Q3 2021 Qurate Retail Inc Earnings Call
Ladies and gentlemen, thank you for standing by [noise] welcome to the curious retail Inc. 2021 third quarter earnings call during.
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 started one on your telephone.
As a reminder, this confidence is being recorded November the fourth.
I would not like to turn the call over to Courtney Chun Chief portfolio office out of Investor Relations. Please go ahead.
Thank you.
We'd like to remind everybody that this call included certain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 actual events of results, including our ability to reach a repurchase target could differ materially due to a number of risks and uncertainties.
Those mentioned in the most recent Form 10-K, and 10-Q filed by our company and QVC. When he said these forward looking statements. The only as of the date of this call and curate retail expressly disclaims any obligation or undertaking to disseminate any updates and revisions to any forward looking statements contained herein to reflect any change and curate retails expectations with Rick.
Guard, there too 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 of free cash flow in constant currency information regarding the comparable GAAP metrics, along with required definitions and reconciliation including <unk>.
Limitary note is scheduled one through three can be found in the earnings press release issued today on our earnings or earnings presentation, which are available on our website today speaking on the earnings call. We have qurate retail CEO, David Robinson, Great retail group CFO, Jeff Davis, and curate retail executive Chairman pregnancy. Please note, we've published slides to accommodate.
<unk> release, now I'll have them call over David Robinson.
Thank you Courtney and good morning to everyone.
You for joining us today and for your interest and curate retail.
I want to start by thank you, Mike George for 16 years of service and dedication to cure rate.
Mike made numerous contributions to this business and I am, especially thankful for the countless marathon sessions, we had over the last two months. These conversations included countless hours of dialogue and exchange as we bonded over the business and transitioned leadership responsibilities.
One of the ways to the ultimate with bike was through his understanding of the consumer my time on the board and then there is a limit Nielsen. So it's 2017 helped me understand the massive shifts and consumer behavior, we have been experiencing.
Since joining the company on August 2nd and transitioning to CEO October 1st I've been working to understand the company and these outside factors I've met with vendors Omer host retail thought leaders entrepreneurs and innovators in law of Commerce I have conducted about 151 on one.
Across the business and conducted town halls, and small group sessions with thousands of employees I've also been spending time with customers and importantly, prospective customers those who don't shop with us, but we hope to engage on our platform.
These conversations have reaffirmed the reasons why I joined cure rate. Our business is built on the foundation of long standing relationships with highly engaged customers expert host compelling entrepreneurs and establish Windsor network and a talented employee base the koala.
<unk> and longevity of our relationships differentiate us for more transactional retailers, we create nearly 90 hours of law programming per day on our 14 television networks the reach more than 200 million homes at QVC U S. Our best customers purchase almost.
70 items on average and spend more than $3000 per year. They visit our website more than 30 times per month and tune into our programming 18 days per month.
Business was also not serving still it is engaging in the future.
The pandemic accelerated the widespread shift to a digital lifestyle a space, we should be able to compete and then even more.
Fact of way overtime over many years, we have created a robust them extensive digital ecosystem with our presence on pay an over the air television digital lost streaming television.
Correct of streaming services, social streaming sites web sites and mobile apps. This ecosystem enable us to extend our relevant and provide our customers with unique ways to engage with our global brands in terms at wherever and however, they choose we still have work to.
Due to drive more profitable revenue through these digitally native channels and I recognize the need to evolve and expand beyond linear television overtime with that said the growth in digital channels is substantial and we are focused on this work we have every right and opportunity to win.
In this space.
The substantial assets of the business mean that we have a strong foundation, but we also know the world is changing quickly around us when I was running the global online businesses for Grainger and building a fast growing business that rapidly acquire new digital customers I came to understand that.
Digital transformation is not just about technology.
It is about building the products your customers will want in three years today. It is about being brutally honest and seeing changing market realities aligning a team, giving them focused on hard choices and injecting urgency and accountability into the culture with these things are present.
Change can happen fast I learned this again as CEO of Nielsen I, Q, where we were able to arrest shrinking margins and drive record EBITDA growth in less than a year. The media landscape of the retail landscape or both changing and I firmly believe that there is a place for them or human trustee.
