HSN (HSNI) Mindy Grossman on Q2 2016 Results - Earnings Call Transcript

| About: HSN, Inc. (HSNI)

HSN, Inc. (NASDAQ:HSNI)

Q2 2016 Earnings Call

August 04, 2016 9:00 am ET

Executives

Felise Glantz Kissell - Vice President, Investor Relations

Mindy Grossman - Chief Executive Officer & Director

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Analysts

Tom Forte - Maxim Group LLC

Neely J. N. Tamminga - Piper Jaffray & Co. (Broker)

Eric J. Sheridan - UBS Securities LLC

Anthony C. Lebiedzinski - Sidoti & Co. LLC

Chase White - FBR Capital Markets & Co.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

Victor Anthony - Axiom Capital Management, Inc.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Operator

Ladies and gentlemen, good morning, and welcome to the HSN, Inc. Second Quarter 2016 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 - Vice President, Investor Relations

Good morning, everyone. And thank you for joining us. On this morning's call, we have Mindy Grossman, Chief Executive Officer of HSNi, and Judy Schmeling, Chief Operating Officer and Chief Financial Officer and as of today appointed President of Cornerstone. Mindy is going to first say a few words followed by Judy's review of 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.

In addition, on today's call, there will be references to certain non-GAAP financial measures. These are described in more detail on 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 GAAP – non-GAAP financial measures to the most directly comparable GAAP results.

I would now like to turn the call over to Mindy Grossman, HSNi's CEO. Mindy?

Mindy Grossman - Chief Executive Officer & Director

Good morning, everyone, and thank you for joining us on today's call. Before Judy reviews our financial performance for the second quarter, I wanted to take a minute to discuss the announcement we made earlier today, regarding Judy's appointment as President of Cornerstone.

Judy has been an integral business partner and friend to me and so many others across the broader management team over the years and I'm thrilled that she'll be taking on the strategically important role, in addition to remaining COO of HSNi.

As you know, Judy is a seasoned executive with extensive financial and operational expertise and over 20 years of experience across all areas of our business. During her tenure, she has contributed significantly to HSNi's growth and development from the advancement of our innovative and patented technology such as Shop by Remote to the implementation of our operational centers of excellence across the organization, and the expansion of our experiential retail operations and distribution platforms.

As we continue to take steps to optimize the business and drive long-term sustainable growth, I have complete confidence that Judy will continue to play a pivotal role in helping us further advance our business strategy and deliver value for our stakeholders. Judy will remain CFO of HSNi until a successor is appointed. We expect this to occur over the next several months following a formal external CFO search that we have initiated.

Please join me in congratulating Judy. And I'll now turn the call over to her to discuss the quarter in detail.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Thank you so much, Mindy, and to our board of directors for their belief in my ability to lead the Cornerstone Brands business unit. I am absolutely thrilled to be taking on the role of President of Cornerstone Brands in addition to retaining my responsibility as COO of HSNi.

While our current financial results for the Cornerstone business are disappointing, it is my belief that our strong brand identities, superior products, and talented teams, we will overcome these challenges in the future and drive long-term success for our customers, our employees and our shareholders. I do believe that I am in the unique position of both understanding the business as well as having strong relationships with the brand presidents and senior leaders across the portfolio to immediately hit the ground running. I look forward to reporting back to you on our ongoing process.

Now, putting back my HSNi CFO hat on, let's turn to reviewing our second quarter results. At HSNi, we exerted disciplined operating expense management in light of lower sales demand. HSNi sales decreased 4% in the second quarter with digital sales up 2%. Gross profit was down 150 basis points with operating expenses excluding non-cash charges, decreasing $17 million or 7%. Adjusted EPS was $0.74 compared to $0.81 a year ago.

As part of our strategic review of the Cornerstone portfolio, we entered into a letter of intent to sell our TravelSmith and Chasing Fireflies brands. As a result, we recorded a non-cash asset impairment charge of $20 million or $0.24 per share. Diluted EPS was $0.50 versus $0.78 in the prior year. I will discuss TravelSmith and Chasing Fireflies in more detail in a moment.

At HSN, sales decreased 3% to $557 million. Sales grew in electronics and beauty, offset by decreases in other category, most notably, business and infomercial related products. Shipping and handling revenues decrease as we implemented more aggressive and strategic shipping and handling incentives, particularly in apparel and accessories. Approximately, one-third of the sales decline was related to the discontinuation of our Keith Urban infomercial.

Digital sales grew 5% with digital penetration increasing 330 basis points to 44%. HSN's return rate improved 60 basis points with units shipped and average price point down 2%. Gross profit decreased 6% at HSN to $197 million with gross profit margin down 120 basis points to 35.4%, primarily due to an increase in shipping promotions and higher inventory reserves. Also, in the second quarter last year, as you'll recall, we benefited from favorable settlements of vendor claims.

