QVC Group Inc. (QVCGA) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail Inc. 2021 Q2 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, August 6. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Thank you. Before we begin, we would 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 in Schedules 1 through 3 can be found in the earnings press release issued today on our earnings presentation, which are available on our website. Today, speaking on the earnings call, we have Qurate Retail CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Qurate Retail Executive Chairman, Greg Maffei. And we’d like to welcome Qurate Retail President and CEO elect, David Rawlinson. Now, I will hand the call over to Mike George.

Thank you, Courtnee and good morning everyone. Thank you for joining us today and for your interest in Qurate Retail. In the second quarter, we started to anniversary pandemic-related growth. Therefore, in our comments we will include select 2-year performance metrics to provide important context for our results. We delivered year-over-year revenue and OIBDA growth on a constant currency basis, up 1% and 2% respectively, on top of last year’s strong growth. Compared to 2019, revenue increased 11% and OIBDA increased 12% in constant currency. The quarter played out largely as we expected. At QxH, we saw a continued rebound of our best customers with the return to growth of apparel and accessories. While new and reactivated customer account declined, it remains significantly elevated compared to 2019. Similarly, home declined, given the steep comps in food, personal protection and cleaning products from the initial stages of the pandemic, but is up high-teens from 2019. QVC International maintained strong revenue and OIBDA growth, sustaining the momentum from last year. Zulily revenue declined as we comped the steepest part of the pandemic curve, but we delivered healthy revenue and OIBDA growth compared with 2019. And Cornerstone delivered outstanding performance with record Q2 revenue and OIBDA at all of its businesses. While these results were largely expected, we did not anticipate degree of product shortages we experienced with the level of inflationary pressures across the P&L, which other retailers are also facing. The fact that we delivered year-over-year growth and OIBDA margin expansion even with these challenges is a testament to the strength of our business model. The strong second quarter results further confirm our belief that we are a much better business now than when we entered at the pandemic with an expanded and loyal customer base, strength across multiple product categories, and more extensive distribution and reach of our digital and video content. We are well positioned for growth, poised to take advantage of the long-term trends towards online shopping, video streaming, social media and all things for the home. Before I discuss each of our businesses, I am delighted to welcome David Rawlinson as my successor. David joined us on August 1 as President and CEO-elect and will assume the role of CEO on October 1. David is the right leader to take this wonderful company forward and write our next chapter of growth. He brings an impressive track record of success, most recently with two store brands, Nielsen and Grainger. He is a transformational leader, with deep experience in global e-commerce and in digital and data-driven businesses. He has played a pivotal role in helping prominent companies like Grainger embrace new customer segments and emerging digital business models, while protecting historic strengths. And he inherits an outstanding management team with deep retail, digital and broadcast expertise, and I can’t wait to see what they will accomplish together as they lead Qurate in our next phase of digital growth and transformation.

Thank you, Mike. I could not be more excited to be joining Qurate Retail at the special moment in its history. Shopping has been forever changed by the pandemic and Qurate’s brands have the international scale, customer affinity and expertise in driving demand across multiple platforms to take advantage of this new world. I believe that providing a deep, personal and rich shopping experience is only gaining importance in a commoditizing and more digital world. We have the opportunity to take an energized team and building on our decades of expertise and investment, further accelerate our transition as a leading entertainer and retailer, one that Qurate’s truly unique products and creates engaging experiences for a growing audience that desires it. We are well-positioned to drive value for our customers, shareholders, vendor partners and team members. I am honored to be leading this talented Qurate team and I look forward to meeting many of you in the months to come. Finally, I do want to thank Mike for his many years of very capable leadership of this company. I am fortunate to inherit a strong foundation, and I look forward to working very closely with him for the next 2 months as we transition. Now, I will turn it back to you, Mike.

