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Edited Transcript of HSNI earnings conference call or presentation 22-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 HSN Inc Earnings Call

ST. PETERSBURG Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of HSN Inc earnings conference call or presentation Wednesday, February 22, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Felise Glantz Kissell

HSN, Inc. - VP of IR

* Mindy Grossman

HSN, Inc. - CEO

* Rod Little

HSN, Inc. - CFO

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Conference Call Participants

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* Eric Sheridan

UBS - Analyst

* Heather Balsky

BofA Merrill Lynch - Analyst

* Alex Fuhrman

Craig-Hallum Capital Group - Analyst

* Zack Silver

FBR Capital Markets - Analyst

* Matthew Harrigan

Wunderlich Securities, Inc. - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning, and welcome to HSN Inc. fourth quarter and full year 2016 earnings conference call and webcast. This call is being recorded. Following the conclusion of today's discussion, the HSNi team will be taking your questions. With that, I'd now like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations. Ms. Kissell, please go ahead.

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Felise Glantz Kissell, HSN, Inc. - VP of IR [2]

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Good morning, everyone, and thank you for joining us. On this morning's call, we have Mindy Grossman, Chief Executive Officer; Rod Little, our new Chief Financial Officer at HSNi; and Judy Schmeling, Chief Operating Officer and President of Cornerstone Brands.

Mindy will first say a few words before Rod reviews our financial performance. Mindy will then strategically discuss the business. As always, some of the statements made on this call may be forward-looking, and as such, are subject to many factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements.

Additional information regarding these factors, as well as various risks and uncertainties can be found in HSNi's earnings release filed with the US Securities and Exchange Commission and available on the Company's website. HSNi does not undertake to publicly update or revise any forward-looking statements. In addition, on today's call, there will be references to certain non-GAAP financial measures.

These are described in more detail in the Company's earnings release and SEC filings available on the HSNi website. You are encouraged to refer to the press release and SEC filings, and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results. With that, I would now like to turn the call over to Mindy.

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Mindy Grossman, HSN, Inc. - CEO [3]

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Thanks, Felise. Good morning, and thank you for joining us on today's call. Before Rod reviews our financial performance for the fourth quarter, I wanted to welcome him to our Executive team. As you know, Rod joined as CFO of HSNi last month and this is his first earnings call with us.

We look forward to Rod's significant impact on the business. We also have Judy Schmeling with us, who all of you know as an additional resource to answer your questions. will now turn the call over to Rod to discuss (inaudible) in detail.

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Rod Little, HSN, Inc. - CFO [4]

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Thank you, Mindy, and good morning, everyone. I am very pleased to be at HSNi, and I am excited to partner with Mindy and the team to evolve our strategy with a focus on growth, optimal resource allocation, expense management and value creation. We will focus on a few key measures to judge success as we move forward, notably sales growth, gross margin improvement and operating leverage. I also look forward to getting to know all of you better over the coming months.

Now let's review our fourth quarter results. As someone who has been at consumer centric companies for over two decades, I can attest that 2016 was a challenging year in retail. This environment compounded our performance as we made strategic changes in the business to benefit the organization longer term. Our actions included: Addressing under performing product categories; standardizing shipping and handling practices at HSN; driving our supply chain optimization initiative; and divesting two businesses, TravelSmith and Chasing Fireflies, which distorted our year-ago comparisons.

At HSNi, sales decreased 2% in the fourth quarter with digital up 4%. Excluding the effect of TravelSmith and Chasing Fireflies on our 2015 results, in addition to a 14-week period this year compared to a 13-week period last year, all related to Cornerstone, sales were down 1% at HSNi. Gross profit decreased 260 basis points with operating expenses down $8 million or 3%.

GAAP and adjusted EPS were $0.82, compared to year ago of $1.12 and $1.15, respectively. Included in these results, we had a charge of approximately $16 million, or $0.19 per share, related to the implementation of our supply chain optimization initiative at the Piney Flats, Tennessee facility. We expect the business will ultimately realize financial and operational benefits from this transformation upon its completion through increased labor efficiencies, greater space utilization, lower transportation cost, and faster customer deliveries.