Adjusted operating expenses decreased 7% to $131 million and improved 120 basis points as a percentage of sales to 23.5% excluding non-cash charges and a $3 million severance related charge in the prior year. This improvement was driven by lower employee related costs, bad debt expense, and media spend.

Including non-cash and severance charges, operating expenses decreased 9% to $142 million. As a result of the factors that I just outlined, adjusted EBITDA decreased 3% in the second quarter to $66 million. Operating income, which includes the $3 million severance related charge in the prior year, increased 3% to $55 million.

At HSN, we remain focused on improving our top-line. In addition to the merchandising strategies that Mindy will be discussing in a moment, we are accelerating our targeted customer acquisition efforts. We expect to continue to experience margin pressure in the near-term as we address excess inventory in certain categories. Simultaneously, we will be prudently managing operating expenses.

Before turning to Cornerstone, I want to provide an update on our latest distribution initiatives at HSN. We continue to expand our presence in the over-the-top environment, most recently by utilizing our excessive content and patented Shop by Remote technology to create a new channel application that just launched on the Roku platform, HSN Beauty. This platform combines our entertaining and educational content with the ease of ordering on Shop by Remote to create a frictionless commerce experience.

Roku also carries channels for HSN, HSN2, HSN Electronics. While sales from the over-the-top environment are currently limited, we are positioned well for the future in this rapidly emerging space.

As Cornerstone, as I mentioned, we've committed to selling TravelSmith and Chasing Fireflies, two of our apparel brands, allowing us to exclusively focus on improving the performance of our strategic brands. We entered into a non-binding letter of intent and expect this transaction to close in the third quarter. The assets and liabilities for the two brands were classified as held-for-sale and measured at their fair value less the estimated cost to sell the brands.

As a result, we recorded a non-cash asset impairment charge of $20 million. For a point of reference, the 2015 sales for Chasing Fireflies and TravelSmith combined were $100 million and the pre-tax operating loss for two brands, excluding asset impairment charges and certain fixed costs, which will partially be reabsorbed by Cornerstone following the sale, was approximately $5 million.

In the second quarter, Cornerstone sales were down 5% to $297 million, primarily from lower sales at Frontgate and Ballard Designs related to less demand in the outdoor segment as well as weakness in apparel at TravelSmith. We deliberately reduced catalog circulation by 6%, which also impacted sales.

Digital sales decreased 2% at Cornerstone with penetration increasing 200 basis points to 69%. We're pleased with the performance at Garnet Hill and Grandin Road, which demonstrated solid sales growth in the second quarter.

Gross profit at Cornerstone decreased 10% to $115 million. Gross profit margin decreased 200 basis points to 38.6% largely from lower products and shipping margins driven by higher promotional activity, particularly in the home brands which have been impacted by a highly competitive and promotional marketplace. In addition, our actions to move certain entities in inventory, including outdoor, contributed to the decline.

Adjusted operating expenses excluding non-cash charges and the asset impairment charge of $20 million decreased 6% to $99 million and improved 40 basis points as a percentage of sales to 33.2%, primarily reflecting lower catalog advertising costs as we tightly managed circulation with sales demand. Including non-cash and asset impairment charges, operating expenses increased 12% to $124 million.

Cornerstone's adjusted EBITDA was $16 million, a decrease of $6 million from the prior year. Operating loss, which includes the non-cash asset impairment charge of $20 million, was $9 million compared to operating income of $17 million in the prior year. Although, we expect to continue to see near-term pressure due to the lower demand in the outdoor category, our management team is focused on improving our performance at Cornerstone, which includes accelerating product development efforts as well as infusing newness and offering expanded product assortments. We are also adjusting our marketing strategies including catalog circulation, digital marketing, as well as our value proposition.

At HSNi, our second quarter effective tax rate was 37.4%, virtually unchanged from the prior year. We currently have 2.8 million shares remaining under our existing share repurchase program. This year, we have purchased 233,000 shares to-date. As we have previously articulated, the principal purpose of the current 4 million share repurchase program is to offset dilution related to our equity compensation programs.

We will be opportunistic and take advantage of market conditions as appropriate. Our board also just approved a quarterly cash dividend of $0.35 per share payable September 22 to shareholders of record as of September 7.

In summary, we're committed to improving our financial performance particularly to drive top-line growth and margin expansion, while simultaneously executing on our strategic initiatives that leverage our unique position in retail commerce.

