Q1 2021 Qurate Retail Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Great retail 2021 quarter, one earnings call. During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press star one on your telephone.
As a reminder, this conference is being recorded May seven and I would now like to turn the conference over to Courtney Chun Chief portfolio Officer. Please go ahead and.
Thank you before we begin we'd like to remind everyone that 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 and food.
And he knows mentioned and the most recent form 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 curate retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statement contained herein to reflect any change and curate retail expert.
Patients with regard there to 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 prelim.
And are you noticing schedules one through three can be found and the earnings press release issued today on our earnings presentation, which are available on our website today, especially on the earnings call. We have curate retail president and CEO, Mike George <unk> retail group CFO, Jeff Davis and available for Q&A journey retail executive Chairman, Greg and I say please note we published slides.
To accompany the earnings release and I'll also point you to our annual report and the letter to shareholders, which provides an overview of the ongoing evolution of the business. It's a great read both of these documents are available on our website now I'll hand, the call over to Mike.
Thank you Courtney and good morning, everyone. Thank you for joining us today and for your interest and share at retail.
I'm delighted to report outstanding results for the first quarter.
Our team delivered strong top and bottom line growth across every business unit and every market driving 13% revenue growth and 32 per cent wasn't a growth and constant currency.
This was our best quarterly performance since the formation of current retail and 2018.
We book sales momentum through the quarter, driven by the reemergence of the fashion business and improving customer sentiment and aided in part by stimulus actions.
And we drove broad based customer gains across all business units.
Welcome to one 6 million, new customers and the quarter up 35% from the prior year and.
$10 8 million total customers and 9%.
We also made important progress on key corporate responsibility initiatives and this we published her inaugural corporate responsibility report provided by the United Nations Sustainability development goals.
It details our commitment and our ambitions to protect your environment jewelry products responsibly and champion empowerment and belong.
And.
And also includes disclosure align with the FASB framework. So please check out the report with Detroit and retail group website.
And as part of this work, we're expanding our highly successful small business spotlight in 2020 one to support 100 entrepreneur has a diverse backgrounds and why didn't them on air and digital exposure and other pro Bono services.
Entered around heritage months, including National military appreciation month, well I'd love the national Hispanic months.
And that's where the pandemic our team member safety and wellbeing remains our Paramount focus and.
And then my other actions, we're providing all team members up to eight hours of paid time off cause facilitate vaccine and adoption.
We anticipate reopening their offices this september and employing a hybrid work and molecule. Most office based team members blending and remote and on site work based on their preferences and the needs of the wall.
This will enable us to consolidate and a global real estate footprint and reduce operating costs in the future years.
Looking forward, we are encouraged by the macro environment.
It's great overall consumer demand.
Rebel and fashion.
Positive outlook for retail sales and the <unk>.
Celebration digital trends we.
We continue to closely monitor supply pressures inflationary challenges and any shifts in consumer spending patterns.
But the unique combination of our extensive digital video ecosystem.
<unk> differentiated customer experiences and strong and growing base of loyal shoppers use without rival and positions us well for the future.
As we emerge from the pandemic and adapt to the new realities.
Turning to Q ex age and the team delivered outstanding revenue growth and the first quarter driven by three key factors first we achieved the most balanced growth across categories and we've experienced since the pandemic the GAAP with five or six categories growing or essentially flat Jeff will provide.
More details.
Second.
And this balanced category growth growth balanced customer performance.
We continue to enjoy strong growth among new customers up 20% and the quarter.
And we remain encouraged by the projected lifetime value of these acquired customers.
And we gain more experience with the large class of new and reactivated customers, who joined us over the course of 'twenty 'twenty.
It's become even more confident and their stickiness and projected lifetime value.
Just two per cent of last year's new class made a purchase and the first quarter of this year.
A comparable rate to prior years. So it was a much larger class.
As a result last year and new and reactivated class drove approximately one third of our Q1 growth.
Additionally, our best customers returned to growth per se.
<unk> up 5% year over year.
No we've shared over the last year, the best customer retention remained stable and we will call. So that's what the sales would turn positive as the fashion business rebounded and.
That's exactly what we saw this quarter.
Third we continued to benefit from the strength of our video and digital reach.
And with a 6% increase and the total minutes viewed our five networks more than 25% growth and visitors to our online properties and 20% growth and all.
Online sessions.
Or was it a margin expansion reflects in part the benefit of our multiyear effort to realize synergies from the HSN acquisition.
As our work on strategic vendor sourcing and.
Along with our disciplined promotional stance.
We reinvested some of these savings and performance marketing and the expansion of our digital ecosystem to support long term healthy growth.
Progress on our strategic priorities hasn't backed and fundamental to both sales and what better games.
Sure Adrian and special products at compelling values.
Stories that inspire and excite you as the heart of our business from.
And the first quarter, we built on strong customer following developed and Cleveland designers, Influencers and entrepreneur, such as Laila Ali and Bethenny, Frankel, and we buy living and yellow and the fashion category.
And so and morale and culinary.
We also continue to expand our product and brand range and on trend categories, including and apparel launch and see the style feature and organically sourced cotton and and beauty E Salon, a customized home hair color system.
Along with hair skin and nail care brands Belle Sonic Spa ritual and finishing touch flawless Salon nails.