Thank you, David. We are absolutely thrilled to have you on the team. Turning now to QxH, revenue declined 1% year-over-year and grew 6% over 2019. OIBDA grew 1% from last year and declined 1% from 2019 and Jeff will provide more details on the specific drivers. Our results further reinforce our confidence in the long-term growth prospects at QxH. I will highlight five important takeaways from the quarter. First, customer purchase frequency was outstanding, with total unit volume up 4.5% and units per customer up 15%, offset by a 6% decline in average selling price. These results reflect high engagement from our best customers and double-digit growth in apparel and accessories offset by declines in higher price point in electronics, beauty and certain home products. Second, we held on to much of the gains in new customers from the peak of the pandemic. New customers declined versus 2020, but grew 17% from 2019. And we have reported in prior calls that the early indicators of these customers’ expected lifetime value were encouraging. Now, with the full year of experience behind us, we are thrilled to report that their 12-month retention rates are up slightly compared to the prior year. Third, sales of items featured on air were up significantly, indicating high engagement across the customer base with our full video experience. This is also reflected in sustained growth in traditional TV viewership, with total minutes viewed up 6% on top of good growth last year and that’s before factoring in the high viewership growth on digital video platforms, where we don’t currently have the same measurement tools. Fourth, our business is more balanced across categories with the home segments now representing a larger portion of the mix than they have for many years prior to the pandemic. At the same time, apparel and accessories recovered all the sales erosion from the start of the pandemic and are up compared to 2019. Further, underlying consumer demand across both home and fashion was even stronger than what we captured due to product shortages. And finally, we were able to expand OIBDA margins despite inflationary pressures, underscoring the strength and stability of our financial model and the agility of our team. Looking now at some of the category drivers, in apparel, the team set a strategy to focus on expanding our top five brands at QVC and HSN through lifestyle extensions, such as Denim & Company Naturals and Belle Beach by Kim Gravel. And this has worked particularly well with our best customers. While beauty declined from last year as we reallocated airtime and TSV slots from beauty to apparel and accessories, we were encouraged to see color cosmetics begin to rebound in the quarter and we are positive about the longer term outlook for beauty as we reinvest back into the category. We are particularly excited about our efforts in multicultural and in masstige beauty, two white space areas with significant upside, encouraging initial results and broader positive social impact. In home, we were pleased to largely hold on to our gains from the stay-at-home tailwinds, with the category up 18% versus 2019. This was led by home décor, where demand sales grew 8% year-over-year and more than 25% from 2019 and culinary, down versus last year, but up over 30% from 2019 on the strength of our largely proprietary gourmet food business. We also began our Christmas in July events in late June with strong initial results, underscoring the pent-up demand and consumer excitement about celebrating holidays this year with family and friends and highlighting our ability to create consumer interest through relevant programming, engaging experiences and curated gifting ideas. Consumer electronics saw the biggest decline in the quarter, following outstanding growth last Q2. We experienced continued supply chain challenges and difficult comparisons to the early stages of the pandemic when demand was highest for work-from-home products and virtual schooling needs. Let me now give you a little more flavor on the supply pressures we are experiencing across multiple categories. First, late deliveries, factory shutdowns in areas like India and Vietnam that experienced a surge of COVID cases, coupled with the severe shortage of ocean containers from Asia and the continued backup at the West Coast ports are contributing to substantial late deliveries despite our efforts to bring inventory in early. As a business that focuses on a handful of items a day, we are uniquely impacted when key items aren’t available for their air date. For example, nearly 30% of our TSVs in the quarter were impacted by supply issues. Our teams are continuously adjusting our programming calendars in response. Second, product and offer shortages, high industry demand for certain home and electronics products, coupled with chip shortages, means that in many cases, we are either unable to get sufficient quantities of key items or unable to provide a compelling offer on the day. Third, apparel sell-outs, the high growth and record sell-throughs we are enjoying in apparel, drained our spring and summer inventory. As a result, we did see pressure on June apparel sales as we ran out of hot products. We are working diligently to get stocked with fresh fall merchandise by September. We are also seeing record cost pressures, particularly in inbound and outbound freight and we are providing wage increases for our fulfillment center and customer service team members in many markets. We took a modest price increase across categories at the start of Q3 to partially offset these pressures. Moving on to QVC International, which sustained momentum and generated strong year-over-year revenue and OIBDA growth, revenue was up in every category and customer count while down against last year was up substantially compared to 2019. We are enjoying the benefits in international of geographic diversification with our Japan and German businesses particularly strong, a lesser impact from cord-cutting and businesses that are still at an earlier stage of market development and penetration. Additionally, while we are facing similar supply and cost pressures as in the U.S., the impacts are not as significant. On Slide 10 of the presentation, we highlight our five strategic priorities for QxH and QVC International. Let me share a few key achievements, which speak to our focus on innovation. As we have demonstrated for the past 35 plus years, we are committed to