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Edited Transcript of QRTEA.OQ earnings conference call or presentation 26-Feb-21 1:30pm GMT

·41 min read

Q4 2020 Qurate Retail Inc Earnings Call ENGLEWOOD Feb 26, 2021 (Thomson StreetEvents) -- Edited Transcript of Qurate Retail Inc earnings conference call or presentation Friday, February 26, 2021 at 1:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Courtnee Alice Chun Qurate Retail, Inc. - Chief Portfolio Officer * Gregory B. Maffei Qurate Retail, Inc. - Executive Chairman * Jeffrey A. Davis Qurate Retail Group, Inc. - CFO * Michael A. George Qurate Retail, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Carla Casella JPMorgan Chase & Co, Research Division - MD & Senior Analyst * Edward James Yruma KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst * Eric James Sheridan UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst * Jason Boisvert Bazinet Citigroup Inc., Research Division - MD, Global Head of EMT & Analyst * Oliver Wintermantel Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst * Sean Christopher Henderson D.A. Davidson & Co., Research Division - Research Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail, Inc. 2020 Year-end Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded, February 26. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead. -------------------------------------------------------------------------------- Courtnee Alice Chun, Qurate Retail, Inc. - Chief Portfolio Officer [2] -------------------------------------------------------------------------------- Thank you. Before we begin, we'd like to remind everyone this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent forms 10-K and 10-Q filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and Schedules 1 through 3 can be found in the earnings press release issued yesterday on our -- issued today, excuse me, on our earnings presentation, which are available on our website. Today, speaking on the earnings call, we've got Qurate Retail President and CEO, Mike George; Qurate Retail Group's CFO, Jeff Davis; and Qurate Retail Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. These slides are available on our website. Now I'll turn the call over to Mike. -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Courtnee, and good morning, everyone. Thank you for joining us today. We had a very strong finish to the year. We sustained top line growth across all business segments as our team responded with agility to meet our customers' rapidly shifting needs in the stay-at-home environment and to adapt offerings and events in the face of substantial product shortages and shipment challenges, all while significantly pulling back our promotional activity. We got robust new customer growth and made good gains on our long-term strategic priorities in all businesses. We maintained tight financial management and drove strong overall net revenue, OIBDA and free cash flow growth and return capital to shareholders even as we invested to keep team members safe and provide them with enhanced pay and benefits. Additionally, we continue to support our communities well-being with innovative programs such as our small business product line in partnership with the National Retail Federation Foundation to help small businesses challenged by COVID-19, including the second phase launched in August supporting Black-owned businesses. We publicly announced new corporate responsibility commitments with time-bound measurable targets focused on protecting our environment, curating products responsibly and championing inclusion and empowerment. I am particularly proud to report that we received a 100% rating on the Human Rights Campaign's 2021 Corporate Equality Index, the nation's foremost benchmarking survey measuring corporate policies and practices related to LGBTQ workplace equality. This recognition is a credit to our entire team and is their commitment to fostering a culture where all team members can be their full selves and do their best work. We are grateful for the commitment and the resilience every team member demonstrated this past year while grappling with all the personal challenges this pandemic has wrought. In appreciation, at year-end, we awarded a special onetime bonus to all regular and temporary team members who are not eligible for other bonus or success share programs. Now turning to the numbers. In Q4, we grew revenue 6% and OIBDA 13% in constant currency. And for the year, we grew revenue 5% and OIBDA 8%. We generated free cash flow of nearly $2 billion for the year, up more than 200%, supporting our ability to return cash to shareholders through special dividends and share buybacks. We continue to experience rapid new customer growth across all business units and all markets with more than 2.8 million new customers added in Q4. That's up 33% from last year, bringing the total new customers for the year to 7.6 million, a 25% increase. COVID-19 has pushed millions of consumers to interact with retailers and brands online and many will continue to do so long after the pandemic is over. We believe this is a fundamental long-term shift in consumer behavior. And given the vast array of online shopping choices consumers now have, our record acquisition and stable retention of new customers speaks powerfully to the relevance and the stickiness of our platforms and our experiences. Now taking a closer look at Qurate Retail's performance in the fourth quarter. As in the prior 2 quarters, we delivered outstanding growth across all home categories partially offset by continued softness in our fashion businesses, although I'd note that we did gain share in apparel, accessories and beauty in a down market and a steep decline in consumer electronics. Excluding consumer electronics, net revenue at QxH increased 6% in the fourth quarter. The moderation in revenue growth in the prior 2 quarters reflected 2 main drivers that are unique to Q4. First, a late season snowstorm impacted our Northeastern fulfillment centers, which forced us to move up cutoff dates for guaranteed Christmas delivery, costing us a final weekend of holiday selling. Second, we had significant product shortages in late November and December. These shortages were driven by vendor challenges keeping up with rising demand, compounded by chip shortages, factory