And I'm pleased the lives of Este Lauder that I mentioned on the last call performed very well.
We also drove strong results and key events capitalizing on opportunities to offer compelling virtual experiences outside our studios.
We broke sales records with our annual St. Patrick's day of that he and the customer to Ireland for inspiration.
And gardening and took the customer to greenhouses and nurseries and into the back yard of her favorite guests.
And an incredible collection of plants tools equipment, and decorative garden assets from our portfolio of rational exclusive and private label brands and we educated the viewer and how to achieve the perfect outdoor oasis.
These events are just a few examples of our ability to translate our strength and content and entertainment and and product duration and it.
Operating moments that attract large audiences and drive high sales volumes.
We expanded our leadership and multi cultural beauty.
Oh from new product stories, and inspirations and expertise, including Premier and the new program shades of beautiful on HSN and lots of new brands, but and urban skin Rx.
We continue to extend video reach and relevance.
And sure and we are relevant and crashed content across traditional and new and emerging platforms.
And late March with seamless party, a solvable online and mobile beauty content platform.
And in your long lives stream collaboration a quarterly program and called the body beauty allo, helping viewers discover the best and skincare and beauty.
And sure editorial and insights and products curated bye bye birdie and QVC.
The content is available over multiple platforms, including Facebook and Youtube PVC Dot com are to receive two channel.
T P devices, both dot com and pretty social presence.
Collaborations is one of many examples of how our strategic initiatives across product duration digital video and social engagement.
And creation and marketing and community building come together.
And the create a compelling platform for retail brands and content partners alike, who access large and attractive audiences.
Now turning to QVC International team delivered another strong performance.
And that's a topline growth.
And what was it a margin expansion customer growth and all markets and gains across all categories.
The consistent strength of our international markets over many years further reinforces our confidence and the long term health and vitality of our global shopping platform.
So really built momentum this quarter with significant new brand launches, such as Atlanta, and benefit cosmetics and Ann Taylor continue.
Continued growth of its factory regret platform strong gains across home apparel, and beauty and outstanding new customer growth and up 81% supported by more diversified marketing programs.
So Lilly is uniquely positioned.
One of the few scaled profitable e-commerce pure plays are.
And that and moms and focused on the Virginia and off price segment.
With a loyal following of high value customers.
We're bullish about its long term growth prospects as the team executes on great price Fives daily discovery to fictionalize personalized shopping frictionless and personalized shopping.
And diversified marketing the sustained high levels of customer acquisition.
And our cornerstone the team delivered extraordinary revenue growth popping, 40%.
The continued surge and home spending benefit and frankly, Ballard designs and Grandin Road.
Garnet Hill also had a terrific quarter on the strength of home textiles, and a rebound and apparel.
We are especially excited about the long term prospects of cornerstone centered at the sweet spot of the home investing trend as the team focuses on building a proprietary assortments and pivoting to a digitally driven marketing strategy, coupled with a strategically placed store network.
In summary.
I am extremely proud of our keurig retail team.
We delivered outstanding results with broad based gains across all businesses and markets balanced across customer segments categories and digital platforms.
But more important than what the team achieved this how they achieved it.
With an unwavering focus on the customer.
And with care and concern for each other's wellbeing through the darkest days and the pandemic.
And kind of unrelenting commitment to driving innovation and advancing our strategic priorities.
And then with the renewed dedication to creating a culture of belonging to supporting our communities and protecting our environment.
Now I recognize that some skeptics may attribute recent strong results exclusively the stay at home tail winds and conclude that we may struggle post pandemic.
So I'd like to take this head on and.
And we kept why we believe our business that exits the pandemic is.
As far enhanced from the one that internet.
Put simply the environment and which we operate.
Ever changed.
And the progress we've made over many years of strategic investment for us.
<unk> is perfectly.
And the World and we now face.
The pandemic has accelerated many long standing trends and retail and created some new ones comfort with online shopping and use of video streaming services and engagement on social platforms are all time highs.
These and turn a fuel and a steady rise and livestream shopping one of the most talked about retail trends.
Last year.
At the same time, the pandemic has brought about a renewed focus on creating a comfortable productive and inspiring home life as.
And as work becomes more flexible and less office space. This.
This is fueling demand for home related merchandise and further increasing consumer engagement with live TV with live streaming and on demand digital video content.
So all of trusted personalities and social Influencers and discovery and purchase decisions continues to expand and then.
And ever growing portion of consumers demand and the retailers and brands be everywhere. They are.
Relevant and engaging video rich experiences.
Seamlessly integrated across virtual and physical touch points.
These massive shifts and consumer behavior perfectly aligned perfectly aligned with the strength of our business model and with the strategic investments we've made.
We bring four unique and expanding capabilities to this evolving digital and home based lifestyle and I want to take a moment to comment on each of these core capabilities.
First we have built and expensive and innovative digital video ecosystem.
And one of our fundamental keys to the adoption of livestream shopping and the west is overcoming the pigmentation of video platforms and the cost of video reach.
Our unique state of the art video platform.
Hundreds of millions of potential customers and a highly cost effective manner.
Through pay TV with attractive channel placement and nearly all major cable and satellite providers across seven countries and 14 networks, which is 81 million homes and the U S and 124 million homes outside the U S.
Free over the air television, including net incremental just clean million cord cutting or cord never homes and the U S.
