Welcome to the QVC Group 2025 Q1 Earnings Call. [Operator Instructions] As a reminder, this conference will be recorded May 7, 2025. I would now like to turn the call over to Shane Kleinstein, Senior Vice President of Investor Relations. Please go ahead.

Thank you, and good afternoon. 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 QVC Group expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in QVC Group'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 in constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including Preliminary Note and Schedules 1 and 2, 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 will have QVC Group's President and CEO, David Rawlinson; QVC Group's CFO and CAO, Bill Wafford; and QVC Group Executive Chairman, Greg Maffei. Now I'll hand the call over to David Rawlinson.

Thank you, Shane, and good afternoon, everyone. We appreciate you joining us and your continued interest in the QVC Group. Q1 was a challenging quarter. We're operating in a tough macro environment, facing continued headwinds from declining linear TV viewership, weakening customer sentiment and a volatile news cycle, most recently exacerbated by escalating tariff concerns. These recent developments intensified the pressure on our business as they did for the broader discretionary retail market. Total revenue declined 10%, driven by sharper-than-expected pressure on our top line, particularly from accelerated declines in linear TV viewership and reduced consumer confidence, that we believe is a result of geopolitical uncertainty across our U.S. and international markets. Our consumer remains heavily distracted by current events. In the U.S., there was a sharp year-over-year shift on linear television to news and business content consumption, which were both up double digits. Based on Comscore data, overall television viewership was down, led by decreases in general entertainment, shopping and lifestyle viewing, which were all down between high single digits and mid-teens. QVC International revenue declined 4% in constant currency, experiencing episodic softness not seen in prior quarters, driven by German elections, inflationary pressure in Japan, and compared to a particularly strong Easter in the U.K. in Q1 2024. Cornerstone was down 13%, driven by continued housing market stagnation. As a result of continued sales deleverage, consolidated adjusted OIBDA declined 31% in constant currency. While there is still more work to do, we are building on what we've already done. Over the past 2 years, we've improved gross margins and aggressively managed costs. This includes closing the Fontana, California fulfillment center, reducing labor expense for nonfulfillment functions and moving our technology support to a managed services contract. As previously outlined, we are pursuing an additional $100 million of OIBDA…

Thank you, David, and good evening, everyone. Unless otherwise noted, my comments compare financial performance for the 3 months ended March 31, 2025 to the same period in 2024. Starting with QxH. Revenue declined by 11% due to lower unit volumes, lower average selling price and less shipping and handling revenue, with a partial offset in favorable returns rate. From a category perspective, home revenue decreased by 9%, driven by reduced demand in culinary, a challenging garden season and overall reduced demand for Today's Special Value events. We did see some bright spots in the fitness and wellness categories, driven by supplements and Denise Austin, as well as growth in our seasonal decor brands of Valerie Parr Hill, Slatkin + Co. and MacKenzie-Childs. Apparel revenue decreased 9%. Beauty revenue fell by 12% in Q1, driven by the Bath & Body category. We are encouraged by the growth we are seeing with new brands like No Makeup Makeup and new technology brands like CurrentBody skin red light therapy. Accessories experienced another challenging quarter with a 14% decline, driven by footwear, loungewear and handbags. Electronics declined 18% due to lower demand for computers and TVs. Bright spots included audio and portable power at both QVC and HSN. Adjusted OIBDA margin contracted 310 basis points. Gross margin declined approximately 205 basis points, with slightly higher product margins more than offset by fulfillment pressure and sales deleverage. Product margins increased 10 basis points, driven by a mix shift to higher-margin products, improved product COGS and better return rates, partially offset by lower initial margin. Fulfillment expenses were unfavorable 200 basis points due to higher labor costs, increased freight rates and sales deleverage. On an aggregate dollar basis, operating expenses decreased 11% and SG&A expenses decreased 7%. Operating expenses decreased $14 million, largely driven by…

Thank you, David and Bill. Well, as you can hear, the Q team is very focused on execution despite the challenging macro environment. Q is now navigating the evolving tariff headwinds along with the rest of retail and recognizing the magnitude that this impact will have on the cost structure of Q and overall consumer sentiment. Q continues to remain focused on balancing growth under the WIN strategy and the large opportunity they have in social shopping, with cost actions to better position the operating business for the tough macro environment and the decline in linear television subs. At the same time, we are focused on strengthening capital structure and are proactively evaluating financial and strategic alternatives to do so. And with that, operator, I'll open the line for questions.

[Operator Instructions] Your first question comes from the line of William Reuter with Bank of America.

This is Rob Rigby on for Bill. So I guess, first, regarding the TikTok shop and social spending, it seems like the current annual run rate is roughly around $400 million for social and streaming spending. I guess, what does that ramp look like over 3 years? And I guess what do you expect will drive that growth?

