iMedia Brands, Inc.
Q4 2007 Earnings Call Transcript

Published: 26 Mar 2008

[Operator:]

Good morning and welcome to the ShopNBC fiscal fourth quarter and full year 2007 earnings teleconference. (Operator Instructions) I would now like to turn the call over to Ms. Amy Kahlow, Director of Communications. Madam, you may begin.

[Amy Kahlow:]

Thank you. Good morning and welcome to today’s conference call. Today’s conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward-looking statements. More detailed information about these risks and uncertainties is contained in ShopNBC's filings with the SEC. I would now like to turn the call over to Mr. John Buck, Executive Chairman of the Board.

[John D. Buck:]

Good morning, everyone and thank you for joining us today on this call. Let me start by saying that this is an exciting time for all of us at ShopNBC and by that I mean the appointment of Rene Aiu as ShopNBC's new CEO, our new leader, and also a member of the board of directors. Rene brings an extensive background and broad expertise in TV shopping to the network. Twenty-two years of experience in both U.S. and international markets, including Japan, Italy, the U.K., and she possesses an industry vision and a working style that without a doubt will contribute greatly to the company in ’08 and beyond. Before I give a more thorough introduction of Rene and how she came to join the network, I’d like to give you a preview of today’s calls, which is also joined by Frank Elsenbast, our CFO. Today’s prepared remarks will touch on three areas; one, a brief financial review of our fourth quarter and full year results; two, a quick report card on our fourth quarter performance against what we said we would do on our last call; and three, some comments on our fiscal 2008 outlook. As you may know, the search for our new CEO began four months ago and was conducted by the firm Spencer Stewart. It would be an extensive process, a global search, in fact, with the board mandating that they find a candidate who not only had a proven track record of success in direct marketing to consumers, but also someone who really understood the business of TV shopping and e-commerce. TV shopping is a fascinating, fascinating and unique business. There’s magic to it. You need the right product, the right hour, the right host, and the right value proposition. Spencer Stewart did a wonderful job in finding Rene. There’s much that can be said about Rene and over time, you will come to know her and enjoy her as I do. She is a great selection to be our new leader. Her proven track record of success, having served as CEO of Jupiter shop channel Japan and previously senior vice president HSN, makes her the ideal leader for the next phase of growth and expansion at ShopNBC. At Jupiter, Rene was successful in establishing the company as the number one shopping network in the marketplace, growing net sales five-fold during her tenure. Profitability and more importantly sustained profitability was also achieved early on under Rene’s leadership. Moreover, Rene directed a well-integrated and successful e-commerce arm of the business, exceeding annual sales goals year after year. In fact, she developed the initial business plan and led the start-up of what would be the first live television shopping channel in Japan. When Rene was with HSN as senior vice president, she directed the company’s marketing, on-air sales, programming, and production departments, with company sales of approximately $1.3 billion. She has been a consultant as well to Liberty Global and HSN International on some major TV shopping related initiatives in European countries. You can see Rene has worked directly in almost all areas of the home shopping industry throughout her 22-year career. She is what we would call a subject matter expert on TV shopping who is passionate and disciplined in her execution -- relentless, some might say. She is customer focused like a laser beam and product being the start of the show. And considering 70% of our loyal customers are female, who better to understand our customer and their needs than Rene, complemented by her wonderful background and experience? So Rene, we are so pleased to have you here.