Digital live streaming television and and the last 18 months alone we've added placement and I'll pay services like Youtube TV, Hulu, plus live television and a tool to now and free services like zoom out and smart Tvs streaming services, such as Samsung TV, plus LG channel plus and Vizio smart cast.
Interactive screen and shopping App, featuring multiple QVC, and HSN and networks and extensive on demand content available on Roku and Amazon fire TV. Among other places with cumulative downloads of 68, and 280 per cent, respectively and the last year.
And then and on the LG sharp kind of App, reaching 12 million devices.
Extensive social screaming presence on Facebook live Youtube, Instagram and picked up and the ability to move quickly to trial relevant new technologies and platforms, when they emerged and our own QVC and HSN and websites and apps, which integrate extensive live feeds and on demand and videos throughout the shopping experience.
Second our scale and resources provide powerful benefits and tangible value and savings to our customers, including thousands of buyers around the world on the hunt for amazing curated discoveries their organization and restructured over the last 18 months to significantly expand the resources focused on new.
<unk> discovered it.
Extensive global design development and sourcing capabilities to translate great ideas and the compelling merchandise for our own brands and <unk>.
Partnership with leading celebrities at local and search.
With a significant expansion and the product categories grants and inflows are supported and the last 18 months.
Multiple state of the Art studios and five countries producing more high quality live content than any other TV programmers and the world.
Oh come and that work nearing the completion of a multiyear restructured and the U S to reduce delivery times and improve efficiency all supported by a treasure trove of customer data, we're increasingly deploy and to create more personalized marketing and shopping experiences.
Third our unique content and customer experience.
We have spent 40 years refining the art and science.
Selling and engaging stories to live video shopping.
And that inform and inspire.
Drive impulse and urgency both trust and lasting relationships and Greenfield customers talk to our platforms nearly every day.
This stands in Stark contrast, the most livestream shopping today.
But just focused on one off marketing and events. The go no relationships and will struggle to create enduring value.
And fourth <unk>.
This experience drives remarkable customer longevity and engagement.
And what's in the stability of our subscription business and a typical retail model.
As a result, we can promise any brand and it comes to our platforms the opportunity.
Tell their stories directly to the world's most engaged shoppers.
And 2020, our best customers at QVC U U S represented 69% of our sales.
And this visit our websites or apps 36 times per month.
And whilst our television programming and 19 days per month, they engaged extensively on our social platforms. They purchased 69 items and.
And they retain at an astounding rate of 99% and.
And these metrics have been remarkably stable year after year.
Just customer loyalty and frequency has always been.
Foundation of our business and we've demonstrated through the pandemic.
This experience is also relevant to historic numbers of new customers.
Who are showing the same stickiness as prior generations equally likely as there forbears to become best customers.
And our critics suggests that we are challenged with an aging customer base.
It's a refrain we have heard for decades.
But the facts are clear.
Well I have regrettably, aged 16 years since taking on this role.
And our average customer as and aged one darn pit.
In fact, the average age of our customer at you can see has actually declined slightly.
We are uniquely well positioned at this inflection point and.
As a leader and video Commerce E Commerce, mobile commerce and social Commerce.
With a unique combination of capabilities and assets.
Present everywhere, our customers prospects and partners want us to be.
Confidence.
And then we can deliver sustainable growth and generate strong cash flow for our investors for years to come.
And with that I'll turn the call over to Jeff.
And thank you, Mike and good morning, everyone.
We delivered strong revenue and OIBDA growth are cured retail for the quarter revenue grew 13% and OIBDA grew 32% on a constant currency basis.
I'll remind you that Q1, 2020, one and <unk>.
One less day due to leap year and 2020.
We estimate the one less day understated our year over year revenue growth by approximately one percentage point.
Let's start with Q ex age.
Revenue grew 8% through continued momentum and the home category.
<unk> of our customer base and reduce customer returns and largely driven by category mix.
E Commerce revenue increased 12% and penetration improved 200 basis points.
Total customers grew 8%.
And with new growing 20% reactivated upton and existing up five.
As illustrated on slide seven of our earnings presentation, we continued to experience a swing and category mix.
And to home from primarily a per.
However, our first quarter mix shift moderated to approximately 200 basis points from approximately 500 basis points and previous quarters.
Revenue and home increased 14% with particular strength and gardening spring to core <unk>.
And May foods fitness equipment health supplements face coverings and air purification.
Consumer electronics returned to growth up 16% on strength and laptops portable power audio devices and smart home.
And most importantly, the fashion categories rebounded as demand for beauty apparel and jewelry recovered late in the quarter.
Accessories grew substantially up 12% on loungewear, non leather handbags sunglasses and active footwear.
Beauty declined slightly reflecting gains and bath and beauty.
Bath and body beauty devices and skincare.
Offset by continued lower demand for color cosmetics and.
Apparel returned to strong growth in late February and March with high demand for denim swimwear and prints.
But for the quarter apparel was down 3%, which is a significant trend improvement from previous quarters.
Adjusted OIBDA grew 19% and adjusted OIBDA margin expanded 160 basis points.
Looking at the components of adjusted OIBDA.
Gross margin was relatively flat, primarily due to favorable product margins offset by fulfillment pressure.