Experiential set of brands that grow alongside the impersonal and Algorithmically optimized scale players.
That will be curate and I look forward to discussing this more with you in the coming months.
One thing we will continue is to have an attractive financial profile as the team has demonstrated for years, we have a robust cash flow model and track record of returning meaningful cash to shareholders.
In short I am extremely excited by the strength of this business and the opportunity to create growth through innovation urgency and accountability the unique capabilities of curate position us for a promising future as we navigate the world during pandemic recovery.
And beyond.
Let me know move on to the third quarter and start with sharing a sense of our customers mindset over the past few months.
Early in the quarter many of our customers told us that they were encouraged by declining Covid cases, and buy vaccine availability. There were excited to resume normal summer activities in the middle of the quarter. There was a significant shift in mindset as the delta varia cause feelings of growing anxiety and men.
Companies extended return the office dates until 20 twenty-two the uncertainty for some customers to shift or postponed plans. This was apparent from research across retail and our own category shifts and measures of customer sentiment.
Towards the end of the quarter, while some feelings of uncertainty remained most customers were excited for the changing of the seasons and preparing for the holidays. They are looking forward to family traditions and gift giving.
The macro story continues to be about supply chain constraints and cost inflation that are impacting efficiency cost and delivery times for the entire industry. These headwinds include unscheduled factory shutdowns. They also include the limited availability of container.
<unk> trucks and drivers like others. We are also seeing cost inflation for freight fulfillment labor and marketing costs. These factors led to a larger than normal deviation between demand sales and net revenue in the quarter for the total company demand sales declined four per.
While net revenue was down 7% and that Q X eight demand sales declined 3%, while net revenue was down eight per cent.
[noise]. Please refer to slide 13 in our presentation for an illustration of the components of net revenue.
Recall that we do not recognise revenue until an item is shipped and delays in inbound great lead to delays in shipments. Further we also saw an increase in advanced orders in the quarter, which come pounded the deviation between demand and that revenue.
In this environment, we focused on what we could control during the quarter, we took multiple pricing increases to counter cost inflation, an average selling price increase at all of our businesses. We also offer customers the opportunity to purchase through advanced orders substituted lower sales balassa.
The products into high volume time slots and presented vouchers to customers and appreciation for their patients as we work through backlogs, we continue to generate growth and apparel at Q X eight QVC International and Garnet Hill.
At two X eight our customers remained engaged in behavior among our customer cohorts played out largely is expected. We saw an increase in the number of T V minutes viewed which grew 1.5%.
The average spend and items purchased by two exits total customers rose, 6% and 4% respectively.
New an occasional customers declined and count and spend partially because new an occasional customers over index in categories like electronics and home innovations, which were most impacted by supply chain constraints this quarter.
The numbers of new and reactivated customers are down from 2020, we continue to see them convert the best customers at similar rates as previous classes.
Let me provide a bit more color on the impact of the macro industry headwind on our video commerce business at.
Q X, 832% of our today's special values and today's specials needed to be shifted due to product availability.
And then the U K and in Germany that percentage was 45%.
Historically, we have had minimal shifts a T S b's due to lack of product availability.
This low product availability is of particular significance for two X eight with a daily item focus business in this business, we tend to sell one story and one item at a time on a typical day, one single item will make up between 20 and 25% of sales.
[noise], what the Halo with that an engagement outside of that TSB that days other product offerings are often plan many months in advance in concert with the TSB bran. So when the item is unavailable because it is in transit are stuck in the harbor, we necessarily shift to less optimize.
And less planned offers.
[noise] Zulily there was limited inventory from top to your national brands to support its key events.
In cornerstone also was not immune to supply chain challenges.
The business is mostly proprietary which provides more direct control over product availability, but it is still subject to transportation delays.
Again across the business the increases in costs. The worst substantial we have seen the average cost of a shipping container rosin more than two and a half times from 2024, Q X eight and four Cronut cornerstone further the average labor right in our fulfillment centers.
Increased 20% to 25% year over year at two X H N zulily.