[Rene G. Aiu:]

Well, thank you, John, for those kind remarks. It’s truly an exciting time for me as well. I must apologize that, as you can see, I’m still in the process of acclimating here in Minneapolis and if I start to lose my voice, I may turn it back to John. But I really thought it was important that at least I participate in this first call. As John has said, I have been in the home shopping arena for over 22 years. I have worked in multiple countries at multiple companies. Through all my experience, one thing has held constant in order to achieve success in TV shopping -- an absolutely disciplined focus on the fundamentals. To be successful in this business, you have to have an absolutely disciplined focus on these fundamentals and this means

[Frank P. Elsenbast:]

Thanks, Rene. As stated in the press release, fourth quarter revenues were $218 million, an increase of 1% over last year. Our Internet business continued to grow nicely with 12% growth and accounted for over 30% of our merchandise sales in the fourth quarter. Our gross margin for the quarter was a disappointing 33.3%, down versus 34.7% a year ago. The decrease was due to two factors -- the fourth quarter saw a significant merchandise mix shift towards laptop computers, especially during the holiday shopping period. The second factor was a significant increase in promotional spending in an effort to over come a decline in customer activity. Operating expenses for the fourth quarter were $72.2 million, which is down 1% versus the prior year. Our cost reduction actions taken during fiscal 2007 have reduced our overall cost structure and allowed us to deliver positive EBITDA in the last two quarters, despite low revenue growth in a volatile economic environment. The more specific comments on the breakdown of our operating expenses, selling and distribution expenses were up 2% versus prior year due to three factors

[John D. Buck:]

Thank you, Frank. Before we discuss our outlook for 2008, I would like to briefly comment on the objectives we set forth on our last quarter call with you and report on the progress made against those goals. I think it’s important that you hear from me -- we did what we said we would do. As you may recall, we committed to work towards six priorities in the fourth quarter. I will quickly review each one and give an honest evaluation on how we did. First, deliver solid fourth quarter execution in a very challenging retail environment -- I couldn’t be more proud of our execution, given that we operated without a permanent CEO, we implemented a 10% workforce reduction and we conducted a comprehensive business review with Alvarez and Marcell, and by the way, we did that review in six weeks -- all this in the fourth quarter. Our second priority was to continue to grow our Internet business -- shopnbc.com delivered another quarter of solid growth, up 12% over last year’s same period. During the fourth quarter, 30% of our sales went through our Internet channel. Three, we said let’s strengthen the core TV business -- well, sales for the business, TV business were down for the quarter. We introduced two new lines -- home products from designer Christopher Lowell, and a rare coin dealer, Silvertown, who brings a very, very strong coin business to ShopNBC, and this will run during our late night hours. These are big wins for us and should be strong contributors for us this year. Fourth, as I mentioned, we partnered with Alvarez and Marcell to successful conduct a review of the business with the objective of increasing gross margins and reducing company operating expense. In addition to the 10% workforce reduction, it also led us to reevaluate partnerships with our product vendors and major suppliers. Fifth, work with our distribution partners to extend our carriage agreements -- as you know, this area continues to be a major focus. We are in frequent contact with our MSOs as well as our partners at NBC who play an instrumental role in securing our continued carriage. This issue will be at the forefront during ’08. And sixth, finally recruit and hire a first-class CEO -- Rene started March 3rd and her presence is being felt throughout the organization seven days a week. While I am generally pleased with our operating performance in the fourth quarter, and the fact that we protected our balance sheet, I am very disappointed with the performance of our stock. At recent trading levels, we feel the stock is undervalued and represents an excellent opportunity, investment opportunity for the company, which is why earlier this month the board authorized $10 million in additional funds for us in the stock repurchase program. This move not only demonstrated our commitment to increasing shareholder value but also reflected the board’s confidence in Rene and our optimism in the long-term future of this company. To conclude my comments on the fourth quarter, I would like to reiterate that we did what we said we would do and this is the board’s direction to Rene -- we will follow through on our commitments. Now, let both Rene and I turn to 2008. We both agree that this will be a year of change, promising change and disciplined improvements at the company. With her as our leader, and by applying her experience and expertise on how best to leverage this company’s unique set of assets, ShopNBC is well-positioned to deliver growth and sustained profitability going forward. 2008 also brings us challenges, coupled with a unique set of circumstances for the company. First, we are all aware of the challenging economy we are in, which is resulting in a slowdown in consumer spending. Our first quarter sales to date are running below last year. Secondly, we have a new CEO. Rene is just a few weeks into the job. She is actively reviewing and analyzing the business. I am sure you will agree with me it’s reasonable to assume that it will take some time before she is ready to make a recommendation to the board about her future plans for the network. Given these conditions, the company will not provide financial guidance for 2008 at this time. I would ask you not to overreact to this change. We do understand that guidance is an important metric for many of you as you evaluate our performance. We feel very, very good about the condition and the position of the company. This is primarily out of respect for our new CEO as she comes up to speed on our business. I want to be very, very clear -- our focus will be on maximizing EBITDA improvement through aggressive management of product margins and operating expense. We will concentrate on EBITDA, EBITDA, EBITDA, this year -- that is our focus for ’08. With that, I’m going to turn it over to Rene who will give you some guidance on how she plans to run the business in the year ahead.