At the HSN segment, sales decreased 1% to $769 million. Excluding the sales in the prior year from the initial rollout of the wholesale expansion of our Ingenious Designs business associated with the Joy Mangano brand, and a direct response television marketing campaign, sales increased 1%. Sales grew in wellness, culinary, and electronics, offset by lower sales in jewelry and fashion. Wellness was driven by our nutritional supplement business, as well as the introduction of innovative health solutions.

Culinary grew largely due to the continued diversification and growth of our Chef portfolio. And Smart Home led electronics. In jewelry, we again pulled back airtime to improve productivity. And finally, in fashion, we reconfigured an apparel brand, exited an intimate business, and moved through seasonal apparel.

We also had lower shipping revenues, largely from changes in our standard shipping rates that took effect in August, as we articulated on our last earnings call, and increased promotions. Digital sales grew 9% with digital penetration increasing 440 basis points to 48%. HSN's return rate improved 110 basis points and units shipped grew by 2%. Average price point decreased 2%, primarily from increased promotional activity and product mix.

Gross profit decreased 9% to $230 million, with gross profit margin down 250 basis points to 29.9%, primarily driven by the supply chain optimization implementation, which included increased freight, packaging and labor cost, changes in product mix and higher shipping cost rates. Excluding the impact of the supply chain optimization implementation, gross profit decreased 4% and gross profit margin was down 90 basis points.

Adjusted operating expenses increased 2% to $154 million, excluding non-GAAP adjustments, and increased 1% with these adjustments. We incurred approximately $3 million related to the supply chain optimization effort, largely associated with additional consulting fees. Aside from these costs, operating expenses remain unchanged. Adjusted EBITDA decreased 25% in the fourth quarter to $76 million, and down 9%, excluding the impact of the supply chain optimization implementation. Operating income decreased 27% to $65 million.

Turning now to Cornerstone, sales were down 5% to $304 million. Excluding the impact of the divestitures and the benefit of the additional week, sales decreased 1% due to certain home brands. Importantly, both Garnet Hill and Improvements had sales growth in the fourth quarter. Digital sales penetration at Cornerstone increased 130 basis points to 73%. Gross profit decreased 12% to $106 million, and gross profit margin decreased 270 basis points to 34.7%.

Excluding the divestitures, gross profit decreased 2%. The home brands, in particular, experienced lower shipping margins driven by higher promotional activity. Adjusted operating expenses, excluding non-GAAP adjustments decreased 11% to $93 million, with a similar decrease, including these adjustments. Excluding the divestitures, operating expenses increased 4%, primarily due to an increase in digital marketing efforts, partially offset by lower catalog cost as the portfolio intensifies its digital strategies.

Cornerstone's adjusted EBITDA was $12 million, a decrease of $2 million from the prior year. Excluding the divestitures, adjusted EBITDA declined $6 million. Fixed costs of approximately $7 million annually will be absorbed by the remaining Cornerstone brands. These costs are largely associated with fixed expenses related to our distribution centers and will be reduced over time.

As part of my responsibilities, I will be evaluating our capital allocation opportunities, taking into account our focus to drive value for our shareholders. We have 2.7 million shares remaining under our existing share repurchase program, and our Board just approved our quarterly cash dividend of $0.35 per share payable March 22 to shareholders of record as of March 8. Looking forward, I am confident that we are taking the appropriate actions to improve our performance, and we expect to see sequential improvement as the year progresses.

Mindy will be reviewing are growth strategies next. We expect to incur incremental cost in the range of $8 million to $10 million, primarily in the first half of the year, related to our supply chain optimization initiative largely from increased labor and consulting fees. Beginning in the second half, we will be lapsing our TravelSmith and Chasing Fireflies divestitures and the impact from our new shipping and handling standards at HSN, allowing for cleaner comparisons.

