Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail, Inc. 2020 Q3 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded on November 5. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. 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 statements contained herein to reflect any change in Qurate Retail's expectations 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 note and schedules 1 through 3, can be found in the earnings press release issued yesterday on our earnings presentation, which are available on our website. Please remember to register for our virtual Liberty Investor Meeting. On Thursday, November 19, we will cover Liberty Media and Liberty TripAdvisor. And Friday, November 20, we will include Qurate, GCI Liberty and Liberty Broadband from 11 to 2 -- 11 a.m. to 2:00 p.m. Eastern on both days. After the presentations on both days, John Malone and Greg Maffei, along with presenting CEOs, will post a Q&A session. Please pre-submit questions by Friday, November 13, to investorday@libertymedia.com. You can find the link to register and all of these details on our home page. Today, speaking on the earnings call, we have Qurate Retail President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis. Available during Q&A, we'll have Qurate Retail's Executive Chairman, Greg Maffei. Please note that 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 welcome, everyone. We had a tremendous Q3 with strong revenue, OIBDA, free cash flow and customer gains across all our businesses. These results reflect our ability to execute well in the near term while building a foundation for sustained long-term growth. We align product assortments, programming and events with rapidly shaping consumer demand. Our home-related assortments generated strong gains while apparel remained soft, consistent with overall marketplace trends. We strategically managed promotions and pricing across our businesses. In mid-May, we made the decision to pull back on a variety of promotional activities to set a better foundation for healthy growth. These efforts continued in Q3 and have significantly improved product margins contributing to the outstanding OIBDA gain. We stay focused on advancing our long-term strategic growth initiatives to ensure we emerge from this pandemic better positioned than when we went into it. And we look forward to sharing progress on these priorities at Liberty's Investor Day on November 20. We also launched an expanded corporate responsibility program, which encompasses 3 broad commitments: to protect the environment through sustainable packaging, energy-efficient operations, shipping and logistics; to curate, source and manufacture products responsibly; and finally, to champion empowerment and belonging by promoting diversity, equity and inclusion in our organization and with our customers and partners. You can find more information on these commitments at the Qurate Retail Group website. We continue to grow our customer base with gains in every customer cohort, in every business with especially strong increases in new customer acquisitions. We generated $1.5 billion of free cash flow in the first 9 months, that's a $1.1 billion increase year-over-year. And we returned on capital to shareholders in the form of a special cash dividend and the creation of a preferred securities with an attractive yield.…

Thank you, Mike, and good morning to everyone. As Mike mentioned, we delivered another strong quarter of revenue and OIBDA growth across our businesses. Our especially strong consolidated OIBDA performance outpaced revenue by a magnitude of more than 2x on a constant currency basis. So let's jump right in and start with QxH. Revenue grew through strong new customer and e-commerce gains as well as our ability to offer end demand products. For the quarter, total customers grew 8% with existing customers up 5%, reactivated of 15% and nearly growing 27%. We continue to be encouraged by new customer subsequent purchase behavior with 30- to 60-day repurchase rates, consistent with prior years. As illustrated on Slide 6 of our earnings presentation, we once again had a sizable shift in category mix from apparel and beauty to home. Home increased 22% as consumers made their focus on nesting, families and well-being, with strong demand for food, seasonal decor, fitness and wellness, floor care and household products. Moving to consumer electronics, which declined 6%, reflecting a lower demand for smart home products and supply constraints for tablets, computers and televisions as well as our intentional promotional actions to reduce the number of installment payment options for our TV and FlexPay up plans. The teams worked diligently during the quarter with our brand partners to secure additional products, which led to improved sales performance in September. We believe supply constraints for many products have improved for the holiday season. With respect to our fashion categories, beauty declined 2% as color cosmetics are in less demand during the pandemic while we're wearing masks. However, our customers remain interested in self-care, and we experienced gains in hair care, bath and body products. Apparel and jewelry remain challenged, down 7% and 5%, respectively, in line with…

[Operator Instructions]. And we'll take our first question from Eric Sheridan from UBS.