The favorable product margins were primarily due to reduced customer returns and strategic sourcing initiatives and promotional pullback, which more than offset category mix margin pressure.
The fulfillment burden.
Was due primarily to higher freight rates and surcharges.
Higher labor costs, including COVID-19 related pay.
Which were partially offset.
By sales leverage of fixed cost.
Operating expense was 25 basis points favorable primarily due to lower credit card fees and favorable commissions due to e-commerce penetration.
Partially offset by higher customer service costs.
SG&A was a net 150 basis points favorable primarily from favorable bad debt expenses that reflect lower customer default rates reduce payment installments and comping conservative provision adjustments from the prior year.
Coupled with lower administrative expenses, reflecting sales leverage and reduced travel expenses.
These tail winds were partially offset by elevated marketing expenses to drive new customer acquisition retention and brand awareness and rekindle relationships with avid and lead customers across fashion categories.
Over the past several.
Quarters.
Adjusted OIBDA margin rates increased largely led by product margin expansion Commission leverage and improved bad debt expense.
These advances were partially offset by freight rate increases net.
Work optimization and marketing and investments.
And to acquire and retain new customers and expand existing customer spend.
But looking ahead to the remainder of 2021.
We expect adjusted OIBDA margins to be relatively flat for the remainder of the year.
This reflects ongoing headwinds from freight and wage rate increases reduced productivity pressure as we exit our Lancaster and Rona fulfillment centers.
Continued marketing investments and relatively flat bad debt expense as we anniversary prior year favorable provision adjustments.
These headwinds will be offset by network optimization investments turning to a tailwind.
Positive category mix impact and favorable administrative expenses.
We recently completed the sale of our secondary corporate campus and Westchester, Pennsylvania as part of our new hybrid work approach.
And a distribution center and Lancaster P. A as part of our network optimization program for total proceeds of $40 million.
We will lease back the Lancaster facility through the end of the year as we fully commission decommission the site.
Moving to QVC international which continued to generate growth across all markets and categories with strong customer games increased e-commerce revenue and penetration and.
And my comments will focus on constant currency results.
Revenue grew 15% with strong growth across our markets.
Total customers grew 7% with new up 23% reactivated up six and existing up five.
E Commerce revenue grew 25% and e-commerce penetration increased 390 basis points.
Business generated broad based gains and every category.
Led by home apparel and beauty.
And our adjusted OIBDA increased 38% and.
And adjusted OIBDA margin, expanding 320 basis points.
So gross margins improved 140 basis points due to higher product margins was primarily reflect favorable product returns and pricing management.
We also benefited from favorable fulfillment expenses, driven by sales leverage and higher average selling price. These gains were partially offset by higher inventory obsolescence, primarily due to continued outlet store closures and proactive inventory management.
Operating expenses were favorable by approximately 90 basis points, primarily due to commissions and customer service.
Putting higher e-commerce penetration sales leverage and renegotiated contracts.
And SG&A was favorable by approximately 80 basis points, primarily due to sales leverage and administrative expenses.
Moving to Zoe.
Revenues grew 19% driven by broad based gains across categories led by home apparel and beauty as well as customer gains and growth and its factory direct business.
Total customers grew 12% and new customers as Mike had mentioned grew 81 per se.
Adjusted OIBDA increased $4 million and adjusted OIBDA margin expanded 100 basis points, primarily due to higher product margins and leverage of administrative expenses, which was partially offset by higher fulfillment costs.
Moving to a cornerstone.
Which once again delivered outstanding results with record first quarter revenue and adjusted OIBDA.
Revenue grew 41% driven by sustained momentum and the home brands on the strength of core home decor.
Interior furnishings, and outdoor categories, and Garnet Hill et cetera accelerated growth.
From the fourth quarter on the strength of apparel and home textiles.
E Commerce grew 46% with 250 basis points improvement and e-commerce penetration.
Adjusted OIBDA increased $29 million, primarily due to the leverage of administrative and marketing expenses and expanded product margins.
These gains were partially offset by higher fulfillment costs.
Primarily freight rates and surcharges.
To quickly review, our balance sheet and cash flow and Q1, Capex was $47 million and we spent $56 million on renewals of multiyear television distribution contracts.
We do not provide forward guidance recalled 2020 was an off cycle year for TV distribution contract renewals with only $56 million being spent for the entire year.
Average annual spend on contract renewals is approximately $130 million.
Free cash flow was negative $6 million and Q1.
Free cash flow was burdened by cash out life outlays for accrued liabilities associated with prior year incentive bonuses multiyear TV carriage contracts that I mentioned earlier.
Note that free cash flow excludes equity investments outside our green energy portfolio, but including our investment and Comscore in March which was which has traded up very nicely.
Yeah.
This year, we expect to return to a more normalized level of free cash flow conversion and the range of 45% to 55%.
Recall, we generate a substantial working capital improvements and 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 and our base and will not serve as a source of working capital this year.
Looking at our debt profile on March 31st we had $75 million drawn under our QVC revolver and approximately $2 85 billion of capacity.
We had $739 million of cash and cash equivalents and our leverage ratio as defined and the QVC revolving credit facility was one nine times.
We continued to return capital to shareholders through share repurchases and from January one through April 30 of this year, we repurchased 5 million shares for a total cost of $61 million.
And closing our performance demonstrates the competitive advantage of our business model.
