you guys looked like you expanded your presence with a couple of cable operators. What do you think the opportunity is to get up into the 90s in terms of millions of homes passed? And then also number of hours on the air, any thoughts in terms of cranking that up a little bit as you bring the merchandise in?

Bill McGrath

Mark, this is Bill. Let me first speak to the number of homes passed and I'll deflect to Mark relative to the number of hours of the specific programming. We had increased in the second half of the year, partially our home counts but I will say more our channel position within the cable systems, within which we operate today. Roughly 11 million total homes had moved from a channel position that was well above the channel 50 to below channel 50. And I’d say that was the primary driver of the increase in home counts as well because that really drives your programing tier where you are in, if you're in a basic tier that gets more coverage and a preferred tier, where the higher channel positions might be found.

So there is a little bit of an organic piece of that that moves in tandem with our moves in channel position. And while we do anticipate, we will continue to look for opportunities to improve our channel position, we want to be thoughtful about those moves because the moves do come with a premium cost. We’ve had chance to digest roughly six or seven months' worth of performance assessment of the 10 million or 11 million homes that we did move in and some markets are doing extremely well for us, very, very substantial increases in productivity that more than offsets the premium cost of distribution that we're paying.

In other markets however, the sales growth is there but we’re not quite yet at a breakeven in terms of the contribution margin associated with those premium distribution costs. So we're going to be thoughtful and measured about when we move and how we move and that will direct the overall growth in the households. But I would say we had a modest growth in the quarter, just about a 1% increase. I’d say looking forward that we’d be in the range of maybe 2% on a roll forward basis over the next four quarters.

Mark Bozek

Okay. Mark as pertaining to your question about the number of hours of programming, I think it’s pretty clear for people that know our industry and people like yourselves who cover us and some that will ideally be covering us. To see that by watching us, that there are opportunities that. We have some really solid relationships with some really solid vendors who do a lot of business with us but you can watch our shows and watch us online and watch us on your phone or listen to us on your phone and see that there is perhaps some repetitiveness there and some openings that we plan to take full advantage of.

And so in order to that, of course as it goes back of the notional proprietary breadth and having much more selection and much more variety, at the point where I feel like we're there and it’s likely going to be beginning in the first quarter of next year to the point we will go back to 24 hours of live programming, I think it’s absolutely essential in our world. It’s one of the hallmarks of this industry that you are live as my colleagues know now in the company, and I've been speaking a lot to it is the notion of we are live and live should be outlived.

And if you're going to be on live you need to create those dynamic experiences that come and start with product but also in the experiences that you are doing both online, on television, on your phone, on your tablet, all of those elements that have to sort of be beating and pulsing in a live kind of way and I think that for us to just instantly, because we talked about it prior to coming here, by just switching on to 24x7 is not necessarily prudent, until we have a more of a selection and depth and breadth of merchandise to present. And then at that point, I think I'm actually frankly excited about the notion of going back live in the overnight because I think that can also be a really special place for us to catch new and exciting things from brands and products and ways of selling our merchandise and creating the so called the art and commerce of what we are going to be doing in the future

Operator

All right. And our next question comes from the line of Alex Fuhrman from Craig-Hallum. Please proceed.

Alex Fuhrman - Craig-Hallum

Mark, I was hoping to talk a bit about some of the programming we've seen since you've arrived at ShopHQ and specifically was really interested in the Mark Cuban event you guys did recently. And kind of -- well, first off, you referred to it as the premiere of Mark Cuban's American Dream. I'm wondering if that is going to be a recurring show that you're going to do, and then thinking more about some of the results of the show -- I know you mentioned the viewership. I wasn't surprised to hear that that was pretty significant for the show. Do you think a lot of that viewership was new viewers? Was that a meaningful period of time that evening in terms of new customer acquisition?

