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Edited Transcript of EVLV earnings conference call or presentation 29-May-19 12:30pm GMT

Q1 2019 EVINE Live Inc Earnings Call

Eden Prairie May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of EVINE Live Inc earnings conference call or presentation Wednesday, May 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Porter

EVINE Live Inc. - Senior VP & CFO

* Timothy A. Peterman

EVINE Live Inc. - CEO

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Conference Call Participants

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* Alex Joseph Fuhrman

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Evine Live First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Porter, Chief Financial Officer for Evine Live. Thank you. You may begin.

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Michael Porter, EVINE Live Inc. - Senior VP & CFO [2]

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Good morning, and thank you for joining us. With me on today's call is our newly appointed CEO, Tim Peterman. We issued our earnings release earlier this morning. If you do not have a copy, you may access it through the News section of our IR website. The earnings release is also in exhibit to a Form 8-K, which is filed this morning and can be accessed through our IR website.

Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and a review of strategic alternatives and speak only as of today's date. We undertake no obligation to update or revise these forward-looking statements for any reason. We believe the expectations reflected in our forward-looking statements are reasonable but give no assurance such expectations or any of our forward-looking statements will prove to be correct. For additional information, please refer to the safe harbor section in today's earnings release and our SEC filings.

Finally, we will make references to non-GAAP measures on this call, such as adjusted EBITDA. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included within our earnings release.

Now I would like to turn the call over to Tim.

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Timothy A. Peterman, EVINE Live Inc. - CEO [3]

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Thanks, Michael, and good morning, everyone. First off, I want to congratulate Michael Porter who yesterday was appointed our CFO, a promotion well deserved. Michael, congrats. I know you will continue to do great things here.

Our release today has a lot of information. It explained the bold and important remediation work we have already accomplished in the last 30 days. It outlined what we intend to accomplish near term to reignite revenue growth and profitability in the next couple of quarters. Most importantly, it outlined our go-forward enterprise strategy to build meaningful shareholder value in 2019 and beyond. It is a lot of news to unpack, so I look forward to our Q&A today.

With my prepared remarks, I will address our first quarter operating results and provide details of our new growth strategy and why we believe it is compelling. Over the last 3 quarters, we have experienced a $79 million decline in revenue, a 460 basis point decline in gross profit rate and a $33 million decline in adjusted EBITDA, all compared to the same prior year period. The cause, fortunately, is not complicated. We lost focus on the blocking and tackling that is paramount to running this business successfully, fundamentals like proactive merchandising and inventory planning; vendor engagement; entertaining television programming; relatable personalities; true customer service; pricing discipline; cost discipline; culture; accountability; and most importantly, teamwork.

So the first question on the shareholders' mind, in our view, is when can we expect better results. We believe the answer is immediately, in the second quarter. In the last 30 days, we have reestablished those disciplines and are already creating a positive impact to culture, revenue, customer and profit. For example, on May 3, we noticed we didn't have a single remote broadcast planned for May. So we created a remote for Miami that was shot live all last week, and it really produced great results. The customers enjoyed the engaging television.

Memorial Day, for example, that was shot on this remote, produced the third-highest day for new customers this year. And outside of the Invicta event in February, the Invicta Cruise, which always produces record high results, this was the highest performing day we've had this year. It's important to note when you build engaging programming with engaging personalities and quality products, the customers arrive and they shop.

I would also like to add that this remote -- this 8-day remote was a mix of diverse concepts with all our product categories, and we did it in a way where our hosts were mingling with each other in transition, and it really created an interesting mix that we're going to replicate in the future.

We also just reset our promotional framework by repositioning the Today's Top Value handle. This will allow us to build predictability in our sales delivery every day. More importantly, it will be better suited to deliver excitement and urgency while serving our core customer better and attracting new customers with special dedicated tune-in times.

To be clear though, prior to this 3-quarter slump, we were on a good performance trajectory. For fiscal years 2016 and '17, our adjusted EBITDA was $16 million and $18 million, respectively. This compares to negative $2.4 million in adjusted EBITDA for 2018 and a negative $8.5 million in adjusted EBITDA in the first quarter of '19 alone, and our market cap shows it today. Back in 2015, our market cap was as high as $350 million. In 2016, it was as high as $140 million. And today, it sits around $30 million. We get it, our shareholders and vendors are frustrated, and they should be.

