Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome to the cure rate retail 2019, Q3 earnings call. During the presentation, all participants will be on a listen only mode. Afterwards, we will conduct a question answer session.
Do you have a question. Please press star one on yourself.
As a reminder, this conference is being recorded November 11.
I wouldn't <unk> conference over to Courtney Chen Chief <unk> Officer, Senior Vice President Investor Relations. Please go ahead.
Yeah.
Before we begin we'd like to remind everyone that this call include certain forward looking statements within the meaning of private Securities Litigation Reform Act 1990.
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 in 10-Q.
Company and QVC with the FCC.
Forward looking statements speak only as of the database, calling trade reach all expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statement contained herein.
Any change in greater details expectations with regard there too or any change in events conditions or circumstances on which any such statements.
On today's call, we will discuss certain non-GAAP financial measures, including adjusted when John adjusted OIBDA margin in constant currency information regarding the comparable GAAP metric, along with required definitions and reconciliations, including preliminary notes and schedules ones.
And in the earnings press release yesterday, which is available on our website today speaking on the call we have to retail president and CEO , Mike George.
Children CFO , Jeff Davis Executive Chairman Gregg the same. Please note we publish slides to accompany the earnings release. These slides are available on our website now I'll turn the call over to Mike George.
Thank you Courtney and good morning, everyone.
The third quarter was challenging let's continue trails in OIBDA pressure at Qxh into Lily.
However, we were pleased to see cornerstone turned to go after adjusting for the closure of improvements.
Further acceleration of growth at QVC International.
And despite the sales pressures, we achieved strong growth in free cash flow.
Looking ahead, we are intensely focused on improving our operating results accelerating synergy capture and better position in our companies for changing marketplace, while sustaining strong cash flow.
Turning to Qxh, let me start by welcoming Luckily for us to our company unless we joined US in September and his jump right into her new role as president of Qxh.
Since Q3 marks our third quarter of declining sales actually works age what it takes some time on this call to walk through the categories and the customer segments.
Tribute to the decline.
Summarize what we believe were the major drivers behind these declines and most importantly, sure what actions, we're taking to improve the trend and returned to strong performance.
So I'll start with the category view.
Her home business is down $45 million in the quarter versus last year down $88 million for the year driven largely by three pressure points.
First at the end of last year, we closed two cents Joy Mangano ingenious designs subsidiary.
Well this brand sales productivity was strong its cost structure was unattractive necessitating the closure.
The exit has created short term sales pressures along with margin challenges as we cleared the inventory.
We anniversary the exit at the end of year.
Second the kitchen electrics businesses intraday more challenging product innovation cycle.
Beginning to see this new Packer sales, especially in Q3.
And third the premium mattress category, a significant business for us is undergoing a dramatic shift as consumers migrate to embed in a box options are team has done a terrific job jumping on this trend with our successful partnership with Casper innovation leader in this space along with our proprietary offerings from northern nights.
And our Scott living products.
With this new category comes at a significantly lower price point, the traditional premier mattresses, which is pressure in overall sales.
Or fashion businesses of apparel accessories, and footwear are down 17 million in the quarter, that's 32 million for the year.
This is a significant change in trend as these businesses had been strong drivers of growth over the last several years. These categories are down substantially across the industry and while we're gaining market share we have not been able to sustain growth.
Our beauty business is up 9 million for the quarter in down 4 million for the year.
Similar to fashion. This years performance is a significant change in trend as beauty had been a strong contributor to growth for many years.
And it reflects a substantial slowing of the prestige beauty market as you've heard from other beauty retailers and manufacturers.
We were encouraged to get back to growth in Q3 in the face of these categories headwinds.
Our consumer electronics business is flat for the quarter and up 18 million for the year. It's a modest factor in the worsening trend in Q3 and reflects challenges we're experiencing securing compelling offers at attractive margins and some of our biggest brands in items, especially for our off air Assortments.
Finally, our jewelry business is down 20 million for the quarter and 60 million for the year as we continue to reduce jewelry airtime in favor of more productive categories. Since truly has been declining for multiple years. It is not contributing to the worsening sales trend this year.
Now turning to the customer view the overall sales decline as reflected in a modest pull back across the customer base, but we're encouraged that we don't see significant pressure in any one customer segment.
Fundamentally our customers are still with us and we just need to do a better job every day, giving her a reason to buy.
In particular for existing customers who represent.
Represent about 87% of our sales in the trailing 12 months.
Count declined 3% in the quarter and 1% in the last 12 months well the average spend per customer was largely stable.
Importantly, the declining count has not translated into any meaningful change in retention rates, which we measure on a rolling 12 month basis.
Rather to indicate that some of our more infrequent customers pulled back from making a purchase in the quarter.
For new customers, who represent about 70% of sales in the last 12 months. We were encouraged to see continued growth in count up 1% in the quarter and a strong 5% over the last 12 months.
Three marks our ninth consecutive quarter of positive were flat new customer growth at QVC and the second consecutive quarter of growth at HSN.