We're undertaking these strategies while confronting near-term consumer mindshare headwinds that included uncertain political environment, media events such as the Summer Olympics, as well as the competitive retail landscape. We are tightly managing expenses while repositioning the business as we focus on returning HSNi to a growth trajectory.

Mindy will now review our strategies to achieve this goal.

Mindy Grossman - Chief Executive Officer & Director

Thank you, Judy. As we articulated on our last earnings call, we expected our results to be challenged in the second quarter as we continued our efforts to improve the performance of certain merchandising categories at HSN, and our results at Cornerstone were impacted by a weaker season and a greater promotional environment in the outdoor business. While we are still operating in a tenuous retail and consumer environment, as Judy mentioned, our number one strategy is to focus on the fundamentals in all areas of the organization to enable us to drive long-term consistent growth.

We believe that this strategic focus will have a positive impact across our business over the long-term. At HSN, we are making progress in repositioning our product categories to optimize newness and variety, as although early, we are seeing improved sales performance in a number of key categories.

As Judy outlined, as part of our strategy to focus on the brands within the Cornerstone portfolio with the greatest growth opportunities, particularly in the home category, we are negotiating the sale of our TravelSmith and Chasing Fireflies brands.

The foundation that we have built positions us well to capitalize on the opportunities to ignite our strong brands, develop unique products, create extensive compelling content, and deliver frictionless commerce across our existing and emerging platforms and experiences with a focus on digital growth.

At HSNi, digital penetration increased 270 basis points, now comprising 53% of the business. Mobile grew 16%, reflecting 21% of our total business and 40% of digital sales.

Turning to HSN specifically, sales in the quarter decreased 3% as we took the necessary actions to position our product portfolio for the future as well as make incremental investments in shipping and handling as a key competitive strategy and a means to attract and to retain customers.

Our core customers remained loyal. And although our 12-month active customer file was down slightly in the quarter, it was primarily due to the continued wind-down of the Keith Urban direct-response business and decline in the fitness and infomercial categories. Excluding these businesses, our customer file would have been virtually flat.

We are investing in targeted customer acquisition strategies to drive growth. Efforts in the second quarter to build our customer file included partnering with Google to leverage their extensive display networks specifically targeting users with similar category affinity profile, utilizing Facebook Custom Audiences and launching new video content integrated into Facebook News Feeds, and developing Yahoo! custom display campaigns focused on specific high-value categories.

Appreciating that compelling product is the most critical factor in attracting, retaining customers, I will now turn to the specific category that most impacted the quarter.

In electronics, we continue to build on our momentum in the category anchored by key partnerships. Our successful Innovation Event featured HP and Bose, and maximize the launch of products in the emerging category of smart home. We remain focused on pursuing opportunities in electronics with an emphasis on innovative technologies.

We have growth in beauty, which is an extremely important category for us with its strong lifetime value customer attributes and higher margins. Our expanded assortment of Dr. Brandt and a deepening of our prominent prestige brands contributed to digital growth and higher off-air sales.

In partnership with Visa, we launched beauty-specific campaigns in the quarter using Visa's extensive customer file to drive additional brand awareness to HSN. Media campaigns ran across Facebook and Instagram, nearly half of the customers from this campaign new to our brands. We will continue to optimize our relationship with Visa.

In the home area, we made further progress in our efforts to reposition the business. Areas of strength in the quarter included home solutions and automotive solutions, another emerging category for us. Our Ingenious Designs retail business also experienced growth. We did have a slow start in lawn and garden, which occurred in the outdoor piece across our portfolio.

Within fashion, a key factor that affected sales growth in the quarter was the timing shift of a high-volume apparel clearance event. We continue to strongly believe in this category's growth prospects as we distort top trends including celebrity apparel and footwear, both of which performed well in the quarter.

In fitness, we are adjusting our portfolio to reflect changes in consumer behavior for the migration to overall health and wellness with a focus on digital health. As a result, we significantly reduced airtime. And while this impacted sales in the quarter, it enabled us to expand our strong assortment of wearable, which had notable strength as we expect to be an area of growth.

Similar to last quarter, the infomercial category was down, driven by a significant reduction in airtime as well as a result of a lack of innovation in the marketplace. In an election year where media costs are high, there is a lack of direct response programming but it has been more pronounced this year.

Although, jewelry sales were down slightly on slightly less airtime, the category experienced improvement in both productivity and profitability. Our increased focus on digital with enhanced customer experiences and expanded offerings led to higher digital growth. We will be expanding our fine and elevated fashion jewelry collections, which have demonstrated strength.

We've made progress in advancing our digital strategy with digital penetration increasing 330 basis points, now representing 44% of HSN sales. We saw strong increases in traffic with new and repeat visitor conversion rates up, while average order value declined slightly mainly driven by lower price points.

