Liberty TripAdvisor Holdings' (LTRPA) CEO Greg Maffei on Q2 2016 Results - Earnings Call Transcript

| About: Liberty TripAdvisor (LTRPA)

Liberty TripAdvisor Holdings A (NASDAQ:LTRPA)

Q2 2016 Earnings Conference Call

August 05, 2016 12:15 PM ET

Executives

Courtnee Chun - Senior Vice President, Investor Relations

Greg Maffei - Chairman, President and Chief Executive Officer

Chris Shean - Senior Vice President and Chief Financial Officer

Mike George - President and Chief Executive Officer, QVC, Inc.

Darrell Cavens - President and Chief Executive Officer, zulily, Inc.

Analysts

James Ratcliffe - Buckingham Research Group

Barton Crockett - FBR Capital Markets

Alex Fuhrman - Craig-Hallum Capital

Eric Sheridan - UBS

Tom Forte - Maxim

Ed Yruma - Pacific Crest Securities

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Liberty Interactive Corporation 2016 Second Quarter Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded August 5, 2016.

I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Courtnee Chun

Thank you. Before we begin, we would like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, market potential, stock repurchases, future financial performance, market conditions, sales demand, international and regulatory matters, the expected benefits and synergies resulting from the acquisition of zulily, the implementation of new marketing and fulfillment processes at zulily, new service and product launches, the proposed split-off of Liberty Expedia Holdings, and the matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, the satisfaction of conditions to these proposed split-offs, market conditions conducive to repurchases, the availability of acquisition opportunities, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Liberty Interactive.

These forward-looking statements speak only as of the date of this call, and Liberty Interactive expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any changes in Liberty Interactive's expectations with regard thereto or any change in events, conditions or circumstances any such statement is based.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted net income and constant currency. The required definitions and reconciliations, preliminary notes and schedules 1 through 5 can be found at the end of the earnings press release issued today, which is available on our website.

This call also may include certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding Liberty TripAdvisor Holdings. These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

These forward-looking statements speak only as of the date of this call and Liberty TripAdvisor Holdings expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Liberty TripAdvisor Holdings’ expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Now, I'd like to introduce Greg Maffei, Liberty Interactive President and CEO.

Greg Maffei

Thank you, Courtnee. Good morning to all of you out there. Today, speaking on the call, we will have, besides myself, Liberty Interactive's CFO, Chris Shean; QVC's President and CEO, Mike George; and the President and CEO of zulily, Darrell Cavens.

During the Q&A portion of the call, we will also be able to answer questions about Liberty TripAdvisor Holdings.

So on to some of the highlights. QVC had a solid quarter but saw softening of results toward the end of the quarter, Mike will discuss those in more detail. U.S. revenue grew 2% and adjusted OIBDA grew 4% in the quarter. On a consolidated basis, revenue was up 3%, adjusted OIBDA was up 4%, excluding the startup cost on our new French venture.

In the second quarter, consolidated mobile penetration was 58% of QVC.com orders, and in the U.S. mobile penetration was 57%. On a very positive note, zulily posted outstanding results with revenue up 23%, adjusted OIBDA up 121%; orders from the repeat customers were up 92% and adjusted OIBDA margins increased to 8% of net sales up from 5% a year ago.

During the quarter or actually the period May 1 to July 31, we repurchased $146 million of QVCA shares. There was a high level of activity also at Liberty Ventures. We closed finally on our investment in Liberty Broadband we are up over $300 million already on that deal. And we completed the spin-off of CommerceHub on July 22.

Frank Poor [ph] and his team did a great job meeting with investors, analysts pre-spin. There are still some important numbers that have kind of come out as we report earnings at the end of the quarter due to the lawyers and the limitations on our disclosure. But I think you’ll see as we’ve long extolled the virtues of this exciting business model, with the margins, that the story is only going to get better and better. And at these levels, we think the stock is pretty inexpensive.

We also saw continued progress on the split-off of Liberty Expedia and re-filed the S-4 on July 19.

Looking for a moment at Liberty TripAdvisor, we saw the continued implementation of Instant Book. Second quarter was the first quarter where we rolled out Instant Book in substantially all the major markets for the full quarter. We are seeing strong indicators for Instant Book including increased conversion, repeat customers and the number of stored credit cards.

Viator, looking at the attractions space also had bookable products up over 45% since the beginning of the year so we’re seeing good traction in that space.

The shift to Instant Book, which we view is entirely necessary is putting near-term pressure on revenue growth and profit margins but we still believe it is the right long-term path for TripAdvisor and remain excited about the progress there.

With that, let me turn it over to Chris Shean to discuss the financials for Liberty Interactive.

Chris Shean

Thanks Greg. Taking a quick look at the liquidity picture, at the end of the quarter the QVC Group had attributed cash and liquid investments of $394 million and $6.4 billion in principal amount of attributed debt.

QVC's total debt to adjusted OIBDA ratio as of June 30, as is defined in its credit agreement, was approximately 2.59 times. This ratio now includes zulily’s adjusted OIBDA as part of the refinancing that we announced in June.