Well, most new customers come to us organically our attitude investments in performance marketing are helping now bringing in 30% of new customers.
Finally for reactivated customers, who represent about 6% of sales in the last 12 months.
It was down mid single digits for the quarter and the 12 month period.
Fucked in a park the challenges in our apparel and kitchen, electrics businesses, which outperform with reactivations as well as the overall softness and on air sales.
Seven given you this category customer view, let's step back to talk about root causes.
And our business, it's never just one or two things the drive big changes in trend up or down, but rather a confluence of factors. These factors. We believe can be summarized in the three broad buckets.
First we're facing a choppy retail environment.
As I mentioned, many of our largest and most the teacher categories are under significant pressure. According to market research from and P.D. in the U.S. women's apparel accessories and footwear sales are all in negative growth territory industry wide for the third quarter and year to date through September .
At prestige beauty and kitchen appliance sales have slowed dramatically from the prior year.
Second we continue to experience execution pressures associated with the acquisition of HSN.
The reorganization of our buying teams has created short term distractions, although we believe we're getting to the other side of this.
Our fulfillment network optimization is still in early stages.
When completed will provide significant benefits to the customer and the PML.
But it is both cost me in the short term and creating more service disruptions to customers than we anticipated.
And our efforts to stabilize and restructured HSN business people involved ticket a number of difficult and costly steps such as the exiting of ingenious designs business.
Despite these short term pressures, we remain fully confident in the acquisition rationale and the power. This combined platform to drive substantial value for customers and shareholders and we're thrilled to have the HSN team in our family.
And third operating in a changing industry context.
Facing the headwinds of declining linear TV viewership and growing brand proliferation, more volatile product lifecycles and intense price competition.
These headwinds are not new.
But they added the other pressures were C.
Offsetting these headwinds are few powerful tailwinds as well, including the rapid growth of digital media.
And the increasing value of retail platforms that can help brands tell their stories directly to consumers in a compelling authentic immersive and video rich way.
Looking more deeply TV viewership.
We are encouraged that our total minutes viewed continues to grow despite declines in overall reach driven by cord cutting.
Fucking continued strength among our more engaged viewers.
However, the decline in linear viewing does place additional pressure on our ability to reach new and occasional viewers.
We're driving a number of initiatives to offset the linear TV erosion with higher viewership viewership across or digital and OTI t. platforms.
The trend towards shorter and more volatile product lifecycles is translating into heightened pressure and some of our larger brands.
Well, we do not have high sales concentration you need one brand.
Kind of our larger brands, representing just 9% sales accounted for nearly 90% as the year to date sales decline.
Actually see this is an encouraging sign in a reminder, that the difference between growth and decline is concentrated in a small number of brands.
So now that I'm sure, what's happening and why let me get to what matters. The actions we're taking.
Well, we can't control some of the macro pressures like a challenging fashion cycle or product in price volatility, we can respond more effectively they get to better outcomes.
The first we're intently focused on disciplined day to day execution.
Controlling our inventories driving improved product margins, reducing fixed costs stabilizing the organization and working to deliver more consistent service levels to our customers.
Most importantly, we're working hard to delight, our customers every day like increasing product differentiation, expanding variety and getting new ideas to market faster.
For example, in Q3 and fashion, we're driving growth in the active in athleisure segment with the launch of Judah on QVC, that's our new proprietary athleisure lifestyle brand.
As well as a new exclusive collaboration we launched new balance times, Isaac Mizrahi, which brings performance footwear together with unique fashion.
In beauty, we launched Carmen de beauty and exclusive beauty brand. She has a significant social following and we supported the launch with extensive programming across our social platforms, including Facebook live.
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And were reinvigorating some downtrend in beauty brands with stronger offers to our customers such as vendor supported free shipping and handling.
Second.
We remain committed to achieving and most likely exceeding our synergy targets.
Third we are tightly managing every element of our cash flow with a commitment to maintaining the high levels of cash flow conversion, we've delivered over time, even all making important investments in areas like our fulfillment networks and re platforming our web site.
We have a number ways, we can improve cash conversion, even if our adjusted or better results are pressured as we did this quarter.
Finally, we're working aggressively to better position our companies for changing marketplace minimizing the impact of the industry headwinds I mentioned well taken full advantage the tailwinds.
We remain confident in or long term direction, but when you to sharpen our focus and intensify our execution of five key strategic initiatives to reestablish growth.
To be the industry leader and curated special products at compelling values.
To extend our video reach and relevance over all the digital platforms, our customers engage with.
To Reimagine daily digital discovery, making our digital experiences as engaging and sticky as our TV experiences.
To expand and deepen engagement of our passionate community as customers.
And finally to deliver joyful customer service.
I'll provide a deeper dive on these five strategies at Liberty's Investor Day next week.
Finally, I'll wrap up my comments on Qxh with a word about the holiday season.
The Thanksgiving falling later than previous years, we'll have a shorter window to engage customers for the Christmas shopping period.
All retailers space this pressure, but with December 21st we in our last ship date without the customer paying for expedited shipping it's more difficult for us to capture last minute sales, we've launched a thoughtful merchandising programming and event strategy to pull demand for as much as possible to.