As we look ahead and we've taken a series of actions to deliver improved performance in the fourth quarter.
First.
We proactively communicated further up the supply chain to understand production and delivery delays, allowing more time to adapt we pre bought inventory and I've taken early delivery for a portion of our two four supply.
Consumer electronics is normally a materially larger portion of the mix in queue for and as you may recall lack of electronics inventory was a significant revenue pressure in Q4 of 2020 [noise].
This year, we are planning ahead to mitigate that pressure and are taking a balanced approach to electronics by waiting sales productivity and new customer acquisition shrimp with this lower than average margin profile.
We also bought seasonal inventory and home decor.
And then a peril, we anticipate receiving 20% to 35% more inventory and two four than the same period last year.
Second we took advanced orders, which we expect to ship in queue for.
Third we are conducting a limited national advertising campaign for holiday at two X eight to build why there were well awareness of the QVC and HSN brands and what they offer to support top of the funnel customer engagement.
The campaign will run on National television [noise] connected T V's like Hulu and Sling online video on network radio streaming audio and online display.
We are also evaluating the mix of marketing channels to improve growth across our customer cohorts, where appropriate we are diversifying channels and expanding on a more digital platforms, such as take top and digitally re targeting non QVC and hsen customers, who have engaged with.
Through a roku at.
Four as mentioned, we enacted targeted pricing increases to counter a portion of the inflation pressure.
[noise] look into our holiday plans for two weeks eight we are leaning into apparel more than we typically would in the fourth quarter. We wanted to sustain the demand momentum we generated in recent quarters and meet the customer's excitement for the change of the seasons, we've seen good interests, notably in denim sweaters.
Lounge, where and outerwear.
There has been widespread media commentary that supply chain shortages will likely lead to limited availability of holiday items and this is shaping the consumer mindset.
We anticipate fewer consumers will leave holiday shopping until the last minute as a result, we've adapted our holiday plans with an earlier focus on events and gifting in areas, where we have a stronger inventory position when we have secured sufficient product.
Our customer demand has been encouraging we've already conducted successful holiday inspired events in fashion culinary beauty and our gift tick off to support holiday purchases.
Judy demand rebounded in September and we are leveraging that momentum and investing in the airtime for products in queue for to sustain that demand. We had a very successfully been in October anchored by a kitchen aid stand mixer T. S. B.
Our team secured hard to find inventory and the customer responded positively.
Similarly, and consumer electronics, the customer was engaged when we've had available quality products such as for the Windows 11, and the I pad Jim eight launches.
We are in a better inventory position and electronics this year than in queue for last year due to the teams planning and this coming weekend, we will host shop with us laugh a loft stream cross platform holiday shopping event that will run on Q V C and H S N Street.
Aiming service and will feature 200, plus unique hours of live video shopping with amazing deals. They will also stream on a linear channels social pages on Facebook, Instagram tick tock, and Youtube, our website and our mobile apps.
[noise] the macro industry factors remain [noise], creating a challenging environment. However, because of the actions. Our team has taken [noise]. We believe Q4 performance will be a bit better than Q3, and the deviation between demand sales and net revenue will improve.
With that said, while it remains difficult to predict the future impact we do anticipate the challenges for product availability due to manufacturing logistics and transportation delays as well as cost pressure from freight and labor will be ongoing into 22 2022.
<unk> and R U S and European businesses.
Turning to other topics I want to announce the jap your gifts and the president of Zulily will be leaving the company and early 20 twenty-two after many conversations Jeff and I mutually concluded that it was time for new leadership.
Jeff had many many accomplishments as the leader of that business and we want to thank him for his service to the company [noise], we have a search for the new leader underway and we also recently hired a new C. F O four zulily. The current market environment is a perfect storm for that business model, but we believe that.
With a normalised market and new leadership that business can be returned overtime to profitable growth.
Today, we're also announcing a special cast dividend of one dollar and 25 cents per share payable to stockholders, a cure rates common stop for an aggregate dividend of approximately $490 million. In addition to year to date share repurchase.
Says through October 31st of 267 million. This announcements shows our commitment to returning a substantial majority of cash flow to our shareholders by year end in a long term belief in the business model.
