HSN Inc. (NASDAQ: HSNI) may not be the most well known stock in the market, but its Home Shopping Network is nothing short of a lean, mean, retail machine. Since it began broadcasting in 1981, its flagship HSN television network has grown to reach about 95 million U.S. households, its catalog business has distributed more than 300 million magazines each year, and it has reached many more customers through its leading website and 11 retail and outlet stores.
These distribution channels generated nearly $3.3 billion in net sales and net income of about $131 million, or $2.25 per diluted share in FY 2012. Last quarter, the company reported revenues that increased 6%, adjusted EBITDA that jumped 7%, and diluted EPS from continuing operations that rose 30% to $0.79 per share. Perhaps the most important development, however, was the 45.1% digital sales penetration that was up 170 basis points year over year.
Despite the strong financial performance, HSN trades with a price-earnings to growth ratio of just 0.6x, suggesting that it may be undervalued relative to its growth rates. The company's price-earnings ratio of 20.7x is also significantly lower than the 50.8x industry average, while its price-sales ratio of 0.9x is lower than the 1.5x industry average. These metrics may be higher than its historical earnings, but are significant lower than its peers as seen in Figure 1.
Figure 1 - HSNI Multiples Comparison - Source: Morningstar.com
Looking ahead, investors could see these depressed multiples rise up to industry averages, as HSN embraces its digital potential. Management's focus on this area has resulted in digital sales growth of 10% with penetration up 170 basis points that contributed to overall net sales growth of 6%. The company has also been active in returning value to shareholders through its share repurchase plan - 900,000 shares were repurchased in Q2 - and cash dividend programs.
Despite these favorable dynamics, there are of course some risks that investors should consider before committing any capital. Amazon.com Inc. (NASDAQ: AMZN) has provided consumers with an "always available" e-commerce store at their fingertips, while competitors like Liberty Interactive's (NASDAQ: LINTA) QVC continue to pose a competitive threat. But in the end, HSN trades with a cheaper earnings multiple and offers the industry's only pure-play investment.
Looking Beyond HSN to Its Vendors
HSN may represent an impressive investment on its own, but investors may also want to take a look at some of its vendors. With the network's ability to generate significant sales and awareness, many small companies have gone on to realize smashing market successes thanks to the unique multichannel retailer's nationwide presence. Some of these vendors include public companies that could see their products reach new levels as a result.
HSN's ability to impact smaller companies is perhaps best illustrated by a story that appeared in Inc Magazine back in November of 2011:
Ever wonder about how to get your product on QVC or the Home Shopping Network (HSN)? It crossed the mind of Lisa Price, the founder of Carol's Daughter, occasionally when her company was a start-up and she was mixing up homemade fragrances and bath products in her Brooklyn kitchen. Years later, when the company was seasoned and had seven brick-and-mortar locations and was generating $18 million in sales, a big break presented itself for Price's products to appear along with one of her partners. Price was able to turn that one-time chance into a reoccurring opportunity with the $3 billion-interactive multichannel retailer based in Tampa …
First was finding the person within the company that would handle the business side of things because we needed someone to be in constant communication with HSN. Now that the partnership has grown to the size that it is, we have a vice president who's dedicated to the Home Shopping Network. And he has an HSN manager that manages the account with him.
Aside from these stores of success, HSN has developed a robust proven track record with leading brands around the world. Mary J. Blige's My Life Prestige Fragrance, for example, sold more than 60,000 units in just six hours of air time during its exclusive launch. Meanwhile, Shark Tank star Lori Greiner's earring organizer completely sold out within minutes, which helped propel her to create more than 400 unique products covered by 100 patents since then.
Public Companies Showcasing Products
Beamz Interactive Inc. (OTCBB: BZIC), a relatively small $10 million publicly traded company, recently announced that its new Beamz by Flo product appeared on HSN. While the product only recently went up for sale, and investors have yet to see any financial results, the promotion occurred with the help of Billboard Top 100 artist Flo Rida, who is the best-selling digital hop-hop artist in the world, with over 600 million video views on YouTube. Given the aforementioned success stories with other entertainers like Mary J. Blige, the product could prove to be a hit.
"Having Beamz by Flo featured on the Home Shopping Network is a threshold event for our company," said Charlie Mollo, CEO of Beamz Interactive Inc. "We are extremely excited to get our new product line into the hands of consumers this fall. HSN's ability to reach over 90 million U.S. households with a demographic that is extremely compatible with our target audience makes HSN an important relationship for Beamz."
The unique product is already available on HSN.com - HSN's e-commerce portal - and appeared on the popular television show on September 15, 2013. The promotion across HSN comes after Flo Rida has already been very active in promoting the new technology in television interviews, online videos, and even new music videos from his upcoming album. With both of these marketing efforts happening concurrently, investors could see significant revenues.
HSN's ability to rapidly sell products has made its television network, catalog business, and Internet presence a hit among investors. Despite its growing digital revenues and high margins, the market continues to value its business at a discount to both its own growth and many of its industry peers, such as Liberty's QVC.
In addition to HSN, investors may also want to keep a closer eye on many of its vendors, particularly when those products are paired with celebrities. Publicly traded companies like Beamz Interactive may be positioned to generate significant value for shareholders with their products appearing on the television network and online venues.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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