We continue to test, learn, and apply our optimization and personalization strategies, areas of focus during the quarter including ongoing testing of campaigns, additional customized sites placements and real-time behavioral influencers at strategic points within the sales funnel. Mobile sales increased 22% and now comprises of 22% of the overall HSN business and 51% of digital sales. Mobile growth was led by beauty and electronics.

We've advanced our social media presence as part of our distributed commerce strategy. This included intensifying our partnership with Facebook through Facebook Live Broadcasts which provides consumers with behind-the-scenes content and real-time access to our extensive partners and brands. In the second quarter, these broadcasts featured Serena Williams, Suze Orman, Kristin Chenoweth, and Joy Mangano.

By the end of the quarter, HSN executed nearly 30 live streams on Facebook and captured more than 10 million impressions and almost 3 million views, driving spikes in reach and engagements. We also created a dedicated social club on HSN.com that raises awareness of the HSN brand experience by a social sharing and increase stickiness with our existing customers.

As we mentioned on the last earnings call, we partnered with Disney on our sixth movie collaboration with Alice Through the Looking Glass. This event resulted in hundreds of sellouts and strong customer engagement. From a social perspective, we ran our first-ever Facebook Canvas ad in support of the Alice digital collection.

Moving to the Cornerstone portfolio, our overall performance was largely impacted by softness in the luxury market as well as weakness in the outdoor segment that impacted our home brands. Our results also reflected deliberate declines in circulation.

Garnet Hill, Grandin Road, and Improvements delivered sales growth in the quarter while Frontgate and Ballard Designs were largely impacted by reduced demand in outdoor, which contributed to the 5% decline in sales.

We are building our interiors business within the home portfolio as we decrease our reliance on outdoor. Our experiential retail strategy had solid performance during the quarter and we continue to be excited about the opportunity to create compelling destinations where consumers can interact with our brands.

Our flagship Ballard Designs studio in King of Prussia has led to increased demand and higher lifetime value customers in the overall region. Our ship to store strategy, which represents over 10% of the business, provides customers an opportunity to physically engage with the brand, leading to additional purchases. We are selectively identifying other opportunities to capitalize on this success, including the opening of our Tysons Corner location outside of D.C. later this month.

Cornerstone's digital sales penetration increased 200 basis points to 69% with nearly all brands contributing to the increase. Mobile sales grew 4% with mobile comprising 18% of the overall business and 26% of digital sales.

During the quarter, we've redesigned all of our smartphone sites with an enhanced user interface, utilizing a new adaptive design platform. The sites have been customized based on learnings from end-user mobile shopping behavior with design enhancements.

Similar to HSN, we are intensifying our social presence through targeted campaigns across our brands with Pinterest, Instagram, and Facebook.

Looking ahead, we remain committed to driving growth in the business through focused execution and consistent performance. We continue to navigate through an uncertain macro environment and recognize that it will take somewhat longer for certain areas of our business to build momentum. But that said, we're excited about many of the initiatives currently underway.

At HSN, we just completed our July birthday, focus on exciting and innovative products, programming, and launches. We've premiered numerous high-profile brands, experts, and designers, including the successful debut of French Rendez Vous at lifestyle designer collections; celebrity entertaining expert David Monn introduced David Monn for Winter Lane as part of our Christmas in July event, a seasonal collection that will expand into tabletops and accessories; actress and home designer, Minnie Driver, and a mother and design expert co-launched an interiors collections inspired by English Living; and Kitchen Solutions from Iron Chef, restaurateur, television personality, and author Geoffrey Zakarian.

In July, we also added two new ongoing segments to our destination programming strategies. First Friday, which will air the first Friday of every month and features insights into our best products, launches, and special deals for the month ahead. And Customer Celebration, which highlights customer picks and integrates online voting for an interactive customer engagement.

Turning to the remainder of the third quarter at HSN, we continue to offer our customers greater variety and newness throughout our product categories. Fall Fashion will launch with a style icon campaign featuring Giuliana Rancic, IMAN, Serena, Melissa McCarthy, and Iris Apfel who will launch our first ready-to-wear collections exclusive to HSN, inspired by her documentary.

And leveraging our success with Vince Camuto's footwear, we will be intensifying our partnership to showcase a comprehensive lifestyle brand. This includes debut of his (25:09) apparel collection and being the exclusive retail destination for Vince Camuto handbags. And as part of our intensification of the footwear category, we are partnering with Hearst Magazine's Marie Claire and Senior Editor Zanna Roberts Rassi to bring an editorial point of view to fashion, speaking of larger trends and highlighting new styles culminating in our Shoes First premiere on HSN, which will also be featured as part of the magazine's Shoes First footwear edition.