Very good progress on continued evolution towards e-commerce and mobile commerce in the quarter. Mike, I wanted to know if we could better understand how some of your digital marketing channels continue to sort of evolve? What that means or what we should take away from and in terms of a lifetime value of the customers you're getting as your marketing channels continue to evolve? And how we think that how should we be thinking about that from a margin profile over the medium to long term for the business?

Sorry, I had trouble getting off this mute there. Okay. Thank you for the questions. Let me start with the second part of the question, which is looking at the lifetime value of the new customers. We have just been incredibly encouraged by the quality of these very large classes of new customers that are coming in through the pandemic. On every metric we can track, they are of equal lifetime value to previous classes. And about 40% of those new customers are coming in through digital marketing. So it's great to see the majority is still coming in organically. But even with this higher percentage that are coming in through digital marketing, that lifetime value is holding very strong. And remember that we measure that a couple of ways. We measure it based on -- their history tells us about what categories they're buying, whether they're buying digital-only assortments or buying from the on air program advances that buy from all categories, all platforms in a very healthy way. And then most importantly, we look at their behavior and their behavior based on 14-, 30-, 60-day repeat purchase rates, their behavior based on the value of their repeat purchases, their behavior even within the last few months of graduating the kind of best customer status, all of those things are holding with this growth of trends. So really, outstanding quality despite the high surge of new customers and the growing mix of customers that came in to paid marketing. And I think that reflects the diversity of ways we're able to track these customers. We're learning a lot about paid social as a way to find very high-quality customers. The power's influencer networks, which are growing in our media mix. So getting networks with influencers to be talking about us. But we're also seeing effectiveness of paid marketing just in areas like getting people to download a Roku app in the month they downloaded a Roku app to do marketing with Roku there kind of promote our channels and our experience. And that's another way to bring new customers in. So I feel really encouraged that we'll find an array of tools to leverage paid marketing, to expand new customers and to keep the overall quality of those new customers at historic levels.

And we'll take our next question from Carla Casella from JPMorgan.

This is [indiscernible] for Carla Casella. I was wondering if you could give us a little bit more detail on your capital allocation plans going forward and how you plan to think about any potential M&A activity. Are you seeing any attractive valuations out there and looking at acquiring any potential brand?

Mike, do you want me to take a cut at this?

Yes. I'll let you take the cut.

So this is Greg Maffei. Look, we, during the course of 2020, have utilized a couple of different tools for capital allocation, which have been outside our usual path. That included a preferred dividend and a large onetime cash dividend. I think we have said in the past that we look continually for ways to invest in the business, which are smart, and generate a high return on invested capital. We would look for ways outside the business, but parallel to it in e-commerce or other areas, which would also generate synergistic, high return on invested capital. And we'll continue to look for ways to go outside the business and return capital to shareholders. Over the recent time, as you've heard, we were prohibited from buying back shares for a variety of reasons. But we are now actively looking at multiple tools for shareholder returns going forward, including buyback and special dividends, and we will take into account many factors, including the share price, ongoing free cash flow expectations for the business, of which we are increasingly positive, and onetime cash receipts, for example, when we sold the Solana property earlier this year. So all of those will be taken into account. And certainly, acquisitions are not off the table. We will look for them in this environment. But in general, it's been hard to find things which are attractive. So we look for things outside the business, recognizing the high free cash flow generating capabilities of the business. Mike, I don't know if you'd add anything.

No. That's great. Nothing else to add.

That was really helpful. And if I may, just one more. Do you have any early outlook on holiday? I know you commented on mix shift coming back a little bit more towards, say, apparel versus home. Are you expecting to see some of that normalization around the holiday period? Or is that really a look into 2021?

