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QVC Group Inc. (QVCGA)

Q2 2022 Earnings Call· Fri, Aug 5, 2022

$0.40

-11.57%

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail, Inc. 2022 Q2 Earnings Call. During the presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, August 5. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Courtnee Chun

Analyst

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 which and in the most recent 10-K 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 expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Please note that we have published slides to accompany the earnings release. . On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and Schedules 1 through 4, can be found in the earnings press release issued today or our earnings presentation, which are available on our website. Today, speaking on the earnings call, we have Qurate Retail President and CEO, David Rawlinson; Qurate Retail Group CFO, Jeff Davis; and Qurate Retail Executive Chairman, Greg Maffei. Now I'll hand the call over to David.

David Rawlinson

Analyst

Thank you, Courtnee, and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. We are continuing to experience the weakness in the macro environment that is affecting all of retail as well as some particular issues that uniquely impact our business model. We are also gaining a better understanding of the many ways that the Rocky Mount fire affected our operations and are working our way through those issues. . Total company revenue declined 13% in constant currency in Q2. Macro headwinds of inflation, the war in Ukraine and rising interest rates impacted consumer sentiment. Supply chain challenges and the downstream impacts from the Rocky Mount fire continued to force us to change planned product offerings on short notice and affected the availability of quality merchandise and our operational efficiency. In the U.S., QVC and HSN shifted approximately 75% and 60% of their Today's Special Values, or TSVs; and Today's Specials, or TSs, respectively. Our TSVs and TSs are the driver of engagement around which the day's programming is built. So changes at short notice have an outsized effect. Given the supply chain and Rocky Mount challenges, our order to delivery times were elongated, which does impact our customer satisfaction, although those challenges are moderating. Total company adjusted OIBDA declined 38% in constant currency at Q2 primarily reflecting lower unit volume. This pressure was heightened by cost inflation for freight, labor and marketing as well as our inventory reduction actions. The simple truth is that we have been experiencing cost deleverage in an inflationary environment, and they're just now able to start to push the counter some of the deleverage. Jeff will discuss each of our four businesses in more detail shortly. While it will take time to show up in the…

Jeff Davis

Analyst

Thank you, David, and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the three months ended June 30, 2022, to the same period in 2021. Starting with QxH. Revenue declined 12% primarily on 9% lower unit volume. Overall, customer counts declined, reflecting macro factors, supply chain disruptions and downstream impacts from the Rocky Mount fire. Although total customer count declined, QxH experienced a 5% increase in average spend per customer and an 8% increase in items purchased. eCommerce revenue declined 12%, in line with overall revenue performance. As shown on Slide 6, we continue to experience a shift in category mix primarily into apparel and continued reduction in electronics. Apparel declined only 1% against the 19% growth in Q2 2021, which shows strong results on a two-year basis. The Q2 performance reflects our strategy to lean into our top brands that resonate with our best customers and deemphasize those that have not. We experienced gains in top brands, such as Susan Graver, Kim Gravel, Candace Cameron Bure, Diane Gilman and Iman. We've also expanded into swimwear, a white space opportunity. These actions are consistent with Project Athens priorities to better serve our most loyal customers and freshen our assortments. Beauty declined 14% primarily due to the weakness in Bath, body and hair care partially offset by gains in skin care. Beauty is notably a strong category with new and reactivated customers. This quarter, a meaningful percentage of our sales decline was attributable to new, reactivated and onetime occasional customers. Supply chain constraints also affected the category's performance as we continue to rebuild our inventory that was destroyed in the fire at Rocky Mount. In addition, sales were impacted by major transitions of brand ownership and on-air guests at two large brands. Accessories declined 11% against an…

