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Edited Transcript of EVLV earnings conference call or presentation 27-Mar-19 12:30pm GMT

Q4 2018 EVINE Live Inc Earnings Call

Eden Prairie Apr 1, 2019 (Thomson StreetEvents) -- Edited Transcript of EVINE Live Inc earnings conference call or presentation Wednesday, March 27, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Diana Garvis Purcel

EVINE Live Inc. - EVP & CFO

* Michael Porter

EVINE Live Inc. - VP of Finance & IR

* Robert J. Rosenblatt

EVINE Live Inc. - CEO & Director

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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. Welcome to Evine Live Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

I would now like to turn the conference over to your host, Michael Porter, Vice President of Finance and Investor Relations. Mr. Porter, you may begin.

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Michael Porter, EVINE Live Inc. - VP of Finance & IR [2]

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Good morning, and thank you for joining us. With me on today's call is our CEO, Bob Rosenblatt; and our CFO, Diana Purcel. 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 an exhibit to a Form 8-K, which was 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 our 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 Bob.

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Robert J. Rosenblatt, EVINE Live Inc. - CEO & Director [3]

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Thanks, Michael, and good morning, everyone. I plan to cover 3 key topics this morning: first, some color on our announcement regarding our decision to explore strategic alternatives; second, our fourth quarter financial results; and third, our fiscal 2019 outlook.

This morning, we announced that we recently commenced the formal process to review a broad range of strategic alternatives. Maximizing shareholder value remains our top priority, and this decision was made after careful consideration by our board. We believe the retail industry has never been more dynamic. Bricks-and-mortar stores continue to close at a high rate. And all types of retailers, whether traditional department stores or digitally native brands, are seeking new and creative ways to reach customers and showcase their products beyond transactional e-commerce.

Interactive video and digital commerce offers that opportunity and is more relevant today than ever. Based on the number of inbound inquiries received of late, we anticipate that there will be strong interest in our chassis, including, but not limited to, our fully built out direct-to-consumer platform, our access to over 87 million television homes, our proficiency in producing engaging and entertaining video content in our Eden Prairie or Los Angeles studios or remotely on location, whether that be in Ireland or in the middle of the Atlantic Ocean on a cruise ship, as well as our expertise in product development and third-party logistics. We firmly believe in our strategy and are committed to continue to work our plan.

That said, we decided to initiate this process now in response to the level of interest as well as the opportunity to maximize shareholder value on a more accelerated time frame.

To assist with our review, the board engaged Guggenheim Securities during the fourth quarter. It's important to note that we are not locked into any particular outcome. The board and management's expectation for this company continues as it has always been: to fully evaluate and execute on a plan which maximizes value so that our shareholders, brand partners, vendors and employees will all be rewarded. Please note that we do not plan to comment or provide any further updates going forward on our review of strategic alternatives unless we move forward with an alternative or conclude that improving our operational execution and financial performance will be the best way to enhance shareholder value.

Moving to our financial results. As indicated in our pre-release of the preliminary fourth quarter numbers earlier this month, our results did not meet our expectations. Coming off a challenging third quarter, we had seen improving trends at the beginning of the fourth quarter, particularly with the strong Black Friday and Cyber Monday. However, shortly thereafter, we experienced softness in the business that continued into January. It appears as if we were not alone as this trend was reflected across the industry, making it a challenging quarter for many retailers.

One of the benefits of our unique business model is that it allows us to respond swiftly to retail trends. This ability to pivot quickly enabled us to manage our inventory effectively, allowing us to start off 2019 in a solid position. In fact, we generated $7.2 million in cash from operations in fiscal 2018, which was more than double the amount in fiscal 2017 and among the highest achieved in the past 5 years.

Our performance in the second half of fiscal 2018 was especially frustrating to our team since it came on the heels of all the work we did in fiscal 2016 and 2017 to stabilize the business, improve the balance sheet, build the team and culture and position our company for profitable growth. I believe our positive results in the first half of fiscal 2018, during which we grew both top and bottom line, are far more indicative of what we are capable of accomplishing given our unique platform.

Our strategy remains intact. We believe the softness in our business is short term, and we are focused on improving our performance, particularly in the back half of the year, along with executing on our new profit improvement initiatives, which we anticipate will result in an additional $5 million of annualized EBITDA.