I don't want to get off this specific at our current selling trends. But what I would say is all the early indicators of holiday that we saw in the Q3 time period were encouraging. And in the Q3 time period, we really lean into holiday decor, early gifting, and those all performed really nicely in Q3. We definitely saw a modest rebound in apparel in Q3 largely around the comfort side of apparel, casual sweaters, loungewear, some activewear. And we think that will continue during the holiday time period but the holiday time period really, even in the normal year, is distorted towards home. Apparel tends to be a smaller part of the mix in the holiday time period. So I think we'll have to get to next year, early next year to see kind of the pace of the rebound in apparel. I expect on balance it will remain somewhat soft with these pockets of growth that are related to the stay-at-home lifestyle until they get fully through the pandemic. But on the flip side, I expect the home business to remain quite healthy. And we've just seen no signs of slowing in home across any of our business units through Q3.

We'll now take our next question from Oliver Wintermantel from Evercore ISI.

I had a question regarding inventories and margins and then a longer, longer-term question to follow that. So inventories, it looks like they were down again in the quarter. But I think -- I don't know it was Mike or Jeff, I think you started buying more inventory for the quarter. So just some color what the inventory levels are? And then regarding the -- regarding margins, it looks like you guys benefited from nesting like many other retailers and promotions where I think you said you pulled back on it. It looks like holiday might be a little bit more promotional, a longer dragged out time frame this year versus the last few years. So maybe a comment on gross margin, what you there expect? And then longer term, you gained a lot of customers now or reactivated customers during the second and third quarter. Looking out for the next -- especially next year, how do you think you're going to keep these customers? Do you think they're permanently coming to you? Or was that just driven by the pandemic?

Thanks, Oli. Jeff, do you want to take the first part of that, and then I'll talk more about the customer side?

Absolutely. So Oli, as we think about our inventories, inventories have been down second quarter, third quarter. And it's really driven by a couple of things. One is just strong demand across a number of categories and our ability to keep that replenishment going at the rate of customer demand. We've also taken the opportunity to adjust our inventory levels against some of the categories and products that are not been in strong demand. As you had mentioned, coming out of Q2 into Q3, we're anticipating that we would have to replenish our levels, especially as we thought about early fall and into the holiday. So you actually did see an increase in our inventories going from Q2 to Q3, but still overall, down mid-teens as it relates to just year-over-year. We believe that we are in good position. The -- as I've mentioned in my remarks that our buyers are working very diligently with our brand partners to get certain items back in stock as well as finding additional alternative items that have been identified as key items for customers in gift-giving in the home décor and even across many of these categories that we're current -- previously in pressure as related to consumer electronics. So I think we're in good shape going into the quarter. And a lot of the sort of inventory reduction year-over-year is really just driven by increased demand and also with the reduced levels in those product categories that are in lesser demand on a year-over-year basis.

And I would add on maybe on your margin question, Oli. Our goal is to remain conservative in our promotional practices. Holiday time period is always intrinsically more promotional, and that's kind of built into the base of the business. But in terms of year-over-year trends in product margins and promotional activity, our goal would be to take the kind of year-over-year improvements we saw in Q3 and try to hold those as best we can in Q4. I mean every holiday season is increasingly promotional even in normal times. But we're trying to stay out of that fray and just offer a relaxing refuge during the holiday season and a place to get great items at great values and feel good about how we're positioned. In terms of the new customers, I'd make a couple of comments. First, as I mentioned a minute ago, we definitely think the customers that we're bringing in will stay with us in a consistent way with what past classes have done. So the fact that these current cases are much larger, that just gives us tailwind that will benefit from over the next couple of years as those elevated levels of new customers. But we're currently seeing kind of [indiscernible] feel in to become good long-term customary. But in addition to that, we're confident that we can continue to bring in larger new customer classes going forward for a couple of reasons. First, just this broad macro shift to home, which we don't see changing anytime soon, you naturally bring in more new customers in home categories. The hardest category to bring in a new customer on is apparel, and easiest is our home categories. And so we're confident with that mix shift to home as that will be a great business in new customer acquisition. And then we add to that our progress on digital marketing that we also chatted about a moment ago and just the ability to continue to leverage digital marketing to bring in more new customers. And as we maintain this conservatism on promotional practices that actually frees up a few more dollars that we can redeploy in marketing if we choose to bring in high-quality new customers with good lifetime value while tucking the overall orbital. So we just see lots of optionalities for continuing to bring in more new customers. And then the final point I'd make is we're just available in more places today. We talked about Roku and LG Shop Time and Facebook live, and it could go on and on, all those -- that consumers can find us today, which is different than a couple of years ago. So always point to good new customer acquisition going forward.