Now, I'll hand the call over to Mike for additional comments on QVC.

Mike George

Thank you, Chris. In Q2 we achieved solid results in a challenging environment. Looking at our consolidated results for the quarter on a constant currency basis, revenue increased 2% and excluding France, adjusted OIBDA grew 3% and adjusted OIBDA margin expanded 14 basis points. In the U.S., we grew sales and expanded adjusted OIBDA margins although we did experience a deceleration in demand late in the quarter.

Our international business generated strong revenue growth and strengthened considerably from Q1, and zulily continued its outstanding performance of growing revenue in excess of 20% and more than doubling adjusted OIBDA.

As we discussed on last quarter’s call and detailed on our press release today, in Q1, we began allocating certain fixed cost for management reporting purposes differently. And remainder of my comments, all describe year-over-year results excluding the impact of the new allocations which we believe will provide a more accurate understanding of underlying performance.

Our U.S. business grew revenue 2% in the quarter reflecting 4% volume growth and a reduction in return rates, partially offset by lower average selling prices. Our adjusted OIBDA increased 2% excluding the allocation change and OIBDA margin expanded 11 basis points due to lower fixed cost, higher credit card income and favorable inventory obsolescence partially offset by higher bad debt and higher freight expenses.

We experienced strong growth in fashion, particularly in our proprietary brand such as LOGO, Isaac Mizrahi, Susan Graver and [indiscernible] Company.

Our household and garden categories also performed strongly with impressive results from home security and fitness. In home décor we saw strong performance from Northern Knights strategy and Select Comfort and Serta mattresses.

These gains were partially offset by continued underperformance in jewelry and consumer electronics and softening results in Kitchen Cook.

Although, even in challenged categories, when we can bring the customers something new at a compelling value, she responds. We were especially encouraged by the outstanding results of our Amazon Echo TSV, which sold 50,000 units. We were able to effectively explain this new technology to our customers and offer her a better price than Amazon, highlighting the complementary nature of our two businesses.

In Jewelry, we were pleased with the launch of Stella & Dot, and we began to build the My Saint: My Hero brand with a very successful June TSV.

Our overall sales results for the quarter were solid, our trajectory weakened late in the quarter. Demand growth was strong through early June with mid single-digit gains which were actually above our Q1 trend. However, in the last few weeks of the quarter, sales declined in the mid-to-high single-digits. And this trend has persisted through July and early August.

As you know, while we don’t as a normal practice comment on current period results or provide forward guidance, but we do expect at this point that our U.S. sales and adjusted OIBDA will experience negative growth rates for the third quarter.

Since mid-June, we’ve seen softening demand in most categories, consumer electronics and Jewelry further weakened. Our Kitchen Cook and beauty businesses slowed and our fashion categories which had been our strongest performers throughout the year experienced the biggest drop-offs relative to their previous trend.

We believe a number of factors contributed to the soft sales trend. The retail environment certainly continues to be challenging, in particular we’re seeing unusually aggressive mark-down activity as department stores clear-out spring and summer fashion goods. And we’re also feeling the pressure from continued industry softness in key categories like jewelry, handbags and consumer electronics.

We’re also concerned that rising bad debt rates, which other parties have referenced, suggested consumers may be feeling greater financial pressures. Given heightened write-off risks, we did choose to moderate our Easy-Pay usage beginning in June, which put some additional pressure on our sales.

And while harder to quantify, it appears that all of the distractions this summer from world events and the U.S. election season are also having some impact. And we anticipate additional sales pressure from the Olympics starting today.

Finally, one of our largest-brand faced a significant drop-off in sales at QVC and other outlets which did materially impact our overall results. This particular issue was brand-specific and not reflective of overall consumer health.

Now in contrast to these pressures, we do not believe that there are any abrupt changes in media viewership or e-commerce shopping patterns that are contributing maternally to the soft sales. The views that we expressed at our Investor Day about how our business model is not heavily impacted from either core cutting or the growth of Amazon have not changed.

We are all highly focused on reaccelerating sales growth without compromising the trust-based relationships that we have with our customers.

We’re taking advantage of the flexibility of our model to shift assets in airtime to better performing categories. For example, in consumer electronics, we reduced airtime by about 20% in Q2, which drove 10% higher productivity. We’re focused on freshening assortments and introducing new brands.

And we’re selectively increasing our clearance activity to make sure that our inventories remain healthy, although this is putting some pressure on margins.

And it’s important to note that there are number of bright spots amidst these challenges that we believe point of the underlying health of the business. Our high customer retention rates are unchanged. Viewership levels have also remained stable. And we’re seeing better sales results on our fall fashion merchandize and also our Christmas and July events.

So, we’re hopeful that as we move out of an unusually promotional end to the spring and summer season, and show our customers more new product, we’ll begin to see this sales erosion moderate.

Turning to the cost side, the favorable fixed cost in the U.S. largely reflected lower bonus and benefit expenses, which had a favorable impact of approximately 110 and 30 basis points respectively.