delays, scarcity of shipping containers in Asia and significant backlog at the West Coast ports. As the business that focuses on key items featured for the day, rather than broad, always-on assortments, last-minute shortages in these key items can be highly disruptive. While these shortages were up across many categories, we saw the greatest pressure in electronics, which normally represents over 20% of our sales in Q4, about double the normal mix. As a result, we are unable to meet demand for smart home items, tablets and audio products. Additionally, in certain subcategories such as gaming devices that were particularly strong in the market, we intentionally don't have a meaningful presence given the unattractive margin profile on a customer base that has typically lower lifetime value than our target demographics. While the electronics challenges significantly impacted our revenue growth, there was not a meaningful impact to OIBDA growth due to the lower margins on electronics. Looking ahead, we do not believe that the impact of product shortages through 2021 will be nearly as significant as they were in Q4. We expect the global supply chain will begin to stabilize. And in the interim, we're taking stronger actions to increase our oversight of the inbound product flow from our vendors. Additionally, the much smaller mix of electronics in the first 3 quarters of the year significantly reduces our exposure. We drove strong growth in new customers at QxH, up 18% in the quarter, especially impressive in light of the consumer electronics' decline as that category brings in the largest share of new customers' most holiday seasons. Excluding electronics, new customer growth was 36%. And over 60% of new customers in the quarter came in organically, even going directly to our websites or customer service agents or finding us through organic search or organic social, with the remainder acquired through disciplined investment in performance marketing. These results highlight the combined power of our TV reach, our brand reputation, our social presence and word of mouth, coupled with highly effective digital marketing programs. And we remain highly encouraged by both the quantity and the quality of new customers we're attracting. Looking back at the customers acquired in the second and third quarters, 26% have made at least a second purchase within 90 days of joining at slightly above last year's rate. And the percentage of these new customers who hit their 20-item purchase threshold to be considered a best customer in just their first 90 days is similar to prior years. So in addition to a record number of new customers in 2020, we added more new customers who have already become best customers than any year in our company's history. We advanced our strategic priorities focused on driving sustainable long-term growth in our global video commerce business. As a reminder, our strategic efforts for both QxH and QVC International are focused around 5 themes: curating special products at compelling values; extending video reach and relevance; reimagining daily digital discovery; expanding and engaging our passionate community; and delivering joyful customer service. I'll briefly comment on a few of these priorities. As part of our focus on expanding and engaging our passionate community, we continue to invest in enhanced customer acquisition, development and personalization initiatives to both increase our overall addressable customer base and retain and enhance the spend of existing customers. Our efforts included successfully testing new advertising programs, such as YouTube and TikTok to reach new audiences, building on our success with personalized content and in e-mail communications to increase customer engagement and spend and expanding personalization on the website that create calls to action based on shopper browsing behavior. We continue to expand video reach and relevance with the addition of new streaming platforms, including LG TV's Shop Time app and Pluto TV, the leading free TV streaming service. And last month, QVC debuted on YouTube TV, which has more than 3 million subscribers. QVC is the only live-streaming shopping channel on YouTube TV, which is available across smart TVs, streaming media players, smartphone apps, tablets, computers, game consoles and smart displays. We continue to see strong growth of our own streaming app, which integrates extensive live, on-demand and original content from QVC and HSN. Downloads of the app on Roku were up 63% in 2020 with average monthly viewers up 47% and downloads on Amazon Fire TV were up over 240% with monthly viewers up 75% since the start of 2020. Even as we see growing interest in our live-stream shopping offerings, we also continue to benefit from high engagement with our traditional linear TV offerings with the number of homes tuning into a QxH network per day up 14% year-over-year in Q4. The reach and relevance of our networks and platforms and sophisticated development, sourcing, marketing, fulfillment and customer service support makes us a highly attractive partner in storied and new brands alike, as we make strides on our strategic priorities to curate special products at compelling values. Our Big Find program, which in 2020 went virtual, helps us find new brands from up-and-coming entrepreneurs with compelling stories that we know our customers will love. Some 2,400 entries from 60 different countries, 92 exciting new brands across apparel, accessories, jewelry, beauty, home, culinary and electronics were selected for launch. And 2/3 of the brand owners identified as women or minority owned. During the fourth quarter and full year, we also added many premium brand partners. For example, QVC U.S. expanded its close relationship with Estée Lauder to now include MAC, Clinique and Too Faced in addition to the namesake brand. Based on this success, we also began offering Estée Lauder in the U.K. in the fourth quarter. We also launched unique, exclusive and timely collaborations with leading designers and entrepreneurs, such as Jason Wu's size-inclusive fashion line. And we created engaging new types of content such as our original series, Curtis Stone's Travel, Cook, Repeat, which contributed to a 33% sales growth for the Curtis Stone cookware brand this quarter. Looking forward, we're leveraging our new merchandising organization