We'll now take our next question from Edward Yruma from KeyBanc Capital Markets.

A bigger picture question. Last time you guys had a similar surge of new customers, you had driven a lot of them through price. And I think the postmortem was they didn't exhibit the behaviors that you wanted. How do you make sure that some of the new customers you're getting today exhibit kind of the strong lifetime value versus maybe what happened 2 years ago? And then as a follow-up, I know you mentioned shipping at Cornerstone. Are you anticipating shipping difficulties during the season?

Yes. Thanks, Ed. As I've kind of mentioned, we're really confident in quality of these new customers. And I think what you're referring to is we definitely saw at Zulily two years ago, the team kind of lean in to new customers, and we're finding that they were not of the quality we anticipated and that led to the downturn in performance that we saw in the 2019 period as we anniversary that. So that's a very baked in learning to really -- we've got new marketing leadership, and that team is doing a terrific job trying to really get refocused on the fundamentals of good customer acquisition, going to the right channels, making sure these are customers that have high quality. But I would note, that was quite isolated to visibility experience. If you look more broadly across QxH and QI, we really never at any point in our history had a surge of new customers that did not perform consistent with our long-term expectation. So all the current data says they will. And again, we've never had an experience that didn't fit that model. So we had one issue to really -- believe me we've adjusted that. Feel very good about the quality of the customers that are bringing in across Qurate. In terms of shipping, benefit of our size and scale is we have very deep relationships with our partners. We're a very meaningful customer of the major shipping carriers. And so we've been able to negotiate agreements that enable us to meet all the demand that we anticipate, and we're not going to be capped like others are. That said, there's certainly pressure of getting all the boxes out of our own 4 walls and getting boxes to the carrier network. So we're sensitive to that. It creates a little bit of pressure on the margin, but we believe we have a good plan, believe we should be fine and be able to meet our typical service commitments and get through the holidays quite well.

We'll now take our next question from Jason Bazinet from Citi.

I just have two questions. Do you all have a target leverage or a maximum leverage figure that you keep in mind? And if you do have a figure, is that at the QVC Retail Group level consistent with the two turns of leverage in the release? Or is that at the corporate model? And then my second question is you talked about some of the restrictions on buying back stock. As of today, November 5, are those restrictions all lifted?

I'll take a cut at that. You want to -- at the QVC level, we maintain a leverage target of 2.5x. We do not have a stated Qurate level -- leverage target, but we have stated our 2.5x target or below for QVC property. Exactly when we're released out of our blackout window, which is normal, I'm not going to comment on.

We'll now take our next question from Phil Porta from DJ. Davidson. There is no response. We'll take our next question from William Brewster from Sullimar Capital Group.

And I'd say great quarter, but I think that, that would understate it. And I want to say thank you, guys, for your hard work. I wanted to drill in, if possible, on something that Greg had said. Within the internal capital allocation priorities, Mike, I was hoping maybe you could talk to performance marketing and what you're seeing there? And Greg, if you could expand on any of your priorities, that would be great?

Yes. Appreciate the comment. I'll hit performance marketing and then let Greg go from there. We continue to invest in performance marketing. It's generally been increasing on a year-over-year basis in the 40 to 50 basis point range, a little bit offset by lower commission rates because as folks gravitate to digital, our TV base commissions tend to decline every year. We'll continue to lean into that investment as long as we're getting a good return on it. We expect performance marketing to be net positive within a year as we measure the value of the customers that come into it. So we feel good about our ability to reinvest back in the business in performance marketing, in efforts like network optimization, in expanding our presence on all sorts of digital platforms so that more and more folks can find our live stream. Those are our priorities for both expense dollars and capital dollars. And believe we're using those effectively to really lighten the digital footprint. That's the way people find us and the way that we can push people toward those platforms. Greg, do you want to make any other comment on capital usage?

