Qurate Retail, Inc. (NASDAQ:QRTEA) Q3 2023 Earnings Call Transcript

Qurate Retail, Inc. (NASDAQ:QRTEA) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Welcome to the Qurate Retail, Inc. 2023 Q3 Earnings Call. [Operator Instructions] As a reminder, this conference will be recorded, November 3. I would now like to turn the call over to Shane Kleinstein, Vice President, Investor Relations. Please go ahead.

Shane Kleinstein: Thank you. Before we begin, we’d like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties and including those mentioned in the most recent Forms 10-K and 10-Q filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Curate Retail’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Please note that we have published slides to accompany the earnings release. On today’s call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP measures along with required definitions and reconciliations, including preliminary note and schedules 1 through 3, can be found in the earnings press release issued today or our earnings presentation which are available on our website. Today speaking on the earnings call, we have Qurate Retail President and CEO, David Rollinson; Qurate Retail Group CFO, Bill Wafford; and Qurate Retail, Executive Chairman, Greg Maffei. Now, I’ll hand the call over to David.

David Rawlinson: Thank you, Shay and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. We unveiled Project Athens last year as our strategic multiyear framework to transform Qurate Retail focused on double-digit growth in OIBDA and cash flow and stabilized revenue through 2024 out of the 2022 baseline. Our 2023 1st half initiatives were designed to increase operating free cash flow through working capital. And our second half initiatives are primarily margin focused. The transformation plan is playing out as we anticipated with tangible progress in Q3 despite a challenging discretionary retail backdrop. Let me walk through a few of the highlights of the quarter. First, we grew consolidated OIBDA, the first quarterly OIBDA growth since Q2 2021.

Total Qurate Retail grew OIBDA 54%. I will remind you that we sold Zulily earlier in the year, in part to benefit total company profitability. Excluding Zulily from prior year results, OIBDA was up 35% in constant currency. Second, we grew OIBDA at all 3 of the businesses. This growth was driven by project assets and other work streams across the organization focused on refreshing our merchandise assortment, enhancing our programming, sharpening our pricing and improving our productivity and lowering our cost to serve. Third, we sustained gross margin improvement at our core video commerce businesses. These gains reflect successful execution on our elevated merchandise and pricing strategies and meaningful improvement and fulfillment operations to reduce costs, improve efficiencies and manage inventory.

Fourth, we grew free cash flow $464 million year-over-year in the first 9 months of 2023. This growth was due to improved operating cash flow from higher earnings and working capital gains. Fifth, we substantially moderated the rate of decline in revenue. Qurate Retail revenue, excluding Zulily from prior year results, declined 3% in Q3, down from high single digits in the first half of 2023. We are proud of the teams and the hard work underlying our progress over the past 12 to 18 months, especially as we navigated massive impacts from post-pandemic supply chain challenges and the fire at our former Rocky Mount fulfillment center. Over this time, we have made meaningful improvements to execution. We reorganized our U.S. video commerce businesses and attract the key talent throughout the organization.

In fulfillment, we negotiated better ocean and domestic freight rigs, improved efficiency and managed inventory to alleviate the detention and demurrage charges that follow the fire and post-pandemic supply chain disruption. We expanded product margins by refreshing our merchandise assortment with higher quality products, rotating into higher-performing categories and higher price point subcategories and affecting strategic price increases. We reinvigorated our core daily programming, the today’s special value at QVC and today’s special at HSN with elevated merchandise assortment, enhanced programming, events and reengaged hosts. We have also returned these specials to time Limited 24-hour event, reinfusing a sense of urgency. From these efforts, we beat expectations on per minute productivity and overall TSV or TS performance at both QVC and HSN.

We effected workforce reductions throughout the company. While these were difficult decisions, they are right for the long-term health of the business. And lastly, we conducted a deep dive customer analysis and have enacted changes that are beginning to stabilize the customer file. We expect these foundational improvements and Project Athens work streams to continue to drive progress. Now, let me discuss each of our 3 businesses. QXH increased OIBDA 41%, driven by 480 basis points of gross margin improvement. From a top line perspective, QXH moderated the rate of decline in Q3 with Q3 down 3% compared to mid-high single-digit declines in the first half of 2023. Our total sales outperformed the discretionary retail market. We achieved a better balance between unit volume and average selling price.