Yesterday, however, we completed an important restructuring. One of the benefits was to remove $15 million annually from our cost structure, but more importantly, we created a flat, nimble organization filled with strong leaders who know how fast we want the heart of our culture to be. We have a team of leaders now who share one definition of success: to build a profitable, growing interactive media business with engaged customers and passionate vendors. Shareholders will not see me bring in a new senior team to execute our growth strategy. My senior team and the talented employees we need to execute our plan are on the field today.

The next question on our shareholders' mind, in our view, is what is our new growth strategy and why is it compelling. Over the past 13 years, Evine has consistently positioned itself, by and large, as a digital retailer offering a broad product assortment designed to compete with HSN, QVC and other major department stores and online e-commerce platforms. In fact, the past 4 CEOs here came from HSN and/or QVC.

However, my background is in interactive media, entertainment and e-commerce, so I do have a different perspective on strategy. For example, under the digital retail strategy, there was this belief that the top priority was for Evine to match its competitors' average selling prices, also known as ASP. In 2009, Evine began to reduce its ASP from over $100 to get to something closer to HSN and QVC's ASP of $55. That was a productive customer-driving strategy up until early 2014 when Evine's ASP reached the $75 range. Unfortunately, Evine continued with this strategy by aggressively expanding into Home and Fashion categories, which directly competed with HSN and QVC and materially reduced its own historical product margins, increased its historical variable cost, slowed its historical inventory turns and lost more customers than it could find.

Going forward, my strategy is closer to the David and Goliath strategy outlined by Malcolm Gladwell, which is to use our own existing strengths to build and scale a new kind of business rather than trying to beat larger, entrenched competitors at their own broad assortment of everything-for-everyone game plan that is much more suited to their strengths.

For example, the biggest challenge we face is reversing our declining customer file. In the first quarter, our 12-month customer file declined by 7% to 1.2 million. And for all of 2018, it also declined about 7%. Our strategy to reverse this trend is twofold. First, in the second quarter, we are planning to change the name of the Evine network back to ShopHQ, which was the name of the network in 2014.

ShopHQ is easier to recognize for existing television retailing customers who, by the way, spend $9 billion annually with television retailers in the U.S. We believe this more intuitive and recognizable name will allow us to better promote to our network and build our customer file again, a seemingly small but important step for the customer.

Second, we are focused on changing how we collaborate and innovate with our vendors. In the past 3 years, Evine has not launched a single new brand that has exceeded $10 million in annual revenues. That simply can't continue. We need our vendors to innovate with us if we are to be able to successfully and collectively reverse the declining customer base.

To help execute this cornerstone strategic priority with our vendors, we were able to secure the services of Eyal Lalo, the entrepreneurial CEO of the Invicta Watch Group, as our Vice Chairman of the Board. In this new role, we expect Eyal to help us reignite our existing vendor community with the kind of passion for this business that he has maintained for over 20 years when he was helping build our Evine network from scratch.

Equally important, Eyal will help us find, launch and build new vendors in all of our merchandising categories. This is a very big win for our culture and our future. Vendor collaboration is what I would call a vastly improved time-to-market effort, sits at the center of our strategic plan. This is a critical thing for us, and it's never really been focused on by our company before. Our time-to-market, our ease and collaboration with our vendors is a key strategic value that we are going to develop further this year.

The next biggest challenge we face is our merchandising mix. So instead of continuing to unprofitably bang our heads against the wall trying to match HSN and QVC in mix and ASP, our David versus Goliath strategy instead focuses us on optimizing the current merchandising mix on Evine to immediately improve customer engagement, merchandising margin and shipping margin. We expect this changed mix will also lower our variable cost as a percent of revenue, which is key. This is also a cornerstone remediation effort for us that we anticipate will create an increase of about 5% to 7% in the airtime mix of our strongest categories of Jewelry, Beauty, Wellness and Watches and a corresponding decrease of about 5% to 7% in the airtime mix of our lowest-performing categories, those of Home and Fashion.

The last critical challenge that we will approach differently in our go-forward strategy is within the world of content distribution, which is really the world I came from. Today, our content distribution cost as a percent of revenue sits at approximately 15%, and quite simply, they just need to be closer to 10%. To date, our strategy to get there has been to focus on achieving cost cuts in exchange for reduction in quality of placement, which as you can imagine has created a self-fulfilling bad result.

Our go-forward plan has a tighter focus on maintaining fee rates but improving the quality of distribution for Evine while we thoughtfully create and launch lower-cost, accretive, niche interactive media networks in profitable partnerships with leading MSOs, ISPs and even broadcasters, primarily in North America but for both English-speaking and Spanish-speaking customers. Our goal is to monetize our services with both e-commerce and advertising business models on linear cable, online and OTT and social where we're expanding the way we think about what we do.