Freight expenses increased about 20 basis points due to carriers’ previous rate increases and volume gains in the quarter. However, this impact was substantially less than in the first quarter and we expect the pressure from freight to moderate further in the second half due to our freight reduction, freight expense reduction efforts and the opening of our West Coast Distribution Center at the end of the month.

Our bad debt expense increased about 100 basis points driven by higher write-offs on our Easy-Pay receivables. We approved for bad debt based on historical experience and there is a lag of about six to nine months to true-up prior period estimates.

Beginning in April, we saw higher than expected write-offs on Easy-Pay purchases from October and November of last year. Accordingly, we increased the reserves for these prior period purchases and this catch-up accounts for approximately two thirds of the Q2 bad debt increase.

The remaining increase reflects the higher write-off experience. Our overall reserve rate, it’s important to note is still under 2%, which is quite low compared to most retailers. Looking forward, we do expect bad debt to create approximately 20 basis points of pressure for the remainder of the year.

Now we’ve responded to these challenges by moderating our Easy-Pay usage and reducing the number of installments available to customers. And while Easy-Pay remains a key component of our model, we are proceeding with this more measured approach until we see healthier customer behavior.

Given the current business pressures in the U.S., in addition to our efforts to reaccelerate sales and moderate bad debt, we’re keeping a tight control of all operating costs and we’ve cut our planned capital expenditures for the year by about $20 million to $25 million.

Now turning to our international segment, on a constant currency basis, international revenue increased 4% reflecting 4% volume gains, improved return rates and stable ISPs. We saw gains in all categories except accessories. The U.K. and Germany continue to deliver solid revenue growth and Italy’s revenue growth accelerated sequentially resulted in the strongest year-over-year growth since the third quarter of 2013.

Our France business continues to focus on building brand awareness, although sales do remain below expectations. Japan revenues declined in the low single-digits in local currency.

On a pre-allocation basis, and excluding the France start-up which had losses of about $8 million, international adjusted OIBDA increased 5% in constant currency. And adjusted OIBDA margin expanded 15 basis points.

Japan achieved strong OIBDA margin expansion after a difficult first quarter, primarily due to improved product margins and disciplined management of marketing expenses. As we detailed at our Investor Day this spring, our new management team in Japan is focused on returning the business to sustainable top and bottom line growth by emphasizing the core QVC model.

OIBDA gains in Japan were offset by margin pressures in - they were partially offset by margin pressures in Germany, although Germany’s absolute OIBDA growth was strong.

Looking forward, our product margins in the U.K. will be pressured due to the rapid devaluation of the pound following the Brexit vote. We will try to offset as much as this as possible through pricing and vendor negotiations, but the impact could be up to 30 basis points to the international segment in the second half.

We also recognized the consumer sentiment in the U.K. has declined considerably and recession risks are increasing. However, our sales immediately after the vote held up nicely.

In our joint venture in China, we saw local currency revenue growth of 4%, with gross sales growth in the double-digits. Our product mix shifted to higher price point items in categories like jewelry, furniture and Kitchen electrics, which put pressure on new customer acquisition and also increased our return rates by over 400 basis points. So, we’re focused on rebalancing assortments to achieve healthier growth going forward. But I should also note that we did anniversary our Shanghai carriage at the end of the quarter.

The adjusted OIBDA loss in China declined 43% as we benefited from lower freight, improved product margins and lower marketing costs which were partially offset by increased carriage expenses.

In addition, our radio and TV program production and business operation license that’s held by our joint venture partner in China and used in connection with the business, will expire next month.

CNR Mall together with our joint venture partner is reviewing the necessary steps to obtain an updated license or otherwise insured’s continued operation. However, we cannot guarantee that there may not be interruption in operations.

As we work through our near-term challenges, we remain confident in the overall health and strength of our business, including our ability to grow sales above general merchandizing and maintain industry-leading margins over time.

The strength of our business in Europe, the improving trend in Japan and the continued high engagement, high viewership and high loyalty of our customers in the U.S., all reinforce our long-term confidence in the business.

Let me highlight a few of our strengths, starting with our large and growing customer base. Our consolidated total customer base grew 2% on a trailing 12-month basis to 12.7 million with U.S. increasing 1% to 8.2 million. Including our joint venture in China, we served 14.1 million customers in the last 12 months, a 2% growth from the prior year.

And as I mentioned, we continued to enjoy very strong and stable customer retention rates. Our model is centered on the art of discovery bringing customers’ compelling merchandize and building successful brands. We were pleased with the Q2 launches of Scott Living home décor, Isaac Mizrahi Home and wonderful discoveries from Shark Tank’s Kevin O'Leary.

For Q3, we’re excited about the launch of Bell by Kim Giselle [ph], Hot in Hollywood Denim, Nayak Footwear and Mario Buccellati in Jewelry among many others.

In our Christmas in July programming, we launched Hallmark, Holiday, a line of décor from the world’s best known Greeting Card brand. And we have a robust plan for expanding that business this holiday season.