To complement the strategy, we're integrating new shows like Sean saves Christmas down home with David very married deals and get gifts be as well as digital platforms, such as holiday HQ inspire early giftgiving ideas.
Turning now to QVC international growth accelerated in the quarter led by strong gains in Japan.
We continue to pursue a series of strategic initiatives across international that are largely inline with our efforts at qxh, notably when the early stages of building, our European capabilities and performance marketing advanced analytics digital discovery and strategic merchandising.
Also continuing our product margin improvement initiatives, including discipline promotional and inventory management.
Optimizing product mix and airtime and implementing selective price increases which yielded positive results in Q3.
In Japan, we actively preparing for the consumption tax increase from 8% to 10% that went into effect on October onest applying learnings from the last increase in 2014.
As a result, Q3 benefited by pulling forward demand in advance of the tax increase, especially in higher priced products and categories such as jory.
However, we do expect to consumption tax increase to have an adverse impact on our Q4 sales in October as we expected or sales in Japan declined.
Turning now to do Lily.
Our Q3 performance was highly challenge, we continue to see significant headwinds in marketing spend efficiency.
The cost to acquire new customers continues to rise.
We remain disciplined on our marketing return requirements and reduced our overall marketing spend by 14% in the quarter.
As a result of lower and less effective marketing spend we saw further erosion and activation of new and reactivated customers as well as lower purchase frequency among existing customers.
Overall product freshness also continues to be a headwind and we have not made sufficient progress and improvements to our overall customer experience.
As we aggressively focused on stabilizing the business, we are working to diversify to more efficient marketing channels reinvest in customer experience and increase our product freshness.
A product, we're working aggressively to add premier national brands.
Seems to early success partnering with well known brands, Tommy Hilfiger, Calvin Klein, Ashley furniture, and a pilot Nike.
And we'll do this while maintaining growth and commitment to our unique and boutique brands as well.
These actions are combines a concerted effort or reinvest in the customer experience, we're leaning into our differentiated fun and addictive mobile score.
With an increased focus on initiatives around her trust through operational excellence and exceptional customer programs anchored by price transparency in October we launched best price promise, which was the first initiative demonstrating our commitment to increased transparency for our customers owning our position.
As the lowest price leader.
Well the vast majority of our merchandise is unique and boutique, yes, thousands of items that lots daily well, we can directly compare our pricing the Amazon and Wal Mart.
The launch of our best price promise, whereas Lilly item is identical to what items sold by Amazon or Walmart as often as 97% of the time Zulily offer the lower price with our best price promise, we're now featuring Amazon and walmarts prices on identical items on our product detailed pages.
The highlight our significant price advantage and build customer trust.
In addition to our efforts on product and priced we're investing in improving shipping times and piloting options, the lower shipping and returns costs.
As we see headwinds in marketing spend efficiency will find a reallocating some of our marketing spend to these efforts and deepen our investment in our customer experience.
The cornerstone excluding improvements we had a strong quarter delivering both top line and little bit of growth driven by continued strength at Ballard designs, including a strong performance at our retail stores.
A positive turnaround at Grandin Road.
Improved trends at Frontgate.
As we move forward, we'll be focused on sustaining the momentum in our home segment as well as continuing to progress, we're making with our gross margin initiatives and our discipline around operating expenses.
Finally, we're trying to build upon the Q3 launch that realize our premium plus size proprietary fashion brand the fills a real marketplace need.
We were pleased with reaction at its launch event and our teams are now beginning to promote the brand more broadly.
Before before I turn the call over to Jeff I want to thank our 27000 team members.
Sure everyday striving to make a difference for our customers and our business.
We recently celebrated the launch of a yearlong effort.
Involving several hundred team members the shape, our curie purpose and to find the principles for how will work together serve our customers.
Especially grateful primes like fees for our team's dedication and passion.
And on this veterans day, we extend our special appreciation and thanks to all of our TRG team members, who have served in the armed forces are whose families have served.
A reminder of the upcoming Liberty Investor Day, I look forward to have an opportunity to speak with you in greater detail about the strategic initiatives and our areas of focus.
And with that I will turn the call over to Jeff.
Thank you, Mike and good morning, everyone, beginning with Qxh net revenue declined 4% on 4% reduction in unit volume slightly offset by 1% increase in ASP do.
Merrily to mix shift within home innovations and the home category.
Adjusted OIBDA declined 7% and margin rate declined 50 basis points, primarily due to sales the leverage and headwinds from network or filming upgrades general rate.
Frankly increases.
Inventory management and continued marketing investments. These factors are partially offset by reduced TV commissions synergies and product mix impact.
Our network optimization plan will reduce our U.S. fulfillment center footprint to seven facilities by the end of 2020 down from nine.
We had a soft opening of our new North East fulfillment center in Q3.
Handling a modest amount of large size not conveyable products.
We're also continue to stabilize our Lancaster facility to support apparel fulfillment.
Anticipate additional expense headwinds in Q4.