Smart Home and DRONES (25:41) will play an important role during our fall Innovation Event and we'll also be extending our successful partnerships with the key brands such as HP, Dell, and Samsung. HSN is also the exclusive launch partner for GRAMMY Award winner Michael Bublé's first-ever fragrance with Elizabeth Arden. Michael will be appearing on HSN as we leverage his strong social following of nearly 15 million fans across Facebook, Twitter, and Instagram. And we'll be debuting Beauty from Gina Rivera, who garnered a large following from CBS's Undercover Boss. The debut will coincide with the launch of her reality show Beauty Boss.

We'll also be premiering an exciting new patented technology and innovation from our Ingenious Designs business, featuring Joy Mangano's new Luggage & Travel-related products which will eventually be expanded into broader retail.

And as part of our American Dreams series, 100 finalists in our nationwide search to find the next top entrepreneur and recipient of Good Housekeeping Seal will be narrowed down to 10 who will be featured in the magazine. Viewers will be invited to vote on their favorite item and the winner will sell their product on HSN.

And lastly, as part of our frictionless commerce effort to remove barriers in the checkout process and drive new customers to HSN, we are launching Apple Pay next month. As I mentioned earlier, our strategy at Cornerstone is to focus on the brands with the greatest growth opportunity.

With our primary focus on restoring performance in the overall portfolio, we are undertaking several initiatives in the third quarter including: at Frontgate, recognizing the continued softness of the outdoor segment, we are expanding on the success of the interiors business by introducing a collection of interior offerings as part of our grand living lifestyle that combines luxury with innovation, exemplifying designer solutions throughout the home with our greatest expansion coming next month.

At Ballard, our Design Discovery series will be featuring author and editor Eddie Ross. Capitalizing on Ballard's extensive partnerships, the brand is currently showcased in the Traditional Home Hampton Showhouse. Ballard is also expanding its customization services as a core differentiator at retail and online. As we have articulated, we believe that creating compelling and unique destinations for our brands will allow us to maximize our business across all distribution platforms and be both a significant marketing and sales vehicle. Each brand is unique, as is the specific strategy for expansion.

In addition to the eminent opening of our Tysons Corner Ballard Designs studio and planned expansion throughout 2017, we're finalizing select opportunities to showcase Frontgate as part of our experiential retail strategy. Our prototype, Frontgate Experience, will open in the second quarter of 2017 outside of Dallas.

At Garnet Hill, we have launched the Garnet Hill Mobile Boutique, an engaging brand experience that serves as both a marketing and sales platform. The transportable boutique is open in New Hampshire, which is the home to Garnet Hill, and will be traveling to the South Street Seaport in New York City. We're also continuing to see success with our seasonal store in Bridgehampton.

And, announce today, in September, Grandin Road will take its first step into experience-driven retailing to an innovative collaboration with Macy's at Herald Square in New York City that will bring an exciting seasonal retail pop-up location to life, Macy's first Halloween concept shop, a definite must see. This 1,400 square foot Grandin Road Halloween Haven pop-up will immediately greet customers as they enter the store's 7th Avenue entrance. With two retail windows and four interactive vignettes, this will be a unique and unparalleled experience from September through Halloween and serve as a great marketing vehicle for Grandin Road in what is already a key market.

In summary, we believe that our emphasis on focused execution combines with our strong talent, brands, proprietary products, innovative platform expansion, and extensive content unique to HSNi will position us to take advantage of our growth opportunities. But once again I'd like to congratulate Judy in her new leadership role at Cornerstone, and I also want to reiterate how thrilled I am that Fiona Dias has just joined our board, given her unique skills and deep digital experience. With Fiona's addition, women now comprise half of our board and certainly having diverse group of leaders around the table is linked to long-term business success. We look forward to working with Fiona and the board, along with our stakeholders to capitalize on our unique position in retail commerce.

Thank you. We will now take your call.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Tom Forte from Maxim Group. Your line is now open.

Tom Forte - Maxim Group LLC

Great. Thank you. So, first off, congratulations to Judy, I'm very excited.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Thank you.

Tom Forte - Maxim Group LLC

Second, and maybe it's too early to ask you this question, so now that you've decided to shed Chasing Fireflies and TravelSmith, do you feel like the portfolio is where you wanted or are further adjustments in order? And then it looks like you're accelerating your, call it, physical store effort for your brands. How should we think about the impact on your P&L from that effort? Thanks.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Sure, Tom. Definitely, I would say that I'm very new into the role, but in terms of the brands that we have, we did decide to really focus primarily on the home brands in addition to Garnet Hill, which has done a remarkable turnaround job and has a unique place in the market. So, at this point in time, we don't see any future change. Of course, once I get in there and really determine, that could always change our approach. But I think our first focus is really trying to return the business back to a growth trajectory and really look at all of those opportunities by continuing to look at our proprietary product development, as I mentioned on the call.