We delivered compelling content on a diverse array of immersive commerce platforms, this strength distinguishing QVC from most other retailers. We continue to extend and invest in our platforms in the quarter. Including our China JV, our TV broadcast reached about 363 million homes at the end of June and 11% increase year-over-year.

As part of our 1Q global structure, we’ve created a global programming center of excellence. Broadcast leaders from around the globe have created programming playbooks, conducted multiple strategy sessions to share best practices and initiated new destination programming in six of our seven markets.

We generated strong e-commerce and mobile growth in the quarter. Consolidated e-commerce revenue grew 11% to 46% of total revenue, up more than 300 basis points from the comparable period. U.S. e-commerce revenue increased 11% to 51% of total revenue, that’s up more than 400 basis points.

Mobile orders were 27% to represent 58% of consolidated e-commerce orders and increased up 850 basis points. And we’re invested in our digital platforms as well. We launched new product detail pages on our German, U.S. and U.K. websites, with an emphasis on mobile first-design and video capability. We launched new iOS and Android apps in Italy and France.

And in the U.S. in May, we launched Beauty IQ on QVC.com. This is our first digital-only channel, comprised of pre-recorded on-air presentations and engaging editorial content. It delivers a relevant video-based shopping experience that allows customers to discover new products and brands, watch how-to videos and learn from experts.

We will continue to build on our social media success. In Q1, we began to utilize Facebook’s new Live-feature to deliver real-time video content. In Q2, the U.K. began to simulcast its broadcast, and in July in the U.S. we produced and air-to-live show specifically for Facebook Live.

Celebrity make-up artist in QVC vendor Mally Roncal joined QVC host Courtney Cason and thousands of beauty fans on her Facebook page for a live interactive talk show from our studios in Westchester. It’s a really terrific example of our ability to combine our live video expertise with emerging technology to deliver relevant content to consumers.

And before I turn the call over to Darrell, let me share a final thought on the U.K., and a brief comment on zulily. We’re very pleased that Rob Muller, who currently leads our Customer and Business Services globally and is a member of our senior executive team, has been named to succeed Dermot Boyd as the leader of our U.K. business upon Dermot’s retirement at the end of the year.

Rob has a long history of increasing responsibility across many areas of QVC. He joined us in 2001 and rose to leadership roles in distribution, quality, supply-chain and strategy and portfolio management. And we look forward to our U.K. business continuing it’s long-run under Rob’s leadership.

And finally and zulily, Darrell and his team delivered an outstanding quarter making it three strong quarters since joining the QVC Group. Our two teams continue to work together closely, leveraging our strengths and executing a broad range of synergy initiatives.

Our biggest revenue synergy actions in Q2 were the continued implementation and momentum gain with zulily’s Deal of the Day, which is similar to our TSV and more than 140 events in which zulily accessed our inventory to sell QVC national and proprietary brands on zulily.

We also did more than 65 TSV redirects from zulily to QVC, 54 new brand launches on zulily leveraging QVC relationships, 25 on-air promotions of zulily and several unique marketing e-mail and banner or homepage redirects from each company’s website.

We’re seeing very encouraging traction across all of these initiatives and we’ll continue to look to exploit these opportunities over the course of 2016 and years to come.

And now I’ll turn it over to Darrell to discuss zulily’s performance.

Darrell Cavens

Thank you, Mike. And thanks everybody for joining today’s call. I’m pleased with our second quarter performance and our team’s great execution so far this year. Second quarter revenue came in at $366 million up 23% year-over-year and adjusted OIBDA came in at $31 million, up 121% year-over-year.

Over the last year, we’ve successfully focused on the core of our zulily brand offering by delivering something special and incredible value every day.

We have improved our customer experience with strong operational execution that has helped to drive accelerating growth over the last four quarters.

Before I share the second quarter results, I want to provide an update on our efforts with QVC. As Mike said, we gained strong traction working together particularly in merchandizing and technology.

We’ve leveraged QVC’s vast vendor network and to date we’ve successfully launched over 70 QVC brands to zulily customers ranging across beauty, apparel and home category including brands like Denim & Co., [indiscernible] Beauty.

QVC’s long-standing and in many cases proprietary relationships have allowed us to offer a highly differentiated unique brand add great value to our customer.

As we had expected, our collaboration with QVC is allowing us to move fast and deepen our brand portfolio as we continue to keep our customer experience fresh every day.

Our teams have numerous other initiatives underway across technology, marketing and operations, which we believe will contribute to incremental and profitable growth for the QVC Group over time.

For example, we’re collaborating on additional image optimization tests for this year that we believe will help QVC drive greater conversion on their e-commerce platform.

We’ve also had ongoing discussions with the QVC international teams, learning what their global business is, which we think opens up a significant new opportunity to grow our business in existing and new markets for both companies.

As a reminder, today only 6% of our sales are from international customers. And I’m excited to continue building on our long-term collaboration and sharing updates with you over time.

Now, moving on to the core business. Today I’ll cover three key areas, marketing; then our customer experience; and lastly on profitability and our long-term opportunities.