Greg Maffei

Analyst

Thanks, Jeff. I want to touch briefly on the aforementioned sale-leaseback transaction, which we view as very positive. As you'd note, we received cash proceeds that calculated about a pretax multiple of cash of approximately 17x and even higher on an after-tax basis given the basis in the assets compared to deductibility of the interest. This is a substantial premium relative not only to our current multiple but even to our historic high multiples. And we view it as an attractive source of financing capitalized on a relatively hot real estate market while importantly maintaining QVC's operational flexibility for its distribution and fulfillment centers. Our liquidity position was meaningfully improved by these transactions as well as QVC's working capital improvements during the quarter. And I feel good about the important actions being taken on working capital and inventory levels, which is an important source of future capital. Net, we reduced QVC's leverage to 2.3x at quarter end, as Jeff mentioned, and this provides additional headroom for QVC under both its bank credit facility, bond indentures and preferred. We now have ample cushion under both covenants even more so after additional sales leaseback transactions which were completed in July. And this fortified balance sheet forms a solid foundation for which David and the team can execute on the 5 pillars of Project Athens. Just one more note, our Annual Investor Day will be Thursday, November 17, in New York. Please save the date. Additional details will be provided soon. We hope to see you -- many of you there. And with that, operator, we'll open it up for Q&A.

Operator

Operator

[Operator Instructions] We'll begin with Jason Haas, Bank of America.

Jason Haas

Analyst

So David, you mentioned that you saw a moderation in the revenue decline through the quarter. So I'm curious if you could provide a little bit more color on what you think is driving that. I'm curious if that was a reflection of the supply chain improving, any of the work you've done to mitigate the disruption from Rocky Mount. Just curious you provide any more color on if that's continued quarter-to-date as well.

David Rawlinson

Analyst

Yes. Thank you, Jason. I appreciate the question. I really think it's a combination of things. I think some of the execution changes we've made in the business that I tried to detail a bit in my script helped. I think we're executing better today than we were six months ago, especially just nailing our core value proposition, and I think that's helped to put a bit of a floor under the business. I think some of the things we've done in terms of new brands and attractiveness have also helped. We're also continuing to see our core customer and our best customers show up even down -- even though we were down slightly in count, what we saw in terms of frequency of purchases were very strong. And actually, what we saw in terms of average purchase was up about 70 -- 7%, up to about $3,600. That's the highest number we've seen in the last four years. And so our best customers, I think, are really still right there and showing up. Our viewing numbers are still growing and strong. I also think we're frankly up against some softer compares. Now we're coming off of some really hard compares. So that also helps. Finally, I would say we're starting to get back to or at least starting to work through some of the issues we've had at Rocky Mount as we get into some of the inventory that was damaged or stored. And as we clear that, we're being able to bring things to our programming and a slightly more real-time way as we gain some of the flexibility in the model back. So I think it's attributable to the improvement sort of top to bottom. All of that said, it's still a very challenging environment. These are improvements from a relatively disappointing starting point. And I would say they're incremental improvements. We're still a long way from where we want to be, to be a growing business in QxH.

Jason Haas

Analyst

That's great to hear. And then as a follow-up, at your recent investor event, you laid out some long-term guidance, including flat revenue growth for 2023 and double-digit OIBDA growth. So I'm curious if that still holds, if you could talk about what the drivers of that will be. What gives you confidence that you'll be able to get to flat revenues and then drive that double-digit expansion or growth for OIBDA?

David Rawlinson

Analyst

Yes. That's great. I think we talked about stability in revenue and double-digit annual CAGRs and OIBDA. We still feel very good about that. And it really is executing off of all of the pillars we talked about. We talked about the balance sheet a lot today because we need to have the balance sheet, liquidity, cash flow position to be able to execute on our plan. But also, Project Athens is a rigorous, detailed plan revisiting almost every part of the business. We are now going into a period of planning and implementation where we will have the initiatives down to the person and accountability level over the course of hundreds of initiatives. And so there's a great deal of execution and a great deal of detail that goes into what we predicted at the investor event in terms of especially the OIBDA and the free cash flow growth in the business. And we think -- we continue to see that opportunity. We continue to be encouraged by the early signs we have from implementing some of the initiatives -- and I would also say part of Project Athens was, of course, the growth initiatives in the video commerce venture space, and we continue to see really strong growth from a low base but really strong growth in that space as well. So I think we are as confident, if not more confident about that road map as we were at the investor event.

