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Edited Transcript of EVLV earnings conference call or presentation 20-Nov-19 1:30pm GMT

Q3 2019 iMedia Brands Inc Earnings Call

Eden Prairie Dec 16, 2019 (Thomson StreetEvents) -- Edited Transcript of iMedia Brands Inc earnings conference call or presentation Wednesday, November 20, 2019 at 1:30:00pm 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

* Mark Nicholas Argento

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities

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Presentation

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Operator [1]

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Greetings and welcome to the iMedia Brands Third 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 iMedia Brands. Thank you. You may 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. 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.

I would also like to remind everyone that this call will be available for replay through December 4, 2019, starting at 11:30 a.m. Eastern today. A webcast replay will also be available via the link provided in today's press release as well as on the Investor Relations section of the company's 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 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 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 the CEO of iMedia Brands, Tim Peterman. Tim?

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

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Thank you, Michael, and good morning, everyone. Before I highlight our continued financial, operational and strategic successes achieved this past quarter and the past 6 months since I joined in May, I want to explain the significance of our Shaquille O'Neal partnership announced yesterday. Specifically, I want to provide the color as to why we work so hard to make this happen and why we believe the size of this opportunity is so significant.

Shaquille is more than a celebrity to us, we know him. We know his work ethic, what kind of partner he will be and how good of an entertainer and entrepreneur he is. That is the why. He's that rare authentic personality who has grown beyond his achievements to become, what I would consider, a pop cultural icon. Everybody loves Shaq. We also think, inquiring minds, both men and women, young and old, want to know what his life is like, offstage that is behind the curtain.

What is it like in the kitchen with Shaq? What does he cook? What kind of kitchen appliances does he use? How did he use them? What are his recipes? Our programming plan in year 1 is to broadcast from Atlanta, a live weekly 1-hour program called, In the Kitchen with Shaq. This will feature Shaquille, along with his family and friends, talking about and using his Shaq-branded innovative assortment of kitchen appliances and related kitchen products. The first airing will be in March 2020. We estimate the financial opportunity here is meaningful.

From an annual revenue perspective, on just our television retailing platforms, we expect Shaq to become our largest brand. While our television retailing platforms will generate significant revenues annually, it will also serve as an important promotional storytelling video platform to drive a robust retail revenue opportunity and an emerging live streaming shopping revenue opportunity in the over-the-top platforms like Roku, Apple TV and Netflix.

Shaq's iconic status, combined with our television retailing expertise and platforms, create a unique opportunity for us to build a profitable business that we believe could exceed $200 million in annual revenues rather quickly. I would also like to note that this partnership could not have been crafted nor completed if not for the group effort of Shaquille and his strategic advisers working with us on the big and small element of launching this partnership. A special thanks to Perry Rogers, CEO and Founder of PRP; and Jamie Salter, CEO and Founder of Authentic Brands Group.

With the importance of this partnership now explained, let's turn our attention to the third quarter results. Prior to my arrival in May, the revenue decline for the previous 6 months was 17.2%. During these past 6 months, we successfully reduced that decline to 12.7%. We accomplished this by launching multiple exciting brands, making important staffing changes, simplifying the promotional framework and introducing an innovative loyalty program. Although the revenue decline did slow, it did not slow as fast as we wanted. The reason, the merchandising effort in the company was more troubled prior to my arrival in May than we previously expected, particularly in the 2 long lead businesses of Home and Fashion. We do expect to arrest the revenue decline in Q1 2020 and position the company for full year revenue growth in 2020.

I'm expecting great things from 7 new brands joining our network: A new beauty brand from a national lifestyle expert, Danny Seo; a new home brand from internationally renowned artist, Romero Britto; a new jewelry brand from our very own host, Heather Hall; a new brand for dogs from John O'Hurley; a new fashion brand from Heather Dubrow; an existing fashion brand, Leota, which is a popular size inclusive women's brand; and a new food brand from Bear Creek Cattle Company Stakes. This Friday marks the launch of another revenue catalyst, the Bulldog Shopping Network, a male-oriented television network with a brand promise to do things differently. The network will launch in 4 million U.S. television households and expects to roll out to 25 million households over its first 60 days. Certainly, exciting times here at iMedia as we create momentum for the holiday season and for 2020.