with the added resources and structurally putting in product discovery and business development to go after high-growth or emerging products and categories that we believe will be highly relevant to the consumer this year. In home, these include new proprietary and exclusive cookware and home decor brands as we build out our global design development and sourcing services and increase differentiation in these hot trending categories. For the enthusiast, increased focus on sporting goods, crafts, pools and spas and games. For the cook, specialty kitchen electrics, from bread makers and ice cream makers to vacuum sealers, pasta makers and wine cellars, along with plant-based food and wine products. To stay healthy, connected fitness equipment and wellness and hygiene products from our [masks] with virus blockers to UV sanitizing products, cleaning and disinfecting, air purification and face coverings. On the fashion side, we're focused on expanding assortments in comfort, at-home wear, athleisure and outdoor apparel and wear-and-wash-and-go footwear. And we're tapping into multiple growing beauty segments including multicultural beauty, (inaudible) and salon beauty. Turning now to QVC International. The team delivered exceptional performance in the quarter with double-digit revenue and OIBDA growth, including revenue and OIBDA growth in every market and across most categories and strong new customer acquisition up nearly 30%. The broad trends in our international business mirror those in the U.S. with particular strength in the home categories and among new customers. However, product shortages were not nearly as significant as most markets didn't face the same inbound supply constraints that we saw at the West Coast ports. Additionally, our international markets are making much smaller purchase orders and, therefore have more flexibility to meet their needs. I would also note that electronics represents only 5% of the international mix in the fourth quarter. We continue to see the benefit of having strong local teams in each market who are highly attuned to country and regional needs, coupled with the test-and-learn mentality our teams lean into, our global video commerce strategic priorities with a particular focus on enhancing daily digital discovery, including developing a new live-streaming app built around user-generated content that's now in beta phase; deploying dropship capabilities to expand digital-only assortments; and expanding digital marketing. Our international team is also taking the lead on building and deploying new machine learning capabilities to optimize pricing and maximize airtime productivity, among many other applications, capabilities we expect to roll out globally as they are developed. Zulily is gaining momentum on its great fresh buying strategy, introducing premier brands London Fog, Honest Company, Mango, Ann Taylor, Hunter boots, HUGO BOSS, Vans and Macy's, along with over 1,400 new long-tail vendors launched in 2020, largely through its China direct program. The team is also making good gains diversifying its marketing program, building a new influencer-based affiliate network and strengthening its outbound marketing. Given this progress, we chose to ramp up our marketing spend in the quarter with an outstanding 74% new customer growth at Zulily and providing a strong foundation to continue growing into 2021. Cornerstone had another outstanding quarter with record revenue and adjusted OIBDA, benefiting from the surge in home spending. And we are excited about the long-term prospects for this business. Cornerstone had strong growth in home office, storage, outdoor living and home decor, coupled with a focus on building highly differentiated proprietary assortments. We saw continued strong margin expansion as the team pulled back significantly on promotional activity along with improved marketing efficiency. I'd like to close with a few thoughts on 2021. We're confident that all our hard work positions us well to successfully navigate this fluid environment. Given the pace of vaccine availability, we will not reopen our offices before September at the earliest. Our highest priority remains the safety of our team members, both those working on-site and those working remotely. I am excited for the year ahead of us despite the uncertain backdrop. The macro trends we're seeing perfectly align with our capabilities and our strategic priorities. The increasing focus on live-stream shopping from Amazon Live to TikTok demonstrates that our business has never been more relevant than it is today. However, the key to success is not the latest technology or the flashiest influencers. It's building lasting relationships, customer by customer. The fundamentals of great shopping have not changed. It's still about the power of human connection and the joy of discovery, wandering into your favorite shop, or in today's world, your favorite virtual shop, having interesting conversations, learning the stories behind the products and getting inspired. As the pioneers of both live-stream shopping and leveraging influencers, we have the experience, expertise and global infrastructure to be the partner of choice for established and new brands alike seeking to reach customers at scale in an engaging way. And we have the financial strength to support our continuing investment in innovation, both in how we reach customers with personalized messages and how we engage them on new platforms and new technologies I am confident we will emerge from the pandemic stronger, well positioned for sustainable, long-term growth. And with that, I'll turn the call over to Jeff. -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Mike, and good morning to everyone. As Mike mentioned, we delivered strong revenue and OIBDA growth at Qurate Retail in both Q4 and the full year. So let's get started with QxH. Revenue grew through continued momentum in home category, expansion of our customer base and reduced customer returns. eCommerce revenue grew 6% and penetration improved 270 basis points in the quarter. For the quarter, total customers grew 6%; with new growing 18%, reactivated up 13%; and existing, up 2%. While we only have access to comparable HSN customer data going back 5 years, we believe this is the largest new customer class in the history of both QVC U.S. and HSN. As illustrated