iMedia Brands, Inc.
Q2 2020 Earnings Call Transcript

Published: 18 Aug 2020

[Operator:]

Greetings and welcome to the iMedia Brands Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tim Peterman, Chief Executive Officer for iMedia Brands. Thank you, you may begin.

[Tim Peterman:]

Good morning everyone and thank you for joining. I’m Tim Peterman, iMedia Brands’ CEO. Before I go into my prepared remarks, I would like to cover a few housekeeping items. We issued our Q2 earnings release earlier this morning. If you don’t have a copy, you may access it through the News section of our IR website at imediabrands.com. This release is also an exhibit to Form 8-K filed this morning.

[Operator:]

Our first question comes from the line of Mark Argento with Lake Street Capital. Please proceed with your question.

[Mark Argento:]

Good morning, Tim. Congrats on a nice, real strong quarter. Was curious where you guys are seeing the strength. It looks like the health and beauty business was up pretty big in the quarter, and you guys are de-emphasizing home and CE, but maybe you could just get in the weeds a little bit on mix. That’d be great.

[Tim Peterman:]

Sure thing, Mark. Thanks for the question. Certainly in Q2, we did see a pick-up certainly with everybody at home in the—I’d call it the home improvement, health and beauty categories, and probably a little bit of a retreat in some of the higher end jewelry and jewelry categories. So, in terms of consumer trends, that’s certainly what we saw from our perspective, and it was really an opportunity for us since we are strong in beauty and in health. It was an opportunity for us to really serve the customers at a time when not only the interest shifts to what we would call our strengths, but it was also a time when there were--you know, the HUT levels, which is homes using television or people watching television, had increased, and so it was both of those elements that helped drive some of the new product introductions that we created in Q2 and in Q1 resonate with those customers.

[Mark Argento:]

Got it. In terms of--you know, do you anticipate those trends continuing in terms of mix or do you expect to see more kind of watch and jewelry come back as you get closer to holiday? How do you see mix playing out through the rest of the year?

[Tim Peterman:]

You know, it’s interesting - it’s anybody’s guess on those things. When we think about our air time mix, we do think beauty and health is something that we’ve done well for a while and certainly in Q2 as well, and as you know we launched our ShopHQ health-dedicated channel, so we do think that there is still demand certainly for jewelry, which was a little bit of a retreat in Q2 and our normalized mix going into Q3 and Q4 is our strategy because we are dedicating an entire channel to the beauty and health category because we think not only are we able to serve it well on ShopHQ today, but we’re not able to really capture the full extent of the opportunity, so that’s why when you balance out a dedicated channel in that health area as well as the normal ShopHQ, which is a bit broader, has a very strong jewelry, very strong watch, very strong fashion, home, home in certain categories, particularly with our strong brands like Mackenzie and Waterford, those continue to perform well in Q2, Q1, and really every quarter. We’ve built very good brands in those categories and we certainly want to give them the opportunity to grow based on the consumer demand. We think that will be more balanced in Q3 and Q4.

[Mark Argento:]

Got it, and then just looking at the operating expenses, it looks like your distribution and selling expense as a percentage of sales was down pretty materially. Could you talk a little bit about what’s driving that benefit?

[Tim Peterman:]

It’s a combination, right, so--and I talked about it in the last quarter, it’s never one thing. So, the combination of--in Q3 and Q4, when we moved to a static programming calendar, we began to make less and less changes. We found that as those changes happened and it became more predictable for the customer, our variable rate was able to come down, so less customer calls, less--you know, all these different elements of the variable rates came down, so that’s in distribution and selling. Our distribution costs with our MSOs again, based on partnering with them and negotiating with them, our costs came down there. Our overhead--it’s a multitude of things all coming together at once, and it’s never--as I said, it’s never disconnected from the front of the house decisions, which had to do with not only the static programming calendar but also how we thought about rebuilding each customer file category by category, like watches. We brought the customer file growth there in Q4 that also impacted distribution and selling expenses, made us more efficient. Then when you think about how we plan our shows with a better price point balance, it allows us to manage our inventory. If you look at the way we’ve managed our working capital, our inventory has come down quarter over quarter pretty significantly, it’s because we’re buying differently. When we say we’re buying differently, we’re buying differently because we have less inventory and our margins are much stronger, and that again brings down your distribution and selling expense.