being there for our customers wherever, whenever and however they want to engage with us. We achieved a major milestone in our effort to extend our video reach and relevance across next-generation media platforms. In June, we launched our streaming service on both Comcast Cable and its broadband-only services. Comcast already carries our linear channels, but now with the rollout of the servers, consumers can access 6 QVC and HSN linear channels in one place as well as a catalog of video-on-demand and original programming specifically designed for streaming. The streaming app is our flagship providing a highly immersive, interactive and frictionless experience with the ability to make purchases directly through the app using a remote control, a new capability we are deploying across Comcast, Roku, Apple TV and Amazon Fire. And we also anticipate adding more distribution partners for our streaming service in the coming months. As we strive to be a true destination for daily digital discovery, we launched a new social shopping app called Qurio in the UK in May. The new app allows users to share video reviews, discover new products and message one another in a supportive and collaborative environment. We have built this sense of community for more than 30 years through our TV broadcast. This new app transforms how that community comes to life on digital platforms. While Qurio is in the early stages, initial engagement is highly encouraging. It is a terrific example of our ability to leverage our smaller international markets as test beds for innovation. Our focus now is to build scale and then deploy across markets. In Europe, we are also utilizing advanced analytics and machine learning to analyze a range of internal and external datasets to optimize pricing decisions. We are scaling these advanced analytic capabilities in building out additional uses to create more personalized customer experiences as part of our efforts to better engage our passionate community. Curating special products at compelling value is a central strategic priority, and I want to share two examples of category expansion that highlight our curation capabilities, the power of our platforms and our storytelling and production skill set. Actress and businesswoman, Candace Cameron Bure, started with QVC in 2018 in beauty, followed by the lines of inspirational home products such as journals and decor. And in April, we introduced Candace’s new line of women’s fashion in collaboration with our proprietary design and development team. It’s exclusive to QVC and encompasses size-inclusive staples such as comfortable tees, colorful flannels, jeans, dresses and loungewear. Although the line was only introduced in April, it was one of the top 10 apparel brands at QVC in the quarter, so a remarkable achievement and we believe the brands hold significant growth potential. Last November, we launched a new fashion line with award-winning global fashion designer, Jason Wu. It performed well in Q2, ranking in the top 15 apparel brands at QVC. And in the fall, we will be extending Jason’s product offerings in the culinary, including cookware and kitchen tools, given his love of cookie. The new line is also developed by our proprietary design and development team and exclusive to QVC. Moving on now to Zulily, revenue and OIBDA declined in 2020, but grew – versus 2020, but grew 9% and 29% respectively from 2019 driven in part by the continued expansion of our strong factory direct business, featuring proprietary offerings and extraordinary values. In the quarter, Zulily was impacted by marketing pressures and supply constraints. The new iOS privacy changes have created challenges for all marketers, but Zulily’s high concentration of marketing spend with Facebook resulted in a meaningful increase in the cost of customer acquisition and corresponding pressures on sales. Zulily continues to make progress reducing its Facebook dependence, with notable success in affiliate and influencer marketing and is working actively to both further diversify marketing channels and find more effective ways to market through Facebook. Additionally, Zulily faced challenges with top-tier national brands not being able to provide sufficient inventory for key events, largely a reflection of the conservative receipt plans many brands adopted in 2020 during the height of the pandemic. As sales rebounded this year, a number of key vendors had limited inventory to allocate to Zulily and we lost many halo national brand events as a result. We believe these challenges will moderate through the rest of the year and we remain confident in Zulily’s long-term growth potential as one of a few scaled, profitable eCommerce pure-plays, targeting moms and focused on the off-price segment. At Cornerstone, the team once again delivered outstanding results with record Q2 revenue and OIBDA at each of its four businesses. This terrific performance continues to be driven by strength across home categories as well as a rebound in apparel at Garnet Hill. We remain very bullish about Cornerstone’s long-term prospects. It is well positioned to benefit from the home nesting trend supported by our strategies to expand proprietary assortments, continued shifting from print catalogs to digital marketing, and surgically expand our retail store network. In summary, we are delighted with our Q2 results, delivering growth on growth against the high bar of 2020 comparisons and executing with agility in the face of macro supply and cost pressures. We continue to make progress expanding our already extensive digital video ecosystem, evolving our highly differentiated customer experiences and building on our strong base of loyal shoppers. These are clear differentiators, and we are delivering top and bottom line growth and strong cash flow, put us in a great position to continue to win post pandemic and return value to shareholders. As I close, I’d like to take a moment to thank our 25,000 team members around the world. It has been my great privilege these past 16 years to work alongside such dedicated and passionate people, never more so than over the last 1.5 years. They demonstrated remarkable dedication, remarkable resilience, remarkable agility in serving our customers despite all the obstacles presented by the pandemic. At the same time, caring, caring for their family, their friends, their teammates. With that, I’ll turn the call over to Jeff to review our results in more detail.