First on marketing. As we’ve improved our customer experience through shorter ship-times, great products and innovative site experience, we’ve continued to see the quality of new customers improve and our existing customer repeat rates grow year-over-year.

Last year we made a strategic shift in the broad-based marketing channels with a focus on acquiring customers with higher lifetime value. We continue to see strong operational execution across the rest of the business. We believe we have much more opportunity to ramp up our new customer base. Going into the second half of 2016, we’ll continue to lean in the marketing to drive quality new customer acquisition which is critical to driving demand long-term.

Some examples, this week, we launched our new TV Creative Campaign, featuring a behind-the-scenes look at zulily that highlights the fresh and unique curetted story we tell about our differentiated brands and boutique events every day.

In mid-July, we also kicked off our back-to-school campaign, which highlights zulily’s expertise and back-to-school of trendsetting across traditional online ads, PR and social channels. I’m excited and eager to build our brand and market presence and believe we have a massive opportunity well beyond the 5 million active customers we have today.

Second, we continue to innovate on our daily site experience to bring our customers back to us again and again. We’ve invested a considerable amount of effort over the last year across merchandizing, marketing, technology and operations and we’re seeing the benefit of these investments through improved customer retention rates and spend per customer.

Q2 orders from repeat customers increased to 92% up from 88% a year ago and up from 90% in Q1. In Q2, we also ramped up a number of new urgency drivers, which have helped drive frequency of engagement.

For example, inspired by QVC’s TSV, we’ve been spotlighting a Deal of the Day or One-Day Sale instead of our typical 72-hour event. With the expansion of our vendor fulfillment services and consignment programs over time, we’ve also continued to increase the volume of events that feature products that can ship in one to two days without taking on additional inventory risk.

Our investment in technology over the last year has allowed us to continue to test and change the cadence of these urgency drivers while also leveraging our variable cost over time.

Lastly, we continue to see significant growth in our profitability primarily from our strong cost discipline and gains from our long-term investments in supply-chain and technology, which are driving efficiency with scale.

Our adjusted OIBDA margin expanded from 5% to 8% as a percentage of net sales year-over-year. Our gross margin expanded from 29% to 30% year-over-year primarily from strong supply chain execution.

Our SG&A cost decreased as a percent of net revenue due to our leverage of scale.

As we look to the second half of 2016, we’ll continue to focus on driving growth and profitability. I remain incredibly excited about the growth we’ve seen to date and look forward to continue building on that momentum for the remainder of 2016 and beyond. I look forward to updating you again next quarter.

With that, let me turn the call back over to Mike.

A - Mike George

Thanks Darrell. Let’s take a quick look at the liquidity picture over at Liberty Ventures Group. At the end of the quarter, the Group had attributed cash and liquid investments of $116 million and $1.8 billion in principle amount of attributed debt.

The value of the public equity method securities and other public holdings attributed to the group was $5.6 billion and $1.7 billion respectively at the end of the quarter.

We did have quite a bit of activity at Liberty Ventures post quarter-end these are detailed in our press release.

Now I’ll hand it back over to Greg.

A - Greg Maffei

Great. Thank you, Mike, Darrell and Chris. To the audience, we appreciate your continued interest in Liberty Interactive. With that I’d like to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of James Ratcliffe with Buckingham Research Group.

James Ratcliffe

Hi, thanks for taking the question. On Ventures with CommerceHub done and Expedia coming presumably reasonably soon, how do we think about the plan for Ventures going forward and it’s going to be dominated by in terms of the asset mix via the broadband and charter stakes. Does it make sense to try to collapse that structure and just thinking about the other assets, I know as you have reclassified. If Interval is available for sale, how much of the rest of it is liquidate-able and if you did go down that route, what would you think about using the cash for? Thanks.

Greg Maffei

Thank you, James. I don’t think we have a permanent announced plan in our minds, perhaps typical Liberty will look at it as it goes. I’m and I think we are all very bullish on our investment at Liberty Broadband. We’re up nicely in the few months we’ve had it. But we remain quite optimistic on the growth at Charter and therefore Liberty Broadband.

And as you can see perhaps by the recent contract that Tom Replidge [ph] undertook which has options that are granted all the way up into the 500, so he’s quite bullish on it as well.

So, I think we’re holders of that stock. We have no plans. And obviously as it grows and it’s a source of liquidity, we’ll look also for other investments that are attractive, none to announce today. But look at the environment where things are moving around and we are always on the prowl.

James Ratcliffe

Okay, thank you.

Operator

All right, thank you. And our next question comes from the line of Barton Crockett with FBR Capital Markets.

Barton Crockett

Okay, so I wanted to focus in on the QVC issue here which is more like pretty dramatic in the history of QVC. I hear the argument that change was maybe a lot of factors, TV, consumer, your Qcard potentially and an issue with the supplier.

But the thing that’s curious is that while the consumer environment is a little bit choppy, it hasn’t kind of turned so rapidly South that anyone else that I can point to in the part of June and going into July.

So, I was wondering if you could respond to the question of why would, you guys see a change in consumer center that perhaps more than we’ve seen elsewhere. And also maybe if you can quantify how much of the kind of downturn is maybe changed to your change with Qcard and from the issue with. I think one, merchant or supplier that you’ve called out.

