Beyond Rescue: No Cure For Qurate's Decline

Summary

• Qurate Retail is facing customer loss, layoffs, and the destruction of a major logistics center, making it an unfavorable investment.
• The company's recovery plan based on cost-cutting is insufficient, and its high debt is concerning.
• The business model is fragile, especially in the long run, due to declining revenues and a shift away from teleshopping.

simonkr/E+ via Getty Images

Qurate Retail (NASDAQ:QRTEA) is certainly not experiencing a good time: customers are leaving, the company is facing one round of layoffs after another, and all this after a fire in December 2021 destroyed the company's second largest logistics center, from which 25-30% of customer orders were shipped.

The company has formulated a multi-year plan to address the situation, providing updates about it in the recent Q2 2023 earnings call. Despite the best efforts of the management, my stance on this stock is bearish, and I believe there are no conditions for a profitable investment in Qurate Retail.

In this analysis, I will primarily focus on three points that form the basis of my rating:

1. The company's recovery plan, mainly based on cost-cutting, is insufficient to change the company's fortunes;
2. Qurate Retail's debt is worrisome, especially in a time of high-interest rates, and with the company not generating cash from its core business;
3. The business model is fragile, especially in the long run.

Business Model Overview

For those unaware, Qurate Retail is a company specializing in video commerce. Essentially teleshopping, increasingly integrated with an online component. The company operated through four business units. Ordered by the percentage of the group's overall revenues, these business units are:

• QxH, the largest and most affected by the fire at the Rock Mountain warehouse. It mainly focuses on the U.S. market, offering various products (supplements, home, beauty, etc.);
• QVC International, similar to QxH in products and operations, but with activities mainly in Europe and Japan;
• Cornerstone, a brand entirely centered on home products;
• Zulily, an e-commerce specializing in women's clothing.

Now only the first three business units remain, as Zulily was completely divested during the last quarter.

Qurate Retail - Q2 '23 Earnings Presentation

Q2 '23 Results: Revenues Keep Falling

The second quarter of 2023 closed with revenues of $2.649 billion, down from the $2.953 billion in the same period of the previous year. The company attributes the decline mainly to a drop in order volume, partially offset by a 5% increase in the product mix price of QxH and QVC.

The quarter ended with a net profit of $107 million, which, however, includes $211 million in extraordinary revenues resulting from insurance proceeds related to the Rock Mountain fire. Quoting from the company's statement:

In the second quarter of 2023, QxH recognized (i) a $209 million net gain on insurance proceeds representing insurance proceeds received in excess of fire-related costs and (ii) a $2 million gain on the sale of Rocky Mount in February 2023 that was released from escrow.

This means that, net of extraordinary events, the quarter would have closed with a loss of $104 million.

The section related to the extraordinary income is highlighted (Qurate Retail - Q2 '23 Earnings Presentation)

Financially speaking, Qurate Retail received the final $225 million insurance payment for the Rock Mountain logistics center. It also liquidated its stake in Comscore, cashing in $67 million. This last piece of information was only provided during the earnings call in response to a specific question. The capex was $105 million, and Qurate expects FY 2023 capital expenditure to be $230 million. Thanks to these investments, the new Cornerstone logistics center in Arizona was opened, becoming fully operational from June.

The balance sheet situation has not changed much: using the liquidity from the insurance payment, Qurate repurchased $177 million in bonds maturing in 2024 and $15 million in bonds maturing in 2025. Considering that total liabilities are worth over $12 billion, it's not a significant change.

Here's Why the Turnaround Can't Work

Given Qurate Retail's current situation, high profitability would be needed to encourage investors to navigate through the company's high debt. As would growth prospects, margin improvements, or other types of catalysts: all things that Qurate cannot provide at this time.

Below, I will analyze the three most important points to understand my pessimism about this stock: the cost-revenue profile, debt levels, and the fragility of the business model. The data on the cost-revenue profile and debt levels come directly from the Q2 2023 quarterly report.

#1 - The Cost-Revenue Profile is Anything But Exciting

The second quarter saw yet another drop in revenues for all business units: -8% for QxH, -3% for QVC, and -7% for Cornerstone on a constant currency basis. The company reports a 5% higher average sale price for QxH and QVC, but a decline in overall order volume.

Since the figure is not provided, I did the math myself: an 8% decline in revenues with 5% higher prices implies a 12.4% decline in order volume for QxH; a 3% decline in revenues with the same price increase implies a 7.6% order volume decline for QVC.