In closing curate as a business with a sound profitable profitable foundation and substantial untapped potential for future growth with additional urgency accountability and aspiration I am confident that we can build a path to growth and continue to.
[noise] return a substantial portion of cash flow to shareholders I am very excited to be here and lead curate through with snacks journey I'll look forward to providing more observations at Investor day [noise] on November 19th and a more fulsome view of our new growth plan in the spring.
[noise] now alternate turn the call over to Jeff to review, our financial results in more detail.
Thank you David and good morning, everyone.
Unless otherwise noted my comments compare financial performance for the three months ended September 30th 2021, and the same period in 2020 star.
Starting with Culex age.
Revenue declined 8%, primarily on lower unit volume.
Partially offset by an increase in average selling price, which reflected product mix and targeted pricing actions thoughts that cost inflation.
Unit volume declined primarily from various supply chain constraints that David mentioned.
Based on internal estimates, we believe the impact of supply chain disruption to third quarter performance was approximately half of the 8% decline in culex age.
Ingesting for this impact we estimate Q X H net revenue, we haven't been up low single digits on a two year comparative basis to Q3 2019.
As anticipated overall customer accounts moderated from the 2020 pandemic highs.
Yeah, we grew average spend and units purchase per customer.
And sustained growth and apparel and home decor, which is the largest sub category with at home.
E Commerce revenue of $1.1 billion declined 7% with a 120 basis points increase and penetration.
As illustrated on slide seven we experience a shift in category mix, primarily from home and electronics to a pair.
Apparel revenue increased 8%, which more than offset the decline in 2020.
The apparel expansion was led by top brand and best customers with continued strength in contemporary Classic an act of where we are pleased to have apparel returned to its normalized product mix level in line with 2019.
[noise] accessory declined 4% that was up 6% compared to 2019.
We experienced lower demand for casual footwear leather handbag in fashion accessories, which was partially offset by growth in non leather handbags, loungewear fashion footwear and luggage.
While beauty declined 6%, we experience 6% demand growth in the month of September.
And as David said, we expect to increase airtime for beauty in queue for.
As anticipated home declined from an exceptionally strong 2021% versus 2019 the.
The year over year performance reflected lower demand for pandemic related fitness and wellness cleaning and for care as well as cookware products and kitchen electronics.
Within home, we continue to experience solid demand growth and home decor, particularly for seasonal items bed and Bath.
Consumer electronics declined, 13%, reflecting supply chain constraints and a reduction in new and occasional customers who normally over index in this category.
Our customers were engaged when products were available and going into this holiday season, we believe our inventory is better position compared to Q4 of 2020.
Just that way, but I declined 14% and adjusted appointment a margin.
Declined 130 basis points.
Looking at the key drivers of the margin compression.
Gross margin was unfavorable 60 basis points, primarily due to higher fulfillment expenses and lower product margins, partially offset by lower inventory obsolescence.
Concealment margins declined due to elevated labor costs higher freight rates and surcharges and closing costs associated with decommissioning Lancaster P. A in Roanoke, Virginia fulfillment centers as part of our network optimization plan.
[noise] product margins decline, primarily due to lower shipping and handling revenue on reduced unit volume and expanded shipping and handling promotional activity.
Partially offset by increased private label credit card income and favorable returns.
Inventory obsolescence reflected a favorable adjustment two provisions from reduced aged inventory.
Operating expenses were unfavourable approximately 55 basis points, primarily from prior year favorable settlement of credit card fees and higher current year labor rates for customer service.
SG&A with unfavorable approximately 10 basis points, primarily from higher marketing and bad debt expenses.
And the deleverage a fixed costs. This was partially offset by lower incentive compensation of course.
Marketing expense increased to engage our customers and expand audiences on digital platforms and reflects accelerated cost inflation.
That that reflects a prior year favorable true up and an increase in the number of installment payments. This year, partially offset by lower default rates and improved credit screen.
We anticipate Q4 performance at Q X age to improve relative to Q3.
We were through the toughest quarterly comparisons to 2020, and expect Q3 advance orders less cancellations to ship in queue for.