We are operating at the inflection point of accelerated online shopping.
Wide adoption of video streaming and growing customer engagement on digital platforms.
And this results reflect the progress we've made through years of strategic investment to capitalize on these trends and position us as a leader in video and digital mobile and social Commerce, we remain confident our ability to sustain future growth and cash flow generation.
We appreciate your continued interest and curated retail and.
And hope you all stay safe and healthy.
I'll now open the call up for questions and turn it back over to the operator.
Thank you very much Sir as a reminder, ladies and gentlemen, and it is star one and your telephone keypad. If you wish to queue for question today, we'll now move to our first question over the phone which comes from Jason Haas from Bank of America. Please go ahead. Your line is open.
Good morning, Thanks for taking my questions and congrats on the strong quarter.
So Mike you talked about being pleased with what Youre seeing with regards to new customer retention rates I'm curious, if you're seeing those retail customers begin to ramp up their spending especially in your.
And your fashion categories, which I know are key for your best customers and then does that give you a comprehensive and your ability to lap the comparisons get tougher and the remainder of the year.
Thanks, Jason appreciate your comments and question.
We are seeing the new customers ramp their spending and in ways that are pretty consistent with what we've seen and in past years and as you know given the rebound and the fashion business.
It does sort of that much more opportunity for these new customers to engage with us and a broad way and of course, you see a range of behavior, but we're definitely seeing a.
Coupled with a number of new customers and move up the kind of spend ladder.
Even getting all the way to cause the past customer spend within their first year. So very pleased with both the retention and kind of a ramp spend.
And of those customers without going out and offer any.
Forward looking guidance on the rest of the year, but I would reiterate what I said during my comments, which is.
We're very encouraged by consumer confidence, we're very encouraged by what's been a stronger than anticipated rebound in fashion and.
And so even though we're lapping these tough home compares.
And we like what we're seeing we like that a consumer or customer base has more resources that are disposal savings a good stock market good housing market.
And kind of more things to buy and she starts to get back out into the world engages with fashion and abroad.
At her way so we like how we're positioned and are.
Confident about how things look for the future.
Thanks, that's great color.
So as a follow up Jeff and I believe you mentioned, if I caught it right that you're expecting OIBDA margins for Q ex H to be flat and the remainder of the year is that the case each quarter I think the compares get a little bit harder and second half. So I'm just curious on how we should think about the cadence there.
Yeah. So as we look at my comments were really for the totality of the quantum of the rest of the year from quarter to quarter, you'll have some fluctuation but as.
As I've mentioned, just a number of different programs with respect to how our category mix rebounds, as we see more of a.
Some of the investments that we've made and network optimization, turning more positive force and the back half to offset some of the other pressures that we're having with respect to sort.
Near term fulfillment pressures.
Around wage rates and and freight rates.
Thanks, and that how that's helpful and maybe a last one if I could squeeze and squeeze one more and interest on capital allocation. It looks like you repurchased a similar I guess lately and.
And you did and the fourth quarter. So just curious how you're thinking about repurchases going forward and if there's a potential for any sort of special dividend or any other means of capital return.
Greg do you want to take that.
And I was going to take it Mike what are you you can take a first shot and I'll happy to ship it.
Sorry, I was turning it over to you. So go ahead, Oh, great Oh look we.
And over the last year as you know we've had one.
A special dividend of a preferred stock and two special cash dividends and we've increased the buyback from what was a low rate to a higher rate the stock did move up dramatically during the period and like most companies, we have a grid and sometimes when the stock moves during the period that means you buy less we will continue to look at the high free cash.
Flow generation, we expect this year and how best to apply it.
You should expect that we will be looking for a large payout as a percentage of that high free cash flow and how and what form it takes whether it's another cash special cash dividend or whether it's increased buybacks will continue to evaluate.
Got it very helpful. Thanks.
Thank you.
Yeah.
Well now move to our next question will come from Oliver Winter mental from Evercore. Please go ahead. Your line is open.
Yeah, Thanks, and good morning.
Mike when I heard your comments.
Sounds like you don't expect that.
Your strong performance was really just driven.
Driven by by the pandemic and and the nesting trends. So so for the rest of the year then should we look at two year trends so two year stacks.
To be relatively flat in sales or do you expect that to decelerate.
Good morning, Ali and get them.
Moving to shy away from any any.
No concrete guidance for the rest of the year as is our normal practice and so and again I can't add much more color other than to say you know and encouraged by the performance of the business encouraged by this call and level of consumer confidence encouraged by this.
Yeah reemergence of fashion.
And also just encouraged by this much larger installed customer base that we have a year and to the pandemic and and that as I mentioned and my comments.
That behavior, we're seeing from her to come back and all those.
We acquired last year are coming back this year, they're spending at historically traditional rates. So we do think so we do think we have a lot of walking and off paper, we certainly recognize the steep comps, especially in the whole categories and they won't put an aggregate number on our expectations, but.
Net net we feel good about the consumer and we feel good about the installed customer base.
We feel good about the strategic programs, we've put in place to find more and more ways to reach consumers and surround filled with high quality content and we'd like the diversity of our merchandising mix and you.
You know what we're charging forward.
Got it. Thank you and then and then Mike one more you mentioned on the and your prepared remarks that you're seeing some inflationary pressure and some supply issues and and I saw the inventory was down this quarter.
