QVC Group Inc. (QVCGA) Q3 2025 Earnings Report, Transcript and Summary

Greetings, and welcome to the QVC Group's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jessica Donati. Thank you. You may begin.

Thank you, Rob, and good morning. Before we begin the call, I'd like to remind everyone that this call contains 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 QVC Group 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 statements 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 and 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 have QVC Group President and CEO, David Rawlinson; QVC Group CFO and CAO; Bill Wafford; and QVC Group's Executive Chairman, Greg Maffei. Now I'll hand the call over to David Rawlinson.

Thank you. Good morning, everyone. We appreciate you joining us and from your continued interest in QVC Group. During the third quarter, we continued to make progress implementing our WIN growth strategy and other key initiatives to drive the future of live social shopping. We are encouraged by the results we're seeing in our social and streaming platforms against what continues to be a challenging tariff, viewership and macroeconomic backdrop. Though declining linear TV viewership has put pressure on our business, we are executing well on the second phase of our transformation as we continue to manage costs, address our capital structure and invest in social and screening. As I mentioned last quarter, we are continuing to work to find cost reduction opportunities. In Q3, we are fully recognizing the favorable impact of our organizational change from our IT outsourced service model. We have largely completed our previously announced reduction of our global workforce by over 1,000. In last quarter, we completed the operational move of HSN to our headquarters in West Chester, Pennsylvania and have now entered into agreements to sell the St. Petersburg properties to independent third parties. We also remain focused on our long-term sourcing diversification strategy which we have discussed during the prior 2 quarters. We have made meaningful progress this year by reducing the penetration of goods from China by 8% to 10%, and we remain on track to achieve our goal that no country will represent more than 1/3 of our sourced goods in the U.S. by the end of the year. We continue to monitor any changes to tariff rates and evaluate the impact as necessary. In Q3, total revenue declined by 6% in constant currency. QxH revenue declined 7%, QVC International revenue declined 5% in constant currency and Cornerstone revenue declined 8%. As I've previously discussed, returning our company to growth continues to be difficult as challenges persist, and we continue to ramp up our WIN growth strategy. We continue to see growth in revenue attributed to our social and streaming channels, helping to moderate the year-over-year revenue decline at QxH by 4 points in Q3 compared to the first half of 2025. We believe that the revenue attributed to our social and streaming platforms is now low double digits as a percentage of QxH total revenue. And according to some third-party attribution methodologies could be even higher. With our current measurement, social and streaming revenue is growing 30% over last year. This is an improvement from Q2, which we estimated at high single digits. This strong momentum is why I believe in our strategy to drive the future of live social shopping. We know that our channels on TikTok are reaching new customers. And in Q3, we added approximately 255,000 new customers through our TikTok Shop and an additional 300,000 through our traditional linear and digital channels. We are also encouraged by early repeat customer rates on TikTok Shop. We continue expanding our partnership with creators, and we now rank among the top sellers for total U.S. TikTok Shop. On streaming, we continue to expand content and distribution and are pleased to see another quarter of strong monthly active user and revenue growth. We are continuing to pursue additional FAST TV channel launches on Amazon Fire TV and Roku and launched a new live-like channel called the Deals Channel. This new channel is a compilation of our TSVs and TSs and is a good example of collaboration across our digital, linear and streaming channels. We continue to build our library and streaming original content