With that, I will turn it back over to Michael Porter, who will go into a bit more detail on the financial and operating results for the third quarter. Michael?

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

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Thank you, Tim. I'll start with an overview of our third quarter financial results, then provide expectations for Q4. Our results in the third quarter reflect continued progress to improve profitability and return the business to growth. We were able to slow our year-over-year revenue declines and improve our gross profit rate. In addition, we have significantly reduced our expenses as we transform the organization into a flatter and more entrepreneurial culture.

Consolidated net sales for the third quarter were $115.2 million compared to $131.7 million in the third quarter of last year, a 12.6% decline year-over-year compared to a 12.8% decline in Q2 and a 16% decline in Q1.

On October 16, we launched a new revenue catalyst, an innovative loyalty program called ShopHQ VIP. It is still early, but the initial response from our customers has been very positive, and we firmly believe that this new program, which provides refunded shipping and cash back on all ShopHQ purchases will be a meaningful benefit for our customers.

Our return rate was 19% in the quarter, which improved 90 basis points from the same prior year period. This improvement was driven by return rate reductions within the Watches, Fashion & Accessories and Consumer Electronics categories.

Our average selling price in the quarter was $66, a 5% increase from $63 in the year ago period. This was primarily attributable to price increases in the Jewelry and Home & Consumer Electronics categories, combined with a product mix shift into Jewelry & Watches.

Our gross margin in the third quarter increased 30 basis points to 36.1% compared to 35.8% in the year ago quarter. The improvement was driven by strong discipline to increase profit rates, which helped to offset slight mix pressure. Our third quarter operating expenses decreased 15% or $8.1 million to $47.4 million. This includes $1.5 million in restructuring expenses related to a workforce reduction that occurred within the quarter. The decrease in operating expenses was primarily attributable to distribution and selling expenses, which declined 19% or $9 million compared to the third quarter of last year. This meaningful improvement reflects the continued restructuring efforts that has enabled us to create a flatter and more nimble organization with improved lines of accountability and decision flow.

In addition, it reflects favorable reductions in content distribution and reduced variable expenses as a result of lower unit volume. Our progress toward improved profitability continues at a rapid pace. We generated an adjusted EBITDA loss of $986,000 in the quarter, which was a 77% improvement compared to the third quarter of 2018. Our adjusted EBITDA loss over the last 6 months of $775,000 shows tremendous progress compared to the $14 million loss, the previous 6 months.

Moving on to the balance sheet. We closed the third quarter with cash of $16.6 million and an additional $6.3 million of unused availability on our revolving credit facility. Our credit facility provides up to a $90 million revolving line of credit, as supported by our borrowing base and a term loan, which matures in July of 2023. As of the end of the third quarter, we had $53.9 million outstanding on our line and $15.5 million on our term loan. Our inventory balance at the end of the third quarter was $82.8 million compared to $86 million at the end of the third quarter of 2018. We believe that we are at the right inventory level to fuel our sales expectations for the holiday season.

Regarding capital expenditures, during the quarter, we spent approximately $1.9 million on capital projects primarily reflecting investments and upgrades in our website and infrastructure. We expect similar levels of CapEx in the fourth quarter as we had in the third quarter, which will result in approximately $7.5 million in CapEx for the full year.

From a tax perspective, we have approximately $338 million in federal NOLs that are available to offset future taxable income.

In terms of our outlook, we expect continued revenue decline in the fourth quarter, but at a decreasing year-over-year rate than in the second and third quarters of 2019. We also expect adjusted EBITDA to turn positive in the upcoming fourth quarter.

Overall, we made significant progress during the quarter in expense management, expanding our capabilities and entering partnerships with exciting new brands and personalities. We remain incredibly confident in where we stand and believe the recent brand launches, partnerships and upcoming network debut of Bulldog will serve as catalyst for growth in the coming quarters. We look forward to updating you on all of these exciting initiatives as they progress.

This concludes my prepared remarks. Now I'd like to turn the call back over to the operator for Q&A. Operator?

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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 Mark Argento with Lake Street Capital Markets.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [2]

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Tim, Michael, just a couple of quick ones. First off, on Bulldog. Is that going to be -- is that streaming only? Or are you guys actually picking up additional carriage on the MSOs?

