Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail 2020 Q1 Earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, May 7. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

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, 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 Qurate Retail’s expectation with regard thereto or any change in events, conditions or circumstances, on which any such statement is based. 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 metrics, along with required definitions and reconciliations, including preliminary notes and schedules 1 through 3 can be found in the earnings press release issued yesterday or our earnings presentation, which are available on our website. Today speaking on the call, we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. These slides are available on our website. Now I’ll hand the call over to Mike George.

Thank you, Courtnee, and good morning, everyone. I want to thank all of you for joining us today, and I extend our best wishes for everyone’s continued health and safety. I’m going to focus my comments today on how we are responding to the COVID-19 pandemic, the impacts we’re currently seeing in the business, including early trends in the first weeks of Q2 and the challenges and opportunities we anticipate as we move through the year. While we don’t normally discuss end quarter results, we feel it’s appropriate to make an exception today due to the significant change in business outlook driven by COVID. Our twin goals throughout this crisis have been to protect the safety and well-being of our team members and to be of service to our customers during this extraordinarily challenging time. We are gratified by the customer response to date and for the commitment and the resolve of our team and our partners. The evolution of the pandemic drove significant changes in our financial results and it’s best to consider our year-to-date performance over three distinct time periods. Through late February, we experienced limited impact due to COVID, except at Zulily. As we previewed on our Q4 call, Zulily sales fell sharply when it couldn’t source product after China’s lockdown in early February. Remember that the Zulily model holds limited inventory and has a significant China direct ship component. In March, when COVID hit Europe and the U.S., we saw a major disruption across our businesses. In most markets, we experienced a significant decline in sales in the weeks immediately following stepped-up government response. We saw a sharp fall off in the second and third weeks of March across our U.S. businesses, QxH, Zulily and Cornerstone. We experienced similar impacts in our international markets, but the…

Thank you, Mike, and good morning, everyone. As Mike mentioned, COVID had a noticeable impact on each of our business segments. Our net revenue for the quarter declined 5% and was impacted by approximately $55 million due to COVID-related changes in sales trends, supply chain disruption, closure of retail stores and constrained fulfillment capacity, which delayed shipments of customer orders until Q2. Adjusted OIBDA declined 17%, in part due to actions we took to protect our team members and suppliers and to respond rapidly to changing customer behaviors. For the quarter, COVID effective adjusted OBIDA by approximately $40 million, principally from reduced sales trends, lower product margins, higher freight costs due to category shifts into home product, reserve adjustments for bad debt and customer returns and lower productivity standards at our fulfillment centers. I’ll elaborate more within each business unit as I go through my discussion. So let’s move to our business segment results, starting with QxH. For the quarter, net revenue was down 4% on 3% lower unit volume and 1% lower ASP. The estimated impact of COVID on revenue was approximately $20 million. This was due to the combination of delayed shipment of customers orders into Q2, partially offset by new customer orders late in the quarter. On Slide 8 of our financial presentation, you’ll see that we have more closely aligned our discussion of adjusted OIBDA and its contributing factors to the P&L. Adjusted OIBDA declined 17% and adjusted for OBIDA margin declined 260 basis points. Let me provide more detail on these contributing factors. Gross margin. Gross margin declined 100 basis points. First, product margins were relatively flat, with increased margin in January and February, largely offset by deterioration in March, primarily from the product mix shift from higher-margin fashion categories, to lower-margin home categories. Second,…