As I mentioned in the beginning of my remarks, my primary focuses to optimize our portfolio for growth that will include efficient and effective resource allocation, and a rigorous expense management discipline to drive shareholder value. I will keep providing ongoing updates on our progress. Now I will turn the call back over to Mandy.

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Mindy Grossman, HSN, Inc. - CEO [5]

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Thanks, Rod. As I reflect on 2016, it was clearly a year of disruption in retail. Consumers were distracted and remain cautious, putting pressure on spending that fueled a heightened promotional environment. While not immune to these factors, we remain committed to our strategy and took action that we believe will strengthen our brands, from building our assortments to elevating our content and data capabilities, and to investing for a competitive advantage.

These efforts also included continuing our strong emphasis in digital, which now represents 55% of our business, with mobile at 45% of digital sales. We expect our hard work and learnings from 2016 to position 2017 as a year of growth regeneration, building strength in the business as the year progresses. At HSNi, we are committed to restoring top line performance by emphasizing five immediate priorities. One, driving customer acquisition, retention, and spend. Second, optimizing digital platforms, particularly, mobile, which we consider our flagship.

Third, advancing our distributed commerce capabilities. Fourth, attracting and developing talent across the organization. Five, and most importantly, the foundation of our business, building upon a proprietary product pipeline, and investing in key consumer growth categories and experiences.

We will be executing against these priorities while investing in operational execution for future efficiency and leverage, as Rod mentioned. At HSN, we have withstood tremendous market challenges over the past year with our most loyal customer intact, and up slightly in the quarter. Our core business had sales growth, and we did seek sequential improvement in our overall customer file, although the 12-month file was down 3% with infomercials and fitness the primary factors.

We have initiatives underway that I will discuss in a moment that are demonstrating results. In fact, the infomercial category had sales growth in the fourth quarter after six consecutive quarters of sales decline, which is encouraging as we believe this represents a resurgence of opportunity for us. We remain focused on restoring growth to our overall customer file.

We intensified our brand awareness effort to further engage with current customers and attract new customers to the HSN experience. Our efforts in the fourth quarter included doubling our targeted marketing reach; extending our frictionless commerce experience that included a successful VISA Checkout holiday campaign, which added thousands of new customers; launching innovative personalization enhancements that employed analytical machine driven decision making; evaluating new artificial intelligence experiences by a voice controlled interfaces, including Amazon ECHO, Google Home, and Chatbox; delivering a contextual commerce experience and community inspired content; and finally, implementing an advanced internal search engine across the HSN digital properties that will also power product recommendations.

We are leveraging digital for accelerated growth through a targeted spend, data analytics, customization and personalization, as well as content distribution. This approach, as Rod mentioned, resulted in 9% digital sales growth, now reaching 48% of the total HSN business, which is a new milestone. Conversion was strong through our optimization efforts with traffic virtually unchanged. Mobile sales grew 19%, now reflecting 26% of our total business, and 54% of our digital sales.

We believe that a mobile device is no longer just a point-of-sale or a means of check out. It's increasingly our first point of contact, and maybe the only form of engagement we have with certain consumers. During 2017, we will deploy resources to support our digital and mobile opportunities through targeted experiences based on segmentation to ensure the right content and product are aligned for the customer, a customized app that is personalized to drive discovery, engagement, and ease of purchasing; social conversation throughout our digital platforms highlighting community interactions, unique digital events to support distinct offers, drive urgency, and deliver new discoveries; video content strategically infused within experiences and the launch of a full video library; and expanded distribution through HSN partners, entertainment opportunities, innovators and influencers, marketplaces, social commerce, and OTT platforms.

Recognizing that there are shifts in live television consumption patterns, we're accelerating our content development and distribution across alternative platforms to complement our own on-air brand experience. Nonetheless, we do benefit from broadcasting into over 90 million homes, a valuable differentiated marketing vehicle. In the fourth quarter, we worked extensively with our key partners such as Facebook.