Thank you, Mike, and good morning, everyone. Qurate Retail delivered revenue and OIBDA growth on top of compelling 2020 results. Let me start with QxH. Revenue declined 1% versus last year, reflecting a decline in consumer electronics, beauty and certain home subcategories compared to robust growth during initial stages of the pandemic. This was partially offset by the continued rebound in apparel and accessories, driven by our best customers and strong demand for home decor. As Mike said, our customers purchase more units and spend more per customer than in 2020. These gains were offset by lower ASP, reflecting the product mix shift. As largely expected, eCommerce revenue of $1.2 billion declined 2% and with an 80 basis point decrease in penetration. This erosion is primarily due to category and custom mix shifts. Total customers declined 9% in the quarter versus 2020 and with new customers down 32%, reactivated down 17% and existing down 2%. When compared to 2019, customer counts were up nicely across all cohorts with total customers up 4%, new customers up 17%, reactivated up 7% and existing up 1%. I’m pleased to report that QVC’s best customers to make 20 or more purchases in a year, performed well in the quarter. They increased their total spend 7% by purchasing 12% more units. As illustrated on Slide 7 of our earnings presentation, we experienced a swing in category mix into apparel and accessories from primarily electronics, beauty and home. Revenue in apparel and accessories grew 19% and 11%, respectively, which more than offset declines experienced in 2020. These gains were driven by our best customers top brands and were broad-based across apparel subcategories with continued strength in the loungewear and non-leather handbags. We also saw a nice rebound in luggage as customers transition to more travel. Beauty declined 10% from last year, reflecting a reduction in airtime and TSVs, which was reallocated to apparel and accessories. The performance reflected softness in most major subcategories, partially offset by gains in skin care. We look forward to rebuilding this category as consumers reengage outside the home. Home decreased 3% versus last year, reflecting expected lower customer demand for cleaning and personal protection-related products that were in high demand during the initial stages of the pandemic. This pressure was partially offset by continued gains in home decor for seasonal items, furniture, rugs, bed and bath and gardening merchandise. We believe our home decor represents a longer term growth engine, driven by continued robust home sales and the hybrid work-from-home trends. Our home decor business is heavily proprietary with a large percentage of product created through our own design and development team. It also includes several key exclusive relationships. We saw nice gains from several of these brands including Home Reflections, Marigold, Vale Par Hill and Ultimate innovation. Consumer electronics declined 23%, reflecting lower customer demand for home office and school-related products as well as supply chain constraints. On a 2-year basis, electronics was down 3%. Adjusted OIBDA grew 1% and adjusted OIBDA margin improved 40 basis points. Looking at the components of adjusted OIBDA margin, gross margin was favorable 30 basis points, primarily due to lower inventory obsolescence expense and improved product margin. Inventory obsolescence reflected a favorable adjustment to provisions as well as increased clearance sales, including sales from our reopened outlet stores. Product margin gains were largely due to the category mix shift and strategic sourcing initiatives. These factors were partially offset by fulfillment primarily due to the increased shipping volume and lower average selling price, higher freight rates and surcharges and elevated labor costs. This was partially offset by reduced operating expense as we’re now ramping down operating, operations and our decommissioned fulfillment centers before exiting by year-end. Operating expenses was a 40 basis points unfavorable primarily due to higher customer service costs and TV commissions, reflecting strong sales from on-air products. SG&A was 40 basis points favorable primarily from lower bad debt and administrative expenses. Bad debt reflects fewer offered installment payments and a lower mix of consumer electronics and new customers compared to 2020. These tailwinds were partially offset by higher marketing costs for customer retention and acquisition as well as platform expansion. We anticipate continued elevated investments in marketing to grow and engage our customer base while continuously monitoring the return on the spend. While more recently experiencing cost inflation and marketing channels, we are closely monitoring the current environment and will adjust accordingly. I’d note, we are also less impacted by increases in marketing costs than others due to our high percentage of organic customer acquisition. As Mike said, we have taken price increases in early Q3 to partially offset the inflationary pressures we are seeing in marketing, freight and labor costs. Moving to QVC International, we sustained multiple, multi-quarter track record of growth. My comments were focused on a constant currency results. Revenue grew 5%, led by Japan and Germany. As expected, total customers declined 4% in the quarter versus last year with new down 24% and reactivated down 16%, reflecting the outsized growth in Q2 of 2020. These declines were partially offset by 2% growth and our existing customers. Compared to 2019, total customers grew 5%, with new up 14%, reactivated up 5% and existing up 4%. E-commerce revenue grew 4% and eCommerce penetration increased 10 basis points. The business generated gains in every category, led by apparel and home. Adjusted OIBDA increased 16% and adjusted OIBDA margin expanded 175 basis points. Gross margin improved 120 basis points due to higher product margins, which primarily reflects pricing management. We also benefited from favorable fulfillment expenses driven by higher average selling price and sales leverage. Operating expenses were favorable by approximately 40 basis points, primarily due to commissions and customer service, reflecting higher eCommerce penetration sales leverage and renegotiated carriage contracts. SG&A was we favorable by approximately 15 basis points, primarily due to sales leverage and administrative expenses partially offset by higher marketing costs. And lastly, I’d note that we have entered an agreement to sell our minority interest in our joint venture in China. After internal evaluation of our business in the retail market in China, we determined that the venture was no longer a strategic fit for our portfolio of international operations. This joint venture is accounted for as an equity investment in our financial results. Moving to Zulily, revenue declined 6% reflecting steep comparisons to last year as well as the marketing and supply constraints Mike mentioned. These headwinds were partially offset by continued growth in its factory direct business. Revenue grew 9% on a 2-year basis. Total customers declined 17% in Q2 from last year, but we’re only down 4% from 2019. This reflects a sizable swing in new customers, which were down 18% year-over-year, but up 27% versus 2019. Adjusted OIBDA decreased $36 million primarily due to lower product margins, higher marketing and fulfillment expenses, including freight rates and surcharges for our factory direct business as well as comping last year’s recognition of a $10 million reduction of our sales tax accrual that was originally recorded at the time of the acquisition. We believe the surcharges will normalize over time as international travel resumes. Moving to Cornerstone, which once again delivered outstanding results with a record second quarter revenue and adjusted OIBDA at each of its brands. Revenue grew 18% driven by sustained momentum in Home Brands, Frontgate, Grandin Road and Ballard Designs and on the strength of core home decor, interior furnishings and outdoor category. Garnet Hill also generated solid growth by its apparel and home textile. Adjusted OIBDA increased $31 million, primarily due to expanded product margins and leverage of administrative and marketing expenses. These gains were partially offset by higher freight and surcharge. Turning to our balance sheet and cash flow, CapEx was $110 million for the first half of 2021. During the same period, we spent $170 million on renewals of our multiyear TV distribution contract, which is nearly all of our planned expenditures for this year. Cash flow was $331 million in the first half of 2021. Free cash flow reflects payments of elevated prior year incentive bonuses in March and a multiyear TV carriage contracts mentioned earlier. This year, we expect to return to more normalized level of free cash flow conversion in the range of 45% to 55%. Recall, we generated substantial working capital improvements in the first half of 2020 by pulling back on offered installment payments, which reduced our accounts receivable and strategic sourcing, which increased accounts payable. These items are now in our base and will not serve as a source of working capital this year. Looking at our debt profile on June 30, we had $77 million drawn on our QVC Common Inc. revolver and $2.85 billion of capacity. We had $950 million of cash and cash equivalents, and our leverage ratio is defined by our QVC revolving credit facility was 1.9x. We returned capital to shareholders through share repurchases. From May 1 through July 31, we repurchased 5.9 million shares for a total cost of $74 million. In August, we increased our repurchase authorization by $500 million and the total remaining authorization pro forma for the increased authorization as of August 1 is approximately $780 million. As previously stated, we are committed to returning substantial portion of our free cash flow to shareholders on an annual basis. In closing, I will reiterate that we view these results as highly encouraging of our long-term growth prospects. And now I’ll turn the call over to Greg for closing remarks.