And also curious to how the e-commerce versus phone orders for a big collaboration like that sort of looked. And kind of thinking more broadly, you mentioned a lot of very high-quality Board members and a lot of relationships they bring to the table. Certainly that event, in particular the Mark Cuban event, involved a lot of merchandise and media tie-ins and things that I was surprised to see that was able to be put together in such short order. Are there specific relationships from the Board that really played into that and are helping to drive getting some things together really quickly? And just curious as to what those relationships could be bringing in the future.

Mark Bozek

I think first and foremost Mark Cuban, the relationship that began with Mark Cuban began before I got here. And kudos to Teresa Harris who is our director of beauty who at the beginning of -- who made that relationship happen. That said, he came here last week and the whole notion of the timing of it as it related to all the things that I have talked about in terms of where -- the ways in the future that I think it can become much more exciting way of selling and presenting, at the end of the day, it still has to be entertaining right and a lot of people who watch our kinds of businesses are in fact entertained by it and I think the opportunities for us be more entertaining certainly began with that show last week where it was really alive and it was a fun and it was funny and it was fun to watch. And guess what? We had some really great products that sold really well and in many cases sold out before they ever went online.

And so the notion of that kind of presentation and those kinds of relationships are very much a part of what I see the future being in terms of relationship, certainly with the members of our Board that I mentioned. There are some obvious connections to those world that make it really exciting for us.

And I think again it was Mark Cuban as the personality, but nobody has ever heard of those eight or nine entrepreneurs that we had on the air. They might have seen them in Shark Tank. But we have the ability to present them in 87 million television homes and online and mobily [ph] and on our tablets, and that’s an opportunity that many-many people launching products in little cottage industries around the world don’t have an opportunity. So it’s really exciting. As far as it being a premier, everything we launch on ShopHQ in our world is a premier. Whether becomes an ongoing weekly series or what I think is to be determined but Mark Cuban certainly left here with a great feeling and a real enthusiasm of presenting something in the dollars per minute world that he hadn’t and he's done a lot of things in his carrier, but this was the first of being involved in a dollars per minute business. And again, if you watch the show or listen to it, it was really exciting and I think it’s the beginning of what you’ll see a lot more from us in the future.

Alex Fuhrman - Craig-Hallum

That interesting what you said about cottage industries because I feel like something I've noticed from your peers out there at QVC and HSN has been a lot more focused on smaller products, presenting more products in different categories within a given hour and I feel like in many regards the event you did with Mark Cuban mirrored that in the sense that you had nine products across different categories in a two-hour window. Do you feel that's an opportunity that either ShopHQ or just the industry in general has been slow to get on? Is more vendors, more products, smaller things that maybe don't need a national marketing platform of their own but could just hop into 10 or 15 minutes of airtime?

Mark Bozek

Alex, I think it’s a combination of both of those things. I think you won’t necessarily be just focused on those but absolutely it's that excitement of having of discovery, right, and it’s not just about the lowest price or the last cycle of the selling of a particular item. It’s that discovery piece that makes it an exciting experience for the customer. And that’s really where I think there's a lot opportunities. And for us, as I said in my comments, I think the smaller size that we are comparatively to our direct competitors is a real advantage if we do it right.

If we do it right by saying wow we’ve got a lot of airtime here, that’s not unlike it was 15 or so years ago I jointed HSN. We had a lot of airspace and a lot of airtime to fill. We began to fill it and then built these real sizable $50 million to $100 million proprietary brands and there is no reason why that opportunity can’t exit here as well. That’s where I think and that’s where we’re having a lot of discussions about. If we’re going to be the size that we are and act the size we’re and perhaps not act like we are five times bigger than we are and I think that if we do that and that nimbleness as I said earlier, thinking nimble and acting nimble, or more nimble, really gives us that opportunity and we can go into the marketplace as a vendor community and say, hey, we know who we are but here is what we could be. And imagine if you launched your brands with us in our 87 million homes and we gave you X amount of airtime and X amount of time online and X amount of time digitally on our mobile platform, that’s a really great way for us to present ourselves now where perhaps it wasn’t done so much like that in the past.