We remain focused on the key elements of our strategy and reversing the main issues that negatively impacted our business in the back half of fiscal 2018, including the delayed launch of Serious Skincare, coupled with the loss of a key brand. Since launching in January, Serious Skincare has been strongly received by our loyal customer base, and it has performed well, particularly with regard to the generation of new customers, which bodes well for us in the long term. Serious Skincare, featuring Jennifer Flavin-Stallone, is resonating with our customer base and, as anticipated, is already one of our core brands.

Our merchant team continues to work diligently on finding new brands which connect with our customers. As you know, in this business, sometimes you hit home runs with brands and sometimes brands don't quite resonate. The key is to drive consistency with ingenious core brands and constantly introduce new boutique brands and products you cannot get anywhere else and that benefit from our ability to use storytelling to connect with customers.

We remain focused on filling our pipeline as our merchant team continues to discover and curate new brands and products. To that point, in the first quarter of 2019, we plan to introduce double the new brands, brand extensions and product lines to Evine customers than we did during the first quarter last year.

We are intently focused on improving the size of our customer base. One way we are looking to build our customer base is by bringing in brands with strong followings. We do this through well-recognized personalities with extensive fan bases, like the aforementioned Serious Skincare brand, as well as Jane Fonda and Paula Deen. We know there's a correlation between customers and brands, which again amplifies the importance of maintaining a current, broad and relevant brand portfolio.

Another way to drive customers is to create loyalty through engaging content, such as conducting unique events and broadcasts, which can showcase our brands and products. Broadcasting our Waterford shows live from Ireland, jewelry and gem shows from Italy and Tucson or from the middle of the Atlantic Ocean on our annual Invicta Cruise, are all the ways that we can combine unique programming with customer engagement.

Speaking of, we just completed the third Invicta & Friends cruise in conjunction with Carnival Cruise Line, and this one was the most successful cruise event yet. An example of this was our Evine pop-up shop set up at the Hard Rock Cafe in Miami. This pre-cruise event provided our customers with the opportunity to buy exclusive and limited-edition Invicta watches and to participate in an Evine broadcast that aired live on Facebook and YouTube.

This is just another example of us partnering with an iconic brand to reinforce connections with our existing customers and, equally important, introduce us to potential new customers. We continue to execute well on these unique events that are valuable for our company as well as for our brand partners.

One other way to grow our customer base is through innovative, engrossing and, yes, sometimes edgy content and programming, such as Evine After Dark. Since we launched EAD a little more than a year ago, this show has garnered a lot of attention as well as new customers. The products and topics of conversation have been exclusive to intimacy. And as a result of the success of this platform, we are looking to expand this type of programming.

Whether in reference to retailers like Neiman Marcus, CVS or Sephora, it's difficult not to hear about the revolution going on in the world of CBD products. We believe that we are the perfect platform to educate customers about CBD and to showcase CBD-related products and accessories. At present, all I can say is please stay tuned. With our storytelling expertise, this will be yet another great opportunity to create engagement and attract new customers to Evine.

We continue to deliver a seamless experience across all of our platforms, and I am proud of the organization for making it easy for our customers to shop with us. We continue to grow our alternative content through social and digital selling as our digital sales penetrations continue to grow. 54.9% of our net sales in the fourth quarter were generated from our digital platforms, representing an increase of 50 basis points compared to prior year. Additionally, of those digital sales, 55.7% were generated from mobile devices, a 490 basis point increase over last year. Lastly, social minutes viewed in fiscal 2018 increased 47% from 2017's levels. And with additional investments, we are committed to driving this forward.

Although our digital business continues to grow, our customer solutions group remain a critical part to our success in meeting our customers' needs. We have been evolving the role of our order capture agents and continue to invest in ways to elevate the skills of this team. Effective earlier this month, this role was rebranded as shopping advisers, a title which better reflects the position's evolving focus to partner with our customers. Shopping advisers personally connect with customers to help them with their desired purchases as well as to make additional purchase suggestions. Combined with recent technology upgrades for our shopping advisers, this evolution allows us to be even more customer-focused.

Like any great team going through a tough stretch, we're using this as an opportunity to be more efficient and nimble, to be more creative and to remain aligned. Our intention is clear, we will get back on track.

Before turning this over, I'd like to share one final thought. Video commerce is an exciting and dynamic business. When I got into this business 3 decades ago, I was excited about the prospects of using a video platform to tell stories about sophisticated and unique products. That excitement is stronger than ever. Interactive video allows customers to be entertained while they are learning about the products that they are interested in. There is a lot of noise out there about the challenges being faced by retailers. And yes, we are a retailer, but we are also different and have many unique attributes and leverage points that traditional retailers simply do not have. We firmly believe that we will come out of this stronger and even more differentiated.

