Q2 2020 iMedia Brands Inc Earnings Call
Greetings and welcome to the I'm Mediabrands second quarter 2020 earnings call. At this time all participants are in listen only mode question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr. Tim Peterman.
She's executive officer for I'm Mediabrands. Thank you you may begin.
Good morning, everyone and thank you for joining I'm, Tim Peterman Mediabrands CEO.
Before I go into my prepared remarks, I'd like to cover a few housekeeping item.
We issued our Q2 earnings released earlier this morning.
We don't have a copy you may access it through the news section of our IR website at <unk> Mediabrands Dot com.
This release is also an exhibit to the form 8-K filed this morning I would also like to remind everyone. This call will be available for replay through September 1st starting today at 11 30 am eastern time.
A webcast replay will also be available via the link provided in today's press release as well as on investors web page and I Mediabrands Dot com.
Statements made during this call are considered forward looking statement and are subject to significant risks and uncertainties.
Statements reflect our expectations about future operating and financial performance.
And speak only as of today's date, we undertake no obligation to update or revise these forward looking statements for any reason, we believe the expectations reflected in our forward looking statements are reasonable, but give no assurance such expectations for any of our forward looking statement will prove to be correct.
For additional information please refer to the Safe Harbor statement in today's earnings release, and our FCC filings. Finally, we will make references to non-GAAP measures on this call such as adjusted EBITDA.
Information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures.
Included within our earnings release.
With these housekeeping items complete let's begin.
As with our last call I'd like to begin this morning by saying that I media brand continues to be focused on taking every step of can during these uncertain times to keep its employees vendors customers guest and their families safe.
Before we turn our attention to our strong Q2 results, let's take a step back.
It was only one year ago. When we began this journey to define a new interactive media strategy.
To implement it with a leaner more entrepreneurial organization.
With employees love operational discipline.
And embrace calculated risks.
It was only one year ago.
When this underperforming television retailer with a poor merchandising assortment declining vendor base.
Loaded overhead negative customer file trend negative viewership trend and real working capital pressure from 18 months of material losses.
Literally picked itself up off the floor and worked hard and I need day and night to create the financial results you see today.
Our employees, our directors vendors and myself are all proud of that effort and today's report card with that let's go into the Q2 detailed shopping skews continued Q2 improvement in product pricing discipline.
Assortment planning and on air execution continue to drive customer and margin growth as illustrated by the following three key metrics.
First and foremost our Q2 active customer file grew by 1% over the same period last year, which was the first year over year quarterly growth in four years, driven by 38% increase and new customers.
Our Q2 gross margin of 37.2% improved 90 basis points over the same period last year.
And for the first six months of 2020, our gross margin of 37.1% improved 480 basis points over the same period last year and our new product launches continue to resonate with our customers for the first six months of 2020 revenue from new product launches produced.
18% of shopping excuse total revenue, which is our best success rate ever.
From a profitability perspective, the Q2 performance was strong we achieved an adjusted EBITDA of 10.7 million.
It was the best quarterly adjusted EBITDA performance ever.
Q2, net income of 1.1 million in excess of 11 cents were also strong performances.
Our balance sheet continues to improve.
Cash at quarter end was 18.7 million.
An 8 million dollar improvement from year end. In addition, we reduced our net debt at the end of Q2 by $23 million.
Moving from 59 million net debt at year end to 36 million in net debt at the end of the second quarter. Our credit facility provides up to a 90 million dollar revolving line of credit as supported by our borrowing base and we have a term loan which matures in July of 2023.
Our inventory balance at the ended the second quarter was 62 million compared to 64 million at the end of the first quarter.
Regarding capital expenditures during the quarter, we spent approximately 1.4 million on capital projects, primarily reflecting investments and upgrade to our web site and infrastructure.
As a reminder, from a tax perspective, we have approximately $393 million in federal and a wells that are available to us to offset future taxable income.