[Mark Argento:]

And obviously, you think this is something that you can sustain given the mid-to-high, single-digital EBITDA, positive EBITDA for the next couple of quarters, so that’s awesome. Thanks Tim.

[Tim Peterman:]

Thanks Mark.

[Operator:]

Thank you. Our next question comes from the line of Alex Fuhrman with Craig Hallum Capital Group. Please proceed with your question.

[Alex Fuhrman:]

Great. Thanks very much for taking my question, and congratulations on the really strong results here. One thing I really wanted to ask about would be the improved viewership trend that as your distribution and viewership moves more and more away from traditional linear distribution and more towards non-linear platforms, how are you driving that viewership with customers not necessarily flipping through the channels the way they used to and perhaps having your network catch their eye?

[Tim Peterman:]

Thanks Alex. Tricky question, don’t know how to approach it. We’ll try starting at the top, which is let’s think about ShopHQ and its distribution platform. I should have done it--I’m trying to do a better job of explaining the different strategies.

[Alex Fuhrman:]

Thanks Tim, that’s really helpful. Then can you talk a little bit more about the secondary network, the Bulldog and then the upcoming launch of ShopHQ Health? Is this really about going after a new customer or taking your existing customers who’s interested in those categories and really expanding that opportunity? Can you just talk a little bit more about how those networks are going to play into your overall portfolio?

[Tim Peterman:]

Sure. Let’s take a step back and say why are we doing what we’re doing? The answer is we have certain strengths with our core business, which is ShopHQ, and that is the first core strength was that different from any other television retailer, 25% of our customer base is male because of Invicta watches and CE and some other areas, and so we thought for ourselves how do we give--that’s a very big category that’s underserved, how do we give that the independent status it deserves? That was the strategy behind creating Bulldog, and so Bulldog will be focused on a broader category of serving products and services to the male customer using our beginning advantage of the customers that we have today on ShopHQ but then finding other customers. That’s the-always the strategy is to use the strength we have today, find the distribution that is economical and where those customers are, and then build and find new customers. Bulldog is not as reliance on 24/7 linear television distribution. We are incubating our programming in other forms of shorter blocks of programming where males are and at times when males are watching television, or when--you know, and we’re doing it in a way that we are also inviting to females who happen to be buying for males, for their males as they say. The strategy for Bulldog is the same strategy we’re doing for ShopHQ Health. We see the health and wellness category as something very underserved in television retailing and in media in general, and we think our strength in beauty and health today can give the independent status to a 24/7 network that we just are launching today--you know, in September, and we expect--you know, based on our research, our experience and our ambition, we expect ShopHQ Health to be as big or bigger than ShopHQ one day, just because of the category and the type of programming and the type of services that we see that could accompany that network. Hopefully that answers your question. It starts with our strengths and then we move into something that we think deserves independent status because of the entertainment and the commerce that’s migrating online.

[Alex Fuhrman:]

That does answer my question. That sounds terrific. Thanks a lot, Tim.

[Tim Peterman:]

Thanks Alex.

[Operator:]

Thank you. Our next question comes from the line of Elliot Alper with DA Davidson. Please proceed with your question.

[Elliot Alper:]

Great, thank you. Could you talk about the monthly cadence of sales trends you saw throughout the quarter and if you saw any correlation between sales trends and geographies that began different stages of reopening and how significant that was? Then lastly, curious if you could talk about any sales trends quarter to date.

[Tim Peterman:]

Thanks Elliot, and--so let’s do those separately. First of all in Q2, the geographic relationship to what you’re describing, COVID, did we see any of that, and the answer would be no. We really didn’t see anything like that geographically timing-wise. What we did see certainly, as we talked about at the beginning of the call, which was we did see viewership going up and we did see some of the categories waning as interest in beauty, health and home improvement grew. The opportunity for us was that we were already in the process of, from a product assortment planning and planning our shows with a price band balance, that it allowed us when we think about that shift in consumer demand, we weren’t so stocked full of inventory and so set in our ways that it allowed us fairly quickly to address that shifting demand and able to provide the programming and the product that met that demand. That was something that was more of a national phenomenon more than a geographic phenomenon. Does that answer that first question?

[Elliot Alper:]

Yes.

