Liberty Interactive's (QVCA) CEO Greg Maffei on Q2 2016 Results - Earnings Call Transcript

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Liberty Interactive Corporation (QVCA) Q2 2016 Earnings Conference Call August 5, 2016 12:15 PM ET

Executives

Courtnee Chun - Senior Vice President, Investor Relations

Greg Maffei - President and Chief Executive Officer

Chris Shean - Chief Financial Officer

Mike George - President and Chief Executive Officer, QVC

Darrell Cavens - President and Chief Executive Officer, zulily

Analysts

James Ratcliffe - Buckingham Research Group

Barton Crockett - FBR Capital Markets

Alex Fuhrman - Craig-Hallum Group

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. [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 regulatory matters, the expected benefit 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 other 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 for the proposed split off, 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 statements contained herein to reflect any change in Liberty Interactive’s expectations with regard thereto or any change in events, conditions or circumstances on which 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 4 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 would 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 costs 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 Poore and his team did a great job meeting with investors and 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 will see as we have long extolled the purchase of this exciting business model with available 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 attraction space, also had bookable products up over 45% since the beginning of the year. So, we are seeing good traction in that space. The shift to Instant Book, which we view isn’t 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, 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 2.59x. This ratio now includes zulily’s adjusted OIBDA as part of the refinancing that we announced in June.

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

Mike George

Thank you, Chris. In Q2, we achieved solid results at 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 of 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 in our press release today, in Q1, we began allocating certain fixed costs for management reporting purposes differently. In the remainder of my comments, I will 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 costs, 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 brands such as LOGO, Isaac Mizrahi, Susan Graver and Denim & Company. Our household and garden categories also performed strongly with impressive results from home security and fitness. In home decor, we saw strong performance from Northern Nights bedding 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 customer 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 the very successful June TSV. And while 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 guidance, we do expect at this point that yield, sales and adjusted OIBDA will experience negative growth rates for the third quarter. Since mid-June, we have 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 performance 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. And particular, we are seeing unusually aggressive markdown activity as department stores clear out spring and summer fashion goods.

And we are also feeling the pressure from continued industry softness in key categories like jewelry, handbags and consumer electronics. We are also concerned that rising bad debt rates, which other parties have referenced, suggested that consumers may be feeling greater financial pressures. Given heightened right-off risk, 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 brands faced a significant drop-off in sales at QVC and other outlets, which did materially impact our overall results. Now this particular issue is brand specific and not reflective of our 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 materially 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 re-accelerating sales growth, without compromising the trust based relationships that we have with our customers. We are taking advantage of the flexibility of our model to shift assets and airtime to better performing categories. For example, in consumer electronics, we have reduced airtime by about 20% in Q2, which drove 10% higher productivity. We are focused on freshening in assortments and introducing new brands. And we are 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 a number of bright spots amidst these challenges that we believe point to the underlying health of the business. Our high customer retention rates are unchanged. Viewership levels have also remained stable. And we are seeing better sales results on our fall fashion merchandise and also our Christmas and July events. So we are hopeful that as we move out of an unusually promotional end to the spring and summer season and show our customers more new products, we will begin to see this sales erosion moderate.

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

Bad debt expense increased about 100 basis points, driven by higher write-offs on our Easy-Pay receivables. We accrued for bad debt based on historical experience. And there is a lag about six months 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 have responded to these challenges by moderating our Easy-Pay usage and reducing the number of installments available to customers. 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 re-accelerate sales and moderate bad debt, we are keeping tight control of all operating costs and we have 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 ASPs. We saw gains in all categories, except accessories. The UK and Germany continue to deliver solid revenue growth and Italy’s revenue growth accelerated sequentially, resulting 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 our 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 UK 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 that consumer sentiment in the UK 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 puts pressure on new customer acquisition and also increased our return rates by over 400 basis points. So we are focused on rebalancing assortments to achieve healthier growth going forward. Well, I should also know 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, 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 ensure its continued operation. However, we cannot guarantee that there may not be interruption in operations.