Thanks, Jeff. We are excited to announce that Qurate Retail’s Investor meeting will be held virtually on Friday, November 19. We will have a full morning of content from various members of the Qurate leadership team. Please save that date and look forward for additional details being provided soon. Before turning to Q&A, we need to recognize Mike George. This is his last earnings call as CEO. And I’d like to personally thank Mike who has been an exceptional partner since we both started our roles nearly 16 years ago. He has shepherded Qurate Retail through numerous evolutions and successfully transformed our company from a single business on linear TV into a portfolio of attractive multiplatform assets. Mike’s strong leadership leaves this business on a sound footing, and I will surely miss our working together. We look forward to welcoming David to the team as we drive Qurate Retail into its next chapter of digital innovation. Thank you, Mike. And thank you for the listening audience for your continued interest in Qurate Retail. I’d now like to open the call for questions. Operator?

Thank you. [Operator Instructions] So we will now take our first question from Edward Yruma at KeyBanc. Please go ahead.

Hey, good morning. Mike, congratulations on the retirement and thanks for all the help over the years. A two-parter for me. I guess, first, it seems like you have a couple of challenges as it relates to both advertising and viewership. I guess any thoughts on how you can try to stimulate more of that front end over the medium term, assuming that these may remain challenging for a period of time. And then David, we will wait to hear more commentary, I guess as you’ve had more time in your seat. But what was the one or two things that was most compelling for you as an external adviser or an external candidate looking inward on the long-term growth opportunity? Thank you.

