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Edited Transcript of EVLV earnings conference call or presentation 28-Aug-19 12:30pm GMT

Q2 2019 iMedia Brands Inc Earnings Call

Eden Prairie Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of iMedia Brands Inc earnings conference call or presentation Wednesday, August 28, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael R. Porter

iMedia Brands, Inc. - Senior VP & CFO

* Timothy A. Peterman

iMedia Brands, 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. Welcome to the iMedia Brands Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this conference is being recorded.

At this time, I will turn the conference over to Michael Porter. Mr. Porter, you may now begin.

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Michael R. Porter, iMedia Brands, 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 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 was filed this morning and can be accessed through our website at imediabrands.com.

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 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 statement in today's earnings release and our SEC filings.

Finally, we 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, iMedia Brands, Inc. - CEO [3]

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Thank you, Michael, and good morning, everyone. I'm proud to say we posted a solid second quarter that exceeded guidance we provided in May. If you think about it, from our standing start on May 2, the task of arresting a 9-month long, $33 million adjusted EBITDA decline year-over-year wasn't going to be an easy thing to do. We had to successfully do the following: Streamline the organization by reducing our nonvariable workforce by 20%; rebrand our flagship television network to ShopHQ, including adding 6 new hosts, redesigning 8 sets, improving our website and creating a compelling new loyalty program that is launching in November.

We had to create innovative new program events like It's the Dubrow Show with Consult Beaute, which is a new reality-based weekly live show from the Dubrow's home and Dr. Terry Dubrow's doctor's office in California.

We had to deliver compelling remote television events, like our live broadcast from the NFL Hall of Fame in Canton, Ohio, where we launched Invicta's officially licensed NFL luxury watch collection.

We had to partner with our key existing vendors to collectively improve their trust in us and our ability to plan and perform together. Important brands like ISOMERS, Waterford, Victoria Wieck, Serious Skincare, Joyce Giraud, MacKenzie-Childs, Gems en Vogue and Samsung.

We had to find innovative new products and brands to offer to our customers, examples like Romero Britto, the world-renowned artist, who will offer his limited edition artworks and other products on ShopHQ; our watch collaboration with the U.S. Army and Invicta, the first of its kind; several new luxury eyewear brands like Fendi, Gucci, Prada and Michael Kors and a new timepiece brand, Bulova.

We needed to begin to optimize the merchandising mix by shifting more time into our strong categories of Beauty & Wellness and Jewelry & Watches and out of our still-fledgling categories, Fashion and Home.

We had to establish a passionate entrepreneurial culture which is nimble and focused on the same single goal. And most importantly, we had to define a new growth enterprise strategy that will help our team create sustainable, consistent shareholder value growth.

In May, I explained our David and Goliath strategy to use our own existing strengths in niche-oriented shopping entertainment to profitably scale our business rather than try to beat larger entrenched competitors who offer broad-based general shopping entertainment, featuring all product categories for all viewers. Our plan includes utilizing multiple monetization models: TV retailing, e-commerce, advertising and service fees.

For example, using an advertising e-commerce business model, we are on pace to launch in November the first male-oriented shopping entertainment service called Bulldog Shopping Network. We will sell and advertise men's merchandise and services and the aspirational lifestyles associated with its brand and personalities. Bulldog will be produced in Minnesota at our corporate headquarters alongside our flagship ShopHQ network. Our advantage and building this new men's network is threefold: Our existing vendor strength in electronics and watches, our ability to produce compelling live remote television from interesting and relevant places and our understanding of our existing male customers on ShopHQ.

In addition, we are on pace to launch LaVenta, a Spanish-language shopping entertainment television network celebrating the Latin American culture. Our planned launch is March 2020, and it will be produced from studios in Miami. Again, our advantage in launching this new television network is a threefold: Our vendor strength in the Beauty & Jewelry categories, which are the most popular categories in the Latin American community; our strong management team and connections in Miami; and our strong relationships with MSOs, ISPs and broadcasters to secure distribution for this new service.

Also included in our new plan is the growth of our iMedia web services, which today is our third-party logistics business that provides 3PL services to G-III Apparel for some of its key direct-to-consumer brands. In the future, we will introduce additional complementary services.

Therefore in July, as a result of these strategic initiatives, we changed our corporate company name to iMedia Brand and launched a new corporate website at imediabrands.com.

I want to thank everyone for their time this morning and remind our shareholders that I was part of the Invicta Investment Group that bought shares priced at $0.75 in early May, which was a price that was approximately twice the market price at that time. We did that, both Eyal Lalo and myself, because we both knew this business well and understood the significant value creation opportunity here in the hand of the right kind of long-term operators.