Primarily from new northeast site lease.
And project implementation costs, However, we anticipate improved productivity and reduced transportation and fixed cost part the favorable impact on adjusted OIBDA and 20 Tony.
Along with capital avoidance on facilities, we are closing.
We will provide an update on our us fulfillment center optimization and current year impact.
Yesterday.
Finally on Qxh, we realize cumulative cost synergies of $110 million through September thirtyth.
We anticipate total 2019 center geez net of onetime costs to be consistent with our prior indications and will provide more detail at liberties Investor day.
Moving to our international business and constant currency international delivered a strong quarter with revenue up 3% on an 8% ASP increase which was partially counterbalanced by a 3% decline.
And lower shipping and handling revenue.
[noise], Japan had the best performance across the markets were strong revenue growth. This performance was driven by better product flow and category level initiatives strong demand from its TSV replay and expansion of programming and carriage as well as initiatives to proactively pull forward demand in advance of the Japan consumption.
Tax increase.
Adjusted OIBDA grew 15% and margin expanded 180 basis points from gross margin improvement and the closure of our former France operations in March of this year.
At Zulily revenue declined 17% due to the factors that Mike mentioned.
We also recognize a 1 billion dollar noncash impairment charge, which is not included in adjusted OIBDA and is the primary driver of its operating loss.
Roughly 60% of the charge was it related to its trade name with the remainder attributed to goodwill.
Adjusted OIBDA declined 56% over the margin declined 200 basis points, primarily due to sales deleverage of supply chain and fixed costs.
Partially offset by reduced marketing spend.
Our initiatives and actions to diversify and test new marketing channels, and strategically reinvest and enhance the customer experience will take time to yield meaningful results.
We anticipate the current rate of sales erosion to accelerate in the near term given the reduced number of new and reactivated customers compared with prior periods.
Our cornerstone business returned to growth with revenue up 5% and adjusted OIBDA, increasing $3 million, excluding the improvements business that was closed in Q4 last year.
The business gained traction with product margin initiatives and remain disciplined operating costs shifting marketing spend from catalog digital.
Looking at the business broadly, we had not seen immaterial impact from tariffs levied to date.
As a reminder of the next tranche will not go into effect until mid December .
In total the announced tariffs cover approximately 35% to 40% of total cure rate retail cost of retail sales.
Approximately 80% of the tariff impose cost of sales is from vendor source products, meaning we have we're better able to mitigate the tariff impact with our vendor partners.
With the remainder of the product is direct imports.
Of our overall exposure approximately one third our in electronics with the rest spread evenly across apparel accessories, and the remainder of our home categories.
Our teams continue to work closely with vendors to share the cost burden across the supply chain and increased prices where necessary as well as look to shift product sourcing from China to mitigate any impacts to our results.
Well, it's too early predict the impact on future sales demand, we will continue to monitor the situation hope for Swift resolution to the trade dispute.
Let me wrap up my comments, where the discussion on capital expenditures in cash flow.
Capital expenditures were approximately $83 million in the quarter and 249 million year to date on a cash basis.
For the full year, we now anticipate cash capex to be approximately 370 $390 million on a cash basis, which is in line with our prior estimate but higher than prior years.
The increase is attributable to our U.S. fulfillment network optimization. This initiative and continued information technology and commerce platform investments.
Shifting to the balance sheet and cash flow.
We improved free cash flow in Q3, primarily due to the timing of the renewal of TV distribution rights and the absence of transaction related costs incurred in the prior year and disciplined working capital management.
Finally, QVC is consolidated leverage ratio as defined in our credit agreement was 2.3 times at September Thirtyth as compared to a maximum ratio of 3.5 times.
With that I'll now turn it over to Greg.
Thank you Jeff.
Let me comment a little bit our capital allocation philosophy cure rate.
We look at the falling buckets, which are not necessarily mutually exclusive first.
Investment the business for the future.
Capex as you heard from Jeff is elevated in 2019, as we invest in Gi and other fulfillment initiatives.
Well, we expect this to revert to more normal levels in 2020.
In part as we complete the integration of each asset.
Secondly, managing our tax exposure.
While the tax liability from our exchangeable bond was reduced substantially due to tax reform.
We decided to be proactive.
Some of the elements, including attacking the MSR bonds towards that end, we repurchased 88 million the bonds in October and hedged a portion of our uncovered and exposure.
We also continue to deploy capital into what we believe are very attractive tax advantage investments and you've heard about some of those in the past.
Third return of capital shareholders.
This year through 10 31.
We bought $392 million of stock.
We will continue to be opportunistic going forward, but are aware.
At the stock has experienced much more volatility this year.
Sure. It continues to generate very strong free cash flow and we will prudently invest that across all of the buckets I had mentioned above.
As Mike and Jeff mentioned, we look forward to seeing many do next week.
And our annual Investor meeting on Thursday November 21st in New York linked to register is on the home page of our website.
We appreciate your continued interesting curing retail and with that operator, I'd like to open up the line for questions.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad.
Or using a speakerphone. Please make sure assumption is turned off to layer signal.