on Slide 8 of our earnings presentation, we continue to have a sizable shift in category mix into home and away from primarily electronics and apparel. Revenue in home increased 17% as consumers maintain their focus on family and well-being with strong demand for fitness and wellness products, food and kitchen electrics, home decor and furnishings and household, home environment and cleaning products. Consumer electronics declined 17% primarily from the supply chain pressures that Mike has mentioned. Yet, we were able to satisfy customer demand in several higher-priced subcategories such as home office and computers and delivered increased overall product margins. With respect to our fashion categories, accessories grew 6% on the strength of loungewear and nonleather handbags. Beauty declined 10%, reflecting lower demand for cosmetics in the pandemic. And apparel and jewelry remained challenged, in line with general market conditions but we did see pockets of strength in activewear and hollowware. Adjusted OIBDA grew 10% and adjusted OIBDA margin expanded 130 basis points. Gross margin improved 200 basis points, which was led by 360 basis point expansion in product margin. Approximately 50% of this expansion was split between -- or equally between strategic sourcing initiatives and promotional pullback, another 20% from reduced customer returns and 15% from pricing to partially offset freight surcharges and rate increases. Given the impact of strategic sourcing work, I wanted to provide some additional background. Recall we initiated this work in 2019 as part of our overall synergy commitments. By bringing QVC and HSN merchandise groups together, we were able to work with our vendors across both brands on the broad program to reduce end-to-end supply chain costs, optimize assortments around vendors offering the greatest sales and margin productivity and create new arrangements such as marketing funds to grow the brands. We started the work in just 2 categories and expanded across all categories through 2020. We'll begin to anniversary the benefits of this work towards the middle of 2021. Finally, fulfillment costs increased 150 basis points primarily due to ongoing productivity challenges in our fulfillment centers from adhering to COVID protocols, freight surcharges and rate increases, which were partially offset by improved pack factor. Operating expense was 10 basis points unfavorable primarily due to higher customer service from longer average call times associated with executing our upsell initiatives and addressing shipping status questions partially offset from favorable commissions. SG&A was 60 basis points unfavorable comprised primarily by 180 basis points, which was split equally across marketing and administrative costs. Marketing reflects our continued investment to acquire, retain and engage customers. Our total marketing spend, while rising, was still only 2% for QxH net revenue in 2020. We expect to increase the spend on average 50 basis points annually if we see attractive opportunities to further grow at attractive returns. Administrative costs are primarily due to our higher incentive compensation accruals. The marketing and -- these marketing and administrative pressures were partially offset by 125 basis points of favorable bad debt expense with -- and which primarily reflects lower customer default rates and fewer offered installment payments associated with the pullback in promotional activities. In closing QxH, we remain on track to deliver $370 million to $400 million cumulative HSN synergies through 2022. And we are over 70% complete as of year-end. Moving to QVC International, which continues to generate very strong across nearly all categories with strong new customer gains and increased eCommerce revenue and penetration. My comments will focus on constant currency results. Revenue grew 10% with strong growth across all markets led by Japan, Germany and the U.K. Total customers grew 10% in the quarter with new, up 28%; reactivated, up 3%; and existing, up 8%. For the year, QVC International attracted 1.2 million new customers, a record number for any year in the last 10. eCommerce grew 23%, and eCommerce penetration increased 500 basis points. The business generated broad-based gains in nearly every category led by home and beauty. And adjusted OIBDA increased 16% and adjusted OIBDA margin expanding 90 basis points. A little more detail. So from a gross margin basis, it improved 120 basis points primarily due to higher product margins, which reflect reduced customer returns, strategic sourcing initiatives. We also benefited from favorable fulfillment expenses driven by sales leverage and a higher average selling price. These gains were partially offset by higher inventory obsolescence primarily due to outlet store closures and proactive inventory management. Operating expenses were favorable by approximately 50 basis points primarily due to lower commissions reflecting higher e commerce penetration, sales leverage on fixed rate contracts and renegotiated carriage contracts. SG&A was unfavorable primarily due to incentive compensation and marketing investment to acquire, retain and, once again, engage customers, partially offset by lower administrative expenses and sales leverage. Moving to Zulily. Revenue grew 11% and driven by outstanding gains in home and hardlines as well as strong customer growth. Total customers grew 11% and new customers grew 74%. Adjusted OIBDA declined $7 million and adjusted OIBDA margin declined 170 basis points primarily due to higher freight costs from international product mix, seasonal wages at our fulfillment centers as well as incentive compensation accruals and marketing expenses. These pressures were partially offset by improved product margins and leverage of administrative expenses. Moving to Cornerstone, once again delivering outstanding results and record revenue and adjusted OIBDA. Revenue grew 30% driven by sustained momentum in the home brands on the strength of core home decor outdoor categories. Garnet Hill returned to growth on the strength of home textiles and its cashmere products. Adjusted OIBDA increased $28 million primarily due to product margin gains in home brands and reduced promotions as well as leverage of administrative and marketing expenses. These gains were partially offset by higher