Thanks, Ed. I appreciate your comments. As we look at advertising and viewership, first, it’s important to obviously differentiate across our different business units. So on the marketing side, clearly, Zulily has more significant challenges, both because it has a higher dependence on paid marketing to attract new customers and a higher mix of Facebook in its marketing channels. So there is some work to do to get through that. But I think the team is well on its way and there is substantial upside as we anniversary this sort of near-term blip in advertising costs and makes I think meaningful progress diversifying our marketing channels. So that’s on the Facebook side – on the Zulily side. When we look at the QxH business, I would say in the main, we’re actually quite encouraged on the viewership front. Viewership was up this quarter on top of being up last quarter. That’s just a traditional pay TV viewership. So despite cord cutting, we’re one of the few folks that is sustainably expanding our viewership. We’ve actually been doing that for many years on traditional pay services. And then the goal is to come up and over that, eliminate any pressures from cord cutting with all these digital media platforms we’re investing in. And that’s why we’re so excited about the Comcast news because you think about what the Comcast news represents. If you get a traditional pay TV service through Comcast, you can get our – all of our channels in the old-fashioned way, but you can also now access them through a great frictionless, rich content, streaming service that we think can stimulate incremental demand. But if you’re a cord cutter and you just use Comcast for your broadband access, you can also get the full power of the streaming service, all the linear channels, all the on-demand content. And so that’s where we’re going. We see the streaming service as the flagship, what can be present on every platform of folks view TV-like content, whether or not they have a TV service. And that’s powerful. And then you add to that, our continued investment in social media, and video viewing on our own apps. We just think we’ve got a number of ways to continue to stimulate viewership over time. On the marketing side, we are fortunate that marketing is less impactful to QxH in general. It’s a complement to all these other forms of viewership. But I would say the team continues to make nice gains in our marketing tool set, the channels that we use. So, you will continue to see us lean into marketing, not necessarily at quite the elevated rate you are seeing right at this moment, but we will continue to lean into it to both stimulate incremental sales beyond what we get through viewership and also to drive people to these new digital platforms, because that’s increasingly where we are moving our marketing dollars in a very distinctive way to drive people on all of these viewership platforms where QxH a is a unique offering. And David, do you want to make any comments on what you saw in Qurate?

Yes, I would love to. I will have a lot more to say about this to this community and all communities in the days to come. But I think the main things were that we are at a moment where the market is dynamic and exciting. I think everybody recognizes we are on the cusp of a lot of shifts. Some of those changes in the consumer behavior were pre-pandemic and accelerated. But some of those changes, I think, post-pandemic are going to be new. And you combine that with the core assets across Qurate, both in terms of customers and capabilities and investments that’s been made over time. And what I saw was the ability of the business to compete and win in the market over time. I just think with the core capabilities, core talent, core unique assets and where the market is going, the business is very well positioned to continue to pivot. But Mike, I think, really started to accelerate that pivot and really lean into a growing change, more digital, more streaming-based world.

Thank you.

Thank you. So, our next question comes from Jason Haas at Bank of America. Please go ahead.

Good morning. Thank you for taking my questions. Congratulations on the strong quarter, and I also wanted to offer my congratulations, both Mike and David. So Mike, maybe starting with you, it’s encouraging to see the strong retention rates and also seeing fashion rebound and more than offset any sort of moderation in home. But I am curious about what you are seeing in July and just what you expect as the country reopens further. Do you feel like there is further room for fashion to rebound? And if home continues to decline, just on the tough compares, do you think the potential rebound in cash is enough to offset that?

Thanks, Jason, for your question. We were really encouraged, as you said, by both the retention rates and the rebound of fashion in the quarter. I won’t make any specific comments about what we are seeing in July. We don’t comment on the in-period results. But I will try to frame how we are thinking about it, acknowledging that it’s a little early to know exactly, obviously, how the Delta variant will play out on consumer behavior over the next few months. What struck me is actually most encouraging about Q2 is that we were able to deliver that kind of strong 2-year growth while still in a situation where the number of categories that are really working well was still a little bit narrow and definitely pandemic influence, meaning great to see apparel and accessories rebound. But it was largely casual apparel, athletic footwear, casual footwear and we are still not seeing that rebound in tailored clothing, in leather handbags and dresses, shoes, those things for going out or going to the office. So to me, there is still a lot of room to claw back apparel and accessories business as consumers kind of widen their appetite for what they want to purchase in apparel and accessories. Whether that happens in the next few months or the next year, depending on how things evolve, let’s see. But there is still a lot of room to go in apparel and accessories. Add to that, that we were in limited stock by the end of the quarter. So, we are excited to get back in stock and by September, a few weeks later than we would like to be. But we think that’s meaningful for us. Then in home, again, what I was struck by in home is that the things that drove the slight negative at home were cleaning, personal protective equipment, those kinds of categories. And we are really actually pleased to see sustained 1-year and 2-year growth in home decor in areas like fitness. So, it just says to us that this multiyear nesting trend is real. And when you see growth on growth in areas like home decor and fitness, that’s pretty encouraging. And of course, our Cornerstone business has seen outstanding growth on growth. I think they are up 40% versus 2019, a pretty remarkable number. So, we would like the optionality in fashion and where that can go. And then I would point to beauty, which was actually a decliner in the quarter. But over the course of the quarter, you started to see color come back. That back. That may now slowdown with the return of masking. But when you get beauty working on all cylinders, which it will at some point, that to me some nice upside we haven’t captured. And so we are dealing with a wildcard of supply shortages, the consumer electronics business is volatile. But I just think the optionality across apparel, accessories, multiple segments of home and beauty really portend well for growth. I won’t try to frame whether that’s Q3, Q4 or Q1. It just says, there is a lot of growth engines yet to be fully tapped as we think over the mid-term.