In terms of our outlook in Q3 and Q4, we believe the company will post adjusted EBITDA in the mid to high single digit millions. We also continue to believe I media will be less impacted by called it then other media companies because we have a direct to consumer revenue model that serves customers who seek to buy goods.
On the comfort of their own homes, and we are not dependent on advertising dollars from national advertisers, who are impacted by the continued disruption in the brick and mortar shopping experience before I close I would like to explain again, our broader journey here to become a leading interactive media company growing a portfolio.
Niche television networks niche advertisers and complimentary media Commerce services and why we recently created and emerging business operating segment.
We launched and acquire businesses designed to better engage with the younger generation of shoppers, who primarily consume media on the Internet based video distribution platforms, sometimes called over the top or OTI tea and TV E or TV everywhere, we believe our new emerging business operating segment would become a.
Fast growing part of our overall company.
For example, with the acquisition afloat left interactive in Q4, 2019, a leading OTI t. technology provider to entertainment brand competing in the OTI tea and TV video ecosystem.
I media is well positioned to pursue new opportunities in this internet based video platform that today enjoys more technological innovation and more customer experience improvement then the 24 seven linear video platform provided by the M. B P D to shop HQ for perspective allergy.
Estimates that 80% of U.S. TV households have at least one internet connected TV device, including connected smart TV.
Standalone streaming devices like Roku, Amazon fire stick or set top boxes, chromecast or Apple TV.
Connected video game systems or Blu ray players.
This is a slight increase from the 74% of at least one connected TV device in 2018.
A bigger increase of 57% in 2015 and it was only 24% in 2010. This research also estimates that roughly 40% of adults and U.S. TV households watch video on the TV via a connected device daily.
And that 40% compares to 29% in 2018.
12% in 2015, and only 1% in 2010 as of today S&P estimate.
The linear U.S. television marketplace is comprised of about 100 million TV households.
Roughly 80 million of those homes are reached by MPPD or multichannel video programming distributors like a comcast or Directv.
And 20 million of those homes are reached by OTI, a providers or over the air broadcasters reach these consumers via an antenna shop HQ is today nationally distributed by the MPPD and many of the LTAC broadcasters.
There's also streamed on shop HQ dot com its mobile apps and it's available on OTI T. services like ROE COO.
Apple TV.
Amazon fire stick and Samsung Smart TV.
That being said shopping excuse merchandising strategy is not focused today on the younger generation a potential customers, who are primarily consuming their media on internet based non linear television because shopping skews customers, who are primarily 50 plus years old are watching about the thing.
Same amount of linear television, but they were five years ago.
And most importantly, these customers spend about 15 billion annually and television retailing on the existing video platform provided today I'd MPPD.
We established our emerging business operating segment to pursue these OTI tea and TV video platform opportunities, which we believe will one day be the size of the marketplace shop HQ enjoys today with the MPPD.
In closing I would like to say that these are important time today media as we continue on our path to become a growth company.
Thank you for your time this morning, I will turn the call back over to the operator for today operator.
Thank you at this time I'll be conducting a question and answer session. If he'd like to ask a question. Please press star one on your telephone keypad confirmation ton will indicate your line is in the question Ken.
You mean prestart too if you like to remove your question from Nokia for participants you think speaker equipment. It may be necessary to pick up your handset before pressing the starkey.
Our first question comes from line of Mark.
Argento with Lake Street Capital. Please proceed with your question.
Morning, Jim Congrats on a nice real strong quarter.
I was curious where are you guys were seeing that strength it looks like the health beauty business was up pretty big in the quarter.
You guys are deemphasizing at home and CE, but maybe you could just.
We do a little bit on.
What would be great.
Hey, Mark Thanks question.
Certainly in Q2, we did see a pick up certainly with everybody at home I N D. I call. It the home improvement health and beauty categories, and probably a little bit at retreat in some of the higher end jewelry and jewelry categories.
In terms of consumer trends that certainly what we saw from our perspective and it was really.