Thanks, Jeff. Let me start by also thanking Qurate’s employees and management for their dedication and perseverance. In no small fleets, they were able to adapt quickly to this new environment. It’s been amazing to see the response from our customers and maintaining this connection. I’d like to reiterate a few points made by Mike and Jeff. First, we feel very comfortable with our liquidity. This is a business that generates free cash flow. We have not drawn on our revolver in this quarter or since the COVID crisis began and, in fact, have paid down revolver. As was noted, we currently have a revolver of $2.4 billion of total capacity, of which $1.6 billion is available subject to our current covenant threshold. That covenant threshold is 3.5 times, and we’re currently about 2.4 times. We did use cash to repurchase $49 million of MSI exchangeable bonds in the quarter, but we’ve since ceased repurchases of those bonds through the decrease in the share price of MSI and the change in interest deductibility under the CARES Act that will no longer be a use of capital. We plan to reduce CapEx spending from our budgeted amounts by $30 million to $50 million for the balance of this year, despite our confidence in our liquidity, a prudent time to be conservative. We are encouraged by the trends we’ve seen in the second quarter. As Mike noted, positive growth and engagement in customer counts are translating into sales growth to date and excellent momentum. We appreciate your continued interest in Qurate Retail and we hope you are all safe and sound. And with that, operator, I’d like to open it up for questions.

Thank you. [Operator Instructions] And we will take our question from Oliver Wintermantel from Evercore. Please go ahead.

Thanks very much. Regarding the margin pressure that you’ve seen in the first quarter, could you maybe talk a little bit about what you expect in the second quarter from COVID-related margin pressures, how much of that will linger into the second quarter in regards to the margins or safety or precautions that you have taken? And the follow-up question was I heard you just mentioned the sales growth of quarter to date. Is that – does that mean sales are currently trading positive in the second quarter? Thank you.

Thanks all for the question. I’ll make a couple of comments on margins and sales growth, and then turn it over to Jeff. On the margin side, let me just comment on the product margin piece of it, and Jeff can cover the rest. I mentioned – we mentioned the downturn in product margins late in Q1, but a reminder that product margins were flat for the full quarter. And then in April, I mentioned about 150 to 250 basis point product margin erosion at QxH due to mix shift. I would say that range got kind of better from the beginning of April to today. So we were trending towards the higher end of that early in the month and have been trending down since then as we’ve taken actions to try to moderate that margin pressure. I won’t predict what it will be going forward, other than to say it’s been trending in a better direction towards the lower end of that range. We also have somewhat easier comparisons in May and June because the fashion mix is not as high from a year ago, May, June as it was in April. So a little bit easier comparison, a little bit improving trend. But yes, we still expect aggregate product margin pressure due to this mix shift. On sales growth, yes, we’re seeing consistent positive sales growth. We’ve seen it every week since late March through to today. We’ve seen it in every business unit, every market, every brand, consistent positive sales growth. Jeff, do you want to comment on the other aspects of the margin profile?

Absolutely. So in addition to the product margin, if you will, one of the headwinds that we had as a result of that shift from some of her fashion categories into the home categories. Her drop ship penetration was much higher on some of those categories. So that was a headwind for us. The other elements, and that will be continued going into Q2 to the extent that we have that same type of mix of our overall categories. The other component that – contractions we’re experiencing in our warehouses from a fulfillment basis is, as a result of having the social spacing and reduced sort of productivity, as a result of some of our attendance levels, that is also creating some pressures for us with respect to just the efficiency and productivity in the – in those facilities. But the one thing that you’ll notice in the presentation that we do, we show that fulfillment was about 125 basis points a headwind for us. And about half of that was as a result of fulfillment and about half of that was as a result of – I say, half of that is freight, and then half of it was from warehouse. The challenges that we will have going forward also, as it relates to our execution of our network optimization, we had talked about where in the – we were expecting to continue to hit our milestones to get through some opportunities to help reduce some of the pressure we would have on our product margins, if you will. And it would help us from some freight and pack factor. As a result of having the delays in that network optimization and then installation of the warehouse management, well, we believe that we’re going to be – from a timing perspective, we’re going to be delayed, and we’re not going to have some of that improvement going into the second quarter that we were anticipating.

Got it. So just to summarize, the sales are trending positive, but margins are maybe a little bit better than in the first quarter, but not positive?

Yes. The margins would be trending – I think what Mike was indicating is that in the second – in the latter part of the quarter – first quarter, we saw some significant headwind with our product margins as a result of the mix and product mix. That – well, we still have the product mix impact, we were improving that product mix margin as we’re coming through the early part of the April, and we would continue to work towards that as we move through the quarter.

Thanks very much.

Thank you. We will now take our next question from Heather Balsky, Bank of America.