Once again that is star one.
We'll go first to Heather Balsky at Bank of America.
Hi, Thank you for taking my question.
Our son on Qxh can you just talked about some of the near term lover issue you have to improve performance you are there any thoughts about investing more in free shipping or marketing and what can you John the products tied thanks.
Thanks, Heather you did a bit of quality above I mean, most importantly, it's just continuing to read and react to what the customers responding to on the product side and as you know we benefit from been able to adjust what we're offering a.
A fairly quickly so trying to just continue to.
Shifting where she is going.
In areas that we know our areas of strength like fashion and beauty.
Working intensely to get those back to sustainable growth.
Watching a number of new product lines I mentioned, a couple of them in Q3, but we've been building our capabilities within our proprietary product development team and you'll see a handful of new brands rollout over the next step a several months.
We're partnering with Influencers to try to bring these influencer brands to market where are we just completed our.
That's what we talked about last call to scar the country for up and coming entrepreneurs and will be.
That was about 850, or so entrepreneurs, if I recall, the numbers correctly and will be.
Launching 80 to 90 of their brands over the next few months so for us it to starts with product and just being resolutely focused on everything we can do to bring her fresh exciting products and try to engage or interest.
We are on the other dimensions you mentioned you know, we're continuing to invest in expanding our marketing we're mindful of the returns on that marketing spend so we don't want to invest beyond what returns would tell us.
But did take up marketing spend in Q3 and expect to continue to invest in that but as a little more benefit on new customer acquisition and an overall sales and so it's a little more of a long term play doesn't help as much in the short term.
And then finally, we are continuing to look at having the right sorts of promotional offers.
Which for US is about use of our easy pay flexpay tools, along with shipping and handling promotions. We just had a big shipping and handling promotion. This past weekend as an example.
To get our vendor partners to support those where we can.
And do those in the right way so.
Tackle all those initiatives still try to do it in a way where we feel like we're getting healthy volume.
And volume that sustainable over time as opposed to overlay promotional in nature.
Thank you and then on the balance sheet can can you just remind us what the current tax liability on Exchangeables is and what the impact is from the M.S. high transaction [noise].
Well.
We'll take that here, Brian do you have that number.
Billion 71 at quarter end.
Now remember.
That number will grow as we received as we take incremental deductions, but we will also get the benefit of an effective.
Interest free love.
For the period until they are retired so there its a.
It's a continuing increase in that liability offset impart by earnings we can make on that interest free low.
Got to the liability come down with the pay with the payment.
[noise] It did yes, yes, okay alright, great.
But that was but that was subsequent to quarter ended part right got it. Thank you.
Well go next to Eric Sheridan.
Thanks for taking my question to Baby might you know it's been about a year now since you talked about leading you're not performance marketing channels and trying to engage with do with existing customers in different ways wanted to know if we could look back in sort of get a better sense of what you learned from those efforts how much they did.
Fit.
Two gross.
Customer side over the last year, and what sort of it might do to inform your spending on marketing going forward and then second question. If I could did you guys called the benefit to adjusted EBITDA in the carriage renegotiations with aegis and I think I missed it but just wanted to make sure. If you did call without that we didnt Miss that and maybe I think the synergy longer term.
Agreements, probably a topic for next week, but just wanted to see that up if you are willing to address that was a topic. Thanks. So much.
Thanks, Eric I'll take the first and ask Jeff the way it on the second.
So so.
I would say in the years since we've been talking about more actively Darcy and increase our performance marketing about 30% on a year over year basis. Each quarter. It's typically have been in that range keep in mind, the absolute number still fairly modest in the kind of 1% of revenues area.
But grow over prior year.
We found about that level of step up that enables us to.
Invest that money in ways that get too attractive returns and we measure the return as the number of new customers that we're bringing in and the value that those new customers bring us over the subsequent couple of the year, So I would say.
It's up it's an investment that's negative in period.
It has a sort of within the year payback as we start to see that new customer repeat.
So we feel good that we.
Know how to increase it we know how to major growth high integrity. We it is bringing in more new customers. So I mentioned that about 30% of new customers came in.
Through performance marketing. So you know, we do think new customer growth would be negative if we didn't have that investment in performance marketing.
We don't tend to describe a lot of benefit to performance marketing to our existing customers, we maybe being conservative in that but view, primarily as an acquisition tool I would say, we're learning more and more about what channels are most effective in as you'd expect those channels evolve overtime.
We know that paid social Wally very high cost channel for US is one where we are most likely to find those new customers, who go onto become real super users QVC or HSN. So we're trying to.
Got to spread the dollars across a higher costs channels that bring.
Attractive type of customer along with the channels that just bringing more volume of are still good customers.
So you know we feel good about the program, we'd love to be growing even faster. So we're going to Oh seen this coming year accelerate our investment in marketing technology tools as well as resources. So we get us ourselves into position, where if we're getting attractive returns we're in a better position.
The scale or faster.
With a higher level of technology to support to be confident in that.
Last month.
Jeff Yes.
Our you're exactly right for point of brevity I didn't go through an individual points.