Strategically, we are creating a new business model that is reflective of a new interactive media network that monetizes in multiple revenue streams, including televised shopping. This includes adding new networks, like we've talked about, Shop Bulldog and LaVenta. Both of these networks are not seeking to build another fully distributed, nationwide television linear network like Evine. Instead, each of these new networks will be distributed in a smaller, more strategic footprint representative of the personality of that service.

Shop Bulldog, for example, will focus more on OTT, social platforms, online advertising and partnerships within regional sports networks. It will offer merchandising categories that match how men want to shop online. Our goal is not to simply bring them to linear TV but to go where they consume media. For clarity, I do want to add that our existing Evine brand won't go away completely. It will be used for smaller programming blocks within different services where it makes sense. It will not be a brand for an entire network.

As a result, to better represent our growth strategy as we work to build distinct consumer brands, like ShopHQ, and these niche new interactive media businesses, like LaVenta and Shop Bulldog, and our 3PL services offering, we intend to change the name of our parent company to iMedia Brands, Inc. Details will be forthcoming on this change soon.

I am thrilled to be back and rejoin Evine as its new CEO. We've accomplished a lot in my first 30 days as we have taken the necessary steps to identify and remediate the causes of our recent financial decline. However, we have a lot more work to do as we execute on our new interactive media growth strategy. I believe that we have a very bright future, and that is why I was part of the investment group, led by Eyal Lalo, that recently purchased shares priced at a significant premium. I look forward to leading this passionate team of employees and vendors on the next stage of our journey.

With that, I will turn it back over to Michael Porter who will go into a bit more detail on the first quarter. Michael?

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Michael Porter, EVINE Live Inc. - Senior VP & CFO [4]

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Thanks, Tim, and good morning, everyone. I'd like to thank Tim for the promotion and faith in my continued efforts. Evine is a special company, and we have a tremendous opportunity in front of us. I look forward to working with Tim and the team to immediately improve our performance.

I'll start with an overview of our first quarter financial performance and then provide expectations for Q2 and beyond. Consolidated net sales for the first quarter were $135.5 million, which was a decrease of 16% when compared to the first quarter of last year. This was below the expectations we had previously communicated, which was a decline of 12% to 14%, and represents softer-than-expected sales in our Fashion and Home categories.

As Tim mentioned, we started shifting our merchandise mix in the second quarter, and we anticipate an increase in the airtime mix of our strongest categories of Jewelry, Watches, Beauty & Wellness and the corresponding decrease in airtime mix of our lowest-performing categories of Home and Fashion.

Our return rate was 20.2% in the quarter, which was an increase of 130 basis points year-over-year. This increase was driven by a combination of rate and mix. We experienced rate increases in both our Jewelry and Beauty categories that was expected based on the increased average selling prices in these categories. Historically, return rates go up as ASP increases. We also had a sales mix shift into the higher return rate category of Jewelry and a corresponding sales mix decrease in Beauty and Home, both categories which have lower return rates.

Our average selling price in the quarter was $63, an 11% increase year-over-year. This was primarily attributable to higher ASPs in the Jewelry, Watches and Beauty categories, combined with a sales mix shift out of the lower ASP categories of Fashion and Beauty. While we expect to experience similar increases in the coming quarters, we plan to achieve the increases more thoughtfully through our new merchandise mix strategy that has the right airtime and inventory receipt allocations to also improve productivity. For example, in the first quarter, inventory receipts brought in during the quarter in our Jewelry category were reduced by 30% compared to the prior year while airtime was flat. This imbalance between inventory and airtime created undue pressure on productivity.

Our gross margin rate in the first quarter was 28.4%, which was a 750 basis point decrease compared to last year. Approximately 460 of the 750 basis point decrease was driven by a noncash inventory impairment charge of $6.1 million related to our go-forward strategy to shift airtime and merchandise mix into higher-margin categories, such as Jewelry and Watches and Beauty & Wellness. Accordingly, as a result of the reduction in airtime for Home and Fashion on a go-forward basis, we made the decision to liquidate excess inventory in these product categories.

The remaining 290 basis point decrease was primarily driven by decreased product margins in our Beauty and Fashion categories. The decrease in Beauty is related to a mix shift within the category to brands with lower margins while the decrease in Fashion was related to markdown pressure as a result of softer-than-expected sales.