We created various tests of quick, unique product offerings that we will scale in 2017. And to date, we have premiered over 70 Facebook live events. In addition, we continue to collaborate the key personalities to amplify our brands to their extensive followings. As an example, in the fourth quarter, we intensified our partnership with Wendy Williams by integrating HSN products into her highly followed show.

And just last month, as part of our launch strategy with NASCAR's Danica Patrick, we distributed original video content to ESPN's digital platforms to raise awareness. We are also creating new destination programming in wellness, beauty, and fashion to elevate and contextualize the depth of our customer experience by using storytelling and content. This quarter alone, our remote events will include Andrew Lessman, with a live broadcast from his ProCaps Laboratory in Las Vegas; Benefit Cosmetics, a behind the scenes look at the Benefit Pink Palace offices in San Francisco; and Tony Robbins, a visit to Tony's home for a series of multi-channel experiences.

As part of our entertainment integration strategy, next month we will, once again, partner with Disney, this time on the highly anticipated Beauty and the Beast to offer a captivating commerce experience inspired by the movie. Disney is putting an amplified marketing effort behind this film, which has already received more views of its official trailer than any other film in history, 128 million views just in it's first 24 hours.

HSN will be prominently showcased on Disney's extensive platform. This will feature social media influencers, not only with an appearance on HSN, but also on Disney's Facebook pages, as well as Disney creating a Snapchat story highlighting the collection. Disney's popular fashion inspired blog, Disney Style, will also generate content dedicated to the HSN collection and event.

Following our Disney event, we will celebrate Music City in Nashville, exposing customers to performers who have developed exclusive collections for HSN. The new brand launches will include Sheryl Crow's first fashion collection; LaBellum by Hillary Scott of Lady antebellum; Patricia Nash handbags; and Kimberly Schlapman of Little Big Town with kitchen. As Rod reviewed, we had success in categories such as wellness, culinary, and electronics, which delivered growth in the fourth quarter, and will be distorted going forward while we take the appropriate actions to improve under performing categories such as jewelry that include infusing newness, emphasize proven brands, and maximizing profitability.

Carmen Bauza, our new Chief Merchant at HSN, has hit the ground running, focused on optimizing our cross-category product portfolio, and expanding our proprietary offerings. Under Carmen's leadership, the following will be areas of emphasis throughout the year. We will leverage our ability to create a holistic multi-category commerce experience focused on consumers living their best life, which we refer to as connected life, a hot topic at CES last month.

Technology and innovation have evolved to the point where we can integrate products to enable an enhanced life for our customers, and we plan to offer a broad assortment of products from health and wellness, to connected home, to culinary, to beauty, just to name a few. We are executing this dynamic content in commerce experience through dedicated programming, digital content, community interaction, expert support and education, and innovative products.

As part of this initiative, we will be launching a new weekly destination program series titled Life Well Lived. We're also excited about the successful launch of the Golden Door Spa, a curation of unique health, beauty and culinary solutions for our customers from the world renowned retreat that is coveted by celebrity enthusiasts. We are also intensifying our American Dreams initiative, leveraging HSN's robust history of cultivating entrepreneurs with innovative products.

We've built a number of key partnerships including, Good Housekeeping, the Hispanic Chamber of Commerce, the TV show Hatched, and most recently, CES to help us extend the message and the power of HSN's inspiring American Dreams program. At CES, we targeted tech entrepreneurs in collaboration with leading wearables manufacturer Flex by hosting an expensive product search. Our American Dreams strategy has resulted in nearly 5,000 product submissions and over 120 products already successfully launched on HSN.

We're currently premiering at least two new inventions and/or inventors each week. This initiative celebrates our heritage while positioning us for the future with a strong pipeline of new products and brands. This year, we are also leveraging our 40th birthday with a campaign celebrating 40 Years of Firsts and 40 Years of Innovation. This milestone provides an opportunity to engage our existing customers, and amplify our message to a new audience.