Unit volume declined 3% and which was an improvement from the high single-digit decline in the first half of 2023, largely a function of higher quality product assortment. We continue to drive higher pricing primarily through our merchandise mix with average selling price up 1% in Q3. From an operational perspective, QXH continues to lower cost and improve delivery times. Rates from our new domestic parcel contract took effect in late July and our operational cost per unit declined 12% in Q3. Our order to delivery time declined 2%. Our refresh merchandise assortment and enhanced programming are contributing to this improving revenue performance. In terms of viewership, minutes viewed on our 5 linear channels increased 15% year-over-year in Q3.

The number of new own items grew low double digits in Q3 and which were met with strong consumer demand. QVC continues to enhance its programming for its core customer. Earlier this year, I told you about a limited-run series, over 50 and fabulous. We broadcast season 2 of the series for 6 weeks from mid-August to late September. We enhanced strategies from season 1 and improved the shows sales per minute productivity. To date, there are more than 26.5 million views of over 50 and fabulous across social and digital platforms. For the series finale, we hosted customers for an in studio live show an after-party live stream. Tickets for that event sold out in 5 minutes. Looking at the category performance in the third quarter; QXH saw a turnaround in the home category, driven by fresher products, exciting events and inspiring personalities.

We experienced year-over-year growth in demand during our Christmas in July event at QVC as well as at HSN during its July birthday month. Food and kitchen gadgets were particularly strong as we leaned on our celebrity chefs like David Venable and Wolfgang Puck, proprietary brands such as Kitchen HQ and specialty events and programming, such as our foody Travel series and Moody Fest. Home decor demand improved, driven by seasonal products, candles, storage and a 30th anniversary event with Valerie Par Hill. QVC U.S. continues to have strength in its wellness and supplements product offering. At HSN, the relaunch of Joy Mungana has drawn a number of our reactivated customers back to the platform. In fashion, we experienced growth in accessories, led by higher demand for footwear and loungewear, including loafers, wellness footwear and brands like Barefoot Dreams and Cootes [ph].

In September, QVC refreshed as Monday night fashion line-up featuring Logo by Lori Goldstein, the relaunch of PM Style with Banestrand and new shows accessorized with Sean and Sean on style. Each show was developed to deliver a strong fashion point of view and include special sets and fresh production elements. At HSN, we were pleased to launch new brands and offers including C. Wonder by Christian Siriano, Birkenstock for the first time as a today’s special Sharp flexstile hair tool and Sofia Vergara’s Toti beauty line. Now, let me touch on QX customers. On a quarterly basis, total count declined 8% in the third quarter, partially offset by a 6% increase and average spend per customer, resulting in an overall 3% decline in revenue. The rate of declining count moderated in Q3 from the low double-digit declines in the first 2 quarters of 2023.

We’re seeing the biggest churn from the low end of our customer file. On Slide 8 of our earnings presentation, you can see we are stabilizing the trailing 12-month count near $8.2 million, down only modestly from $8.3 million at the end of the second quarter. Please note that while our press release discloses customer count on a trailing 12-month basis, this is a lag-on indicator and does not reflect the progress in Q3. The increase in average spend was driven by our existing and best customers and reflects our higher quality product assortment. The average dollar spend for each of these cohorts was the highest of any quarter in 2023. We are taking a variety of actions to attract new customers, retain customers and reactivate former customers.

We have launched new programs and formats on both linear and digital forms. We have offered gifts and vouchers and have refined and enhanced our marketing spend, both of which have yielded high returns. We have created new on-site experiences to have letters from the business presidents to recognize and appreciate our best customers and we are testing a pilot loyalty program. As a result of these efforts, we’re pleased to report that new customers grew 8% at QXH in Q3 which was the first quarter of growth since Q1 2021. This growth was primarily attributed to strategic targeting of promotions based on marketing channel and product categories. We are constantly reviewing our customer acquisition costs and carefully managing overall return on our marketing efforts.

We shift marketing spend to capitalize on opportunities in the market where we can efficiently acquire customers in our target demographic and track their lifetime value. We will continue to test, learn and scale initiatives. We are executing with more success at a faster pace now than a year ago and I look forward to telling you more on future calls. Before closing on QXH, let me provide a view on the important holiday season. Our customers are looking forward to activities with friends and family and more importantly, ready for holiday shopping. Our target customer is mindful of our budget and cognizant of inflation, particularly for groceries and gas. Therefore, it is important for us to incite and inspire her with fresh products and compelling value.