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

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Mark, and for the question, yes. So for Bulldog, it is 24/7 carriage. It'll launch for -- it'll launch with 4 million on Friday and quickly move out to 25 million over the next 60 days of 24/7 carriage on television.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [4]

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And is that -- are you guys able to get HD carriage? Or what -- where are you guys going to be in the channel spectrum there?

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

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It did -- MSO to MSO. But yes, we are focused on HD as the preferred place to be. We look at -- when we look at distribution, we look at it from a variety of angles for -- whether we have indices about where the male programming has performed the best. We look at that, we look at HD, we look at the DMA. So it's a variety, but we do love HD. We do think that overperforms, and we will focus -- we are focusing on that as the rollout comes through.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [6]

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Got it. All right. That's helpful. And then just pivoting to Shaq, no pun intended, what -- so it looks like 30 -- am I reading this right, 30 annual appearances or shows? Is that accurate? It seems like a lot.

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

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No, I don't think it's enough. So yes, what that means is it's 30 original 1 hour programs that will be a weekly show for us. So it's a weekly 1-hour show. It will be filmed in Atlanta. And when those 30 original shows, well, it's like a season, right? So you'll have those repeat sometimes through the year. But we're excited, obviously, about the Shaq. We think it's a very big opportunity for a variety of reasons, both on television retailing as well as retailing. And we think these shows are going to be unique, and we think our audiences are going to really enjoy them.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [8]

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And in terms of the product set that he'll be selling, are you developing those products with him? And does he already have some products that he's developed or his team? Can you talk a little bit about how you're going to merchandise that event?

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

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Yes, it's a complete collaboration. So Shaquille, with our merchandising teams, we're collaborating and creating them together. So whatever products that you see come out with label, Shaq, are a collaboration of our efforts. It's not a licensing deal where we're just providing the product. This is -- really Shaq has a lot of passion in this area, and we're working these products out together.

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Mark Nicholas Argento, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst, Founding Partner & Head of Institutional Equities [10]

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And then just one more for me, and then I'll hop back in the queue. But -- so as you're remerchandising, put a bunch of new brands on rebranded and launching the new Bulldog, what are you guys thinking? Or how are you thinking about driving additional viewership, in particular, social media, some of the other ways to actually introduce these new brands to a broader audience other than the people that are just watching the channel right now? Because to me, that seems like the biggest opportunity once you re-establish some of these new or establish some of these new brands to get up in front of a much broader audience.

So maybe I don't know if you have any ideas of to talk to some of the things you guys are thinking about as you launch, get more aggressive, that would be great.

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

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Yes. Sure thing, Mark, so when you think about it, an entertainment service or a network in general, it's really defined by the quality and the hit of their shows and their personality. So our plan for inviting new people to come and participate in our experience is really about bringing new brands.

As I mentioned earlier, the Home and Fashion categories, which are really exciting categories for us, hasn't been developed for this fall like we had wanted, and now we're working on making sure that the spring is very elevated with new faces that will bring new customers and new authentic experiences to the network. It's just advertising. ShopHQ is never going to resonate. It's about -- like an example would be Shaq. The amount of people that will explore our network as we promote and talk about Shaq in the home, which, again, we talked about Home being -- if you look at the commonality of the brands that I've talked about so far, they're all in Home and Fashion. And these are the areas that we had to take inorganic approaches to bring in new customers.

So we think with the brands that we're launching and a few more coming soon, that those brands will be how we bring in new viewership. I think that's the way that the -- that's the best way for us to broaden the appeal of our channel -- channels.

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Operator [12]

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(Operator Instructions) Our next 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 [13]

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I wanted to ask a few more about the Shaquille O'Neal partnership. That certainly sounds like a big pillar of your strategy here over the next couple of years. Tim, you mentioned the target of getting the $200 million in revenue, and that there might be some retail component. Can you help to just size this up for us a little bit? Can you give us a sense of how much revenue you think this partnership can generate, just within the 1 hour of weekly programming? And then as you look kind of 2, 3, 4 years out, how should we envision a retail strategy with this partnership?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [14]

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Thanks, Alex. When you think about Shaquille and you think about this business that we're creating, it's -- we keep it very, very simple in terms of the rollout strategy. We are using the 4 corners of our television screen, which is our television retailing networks, that being ShopHQ and Bulldog, to launch and explain and demonstrate until the stories behind why Shaq is developing this product and why and how he uses it. We think that form by itself will generate a lot of viewership and a lot of revenue.