Mike George

Thanks Barton. I’m trying to frame it in a couple of ways. So, zero point, this is very unusual swinging trend for QVC and we’ve really not seeing this kind of swing before outside of couple of quarters round the great recession timing in ‘08 or early ‘09. We pride ourselves on the stability of the business we’ve pride ourselves now being able to achieve positive growth in partially all environments. So this is an unusually big swing in it. But I would want it to be very forthright about acknowledging it and kind of break in precedent in terms of updating you on the trend at quarter to date.

And certainly when we saw our sales software as and as quickly as they did we began to try to find, what did we break or what was the sort of one-big change that happened. And we really can’t find anything in our data and experience to suggest that there is any one thing to point to.

So, it really feels to us that its unusually difficult confluence of events that we think will broke our way out of, as know but we don’t I think it’s any kind of new normal by any means. But this unusual combinations and is it part of what we’re seeing is, we’ve acknowledged now for quite a while but we’ve had a I think.

But we’ve had a couple of fairly tough businesses and consumer electronics and jewelry and haven’t been as successful as we would have hoped to - getting those businesses moving.

We’ve had a couple of unusually strong businesses really dynamic businesses and apparel and accessories and then kind of in between sort of solid results in areas home and beauty.

So I think we just hit a combination of factors.

I think in those businesses that have been performing in a very good stable way in home and beauty, we’ve seen a few big items that aren’t, in a couple of categories like kitchen electrics, some new items are getting, some items are getting little bit stale, we’re waiting on a little more innovation in the industry that’s created more pressure in those businesses.

We had this one big supplier issuer that I mentioned that put some pressure on those businesses. And then, where we saw the biggest drop was clearly in fashion which had been the thing that was really propelling our business. And while it’s hard to point to why that business would fall off from such a strong trend, I do keep coming back to the view that we are at the end of a long-season with this extraordinary level of mark-down activity in department stores is best we can tell, department stores of course haven’t reported yet. But just from our own observations, the nature of the discounts and coupon and going on.

And so, we think our customers kind of feels like, she’s kind of taking a bit of a timeout. And maybe shifting some purchases to this mark-down activity or maybe just sort of holding. And when we’ve done kind of pre-fall season fall events, we’ve actually been pretty pleased with results.

And today actually coincidentally marks the official launch of our fall season, with a big fashion event that knock-on-wood is slightly above plan today, so a day doesn’t make a year. But I think we’ve got to get into the new season and really figure out what our normalized trend is.

So, one way of saying, I think a variety of different events affecting different businesses combined with the fact that our greatest area of strength happens to be which is fashion, it happens to be the area I think under most pressure in retail right now at the end of a tough season.

So, we got to see that happen, we got to see that we can grow out of this. But I think that’s where we are today. And then with a little bit of caution there, turn it around that kind of trend in August as we move into couple of weeks of heavy Olympic viewership. Maybe we’ll be able to turn it around more quickly but we wanted to acknowledge caution as we kind of finish out the summer months.

Qcard and if you’re, I’m not sure I understood the end of your question. If you’re referring to the change in Easy-Pay practices where we’ve been a little more conservative on Easy-Pay, that pie has some impact. But I don’t think that’s, I think that’s likely to be a huge driver. But it could be one of sort of five or six contributing factors possible.

Barton Crockett

And I guess what’s Qcard, I mean the fact that there is little bit more credit pressure here. Is that customer not spending like they were because maybe they’re feeling more constraint, as there something I that customer base that is potentially an issue.

Mike George

I would say what we see in general is that, where are we seeing the sort of the biggest follow-off in sales is with our most valued customers. These are sort of the best of the best, customers have pulled back somewhat.

Now, I caution that that means a customer that might have been making 15 or 20 purchases a month, might have pulled back one or two purchases. Right, so they’re highly, highly engaged with us but pulling back on the margin.

Whether that’s she’s feeling financial pressure whether that’s because that’s the customer that spends the most on fashion and just kind of waiting for the new stock, so little bit hard to tell. We don’t see any correlation. We’ve looked at our kind of outstanding payments to us and to see if per level of out-sanding payments co-relates lies with any change in performance and we haven’t seen.

So, it’s hard but we are concerned that right up-rates pumped up a bit. We’re not seeing an obvious linkage between that issue and the sales trend.

And I guess the final point I’d make on that is, given that the sales shortfall is with our best customers, actually lower frequency customers have actually increased their purchases probably in the last couple of months, so it really is among that core customer.

What gives us confidence that we’ll get through just fine and we actually have been doing some focus groups where we brought in our highest spending customers who had the biggest drop-off in sales. And the good news is according to those focus groups and I’ve been listening to a lot of them, the still love us. They don’t even, they aren’t even aware that they pulled back their spending. So, that’s why these things feel like they are bit of kind of moment in time event while dramatic still a kind of moment in time event that we should be able to push through.