Throughout the year, we will take customers through the past, present, future of HSN, highlighting the innovation we have developed and the relationship we have built over the past four decades. Turning now to the Cornerstone portfolio, we continue to navigate through a highly competitive and promotional retail environment, particularly in home. I believe there's an opportunity to leverage the portfolio to create value through key strategies, focus on intensifying our digital presence to drive commerce, creating 360-degree experiential destinations to increase market penetration through direct and physical sales, and accelerate proprietary product development with faster speed to market, and heightened customization and personalization capabilities.

We have begun realigning the organization to capitalize on our high digital presence, now representing over 73% of the portfolio, an increase of 130 basis points in the quarter. Mobile sales grew 11%, now reflecting 22% of our total business and 30% of our digital sales. Similar to HSN, Cornerstone will be reallocating resources to intensify our digital and mobile efforts, which includes the recent addition of seasoned talent.

We've also introduced another innovative digital concept, our How To Decorate podcast. This ongoing series, launched by Ballard Designs, allows customers to engage directly with guest designers and Ballard specialists. The technology is featured in the iTunes new [annuitable] sections, with over 20,000 downloads to date. Going forward, within digital, we are focused on three key strategic pillars.

One, agility and scalability; two, customer journey marketing; and, third, authority and differentiation. At Cornerstone, a strategic area of growth is building upon our experiential retail environment that represents 360-degree commerce destinations with strategic physical experiences. As you know, our first two experiential retail contests opened last year with Ballard Design studios in King of Prussia and Tyson's Corner malls.

They provide a proof statement that these destinations not only drive their own traffic, but also lift the direct business in their respective markets. We are unveiling four experiential destinations this year, and remain purposeful about their location and the interconnectivity with our overall direct business. Our Ballard Design studio in Nattuck, near Boston, opens today for media with the official opening next week. That includes a social media campaign with bloggers, and a VIP event with our best customers.

This year, we will roll out additional Ballard studio locations in Roosevelt Field, New York and Charlotte, North Carolina. We will also be launching our first [trunkey] destination in Plano, Texas in Legacy II, outside of Dallas this summer. This grand living experience will feature both indoor and outdoor interiors and exteriors, as well as a wine bar, cafe, and concierge service. We will also host a robust calendar of events focused on entertaining and seasonal decorating, as well as designer-led how-tos.

We've intensified our focus on proprietary product development with faster speed to market to capitalize on a first-mover advantage, and to further differentiate and elevate our unique brand positioning within the marketplace. As an example, at [Trucnkaid] and Ballard's, we're building our extensive customization capabilities, which will be prominently featured from our digital platforms all the way through to our experiential retail destinations.

We will also be collaborating with key authorities, including famed designer and artist Judy Ross with a textile collection at Garnet Hill. And Judy's clients include the Ritz Carlton, Four Seasons hotels, et cetera. And at Grandin Roads I look forward to the contributions from our new President Jason Jones. Jason has had extensive leadership roles including at Crate & Barrel, Pottery Barn and Ralph Lauren Home.

In closing, while this past year was challenging, not only for us, but for broader retail, I am optimistic regarding our growth prospects. The foundation we are building provides us with ample opportunity to drive sales growth, optimize our investments in areas such as digital, and realize operational benefits to deliver leverage and scale in the business.

We will apply our hard work and learnings from 2016, along with our extensive history of success to propel improved performance. We remain laser-focused on the actions that I have outlined which we believe will result in a year of growth regeneration. I look forward to updating you on our progress. And now, we will open up the call for your questions. Thank you.

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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 Eric Sheridan with UBS. Your line is now open.

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Eric Sheridan, UBS - Analyst [2]

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Thanks for taking the questions. Maybe just two quick ones. One, maybe you talked about the competitive environment and the consumer behavior in Q4. Want to know, looking at an update as we move into 2017, what you are seeing on either the consumer behavior front or the competitive front? And appreciate all of the detail on the digital initiatives.