Yes. Let me start and then let Bill pick up. I think what we've said is that social and streaming today is hundreds of millions. And then I think what we said in November was that we thought social and streaming together over a 3-year period could get to $1.5 billion. So that dimensionalizes a little bit what the growth rate looks like over the next 3 years. And we think we are growing fast right now and on track to achieve on that scale. In terms of what drives the growth, a big part of it is just going to be new customer acquisition, as well as some customer transition. There's some cord-cutting capture that's happening with former customers, but we're also seeing good rates of being able to acquire new customers with reasonable economics on the social and streaming platform. One of the things that's really great, especially about the social strategy, is that it's a pre-aggregated audience. There are already tens of millions, in some cases, hundreds of millions of people, if not billions, on those platforms. And so you get to play in a very growing, large stream of potential customers who are increasingly used to seeing shopping content in their social feeds and who are increasingly converting over to purchases within their social experience. And so that's the magnitude of the opportunity. Anything you'd add, Bill?

No. And I think the run rate, I mean, you're kind of taking what the pro rata percentage is now and just carrying that across, I think we've -- obviously, our aspiration, as David said, over the 3-year period would probably put us on a little bit higher trajectory than that. But you're directionally in the right ballpark there.

Great. I appreciate that color. And then second one from us would just be regarding capital allocation. Appreciate the commentary around evaluating strategic alternatives, financial alternatives. But is the plan near term to still use free cash flow to repay the revolver balance? And then if you have any updated color regarding what the use of proceeds would be on the potential sale of the St. Petersburg facility.

Yes. I think potential sale of the St. Petersburg facility is obviously not going to be in the next quarter or 2. And don't expect that to be largely material to the overall size of the enterprise. So I don't think there's a big windfall that we're looking on that. In terms of how we've managed capital structure and free cash flow, I mean, no change right now. But like we said, we're evaluating what our opportunities are going forward.

The next question comes from the line of Karru Martinson with Jefferies.

Just in terms of the proactive financial option review. Does this mean that the RCF renewal is off the table? Can you kind of elaborate where we are in terms of the liquidity needs of the company? And where would we access that from?

So I mean we've given you where -- kind of where we are in terms of the leverage ratio and kind of what that gives us in current liquidity right now. We haven't said anything is off the table right now. That's why we're evaluating what all options are given kind of what the current headwinds are and where the business is today.

And then when you look at kind of your customer count, and while recognizing social is growing nicely, but losing, call it, 200,000 customers, with the linear minutes down, I mean, is that just kind of the new run rate that we have to work through here for the next year while social ramps up? Or how should we think about kind of that sales deleveraging that we saw in the first quarter?

Yes, it's a great question. There certainly is some underlying run rate that is just the structural pace of cord-cutting that's impacting the business. If you look at our linear TV households, I think we said, versus 2018 or 2019, we're down something like 40%. And so there just is some degradation of the core linear households. And I think it's fair to expect that we'll have to eventually outrun that with streaming and social growth. I do think there are a number of things that made this quarter a particularly challenged quarter from a customer count perspective. First, you did see really in February a real change in consumer sentiment and I think a real pullback in the market. And I think that had an impact. You certainly had some of the trends in viewership that were really pronounced in the first quarter. I gave some of those statistics in the beginning where total television viewership were down. You saw a real spike in news and business coverage, and almost everything else in the television universe being down, much of it being down double digits. And so you really did see very strong diversion from normal television watching patterns. And given the fact that we have to have eyeballs to show products to get sales, that has a real impact on our business. The other thing I would say is, given what we saw in terms of consumer sentiment, it didn't feel like a very responsible time to invest as heavily as we otherwise might have in new customer acquisition. And so in terms of our new customer count, we weren't spending to go after new customers in the way that we might have if the consumer sentiment and macro environment had been different. And so I think that may have slightly artificially depressed our new customer count year-over-year and new customer acquisition within the quarter. So I do think there were some things that were idiosyncratic within the quarter that had an effect on the customer count. But I also wouldn't deny that there is just an underlying reality to cord-cutting in linear television that we're also seeing and we'll continue to have to face into.

Maybe just lastly, does the de minimis exemption ending change anything from a competitive landscape for you guys?

Great question.

Yes, it's a great question. I would say, observe a couple of things. I think around the edges, the de minimis exception was unhelpful, I think particularly unhelpful to some of our digital businesses. I think not having this de minimis exception probably is a slight tailwind to our social push, because that's where, I think, in digital channels, you saw a lot of players taking advantage of it. I think the primary places where you saw big businesses built around de minimis exception tended to target consumers who are younger than our average consumer. So I don't know that it provides an immediate massive target that we'll want to go after. I think in terms of average sell price, in terms of age, those both tended to be well below where we tend to target. But I think net-net on the margins, it was a positive thing to have happened for the business.

And the last question comes from the line of Hale Holden with Barclays.