[Rene G. Aiu:]

Thanks, John. Before I proceed, I just want to take a moment to reiterate my passion for the business of home shopping and my excitement for being here at ShopNBC. As you get to know me, you’ll learn that I am a high energy and very focused on the business. Hearing your thoughts and concerns about the company is something I look forward to. Now looking ahead, in 2008 we will focus on managing our business for increased profitability and building our business for sustained and long-term growth. We will aggressively manage our product margins and operating expenses, as John as mentioned. We will not chase short-term sales growth. Rather, we will focus on building a stronger core customer base. The long-term success of our business needs to be built on a solid foundation of repeat customers and compelling merchandise. This is my commitment to you on how we will run our business during this period of transition. Meanwhile, I am encouraged by what I have seen so far and the opportunity within. While it’s too early to give specifics about my vision for the company, as I still need some time to complete my review, I do feel comfortable about continuing the four corporate initiatives John identified earlier this year. Number one, gross margins -- we have opportunities to slowly adjust our product mix and price points that will reduce our reliance on promotional offers and [reduce] our returns. And I think if you are aware about this business, you know this is what we need to do -- slowly adjust. Number two, operating expenses -- we are going to be disciplined in our control of operating expenses, prioritize and allocate our resources where they will be the most productive. Number three, distribution -- this is going to be a priority for us in 2008. GE and NBC have committed their support and I look forward to working with them to secure continued distribution. Number four, growth opportunities -- this will be the year to start the process of establishing the fundamentals that will ensure long-term growth through increasing our core customers, expanding in the right merchandise categories for television, and capitalizing on new opportunities for our Internet business. Let me conclude. I wouldn’t be here if I didn’t see real opportunity. My interests are aligned with yours, our shareholders. I am committed to improving the performance of this company, which should be reflected in our stock price. I know what it’s going to take to make things better, the kind of effort required. I have been here before and I am confident we can do it. At this point, I would like to open up -- I think this is yours, John.

[John D. Buck:]

Thank you, Rene. And she was beginning to say at this point, we’ll open it up for questions, but I think again to save some time, I know there are questions a lot of you are interested in hearing from us, and so I’ve got a few here that I will ask the question and then provide an answer. One, I know a lot of you are interested in how are the cable renegotiations going? As many of you know, at the end of this calendar year we have approximately 65% of our homes up for renegotiations and as Rene said, we are currently working with our NBC partners to extend these carriage deals. At this point, and I think you can all appreciate this, I don’t want to really make any further comments. I think it would be inappropriate for me to share negotiating strategies here on this phone call. But the important point is it is a primary focus here for us in ’08. Two, what are the plans for the stock buy-back? Well, as you know, we recently authorized another $10 million. We believe that the stock is a value at recent prices, at the current price. Three, could you elaborate on the PR issued yesterday about NBC Universal withdrawing its share registration request? Again, as I think a lot of you will recall, in the first quarter of ’07, NBC Universal requested to withdraw approximately 6.4 million shares of our class A common stock. Earlier this year, they withdrew their request, which was announced yesterday. We are obviously very happy to have NBC as a strategic partner and clearly as a large, large shareholder for us and we look forward to working with them. How long will it take before you see improvements? We are working hard to improve this business but it is also a business that needs to move slowly to avoid losing its core customers. Changes will be made in incremental phases. You should see results as we progress through the year. Will there be any new officers added to the senior management team? The answer is yes. Rene knows a lot of people in this industry. We have identified three of the best who have a tremendous amount of TV shopping -- in fact, over 50 years of TV shopping experience and a great performance record in their area of expertise. These new hires are people she has worked with in the past and they will be highly complementary to the existing management team at the company. So with that, I will turn it back to the moderate and we are ready for questions from the group.