There was a lot in there. Wanted to know if we could tease out what you are seeing either from a spend per customer standpoint or a retention standpoint, as people engage with more digital platforms as time goes on? Thanks.

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Mindy Grossman, HSN, Inc. - CEO [3]

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Sure, certainly, we look forward to entering a new year in 2017, given everything in 2016. And I would say as much as we are optimistic as to where the year is going to go, sequentially, there's still some volatility in the environment, but I think we have taken appropriate actions to manage to the lot around our customer focus and engagement. You mentioned digital, which we did as well, and, certainly, bringing in new talent in the merchandising area was very important.

But we really don't see some future state where the environment is all of a sudden going to lose it's promotional nature or the competitive environment is going to remain intense. So we just have to use all of the assets we have to maximize our performance. On the digital side, what we are seeing, and I think I talked a lot to this, it's not just investment in digital, which we are looking to reallocate resources to be able to increase those investments on the marketing side, but a lot of the efforts, and I mentioned Facebook, so things like many digital DR videos, we tested a tremendous amount in 2016.

You're going to see a lot of that in 2017. Our focus on custom audiences, which allows us to take our marketing spend and really apply it, again, new customer acquisition, which, as I said, is very much our focus. We've seen consistent performance with our existing customer and retention and engagement. And not just for HSN but for Cornerstone, as well. Most of the efforts are incremental efforts that you're going to see throughout the year are really against effective customer acquisition.

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Operator [4]

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Our next question comes from the line of Heather Balsky with Bank of America. Your line is now open.

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Heather Balsky, BofA Merrill Lynch - Analyst [5]

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Hi, good morning. Thank you for taking my question. First, as a follow-up in terms of the promotional environment, and how the consumer is responding, how do you think about the pace of your sales turnaround given those headwinds?

And then in terms of SG&A, it sounds like your investing a lot in your business, but you also have some opportunity to find savings. I'm just curious how we should think of SG&A going forward?

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Mindy Grossman, HSN, Inc. - CEO [6]

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Okay, I'll take the first part and I'll let Rod talk. As Rod said in his recap, we definitely have opportunities as the year progresses because we are lapping certain things in terms of comp. So we do feel that you'll see that progress throughout the year. We are also focused on making sure that not only are we looking for sales growth, but we are looking at doing it through productivity, profitably, making the right investment.

He also mentioned, we will also be lapping our change in are S&H tables, because we need that fine balance of being competitive, but really focusing on having the most compelling product and assortment to drive top line, so we don't have to achieve it through just promotional activity. So I think that's what you're going to see as the year progresses. We tend to be optimistic but conservative.

We're not insinuating that all of a sudden there is going to be the ceiling lifting up on spend. If that happens, we will be thrilled and we will be able to take advantage of that, but we are being very strategic about how we're investing, the pace at which we're investing, and what we're investing against.

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Rod Little, HSN, Inc. - CFO [7]

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And, Heather, this is Rod. I would just add to that, from a philosophical point of view on the SG&A line, we want to have more investment going against things that drive new consumers to find us and, ultimately, take them through the funnel and convert that to purchase. So anything digital that's going to reach our target we're going to spend money against, things like, shop by remote, over the top platforms are things where we're going to invest, and we'll look very closely and have a lot of discipline on the SG&A line on things that don't do that.

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Heather Balsky, BofA Merrill Lynch - Analyst [8]

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Okay, thank you so much.

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Operator [9]

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Our next question comes from the line of Alex Fuhrman with Craig-Hallum. Your line is open.

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Alex Fuhrman, Craig-Hallum Capital Group - Analyst [10]

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Great. Thank you for taking the question. First of all, I was wondering if you could just help us to think about the impact of losing the leap year from last year. If I recall correctly, I think last year we gained a week day in the calendar.

Now we're going to be losing a weekend. So just wondering if you could size up how much revenue you expect to lose from the loss of leap year relative to what you gained last year? And then, secondly, it was interesting that you commented on the of the informercial category growing in Q4 for the first time in a while. Are there any particular products coming out of the infomercial pipeline that your partnered with for 2017 that you're excited about? And when does that typically -- something that was a big infomercial for Q4, at what point in the year in 2017 for a product like that really start to be on your platform?