Maybe if you could give us a little bit more details what are you seeing out there and inflation and supply issues and and how you think you're going to navigate. This this year for example, and inflation that you are trying to put price through to the end customers. Thank you.
Yeah, well you know what we're definitely seeing that as all retailers are various.
As I mentioned I've been.
Well I would say cost inflation, you are probably three big categories. One that we've talked a lot about and Jeff mentioned is that just higher freight rates as the demand for both inbound freight and outbound freight exceeds the supply and prices tend to rise when that happens.
And so we're paying more per se.
And you know where.
You're certainly seeing wage pressure and we're trying to make what we committed to be market competitive with our team members on wage rates at our fulfillment centers and so there's some pressure there and then and then Theres just cost pressure from product shortage and.
And and how that drives up our cost so.
Yes, we're seeing inflation, but as you can see and all results we've been able to overcome those inflationary pressures and we think the whole industry is accurate and a highly disciplined way trying to manage through these.
Various challenges and try to try and not to get overly promotional and so.
And you know and in some cases, we have had to pass pricing through and our cornerstone business. As an example, where the freight increases are the most impactful and it just.
Well the bulk besides of those products.
You definitely have to pass some out of the customer we're trying to do that and the judicious way, we're trying to stay disciplined on promotions and so we think we're able to.
Kind of outrun those inflationary pressures with Oh, the offsets that Jeff talked about and that's why we're projecting a relatively stable EBITDA rates, but within that there's some built in inflation and some recovery of that but then some other good programs to the offset so that we can stay neutral and and.
And the aggregate.
Hi, Thanks, very much and good luck.
Thank you.
Our next question now comes from and from Keybanc Capital Markets. Please go ahead. Your line is open.
Hey, good morning, Thanks for taking the questions I guess first I'm very helpful. Slide deck and you know there's a I think I noted there was a 200 basis point difference and apparel penetration versus first quarter of 'twenty, but maybe just provide some more historical context. If we look at where apparel is as a percentage of mixed drink kind of a peak of cycle, where is it versus where you're at today.
And and maybe and just in general terms, how much incremental margin as apparel versus company average.
So.
Apparel is definitely.
Still down in Q1 from from peak for sure you know and it's probably.
Yeah.
And you can look at and.
Apparel and had been relatively flattish to slightly down and a couple of years preceding the pandemic. So you know, we're probably a few hundred basis points off of peak and.
And we do believe still a wound to recapture a lot of share and mix and apparel.
Terms of the margin rate.
And it comes with a higher margin rate and we think that will be one of the positives and it just mentioned to kind of rest of year or better rate.
But I would note that it also comes with a higher return rate so.
There's some degree product margin rate and return rates tend to offset each other to some degree. So you get you get you'll get some mix.
Mix related benefit and product margins from.
And the rebound of apparel.
It will be meaningful, but it will be.
A portion of that that will be offset by what you would then expect to see as a higher level of returns that just comes with the category and that's part of why we have a higher product margin rate and <unk>.
Apparel, so long way of saying three to 400 basis points at least of.
Probably mixed below peaks.
And.
B groh and such.
Some modest mix benefit that comes with that.
Got it and maybe a bigger picture question you know certainly you likely benefited or you have during COVID-19 with your new customers right. She was at home maybe turned on Q for the first time and some period of time and.
As she starts to venture out and and engage and more activity out of the home how do you you.
You know what what initiatives you have in a wait and make sure that you continue to drive continued viewership of that consumer or maybe if he's not turning into Q, maybe engage with with you digitally. Thanks.
Yeah. Thanks.
You know price, it's really a multi dimensional strategy to kind of surrounding this new consumer and new customer with compelling content wherever she's traveling and so you know that consumer is you know what.
And we're just simply at a different threshold of engagement and online shopping and social screaming and video streaming and it's that's not going away right. So.
And when that.
New customer is visiting you.
You too not at not associated with our business that just engaging.
And Youtube.
We have something that's going to be of interest to whatever she's engaging with on Youtube and present that to her and are really compelling.
Platform offers a much younger consumer she's got to rediscover us I could talk with fun and 15 to 32nd AD.
Video is created by it.
Our creator community and we're going to go back to her with great.
It's just a a certain demographic maybe great actual physical catalogs of I'll go.
Gourmet food offerings, but.
But we just you know.
As you know, we believes and serendipitous discovery.
Fueled by our poor so we want to push our platform and one of her on whatever digital mediums she's engaged in and the way that's relevant to how where she's engaged digitally.
Digital media and and having really nice success.
Getting her then that kind of come back with those are.
Additional.
Purchases and as you know it only takes a few purchases to lock someone into being a customer for life. So couldn't get that second and third purchase.
No were and whatnot.
Great shape for the long term.
Thanks, so much.
And now move to our next question over the phone which comes from Oliver Chen from Cowen. Please go ahead. Your line is open.
Thank you very much and I'm, Mike and Jeff Mike regarding live streaming and the thoughts around and fragmentation, what do you see happening overtime, and how well curated and be prepared to be competitive there.
And I would also love your thoughts on content and how content has evolved and which changes will be more sticky in terms of what the customer likes in terms of.
The creative and content and engagement factors as you think about innovation there as well.