I will now turn the call over to our CFO, Diana Purcel, who will provide additional details on our financials. Diana?

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Diana Garvis Purcel, EVINE Live Inc. - EVP & CFO [4]

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Thanks, Bob. I'd first like to start off with recognition of our ability to manage our balance sheet during the fourth quarter. We closed the quarter with cash of $20.5 million and total liquidity of $36.2 million as compared to $42 million of liquidity at the end of fiscal 2017. And our net debt position of $50.9 million at the end of fiscal 2018 was only slightly higher than our net debt position of $50 million at the end of 2017.

Our inventory balance at the end of the quarter was $65.3 million, down sharply from the $86 million at the end of the third quarter and down 5% from the year-end 2017 balance of $68.8 million.

From a cash flow generation perspective, our $7.2 million of cash generated by operations in fiscal 2018 was more than double fiscal 2017. And excluding the sale of a TV station in 2017, we had our best year in 5 years in terms of free cash flow.

I'd like to expand on this because it really is a significant accomplishment. Despite the decline in our adjusted EBITDA compared to the last few years, cash from operations and free cash flow in 2018 were among the best that we've accomplished in the last 5 years. We believe this shows that we are making progress towards that all-important inflection point of producing positive free cash flow on a consistent and sustainable basis.

Moving to the P&L. Despite the challenged top line, we did have some wins in the quarter, including growth in our subscription sales, which increased 28% year-over-year during the fourth quarter and 29% for the full year. Our top-performing category during the year was Beauty & Wellness, and our subscription business was a big driver of that category's success.

Our average selling price increased 5% to $60 in the quarter and increased 4% to $58 for the year. The higher ASP reflects increases in average prices in our Jewelry & Watches, Beauty & Wellness and Home & Consumer Electronics categories. These were partially offset by a decrease in our Fashion & Accessories category as we took higher-than-normal markdowns in that category during the fourth quarter to work through inventory levels.

As a reminder, we follow a 4-5-4 retail calendar, so every 5 to 6 years, we have an extra week of operations. Fiscal 2017 had the extra week, which resulted in approximately $13.8 million of revenue.

Our gross margin percentage was 29.5% in the fourth quarter, which was 430 basis points down from last year. This decline reflects the loss of a high-margin brand as well as the rate pressure from the continued over-rotation of brands within the quarter and resulting decline in productivity. Additionally, and as previously noted, in response to the sales pressure following the Cyber Monday time frame, we took more aggressive markdowns across categories in order to ensure that we ended the season as clean as possible from an inventory perspective.

With regard to expense management, we had another strong quarter. In total, operating expenses decreased approximately $4.7 million or 7.8% as compared to last year. Variable expense dollars for the quarter declined as we continue to find efficiencies through process and technology. And at 8.9% as a percentage of net sales, variable expenses were just 20 basis points higher than last year, reflecting only slight deleveraging of our fulfillment, credit and customer solution expense categories.

Interest expense was $805,000 in the fourth quarter, representing a decrease of $306,000 or 28% from the fourth quarter last year. This decrease is due to our credit agreement amendment in the second quarter of fiscal 2018 as well as our debt reduction over the past year, particularly the payoff of our high-interest debt that was completed during the fourth quarter of fiscal 2017.

Regarding capital expenditures. During the quarter, we spent approximately $2.1 million on capital projects, primarily reflecting investments in upgrades to our website, IT infrastructure and customer solution systems. We also received the final $665,000 of proceeds from the sale of the Boston television station. Looking forward to fiscal 2019, capital expenditures are expected to be between $5 million and $7 million after totaling $8.8 million in fiscal 2018.

From a tax perspective, we have in excess of $321 million in federal NOLs that are available to us to offset future taxable income.

In terms of our outlook, we remain focused on improving our performance. And as Bob mentioned, a portion of that will be related to the execution of our profit improvement plan that is expected to have an annualized impact of $5 million.

Our business remains very fluid, and a key driver is the management of our brand pipeline. We are working diligently to attract new brands and to work with our current brands on developing new products and line extensions for our customers. There are many factors which affect the timing of when new brands and products go on air or hit our website, and some, as we've indicated, are out of our control.

With a number of things in play and limited visibility on timing, we made the decision to only provide guidance for the first quarter of 2019. With that in mind, we expect sales for the quarter of $134.5 million to $137.5 million. This would result in a sales decline of 12% to 14% compared to last year. We expect adjusted EBITDA to be negative in the $5.5 million to $7 million range. This compares to $3.3 million of positive adjusted EBITDA last year.