Marketing spending remained unchanged from 12 months ago, indicating that customer acquisition efforts are yielding less. Against this backdrop, the company's plan to change trajectory is not based on stimulating demand: it is based almost exclusively on cost-cutting through staff layoffs:

• QxH - After the layoffs in February, more followed in Q2 2023, reducing the workforce by a further 8%. Staff cuts are expected to have ended for now, leading to a cost reduction of $50 million in 2023 and in subsequent years;
• QVC - The company intends to implement a layoff plan with a run rate of $45-55 million in savings by Q1 2025;
• Cornerstone - Cut 100 jobs for a total annual saving of $10 million, of which $4.5 million will already be saved in 2023.

Even when explicitly asked during the conference call, when management was asked when revenues will start growing again, the answer was very vague. The only clear information is that at least two more quarters of decline are expected.

Layoffs and price increases can't go on indefinitely. They are among the last tools a company has to combat its decline, but against crushing debt and chronically declining revenues, they are not enough. The savings from the extensive restructuring plan are worth less than $30 million per quarter when the company would have lost over $100 million without insurance capital gains and with a deteriorating outlook in the coming months.

All this without considering that up to this point the macroeconomic scenario has remained favorable, with good consumer confidence and an extremely solid job market. If the macroeconomic context were to deteriorate, it could be the death knell for Qurate.

Qurate Retail - Q2 Earnings Presentation

#2 - Debt Levels are Very High

One of the main problems with Qurate is that the company's debt levels are extremely high, to the point that bears are even betting on a possible bankruptcy. Here are some data points to consider about Qurate Retail's financial profile (data in $ millions):

Current assets (ex. inventory)	2.591
Current liabilities	2.397
Long-term debt	6.537
Total liabilities	11.072

Click to enlarge

The tangible book value per share is -$15.87, and the company's tangible book value is negative by $6.169 billion. It's not exactly a wonderful situation, especially considering that refinancing today means accepting extremely high interest rates. The key issue, in this context, is that there is no foundation to improve the profitability of the core business, and consequently, not enough liquidity is generated to significantly address the debt.

#3 - The Core Business is Fragile

Even though Qurate Retail reports that 61% of its revenues come from e-commerce, this is just the platform where consumers complete the purchase. Television remains the tool that drives customers to buy on the website, by phone, or in any other way.

Younger consumers watch little television and even fewer teleshopping programs. In the long term, the pool of users that Qurate targets will increasingly dwindle. Additionally, the company sells products at extremely high prices compared to market equivalents: for today's increasingly tech-savvy consumers, it has become easy to compare the product seen on TV with alternatives available on Amazon.

Below is a table of prices listed on HSN (part of the Qurate network) and the most purchased equivalent product on Amazon.

	HSN	Amazon
Whey Protein Isolate (1.1 kg)	139.90$	67.09$
HP 15.6" Touch Intel Core i3 8GB RAM 256GB SSD	419.99$	357.90$
Samsung 2023 50" Q60C 4K QLED	599.99$	477.99$
Birkenstock Gizeh Canvas Thong Sandal	110$	91.90$
Gucci Bamboo For Her, 2.5 ounce	124$	75.99$

Click to enlarge

I did not cherry-pick to select the products presented in the table; I simply chose the first product that the HSN site suggested when clicking on different categories. The goal is to provide some practical examples, not necessarily those with the largest price difference. HSN prices are publicly visible on the official website, as are those on Amazon. Regarding isolated whey proteins, HSN sells its own brand, but it's a commodity: pure proteins extracted from non-hydrolyzed milk serum, like the hundreds available on Amazon. The comparison in this case is with IsoPure isolated whey proteins, which on Amazon are sold at $67.09 for 1.3 kg: not only is the price much lower, but there's 20% more product in the package. All the other products are associated with a specific brand, so the comparison is between the price of the exact same product on HSN and on Amazon.

The lack of convenience is not the only issue: the quality of the products is also questionable, or at least it seems so when looking at the statistics. In Q2 2023, the return rate increased from 14.8% to 15.8% for QxH and from 19.4% to 19.6% for QVC International. When 1 in 7 products for QxH and 1 in 5 for QVC are returned, the problem is clear: I spent half an hour in an eBay forum thread to understand the benchmarks, and most sellers are concerned when their return rate exceeds 4-6%. Amazon does not publish this statistic, but various sources mention a range of 5-15% depending on the product category.