An opportunity for us.
Our strong in beauty and how that was an opportunity for us to really starting to customers at a time when not only the interest shit.
What we would call our strength, but it was also a time when or.
Levels, which is homes you television or people watching television had increased and so it was you know both both of those elements.
Helped drive some of the new product in or reduction that we created in Q2 and in Q1 resonate with other customers.
In terms of.
And just straight those trends continue in in terms of a mix or do you expect to see more going to watch and jewelry term budgets you get.
Closer to holiday or would you assume exporting out through the rest here.
No it's interesting I it.
Anybody's guess on those things when we think about our airtime mix, we do think beauty and health is something that we've done well for a while in certainly in.
Jewelry very strong watch very strong fashion <unk> home home in certain categories, particularly with our strong brands like Mckenzie and Waterford those continue to perform well in Q2 Q1 and really every quarter. So we built very good brand in those categories and we certainly want to give them.
The opportunity to grow based on the consumer demand and we think that will be more balanced in Q3 Q4.
Got it and then just looking at the operating expenses it looks like your distribution and so on expense as a percentage of sales those down pretty pretty materially could you talk a little bit about what's driving that benefit.
It's a combination right so it and I talked about in last quarter. It never one thing so the the combination of in Q3 in Q4, when we moved to a static programming calendar and we began to make less and less changes. We we found that as those chain.
Ranges happened in it became more predictable for the customer our variable rate was able to come down so more or less customer calls less.
These different element of the variable rate came down so thats in distribution selling our distribution costs with RMS those again based on partnering with them and negotiating with them our cost came down there our overhead that there is it.
A multitude of things all coming together once and it's never.
It's as I said never disconnected from the front of the house decisions, which had to do with not only that the static programming calendar, but also how we thought about rebuilding each customer file category by category like watches the way we brought the customer file growth there in Q4 that also impacted.
Distribution and selling expenses made us more efficient and then when you think about how we plan our shows with a better price point balance it allows us to manage our inventory. If you look at the way we've managed our working capital in our inventories come down quarter over quarter pretty significantly it's because we're buying different.
Really.
And when we say, we're buying differently, we're buying differently, because we have less inventory and our margins are much stronger and that again brings down your distribution and selling expense.
And obviously you think this is something that you can sustain given the.
Mid to high single digit EBITDA positive your EBITDA for the next couple of quarters. So that's awesome. Thanks.
Thanks Mark.
Thank you. Our next question comes online about experiment with Craig Capital Craig Hallum Capital Group Sorry. Please proceed with your question.
Great. Thanks, very much for taking my question and congratulations on the really strong result here.
One thing I really wanted to ask about would be the improved viewership trend that as your distribution and viewership moved more and more away from traditional linear distribution and more towards non linear platform. How are you driving that that viewership with customers not necessarily flipping through the channel the way that used to it.
And perhaps having your network cash there.
Thanks, Alex Tricky question I don't know how to approach and we attract starting at the top which is let's think about shop, HQ and its distribution platform and I should've done it I'm trying to do a better job explaining the different strategies. So.
You know Bulldog shopping SKU health and some of these channels that are coming out are going to use a lot more reliant on some of these.
We call them, social selling platforms, where you have certain personalities, where you have certain.
Products that resonate with different types of customers and those customers. If they are younger ours are on a different kind of platform and we will go through that here in a minute to back to the main our flagship network would you shop HQ still today and for the next three to four years, we certainly are.
Focused solely.
Thats really the strong word, but primarily on the existing platform that we talked about which is 15 billion dollar annual revenue oligopoly between us QVC and HSN, where there are customers that we intend to.
Liberate in other words take share from other networks and compete at that level, we think that platform today with the customers today, there's plenty of opportunity for us in share over the next three to four years without trying to make shop HQ into something it's not and going after a different generation on a different.