As we work to our near-term challenges, we remain confident in the overall health and strength of our business, including our ability to grow sales above general merchandising 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 the 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, the 2% growth from the prior year. To mention, we continue to enjoy very strong and stable customer retention rates. Our model is centered on the art of discovery bringing customers compelling merchandise and building successful brands. We were pleased with the Q2 launches of Scott Living Home Decor, Isaac Mizrahi Home and Wonderful Discoveries from Shark Tank’s Kevin O’Leary. For Q3, we are excited about the launch of Belle by Kim Gravel, Hot in Hollywood denim, Naot footwear and Mario Buccellati in jewelry, among many others.

In our Christmas and 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 deliver compelling content on a diverse array of immersive commerce platforms. The strength distinguishes 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 have created a global programming Center of Excellence. Broadcast leader from around the globe have created programming playbooks, conducted multiple strategy sessions to share best practices and initiated new destination programming in 6 of our 7 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 grew 27% to represent 58% of consolidated e-commerce orders, an increase of 850 basis points. And we are investing in our digital platforms as well. We launched new product detail pages on our German, U.S. and UK 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 UK began a simulcast its broadcast and in July in the U.S., we produced in air at a live show specifically for Facebook live. Celebrity makeup artist and QVC vendor, Mally Roncal, joined QVC host Courtney Cason and thousands of beauty fans on our 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.

Now, before I turn the call over to Darrell, let me share a final thought on the UK and a brief comment on zulily. We are 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 UK 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. We look forward to our UK business continuing its strong run under Rob’s leadership.

And finally on 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 RTSV 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 are seeing very encouraging traction across all of these initiatives and we will continue to look to exploit these opportunities over the course of 2016 and years to come.

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

Darrell Cavens

Thank you, Mike and thanks everybody for joining today’s call. I am 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 successfully focused on the core of our zulily brand offering by delivering something special at incredible value everyday. We have improved our customer experience with strong operational execution that has helped drive accelerating growth over the last four quarters.

Before I share our second quarter results, I want to provide an update on our efforts at QVC. As Mike said, we have gained strong traction working together particularly in merchandising and technology. We have leveraged QVC’s vast vendor network. And today, we have successfully launched over 70 QVC brands to zulily customers ranging across beauty, apparel and home categories, including brands like Denim & Company, MyPillow, and Laura Geller Beauty. QVC’s longstanding and in many cases proprietary relationships, have allowed us to offer us highly differentiated unique brands at great values to our customers. 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 everyday.

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 are collaborating on additional image optimization tests for this year that we believe will help QVC drive greater conversion on their e-commerce platform. We have also had ongoing discussions with QVC international teams learning about their global businesses, 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 am 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 will cover three key areas, marketing and our customer experience and lastly, on profitability and our long-term opportunity. First on marketing, as we have improved our customer experience through shorter ship times, great products and innovative site experience, we continue to see the quality of new customers improve and our existing customer repeats rates grow year-over-year. Last year, we made a strategic shift into broad-based marketing channels with a focus on acquiring customers with higher lifetime value. If you 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 will continue to lean into 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 behind-the-scenes look at zulily that highlights the fresh and unique curated story we tell about our differentiated brands and boutique events everyday. In mid-July, we also kicked off our back-to-school campaign, which highlights zulily’s expertise and back-to-school trendsetting across traditional online ads, PR and social channels. I am 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 have continued to innovate on our daily site experience to bring our customers back to us again and again. We have invested a considerable amount of effort over the last year across merchandising, marketing, technology and operations and we are seeing the benefits 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 have been spotlighting a deal of the day or one day sale instead of our typical 72-hour events.

With the expansion of our vendor fulfillment services and consignment programs over time, we have also continue 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 costs 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 costs decrease as a percent of net revenue due to our leverage and scale. As we look to the second half of 2016, we will continue to focus on driving growth and profitability. I remain incredibly excited about the growth we have 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 Chris.

Chris Shean

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 principal 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 will hand it back over to Greg.