[Operator:]

(Operator Instructions) Our first question comes from Jamie Lester. Please announce your company name and ask your question.

[Jamie Lester:]

[inaudible] Partners. Welcome aboard, Rene. Hope you feel better. I guess the first question is what’s the share count outstanding as of the end of the prior buy-back through the whatever period in the first quarter that you ended it?

[Frank P. Elsenbast:]

The ending share count for the fourth quarter was 34.1 and then Jamie, to account for the additional buy-back that happened in the first quarter, we are down to 33.5 million shares outstanding.

[Jamie Lester:]

Okay, the second question, I know you don’t want to elaborate on the negotiating approach, but what percent of your distribution is up for some sort of negotiation this year?

[John D. Buck:]

Jamie, 65% and it’s at the end of the year. They all come due 12/31/08.

[Jamie Lester:]

Okay, so this would all be in 2009?

[John D. Buck:]

Correct.

[Jamie Lester:]

Okay. Year over year, what should we expect SG&A to do, given some of the cost takeouts that have already been initiated? And I guess maybe there’s some stuff you still need to put in place from A&M?

[Frank P. Elsenbast:]

I think in general, you are going to see a decline in operating expenses year-on-year. We will continue to have certain expenses that go up -- our homes will continue to increase as we go through the year but in general, we expect our operating expenses to be below last year by 2% to 3%.

[Jamie Lester:]

So the $10 million or so that A&M identified, is that all in the G&A line or is some of that coming out of other areas?

[Frank P. Elsenbast:]

No, that’s split between G&A and selling and distribution.

[Jamie Lester:]

Okay, but G&A was $25 million in ’07. You would expect it only go down about -- it sounds like $100 million. Why not more?

[Frank P. Elsenbast:]

Well, I think part of the reason is there were headcount reductions taken in ’07 but there was also no bonus expense that ran through the G&A line in ’07 as well. So if you put the bonus line back into G&A, that’s probably offsetting some of the decline that you were expecting.

[Jamie Lester:]

Okay, but if sales are down in 2008 and the stock price stays at the same price, will bonus expense still be higher in 2008?

[Frank P. Elsenbast:]

No.

[Jamie Lester:]

Okay, so you are anticipating that that won’t be the case in giving that G&A guidance?

[Frank P. Elsenbast:]

Exactly.

[Jamie Lester:]

Okay. I appreciate it and -- I guess maybe last question for Rene, which is why not monetize some of the non-core assets or borrow a little bit against the value pay receivables in order to initiate a more aggressive buy-back if this is such a bargain of a stock price?

[John D. Buck:]

Jamie, I think that’s an excellent question. I know it’s been an area of interest. I think in fairness to Rene, she just needs some time to get up to speed and focus on the business. But that is always a continuing area that we look at so -- and we will continue to do so.

[Jamie Lester:]

All right. I appreciate it, guys. Take care.

[Operator:]

(Operator Instructions) Your next question comes from the line of Bob Evans. Please state your company name and you may ask your question.