Got it. That’s really helpful color. And then a question for Jeff, on the last call, you talked about QxH margins likely being flat for the remainder of the year. So, I am curious if that outlook still holds. I know you called out some more fulfillment cost pressures. So, just curious if that’s still the right framework to think about?

Yes, Jason, we still stand by our outlook that we expressed as you had mentioned at the end of Q1. And that outlook really was around being relatively flat for the last nine months of the year. And that’s really after also posting a 40 basis point improvement, as you just saw here in the Q2 OIBDA margin. We do recognize and acknowledge that we are experiencing some heightened inflationary pressures in freight and labor. But we are also taking certain steps to mitigate that, that Mike had mentioned early in the third quarter with respect to taking some price where we can, where appropriate.

Thanks. And if I could add one more last question for Greg. Just on capital allocation. So, it’s good to see the step-up in the repurchase authorization. Just curious how you are thinking about using that more aggressively in the remainder of the year? And at least by my math, given the free cash flow conversion, what I am expecting for OIBDA, it seems like you will still end the year with a healthy cash balance. So, curious if it’s possible to do – or what you would do with that extra cash if it’s possible to do another special dividend or could – that could lead to more repurchases beyond the authorization?

Great. Thanks for the question. As you know, we are going to have substantial free cash flow. We had an exceptional 2020, as Jeff noted, but we are going to have a strong 2021 despite some investments in the beginning of the year. We have had multiple tools for return of capital to shareholders, and we have indicated that we will pass the majority of our free cash flow out to shareholders during the year. And as you noted, some of those tools have included buyback, the preferred stock issuance, a couple of special cash dividends and now we have done some derivatives as well. I think we are going to look at all of those tools for the balance of the year recognizing the substantial free cash flow and strong capital position we have. And I expect you will hear more from us on all the various fronts as the rest of the year continues.

Got it. Thank you very much for taking those questions.

Thank you.

Thank you. Our next question comes from Oliver Wintermantel at Evercore ISI. Please go ahead.

Thanks. Good morning. And also congratulations, Mike, and welcome, David. Looking forward to working with you. I have a question regarding the behavior of your best customers. Maybe – can you maybe give us a little bit more detail about how these best customers have behaved maybe before the pandemic, during the pandemic and now in the last few months? Is there a big change of the behavior of those best customers and purchase frequency? How much did you spend? That kind of thing.

Yes, Oliver, thanks for the question. I will tell you what’s changed and what hasn’t changed. Let me start with what hasn’t changed. What hasn’t changed is that we retained best customers at a very high 99% plus rate. That retention hasn’t varied pre, during or now in terms of pandemic trends. And we continue to add a consistent flow of new best customers. So, the percentage of new customers who graduate the best customer status within a month, within a year, within 2 years is continuing to be quite solid. And given the number of new customers we added over the last year, therefore, the number of new best customers we added was quite high. So, we like the stability of the best customers. We like the fact that we are adding new best customers at very good rates. What does swing is how much she spends in the quarter. And that’s heavily influenced by these underlying product category trends, because the way best customers get to that high level of purchase frequency and remember the best customer on average buy 70 items a year. The way she gets there is by buying a lot of apparel and accessories and then to a lesser extent, a fair amount of beauty. And so what we saw in the first part of the pandemic was we held on to all the best customers, but our spend declined because she simply wasn’t making – she was buying – her home sales went way up, but they weren’t enough to offset these big declines in apparel accessories. This quarter, we have seen that extreme flip where best customer sales are up 7% and best customer units purchased were up 12%, which is probably one of the highest growth we have ever had in unit growth and best customers’ sales in a quarter. And so that really reflects that she is continuing to lean into home and all these home nesting trends, but now she is back in the market for apparel and accessories and that really helped to fuel the quarter. And again, that’s despite the fact that beauty is still somewhat challenged, but the apparel and accessories are still somewhat narrow as I mentioned to Jason. So, love the growth and best customers love the retention of it and love to see how they are now coming back strongly across multiple categories, really fueled by apparel and accessories in demonstrating a purchase frequency in the quarter that I have to go back and double check, but I suspect if it’s not a record, it’s probably pretty close to a record.