Greg Maffei

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

Question-and-Answer Session

Operator

Thank you. [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, I mean it’s going to be dominated by in terms of the asset mix by the broadband and charter stakes, does it make sense to try to collapse that structure. And just thinking about the other assets, I noticed that you reclassified if interval is available for sale, how much of the rest of it is liquidateable and can you – 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 formally announced plan in our minds, perhaps typical Liberty will look at to go. And I think we are all very bullish on our investment in Liberty Broadband. We are up nicely in the few months we have 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 Rutledge undertook, which has options that are granted all the way up into the 500, he is quite bullish on it as well. So I think we are holders of that stock. We have no plans. And obviously, as it grows, and it’s the source of liquidity we will look also for other investments that are attractive. None to announce today, but look, it’s an environment where things are moving around and we are always on the prowl.

James Ratcliffe

Thank you.

Operator

Thank you. And our next question comes from the line of Barton Crockett with FBR Capital Markets.

Barton Crockett

Okay. So I wanted you focusing on the QVC issue here, which is really pretty dramatic in the history of QVC, I hear the argument that change was may be a lot of factors TV, consumer, your QCard potentially and an issue with the supplier, but the thing that’s curious is that your – while the consumer environment is a little bit choppy, it hasn’t kind of turned so rapidly than anyone else that I can point to in the last 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 sentiment perhaps more than we have seen elsewhere. And also maybe if you can quantify how much of the kind of downturn has maybe changed with QCard and from the issue with I think one merchant or supplier that you have called out?

Chris Shean

Thanks Barton. Let me try to frame it in a couple of ways. So to your point, this is a very unusual swinging trend for QVC. And we are really not seeing this kind of swing before outside of a couple of quarters around the Great Recession, the timing and ‘08 or early ‘09. We pride ourselves on the stability of the business. We pride ourselves on being able to achieve positive growth and virtually all environments. So this is an unusually big swing in it. Why we wanted to be very forthright about acknowledging it and kind of breaking precedent in terms of updating you on the trend quarter-to-date. And certainly, when we saw our sales softening as quickly as they did, we began to try to find out 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 was any one thing to point to. So really feels to us that it’s an unusually difficult confluence of events that we think we will work our way out of. But we don’t – I think it’s any kind of new normal by any means like this unusual combination. And I think part of what we are seeing is we have acknowledged now for quite a while that we have had a couple of fairly tough businesses in consumer electronics and jewelry and haven’t been as successful as we would have hopped getting those businesses moving. We have had a couple of unusually strong businesses really dynamic businesses in apparel and accessories. And then kind of in between, sort of solid results in areas like home and beauty. So I think we just had a combination of factors. I think in those businesses that have been performing in a very good stable way in home and beauty we have seen a few big items that in a couple of categories like kitchen electric some new items are getting a little bit stay, we are waiting on a little more innovation in the industry that’s created more pressure in those businesses. We had this one big supplier issue that I mentioned to put some pressure on those businesses. And then when 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 markdown activity and the problem goes as best we can tell, the problem of course hasn’t been reported yet. But this is from our own observations of the nature of the discounts and coupon and going on. And so we think our customers kind of feels like she is kind of taking a bit of a timeout. And may be shifting some purchases to this markdown activity or maybe just sort of holding. And when we have done some kind of pre-fall season fall events, we have actually been pretty pleased with the results. Today actually coincidentally marks the official launch of our fall season with the big fashion event that knock on wood, is slightly above plan today. So a day doesn’t make a year. But I think we have got to get into the new season and really figure out what our normalized trend is. So a long 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 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 have got to see that we grow out of this. But I think that’s where we are today. And then with a little bit of caution that turning around that kind of trend in August as we move into a couple of weeks of heavy Olympic viewership, maybe we will be able to turn it around more quickly. But we wanted to acknowledge caution as we kind of finish out the summer months. The – Qcard and if I understood the end of your question if you are referring to the change in Easy Pay practices we are being a little bit more conservative on Easy-Pay. The site has some impact, but I don’t think that’s – I think that’s unlikely to be a huge driver, but it could be one of sort of five or six contributing factors possibly.