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Mindy Grossman, HSN, Inc. - CEO [11]

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I'll take the second question and I'll let Rod take the first question. We use the word, I'd say, infomercial, very broadly. It's not just about, wait, there's more, right. It's about, are there businesses that can be maximized that also have direct response exposure.

And as I mentioned, one of the challenges last year, especially in an election year, there wasn't a lot of media spend so a lot of innovation didn't rollout. One that we launched in the fourth quarter that was very successful, which is an ongoing business, and is part of our holistic health and wellness strategy was Copper Fit. And we will see that, certainly, as a viable active life business going forward.

In that category, we're really focused on things that are going to really enhance our customer, not just for short-term maximization. So those are the kind of things we're looking at. It also speaks to fitness. We've seen some better performance in that category, as well. Wearables continue to perform.

So one of the things that Carmen is actually very focused on is how do we look at our product category, not just vertically, but horizontally, and how are we creating programming that brings things together. So, again, it's not just infomercial programming, it's health and wellness programs that incorporate products across all of our categories. And that's one of the areas that were very focused on.

Travel is another good example of that. So you will see more holistic programming that integrates a lot of these new products.

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Rod Little, HSN, Inc. - CFO [12]

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And, Alex, good morning, this is Rod. Following up on the question on leap year impact. That's a good observation. It goes from 91 days to 90. We expect it will be approximately a $5 million impact, mostly impacting the HSN segment.

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Alex Fuhrman, Craig-Hallum Capital Group - Analyst [13]

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Great, that's helpful. Thank you both very much.

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Operator [14]

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Our next question comes from the line of Barton Crockett with FBR Capital. Your line is now open.

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Zack Silver, FBR Capital Markets - Analyst [15]

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Hey, guys. This is Zack on the line for Barton. I just had two questions. The first one is, the pressures that, I guess, you guys changed your shipping and handling (inaudible) in August 2016. Do you think, going forward, just given how aggressive people like Amazon are in terms of shipping and handling that you have to reduce those rates, or change those rates going forward?

And then the second question is on Piney Flats. You guys to get $13 million for gross profit on this during the quarter. Can you just give us a sense of where you are in fixing that and when we can start seeing margin improvement from that initiative? Thank you very much.

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Mindy Grossman, HSN, Inc. - CEO [16]

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Sure. I will just take the first and I will hand it over to Rod. On shipping and handling, if you think of the different ways to maximize and be competitive. We've been very clear that this is something we will continue to invest in. We feel the new tables, as I mentioned, we lapped that in August, are where we need to be.

But in addition to that, we're also very strategic about selective promotions, where we put free shipping and handling on an item basis, whether it's TS, or whether it's a category, and we look to be competitive and balance all of that. But for us, it's a combination of things.

It's looking at where we have to be competitive in shipping and handling by category, by item at times, where we have to be competitive because the product is new and exclusive a compelling, and where we have to be competitive with FlexPay or other areas of our business that we can use as levers. But, again, we're going to look to be as competitive as we can, as well as maximizing as many efficiencies as we have to be able to invest in that.

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Rod Little, HSN, Inc. - CFO [17]

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And, Zack, good morning. On Piney Flats, it's the top priority for the organization to deliver, ultimately, what was anticipated with that initiative. We need the savings, we need to be faster, and that's exactly what the initiative sets out to do. So what's behind this, I think we've laid out clearly in this call.

What's ahead of us is an incremental $8 million to $10 million which will be a blend of gross profit and operating expense, largely in the first half of the year. And that's predicated on an assumption that the new sorter at the Piney Flats facility comes up in the summer, and then we get the going rates in the back half of the year. So any improvement, financially, from that will largely start to come in 2018.