Barton Crockett

Okay. And just I mean, one final question on this because it is I think important for the equity. What makes you confident that this isn’t just partly at least or maybe to a large extent Amazon getting success and fashion and taking share not just from department stores but maybe from QVC.

Mike George

And I guess, we try to conclude that for a few different reasons, to break questions. So, where 1 as you would expect in this kind of an environment in particular we’ve done a lot of surveying over the last several weeks of our customers to understand about, try to understand this change of behavior better to ask them where else they’re shopping.

That survey data as imperfect as it is it’s all obviously sell reported but our customers are simply not reporting that they’re shopping at Amazon more. In fact the recent surveys we’ve done suggest they’re shopping there less. And what with too much in the data release at least it says to us but so we’re not top of mind for them.

And the very fact that actually if you think about who, for the risk of losing sales to Amazon, intuitively you would believe that the less engaged lower frequency customer is going to be the first to go to Amazon. The last to go would be the core customer.

And so, when you look at our sales softness over the last couple of months, that loan gate customers is actually doing more with QVC. And it’s that core of the core that’s doing a little bit less. And this would be very unusual for that customer to be the one interested in Amazon.

And I guess, kind of the last piece of comfort I take in all o that I going back to these focus groups and not to too much talking to bunch of focus groups.

But in those focus groups what really struck me is a we asked every customer where else they shop? We know our customers love shopping and they all talked about from Niemen’s to Macy’s to TJ Max to zulily, not a single customer unaided mentioned Amazon, not a single one. We them prompted Amazon and they said yes, we shop on Evans on to but now for QVC stuff we shop there for food cleaning supplies and so forth.

So, again that’ highly imperfect data but we just can’t find anything in any of our metrics that would suggest that we’re losing in these fashion businesses to Amazon.

Barton Crockett

Okay, that’s helpful color. Thank you very much.

Greg Maffei

Next thank you.

Operator

Okay, thank you. And our next question comes from the line of Alex Fuhrman with Craig-Hallum Group.

Darrell Cavens

Great. Thank you very much for taking my question. Thinking about the kind of sudden drop-off, also curious if obviously zulily had a terrific quarter overall here. But wondering if perhaps they saw the same directional shift there in June, in July and perhaps more broadly thinking about all of the other retail and e-commerce properties that Liberty is involved with, is that something that you get the sense that sequentially it’s impacting other properties as well?

Mike George

Darrell, do you want to take that?

Darrell Cavens

Sure, yes. I mean I think as we said on the call, I think we’re pretty optimistic about the back-half of the year. I think we prescribed [ph] on a very kind of consistent, kind of strong growth through Q2 didn’t see kind of the same behavior that Mike expressed.

We certainly have some harder comps as we come to the back half of the year that we’re kind of watching carefully and driving aggressively at but no we haven’t seen kind of that same behavior?

Mike George

Let me jump in. It doesn’t have as many e-commerce properties but I don’t think we saw that bodybuilding something in that form or shape. Obviously a different kind of consumer then perhaps KBC has. Next question please.

Operator

Thank you. Your next question comes from the line of Eric Sheridan, UBS.

Eric Sheridan

Given the question, maybe just following up on one theme there and then also asking Greg a question. But on the theme of the sharper trends and what you saw Mike in the quarter. Maybe walk us through the decision you made and what you saw in consumption habits that you felt it was the right decision to sort of let the consumption habits fall off a little bit and not incent continued consumption whether it be the credit decision or incentives around shipping or discounting on pricing. Just so we could understand a little bit of how you sort of saw that evolve in the decision you made on sort of how it will ebb and flow through Q3.

And then Greg, maybe for you, with QVC down as much as it is, does that change at all the thought process for an allocating capital behind the buyback for QVC and thinking through the leverage targets there? Thanks so much guys.

Mike George

Okay, thanks Eric. So I’ll take the first part. It’s certainly something we look at carefully, we have this overwhelming buyers to avoid getting too promotional because it actually kind of pollutes the model over time, it trains the customer to have a certain set of expectations, it creates a buying remorse.

And so, even when times are really tough we try to kind of steal ourselves to letting the sales hit their natural level and not getting too promotional. And we did actually, we did pull back on Easy-Pay in June. We did have in Q2 our first not only fully comped, the shipping and handling change, our first growth in shipment and handing revenue in a year.

So, we didn’t, we chose not to engage in those promotional activities. That said, we do are sensitive to losing too much share in this environment. We want to make sure we stay relevant to our customer base. And we want to make sure that our inventory stays relatively clean. So we have done, we’ve been a little more active in clearance events than we historically would be.

And we did a little more of that in July and then we’ll probably do a little more of that in August where we’ll be a little more aggressive on our discounting to kind of get the apparel and jewelry businesses in particular a little bit cleaner. That will put some downward pressure on our product margins. And then we’ll just kind of keep watching it. But sort of our general view is, getting reinforced by everything we’ve seen is, this customer loves us, she’s with us and let’s not make such major decisions that we start to really pollute the business. We just want to do those in a very measured way as we kind of move through this current sales pressure.