From a merchandise point of view, we feel good about our assortment and are in a substantially better inventory position than 1 year ago. At QVC, we are excited about several brand extensions and limited time collections from key brands. These include Susan Graver, Kim Gravel, Dennis Basso and Denim and company. We have new product launches, including Laurence Zaria and a new private label cashmere sweater collection from Pure Splinter. We are extending our shaft family with new culinary lines, from Artee Sequera [ph] and a cookware line from Carlyle. In beauty, we have exclusive holiday packages from key brands. These include philosophy, Elemis, Peter Thomas Ross and more. In addition, QVC is the exclusive retailer for Beekmans launch in November of its toll house partnership.

HSM will also inspire with new merchandise, including an exclusive widely Dolly Parton for the launch of our new Rock Album; Catherine McPee’s Radiance by absolute collaboration. Aaron Andrew’s license sports launch with Vanadis and the launch of Tart Beauty as of today’s special. We’ll also have all our celebrity chefs cooking their holiday favorites and celebrity designers bringing new and exciting assortments. Looking now at QVC International. Like QXH, we are implementing a transformational program that is focused on margin opportunities, content and broadcast strategies and optimizing execution. These efforts are paying dividends. QVC International grew revenue and OIBDA compared to last year and sustained gross margin gains from Q2. Growth was stronger in the U.K. and Germany as euro area inflation levelled off and the U.K. was in comparison to the Queens passing last year.

Japan was flat as consumer sentiment continued to be affected by higher energy costs. QVC International’s transformation actions are on track to deliver substantial OIBDA opportunities that will achieve full run rate by 2025. Looking to the holiday season, we remain optimistic about our product assortment and campaigns that we believe resonate with our customers. At both of our video commerce businesses, I’m especially pleased that we grew OIBDA while still investing in growth initiatives. Our domestic streaming operations have grown revenue and customer engagement year-to-date in 2023. The free ad-supported portion is the fastest-growing sector. In March, we launched soon. Our next generation video and live stream shopping platform and app.

We continue to build momentum in its beta phase. At QVC International, we launched integrated experience in the U.K. and Germany with a focus on gardening and food and kitchen, respectively. Both have shown positive customer engagement and we believe we can scale to other category segments and markets over time. Looking at Cornerstone. The overall home sector remains highly promotional and competitive. Demand for most categories was soft across the 4 Cornerstone brands. Despite the challenging environment, we focus on factors in our control, managing inventory and lowering supply chain and operating costs. As a result, the business generated OIBDA growth in the quarter. We have seen continued progress in our retail store strategy as customers are gravitating to our new physical stores.

Accordingly, we are planning to open 5 new retail stores by the first half of 2024. In closing, our Q3 results are in line with our Project Athens plans and amplify our confidence in our 2024 objectives. Going into Q4, we are cognizant of the challenges from inflation, interest rates and geopolitical events. We remain steadfast in our transformation. We recognize we have much work still ahead of us. We remain confident in our ability to execute and drive results. The foundational changes we have enacted and the dedication from our teams are materializing and better financial results. We expect to sustain progress going forward and I want to reiterate our expectations for a double-digit CAGR for OIBDA and free cash flow and stable revenue through 2024.

Now, I’ll turn the call to Bill to discuss the financial results of each of our businesses in more detail.

Bill Wafford: Thank you, David and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the 3 months ended September 30, 2023, for the same period in 2022. Starting with QXH. Revenue declined 3%, primarily on lower unit volume. These pressures were partially offset by 1% growth in average selling price and a 6% increase in average spend per customer. From a category perspective, QXH experienced growth in accessories, home and jewellery, offset by declines in electronics, apparel and beauty. As David mentioned, we experienced a turnaround in home, where revenue increased 2%. This growth was mainly due to higher demand for cookware, food and seasonal products. Accessories grew 7%, primarily due to broad-based strength in footwear and higher demand for loungewear.