Hi, thank you for taking my question. I was just wondering on the sales front. First, could you put some perspective, especially for QxH, I guess, how positive your overall sales are trending for the business through April? And then also, you talked about investing in marketing to help retain some of these new customers you’re attracting. Can you talk a little bit more about what else you’re doing to ensure that the customers and engagement that you’re seeing right now that you can sustain that and/or sustain part of that? Thank you.

Hi, Heather, thanks for the question. No, we’re not going to put specific numbers around the sales trends just because it’s a handful of weeks and a long way to go in the quarter. But I would characterize it as very solid positive sales growth. And again, we’re encouraged by the consistency of the growth, meaning we’ve seen it every week since late March. We’ve seen it across new customers, reactivated customers, occasional customers and core customers. We’ve seen it across a range of home categories, electronic categories, beauty categories. The only place we’re not seeing it is in apparel, accessories and jewelry. So I’d characterize it as consistent, broad-based sales growth. In terms of the customer engagement, I would say we’re highly encouraged to see growth in every tranche of customers with really accelerated growth in the new and reactivated customers. So as I mentioned in my comments, we’re doing a lot to engage all customers, and particularly, those new and reactivated customers, through the e-marketing programs, through retargeting marketing, through continued investment in social marketing, all the places where we know she is, to continue to speak to her, to continue to demonstrate a range of our product offerings, welcome kits that help sort of introduce her to the story, financial incentives for second purchases. So I would say a very broad approach based on her behavior to target how we would defer to continue that behavior. We are really encouraged, given the increase in new customers we’re seeing, we naturally expect it up that on average, the quality of those new customers would kick down, even if the absolute numbers are strong. But at least our early metrics of quality are suggesting that it’s every bit sort of same predicted lifetime value as earlier classes because we…

Great. Thank you so much.

Ladies and gentlemen, we will now take our next question from Edward Yruma from KeyBanc.

I guess just a two-parter. First, on the bad debt, are you starting to see behaviors within Easy Pay that underpin your change in bad debt assumption? Are you seeing kind of delinquency or higher charge-offs? And then two, I know apparel has been a mix shift away. Other retailers have taken inventory impairment, I guess, I know you said that I think your inventory obsolescence, which are actually going down. Just kind of walk us through the quality of inventory that you have on the balance sheet? Thank you so much.

Mike, do you want me…

Jeff, you want to take that?

Yes. Absolutely. So let me start off with bad debt. From a bad debt perspective, we have not seen a deterioration in the quality of customer payments as of yet. But we do know that the combination of purchases when they are more concentrated in to some of the home categories, over time, they have a higher level of default rate as well as the longevity of the customer. So if you have a customer who is a new customer versus one that’s reactivated or has been with you longer. That newer customer is one, many times, that has a higher charge-off experience. With a combination of new customers and these new customers, essentially buying their first purchases in some of those higher categories – some of those categories, in which we had a higher deterioration where we thought it was prudent to start reflecting that and kind of how we think about our reserves going forward. As it relates to inventory, our inventory levels are actually down year-over-year. And we’ve been working very diligently to try and adjust receipts where – where we could – as we’re really going through this process, we did increase our obsolescence in reserve a little bit as a result of some of the shifting we’re seeing in categories. But for the most part, the 30 basis point improvement in overall obsolescence [indiscernible] reduced inventory net of that adjustment that we made for the category shift that we’re seeing in some of the heavier inventory that we think we might need to ultimately liquidate, essentially move to higher spot pricing later in the quarter.

Thank you so much.

I’d add one other comment on inventory. And so as Jeff said, we’re pleased with the position we’re in, with inventory down over prior year, overall healthy inventory. But we’ve made a strategic calculation to generally reduce the amount of receipt we would have in the fashion categories in the fall given the COVID situation, but not to eliminate them. And so one of the things that also gives us encouragement about sustaining the sales momentum is that most retailers have canceled most fall orders, and we’ll be trying to take a big backlog to bring summer merchandise and move it through their system. We’ll be having fresh orders, new items, and a new concept, new products in the fall and holiday time period, that I think will be really differentiated from what will be broadly available at retail. So there’s a little bit of a risk in that, either we don’t get all the sales we think we can get. But we feel good to struck the right balance of keep the inventories clean and also half crush receipts, so that we’ll be relevant for the customer in the fall.