Looking at our retail experiences that you mentioned, we don't have a set number of retail locations that we're looking to expand, but what we have found with a few Ballard stores that we have is it really brings an increased sales to those markets as well as a further brand awareness and so we're trying that also with Garnet Hill, as you know we opened a Bridgehampton store last year in the summer, great brand recognition. We're very excited about the opportunity with a pop-up shop to be able to again to drive that brand business. And it's not a lot of investment from that perspective. As we rollout more stores, certainly, if we decide to increase that level of store rollout, we will be informing the group in terms of CapEx. But the incremental P&L is positive, except for opening up startup costs of the first store. So...

Tom Forte - Maxim Group LLC

Great. Thank you very much.

Operator

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

Neely J. N. Tamminga - Piper Jaffray & Co. (Broker)

Great. Thanks. Hey, Judy, congratulations, completely deserved and I too echo the board and Mindy's accolades here, watching your career over the years. I think you are in a really cool and very unique position, though, given your kind of ability to see cross-functional and then also being kind of a chief capital keeper of the company. So could you share with us maybe some of your early approach as to how you're going to maybe manage the Cornerstone business differently than it's been managed in the past? Thank you.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Sure. Great question. And you're right. I have seen what has worked and what hasn't worked over the timeframe and I am in a unique position because I know some of the team members here really well and I have looked at it from a CFO vision and a different eye. I would say that my approach first is going to be really work with the team leaders.

I think that they have a lot of thoughts on what their issues and opportunities are. And one of the things that I think I can do best which is what I've demonstrated here in my current role is really galvanize the team around the core strategies, eliminate roadblocks for them and really focus on the big rocks that are going to have a substantial impact on the business. And so, I am going to be visiting the brands starting August 15, hitting the ground running on our strategic planning process.

But I think that there is a lot of opportunity here. We can continue to really maximize our digital experience from a consumer standpoint. I'm very passionate about that. I think the HSN people will also tell you that as well. And really question and just determine how we are spending our dollars, whether it's on marketing or capital or whatever it is, I think I bring a different skill set to this team and we'll be very complementary (35:54) with each other.

Mindy Grossman - Chief Executive Officer & Director

And I have to say that the response from the organization has been overwhelmingly positive to have Judy as a partner in this role, so we are thrilled.

Neely J. N. Tamminga - Piper Jaffray & Co. (Broker)

Thanks for that, Mindy, and congratulations, Judy. We're going to really enjoy watching the next era for Cornerstone. Thank you.

Mindy Grossman - Chief Executive Officer & Director

Thank you.

Operator

Thank you. Our next question comes from the line of Eric Sheridan from UBS. Your line is now open.

Eric J. Sheridan - UBS Securities LLC

Thanks so much, and congrats also, Judy, look forward to seeing how it progresses going forward with Cornerstone. Maybe one big picture question and just one clarification if I can. Bigger picture, for Mindy, you cited macro, you cited competition and some of the things you are dealing with in the business as we moved through most of the first half of this year. I want to understand a little bit better how those pressures might be evolving as you move from Q1 into Q2 and now into Q3, what you're doing just to sort of offset those and how we should be thinking about those impacting the business model as we moved out of the first half and into the second half of the year.

And then maybe a clarification, I think you called out the annualized revenue of the brands that are under the letter of agreement. I wanted to know if you'd also be willing to call out the EBIT or EBITDA impact from those brands. Thanks so much, guys.

Mindy Grossman - Chief Executive Officer & Director

Great question. So let me talk about two things. One, what we're seeing in consumer behavior of what we think it is happening externally and then what we're really trying to do within our brands to ensure that if the consumer is going to spend that we will get a piece of that pie. I would say that what's happening right now in terms of the uncertainty, the distraction, the negativity, that's an anathema to the consumer mindset and for retail in general, especially the want side of retail versus the need. And they will wait for what they want versus need.

So I think across HSNi, we really have to focus on the experience, on the uniqueness and really delivering compelling content wherever the consumers are to drive that commerce. And those are the strategies we have in place which is I talked about newness and variety in the pipeline, the more content that we are putting on additional platforms, the more opportunities for our brands to be exposed. That has to be our maniacal focus because, over the next few months, I don't see that consumer distraction, as you will, abating. So we really have to focus on where we can be differentiated.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

And for your follow-up question, the EBIT, the pre-tax loss was $5 million.

Eric J. Sheridan - UBS Securities LLC

Thanks so much for the color.

Operator

Thank you. Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Co. Your line is now open.