But it's a unique promotional platform, and that's the key that we think -- that's the unfair advantage, we think we have as we begin to drive a retail opportunity with a -- whatever the type of mass distributor, there's the targets of the world, something like that. We think that our television promotional platform will help create the demand that will make that opportunity even more robust than you would normally think a celebrity, an icon like Shaq would do with this category.

So that combination works together. And then the other thing that we are excited about is that Shaq is a personality that's very interesting to all ages, men and women, particularly when Shaq's going to be on there with his family, he's going to be on there with this mom. There's going to be a lot of different elements to it that make it interesting to a lot of different age groups.

And so when we move into the arena where you say, the OTT arena, which is at the emerging area and particularly emerging for our customer demographic. But as we reach more and more demographics that are different than today, the ones we have today, we want to use a opportunity with Shaq as we build out these products to make sure that we move into those categories in a way that is exciting for that audience. And I think that is another opportunity for us in the OTT space with Shaq. We think that there's -- he is uniquely qualified to be very interesting in that area.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay. Great. That's really helpful. And then looking ahead a couple of days to the launch of the Bulldog, it sounds like you're going to be in 4 million homes pretty quickly moving to 25 million. Can you talk about how those homes were selected? Where you're going to be for the first 60 days? And then what are some of the signposts that you're going to be looking at over the next 3, 6, 12 months as you decide whether or not you want to scale it up from 25 to a more substantial number of homes?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [16]

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Sure. So when you think about the distribution model for Bulldog, and it's different than ShopHQ and LaVenta, when we launched that in March, will be different than Bulldog and ShopHQ. But we start with just understanding where the audiences are, where the demographics are doing well, and we use our national platform, ShopHQ, to better understand that. So we look at by market, we look at by distributor, whether that's Comcast, Spectrum. We look at the quality and the viewership versus buying. So there's many different KPIs we look at when we look at whether we want to be in a market or not with a service. And with Bulldog, we really focused on patterns where we saw the highest concentration of male shoppers.

And so the first bar, we looked at was that, then we look to, are there HD homes in that area because we know that after you look at where the men -- where the male shoppers are performing the strongest, then we look at the HD neighborhoods and decide that's the second priority. Then when we look at that, we look at, okay, what major markets versus B and C markets do we want to be in? And that -- those are really the criteria we use, as we put together a launch plan. And that's balanced, of course, with cost and rolled out accordingly. And we feel that the service Bulldog is not of 100 million home service. We think it'll move probably into the 40 million to 60 million home arena when complete.

Now it will also have part-time distribution. 24/7 is the 40 million to 60 million. But for men, there might be a programming block that we have in a regional sports network. It won't just be 24/7. It will be part-time carriage. It'll also be a much heavier presence online than the traditional ShopHQ even because of the demographics of how the male shops and the time periods at those times that he does shop.

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Alex Joseph Fuhrman, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Okay. That's helpful as well. And then one last question. A couple of companies have been commenting about the impact of the later Thanksgiving this year. I would imagine that, that creates a little bit of a headwind for you guys just having a shorter holiday shopping period before your last date that you can ship before the holiday. Can you talk a little bit about what that headwind has been historically? Obviously, you're guiding to a smaller year-over-year decline in Q4, in spite of that, but can you just comment on what historically that has meant for your business?

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Timothy A. Peterman, iMedia Brands, Inc. - CEO [18]

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Yes. So the -- I characterize it as BFCM, like Black Friday, Cyber Monday. Let's call it, the 10 to 13 days, it's a pretty important window. And obviously, when Thanksgiving happens is always relevant. But there are many other relevant factors and catalysts that go on every year. So we don't think it's going to be materially different of an opportunity for us, and we actually think this year is going to be stronger, regardless of that timing issue, certainly because we launched the new loyalty program. We have new programs coming on. We've really simplified the promotional framework where we think it engages the customer in a much easier way.

So when we think about these important 13 days, it's -- we are far more bullish about this year than last year or even the year before because of the new elements we've added to it.

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Operator [19]

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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, iMedia Brands, Inc. - CEO [20]

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Listen, we really appreciate everybody's time this morning. We are looking forward to a robust Q4 and a strong 2020, and we'll talk to everybody soon. Thank you.

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Operator [21]

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