Internet platform and that's what we spend a little bit time talking about in my prepared remarks around emerging business, whereas when we have products in a selling format that would engage a different type of customer that isn't early adopter in these OTI platforms or even in the TV everywhere, we will have a.
Shorter selling season, right. So it'll be a two minutes sell it won't be an hour. So it'll be done differently and it's really the type of selling is really a primary engine of how we're going to be more relevant in these internet based video platforms, rather than the traditional selling approach.
That we've done today with shop, HQ and we've been testing that for several quarters with success until we call that term.
Social commerce, and you'll you'll hear more and more from us in Q3 in Q4 as we begin to expand that effort and we think that social commerce strategy is how will the relevant on those platforms.
Thanks, and Thats really helpful. And then can you talk a little bit more about the secondary network. The Bulldog and then the upcoming launch of shop HQ help it it's really about going after a new customer or taking your existing customer who is interested in those categories and.
Really expanding that that opportunity can you just talk a little bit more about how those networks are going to play into your your overall portfolio.
Sure the.
Let's take a step back and why are we doing what we're doing and the answer is we have certain strength with our core.
Business, which is shop HQ and that is.
The first core strength was is that different from any other television retailer, 25% of our customer bases mail because of index to watch and see in some other than some other areas and so we thought for ourselves how do we give that's a very big category that under served how do we get that independent status. It deserves and so that that was the strategy behind.
Creating build on until Bulldog will be focused on a broader category of serving products and services to the male customer using our beginning advantage of the customers that we have today on Chubb HQ, but then finding other customers and that that's the always the strategy is to use.
Is the strength, we have today find the distribution that is economical and where those customers are and then build and find new customers. So bulldog is not as reliant on 24, seven linear television distribution, we are incubating our programming it in other forms of.
Shorter block programming, where males, our and at times, when nails are watching television or when.
And we're doing it in a way that we're also inviting two females who happen to be buying from males for their males and they say so it's that the strategy for Bulldog is the same strategy, we're doing for shop HQ health lease, we the health and wellness category is something very underserved in telling.
In retailing and median general and we think our strengthened beauty and health today can give the independent status to a 24 seven network there.
We just.
Our launching today in September and we expect.
Based on our research our experience in our ambition, we expect CHMP HQ held to be as bigger bigger than a shop HQ. One day, just because of the category and the type of programming and the type of.
Services that we see that could accompany that network. So it hopefully that answers. Your question. It starts with our strength and then we move into something that we deserve we think deserves independents that is because of the the entertainment and the commerce Thats migrating online.
That does the answer my question, that's not that's sounds terrific. Thanks, a lot them.
Thanks, Alex.
Thank you Sir our next question comes from line Elliott Alper with D.A. Davidson. Please proceed with your question.
Yes.
Great. Thank you.
Could you talk about the monthly cadence of sales trends you saw throughout the quarter and if you saw any correlation between sales trends in geographies that began in different stages of reopening in how significant that was and then lastly curious if you could talk about any sales trends quarter to date.
[music].
Thanks, Elliot and so let's let's.
Do those separately so first of all in Q2, the geographic relationship to what you're describing Covance did we see any of that in and the answer would be no. We really didn't see anything like that geographically timing wise, what we did see certainly as we talked about in the beginning of.
Of the call, which was we did see viewership going up and we did see the category some of the categories waning as interest in beauty health at home improvement grew so.
The the opportunity for US was is that we were already in the process from a product assortment planning and planning our shows where the price band balance they allowed us when we think about that shifting consumer demand, we weren't we weren't so stock full of inventory and so setting our way.
Say that allowed us fairly quickly to address that that shifting demand and able to provide the programming and the product that that net that demand. So that was something that was more of a a national phenomenon more that geographic phenomenon does that answer that first question.
Yes.
And then in terms of the second question I'm not really sure it.
If you could go into a little bit more detail on that I want to better address it on the second part of your question.
So just on the cadence of sales turns you saw in the quarter and any trends quarter to date.
Hospital to call out.