freight rates and surcharges. So let's quickly review the balance sheet and cash flow. CapEx was $92 million in Q4 and $257 million for the full year, which is a reduction from our initial 2020 indications. For 2021, we anticipate CapEx to range from $265 million to $300 million. TV distribution payments were $56 million in 2020, reflecting an off year of a 2-year cycle for multiyear contract renewals. While we do not provide forward guidance, fiscal '21 will be higher than 2020. On average, our amortization of TV distribution payments average $130 million annually. As Mike said, we generated nearly $2 billion of free cash flow in 2020. This outsized growth was driven primarily by improved cash flow from operations. Working capital benefited from the extension of vendor payment terms, pullback of customer installment payments, reduced inventories and increased accruals for management incentive bonus and returns. Separately, you recall we also received $267 million of pretax proceeds from the sale of a green energy investment in 2020. We expect to return to a more normalized level of free cash flow conversion in the range of 45% to 55%. Recall we generated substantial working capital improvements in the first half of 2020 from pulling back on offered installment payments, which reduced accounts receivable; and strategic sourcing, which increased accounts payable. These items are now in our base and will not serve as a source of working capital this year. Finally, the accruals for incentive and other bonus compensation will be paid in the first half of the year. And these items will create more difficult compares for free cash flow in the first half of 2021. Looking at our debt profile. At the end of the year, we had nothing drawn under our revolver and $2.9 billion of capacity. We had $806 million of cash and cash equivalents. And our leverage ratio as defined by our QVC revolving credit facility was 2x. In closing, we have multiple paths to sustain net revenue and OIBDA growth. As we look forward to 2021, we believe the same digitally driven macro consumer trends will continue, with elevated home demand supporting new and occasional customer growth and upside with best customers as behaviors shift back to fashion. OIBDA margins are reinforced by rebalancing our category mix, continued realization of our strategic vendor management incentives -- initiatives and reduced commissions from increased eCommerce penetration and contract negotiations. These positive drivers will partially offset -- will be partially offset by prevailing increases in freight and competitive labor rates as experienced across the industry and increased marketing to support customer acquisition, retention and expanded audience development. And now I'll turn the call over to Greg. -------------------------------------------------------------------------------- Gregory B. Maffei, Qurate Retail, Inc. - Executive Chairman [5] -------------------------------------------------------------------------------- Thanks, Mike and Jeff. Well, in addition to a strong operating performance in 2020, Qurate had superior capital returns in the year as well. We paid out nearly $1.3 billion in 2 special cash dividends. We also had a $1.3 billion dividend of an 8% preferred stock, which is trading at par now, trading very nicely. We resumed our buyback in late November. The stock did move meaningfully higher as we reconsider reinstated our buyback. And the material movement to stock ran for a greater impact of our repurchase volume. You sometimes call that a high-class problem when your stock moves that quickly. And finally, we also repurchased nearly $50 million of our MSI bonds for liability and tax management. In 2021, we anticipate using the above tools, all of them potentially, to deploy a substantial portion of the free cash flow that Qurate will generate to our shareholders. And with that, we appreciate your continued interest in Qurate Retail and hope you all stay safe and healthy. And with that, operator, I'd also like to open the floor to questions. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question will come from Ed Yruma with KeyBanc Capital Markets. -------------------------------------------------------------------------------- Edward James Yruma, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- I guess first obviously would be -- looking back at 2020 would be a significant amount of new customers you're able to bring into the fold. How are they behaving kind of out of the gate? I would guess that they're probably buying different categories than maybe your cohorts from previous years. And kind of how can you continue to encourage them to come back and become habituated users? And as a follow-up, I know you had a lot of favorability in '20 from a returns rate perspective. You're able to reduce the amount of Easy-Pay. I know you don't guide in '21 but should we assume that we're going to see some normalization of those trends? -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you. Ed, this is Mike. I'll take the first part of the question. And maybe, Jeff, you can comment on the question around payables. We continue just to be very encouraged by the new customer performance, as I mentioned on the script, both in the quantity and quality. They're coming in -- first thing is that they're coming in on every single category. And they're kind of exhibiting very similar behavior to prior classes. So what they're buying is aligned with what everyone is buying, so certainly more of a shift towards home. But we've been especially encouraged by the fact that we're actually seeing strong new name growth even in the down trending categories of apparel and beauty. So they're coming in on every category. As I mentioned, about 1/4 of them will get into a second purchase within 90 days. And I mentioned that metric as it's sort of the one metric that has really stood the test of time is that if they repeat purchase within 90 days, they're probably going to stick with you. And so we watch that metric carefully. That metric is at or above prior year performance over the life, how they're reengaging with us. And we're even seeing a small part of these new customers get to this 20-purchase threshold, which is that threshold we talk about. When you hit that threshold, you are absolutely an amazing customer for life. So