Yeah, great. Thanks, Thanks Oliver.
And you know a couple of thoughts here.
At the highest level I think we've got a b and constant test learn innovate.
Because I know this ecosystem and it's going to continue to evolve and ways that are hard to predict.
And I don't know, if we ever see kind of a really substantial consolidation.
And like theirs, and China, where you can have one or two big platforms that just dominate livestream shopping and just think youre seeing a consumer that is.
He is engaging across every social platform dependant on the consumer and and and and and and this.
And a variety of ways consumers are accessing and like T V.
It's a digital skinny bundle or a roku device or directly through their Samsung Smart TV.
I just think we see this explosion of ways in which consumers access content, both a sort of lean back linear mode and.
And in a lean in.
Interactive and and navigation mode, and so we're trying to win on both sides well she's been a lean back mode to consume television content or Washington content, we want to be there where she is in a lean and mode, what does that and based upon on our social platform or navigating our and our screening.
Which is a highly interactive app, yes. It was.
Just wanted to be there and try to understand what behaviors and she wants to demonstrate and and what she is most interested in and and I think we'll just continue.
To learn as we go on your on the second part of your question a lot of content and again a great.
Kind of discovery and.
It is not widely understood just how big our competitive advantage is and content because the amount of content, we produce our experience base and content creation resources at our disposal globally are just overwhelmed and the thing we've learned.
Is it these live streaming platforms, our content and to be able to have great high quality cockpit. That's fresh every day. So she wants to come back every day is this huge barrier that others are finding.
And so we're just going to continue to test and learn and what's striking to us is that the diversity of content that works so everything from a 30 minute.
The original series with Curtis stone or he travels around the world.
And and and cooks, great dishes, and we help with discover culinary innovation around the world. That's a fun 30 minutes show no selling involved but brings people into our screen and app and gets them engaged and it too on the other and does the spectrum have you engaged somebody and a six or 50 and second interval and picked up.
It's really all of the above and and I think too early to say what would be most com and other than I think there'll be a variety I think it'll be extensive and I think we've got the scale and resources to want to go after it.
Thanks, Mike and on sustainability and ESG and from.
From the lens of the consumer what what do you think will be increasingly important and from the lens of stakeholders.
I'm curious what metrics are you focused on in terms of visibility and tracking.
Yeah.
Obviously, we've got to take out really comprehensive approach because different kind of do a question different stakeholders have different areas of focus and.
And what's most important is that we do write for ourselves that we as a security team are proud of the way in which we're engaging and and the walk around and so you know what are the things that are important and I think they're really embedded I would encourage you to read our corporate social responsibility report and also the commitments we've published because they've kind of reflect what we think is more.
Most important but and the.
Protecting the planet category, we're focused on obviously issues are out and emissions Recyclability and how do we really drive our customers to recycle and yeah, So just sort of reducing waste.
And emissions throughout.
And the supply system.
Are you now getting rid of single use plastics, and our facilities and so series and commence along those lines.
And then around product.
Product sourcing and I think that's a critically important area. So really trying to make sure that we're doing all we can you know round, where we source product truly source from use of different fibers and materials.
And I cut.
And what the society cares about today, and then finally on our pillar around empowerment and.
And we want to create thriving communities and cloud and communities as our diverse communities or set goals for ourselves for diverse representation and our leadership ranks.
And we've set goals for ourselves about how do we create a thriving community of entrepreneurs and support entrepreneurial development and which we think all consumers have a lot of passion for seeing how we're embracing the small business community. So a long answer, but it's sort of all of it. Both we think are important.
Okay. Thanks, that's really helpful. Lastly, Geoff on the increase and marketing investments.
How are you pursuing that composition as you think about engagement and then also balancing the media mix and thinking about new versus existing engagement. Thank you.
Yeah.
Oliver It's a great question because as our marketing teams are looking at sort of the duality of continue to attract.
Attract and expand the spend with new customers and how do you continue to reach.
Reach them across a number of different.
Platforms, and where are we.
We believe that we will get the.
Appropriate returns.
And so we're definitely leaning in there, but yet also as Mike had mentioned with the.
Opportunity to Reengage, and expand and revitalize our experience with our habits and elite.
You have a much larger purchasing.
Larceny and something that we believe has the opportunity to continue and <unk>.
Personalization and.
And through the opportunity to have some some push notifications if you will recognizing her and the other platforms and which she is engaged is some of the areas that we're looking at really leaning into and you know quite honestly ever getting some great results from it.
Thank you best regards.
Well now move on to our next question over to flow, which comes from Michael Coppola from J P. Morgan. Please go ahead. Your line is open.
Hi, Good morning, and thank you for taking my question.
And she is provided on.
Page six which shows the category performance for Q ex U S. H excuse me.
Very helpful. I was curious if you guys had talked about how you know what categories are shifting as the United States reopens that and even if you could provide color you know sequentially throughout Q1, and what categories kind of came back from them.
And as well thank you.
Yeah sure I'll take that.
You know.
So the whole category as you can see from the numbers kind of maintained strength through the quarter as we started to lap much steeper home growth in March on a relative basis. It has started to soften.
As you would expect with continued broad based strength.
And home.
We will now start to lap as we get into much weaker comparison and home electronics has been a more up and down category through the pandemic and we suspect that's what it will look like through the rest of the year, but as we point towards Q4 and the critical holiday season, even though we've suffered from substantial consumer electronics shortages.