Apparel was down 8%. We experienced softness in classic and contemporary apparel, partially offset by growth in outerwear. BD declined 7%. This performance was mainly due to declines in beauty devices and color, partially offset by higher demand for hair care. The decline in our electronics revenue by 18% was partially driven by the softness of the category in the market. We continue to strategically pull back on electronics airtime as we focus on higher margin home and fashion categories. Adjusted OIBDA margin increased 380 basis points. Looking at the third quarter performance in more detail. Gross profit grew 480 basis points, mainly due to favorable fulfilment, product margins and inventory obsolescence. Fulfilment expenses improved 220 basis points due to Project Assets initiatives, less detention into mirage costs and favorable rates from our new parcel carrier contract that went into effect in late July.

Product margins increased 185 basis points, driven by a mix shift to higher-margin products, less clearance due to improved inventory health and initiatives to increase in initial margin. Inventory obsolescence declined, reflecting a favorable composition of higher quality inventory compared to the prior year. Operating expenses were favorable by approximately 30 basis points due to fewer customer service contacts partially offset by higher commissions. SG&A was unfavourable by approximately 120 basis points. About half of the pressure is from the transformation-related costs associated with project assets. Marketing expenses were 20 basis points of pressure due to sales deleverage. These headwinds were partially offset by lower bad debt expense, reflecting provisional adjustments and lower instalment counts.

Moving to QVC International. My comments will focus on constant currency results. Revenue increased 1%, primarily on higher unit volume. Our largest markets in Europe, QVC Germany and the U.K. letter performance. Japan was flat and Italy declined moderately. From a category perspective, QVC International experienced growth in beauty, home and apparel, partially offset by a decline in electronics. Adjusted OIBDA increased 23% and adjusted OIBDA margin improved 210 basis points. These gains were driven by a 140 basis point increase in gross margin mainly due to improved product margins and lower inventory obsolescence. Product margin gains were driven by lower supply chain costs and a mix shift to higher-margin products. Fulfilment was unfavourable 15 basis points, primarily due to a $4 million of rent in sale-leaseback transactions in January and increased labor costs.

SG&A was modestly unfavourable due to higher fixed costs from outside services and management incentive accruals, partially offset by lower marketing expense. As David said, QVC International is executing its transformational plan and is on track to deliver significant run rate OIBDA opportunities by 2025. Moving to Cornerstone. Revenue declined 13% in the quarter. The broader home industry remains highly promotional, requiring cornerstone to offer promotions to stay competitive. We experienced soft demand in most home categories as well as in apparel at Garnet Hill. Despite the revenue decline, Cornerstone adjusted OIBDA increased 10%, mainly due to favorable supply chain costs from lower ocean shipping rates and less detention in the marriage costs.

These gains were partially offset by increased promotional activity and higher fixed cost overhead, reflecting the opening of 3 new stores in the past year. Turning to cash flow. And year-to-date capital expenditures were $151 million. For all of 2023, we expect capital expenditures to be approximately $250 million. We spent $111 million on renewals of our TV distribution contracts in the first 9 months of 2023. Our TV distribution payments can fluctuate year-over-year depending on renewal cycles, though we continue to expect the 2-year average to be approximately $100 million. We have already covered the majority of our 2023 distribution payments through September. Free cash flow for the first 9 months of 2023 with a source of $359 million versus a use of $105 million last year.

The year-over-year improvement was attributable to increased cash flow from operations, driven by higher earnings and working capital improvements. This was partially offset by higher TV distribution payments year-over-year. In Q4, we anticipate generating additional year-over-year OIBDA gains which will continue to benefit cash flow. Looking at our debt profile. On September 30, we had $995 million drawn on the QVC revolver, down $435 million in the third quarter with $2.1 billion in available capacity. As of September 30, 2023, Qurate Retail had total cash of $1.1 billion, of which $279 million was at QVC Inc., $448 million was at Liberty Interactive LLC and $329 million was at Qurate Retail Inc. Our leverage ratio, as defined by the QVC revolving credit facility was 2.6x.

During 2022 and 2023, we took substantial steps to generate liquidity and position ourselves for the successful execution of our transformation plan. We believe that our debt level is manageable our current cushion is sufficient in relation to the 4.5x maximum net leverage covenant threshold specified in our credit facility. Note that covenant OIBDA includes adjusted OIBDA of QVC and Cornerstone. The gains on the sale-leaseback transactions for the 4 quarters following such transactions and as of the beginning of this year also includes a portion of the next 12 months’ expected cost savings. Our Q3 performance is a clear indication that we are effectively delivering on project assets. We grew OIBDA [ph] and generated gains in working capital which in turn led to a significant enhancement in our year-to-date cash flow from operations.