Thanks. Very helpful. And the next question was on inventories. I saw they were up actually up more than sales in the quarter, but you were speaking of challenges and out of stocks. So, is that just a function of inflation that was up so much? And how do you expect that to play out for the rest of the year?

Jeff, do you want to take that one?

Absolutely. Oliver, it’s a combination of things. One, we are in preparation for Q3 and for holiday. Starting to take some receipts earlier than what we had in the past, once again, to try and get ahead of some of the challenges that we have been experiencing. And the other portion of this, quite honestly, is as a result of some of these supply chain delays, and we have more product in transit than we normally would have at this time of the year. So, the combination of higher end transit levels as well as getting out ahead where we can in certain areas to restock the coverage for us as we move forward.

Got it. Thanks very much and good luck.

Thank you. We will now take our last question from William Brewster at Sullimar Capital Group. Please go ahead.

Hi guys. How is it going? Mike, I hope you enjoy retirement, and thanks for all you have done over the past 24 months really and especially over the last 18 months. Some that’s just got me scratching my head a little bit is she got into reopening, right, got dressed up, went out to see her friends again. What’s going on like with the mix of why is she turning to us for athleisure and maybe not some of the higher ticket items and beauty has me scratching my head, and I don’t mean to keep asking the question, but if you can maybe give a little bit of color on that, that would be great.

Sure. Thanks, and appreciate your comments. I would say, again, as I look across the range of what she is buying, I feel good about the pace of rebound into apparel and accessories, I actually felt good about what she is buying in home. The things that we are deflating to the price – average price point and where we had some more downside pressure was, again, part of it is comping cleaning and PPE. Those are obviously non-strategic businesses, so that’s in probably in all. The other one was consumer electronics was obviously weight down in the quarter, combination of supply shortages, lack of really good compelling products and offers. That’s not as motivating to the best customers. So, it doesn’t have the big impact on her spend. But you might miss out on that incremental electronics purchase from her, but not the most strategic category, certainly not a high margin category. So, if you are going to have a wobble somewhere, it’s not a bad place to have it. The one that’s most important is the one you mentioned, which is beauty. Beauty is a highly strategic category for us. We did see softness across all customer classes in beauty. I would say that our own reflection is it was largely – not largely, but a part of it was self-inflicted, deliberately so. We did make a choice to be ready for that uptick in apparel and accessories by just basically moving our finite airtime and TSV slots from beauty to apparel and accessories. So, to dimensionalize that, the amount of airtime we devoted to beauty in the quarter was down 15%. The amount of TSV slots we devoted to beauty was down 20%. So, that’s really meaningful. It’s almost impossible to grow in that context. And we could debate whether that was the right move to make or not. We thought it was the best choice at the time given the various pressures and opportunities we saw. But as we now start to feed that business again. I do think we will see beauty come back. I have said all along that the one wildcard is the pace at which color returns. We were pleased to see it start to come back late in the quarter. Let’s see if that continues with the Delta. But we are just making such a big push in other segments as well. So, I mentioned a couple in my comments, but we are excited about multicultural beauty at a number of new launches in that space. We are excited about really trying to go in, in a more meaningful way in Masts beauty at sort of that price point between drugstore and premium in areas like nail care, hair care, it’s really an on tap space for us. It’s a heavily digital offering more so than an on-air offering, but we are leaning into that hard. We have really expanded our relationship with premier brands like Estée Lauder. So, in the last handful of months and/or coming up, we have launched Estée Lauder Mac, Linie to face Bumble and Bumble Aveta, pretty Bumble and Bumble and Aveta being quite new to the assortment. So, I think we are going to be okay in beauty. I think we have a lot teed up that could really help those results through the next several months. And that – you put your finger on it, that’s the most important one, and we are going to lean into that one.

So if I can just reiterate real quick, we have got purchasing frequency is great, retention of customers was very good and the beauty decision was almost an internal merchandising decision, but I see a mix shift into reopening, which sort of validates the entire business thesis. So, maybe more airtime to beauty will be a good thing, and we should see an uptick. Is that like a fair assessment of what’s going on here?

I think it’s a very fair assessment.

Okay. Thanks Mike. Take care.

Thank you. I appreciate it. And I believe that was our last question. So again, thanks all of you for your time. Definitely check out the Investor Day in November. And thanks to all of you for your partnership with me over the years. It’s been a wonderful journey for the last 16 years, and I have greatly valued your partnership and friendship. So thanks, everyone.

This concludes today’s call. Thank you for your participation. You may now disconnect.