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Zack Silver, FBR Capital Markets - Analyst [18]

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Okay, great. Thanks a lot, guys. Very helpful.

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Operator [19]

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Our next question comes from the line of Matthew Harrigan with Wunderlich. Your line is open.

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Matthew Harrigan, Wunderlich Securities, Inc. - Analyst [20]

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Thank you. Two questions. One, given everything going on in retail with mobility and social media and all of that, I'd be curious what your big takeaways from CSR, even, buzz about [4RG] and it starts to mount. And then, secondly, I know partitioning digital and the regular business is a little arbitrary. Some of it is just for fulfillment.

But is there any benefit at all as the digital component gets really, really large, a higher growth rate there, will it naturally propel the business forward as you go smaller, your contribution from the existing business, maybe it's actually your older customers who are getting less and less active on purchasing activity on that side. But still I think so much of your customer acquisition is on the digital front. And that may be a little bit of a naive supposition but I still thought I'd run it by you?

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Mindy Grossman, HSN, Inc. - CEO [21]

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Okay. (Inaudible) up to two things. So after a decade of attending the CES show, I was actually more excited coming out of this show than in the past 10 years. And there's been a massive shift in what truly consumer electronics are, right.

We went from televisions and laptops to fast forward to today, and I would say that entire show was around, I'm calling it, connected life, the idea of mobility being the core of everything. The ability, for the first time you had massive areas of that show not just dedicated to traditional consumer electronics, but to health and wellness, to sleep, to mom/baby, the broader assortment. And what excited us is that we are unique in that we have the capability to showcase these as an ecosystem and, really, how technology and meaning can really bring things to the customer.

And to your point, that also includes new, more sophisticated technology, and everything from wearable devices to television to everything in between. So, as I mentioned before, we have new programming concepts coming out. We will be testing a lot of new and innovative products. And I think we really felt that people were looking to us as a very significant partner to be able to showcase this connectivity.

Now as far as the digital piece, to your point, yes, we report kind of digital penetration, but it's really evolved. It's less a check out mechanism choice, which in some cases it certainly is, but people are becoming more and more comfortable with these devices as both a way for them to really look at content, to communicate, whether it's with us or anyone else. And how we are able to approach people when they pick up that phone, and how we are kind of the first person they come to, that's got a lot to do with the content and experiences that we're developing.

So you saw that in June you will have a really enhanced app experience on the HSN side. You will see a lot of development in areas such as customization on the CBI side. I think the amount of customizable product at both Frontgate and Ballard have accelerated dramatically. We have one chair at Ballard, I think there's about 1,000 different ways to customize it.

We're trying to create a lot of experiences that are going to create engagement versus just, I look at something, and now it's a check out device. Now to your last point on who the customer is, now, as I mentioned, were going to celebrate our 40th anniversary. And we're going to celebrate customers, some of whom may have been there the whole time, existing customers and kind of new customers, everything in between. Certainly, our big focus for growth is expanding that funnel for new customer acquisition.

And, yes, that is going to be a somewhat younger demographic than our median, but we really do have a pretty broad diversity. What's interesting to us is that our psychographic is as important as our demographic, because even our customers who may skew a little older, and I guess I have to put myself in that bucket today, we're pretty technology savvy because she really loves to shop and she wants to engage, and she wants to share in community.

And if you think about it, the reason why Facebook has been such an important partner, 70% of our customers are on Facebook and they are checking it three to four times a day. And she's very comfortable shopping digitally. So we have to make sure that everything we do certainly is going to keep our existing customer engaged, but it really is a focus on customer acquisition.

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Matthew Harrigan, Wunderlich Securities, Inc. - Analyst [22]

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Thanks, Mindy.

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Operator [23]

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There appears to be no further questions. I will now turn the call back over to Ms. Grossman.

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Mindy Grossman, HSN, Inc. - CEO [24]

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Well, thank you, everyone, and I look forward to updating you on are progress as the year progresses. Thank you.

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Operator [25]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all now disconnect. Everyone, have a great day.