with new shows like Your Splendid Space with Kathy Hilton and new episodes of our top show series hosted by Busy Philipps. Both of these highlight our new way of working to create content in multiple forms to engage with our customers in various ways. In the third quarter, we were pleased to see QxH average customer spend increased for the first time since Q2 2024. Spend per customer grew 4%, while total customer count decreased 12%, not including customers buying through our TikTok Shop. Existing customers declined 10%, new customers declined 26% and reactivated customers declined 11%. It's important to note that our traditional customer reporting excludes customers buying through our TikTok Shop. And when we include those new customers in our results, new customers grew 38% versus last year. As you can see on Slide 8 in our presentation, on a trailing 12-month basis, customer count declined on a sequential basis, approximately 2% versus June 2025. But our existing customers continue to purchase at healthy levels, spending on average $1,620 and purchasing 31x in the 12 months ended September 30. At QVC, our best customers who buy 20 or more items annually, also continue to purchase at very attractive levels. In the 12 months ended September 30, they bought 78 items and spent $4,048 on average, both increasing approximately 2% year-over-year. As we look at category performance, while we experienced declines in all categories, we saw the year-over-year rate of decline improved compared to the second quarter in every category except for electronics. In apparel, while sales were down year-over-year, we saw a meaningful improvement versus the trend we experienced in the first half of the year. This was driven by successful fall fashion events and strong performances from several of our core brands, including Kim Gravel, Denim & Company, LOGO and Diane Gilman. The jewelry category showed a notable improvement in trend over the last 3 quarters. This was fueled by standout performances from J. King and our lab-grown diamond assortment. Our home category revenue was down 7%. However, we saw encouraging results from our seasonal programming with customers responding to both our fall and holiday products. Speaking of holidays. Our team is bringing the holidays to life with festive programming, limited-time deals and tent-pole omnichannel events that span TV, streaming, social and digital. At QVC, we've completed our biggest ever nonstop holiday party last weekend. Kathy Hilton is appearing in many special moments as our official Mrs. Claus this year. We're presenting Mrs. Claus' Holiday House, a pop-up event in New York City that will also be the site of our second TikTok Super Brand Day. QVC, Shawn Killinger is taking customers on a holiday tour of Britain's capital in all-access London calling, a weeklong event featuring Elton John, British bands and more. Meanwhile, HSN is heading south for All-Star Nashville holiday, a 2-day event featuring country music stars, Martina McBride, Trisha Yearwood, Brad Paisley and Lady A. Moving to QVC International. Performance in the quarter was stable with the exception of Japan. Our European market revenue was down slightly, but the U.K. grew 2% in the quarter. We continue to see challenges in the Japan market and have kicked off a multiyear plan to combat lost market share driven by technology and marketing investments. For our Cornerstone brands, revenue declined 8% in the third quarter. As I've mentioned in prior calls, this business has been impacted by tariffs and is largely tied to the housing market, which remains depressed. To wrap up, our WIN growth strategy continues to guide the company through its transformation. And although there is much work to be done, we are pleased with our progress to date, and the consistent success we've witnessed through our social and streaming efforts. We have demonstrated our ability to evolve to meet the needs of the modern consumer, and we remain confident in the future of live social shopping and QVC's ability to continue to be an innovative class leader in the space. To execute on our ambitious transformation efforts, we will continue to focus on what we do best, creating an opportunity for shoppers to explore, dream and connect. Now I'll turn the call to Bill to review the Q3 financial results for each business.