In addition, we are in a better inventory position than Q4, 2020 and have launched an advertising campaign to drive top of final awareness of QVC and HSN.
The call last quarter, we reiterated R Q1 expectation for Q X H OIBDA margin to be relatively flat for the nine months ended December 31.
This was predicated on prevailing estimates of supply chain disruption broad base cost inflation and the anniversary of certain favorable 2020 provision adjustments.
Based on actual year to date results in our view of elevated cost inflation and persistent supply chain disruption. We now expect our full year 2021 point that our margins will.
It will be relatively flat to down modestly.
Moving to QVC International My comments will focus on a constant currency results.
Revenue declined 4% on lower unit volume, partially offset by an increase in average selling price.
Our operations in Europe, a similar supply chain constraints as culex age.
These challenges will partially offset by sustained growth in Japan, which delivered 10th consecutive quarter of revenue growth.
As anticipated total customer count declined 4% in the quarter, reflecting the outsized gains primarily from new and reactivated customers in 2020 <unk>.
Compared to 2019 total customer accounts increase across all cohorts in a relatively exhibiting the same behavior as prior year cohorts.
E Commerce revenue with flat for the from last year and penetration increased more than 200 basis points.
Q V C international experienced growth and apparel a decline in other categories.
Revenue declined 5% from last year's strong growth of 21%.
Compared to 2019, the business generated games, and home apparel electronics, and beauty with slight declines and jewelry and accessories.
Adjusted OIBDA declined, 14% and adjusted OIBDA margin compressed 180 basis points.
Looking at the key drivers in the margin compression gross margin decrease the 90 basis points, primarily due to lower product margins and higher fulfillment costs.
Product margin pressure with particular, who was partially due.
The lower shipping and handling revenue on lower unit volume.
Fulfillment expenses were unfavourable due to higher freight and labor costs.
Operating expenses, where approximately 35 basis points unfavourable, primarily due to higher television commissions from increase carriage costs in Japan, and the anniversary of nonrecurring contractual rebates and Germany from 2020.
SG&A was unfavorable approximately 70 by 75 basis points, primarily due to higher fixed costs and marketing expenses, partially offset by lower incentive compensation.
Moving to Zulily.
Revenue declined, 17%, reflecting inventory scarcity across national emerging brands and marketing inefficiencies Ah.
Approximately one third of Zulily revenue is from National brands, which was down approximately 30%.
We continued to see challenges across paid marketing channels, mostly due to the I O S 14.5 consumer privacy launch.
These pressures were particularly offset were partially offset.
Hi sustained growth and our factory direct business.
Adjusted OIBDA declined $44 million due to sales decline combined with higher fixed fulfillment costs.
Including.
Frank and surcharges for the factory direct business.
Hire marketing expenses.
Fixed costs, the leverage and lower product margins.
Moving to cornerstone the business generated 7% revenue growth.
Nizing record third quarter revenue in Ballard designs and Grand and road.
<unk> revenue gains were driven by sustain momentum from home decor interior furnishings, Bath and textiles and had Garnet Hill.
Peril and home textiles.
E Commerce grew seven revenue E Commerce revenue grew 7%.
Adjusted OIBDA decreased $11 million, primarily due to higher in bound freight costs and marketing expenses, partially offset by lower administrative expenses.
Just a quick note on inventory sourcing current retail directly sources, approximately 10% to 20% of its inventory from outside the United States and is designated as the importer of record.
China represents over half of our foreign exposure and since 2019 and the application of certain import tariffs, we've taken actions diversify into other southeast Asia countries.
Turning to our balance sheet and cash flow cat.
Capital expenditures were $169 million in the first nine months of 2021.
In addition, we spent $184 million on renewals of our television distribution contracts, which essentially wraps up our planned expenditures for 2021.
Free cash flow was $218 million in the first nine months of 2021 the.
The year over year decline is primarily attributable.
Two prior year expanded sources of working capital driven by strategic sourcing actions.
A reduction in customer installment payments, which is now included in our base and is no longer incremental and.
In 2021, we are incurring higher renewals for multi year television distribution agreements and early receipts of 2021 holiday inventory with elevated capitalized inbound framed.