Operator

Operator

Now we'll move to a question from Oliver Wintermantel with Evercore.

Oliver Wintermantel

Analyst

I had a question regarding the sale and leaseback, the progress there. Congratulations on all the executed deals there. Just wondered where we are in that process, how much more is there to go, and how much could that be worth in dollars.

Greg Maffei

Analyst

Well, I'll -- this is Greg. I'll start, and then I'll let Ben and David comment. We think they were also very good transactions. Thank you. And these actions taken up until June strengthen the balance sheet capacity and resulted in more than $2.5 billion liquidity between our cash and borrowing capacity on the revolver. It also gave us close to $1.5 billion of restricted payments capacity to support parent level needs, including debt and the preferred. So important things to ensure a very strong balance sheet. Ben, maybe you want to comment on any further progress?

Ben Oren

Analyst

Yes, sure. And just to note, the numbers that Greg mentioned were based on the actions in June, the transactions in July will add even more balance sheet convert. Look, I'll let David respond as well. But we will continue to focus on neutral to positive operational impacts of any of these transactions, but we have a large global real estate portfolio, that market or that capital market continues to be very favorable, and I would expect us to look at additional opportunities.

David Rawlinson

Analyst

Yes. I think that I wouldn't add anything except that we feel very good about the way the sale leaseback positions us to operate and to optimize our operations going forward, and everything here operationally is consistent with what we're trying to achieve with Project Athens.

Operator

Operator

Now we will hear from Carla Casella with JPMorgan.

Carla Casella

Analyst

Just curious, have you said what amount of square footage was sold with those facilities and how much owned square footage you have remaining?

Greg Maffei

Analyst

We have not said anything publicly about that.

Carla Casella

Analyst

Okay. And then on the -- just a covenant question. So are sale leasebacks included in your debt levels? Or are those excluded from your covenant calculations?

Greg Maffei

Analyst

The lease liability that will be recognized on a consolidated basis is not debt for purposes of the QVC bond indenture or the QVC credit facility.

Carla Casella

Analyst

Okay. Great. And then as you commented in the press release about the Liberty Interactive, I guess, is an asset that you put on the balance sheet for a contingent asset. Can you just explain more what's going on with that and kind of timing of that potential release of the indemnification asset?

David Rawlinson

Analyst

Talk about that indemnification agreement with broadband.

Greg Maffei

Analyst

Oh, sorry, yes. So we have -- Qurate has a exchangeable that's due in 2023 -- or sorry, not due in '23, it has a put and a call date in 2023. As part of the real transaction that sent Charter shares out of Qurate, there was an indemnification. So to the extent that the value of that security, the market value or the parity value of that security is above face value, there's an indemnification where if someone were to voluntarily convert, we would notify Liberty Broadband and Liberty Broadband would provide cash for that incremental value above the face. And QVC -- or sorry, Qurate would be responsible for the face value only. And just to remind everyone, Qurate received as part of that M&A transaction cash equal to the face value at the time.

Carla Casella

Analyst

Okay. Great. So something could happen on that if it does, it depends on the holder and it's between now and October.

Greg Maffei

Analyst

Yes. Anytime between now and October, to the extent somebody voluntarily converted, the value above the face value would be the responsibility of Liberty Broadband.

Carla Casella

Analyst

Okay. Great. And the face value of your responsibility...

Greg Maffei

Analyst

Until 2023.

Carla Casella

Analyst

Okay. And the face value of the responsibility of Qurate. And your debt, restricted payments from QVC permit payments of Qurate debt? Or is it just permits payments for Qurate and Liberty Interactive interest?

Greg Maffei

Analyst

So all of the credit facility and the QVC bond indentures carve out or do not include as a restricted payment debt service, which is interest and principal payments. So there's no restrictions on our ability to send money out as long as we have cash or the ability to borrow it.