We remain confident in our ability to sustain OIBDA growth in Q4 and deliver on our transformation objectives. With that, I’ll turn the call over to Greg.

Greg Maffei: Thank you. So I’m pleased to say we’re on track with Athens and you can see some of the tangible results in the numbers today. OIBDA grew for the first time since the second quarter of ’21. And we moderated the revenue decline from the first half of ’23. We saw meaningful growth in cash flow year-over-year largely due to higher earnings and working capital benefits. Qurate continued to reduce debt and lowered its revolver balance by $435 million. And we retired or exchange the remaining 1.75% exchangeable debentures during the quarter or right after quarter end. We continue to assess incremental opportunities to improve the balance sheet and you should expect in the near term, we will devote free cash flow to debt repayment.

We look forward to seeing many of you at our Annual Investor Day on Thursday, November 9, in New York, additional information is available on our website, John Malone and I will be hosting our annual Q&A session alongside management teams. If you would like to submit questions in advance, you can e-mail investorday@libertymedia.com. And with that, operator, we’ll open the line for questions.

See also Top 20 Most Profitable Banks in the World and 13 Best Future Stocks for the Long-Term.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Jason Haas with Bank of America.

Jason Haas: So it’s good to hear that you’re starting to see some signs of stability in the customer count. I was curious if you could talk about what you’ve seen from spending behaviour from your newer customers as they’ve entered into the ecosystem, are you seeing them have similarly to prior cohorts? Are you seeing a good chunk of those sort of graduate up into your best customers.

David Rawlinson: Yes. Thank you, Jason. I appreciate the question. So new customers, as I mentioned, it was the first growth of new customers, really since the pandemic. We tend to look — we find the best correlation for future behaviour to be repeat purchase behaviour. I would say so far, we’ve been encouraged by the repeat purchase behaviour, all of the data we have suggests that they’re going to graduate into being better and better individually best customers at about the same rate as some of our historical trends. What we’ve learned through the pandemic, though, is that not all customers behave the same. So we try to measure different time periods to predict behaviour. And like I said, what we’ve seen so far suggests that this crop of customers is a relatively stable and high-quality crop a customer.

So we’re both — we’re very encouraged both by the growth of new customers, the continued attractiveness of the platform. We think we’re finding — continuing to find new tools that will be attractive to new and different types of customers within our core customer target groups and we build it there. I would say, in addition to new customers, we also feel really good about the performance of our best customer group. Keep in mind, best customers which we define as in QVC as customers that buy over 20 times a year. They make up about 18% of the account and 75% of the sales. So even though refreshing the product file with new customers is important to the count, the best customers tend to be the most important to the overall performance of the business.

And when you look at QVC on a last 12-month trailing basis, we were up 5% — we were up 9% year-over-year on a 12-month basis in Q3. We had the highest average spend for any quarter in 2023 in Q3. And so our best customers are just continuing to really show up for us. And the rate of decline for those customers are substantially under the rate of decline for the overall count and our retention of those best customers are still in the 90s which I think is fair to say world-class across world-class across retail. So, both on the new win for bringing new customers into the platform but also our most loyal and best customers who drive an awful lot of our results, we feel good about the results of the third quarter.

Jason Haas: It’s great to hear. And then as a follow-up, I’m curious if you could talk about what you saw in terms of the cadence through the quarter. We’ve had a number of companies calling out some macro-related headwinds. So I’m curious if that’s weighed on top line revenue at all, partially offsetting some of the success you’ve had with your initiatives.

David Rawlinson: Yes. It’s a fair question. I would say we definitely saw fluidity through the quarter. But certainly, in terms of bottom line results, we saw a pretty good consistency through the quarter. We were a little bit better in July and September than we were in August. But a pretty solid quarter as we went through the quarter. And we saw some different — we saw some different revenue trends across the businesses. I’d say a little bit of deceleration at QXH but some acceleration and the international businesses as we went through the quarter but none of that looked very sticky. So, I’d call it a pretty even quarter as we went through the quarter.

Operator: Next question comes from the line of William Reuter with Bank of America.