Conclusions

The teleshopping business is waning, as is the medium itself. Like any other business that heavily relies on a single platform, the company's fate is intricately tied to that platform. The decline in teleshopping, the misfortune of the Rock Mountain fire, but especially because of the poor profitability and high indebtedness, I prefer to stay away from Qurate Retail's shares right now.

I might consider opening a short position, but honestly, I don't think I want to use my portfolio's liquidity for such an investment. I certainly won't do it in the near future. My liquidity for side-bets is set to flow soon into the companies to which I have recently assigned a buy rating: as I highlighted in my analysis of SurgePays and that of Illumin, there are several micro-cap stocks different from Qurate that are grabbing my attention right now.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[theheckwithtech]

I'm out with a nice profit at $37. Will look to get back in under $25 again.

[Strathos]

Has anyone an explanation why just the A stock is falling, while the B stock is rising?

[hunter3]

@Strathos not sure. B has a very high insider ownership so perhaps that is playing into this. Quite interesting

[Mrjs]

Few possbile reasons why A shares continue to fall...
-forced selling by institutions
- tax loss harvesting
-B/P shares as alternative
-some may be putting in the "too hard" pile and exiting but not necessarily saying it is heading for bankruptcy.
- possible exit and reentrance when more clarity

[Mrjs]

QRTEP 32% yield. Wow

[goodfellasfinancial]

@Mrjs seems too.good...patiently holding looking to add

[hunter3]

@Mrjs look at the price! this is basically a bet that the company is not bankrupt in 2 years. seems overly pessimistic

[theheckwithtech]

@hunter3 I'd argue it's very pragmatic.

[Kbtbbjm]

I was on the call for the business update webinar, painfully unimpressed. The mentality has not changed.

[Mrjs]

@Kbtbbjm please elaborate

[you are wrong]

Completely disagree. Excellent CEO,CIO, and Chairman. Dividends all approved. Please disclose your experience and education background.

[Mrjs]

@you are wrong I want to hear more from you please elaborate. Thanks

[SummitWaldo56]

@you are wrong What is the criteria for it being excellent management? Is there any evidence of their success? Just asking

[2whiteroses]

@you are wrong Thanks for your post... Your own disclosed experience and educational background is impeccable..

[hikaruLight]

what an amateur

[Mrjs]

@hikaruLight explain more please, thanks

[SummitWaldo56]

Thanks. Good article. I think we have a classic bear trap with little cause for optimism. Clearly nobody wants to buy this or they would have done so already. There is still great (albeit small) value in the brand. The debt level is suffocating, but not likely to precipitate bankruptcy soon. No catalyst, no interest and no growth. Sad.

[snkist1]

So inventory is worth $0? Most of the company's debt, other than $1.5 billion, is out past its 2026 revolver.

[nathan.chui]

@hunter3 sorry that I didn’t repiled your comment eariler, was a bit busy last few days. If you look at the overall market, a lot of retail company share price is suffering( especially the micro cap with huge debt, eg, delta ,children place, HBI, www), mainly due to decline margin and revenue, fear of recession, increased interest rate. To me, it is a once in few years great opportunity to buy in these companies.
1) they already priced in for recession, but actually no one knows what is going to happen, no one can predict the economy
2) the margin is going to go up in the second half of 2023, not only qurate, lots of other retail companies are saying the same thing, the shipping rate and other raw material like cotton already revert to normal price, but it takes a few quarter for the items to arrive and sold,it is how accounting work and lots of retail investor don’t understand
3) interest rate is not going to stay this high forever,it will drop eventually, the refinance market will turn better in a few years
4) the consumer spend a lots of money during Covid, it will take 1-2 years for them to be active again, especially the home category, consumer won’t stay passive forever, personally I also bought lots of stuff the last 2 years, I am buying less things now, but in the end the spending will go back up , it is how human nature work

As for qurate, it has a wide competitive moat that everyone underestimate, no one does video shopping better than them! The margin will increase and the revenue will be stable and the debt will become manageable.

[Mrjs]

@nathan.chui can they redeem the preferred early?

[nathan.chui]

@Mrjs they can, but they do not have enough cash, qurate need the cash to repay debt due 2024,2025 and 2026, which I believe they will be manage to do so.In 2025-2026, they will refinance the debt beyond 2026, by that time they will have extra cash to do whatever they want(their interest expense will be lower also), but most of their cash in cash will be used to pay down the debt due 2024,2025 and 2026.