Looking at our deck profile.
On September 30th $120 million withdrawn on QVC revolver and $2.8 billion was available.
What's available capacity.
Our leverage ratio as defined by our QVC revolving credit facility was 2.1 times.
On October 27th we amended and restated our QVC revolver, extending the maturity to 2026, reducing the interest rate and increasing total capacity the $325 billion.
Borrowing group was expanded to include cornerstone.
These primary revisions to our leverage calculation, including the addition of cornerstone to the borrowing group and the recognition of all unrestricted cash reduce our leverage pro forma.
219 times has a 930.
After quarter, and we issued a notice to redeem 100% of the 3.5% MSI exchangeable debentures by year end.
Carrying value of the MSI exchangeable debentures was $549 million has of quarter and and the redemption will be funded through our revolving credit facility.
With that I'll turn it over to Greg.
Thanks, Jeff.
First I'd like to start by welcoming David on his first earnings call as CEO and again, Thank you Mike George.
16 years, a tremendous service to carry.
As David mentioned, we are pleased to announce a special cash dividend of $1.25 per share.
Ahead of a likely tax increase.
The total of that cash dividend is approximately $495 million.
I know that we have purchased your date about 23 million shares.
Four $267 million.
That includes $23 million from settling a financial instrument, we entered into in the second quarter.
We expect to purchase an additional $46 million worth of stock under remaining an outstanding financial management financial instruments that will also settle in the fourth quarter.
We will continue our buyback strategy and are targeting repurchasing 10% of our share count by year end 2021 based on shares outstanding at the start of the year.
We have told you in the past we are committed to returning a substantial majority of our free cash flow.
And this year, we anticipate returning virtually all of it including some one time tax green energy and other like items.
This announcement about the dividend reflects our ongoing enforcement of curates business and our commitment to balance shareholder returns and equally our statement about our intent to return the majority or more of all of our cash flow.
We look forward to the ongoing evolution of jewelry retailer's, we welcome David is our new CEO. We also look forward to seeing you virtually.
Or or Investor date November 19th.
Now operating with that will open up for questions.
Thank you once again. Please first started one to ask a question, let's take our first question from Jason half with Bank of America.
Hi, good morning, and thanks for taking my question.
So first I wanted to ask about the supply chain delays I know in the last call we had talked about.
Orders.
You were hoping that they would arrive by September so I'm curious.
That's what the issue was if those were delayed.
And maybe pushed in revenue that you are expecting in September into October.
Yes, I can start on that and then.
Jeff come in as well first of all.
Good to talk to you it's great to be here I appreciate the question.
So we did see a number of supply chain delays in the quarter.
And that did drive advanced ordering throughout the quarter. So I don't think we're giving them advanced order is that number but I can tell you that advanced orders were about double what we would have expected and prior quarters.
So that definitely wasn't piece of it and our queue X H business I think we about 60% of our deliveries came late about 80% of those deliveries were more than two weeks late and so that caused.
To do a number of things, including allowing customers to do more advanced ordering when there was going to be longer lead time, all the products I would say another thing that that also drove summit Bam sort of ran as you know we have a relatively large Christmas in July.
That was very successful this year and that causes some people to order for Christmas in advance. So that also led to probably higher than normal deviation in terms of.
Some advanced ordering so.
Definitely was a big supply chain elements, but also some other other elements throughout the business.
The only thing I would add to that David is.
The customer demand for apparel really exceeded our expectations.
And while we had when we thought it was going to be an adequate supply of inventory. The demand is really outstrip supply. There. So we felt as if we left a little opportunity on the table. That's one of the reasons why we have worked very diligently to his.
As David had mentioned earlier to bring in some additional inventories where the fourth quarter upwards.
Upwards of 30, 35%.
Got it. Thank you that's really helpful. And then I have a couple of questions on the balance sheet and capital allocation either for Jafar for Greg. The first is just.
And you can find some more color on the decision behind this new credit facility.
My two biggest questions would be why why include cornerstone now I believe that was previously unencumbered and then also why I go ahead and take leverage capacity there.