[Bob Evans:]

Welcome aboard, Rene. A few questions -- first, to follow-up the previous question as it relates to the management bonuses this year. Can you give us a little bit of color in terms of what your -- you know, what metrics that will be based on? is that share price? Is that EBITDA growth? Can you give us a little color in terms of for management to make their bonuses what -- maybe not -- I know maybe not the specific numbers but what metrics are going to be most watched?

[Frank P. Elsenbast:]

The ’08 bonus program is, and of course, you’re going to be able to read about this when we file the proxy but you will find that the management intended plan for ’08 is almost exclusively driven on EBITDA and EBITDA improvement for this year.

[Bob Evans:]

Okay, and is there -- back to the cost cuts, is some of that in gross margin as well? And could you quantify -- is $10 million kind of the aggregate number or is it a bigger number than that?

[Frank P. Elsenbast:]

No, I’d say $10 million is the aggregate number and we are on track for that. You know, it is a little bit hard to carve out because we have -- some of this is the headcount reductions that were taken in May and the second round that were taken in January, but there is also a piece of it that comes through in gross margin with the adjustments that we made to our shipping and handling structure in the May adjustment, and there frankly there is also just ongoing increases that we do get with increased home carriage that’s -- and we are also going from a year of ’07 where there was no bonus baked into the numbers to an ’08 plan that does assume that we achieve the targets and bonuses are paid.

[Bob Evans:]

Okay, and can you give any sense of what that needs to be at or not, in terms of those -- what needs to be achieved for those bonuses to be hit? From an EBITDA standpoint?

[Frank P. Elsenbast:]

I think, Bob, we’ll probably put that in the proxy and everybody can see that when it’s published in May.

[Bob Evans:]

Okay. All right, fair enough. And can you comment also in terms of the distribution -- you know, you are working on your distribution and you had answered the one question, John, but is it fair to say that from where you are at today, you’re not -- you know, your worst case scenario is maybe staying at where you are at from a distribution cost standpoint? I mean, net net, the market from my understanding is the cost is moving down -- the pricing has moved down considerably over time, not up. And so from where you are at, worst case is it’s neutral and best case is you can get some meaningful improvement. Is that a fair statement?

[John D. Buck:]

Yeah, I think that’s -- I would -- I think that’s a fair comment.

[Bob Evans:]

Okay. And also, Silvertown, you had mentioned that as vendor. Can you give us any sense of how big a vendor that could be for you?

[Frank P. Elsenbast:]

They just went on -- they just premiered on air in early March and I’d say that they are off to a good start. They were previously on Shop at Home, where they had a long relationship and a very successful business down there. We would hope that they are going to come to ShopNBC and really take a lot of our late night and overnight hours and bring with them a very dedicated group of customers. So we are still in early stages on this but we have pretty high expectations for it and -- but we are not at a point to discuss what we think the size of the business is.

[Bob Evans:]

Okay. All right, thanks. I’ll let others ask questions.

[Operator:]

Our next question comes from Jamie Lester. Please state your company name and ask your question.

[Jamie Lester:]

I think we are just going to go back and forth with these questions. Just a quick follow-up; one is, can you just comment on why NBC actually withdrew the registration? I understand why they wouldn’t want to sell shares at this level but why not keep the registration in effect? Was there some reason that they have to do that or did they come to you and say do you want us to do that, or did you go to them and say would you do this? Can you give a little more color about why they took what seems to be an unnecessary action, even if they didn’t necessarily want to sell the shares at this price?

[John D. Buck:]

Thank you, Jamie. First, obviously I can’t speak for GE or NBC Universal but this was their initiative. Clearly they don’t want to sell their stock at this price, and I think that’s a fair assumption. And then secondly, as you know, we’ve got two members on our board who are very, very supportive of the company and its vision and the strategies going forward. My guess is -- and again, I can’t speak for them but my guess it’s a combination they’re not going to sell at this price and they see upside.

[Jamie Lester:]

Okay.

[John D. Buck:]

And it was their initiative, not ours.