[Tim Peterman:]

And then in terms of the second question, I’m not really sure it’s--if you could go into a little bit more detail on that, I want to better address it on the second part of your question.

[Elliot Alper:]

Just on the cadence of sales trends you saw in the quarter and any trends quarter to date, if possible to call out.

[Tim Peterman:]

Yes, so--I’m trying to think how might I do that. We don’t really get into inter-quarter results, and I was hoping for a different angle on that. I would just say that we don’t offer any color on our quarter to date in performance, and to Mark Argento’s call earlier, we think that in terms of when and how the consumers’ shifting preference for beauty and health will change, we’re not sure, but what we do know is that our game plan consists of a pretty clear road map for Q3 and Q4 as it relates to the mix and as it relates to what we’re offering, and we do think as a result of Q2 and our strength in beauty and health, that we think the popularity of ShopHQ Health may be more impacted by how long and when and how it migrates in terms of the stay-at-home and COVID. But we don’t think ShopHQ Health and our agenda there is going to be driven as a reflection of how COVID ultimately stays or goes in Q3 and Q4.

[Elliot Alper:]

Okay, great. Then on the new customer growth, could you expand more what into the growth? Are you seeing new customers fitting into these niche categories? Are you seeing a wider demographic of customers, and what would be the Company’s plan to retain these new customers?

[Tim Peterman:]

Sure. Again, let’s go back to the origin of the change, which was in Q3 and Q4, as we’ve talked about in the past, we went about a category by category strategy to rebuild our customer file, which had been negative for quite some time, and in Q4 we talked about how we deployed a certain strategy to rebuild the watch customer. It was around price point, it was around certain elements around engaging those customers, and in Q1 and Q2 we’ve been going about it in a very methodical basis on which categories, which shows, which static programming would address new customers and which would embrace the existing customers. Sometimes that answer is not the same. But if you want to think about the primary driver for the customer file growth in Q2, it would be around our ability to move very quickly to launch quality brands and products that resonate with those new and existing customers, so the first time in our Company’s history in 30 years, we generated roughly 19% of our revenue year to date, in Q1 and Q2 from product launches that took place in Q1 and Q2, and that really to me is a KPI that says we are not just launching products to launch products, we’re not just flailing at what we think our customer may or may not like, we are being thoughtful about the 25-some brands that we did launch, that they are sticking and that they make a difference to the customer. Customer file growth is comprised of three things, right

[Elliot Alper:]

Great, I appreciate it.

[Operator:]

Thank you. Ladies and gentlemen, as a reminder, if you’d like to join the question queue, please press star, one on your telephone keypad. Our next question is a follow-up from the line of Mark Argento with Lake Street Capital. Please proceed with your question.

[Mark Argento:]

Hey Tim, more of just a quick housekeeping here, but I did notice--it looks like the D&A or the amortization, it looks like that’s up quite a bit, and then I also see the--it looks like you guys have some television distribution rights on the balance sheet now, so just wondering what’s going on there. Is that a new accounting treatment for those rights? Thanks.

[Tim Peterman:]

Sure thing, Mark. In Q1, we talked about that more and talked about television amortization, which is in the entertainment industry and in our industry in TV retailing, the distribution agreements with the MSOs, a portion of it is related to the actual channel and staying on that channel and the right for that channel. They call them broadcast rights, and then a certain amount is obviously just for the servicing fees, and in this industry of television retailing it’s oftentimes a percent of net sales. The amortization that you see in our balance sheet and our income statement relates to the channel placement rights or those intangible rights related to our distribution agreements, which is us getting caught up with the standards of how this industry accounts for that.

[Mark Argento:]

So the amount of amortization basically, will that fluctuate depending upon the sales in the quarter, or is that pretty static?

[Tim Peterman:]

No, traditionally the channel placement fees are static and the fees related to the volatility of the business are all related to the service fees.

[Mark Argento:]

Great, thanks for the reminder.

[Tim Peterman:]

Yes, thanks Mark.

[Operator:]

Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Mr. Peterman for any final comments.

[Tim Peterman:]

Thank you Melissa. Listen - I just want to say again thank you to everybody who has been with us and who joined us this morning. We are moving in a strong direction to become a growth company and we’re excited about it, and look forward to talking to you soon. Thank you.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.