Last Q4, we actually think Theres room, there that could be very compelling to get that business back to healthy.
Our growth so it's a scenario, but we actually have that and easier compare just because of the supply shortages. We shared with you on our last call.
And accessories has been pretty strong for a few quarters and and we see that business.
And to be strong.
And we think it'll get healthier as it moves away from a few a few categories like loungewear and not leather handbags and active footwear into a broader range of categories as the consumer starts to go out more and maybe what's a leather handbag and.
And starts to watch that and.
Get out and new footwear.
Apparel is the big story apparel has been substantially negative it returned to strong growth in March we were pleased with the strength of the rebound across multiple categories in apparel, and we look to apparel to be a big grower through the rest of the year.
And really is growing across most categories as Jeff shared the one category isn't growing as color cosmetics, which I don't think will grow and until we get past hour and mass.
And so that's a wildcard I think theres real upside force and beauty and we just can't quite predict exactly when that color cosmetics business will rebound, but its fallen off so substantially over the last year that I think will hit a point of pent up demand and color cosmetics, and we'll talk to the other aspects of beauty will stay strong and then finally, we don't.
Talk about it very much the jewelry, which has been a difficult business for us we've purposely downsized, but over the last few years it was basically flat and.
First quarter of this year, which is substantially better than historic trend and we think we've found a good formula and that's working for us and so we think we can get that business stabilized and even potentially growing as we move through the year. So I'm kind of excited about the range of categories that are performing and the optionality that gives us as we go forward.
Great. That's very helpful. I appreciate it and this is the last one from me I know you guys mentioned and the press release that you sold I believe it was the Westchester corporate campus as well as the distribution facility for $40 million should we be thinking of those as onetime in nature or if theres any plans for further asset sales and that's all from me.
Thank you.
Thanks, Jeff you want to take that.
Yeah.
And so just to be clear, we actually had two separate corporate campuses and Westchester and was the that.
And that was the second location that we actually consolidated.
As we continue to look at our sort of hybrid our ways of working going forward to understanding what our customer our team member needs are for to be either onsite or remote we believe that there will be continued opportunity for us to take a look at our office space to.
And to the extent that we will be able to reduce that office space.
We will.
And I look to do so we do have some other facilities and which from.
From a customer service perspective, we actually closed last year and those customer service individuals are working from home permanently and.
And we are working to monetize those and the appropriate time also.
Awesome. Thank you guys.
Thanks.
And our last question now comes from Wisdom Brewster from sort of more of a capital group. Please go ahead. Your line is open.
Hey, guys. How are you doing Mike nice to see.
You know the business continuing to execute and with your announced departure coming up and the not too distant future. It's nice to see everything coming together that I know that you worked really hard to to make sure.
And you know is working as a well oiled machine and I was curious on that note.
What.
Looking back in the past.
The HSN integration I think caused some some issues within the organization and I was hoping that maybe you could talk about what what maybe we should expect from a succession planning and.
And you know if you're if you're willing to talk a little bit about Leslie his role and the organization and.
Yeah, and just kind of how you all are thinking about making sure that there's no hiccups as you sort of as you get ready to depart right. Okay great.
Thanks, and thanks, so much for the comment and question.
Yeah, we have we do feel really good about where the business is performing now and it's it's it's a it's not due to me its really due to a terrific leadership team and and highly engaged team members and and <unk>.
You know book.
And here's a hard labor, including as you noted.
The challenge and integrations just because these integrations usually are challenging and we've made a number of changes and HSN business and <unk> got teams together and different ways that it always takes longer to get through those things and then probably we estimate and so maybe we were a little overly optimistic and prosper.
And with which we could get that.
Through those complicated changes, but we now look at that and organization that is fairly stable.
When it comes up.
You know I'm thrilled with the big parts of integration and just a terrific.
Senior leadership team with a number of very strong recent additions, including last week and.
So really like the stability of the senior leader and cleaning deep level of experience along with some talented new folks and whatever.
We're really clear strategic focus which is why we keep coming back do you ever call and you're reiterating what the strategic priorities are we know where we're headed.
And I have to do for sure, but feel really good about where we're headed so I think that enables us to get to the succession process very well, which is why I picked this timing and I wanted you know I Didnt wanted to part D. Quite thought we were in a position of stability momentum and <unk> and a strong leader team and you mentioned Leslie.
And it actually plays a critical role because she oversees and she's been a effectively a newly created role when she joined US oversee all of QVC and HSN and the U S, which was which was definitely a sort of a GAAP and our organization. So we've got a very talented leader team across QVC and HSN and she's been able to the green dot team.
Gather and really help us lean into the strategic priorities that I get to talk about them, but it's really Leslie and her team that have driven these strategic.
And initiatives that are.
And it's the kinds of results were seeing so net debt.
And we feel good that we'll have and.
Good and effective transition and will be a book maintain.
Maintain the momentum and and the new leadership team will undoubtedly take the company and much farther than I.
And I have and and that's something.
I'm excited about.
And I know that was our last question and there were a little bit law, and so well well we'll leave it there. Thank God all of you for your.
Time and interest stay a stay well and look forward to talking to you on the next call.
Everyone.
Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation you may now disconnect.
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