Barton Crockett

And I guess, with QCard I mean the fact that there is a little bit more credit pressure there, is that customer not spending like they were, because maybe they are feeling more constrained, is there something in that customer base that is potentially an issue?

Chris Shean

Well, I would say, what we see in general is that what we are seeing sort of the biggest falloff 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 are still highly, highly engaged with us, but pulling back on the margin. Whether that’s because she is feeling financial pressure, whether that’s because that’s the customer that spends the most on fashion and she is kind of waiting for the new stuff, it’s a little bit hard to tell. We don’t see any correlation. We have looked at our own customers’ kind of outstanding payments to us and to see if her level of outstanding payments correlates with any change in performance and we haven’t seen any. So, it’s hard to tell. But what we are concerned the write-off rates bumped up a bit. We are not seeing an obvious linkage between that issue and the sales trend. But I guess, the final point I would make on that is given that the sales shortfall is with our best customers, actually lower frequency customers have actually increased their purchases of apparel in the last couple of months. So, it really is among that core customer, which is what gives us confidence that we will 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 have been listening, sitting in on a lot of them. They still love us. They aren’t even aware that they pulled back their spending. So, that’s why these things feel like they are bit of a 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 in fashion and taking share not just from department stores, but maybe from QVC?

Chris Shean

I guess, we try to conclude that for a few different reasons. It’s a great question. So, where one, as you would expect in this kind of environment in particular, we have 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 are shopping. That survey data as imperfect as it is it’s all obviously self reported, but our customers are simply not reporting that they are shopping at Amazon more. In fact, the recent surveys we have done suggest they are shopping there less. I won’t read too much into that, but at least it says to us it’s really not top of mind for them. And the very fact that actually if you think about who – if we are at 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 low engaged customer is actually doing more with QVC and it’s like 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 of that is going back to these focus groups and not to put too much talk into bunch of focus groups, but in those focus groups, what really struck me is we asked every customer where else they shop. We know our customers love shopping and they all talked about from Neiman’s to Macy’s to TJ Maxx to zulily, not a single customer unaided mentioned Amazon, not a single one. We then prompted Amazon and they said oh yes, we shop Amazon too, but not for QVC stuff, we shop there for pet food, cleaning supplies and so forth. So, again, that’s highly imperfect data, but we just can’t find anything in any of our metrics that would suggest that we are 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.

Alex Fuhrman

Great, thank you very much for taking my question. Thinking about the kind of sudden drop-off, I am also curious if obviously, zulily had a terrific quarter overall here, but wondering if perhaps they saw the same directional shift there in June and 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 is impacting other properties as well?

Greg Maffei

Darrell, you want to take that?

Darrell Cavens

Sure. Yes, I mean I think as we said on the call, I think we are pretty optimistic about the back half of the year. I think we saw very kind of consistent kind of strong growth through Q2. We 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 are kind of watching carefully and driving aggressively at, but no, we haven’t seen kind of that same behavior.

Greg Maffei

Great. It doesn’t have as many e-commerce properties more, but I don’t think we saw that bodybuilding something on that form or shape, obviously a different kind of consumer than perhaps QVC has. Next question please.

Operator

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

Eric Sheridan

Maybe just following-up on one theme there and then also asking Greg a question, but on the theme of the shopper trends and what you saw Mike, in the quarter, maybe walk us through the decision you made on 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 intent continued consumption whether it be the credit decision or incentives around shipping or discounting on price, 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 it, does that change at all the thought process around allocating capital behind the buyback for QVC and thinking through the leverage chart that’s there? Thanks so much guys.