Anthony C. Lebiedzinski - Sidoti & Co. LLC

Yes, good morning. And let me add my congratulations as well to Judy. So, a couple questions, you did mention – I think actually it was Mindy, that mentioned near-term margin pressures and, just to clarify, is that at both at HSN and Cornerstone, and also what you're seeing from just an overall demand perspective?

And my follow up question as far as the divested brands, can you give us a run rate for the first half of this year in terms of sales and EBIT? Thank you.

Mindy Grossman - Chief Executive Officer & Director

So, I would say where we will see pressure, as I mentioned before, is in that outdoor segment as we get through just the balance of the season and inventory until all our interior drops occurred. And then in select categories at HSN where we're still cleaning up on terms of the inventory. Where we're seeing strength is in beauty, electronics, this is specifically HSN, culinary and certain design and improvements with health and wellness. Where we are still challenged is really more on the equipment side of fitness and the infomercial category. We're seeing it this time of year, less launch, less media spend because of the high cost of dollars spend. And less innovation, obviously, occurs during election year. But it's been somewhat more pronounced. So we're obviously focusing on the categories that are performing. And then the business such as Garnet Hill, which has been pretty consistent.

Anthony C. Lebiedzinski - Sidoti & Co. LLC

Got it. Thank you.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

And regarding your question on the first half sales for those two brands, it was approximately $30 million.

Anthony C. Lebiedzinski - Sidoti & Co. LLC

Okay. And what was the EBIT drag from that?

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

I don't think that we release that yet, so let me find out. And I will let you know.

Anthony C. Lebiedzinski - Sidoti & Co. LLC

Thank you.

Operator

Thank you. Our next question comes from the line of Barton Crockett from FBR Capital Markets. Your line is now open.

Chase White - FBR Capital Markets & Co.

Hey, guys. Chase White stepping in for Barton Crockett today. Thanks for taking the call. First question is do you guys have any thoughts on how the Olympics might impact your 3Q 2016 TV shopping segment, especially given that it is in the same time zone this year? And then I have a follow-up.

Mindy Grossman - Chief Executive Officer & Director

Yeah. We always take that into consideration certainly and any time there is a shift in kind of media viewing, we know that it can have specific programming disruptions, particularly certain very high profile elements. I think the combination of that and as we're seeing a lot of increases in the whole new genre with the election, we know it is going to have some impact to key programming, but we try and program against that and anticipate. And we launch more digital campaigns.

Chase White - FBR Capital Markets & Co.

Got you. That's helpful. And then second one, I had an unfortunate question that I hate to have to ask but investors have been concerned about it. So, has the string of recent horrific tragedies across the world, which has obviously driven increases in news viewership, have you guys seen any impact from that at all and do you think that would continue if so?

Mindy Grossman - Chief Executive Officer & Director

You know, sadly when in the immediacy of something or an event like that happening, yes, of course we see it, because that's when the customer migrates to the news channels. I would say at a very high level, it goes back to my earlier comment that any time there's uncertainty and distraction and negativity and I would hate to use the word fear. And I'm not just talking for our business, I'm just talking in general obviously, that's not a good thing.

You know, what we try and do is give our consumers meaning, we have a philosophy, there's never any bad news on HSN. And what we try and do is really just focus on our customer and try and be a respite for her and give her a great experience.

Chase White - FBR Capital Markets & Co.

Gotcha. Thanks guys.

Operator

Thank you. Our next question comes from the line of Alex Fuhrman from Craig-Hallum Capital. Your line is now open.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

Great, thank you for taking my questions. And I will certainly add my congratulations for Judy. Would love to ask about the big July birthday month, are there any big learnings, both in terms of just how business trended all in general for such a big, important month for HSN?

And then as you kind of think about the holiday season coming up, are there any particular items or categories or brands that get you excited that were launched during the birthday period that could be key as you think about the holiday season this year?

Mindy Grossman - Chief Executive Officer & Director

Yeah, well we weren't down. So as I mentioned before, we definitely had strength in certain categories but pressures in others. I continue to be pleased with the beauty business. It's obviously a key business for us. We are having very good success, actually we have a program on Beauty Report tonight all around the doctors and innovation and brands.

I'm also – we're also focused in the health and wellness category, digital health particularly with Fitbit, preventative, digital spa, I think those you're really going to see emerging. And then the areas of connected home, as well, for going into the fourth quarter and some of the electronic categories. And then expansion of our, let's call it, organization automotive and home solutions, et cetera and then our vitamin business.

Again, but it's got to be balanced with some of the areas. I mentioned before, we've seen improvement in jewelry and productivity and profitability, but knowing that is not a real strong category externally.