Operator

Our next question comes from the line of Greg McKinley from Dougherty. Please proceed.

Greg McKinley - Dougherty

So you announced a couple of executive leadership changes, Mark. I wonder if you can talk a little bit about the roles and responsibilities those previous positions held and sort of what your strategy is with who is going to take ownership of those responsibilities going forward. And maybe you’ll just start with that, please.

Mark Bozek

Sure. Thanks Greg. I think that anybody in my position that comes into this situation that I’m now in has the opportunity at the beginning to look at the team of people that work with him or her and see where there is perhaps opportunities to tweak it if you will and I think as I just mentioned earlier in terms of our size, I think that perhaps the way we were organized was perhaps too siloed and too heavy if you will at the top and that there is a way to, in our think nimble, act nimble kind of way, approach it from having more direct access to the different divisions.

So in the case of the COO position, the Chief Operating Officer position, that covered operations, it covered e-commerce, it covered HR, it covered all different kind of rather disparate areas and that’s just the way it was organized before and not for better or for worse. It’s just I think we can be more nimble by having less of that organizational structure at the top if you will to have more direct access to the people who work in those divisions and I think that that’s really what drives that in particular on the merchandising side of things again when you are in the position of coming into the Company that I am, that you have to look at what the opportunities are and how we are organized and who are the best people that you have around you, that are smarter than you in all the way that you want them to be smarter than you, surrounding you and I think, so that’s the reason why we've begun this process of looking at that team. I don’t anticipate drastic changes or any other movements in any big ways going forward that they were out of the gate opportunities that I saw for us to begin to be a lot more nimble and act our size.

Greg McKinley - Dougherty

Okay, thank you. And then maybe just a numbers question behind that. With the elimination of the COO role, and I’m not sure, I think you indicated the CMO role will be replaced. I don’t know if that actually means adding a body or people taking on additional responsibilities within your existing merchandising team. But how should we expect that to impact administrative and operating expenses going forward?

One of the things that was little higher than I had expected was G&A. After pulling out some of those nonrecurring items you had identified and maybe part of that G&A was a stock comp catch-up on the new board members. But wondering if you could just right the table on that expense run rate going forward?

Bill McGrath

Sure Greg this is Bill. First of all with G&A, you did hit the nail in the head and the primary components of the driver of G&A cost or the increase in G&A cost in the quarter we wound up about $6.8 million. About $1 million, $1.2 million of that were what I would describe as non-recurring components of flow cost within our stock options and restricted stock expense, one tranche being the element that relates to new board members that have joined us and the stock awards associated with that and then the second being the recognition of accelerated vesting associated with the CEO transition.

So absent that, we're in that range of around $6 million or so, actually little bit less than last year, primarily influenced with the absence of rebranding cost that occurred in the prior year. So I think as a run rate going forward, if you equate for that, roughly $6 million or so would be what you’d anticipate, with a little bit of a range around that in terms of Q3 and Q4, G&A, then exclusive of unusual items. You referenced the salaries associated with the previous role of the Chief Operating Officer and how that would influence. It was a named executive officer role. So that salary was disclosed in our proxy. It’s around $450,000. That would be the nonrecurring component of that.

We did mention in the 8-K associated with the personnel changes that those moves or those individuals are eligible to be paid a severance in accordance with the executive severance benefit plan that was approved by the board in the early part of this year. So those costs would be recognized as a below the like adjusted EBITDA cost within the third quarter. The event itself, the personnel change and the approval of that occurred within the third quarter. So you'll see that as a below the adjusted EBITDA line calculation within Q3.

Mark Bozek

Greg, just to sort of to add to that, it’s Mark again. I think again the act -- being nimble and acting nimble that there is opportunities for us. I don’t think we’re quite ready to say on overall what the number is but I think just in terms of how we are organized as a company in all the different divisions, both on the digital side and the operating side and on the television side and certainly on the merchandising and the programming and planning side of it that there is opportunities for us to just organize ourselves in a way that we can be more reactive and scrappier if you will as a $600 million company. That will enable us to grow and being more successful in a scrappier, more aggressive kind of way.