There was a page in the presentation that we post to the IR website.
The commissions.
For the support for the quarter with a total of 95 basis points about two thirds of that was really associated with the M.S. So change so that delta. If you will is really the portion that is attributed to the.
Synergies associated with the carriage.
For both Q an age.
Thanks, guys.
Well move next to Oliver Wintermantel at Evercore ISI.
Yeah. Good morning, guys. Thanks, Mike for all the additional details on the Qxh business.
If I know you don't break it out anymore, but maybe you could talk a little bit about the difference between.
QVC, a U.S. and HSN how to performance. So it wasn't just third quarter.
Yes, Thanks Ali.
Yeah, we don't.
We don't break it out anymore.
As part because we're really trying not to manage the business in that way.
So our feeling is to try to parse out QVC versus 8% performance you can can be a misleading.
Signal, because we want to be investing our resources, where they get the best return across the.
The platforms. So I don't want to say much other than there were highlights in both the rents and challenges in both brands.
There are some issues that were a little more specific to HSN like that pressure, we're having with the ingenious designs at business that we've exited.
But on the flip side, we've been encouraged for example that we've been able to part of how we're able to throw the beauty business in a tough cycle is because we felt the beauty was substantially under penetrated at HSN and so we've seen nice growth over the course of the year as Weve lean into the beauty business at HSN. So we're trying to be thoughtful.
But how to optimize each category across the two brands in ways that makes sense relative to where those two brands a two brands are.
Got it thanks, and then maybe on the free cash flow side. As you mentioned, it's still free cash was still very strong, but with declining sales there might be going forward. Some pressure on on free cash flow and you also mentioned that capex is going to be peaking in or.
Relatively high in 2019 with that level down in 2020, So maybe you could maybe capital allocation strategy going forward.
Do you have a leverage ratio that you are.
Being at or.
When we could see maybe free cash flow or sorry buybacks going to more of a normalized level. Thank you.
I think that okay all right.
And I'll comment on top very good I was just going to comment on the first portion of the question with respect to.
If your leverage ratio.
Our focus in commemorate now is to.
Continue managing the business and the ranges that showed a half times area.
At the operating company level.
We continue to look for ways to.
Very diligent with respect to our capital allocation with respect to.
Expenditures as it relates to our network optimization and other areas within our technology platforms, but I'll leave the rest.
With respect to.
Share buyback, Greg you want to maybe address that Doug Thanks, Jeff So.
I think we have.
Then.
Tried to be consistent over the last several quarters with a view that our capital allocation philosophy, which has been primarily focused on share repurchase over the last several years.
It has been somewhat disappointing in light of the results. We've had in the performance in the stock. So we've tried to become more opportunistic and bites.
Less on a.
Absolute basis and more on a.
Opportunistic basis, and try and find attractive entry points for that and also do some things as we've talked about to reduce other liabilities like the deferred.
Tax liability BTL through taking out the m. aside bonds in hedging a portion of that so we're going to continue to look.
At those alternatives for non.
For balance sheet and capital markets related alternatives, we're going to continue to look at those over the next several quarters and see what drives the most attractive in our minds.
Thank you very much good luck.
Well go next to it.
Capital markets.
Hey, good morning, guys and thanks for taking my question I guess, just first a broader question you know the company has had kind of ongoing merchandising issues going back I think even before Doug how left but but maybe even a certain accelerated since then I guess as you step back and think about this if its beauty bits apparel do you think it's been tactical missteps or do you think there's been kind of a structure.
Throw away and maybe the consumer or change the way they shop and maybe haven't been response as you could have been and then second.
As you think about kind of the Q and H. merchant organizations I know that there's been a lot of volatility there what changes to be implemented to kind of smooth that process out and maybe where did you change h.'s merchandising philosophy that Tom then in hindsight, maybe can be course corrected. Thank you.
Thanks, Ed.
Great question.
We try to pine on it for a moment.
I think we have an extraordinary merchant team I don't see that at a defensive way I. Just I think this is a team that does miraculous things every day, so really don't characterize it as so much tactical missteps and by that I mean.
You know at this very unique mission that pretty much no other retailer in the world can do which is to identify handful of items everyday that can drive extraordinary volumes that attract mass audience has done a highly fragmented world and I just continued to be a competing and how they have they try to do that and try to add creativity and energy and new ideas.
To it.
I'm going basis in ways that both delight, the new customer, but also and meet the needs of all of our existing and longstanding customers I would say our challenge has been and our warning on reflection has been that probably as a leader team.
We haven't.
Move fast enough to evolve the structure of our merchandising capability.
To respond to just how fast the product cycles are evolving in the world and and that's definitely on.
So on our leadership team and so one of things we're doing now having done the heavy lifting of bringing the Q NH organizations merchant organizations together.
So that we could take more of a holistic category view of our opportunities.
And combined these really talented resources now the next phase of that now the were largely stabilized and that organization is to really invest in more specialized capability to be out in market more often.
Take all the administrative activities off the backs of our buyers.