I think we're really going to focus on the fine jewelry business and manage it really well. And then we're enthused with apparel and accessories. But our big really fall emphasis and where that business becomes stronger, it doesn't really launch until a little later in this month. So that's basically what we've been seeing.

Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC

That's really helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Victor Anthony from Axiom Capital. Your line is now open.

Victor Anthony - Axiom Capital Management, Inc.

Thank you, thank you. And Judy, I will tell you congratulations as well. So a quick question at Cornerstone, it's a $1 billion revenue business; thin margins, but most retail businesses are. So maybe I'll ask the question this way. Is you assuming the role a precursor to some sort of value enhancing transaction in the feature?

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Well, I'm taking this role to really create value for all of our shareholders. So you know my goal is to really turn the business back to a growth trajectory. And with all the different things that I outlined earlier, obviously I am still a CFO and I think in certain ways, but I think that I'm also front facing as well. And so, again we will do and grow the business and maximize value for shareholders, absolutely.

Victor Anthony - Axiom Capital Management, Inc.

Okay. Okay. Second, how has your customer base evolved over the past probably two years, given – has it skewed younger, given mobile has become a bigger part of the mix? This is on HSN. And given that you've leveraged social media, you called out Facebook Live, I'm not sure if you're doing anything on Periscope, maybe Messenger. I'm just curious if your customer base has skewed younger, or as well, maybe if there's any sort of shift away from more of the affluent regions like Long Island to more lower – less-affluent regions in the country?

Mindy Grossman - Chief Executive Officer & Director

Okay. We have not seen any shift in the region. I mean we still have very strong market, which reflects both income and population. It's interesting at HSN, you understand it's a 40-year-old brand and as we said, we have an incredible commitment from our loyal customers. But to your point, our mobile customers are most affluent, are youngest and most diverse.

So the key for us is to keep driving customer acquisition through digital and mobile in these younger segments, or even segments with the psychographics that look like our existing customers with a younger demographic, while we keep our existing customer base, which is also very important.

But hence that's why all our acquisition strategies are around mobile and digital. And to your point, we are leveraging a tremendous amount of live streaming.

So for example, in September, we are live again from New York with Serena Williams, but we are taking the streaming event one step further. It's September 18, so it's streaming across all our digital mobile platform, as well as other digital media outlets. And then we're also going to stream that feed on the TV screens, but what I'm excited about is there's the shoppable video experience for online viewers for the first time, which will be a virtual reality experience. And you'll be able to feel like you're there with or without a headset.

And as I mentioned before, the Facebook Live, just the ones we've done have been successful. So you'll see us escalating our efforts there.

Victor Anthony - Axiom Capital Management, Inc.

Fair enough. Just one last question on the sources of the gross margin pressure. I know you called out shipping, the product mix, high inventory reserves. Maybe you could just unpacked that for me in terms of which one had the greatest impact and which one will going forward?

Mindy Grossman - Chief Executive Officer & Director

Sure. I would say on the HSN side, shipping, handling had the highest impact. We specifically did that in certain areas of our business to A; be more competitive, but to also ensure that we were limiting any additional inventory overhang going forward. We do have already, as I mentioned, some excess inventory that continues to be moved, so our goal there is to continue to try and limit that on a go forward basis, any additional buildup, if you will.

On the Cornerstone side, I'd say it was both a mixture of promotional price and shipping, really because the teams were actively managing down the inventory-related to the four outdoor seasons.

Victor Anthony - Axiom Capital Management, Inc.

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Matthew Harrigan from Wunderlich Securities. Your line is now open.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Thank you. There's been a lot of emphasis at NAB and some other conferences on adapting programming for short form into mobile devices, really on the part of original content and on the part of advertising as well. I mean, that's a real established wheelhouse for you. Do you see yourselves going even more in that direction? I mean that's a behavioral change, particularly for younger people but of course that gradually seemingly disseminates to the upper age ranges as well over time.

Mindy Grossman - Chief Executive Officer & Director

Yes, Matthew, as a matter of fact, we have released quite a number of those short form, almost DR (51:43) minimercials that are demonstrable. We've done it with the great pineapple cutter. We've done it with cookware, with Wolfgang Puck, and actually we are reallocating resources in content to be able to do more of those coming up through digital feeds. And we do think that is part of our distributed commerce strategy that you will see more of.

Matthew J. Harrigan - Wunderlich Securities, Inc.

Got it. Thanks, Mindy. Congratulations, Judy.

Judy Schmeling - Chief Operating Officer, Chief Financial Officer & President of Cornerstone Brands

Thank you.

Operator

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

Mindy Grossman - Chief Executive Officer & Director

Okay. Thank you, everyone. Congrats once again to Judy, and we look forward to keeping you up on our progress. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!