Our first quarter operating expenses totaled $57.4 million, which was a 1.3% decline compared to the prior year. The decline was driven by a $2 million or 4.1% reduction in distribution and selling expenses as a result of lower variable expenses related to the decline in volume. However, variable expenses as a percent of net sales were 9.8% for the quarter compared to 9.3% in the first quarter of last year. The increase in rate was primarily driven by a conversion in our customer service call routing technology that occurred during the quarter along with slight deleveraging as a result of the sales decrease. The decline in distribution and selling expenses was partially offset by a $1 million year-over-year increase in executive transition expense, reflecting $2 million incurred as part of the CEO transition during the quarter.

Our adjusted EBITDA in the first quarter was negative $8.5 million. This was below our expectation of negative $5.5 million to negative $7 million and is reflective of the softer-than-expected sales and margin rate pressure in the Fashion category.

Moving on to the balance sheet. We closed the first quarter with cash of $28.7 million and total liquidity of $34.4 million as compared to the $36.2 million of liquidity at the end of fiscal 2018. Our net debt position of $42 million at the end of the quarter compared to net debt of $51 million at the end of fiscal 2018. This improvement was driven by the Invicta Watch Group transaction that occurred during the first quarter.

Our inventory balance at the end of the first quarter was $57.2 million compared to $73.1 million at the end of the first quarter of 2018 and $65.3 million at the end of fiscal 2018. This decrease reflects our proactive efforts to manage inventory efficiently as we've experienced softness in the business in addition to the aforementioned $6.1 million inventory impairment in our Home and Fashion categories that was recognized in the quarter.

Regarding capital expenditures, during the quarter, we spent approximately $1.8 million on capital projects, primarily reflecting investments and upgrades to our website, IT infrastructure and customer solution systems. We continue to expect capital expenditures to be between $5 million and $7 million in fiscal 2019. From a tax perspective, we have approximately $338 million in federal NOLs that are available to us to offset future taxable income.

Before discussing our outlook, I want to provide clarity on a couple of matters. As Tim mentioned, during the quarter, we executed a definitive agreement with the Invicta Watch Group that added significant strategic and tactical value for the company and shareholders. On May 2, we improved our balance sheet and liquidity position through the sale of 8 million shares of common stock to investors including Invicta Watch Group, our largest brand partner.

The purchase price was $0.75 per share, a 97% premium to Evine's closing stock price on the day prior to signing the purchase agreement. The transaction also included warrants to purchase 3.5 million shares with an exercise price of $1.50. Additionally, as part of the transaction, we secured a $5 million increase in our vendor line for Invicta Watch Group's family of brands which will take effect in the second quarter. Lastly, we secured a 5-year TV retailing exclusivity commitment from Invicta Watch Group that further deepens the relationship with this significant vendor.

I also wanted to provide some more color on the cost optimization and restructuring actions that were announced. These actions were not taken lightly and were made to help rightsize our expense structure, transform our organization to be more agile and lean and establish an entrepreneurial culture to execute on our go-forward strategy. As a result of these actions, we expect to incur nonrecurring restructuring charges in the second quarter of approximately $4 million to $4.5 million for severance payments and other transition costs. As Tim mentioned, this action is expected to save us $15 million in overhead expenses on an annualized basis going forward.

In terms of our outlook, in the short term, our priority is to address the clear operational issues that are impacting our profitability. And as Tim mentioned, we are taking clear, immediate and meaningful action steps on all fronts. We believe we can return to growth and profitability in a reasonable time. Our expectation is that this next quarter will show improvement compared to the first quarter in both top line revenue and bottom line adjusted EBITDA and that we will return to positive adjusted EBITDA in the third and fourth quarters.

With that, Tim and I are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alex Fuhrman with Craig-Hallum Capital Group.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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Congratulations to both of you, Tim and Michael. I wanted to ask -- it certainly seems like there's quite a few positions coming out as part of your cost reduction plan, and it looks like most of them are in the merchandising area. So can you talk about how you plan to manage merchandising going forward? Is there going to be more -- one central merchandising team that works across all categories? Just curious what that organization is going to look like going forward with so many fewer senior people.