I had I guess 3 really quick ones for you. The 2021/2022 supply chain hit the company pretty hard just on Today's Special Value. So I was wondering, in regards to tariff mitigation, if you're actually shipping from China given the higher tariffs, or if there was the potential for a slowdown and good flow in the back half of this year?

Yes. I can start with that and maybe Bill will want to chip in. I would say we're being very deliberate with what -- given current levels of tariff, of what we would potentially bring over. We've canceled a fair amount out of China. We are very actively sourcing from places outside of China. Like I said in my prepared comments, we would -- think we can target being no more than 1/3 of product costs exposed out of any one country, which will be much more diversified than we have been historically. And we're making good daily progress on getting there. I would say that we will not immediately be able to like-for-like replace every purchase we would have made as we go into the back half of the year. So we will have to do some reprogramming. There are some plans that we had made where we will make choices not to bring in goods given the current tariff rates, and will cause us to go to Plan B and, in some cases, Plan C. And so that's certainly a dynamic we'll have to navigate. You made the reference back to the supply chain crisis. I would not say that currently we're seeing the level of impact in terms of planned programming changes that we saw in the course of the supply chain challenges. And we have far more visibility. One of the things that was very disruptive about the previous supply chain challenges is you just didn't know what was coming when. Here we know that there is a structural change in the economics of certain goods, depending on where they come from. And so we are able to be more proactive in our planning than we were able to in light of the prior challenges. So hopefully, that's some helpful color. Bill, anything you'd add?

Yes. And I think, Hale, I mean, in the near term, we're a larger inventory position than we did this year -- last year at this time on a smaller revenue base, gave us a little bit of buffer coming as we're in Q2 from an inventory position. Obviously, what we're trying to solve is back half of the year now, holiday, as most discretionary retailers heavily penetrated in China. And so that's the work that the teams have been doing right now on diversification, to moving -- and especially when you see apparel and other things where we've made really good strides so far. So it's really chopping wood on the rest of it right now.

Got it. And then with -- I wanted to follow back to Karru's question. With regards to the revolver extension, that's still something you guys are working towards and planning as part of this liquidity solve? And then in connection with that, I was curious if you could give us some color why Cornerstone was dropped off the revolver collateral pledge.

Sure. I mean, so we're looking at all options on that. The revolver doesn't mature until October of '26, right? And so we have obviously time and are using that to make sure that we're doing the right thing for the business. Cornerstone was removed, wasn't material to the calculation, also ample cash on hand to manage that business, and wasn't needed in the facility.

Okay. And then my last question is, David, your comments were sort of relative to first quarter consumer weakness, but it does feel like things have gotten a little softer since then. So any macro thoughts on where you think the consumer is or might be going would be helpful to level-set.

Yes. It's a good question. We saw a January, which, I would say, was basically on trend from the fourth quarter. I think you saw real impacts on consumer sentiment and consumer behavior in February, tended to be, where we saw real change in consumer behavior. Also you had a couple of things going on there. We didn't put too much on it. But of course, you had a little bit of leap year impact as well as an Easter shift impact. And so we did see a real change in the overall discretionary consumer environment in February. That, I would say, got that onto something like the fourth quarter trend as we went through February into March, or at least stopped the descent. And so I would say now it feels like we're -- continue to be at a very depressed and challenged level in terms of consumer sentiment, but it feels more stable at that lower level than it was feeling in February. I would say for us, in terms of how we view the consumer in the back half of the year, we're trying not to, given the level of volatility, make too many predictions. Structurally, we have a couple of things that should be somewhat helpful. The first is social and streaming at their current growth rates will continue to become a larger and larger portion of the business as we go through the year given some of the investments and the progress we're seeing there. And then second, we did a number of things in terms of cost in the business in the first quarter that were not in time to impact first quarter results, including the reduction in force and some of the other cost actions that we took that will have an opportunity to be better reflected in the operating results as we go into the second half, which should give us some additional cushion given where the consumer sentiment and the market may trade.

All right. On a lighter note, I'll do my best to buy something on my next American flight.

Thank you.

In this environment, every purchase is useful. We're really excited about that partnership. When we announced the WIN strategy, the W in WIN was Wherever She Shops. And part of that is just recognizing that our consumer's attention is increasingly divided across platforms. And so hopefully, what you're starting to see is, we know she's in social, and so you're seeing a different sort of presence on TikTok and Facebook. We know that she's a very captive audience when she's on the airplane, and so that's another place we think is a potential for shopping. And so we wanted to get there. So we will continue to try to live out our strategy of being wherever a potential customer eyeball is. With that, I think that was the last question. I want to thank everybody for joining us and for your continued interest. We will continue to try to do a reasonable job of keeping you updated given the volatile environment. And always, very helpful questions and continue to be thankful for the interest in the company.

Thank you. This concludes today's conference. You may disconnect your lines at this time.