Carla Casella

Analyst

Okay. Great. Super helpful. There's one more debt question. On the preferred debt coupon, that's cash pay. Is there an opportunity to pick that if you wanted to?

Greg Maffei

Analyst

It is not a voluntary instrument. We could miss the cash payment, and then there are penalties that accrue, but that is a cash pay instrument. We intend to pay it. And I think what we're trying to say is, we have substantial flexibility to fund those payments.

Operator

Operator

And we will take our final question today from William Reuter with Bank of America.

William Reuter

Analyst

My first question is, it seems, when you guys were mentioning all the challenges you were talking about the global supply chain, then the challenges in North Carolina at that facility and then demand is a challenge, thinking about when you will have, for example, the Rocky Mount facility, that volume shifted to other facilities more successfully, when could we start to see improvement in each of those three areas? I understand the demand is something you don't have a sense for, but I'm trying to get a sense for the two that maybe you do have some visibility into global supply chain and then the facility in North Carolina.

David Rawlinson

Analyst

I'll let Jeff follow, but on the global supply chain, I'm not sure we have better visibility than the market at large. What I would say is the global supply chain is still troubled. But I would say it's incrementally more manageable than it was, say, three to six months ago. And I think it's incrementally more predictable than it was three to six months ago. And we've certainly seen the costs stabilize. They haven't always come down substantially, but we're not seeing the same type of rate increases. And so I think the pressure is alleviating slowly, and I imagine that'll continue to be the case throughout the end of this year. And to the early part of next year, that will continue to be disturbed but getting better incrementally. In terms of Rocky Mount, I'd say it's much the same. I think we've started making significant progress in stabilizing our fulfillment center, both storage and delivery capacity. I think we -- on things like order to delivery times. I think we've seen the worst of the increase in our order to delivery times. Those numbers are now starting to get back to normal, although they are not quite at normal in terms of our delivery expectations yet. The amount of stored inventory is starting to come down slowly. You can see that a little bit in our quarter-over-quarter inventory numbers as those started to inch down. And so I think we're -- I think we're going to be working through Rocky Mount, again, through the end of this year or maybe into the beginning of next year. But I would say, I think we've started making substantial progress in getting to a normal operating posture.

William Reuter

Analyst

Okay. And then in terms of the reduction in inventory, when you look at the amount of inventory you have in total and then kind of thinking about a more normalized level, over the next year, what type of an inventory reduction do you think we might be expected to see?

Jeff Davis

Analyst

As part of Project Athens, we had stated that we were going to reduce our inventories by 20% to 30% over the next 18 months. So that would take you through 2023. We're making some good progress against that, as David had mentioned already, with the actions that we're taking with respect to some of the sale and clearance actions as well as one of the things that we didn't have a chance to share as much around as other avenues for us to use such as Zulily as a clearance avenue for us. So we're on track to do so. We continue to think about ways of as we balance our consignment and dropship vendor relationships also. But all of these things will go to support that revenue reduction.

William Reuter

Analyst

Yes, hopefully, not a revenue reduction. Okay. And just lastly for me. You declined on Carla's question around the amount of square footage remaining. I assume you may decline this as well to respond. But in terms of the value of remaining either real estate or other assets that you could monetize if you were to choose to, is there any kind of ballpark numbers you could give us?

Greg Maffei

Analyst

I think you accurately guessed our answer. You were very -- you were forward-looking there and thoughtful.

Greg Maffei

Analyst

But thank you for the questions. And thank you to the listening audience. With that, I think we are complete. Again, thank you for your interest in Qurate Retail, and we look forward to speaking with you next quarter, if not sooner, and seeing you -- many of you in November.

David Rawlinson

Analyst

Thank you

Jeff Davis

Analyst

Thanks, everyone.

Operator

Operator

Ladies and gentlemen, this will conclude your conference for today. We do thank you for your participation, and you may now disconnect.