Operator

Our next question comes from the line of Mark Smith from Feltl. Please proceed.

Shannon Richter - Feltl

This is Shannon Richter on for Mark Smith. Just a few number of questions for him. Could you give us the sales by segment for Q2?

Bob Ayd

Sure, this is Bob, thank you for the question. You want to a mix breakdown?

Shannon Richter - Feltl

Yes, please.

Bob Ayd

Okay. So our jewelry and watch business was 43% of our business, fashion was at 18%, health and beauty was at 15% and home and consumer electronics was at 24%, with home growing but consumer electronics decreasing.

Shannon Richter - Feltl

Perfect. And then just one more question here. The return rate came in a bit higher this quarter. Is there anything that we should be worried about there?

Bill McGrath

No, this is Bill, no concerns. That was primarily a function of mix. So our jewelry mix was down somewhat, slightly from prior year Q3. The real strong rise in our sales base within Q3, or Q2 I should say was within the fashion category and that carries a return rate with it that’s somewhat higher than our overall average. So the influence on return rates within the second quarter was almost exclusively a function of the product mix within the period.

Operator

All right. Our next question comes from the line of Robert Routh from National Alliance Capital Markets. Please proceed.

Robert Routh - National Alliance Capital Markets

First, obviously when it comes to home shopping, household names are QVC and HSN. Everybody knows them. ShopHQ for years it was ShopNBC. It's one of those names that people either know or they don't know. And given you're in 87 million homes there are great operating leverage inherent in the model. The biggest problem it would seem is getting more eyeballs and more people to know who you are, what you are doing, and what you're going to do going forward.

And obviously, the Cuban show helps along those lines. But I'm curious what other types of things could you do to get the general public more aware of who you are and what you are doing so that ShopHQ becomes a household name like QVC or HSN where people ask, name a home shopping company. Obviously, it's not on the tip of everyone's tongue but you’d think it should be, given what you are doing, what you could do in the number of homes that you are in. Just curious what else you plan to do to drive eyeballs to that network and to the brand?

Mark Bozek

Thanks Robert, this is Mark. Obviously it’s the -- figuring out if you will that we have to do in terms of what we're going to do. At the end of the day, it starts with more better stuff. It starts with that broader mix and broader depth and breadth of merchandise and the Cuban show was a perfect example of it. We launched eight new brands that have never been on our air before and we had an audience of people that doubled more than what we usually had. And so it’s the beginning of those kinds of things that really enable you to define your brand.

I think you can define and we will define our brand by the products and weight that we sell them. Excuse me, I will take a drink of water. I think we will define our brand, I know that effort it has to be effort for us. The way for us to define our brand and be as recognizable as those two other companies and by the way not just those two other companies but everyone that plays in the commerce space, I think that’s a much bigger opportunity for us and it’s certainly what we’re setting our sights. But obviously in the category as were compared to HSN and QVC and regards to your question, I think that it starts with the brands that you develop and the way that you sale them, and the way that you present them. I think once you do that, that your ability then to market your brand name and all the incredibly ubiquitous ways there are to market these days, both online and on television and through grass roots marketing et cetera, that there's way that you can do it. We have to do it. Obviously I think that going from ShopNBC to ShopHQ, that there's not a whole lot of brand equity necessarily in the names and I think there is some real opportunities going forward for us to develop those.

But I believe that it starts with I know -- I strongly believe that it starts with the brands that we're going to be introducing and the ways in which we're going be presenting these products. I would rather not competitively speaking and the competitor may not necessarily lay them all out on this call but rather just show by doing them and hopefully some more than others will be or more than -- let me put this a different way. Hopefully more than of them that we try and will be successful than not.