To get them out in the market to build more product incubation and development capabilities within the merchant team.
Said differently, it's just all about trying to now take this Walter.
Segment in consumer tastes and rapid brand proliferation, and give our merchants more structural resources tools and capabilities to move that much faster. So again I think the misstep has been that we just have been a little behind in the pace of change we needed relative to the environment, that's changed even faster than.
We anticipate it would so I as pressured as the business has been I'm encouraged by the work at the team to start to.
The the fine that organization merchant organization of the future start to put it in place and I think that's going to really be an enabler as we start to move through.
Next year.
A question by Q and H integration on philosophy, I, you know I would say we're feeling you.
Pretty good we tried to be thoughtful about kind of.
Putting together the best capabilities and approaches of both the queue at age.
Organizations and teams on philosophies.
Always adjusting always course correcting continuing to evaluate when it makes sense to share brands across Q and age when it makes sense to keep the brands unique so I would characterize it more it's just kind of continuous learning.
And fine tuning, but not any kind of major change in direction relative to what we've put in place over the last several months.
Great. Thanks, so much.
Thanks, Ed.
Excellent.
Craig Hallum.
Great. Thank you very much for taking my question I want to asked about the closure of the ingenious designs. It if I'm interpreting your comments correctly, Mike it sounded like the products were selling well, but the business behind it wasn't very efficient you can you can you just give us a little bit more color on why you made the.
Decision to close that that subsidiary at that just looking out at your your other report proprietary brands across both Q and age or are there any other brands that stand out as as perhaps having businesses that that arent great that are either an opportunity to do some restructuring behind the scenes or perhaps are at risk of.
Also getting closed.
Yeah. Thanks, Alex.
I would say, there's nothing else that's kinda parallel to ingenious designs. So I don't think there's any learnings are risk from ingenious designs that apply more broadly across the business is a very unique situation, where HSN had a wholly owned subsidiary a those operating as a separate business located in new.
Youre.
With that with a very high cost structure and quite frankly under resourced for the products. It was developing relative to our own existing proprietary development capabilities.
And so.
We had we had a business structure that was on economic and then also we had a wonderful partner enjoy he's been a very important part of the of the QVC story and HSN story for many years.
But discussions with her she was ready to move on.
And we were just sort of collectively felt I need to make make a change so fairly unique situation a lot of the products will continue.
But that being developed internally as opposed to through the subsidiary so get unique situation.
We anniversary at the end of the year I don't think it has a lot of applications beyond a ingenious designs.
Okay. That's helpful. Thanks, and then just thinking about this short her shopping period. This year between Thanksgiving and Christmas is that something that you can share with us just historically, how much of a headwind its bandwidth when we've made that full week leap into calendar.
Yes.
We certainly look back at every seven years or so when this happens six or seven years and.
I would say, it's hard to the world changes so much that I think it's very hard to extrapolate what the impact will be.
You know.
Last time it happen you know just the whole dynamics around Black Friday week, where a radically different than they are today. So.
So we don't know what the impact will be we just are prepared to trying to get as much demand in as we can.
And then hopefully the impact will be will be modest, but we haven't been able to find a good historic analog that there would be ethic, a relevant reference point given how much has changed.
Sure that makes sense, thanks very much.
Thank you.
Well move next to Jason Bazinet at Citi.
I think I heard on your prepared remarks, you reiterated your long term.
Synergy targets, but I was just wondered if you.
It was about $80 million Sunedison realization.
Jason we.
What do you foresee a little bit maybe you could repeat your question.
Oh sure I'm, sorry, you I heard you maintain you meet you said, you're going to maintain or exceed your long term synergy targets, but I was just wondering if you could give us an update on where we are as <unk> third quarter I think as of the second quarter is about 80 million of net synergy realization.
And we were looking for maybe 135 for the full year [noise].
So through the third quarter now to $110 million.
For the year our.
Yes, we were anticipating a $165 million to $170 million gross.
That would have been there there were approximately $24 million to $25 million a onetime cost that would have been associated in order to to get to that 165 to 170 basically on where we are today, we feel as if we are.
Able to accomplish our 2019 goal for for this year.
Okay very helpful. Thank you.
And we'll go next to Thomas <unk>.
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Great. Thanks for taking my question, So Mike I want to know if you could comment on the comparison conversion rates for some of your digital engagement versus legacy TV versus QVC dot com per se.
Cool.
Yes.
Yeah. Thanks, Tom.
That's a tough question because.
The hard to truly major conversion across these platforms and keep in mind that.
We can't associate a TV viewer to a sale that we have TV viewership data, but it's all anonymized.
So you know I guess I would characterize the overall conversion funnel as.
We have an enormous volume up people watching QVC or HSN TV at any point in time, the vast majority actually not customers. So we even in today's world.
With that pool of non customer shrinks, a bit with cord cutting, but even with cord cutting we still have this enormous opportunity to engage that non customer as well as oxy engaged the engage the customer we've talked a little bit about the fact that that it feels like the sort of an immediate translation of TV.
Viewing moment to a sale feels like it's not quite as tightly correlated that's it's historically been.