Thank you, David, and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the 3 months ended September 30, 2025, to the same period in 2024. Starting with QxH, revenue declined by 7% due to a 7% decrease in unit volume and a 13% decrease in shipping and handling revenue, partially offset by favorable returns rate and slightly higher average selling price. From a category perspective, home revenue decreased by 7%, primarily due to reduced demand in culinary and ongoing pressure in our today's special value events, many of which were impacted by tariffs. Apparel revenue decreased by 4%, an improvement from Q2. Beauty revenue declined by 9% in Q3. However, we saw wins from standout brands such as No Makeup Makeup, Philosophy, Naked Re and Beekman 1802. Accessories improved from Q2, with revenue down 6% for the quarter. Handbag and lounge categories drove some positive momentum, along with brands like Skechers and Patricia Nash. Electronics declined 14%, driven by reduced demand in portable power. Adjusted OIBDA decreased 26% and adjusted OIBDA margin contracted 245 basis largely driven by 145 basis points of marketing investment, 130 basis points of total sales deleverage and 85 basis points of pressure from a change in the management incentive compensation plan, partially offset by favorable commissions. Gross margin declined approximately 110 basis points driven by fulfillment pressure, sales deleverage and lower product margins. Product margins decreased by approximately 25 basis points, driven by higher promotions and increased tariffs. Fulfillment expenses were unfavorable 80 basis points due to increased freight rates and sales deleverage. On an aggregate dollar basis, operating expenses decreased 12% and SG&A expenses increased 4%. Operating expenses decreased $15 million, largely driven by lower commissions. SG&A expenses increased $10 million and were unfavorable by approximately 180 basis points due to sales deleverage, higher marketing costs and higher management incentive costs, partially offset by lower personnel costs. Excluding the increased marketing investment and timing change related to incentive compensation, SG&A expense was down approximately $18 million year-over-year. Moving to QVC International. My comments will focus on constant currency results. Revenue declined approximately 5%, driven by a 4% decrease in average selling price and lower shipping and handling revenue. From a category perspective, sales declined in all categories with the exception of apparel, which increased 3%. U.K. net revenue increased 2%, while Japan net revenue declined 11% and Germany declined 3%. Adjusted OIBDA decreased 21% and adjusted OIBDA margin declined 210 basis points. Gross margin decreased 130 basis points due to sales deleverage and fulfillment pressure, partially offset by product margin gains. Operating expenses were flat, and margin was unfavorable due to sales deleverage. SG&A expenses decreased 2% due to lower personnel expenses. SG&A margin was unfavorable by approximately 40 basis points due to sales deleverage and the timing related to management incentive costs. Excluding the timing change related to incentive compensation, SG&A expenses were down approximately 6% year-over-year. Moving to Cornerstone. Revenue declined 8% in the quarter as we continue to experience soft demand for outdoor furniture and seasonal decor in our home brands in apparel at Garnet Hill, largely driven by continued challenges in the housing market. Adjusted OIBDA margin decreased approximately 315 basis points driven by sales deleverage and product margins. Product margins decreased 220 basis points due to pressure from tariffs. I would also like to comment on the recent change to our management incentive compensation program. We believe the recent change allows us to appropriately recognize our team for their efforts and continued progress of the WIN strategy in a more timely manner. The cost of the program had a material impact on our adjusted OIBDA results in 2025. And going forward, the long-term incentive portion is no longer treated as stock-based compensation and is now recognized as an expense impacting OIBDA. Turning to cash flow and the balance sheet for the quarter. In the first 9 months of 2025, free cash flow was a use of $184 million compared to a source of $102 million last year. The decrease in cash flow was primarily due to a reduction in cash provided by operations and higher payments for TV distribution rights, partially offset by lower capital expenditures and timing of dividend payments to our Japanese joint venture partner. As a reminder, our TV distribution payments fluctuate year-over-year depending on renewal cycles. Looking at QVC Group, Inc. debt profile. As of September 30, 2025, net debt was $4.8 billion and the QVC Group revolver had $2.9 billion drawn. QVC Group had total cash of $1.8 billion, of which $1.3 billion was at QVC Inc., $160 million was at Liberty Interactive LLC and $250 million was at QVC Group. Our leverage ratio as of September 30, 2025, as defined by the QVC revolving credit facility was 4.2x, excluding Cornerstone, compared to our maximum covenant threshold of 4.5x. As a reminder, covenant OIBDA includes the adjusted OIBDA of QVC, Inc. as Cornerstone was removed as a borrower from -- under QVC's credit agreement as of April 1. As David touched on in his remarks, we remain laser-focused on managing costs and addressing our capital structure to better position the business for long-term success. This is a key pillar of our WIN growth strategy. And as part of these efforts, we are continuing to evaluate a range of proactive financial and strategic alternatives. This review is ongoing and no decisions have been made at this stage. We will provide updates if and when there are material developments that warrant further communications. Now I'll turn the call over to Greg.

Good morning. As both David and Bill noted, it was a challenging quarter as we continue to experience pressure from the linear TV decline, but are making good progress on our WIN strategy, specifically around social. We continue to invest here. We expect to continue to invest here and we will balance cost and return. We are working on our capital structure and balance sheet and proactively evaluating financial and strategic alternatives. And with that, we'd like to note that we appreciate your continued interest in the QVC Group, and thank you for listening to the call. We're done.

Thank you.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.