Greg Maffei

So on capital allocation, well, just on capital allocation. Look I think we have been consistent with returns on capital. Obviously it’s a more attractively priced equity. We still have the lead from the company. We don’t necessarily set forth what we’re going to buy prior to buying it.

And I would note we are somewhat constrained by the leverage targets we’ve given to rating agencies and alike. But with that all in mind, it is now obviously a more attractively priced equity that it was yesterday.

Courtnee Chun

Next question please.

Operator

Okay. Next question comes from the line of Tom Forte with Maxim.

Tom Forte

Great, thanks for taking my questions. So, due to recap there is nothing in the results that suggests this is all related to Amazon or to cord cutting. And then by way of context can you tell us the last time QVP U.S. reported negative sales for the full quarter? And then two other quick ones.

So, is it possible if you look back..

Greg Maffei

No, no, you get to ask two questions, that’s it. You had your one question, is you want to hear about Amazon. Go ahead.

Tom Forte

Okay. So, I’ll take those quickly. So we get on Amazon on the other side of the cord cutting, we’re not seeing any material erosion in, number of comps at access QVC and our viewership is actually good. So just, no - certainly no change in those metrics that would suggest any concern in the last couple of months?

Greg Maffei

And you had a second question?

Tom Forte

Yes, I do. So, since this is the quarter where you’re going to have the Olympic and then Election. And that could create some incremental noise, how should we think about historically how those items affected your sales? Thank you.

Mike George

So, and I didn’t, I know you’d ask when was the last time we had negative sales, an answer to that is Q2 ‘06. So, other than the latest two quarters are laid in the first quarter s of ‘09 for obvious reasons where we will put a negative result. This business has been consistently positive and its well, we we’re showing disappointed with this trend in Q3. We absolutely view this as anomaly.

Look Olympics, every four years it’s different, as a fact that it’s in same time-zone. And we’ll prepare forth perhaps some impact on viewership and sales that would be hard to quantify that, I don’t know that that means a worsening trend to what we’ve seen but it made me, it’s a little bit harder to get up and over this trend, at least over the next two weeks. Although even that can be counted by the fact that we’re now finally starting to launch our fashion goods.

So, we’ve tried to do software counter programming against the Olympics. But it’s different CV impact. So the impact of the President Election, I don’t know that you could say that has a clear and systemic impact on QVC, to actually have it over such an extended period of time.

I think this year has been a bit unusual for obvious reasons and I think there is little bit of this negative consumer sentiment about the presidential race that is having some impact. But I think that’s more diffused, I think the real issue is we just need to kind of get through the Olympics and see if we can kind of start the club access this trend.

Greg Maffei

Great. Thank you operator. Another question?

Operator

Thank you. And our last question comes from the line of Ed Yruma with Pacific Crest Securities.

Ed Yruma

Hi, thanks for sneaking me in. So, I guess first question on apparel, were there any specific areas of apparel that were particularly weak or that the downtrend was particularly pronounced. And then I guess second, as you think about the credit business from a longer term perspective, how important is it to kind of drive a credit business to maintain top-line and what kind of metrics do you think about when you look at the profitability of credit business tied to your sales. Thank you.

Mike George

So, in terms of specific categories in apparel I would say it was more broad-based than the north. Now again I think the biggest differentiator is going to be we’ve been able to do some preview of fall fashions when we’re able to introduce new brand or one or two we introduced in July. We’ve actually seen pretty good results. So we think the apparel business has been so healthy that again, we think it’s going to rebound. It feels like little bit of a sort of broad overhang as opposed to our particular category that was especially challenged.

And I’m sorry, remind me of your second question?

Ed Yruma

Yes, just trying to understand from a bigger picture perspire how important do you think Easy-Pay is to drive top-line and kind of what are the financial return metrics you look at when you make decisions as to how much you should allocate to the Easy Paper wrap?

Courtnee Chun

We do think UG Pay is important and even though we’ve moderated the UC [indiscernible] we’re certainly still, using it in a meaningful way. It’s to me because we don’t have a lot of promotional lovers in our business, it is I think part of the YQBC story that our customers get and value.

And because of the high loyalty of our customers, it ends up being a relatively modest expense. In fact most write-offs associated with Easy-Pay, the overwhelming amount of the write-offs associated with Easy-Pay are actually from new customers. We don’t have quite the same experience base. The write-off rates from our existing customers, especially once they’ve made a few purchases or been with us couple of years is really quite low.

So overall, you’re talking about a program that has a less than 2% expense rate and so we view this as extremely efficient program that does create a differentiation for QVC. And because that write-off rates popped up a bit, we’re being a little bit cautious right now about the use of it. But we see it as an important ongoing program. And not necessarily critical to accelerating sales but just something that we need to be able to offer. And we fully expect to be able to continue to offer.

Ed Yruma

Great. Thanks so much.

Greg Maffei

Great. I think that’s what we have time for today. Thank you to the audience for your continued interest of Liberty. And we look forward to speaking with you again next quarter if not dinner. Thank you.

Operator

Thank you. And that concludes today’s conference call. You may now disconnect.

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