Yes, so I'm trying to think how might I do that we don't really get into inner inter quarter result, and I was hoping for different angle on that the I would just stay that way.
We don't offer any color on the are on our quarter to date and performance and to Mark Our cantos call earlier, we think that in terms of when and how that consumers shifting preference for beauty in health will change we're not sure but what we do know is is that.
Our game plan consist of a pretty clear roadmap for Q3 in Q4 as it relates to the mix and as it relates to what we're offering and we do think as a result of Q2.
And the in in our strength of Union health that we think the popularity of shopping HQ health.
Maybe more impacted by how long and when and how it migrates in terms of shopping in terms of the stay at home and and Kobe, but we don't think shopping few health and our agenda. There is going to be driven as a reflection of how kobe to ultimately stays or.
Goes in Q3 in Q4.
Okay, Great and then on the new customer growth could you expand more what went into the growth are you seeing new customers fitting into business categories are you seeing water demographic of customers and then kind of what would be the company's plan to retain losing customers.
Sure the so.
But again the Ed let's go back to the origin of the change which was in Q3 in Q4 as we've talked about the past we went about a category by category.
Strategy to rebuild our customer file which had been negative for for quite some time in and in Q4, we talked about how we deploy a certain strategy to rebuild the watch customer and it was it was around price points around certain elements that around engaging those customers and in Q1 in Q2, we've been going up.
Got it not very methodical basis on which categories, which shows which static programming would address new customers and which would embrace the existing customers and sometimes that answer is not the same but if you. If you want to think about the primary driver for the customer file growth in Q2, it would be around.
Our ability to move very quickly to launch quality brands and products.
That resonate with both new and existing customers for the first time in our company's history in 30 foot 30 years, we generated roughly 19% of our revenue year to date in Q1 Q2.
From product launches that took place in Q1 in Q2 and that really to me as a caveat it says.
We are not just launching products to launch products. We're not just flailing out what we think our customer may or may not like we are being thoughtful about the 25. Some brands that we did launch that they are sticking and that they make a difference to the customer so.
The a customer file growth is comprised of three things right new customer growth.
Reactivation of customers that.
Have not bought in awhile and churn and it's that balance and finding a way to make it grow.
And it is not ISI and it is an art. It's in every day thing, but we have a roadmap we feel pretty good about and that roadmap headed picture taken as I like to say in Q1 in Q2 and the results are pretty good.
Great appreciate it.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question can you. Please press star one I knew telephone keypad.
Our next question is a phone from the line Mark Argento with Lake Street Capital. Please proceed with your question.
It's more of a just a quick housekeeping here, but I did notice which say.
The DNA or the amortization, which we've got so quite a bit many I also see the.
Thank you guys have us until the end distribution rights on the balance sheet now so just wondering what what's going on there is on the new Tony treatments for those rights. Thanks.
Sure. Thank Mark in Q1, we we talked about that more and and talked about television amortization, which is an entertainment industry and in our industry in TV retailing the distribution.
Agreements with the MSR shows a portion of it is related to the actual channel.
Hang on that channel and the right for that channel they call them broadcast right and then a certain amount is obviously just for the servicing.
Fees and in this industry a television retailing at oftentimes a percent of net sales. So the amortization that you see in in our in our balance sheet. Our income statement relate to the channel placement rights or the those intangible relight rights related to our distribution agreement.
Which is.
In the.
Getting caught up with the standards of how this industry accounts for that.
So the amount of money.
Desertion boosted the ROE.
Once you are dependent upon the sales in the quarters are pretty static.
No they.
Additionally, the channel placement fees are static and the fees.
Related to the volatility of the business are all related to the services.
Great. Thanks for the reminder.
Yep.
Thanks, Mark you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. peterman for any final comments.
Thank you Melissa.
Listen I just want to say again, thank you to everybody who has been with us and who joined US This morning.
We are moving in a strong direction to become a growth company and we're excited about it.
And look forward to talking to you soon.
Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.