Yes. I would say we are not -- we don't have a religious view about which is the preferred method. Historically, because of tax efficiency, we have favored buybacks. Candidly, they have not worked as successfully as we would like, partly due to some diminution of the growth of the business, but in large part due to a reduction in multiple and the marketplace not truly following or believing in it. This year, we tried some other methods of returning capital, including that onetime cash dividend and the preferred dividend, which we thought had the benefit of opening up choice, more choice for investors who wanted to continue and stream versus those who wanted more levered equity. I think those have largely been successful. We are not anti-buyback. It's certainly not been the Liberty posture, and we will use that and look at that as one of our tools going forward and look at the ways to best deliver value to shareholders. We are also cognizant of changing tax rates, which may influence our views and -- but we'll weigh them all. I don't think we have a bias, one way or another. Our goal, obviously, is -- like most of you would hope, agree is to return the best amount of capital we can to shareholders in the most efficient way.

I want to thank you guys for the hard work. And I hope you enjoy a small victory here as the heck of a quarter.

Thank you.

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

Great. I apologize, I didn't -- I got tripped in the fill. So Mike, congrats on the continued improvement of Zulily and Cornerstone across the board. I wanted to get your thoughts on the current state of your consumer. So I feel like working for her and looking for you is the state of the stock market and home values. At the same time, I'm concerned about maybe it's too short term in nature, but at the high level of distraction given what's going on with the election and things of that nature. So I'd appreciate your thoughts on the current state of your consumer?

Thanks Phil for the question. We feel good about this consumer. I think she is amazingly resilient. And to your point, we benefit from a somewhat higher income and certainly higher household wealth. Consumer, so she is in a better place financially. We're not as driven by issues like government stimulus and unemployment rates. We also know that all consumers, including ours, have been increasing their savings rates. So they do have some money in savings. Quite frankly, as we pull back on the use of installment payments, that gives her more open to buy with us because she doesn't -- she hasn't been using credit to the same level in her purchasing or I shouldn't say credit, but our installment payment programs, which she'd used in the past. So she has resources, she has savings and she's proving to be resilient. Certainly, the election is a distraction. And -- but I think it also plays to our strategy, which is to be that place you can turn to on the dial or on the web, to get away from election news, to get some joy, to get some inspiration, to get some distraction to be among friends and a virtual community that she cares about. And so I think by not being in the promotional phrase, just to be there for her as she's looking for distraction from the election, it's all positive. Obviously, we hope and expect that this election gets resolved, surely, which it appears that it will. We'd love to be behind it. But I think through the pandemic, through the fight of a racial justice, through the election, this consumer has continued to turn to us, and we're encouraged by that.

We will now take our last question from Steven Litt from 4010 Capital.

I apologize for asking another buyback question. But when I look at your company, you guys are hitting on all cylinders, you've got tremendous free cash flow, your leverage is low, you're incredibly well positioned as a retailer. You could literally buy back your entire company in three years at current prices. So I'm not sure -- I don't understand why not just spend all of your free cash flow right now to repurchase stock while you've got the opportunity?

Well, I appreciate -- this is Greg again. I appreciate the confidence in the business and the observations about the strength of the business and the strength of the cash flows. And I don't disagree with a lot of your points. I reiterate that historically, we've been very buyback -- central buyback focused, and that has not proceeded as well. During the recent quarter, we were prohibited, as we noted, for some tax reasons for doing buyback. But as we said, we are not -- certainly not taking buyback off the table and certainly not looking at -- or removing buyback as one of the tools and which we will do, utilize. So thanks for the observations, and don't disagree with them.

Thank you and...

And Mike, you're going to -- you can wrap it up. Go ahead.

Yes. That's our last call. But thanks, everyone, for your time and interest today, and we look forward to connecting with you virtually at the Investor Day. Thanks, everyone.

Thank you.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.