on all of those dimensions, they're sticking with us. That said, we don't want to take it for granted. And so we are leaning into a lot of marketing programs, I would say, a couple of big categories we're looking at how to retarget new customers. I mentioned that new YouTube ad campaign, for example. So we'll retarget that new customer when she's on YouTube and present a really compelling video experience to her that very much fits with the brand and kind of reminds her of why she made that first purchase at QVC or HSN. If proven very successful, we'll continue to innovate those kinds of programs. And then just a lot of personalized outbound marketing, both e-mail and physical mail, because we're finding as others are that physical mail is a little disruptive right now and people enjoy seeing a great culinary catalog as an example. And so we'll get folks back in through a really cool culinary experience through this catalog. So really pleased with what we're seeing. And Jeff, do you want to take the second part? -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [4] -------------------------------------------------------------------------------- Sure. Ed, part of your question was around the promotional activities. We have the unique opportunity as a result of the pandemic, maybe a once-in-a-lifetime opportunity, that kind of resets some of the promotions that we were doing with respect to installment counts just being one element of it. It's really important to note that that's really just one portion of our overall strategic actions that we are taking from a promotional element. As we move forward, as we see customers continue to possibly rotate back into other categories, we'll continue to evaluate how we pulse those installment payments in order to continue driving demand overall. As -- you may recall that we really started this promotional pullback, if you will, in the second quarter of 2020. So as we kind of go through first quarter and going into second, we'll start to anniversary some of those items. But the one thing I'd want to leave you with is that a lot of these activities that we were taking was our opportunity to try and protect as much margin as we could given the shift from fashion and beauty into home. As we start to see, hopefully, that rotation back into some of our fashion and beauty categories, we'll have an opportunity to take a look at our overall margin mix. And how we will continue to maintain and grow that promotional activities may get a little more aggressively, maybe less. But our real decision is around trying to be very disciplined in our actions going forward. And then the last piece, just to go on just one moment, is around returns. While returns have been favorable for us, it's really reflective of the categories in what she's currently buying, which has a lower return rate. But also, as you think about this, they usually have a little lower margin rate associated with it. So kind of getting back to my early portion where I think about the rotation back into some of our fashion and beauty categories which may have a higher return rate, we'll also get higher margins associated with that business to offset that return cost. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Our next question comes from Oliver Wintermantel with Evercore ISI. -------------------------------------------------------------------------------- Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [6] -------------------------------------------------------------------------------- My question is more regarding QxH and on that with the strong decline, I think you said CE was down about 17%. That must have been a very big help from a mix shift perspective for margins and then the shift to home probably in addition to that. So maybe -- if you could maybe give us some quantitative or qualitative information about what that mix shift due to margins, how much did that help? -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [7] -------------------------------------------------------------------------------- Mike, do you want me to take that? -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Jeff, do you want to take that? -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [9] -------------------------------------------------------------------------------- Sure. So interesting enough, as a result of the decline in electronics in the fourth quarter for us given its overall penetration, customer mix was actually probably one of the last favorable items. But in our kind of waterfalls, as we think about what was supporting product margins, customer mix as a result would have been maybe the last item. So in our presentation, we outlined that strategic sourcing, promotional pullback, returns and pricing were some of the major drivers of product margin increase. Category mix would have been a far distance to that but if it was, modestly favorable for us. -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- I'd just add -- I was going to say part of the reason that you don't see a bigger benefit is because it was offset by that softness in fashion and beauty. So category mix, as Jeff said, turns out to be a relatively minor driver of the margin expansion. -------------------------------------------------------------------------------- Oliver Wintermantel, Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst [11] -------------------------------------------------------------------------------- Got it. Got it. And then just 2 quick follow-ups on the balance sheet and cash flow. So you mentioned CapEx. I think you came in at about 1.8% of sales. I think that was below what you guys were talking about at your last Analyst Day. But then you said it's going to go up. It looks like it's 2%, 2.1% of sales next year. Is -- what is this for? Like what are you spending on there? Is it fulfillment centers? Is it distribution capacity? Would like some more color there. And then I saw inventories were down 8, with sales up 6 or 7. With that -- what is the inventory level going into the spring selling season? -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- Yes. So Oliver, I can't necessarily opine or give you -- from a standpoint of the percentage of net revenue. That will be giving guidance for 2021. But as it relates to the absolute dollar of spend that we're anticipating, we continue to invest in our technology platforms. We still have a little more work to be done while it's much less than in prior years in our network optimization. But it's really around continuing to expand capabilities in order to drive our strategies. But it's primarily in technology where the vast majority of the spend is, then followed up by sort of our supply chain and fulfillment centers. And then as it relates to inventory, coming out of 2020, our inventories were down. Part of that is a result of some of the supply chain challenges that we've had. We continue to really be disciplined around how we're growing our inventories and really focused on our supplier base and how we support our sales growth. You would expect to see our inventories start to replenish as we go through the first half of the year as we get away from, hopefully, some of these supply chain challenges. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Our next question comes from Eric Sheridan with UBS. -------------------------------------------------------------------------------- Eric James Sheridan, UBS Investment Bank, Research Division - MD and Equity Research Internet Analyst [14] -------------------------------------------------------------------------------- I'll just ask one. On international, that came in stronger than we had forecasted. You have this interesting array of countries that are in sort of various states of recovery or still in the midst of the pandemic. Any sense of consumer behavior across your array of international assets? What do you think that might tell you about how the business might operate as we go through '21 and into '22? -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Thanks. Yes, we've been just delighted with the broad-based strength of international. Every market is performing well in most categories that are strong. Clearly, home is the strongest as it is in the U.S. But especially in Germany and Japan, we haven't seen the same level of pressure on the fashion and beauty and even jewelry categories. They've held up better. U.K., I would say, a little more mirrors what you see in the U.S. in terms of consumer behavior and the categories she's selecting. So it's a little hard to draw a lot of conclusions about what that means for the future. But we're certainly focused on making sure we're staying close to the markets to try to see early indicators of change. Clearly, the lockdowns in Europe were stronger more recently than in the U.S. So that may have provided some additional benefit to the businesses in Europe that the brick-and-mortar environment is a little more constrained. But I think in the main, we've just seen sort of a more resilient consumer engaging across a broader array of categories. What that exactly says about the future, a little hard to say. The breadth and strength of the business internationally gives us confidence that we can sustain pretty healthy trends over the long term. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And moving on to our next question will be Jason Bazinet with Citi. -------------------------------------------------------------------------------- Jason Boisvert Bazinet, Citigroup Inc., Research Division - MD, Global Head of EMT & Analyst [17] -------------------------------------------------------------------------------- I just have 2 questions. On the growth dichotomy between international and domestic on a constant currency basis, was there any other driver other than the electronics issue that you called out that probably hurt U.S. more than international? And then my second question is -- I think there was a benefit to you guys when the corporate tax rate dropped on the exchangeable debentures. And if you can just sort of remind us how that works. I think it was a good guide. Is the converse also true that if the tax rates go up, it becomes a slight negative in terms of what you have to pay back when those mature relative to the lower value of the shield, this lower federal tax rate we've had over the past 2 years? -------------------------------------------------------------------------------- Gregory B. Maffei, Qurate Retail, Inc. - Executive Chairman [18] -------------------------------------------------------------------------------- Mike, I'll let you talk about the impact from the U.S. And then I'm happy to take on the DTL. -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Right. Thanks, Jason. On the growth driver differential U.S. and international, so you're right. Consumer electronics was the biggest single component by far of the delta. The other difference is the fact that in Germany and Japan, they haven't seen the similar pressure in the fashion, beauty and jewelry businesses. So those businesses aren't growing as strongly as home but growing. So home, pretty consistent globally. Fashion, beauty and jewelry, challenged in the U.S. and the U.K. and, to some extent, in Italy and holding up better in Germany and Japan. So those would be the 2 big differences. As a result of that, the overall customer base is -- and we're seeing sort of good performance across all elements of the customer base. And Greg, I'd like you to take the second. -------------------------------------------------------------------------------- Gregory B. Maffei, Qurate Retail, Inc. - Executive Chairman [20] -------------------------------------------------------------------------------- So Jason, as you noted, the way these -- we issued those series of exchangeable debentures which have the feature that we deduct interest at a rate -- the imputed rate rather than just the cash rate and that deductions -- those deductions were taken at higher corporate income tax rates such that we were building the deferred tax liability, knowing we would have to pay it back. When the corporate tax rate was reduced, our deferred tax liability was decreased. If the corporate tax rate increases, we will have to revalue deferred tax liability and it will likely go up. I will make 2 points about that. First is I have not seen any projections that it will go up to the rate at which we deduct it. We will still be net ahead, having deducted at higher rates than the corporate tax rate is likely to get to. And two, you may have noticed over the last several years, we have been managing some of that DTL liability down by repurchasing some of the bonds that generated the DTL liability and in effect have been like the MSI bonds and in effect have been reducing that liability already. