HSN Unwraps Profits This Holiday Season

Dec.13.11 | About: HSN, Inc. (HSNI)

Millions of shoppers are avoiding crowded malls and turning to computers and mobile devices for holiday wish lists. E-commerce retailers, such as HSN Inc (NASDAQ:HSNI), which gets 41% of its sales through digital channels, are reaching a broader audience and capturing better margins. And this means solid revenue and earnings growth for investors.

There's a lot of money up for grabs for digital retailers. On Cyber Monday, online retail sales increased 20% from last year while November and December online sales are expected to advance 15% to $37.6 billion. Increasingly, mobile devices are playing an important role in holiday shopping. This season, mobile devices accounted for 6.6% of Cyber Monday sales, up from 2.3% last year.

This is good news for HSN, which is expanding its e-commerce footprint. Not only does HSN operate its Home Shopping Network television stations through cable, but it provides programming online. And, the company's Cornerstone catalog segment is growing online too.

Meanwhile, short sellers are reducing their exposure. Over the past month, shares short have fallen from 3.25 million to 3 million. But, a lot more covering could be coming. It would still take short sellers more than seven days of average daily volume to unwind the remaining shares short, suggesting solid support underneath the stock.

One of the reasons shorts are covering is HSN's new buyback program. In September, the board authorized buying back up to 10 million shares, equal to 26% of the float. Another reason is HSN's ongoing sales growth. Since 2009, HSN has seen sales at its Cornerstone segment increase 32%, while HSN's core segment sales have risen 7.5%.

These investments are driving digital sales to account for a growing portion of HSN's $3.1 billion in revenue. Currently, 41% of revenue comes from e-commerce platforms, up from 38.8% last year.

In the first three quarters of 2011, HSN's mobile ecommerce sales had already doubled the full year of 2010. Last quarter, Cornerstone, digital sales rose 15% - helping lift overall segment sales by 11%. HSN segment digital sales were also up a respectable 10%. As a result, online shopping has been a major contributor to HSN's 7% sales increase from 2010. Not only have unit sales improved by 3%, but prices have firmed, rising 4% last quarter.

This has allowed HSN to post a solid record of beating analyst expectations. Last quarter, its gross margins were 100 basis points better than last year. HSN has exceeded the street earnings estimate in 3 of the past 4 quarters and analysts expect earnings per share to advance 17% in 2012, following 9% growth in 2011. The strength drove analysts to boost 2012 expectations to $2.45 from $2.36 per share over the past 90 days. The sales growth has helped the company reduce its debt to EBITDA ratio fall from 1.6 to 1.1 since 2009.

Given the holiday shopping season continues to drive online growth faster than comp store sales, HSN's likely to post strong results. And, with $204 million in free cash flow, the company generates plenty of money to fund its buyback and 1.3% dividend. With the S&P moving HSN from its less widely traded S&P 600 to its more liquid S&P 400, shares could get increasingly active too, making HSN a smart play for investors looking for e-commerce exposure this holiday season.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HSNI over the next 72 hours.