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Timothy A. Peterman, EVINE Live Inc. - CEO [3]

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Thank you for the question. I look forward to catching up with you. On the question of the permanent positions that we removed, those were all across the board at the senior level, but we really didn't take a lot out of the merchandising effort. We did consolidate the merchandising -- a couple of the merchandising positions into 2, but that was not part of the permanent positions that we eliminated. So I think that we've kept our offense, which is very, very important, as you know, in this business with maximum investment. The positions that we did eliminate were that executive level that were working, I would say, outside the core scope of our merchandising effort on our channel today.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. That's really helpful, Tim. And then just thinking about some of the new channel initiatives you have going forward, the men's initiatives, the Spanish language initiative, can you talk about what the distribution for that content is going to look like? Is that something that you plan on having [at first instead] as programming within your initial channel? Or is this something that we're going to see additional distribution online or perhaps other channels on cable?

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Timothy A. Peterman, EVINE Live Inc. - CEO [5]

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Certainly. So with respect to LaVenta and with Bulldog, both of the channels are -- have a different distribution strategy based on their own personality. So let's take Bulldog for example first. Bulldog was really a rebranding of our existing channel, Evine Too. So the complexity of how we launch in Q3 is greatly minimized by, basically, that rebranding effort.

But from there, the Bulldog effort, because of the personality that is male-oriented or a higher percentage of male than we have today on Evine, it's going to be different with respect to OTT. We'll have a heavier concentration of OTT. We'll have a heavier concentration on Instagram. We'll be going to where these males are consuming media today and where they most like to be, regional sports networks. We'll be incubating different programming blocks. It will not be what historically you've known as a linear 24/7 network. It will have elements of that, but it will be a little bit more nimble and certainly dedicated to the customer that we're seeking to find.

On LaVenta, that is a different strategy as well. There are, call it, 7 million to 9 million linear national television subs that we would be focused on. But again, it will be based on the success of rolling out each of those incremental strategies. Maybe we start with just the -- that market for the Latin community, and those will be where we focus first, and then we'll build from there.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Great. That's really helpful as well. And then lastly, if I could just ask, Tim, you talked about trying to get your distribution cost down closer to 10% of sales. Just curious how some of those conversations in your weeks back at the company have gone with your distribution partner. And can you remind me, if I'm not mistaken, I think historically, most of your cable and satellite agreements were fairly short in duration, a lot of 1-, 2-, 3-year kind of agreements. As the company was transitioning over the past couple of years and adding more HD and then subsequently trying to lower PSUs, is that still the case that most of your agreements are very short term in nature? And have your partners been open to having these conversations with you?

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Timothy A. Peterman, EVINE Live Inc. - CEO [7]

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Absolutely. There are a couple -- it seems like 6 questions there, Alex. I'm going to wrap them all into one with this. Yes, our distributors are onboard with what we're trying to do, which is we are trying to bring offense to the table rather than just continue to ask for cost concessions around lower-value distribution. So when you think about the length of the contracts, they're all in the 1- to 3-year term, but what we would be doing and how we're bringing our distribution cost as a percent of net revenue down from 15% to 10% is not based on our historical approach of cost reduction. What it's really based on is the launching of these smaller, less expensive niche services that help build revenue.

So when you think about LaVenta and you think about Bulldog, those will be coming on already with a distribution cost as a percent of revenue far below what our national footprint is for Evine. So when you combine them on a consolidated basis, that's how you bring down strategically your distribution cost as a percent of net revenue. It is -- the idea around Evine Too building that, the idea of moving into Bulldog, those are all the complements of this strategy.

And by the way, we're not taking credit for something that is innovative. This is how -- if you look at the landscape of entertainment services that actually get paid by the MSOs, that's how they are constantly launching and trying to create these further niche services. If you look at the competitors of QVC and HSN, they've also done this strategy, but it's how well you do it.

So for example, Alex, I remember talking to you about this strategy 3 years ago when we launched Evine Too because that was our intent with Evine Too, was to distinguish it as something distinctly different from Evine, the core channel. However, unfortunately, we have continued to just simulcast Evine and therefore, the pickup has not been material.

I just wanted to note that the Evine, the channel, will be moving to ShopHQ, and the Evine name will move more to incubated blocks within the various services that we have.

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Operator [8]

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Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Peterman for any final comments.

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Timothy A. Peterman, EVINE Live Inc. - CEO [9]

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Thank you. Listen, I appreciate everybody's time today. We are in a turnaround moment, and we are very bullish about our prospects. And we just encourage you all to stay tuned and -- over the next several quarters, over the next quarter and see how the culture that we've created, the start-up culture, will create the kind of financial results that our employees, our shareholders and our stakeholders all expect.

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Operator [10]

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