We also knew there was a lot of smart work needed to be done quickly to re-establish profitability and introduce a new culture with an entrepreneurial attitude and edge. We did that, so that part is complete. However, we know there is still a lot of hard work required to complete this turnaround, which includes: Reigniting revenue growth at our flagship network, ShopHQ; the launch of 2 new television networks, Bulldog and LaVenta; and the continued growth of our iMedia web services. I look forward to leading this passionate team of employees and vendors on this 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 second quarter. Michael?

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Michael R. Porter, iMedia Brands, Inc. - Senior VP & CFO [4]

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Thanks, Tim. I'll start with an overview of our second quarter financial performance then provide expectations for Q3 and Q4. Our results in the second quarter reflect a concerted effort to break the negative trends of the last 3 quarters where we reposted significant adjusted EBITDA losses. We were able to accomplish at this by slowing our revenue declines, improving our gross profit rates and significantly reducing our run rate expenses, with the elimination of $15 million annually in overhead. This all resulted in positive adjusted EBITDA and an $8.7 million improvement compared to the first quarter.

Consolidated net sales for the first quarter were $131.5 million, which was a decrease of 12.8% when compared to the second quarter of last year. This compares to a 16% decline in the first quarter and a 15.7% decline over the previous 3 quarters combined.

Over the last 3 years, net sales in the second quarter have been approximately 5% less than the net sales in the preceding first quarter. However, this second quarter, we achieved flat sales compared to the first quarter. We believe that this improvement is a strong signal that our revenue performance appears to have stabilized as we are reestablishing our operating fundamentals.

Our return rate was 19.8% in the quarter, which was an increase of 110 basis points year-over-year. This increase was driven by rate increases in both our Fashion & Accessories and Beauty & Wellness categories. Our return rate was 40 basis points better than the 20.2% rate reported in the first quarter.

Our average selling price in the quarter was $68, a 24% increase year-over-year. This was primarily attributable to higher ASPs in the Jewelry, Watches, Home and Beauty categories, combined with a sales mix shift into the higher-ASP categories of Jewelry & Watches.

Our gross margin rate in the first quarter was 36.3%, which was 790 basis points better than the 28.4% rate recorded in the first quarter and still 330 basis points better after adjusting for the $6 million inventory impairment that was recorded in the first quarter. The improvement compared to the first quarter was driven by rate improvements within Fashion & Accessories, Beauty & Wellness and Home & Consumer Electronic categories.

Our second quarter operating expenses totaled $57 million. This includes $5.2 million in restructuring expenses related to the 20% reduction in nonvariable workforce that occurred within the quarter. Our distribution and selling and general and administrative operating expenses combined to decrease 8.7% or $4.7 million compared to the first quarter. This meaningful improvement reflects the restructuring that enabled us to create a flatter and more nimble organization.

Variable expenses as a percent of net sales were 9.5% for the quarter compared to 9.8% in the first quarter. As a reminder, variable cost include our primary operational functions, our customer solutions group, our fulfillment and logistics center and our credit and payments group. The improvement in rate compared to the first quarter, when we had the same sales volume, was primarily driven by sales mix shift into the higher-ASP categories of Jewelry & Watches, which by design, reduces our variable expense rate.

Moving on to the balance sheet. We closed the second quarter with cash of $21.6 million and additional $5.7 million of unused availability on our revolving credit facility. Our net debt was a $48.5 million. These balances reflect the $11 million in additional working capital secured at the end of the first quarter related to the Invicta Watch Group investment transaction. This transaction included a $6 million sale of stock at $0.75 per share and a $5 million increase in our vendor line of credit with the Invicta Watch Group family of brands. Our inventory balance at the end of the second quarter was $62.4 million compared to $65.4 million at the end of the second quarter of 2018. This year-over-year decrease reflects the $6.1 million inventory impairment in our Home and Fashion categories that was recognized in the first quarter.

Regarding capital expenditures. During the quarter, we spent approximately $1.7 million on capital projects primarily reflecting investments and upgrades to our website and IT infrastructure. We now expect capital expenditures to be between $7 million and $8 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.

In terms of our outlook. We expect continued revenue declines in the third and fourth quarters, but at a decreasing year-over-year rate as we demonstrated in the second quarter compared to the first quarter. Similarly, we expect continue adjusted EBITDA increases in the third quarter and fourth quarters, but at an increasing year-over-year rate.

Like Tim, I am pleased with our second quarter performance. This quarter was about setting the foundation to execute on our new interactive media growth strategy, and we believe we are in a much better position now than we were 3 months ago. We look forward to speaking with investors in the coming months and sharing our strategy as we continue to work to unlock value in this company.