Great. Thank you so much, guys.

We will now take our next question from Thomas Forte from D.A. Davidson.

Great. Thanks for taking my question. So Mike and team, I’m glad to hear that everyone is well, and it sounds like you’re doing a wonderful job navigating just in a very challenging environment. So the question I had for you, Mike, is I wanted to know if you could tell me the financial mindset of your U.S. and international customer. I know historically, things that have affected it have been home values and stock market levels. Just wondering what your thoughts are today?

Tom, appreciate your comments. We’ve been – we’ve certainly been encouraged by the spending pattern we’ve seen. I’m not sure how to exactly link that through her financial mindset. Certainly, in the surveys we do, she is concerned about the economy, as you would expect. You’re right that she’s typically most sensitive to housing values and stock market values, both of which have probably held us better in recent days than maybe we would have expected a month or so ago. What we’re encouraged by her behavior is that she’s investing in her home right now – and to see really strong performance across every Cornerstone brand and those sort of are highest income customers, along with high-performance across [indiscernible] but I think she’s still okay. She’s willing to make investments to make to make her home life more comfortable for herself and her family. Clearly, she’s not going to be buying apparel right now or buying much less of it. So that’s not a priority to her. But for those things that are priority for her, for making her home life better at this current moment, is clearly investing in product, investing in quality, and there’s no sort of trade down phenomenon that we’re seeing. So I think for now, while we certainly have concerns about this tough environment we’re in, at least in the way she’s engaging with us. I think she’s doing – she’s surprisingly resilient, I guess it’s how I would characterize it.

Thank you, Mike.

Ladies and gentlemen, we will now take our last question from Jason Bazinet. Please go ahead.

Just had a question for Mr. George. If you had to offer up a hypothesis for the main driver of the top line improvement between the quarter and what you’re seeing quarter-to-date, what would that be?

I think – Jason, thanks for the question. To me, it is a combination of we know we have a consumer who is home and is much more engaged in viewing TV, much more engaged in spending time online. And so the power of our platform is to be present for her. And again, we’re seeing a lot of new viewers and new consumers and move traffic to our website. So it’s not just our existing customers. So I just think the fact that we have very powerful platforms with broad reach, both TV platforms and online platforms, say that at this moment in time when she’s engaged in that universe, we are there, and we’re there in a big way, and we’re there in a really differentiated way. And we’ve always believed that if you get a consumer to spend a little bit of time engaging with us, she’ll start to spend a lot of time engaging with us, and you have a sort of a reinforcing positive effect. And so I think we’re seeing that. That then coupled with for a much higher level of engagement and taking purchases for home. And I would say if there’s a story of Qurate sales pressure, especially at QxH over the last couple of years, it’s been that we benefited from a fairly strong fashion cycle and a tough to home cycle. The fashion cycle then moderated over the last year, but we didn’t see the home side pickup. And that was really what caused that couple percent point decline over the last year. If you had to oversimplify a historic growth with fashion and beauty got softened, home didn’t rebound. Now we’re in a mode where the customer is thinking much differently about her home and now she wants to invest in that home. And we have a wonderful array of products for her home across all of our business units. And now that she’s much more focused on that aspect, I think we’re benefiting from that. So you as then try to fast forward, again, none of us can predict the future of this pandemic, but just the fact that so many people have been exposed to our ecosystem that might not have been exposed to it in a normal time, the fact that some aspects of this digital lifestyle will certainly continue. The fact that some aspects of the, stay-at-home lifestyle file and appetite for investment in the home will likely continue. I think we can be strong beneficiaries of both of those trends.

Thank you very much.

Thank you. And I believe that’s the last call. So thank you, everyone, for your interest and support at this really tough time. We appreciate it. I hope you all stay safe and well. Thanks very much.

Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation. You may now disconnect.