Mike George

Thanks Eric. So I will take the first part. It’s certainly something we look at carefully. We have this overwhelming bias to avoid getting too promotional because it obviously, kind of pollutes the model over time. It trains the customer to have a certain set expectations that creates a buying remorse. And so even when times are really tough, we would try and kind of steal ourselves to letting the sales hit their natural level and not getting too promotional. And we did actually pulled back on Easy-Pay in June, we did have in Q2 our first now that were fully comp the shipping and handling change, our first growth in shipping and handling revenue in the year. So we chose not to engage in those promotional activities. That said, we do – are sensitive to losing too much share in this environment. We are – we want to make sure we stay relevant to our customer base and we want to make sure that our inventories stay relatively clean. So we have done – we have been a little more active in clearance events than we historically would be. And we did a little bit more of that in July and we will probably do a little more of that in August where we will 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 will just kind of keep watching it. But sort of our general view is getting reinforced by everything we have seen is this customer loves us. She is with us and let’s not make such knee jerk 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.

Operator

Thank you.

Greg Maffei

So on capital – well, just on capital allocation, look I think we have been consistent returns on capital, obviously it’s a more attractively priced equity. We still have belief in the company. We don’t necessarily set forth what we are going to buy prior to buying it. And I would note, we are somewhat constrained by the leverage targets we have give to the rating agencies and the like. But with that all in mind, it is now obviously a more attractively priced equity than 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 just to recap, there is nothing in the results that suggest that this is all related to Amazon our cord cutting. And then by the way of context, can you tell us the last time QVC you guys reported negative sales for a full quarter. And then two other quick ones, so is it possible, if you look back…?

Greg Maffei

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

Chris Shean

So I will take this quickly. So on – we hit on Amazon on the other side of it core cutting. We are not seeing any material erosion in number of homes that 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 are going to have the Olympics and election and that could create some incremental nice, how should we think about historically how those items have affected your sales? Thank you.

Chris Shean

So and I didn’t – I know you would ask when was the last time we had negative sales and the answer to that is Q2 of ‘09. So other than the last two quarters of ‘08 and the first two quarters of ‘09 for obvious reasons, where we would put negative results, this business has been consistently positive. And it’s we are showing disappointed with this trend in Q3. We absolutely view this as an anomaly. Look, Olympics, every 4 years it’s different and the fact that it’s in the same time zone and we are prepared for it to have some impact on viewership in sales. It would be hard to quantify that. I don’t know that, that means a worsening trend to what we have seen, but it may mean 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 countered by the fact that we are now finally starting to launch our fashion goods. So we try to do proper counter-programming against the Olympics. But we will just see the impact. So the impact of the presidential election, I don’t know that you could say that has a clear and systemic impact on QVC. It obviously happens over such an extended period of time. I think this year has been a bit unusual for obvious reasons and I think there is a little bit of this negative consumer sentiment about the presidential race that is having some impact. But I think that’s more diffuse. 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 claw back this trend. 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

Okay. Thanks for taking me in. So I guess first question on apparel, were there any specific areas of apparel that were particularly weak or that the down trend 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 part of the business to maintain top line and what kind of metrics do you think about when you look at the profitability of a credit business tied to your sales? Thank you.

Chris Shean

So in terms of specific categories in apparel, I would say it was more broad based than not. Now again, I think the biggest differentiator is what we have been able to do some preview of fall fashions when we were able to introduce some new brand or one or two we introduced in July, we have 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 a little bit of a sort of broad overhang as opposed to a particular category that was especially challenged. And I am sorry, remind me of your second question.

Ed Yruma

Yes. Just trying to understand from a bigger picture perspective, how important you think Easy-Pay is to drive top line and kind of what are the financial return metrics you would look at when you make decisions as to how much you should allocate to the Easy-Pay program?

Chris Shean

I do think - we do think Easy-Pay is important and even though we have moderated the uses of it we are certainly still using it in a meaningful way. Because to me – because we don’t have a lot of promotional levers in our business, it is I think part of why QVC’s 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 one they made a few purchases or been with us for a couple of years, it’s really quite low. So overall, we are talking about a program that has a less than 2% expense rate. And so we view it as an extremely efficient program that does create a differentiation for QVC. And because the bad debt write-off rates popped up a bit, we are 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 that we fully expect to be able to continue to offer it.

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 in Liberty. And we look forward to speaking with you again next quarter, if not sooner. Thank you.

Operator

Okay, thank you. And that concludes today’s conference call. You may now disconnect.

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