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 is 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 [2]

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Certainly nice to see the results coming in ahead of your prior guidance here in the second quarter. I'd love to ask, I know this is subsequent to the quarter, but last week, changing the name of the TV network back to ShopHQ, has there been enough time to see any immediate trend? Is it fair to assume that sometimes, when brands like yours change the name of the network, is it the expectation that you're going to be taking a step back to take 2 steps forward in the future? Or is it possible just because your customers remember the ShopHQ name from not too long ago, that perhaps there hasn't been as much impact? Just trying to figure out what you've seen here in the past week with the name change.

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [3]

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Alex, thanks for the question. So on the name change, we tried to -- since the network has changed its name a couple of times, we tried to learn from the past. And we started with this name change about 6 weeks ago. It was teasing it on air with email campaigns. We actually sent a postcard signed by me to our top customers letting them know about it. So we wanted them to bring along on the journey. We had contests on air where they talked about our new logo.

And so when we made that final turn, which was last week, it was no big thing in terms of impact, in terms of customer, in terms of the website penetration, all those different things that we did see an impact on in 2015. We didn't see any kind of impact that lasted more than a couple of days as we shifted over on everything. So we were very pleased with our prepromotional efforts to make sure that the customers knew about this change.

And you're right. Since we moved back to the name we were before, there was certainly some muscle memory there.

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

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Well, that's certainly good to hear. And it certainly sounded like you have a number of exciting irons in the fire here. Curious with the upcoming launch of the loyalty program in November. Is that something that's really going to be targeted towards getting your best customers to spend more? Is there any anticipated negative impact to gross margin in Q4 associated with that?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [5]

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Yes, no, that's the great thing about this program. So first, in terms of design and intent, it is really to engage both our heaviest and most frequent buyers as well as attract and engage new customers. Certainly, around the proposition of when they joined our royalty program, getting refunds for their shipping charges is something that we think will be very engaging for them. So it is a program that we're familiar with. We've been talking to these folks for a long time, and so we look forward to rolling it out. And it would not and will not be a drag on gross profit, if that's the question. It's not designed to cost us additional monies for that.

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

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Okay. And then I thought that certainly interesting, the launch of LaVenta upcoming in March. And it sounds like that's going to be broadcast out of Miami. Can you tell us where you're going to be broadcasting from? And are you expecting to have meaningful CapEx, think this year or early next year, related to set construction, cameras, things like that?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [7]

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So we will be -- we're building out a studio in the Invicta headquarters in Miami. So that will be -- in terms of additional cost and capital outlay, it won't be material because we're taking advantage of an existing facility already in the market with existing relationships. So that part of capital spend and an ease of transition is one of the important reasons why we moved in this direction with LaVenta.

So I think we're set on that as well as set on the launch with Bulldog. We have plenty of equipment here in Minnesota that we'll be using. Some of it will be moved down to [Minnesota], some of it will be used for the additional airtime recording that we'll be doing for Bulldog. But it is not a material amount of capital. That's the great thing about this model that's been replicated in general entertainment as well, where you have a major network, call it HGTV, that then launches a Fine Living or something like that.

We have the infrastructure, the talent, the producers, the vendors and relationships and the important relationships with the distributors to put up these new networks with relatively little incremental cost compared to the moat around what anybody else would have to do to get into this business. So it's something that we feel good about and we are on track with.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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And then lastly, if I could just ask gross margin. Obviously, that was under a lot of pressure in the fourth quarter, in the first quarter, much better here in the second quarter, a little bit better than we had been looking for. Can you talk about what's driving that? Because it sounds like your return rates were still up year-over-year. So has that been mix? Has that been some other factor? Do you feel like that improvement on gross margin can be sustained? Or do you need an improvement in the return rate to drive things further?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [9]

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Well, let's take a step back. So 90 days -- we've been here 90 days, and there's a lot of fixing to do on the revenue side, as we talked about, and on the gross margin. And that means when we talk about gross margin, we mean merchandise margin and we mean shipping margin. They all work together. And so other than providing any kind of color in terms of guidance on gross margin, I just can tell you that the main focus of what we're doing is building plans that have a line of sight that moves out more than 30 days, which is what the company's historically used as a line of sight on how it builds its business.

So with a longer runway on how we plan together with our vendors and how we build the product assortment over a 96 -- a 90-day, 6-month period, will in our view, naturally translate to stronger gross margin, stronger coordination on shipping promotion, stronger coordination on the product assortment that we think will engage the airtime that we're providing. Those are the kind of things of how we're taking care of gross margin or why we think long term, we will have a strong gross profit percent more so than we've had in the past. But other than that, it's just too early to give you any kind of forecast.

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Operator [10]

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Thank you. We've reached the end of our question-and-answer session. I'll now turn the call over to Tim Peterman for closing remarks.

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [11]

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I want to thank everybody for joining us today, and we look forward to talking to everybody again next quarter as we continue this journey. Thank you.

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Operator [12]

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