Robert Routh - National Alliance Capital Markets

Okay great and then just one follow-up to that. Obviously, given your equity cap and given your 87 million homes, you couldn't launch a basic cable network and get in 87 million homes for less than what your total capitalization is. It would cost multiples of that, as we all know. You look at companies like Zulily out there, you look at your valuation and your revenues and there's a disconnect in terms of either these things are way overvalued or you guys are way undervalued given the operating leverage inherent in the model, the infrastructure you have built, what it would cost for someone else to build it from the ground up. And I'm curious, could you talk a little bit as to why you think the public markets seems to put that valuation differential on the equities because it doesn't seem to make a lot of sense to me, given what you have and what some of these other, in theory, competitors don't have, and yet they are seeming to capture multiple and a valuation that is light years ahead of where ShopHQ is, which doesn't seem to make any sense. [Indiscernible] if you could explain what you think that is the case?

Mark Bozek

Thanks for the question Robert. And I second that emotion in a big way. I think that Zulily, in the valuation there $4.5 billion and they've done -- they’re doing slightly larger numbers than us and obviously they’re growing much more rapidly because of the nature of how they have begun from scratch. But I would be -- frankly I'm much more excited about being in 87 million unique television homes than I am necessarily about 6.7 million unique visitors because as we all know, a unique visitor does not a margin make unless they buy something from you and then they have to buy again and then again and again and again and become an actual customer, much like our 87 million households are only relevant if they’re buying and then of course if they’re watching.

So I think that is it’s my goal in raising the awareness and perhaps evolving the dialogue and the discussion to the comparison that we are this commerce company that happens to be in 87 million television homes and has a real presence online and is our presence great and is it the best mobile site going? No. Everybody here in our Company knows that. But the opportunities for what we have to build all that and the framework that we have by having these 87 million homes should if we do it right and create the right amount of relevance for our Company and for our brand that perhaps in the efforts of what we’re going to be doing and the unique ways that we think we can disrupt this world, as it relates to what companies such as Zulily come about and are perceived as they are with these incredibly large valuations compared to ours, I think there is real tremendous opportunity and I hope very much and it's what’s got me most excited about being involved in this company, was the opportunity to do exactly that, is to perceive us much more as we grow and it's not going to happen overnight, none of this does, but be perceived in a much more relative kind of way and compared kind of way to the entire commerce world, not necessarily just to the people and the companies in Pennsylvania and in Florida.

Operator

(Operator Instructions) And your question comes from the line of Justin Ruiss from Sidoti.

Justin Ruiss - Sidoti

I just had a quick question when it came to -- I guess really what you've been harping on the entire time is the proprietary-ness. Are you going to be looking to expand out any product verticals at this point? Are you going to be adding more verticals? Is that something that would behoove you guys in the future?

Mark Bozek

Yes, Justin, I think that’s we’re fully covered in the area of watches. We have great relationships with our watch vendors. I think that you open up all the other categories that we are going to compete in. The verticals as they exist are one that are fairly well known in our industry in terms of beauty and home and food and fitness and ingestibles and all of those categories that are the anchors of competitors and our high margin real revenue driving categories that we are absolutely going to be and again it speaks to the whole white space that I think we have in our 168 hour-a-week programming schedule that will enable us to fill those spaces and those hours and those times online and what we do digitally in a much more buoyant kind of way. And I also believe there will be other categories that perhaps that will play in as well that our competitors do not.

Okay, I think that just about does it. I guess I wanted to -- again, because this is my first call with all of you to reiterate that I am extremely mindful, as are my colleagues in the Company, aware of the history of the Company and that we’re keenly aware of all the challenges that lie ahead and what it takes to make these businesses successful.

But again, it bears repeating that those challenges and it’s coupled with to the point about Zulily and those questions that the incredibly fluid nature that are all things commerce and all things digital that present us with really great exciting opportunities and I am viably excited to be here working amongst this team. Thank you very much.

Operator

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

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