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- And our next question comes from Carla Casella with JPMorgan. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [22] -------------------------------------------------------------------------------- I notice you've been keeping your leverage nice and low at QVC at about 2x. Is that within your target range? And how high would you be comfortable taking that either for the right transaction or for further dividends to the parent. -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Greg, do you want to take that? -------------------------------------------------------------------------------- Gregory B. Maffei, Qurate Retail, Inc. - Executive Chairman [24] -------------------------------------------------------------------------------- Jeff, do you want to do that? Or I'm happy to... -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [25] -------------------------------------------------------------------------------- Okay. Go ahead, Greg. -------------------------------------------------------------------------------- Gregory B. Maffei, Qurate Retail, Inc. - Executive Chairman [26] -------------------------------------------------------------------------------- Okay. Our stated corporate leverage target at the Q level is 2.5x. We are obviously below that, probably around the 2x. And so that does create some opportunity. We had a high quality problem, enormous cash generation in 2020 that helped even with our onetime cash dividends. And our share repurchases help drive leverage down. So we do have some flexibility. And we'll monitor what we can do with that flexibility in the coming quarters and years. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [27] -------------------------------------------------------------------------------- Okay. And if I could just ask one follow-up on the answer, some questions about payables. Have you extended terms? So was some of the payable increase permanent versus temporary? Or would you call it all temporary and all going to reverse in the first half of '21? -------------------------------------------------------------------------------- Jeffrey A. Davis, Qurate Retail Group, Inc. - CFO [28] -------------------------------------------------------------------------------- So all of the extensions of payables is one component, once again, as we were strategically working with our vendors. That was all permanent. And those negotiations and how we put that into place happened over the course of 2020. So you'll start to see a reverse of that really starting in the second quarter through the end of the year. -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- And just to put a fine point on it. So both that and the reduction in our installment payments which has benefited accounts receivable. Again, these are meant to be long-term programs. So it's not that they reverse. It's just that you don't keep comping them. So you get it into the base. And then you have sort of a normal set of working capital trend off of that newly established base. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Our final question will come from Sean Henderson with D.A. Davidson. -------------------------------------------------------------------------------- Sean Christopher Henderson, D.A. Davidson & Co., Research Division - Research Associate [31] -------------------------------------------------------------------------------- I just wanted to know if you guys could provide a little bit more color on just the new customer cohort that you guys are seeing just in terms of any new demographic callouts. And then also, are they being acquired at a kind of a lower customer acquisition cost than historically normal? -------------------------------------------------------------------------------- Michael A. George, Qurate Retail, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- Yes. Thanks for the question. And I'll focus my comments on QxH customers just because they're the most viable customers and there are so many different stories across all of the different businesses we have. So let me just focus on that. Broad-stroke demographics of the new customers look literally identical to prior years. New customers tend to be 6 to 7 years, on average, younger than the existing customers on average, kind of as you would expect. That isn't changing. So I always emphasize the fact that our business tends to be very stable around age cohorts and kind of life stage both for existing customers and new. And that's remained true in the pandemic. That has remained true as we've seen a lot of new customers come in through streaming services or other forms of digital platforms. The overall profile of those customers, even though they're coming in on different platforms, is very alike in prior year classes. And it's one of the reasons that this gives us confidence on the other more quantitative metrics that these customers will behave in a similar vein to past year classes because on both demographic elements and on behavioral elements, they're remarkably similar. There's just more of them. I guess the way I would think about cost of acquisition is when you think about the 60% of new customers that come in organically, there's effectively 0 marginal cost of bringing that 60%. And so the fact that we're bringing in a lot of them at 0 marginal cost is obviously a very positive story. That 40%, where we used paid marketing to bring them in, I would say, paid marketing is about stable, a hair less efficient in Q4 just because we grew it at a pretty rapid rate and we're still ROI positive. But obviously, when you grow it faster, you tend to get a little bit less efficient. But if you wait all that out, you've combined the organic and the paid, I think it's safe to say that per customer all acquisition costs have gone down just based on the volume of new customers that we're bringing in. And I think that was our last question. So again, thanks to all of you for your time and continued interest and support. And we hope all of you stay safe and well as we go through what we hope is the final stage of this pandemic. Thanks, everyone. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.