[MillionsDollarMan]

@Mrjs loan covenants may prevent buybacks

[hunter3]

I think this is a very pessimistic outlook. This article makes it seem like the company will go bankrupt tomorrow. I think the core customer base keeps this company going well into the late 2020's from there the company can pivot to a new direction if they want. Also cable TV is declining but Roku/streaming TV is rising. I do not think the death of cable has a large impact on QVC.

[Alessandro Calvo]

@hunter3 I'm not saying that it's going bankrupt tomorrow, but that does not make the case for buying either. What I'm saying is that, if we look at profitability and free cash flow, the problems are already there even regardless of the -in any case concrete- risk of bankruptcy.

[hunter3]

@Alessandro Calvo well it seems you have been correct since this post was made. I am still long but I give credit where credit is do.

[theheckwithtech]

@hunter3 Project Athens is just starting to work. FCF improved this latest quarter. Waiting to buy heavy back into QRTEP if it drops to $30, but if not, I'll still get back in in the next month or two.

[Kbtbbjm]

When I walk into qvc you see the problems everywhere, moral is low and no one trusts management. There is no faith in buyers and some should have been fired along time ago. We give away our customers to Amazon by selling them products that push the Amazon ecosystem. They are not an authorized apple dealer so it’s always overpriced with some plastic throw ins.
Home goods quality has dropped. Q is about sales for the day and doesn’t look to the future. It’s a shame it use to be a good place to work, but the cliques has taken over. It’s not about fixing problems it’s about hiding them.
There are ways to fix qvc but no one wants to speak up since its seems it can get you fired if your ideas do well. It also doesn’t help when the Nepos are spread out into the company in positions that do damage.
If you ever seen boring shows on air you can chalk that to guest excellence , because it’s just been down hill .
It’s gotten so bad that there’s talk of unionizing and It’s going to be interesting to see what happens if these issues don’t get resolved. But to be honest I don’t see them fixing it with the Sears mentality that’s there, the focus is putting up signs everywhere in the building instead of actually fixing the real problems.

[Alessandro Calvo]

@Kbtbbjm Such an interesting point, thank you!

[Kbtbbjm]

@Alessandro Calvo hopefully they get their act together.

[boo151]

I'm a financial advisor and I don't buy micro cap stocks. I think the company may survive but they may need to go through bankruptcy to move out of the current situation. I'm commenting because I think your view of the company is dated and doesn't match the reality in recent years. I can tell you that a lot of customers go directly to the websites and aren't driven there by the TV channels. I think it's been many years since shoppers were watching on TV often. Both QVC & HSN have in house brands of clothing, jewelry, & home goods that are very high quality, well made and there is no equivalent to many of these on Amazon. There are also some great designers who design lines for QVC & HSN but aren't on Amazon. I personally have tried to find very similar items on Amazon for a lower price and all I found were items of lesser quality & lower price. Both QVC & HSN let customers use items for 30 days and return them if they are dissatisfied. That's appealing to some shoppers and unavailable elsewhere. I am a picky shopper who prefers higher quality for a reasonable price and I don't want poorly made items. I work in a professional environment and the clothing on Amazon that I've tried is not even decent quality. Sure there are vitamins and sometimes shoes on Amazon that are good quality. Most items & brands through Qurate aren't available on Amazon. Qurate has a lot of obstacles to overcome but I hope they make it because they offer mostly high quality products and provide excellent customer service. They also provide many jobs in PA, FL, and at the warehouse locations.

[Capt Stu]

@boo151 as a bond holder, what can I expect to happen to the bonds as they go through bankruptcy? would they restructure? or would I get an ottoman? your input appreciated.

[boo151]

@Capt Stu I would ask the person who wrote the article. Your question is unrelated to my comment. I was simply clarifying some issues related to how the company does business and how customers buy from them.

[Mrjs]

@Capt Stu bankruptcy is not imminent

[idahojoe]

Any thoughts or recommendations on the preferred?

[Alessandro Calvo]

@idahojoe very risky, I personally wouldn't buy them, but as long as one is aware of the risks it's all doable!

[theheckwithtech]

@idahojoe the turnaround is slow, but it's working. I've been heavily accumulating the preferred this year. Thinking about a position in the common now that Burry is back in as of August 25th, but that would just be for a quick trade as my focus is on income.