I don't want to overplay that point, but I think there's some truth to that just because in a folks will take their time to go check it out on the website then do other forms of researcher there can be some other intervening steps that might not have been historically.
There, we have very high conversions, when we get traffic to our website. So even though again most of our traffic to our website is also non customers.
The power that TV signal of such that our conversion rates on the web sites are absolutely industry, leading were typically north of 5% conversion rates, which is you know two to three times what the other.
Folks would have just because of the power of the overall ecosystem.
I still early days on platforms like wrote crew.
So you know if you just thought about.
The number of homes that Roko is and I would say, we convert a relatively small number of those home to a sale.
About but if we can get them to look at market to them get them to download the app get them to engaging experience. Then we can start to see attractive return or a conversion rates. So we're in a learn mode on on those platforms, but like the power those platforms to create a more interactive experience for that.
Thank you Mike.
Excellent.
And we'll take our final question from Victor Anthony Aegis capital.
Hi, guys. So Mike you.
Talked about I guess, the foremost headwind for the business is really just a choppy retail environment is there any I'm really some sites for that always business just to sustain norm.
And second on Zulily, you're talking about the low.
Going to spend efficiency, we talked about for quite some time now you know I know some other companies in the space I bought called out there are changes the Google has made either on the mobile side on the desktop as well.
Maybe could you give us a little bit more detail in terms of what's driving that walking to spend efficiency and and at a higher level facility.
Is there any sort of structural I guess, especially with the model.
That that's probably contribute into huh.
I guess, a decelerating growth that were seen in the business. Thanks.
Okay. Thanks to the questions. So on the on the Qxh side on the choppy retail environment.
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I do think I don't think that's a new norm I do think we're in an unusually tough cycle with apparel accessories, and footwear and negative growth territory. They were not a negative territory last year. So you know we live in this funny.
Year, where we see growing separation and performance of different retailers heavily driven by what segment of retailing you're in.
But clearly folks that are in this sort of.
Let the mid mid tier.
Fashion and mid mid to upper tier fashion and beauty business.
[laughter].
We're in a tough cycle do I think that cycle continues forever I doubt when does it evolved when does it change I don't know it looked different last year I suspect it will look different in the future no I separate that from just the you know I I talk about both the choppy retail environment and the sort of change in industry context, the changing industry topics is ongoing.
Well, that's cord cutting or.
Pricing competition, and we need to win and that change in context, but in terms of it sort of current shop, it feels a bit exaggerated from what we normally see it feels like an unusually adverse cycle. We by no means use it as an excuse for our performance we need to do better pattern, even even an adverse cycles, but I do think that can come around.
Over time under Zoo side, you hit on one of the issue. So I would start over simplified I would say, there's kind of a couple of real marketing related pressures that you Lily.
One is just that our.
Email has historically been a very powerful platform for zulily to engage it's a 50 80 90 million prospect base.
And that has become increasingly difficult, especially with the kind of filters that exist on GE mail just harder to consistently get to those customers. We know that we've been working.
For multiple years, but an accelerated way for the last year to finding other ways to reach our customers beyond email I, certainly getting them to download our apps and engage with our apps on a daily basis engage with Facebook messenger. Some of these other platforms are rising in importance.
And we have one of the highest.
Our our percentage of sales done on apps is one of the highest in industry had zoo also quite high Q and age we think thats, a real strength, but it hasn't fully offset the pressure we see a in E marketing and then the other big pressure. We save you see is more on the acquisition front.
Where that Facebook has just become a much more costly channel less effective for us and we have been working diligently all your to try to mix to more favorable channels and just haven't quite found.
That formula and so we do believe as we look forward given the the depth of the pressures that zoo.
That mark we're not going to be able to market our way to back to health, we can do better in marketing and we're doing now.
But we think these pressures are such that we can't rely on marketed in the same way we've relied on it in the past and that's where we got to work harder on product freshness, and we got to work harder on customer experience and by doing that do a better job of engaging our existing customers reduce the churn rate of our existing customers.
And so I think to your question about is there a structural pressure.
I think some of the formula that worked so well in the early years, bringing in a lot of new customers on the basis at this very unique.
Experience, we've got to round out that experience as we move to appeal to broader groups of customers.
And grow our existing customer base.
We have to have a better sort of everyday store, which the team is working on an addition to our daily events, we have to do better with returns and shipping times and the team has a good plan for doing better with returns and shipping times.
We have to again build up this message of transparency and trust, which we're doing with our best price promise and we've got to round out the product Assortments and so having the pilots like Nike on the platform is a real wow factor for our consumers.
So it's not a short term fix there's a number of things we need to do we do believe intrinsic.
Importance of the brand what it represents the amount of customers that engage with it but these are all addressable issues and we can get back to growth having had a very pressured a year, but we need a number of things to.
Work together well.
So if that I think that was our final.
Call. So final question. So thanks, everyone for joining US today. We appreciate your continued interest and support and curator and look forward to see new at our Investor Day next week. Thank you.
And that does conclude today's conference again, thank you.
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