Despite the strong start to the year, we had a challenging second half of fiscal 2018, but there is strong energy to get back on track and position Evine to capture the growth opportunity in front of us.

With that, we are ready to take questions from the analyst community.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of Elliot Alper with D.A. Davidson.

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Robert J. Rosenblatt, EVINE Live Inc. - CEO & Director [2]

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I don't know if Elliot -- Elliot, are you there?

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Operator [3]

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Gentlemen, our next question will come from the line of Alex Fuhrman with Craig-Hallum.

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

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I'd love to get a sense of all these new brands that you're launching in Q1. I mean, my understanding is typically, when you launch a new brand, that takes a couple of weeks or months or quarters to really build a following and start to leverage the airtime that you put behind that brand. So just thinking about the guidance for Q1 of revenues to be down somewhere in the low to mid-teens here, just wondering how much of that is the continuation of the slowdown that you saw after Thanksgiving weekend versus how much of that is potentially a new dynamic from all of these new brands that are going to be launched in the quarter?

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Robert J. Rosenblatt, EVINE Live Inc. - CEO & Director [5]

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Alex, it's Bob. Thanks for the question. We have about 60 brands or so that are coming -- that have started in the first quarter and are going to go into the second quarter, really, among every one of the categories. And so far, we've done a really good job in terms of starting it up in a really crawl, walk, run strategy. One of the things we don't think we did as well as we should have during the third and fourth quarter of this past year was we think that we started too many brands during a season when it's unusual for a video commerce network to start brands. And so we start -- we decided to look back and back off of that way of doing things. And for the first quarter, we are now promoting the brands in a more thoughtful way. So for example, we had Fiestaware on the other day. And we had a Tiffany -- a different Tiffany lighting solution that we had on. And we have many brands that we are walking through and many in the apparel area as well. But the way that we're starting them up is to really be able to read and react to them. So the difference is that instead of kind of trying to hit a triple or a home run, we're much more in line, to your point earlier, about trying to hit some singles and doubles. Because what we find, to your point, when people come on air, it does take 2 or 3 times for them, presentations for them to come on, to really be able to determine what kind of legs they have and how we should plan them going forward, which helps us on the inventory management. So one of the learnings, and we continue to learn, believe me, of what we felt we could have done better in the third and fourth quarter result, though we introduced a bunch of brands, we didn't introduce them in a way that we were happy with. So I think what you're going to see is a lot more of this natural growth component. And what we want to do is go back to the basics of hitting singles and doubles and, therefore, really being able to build a brand the appropriate way by having merchandising and our marketing group work with the vendor partners to be able to have the best idea of how to do it.

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

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Bob, that's helpful. And then trying to be mindful of the fact that you haven't put full year guidance out there, but if you could just maybe give us some things to help us out as we think about modeling the different quarters of this year. I mean, it looks like you had a pretty strong first and second quarter last year, so the comparisons don't really get easier until the third quarter. Is that really when we should be looking at as the first real opportunity to see a change in the top line trend here? Is it possible that some of these new brand launches could have somewhat an impact earlier? Just trying to understand kind of what the base case is as you move throughout the year.

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Robert J. Rosenblatt, EVINE Live Inc. - CEO & Director [7]

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Sure, Alex. So yes, I think that's absolutely true is that for 2.5 years prior to the third quarter of last year, following into the fourth quarter, we had a certain rhythm that we were using that we felt very comfortable with. And we moved off that rhythm. And based on that, we now know that, especially when you have long lead time items coming from overseas and the planning that we do, which is usually 6 months out at least to be able to determine how to set up our programming grid, that I think it's safe to say that the comps that we have in third and fourth quarter are very weak compared to anything we've ever had before. And it was really a change and a shift in the way that we try to manage part of the business as well in the promotional calendar. So I would say that, yes, I think we're still going to have some growth in the second quarter, but we are not looking at seeing some kind of significant growth. And I think you'll -- we'll see the turnaround on that part of the business coming when we go against very weak comps in the third and fourth quarter.

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Operator [8]

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At this time, I'll turn the floor back to management for further remarks.

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Robert J. Rosenblatt, EVINE Live Inc. - CEO & Director [9]

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Thanks, everybody. We appreciate you taking the time to participate in our business update call this morning. We look forward to providing our first quarter update in May. Thanks to your continued interest in Evine, and please have a great rest of the day.

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Operator [10]

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This will conclude today's conference, you may disconnect your lines at this time. Thank you for your participation.