[Jamie Lester:]

Okay, and then this question is for Rene again, and hopefully she can answer it, but how much stock are you taking and do you have any plans to buy stock in the open market if and when you are able to?

[Rene G. Aiu:]

Well, of course I want to buy stock but as you know, I’ve been advised by general counsel I can’t do it until I am able to do that, and I am -- my whole -- how do I put this -- when I said my interests are aligned with the shareholders, they truly are aligned with the shareholders. So that was a good question.

[John D. Buck:]

Jamie, a significant part of her compensation package includes stock options.

[Jamie Lester:]

Okay, and John, when is Rene allowed to buy stock in the open market based on your legal counsel’s opinion?

[John D. Buck:]

-- the blackout period.

[Jamie Lester:]

Right, so a few days after today, basically?

[John D. Buck:]

You know what, Jamie, I’ll have to get with our general counsel but I know we are in the middle of a blackout period, so it’s probably out a few days, maybe a couple of weeks, some period of time. But the moment she can, I know she wants to.

[Jamie Lester:]

Okay. I appreciate it. Thanks.

[Operator:]

Thank you. Our next question comes from Bob Evans. Please state your company name and ask your question.

[Bob Evans:]

Craig Hallum Capital.

[John D. Buck:]

Hey, Bob, I’m going to stop now -- is there something going on with you and Jamie? You are passing this baton back and forth.

[Bob Evans:]

I don’t know. I guess we’re the queue right now, so --

[John D. Buck:]

Did you rehearse this?

[Bob Evans:]

No rehearsal, just a good act impromptu. CapEx, I forgot to ask, Frank, do you have a general sense of what you are expecting for CapEx this year?

[Frank P. Elsenbast:]

Yeah, sorry I didn’t get you that, Bob. It’s $3.4 million.

[Bob Evans:]

Okay, 3.4 for the Q4 but how about for the upcoming year, assuming no big new projects.

[Frank P. Elsenbast:]

We have been running right around $12 million a year in capital spending for the last year. Given some unforeseen change in plans, we’re probably going to run close to that right now. There’s no big projects on the horizon right now.

[Bob Evans:]

Okay. And how about D&A?

[Frank P. Elsenbast:]

D&A for ’08 will run -- you know, this continues to slide down a little bit every quarter. It’s probably going to start off a little under five in the first quarter and by the end of the year, we’ll probably be down to $4.2 million, $4.3 million in D&A expense for the fourth quarter.

[Bob Evans:]

Okay. And the -- okay, that’s helpful. John, you had commented that business was maybe down a little bit so far this year. Can you elaborate in terms of magnitude of down a little, or -- you know?

[John D. Buck:]

Well, first off, as you know, Bob, we are about halfway into the quarter, but I would say we are tracking along with the retail sector, the traditional retail sector. You know, you guys know as well as I do, better than I do, this is a tough environment right now. We’re in a recession. The question is how long. Consumer spending is soft right now. You saw consumer confidence number here the other day and it’s the lowest its been in five years, so I wouldn’t -- I don’t want you to overreact to that either. I would just say sales are soft compared to a year ago but we are tracking with the rest of the retail environment.

[Bob Evans:]

Okay. And is it fair to say even given the softer retail environment, given the cost reductions that you’ve made towards the end of ’07, that you would still expect EBITDA to improve ’08 versus ’07?

[John D. Buck:]

Again, the only thing I would comment there, Bob, is that is our focus. We are focused on EBITDA for ’08.

[Bob Evans:]

Okay. All right. Year to year.

[John D. Buck:]

-- business has to -- we need not only EBITDA, we need sustained profitability going forward, so that is clearly our focus.

[Bob Evans:]

Okay. All right. Thank you.

[Operator:]

At this time, we have no further questions.

[John D. Buck:]

Thank you. Have a good day, everybody.

[Operator:]

Thank you. That does conclude today’s conference call. You may disconnect at this time.