Jeff do you want to let Ben take a shot at that sure.
Just.
Cornerstone is being added.
Added as a co borrower they are not to the extent that they want to borrow under that facility that leverage on them to the extent that they don't.
We continue to have the ability to remove cornerstone at any time and.
And so we wanted that flexibility so that it was it was more simple or exercise than creating a facility directly at cornerstone, it's optionality rather than true and conference at the moment, though.
You had another question.
Yeah. My my second question, well I guess another.
Any reason any reason to take up the leverage ratio there and then the second one is just Greg if you could just maybe walk through the derivative transactions that you're doing I think it would be helpful. Just to kind of get an understanding of the rationale for doing that.
True.
Talk about expanding first and I'll talk about that.
Yeah sure expanding it is really just coming back if you'll recall, we were at a higher level of back in 2019 during the 2019 refinancing and they're all her.
<unk> $2 95 billion, so given that the companies in a much more.
Attractive space from a leveraged perspective of banks were more than willing to give us slightly higher amount, even more attractive levels and we took it.
So on the financial instruments, we have been.
Yeah, issuing put warrants against our own stock knowing that we have a buyback in place. We think that's an attractive way of reducing our overall cost of net.
Net share repurchase or potentially pocketing, some extra change depending on how they settle but overall, we think against our buyback it's an attractive facility.
That's great. Thank you, though detail.
Thank you for taking next question from advert eat them that please keybanc capital market.
Hey, good morning, guys. Thanks for taking the question in your prepared remarks, you really talked about the importance of digital and obviously given your background. You know the focus makes a lot of sense I guess as you assess the asset base. You have do you think improving performance in digital is one of execution do you think you need to do M&A.
And I guess as you think about kind of going for do you think that this will require significant capital outlay and then just as a quick follow up on the on the commentary about the shipping being a little bit tighter in the fourth quarter.
Is it symptomatic because you have greater visibility on inventory on hand, I guess it just interesting because most people are saying that the supply chain issues will intensify versus.
Maybe get a little bit better thanks.
Yes, that's great. Thank you for the questions. So we are.
Dedicated to winning digitally of course.
What I think is true was that the retail landscape and media landscape or changing at the same time, both going through digital Revolution, We said right at the center of that so so what would be a winter long term, we have to where there. So we're doubling down one of the things I think that's very attractive about the business today.
Is that especially on the streaming side. We're about every place you would want to be around the interactive streaming shopping services Roku Comcast X. One extended reflects digital Australian ATV flame Teevee free streaming services Smart Tv's streaming services social freely.
Our own mobile labs website's pretty over the MTV paytv.
And we are continuing to expand but were largely on the rise platforms.
Day, and then the same thing is true and social we're we're all in all of the major platforms today at least in the future. We have not only beyond those platforms. We have to continue to be more productive more innovative on the platform and we have to continue to Rob the way, but I think more shopping moves.
To those platforms I'm going to talk probably a little bit more about that during investor day, and a lot more about that.
Come back to you with some time on our growth plans.
Early next year.
I don't think it's going to require we're looking at everything a meeting with people across.
History updated with entrepreneur as I'm, leaving with the large platforms to stay close to everything that's happening because of the substantial role we play in the space, we tend to get a call when somebody's doing something new so it helps it helps us keep up so we're going to be a player consistently I don't think it required very substantial change to our capital.
Allocation strategy, we're able to do that based on internally focused investment if there's something interesting of course, we would look at it but.
No changes to that so I feel good about our starting position I do think we're out of time, where urgency is going to be necessary, we're determined to play and win in the space digitally.
Oh and shipping what I would say is we are in fulfillment centers.
Starting to see some early signs of some lessening of that pressure is still incredibly elevated but costs are still incredibly elevated out within one of our largest.
Fulfillment centers yesterday, and we're starting to see we're starting to clear a little bit of a backlog, we're starting to see some lightly of the labor market.
Success in hiring.
Contain our costs.
Are still under incredibly elevated level, but I've started to stabilize.
Just the touch so we are BLA.
Bit better.
About the supply chain.
Fulfillment Center and and then we also as we discussed or I've taken some steps going into the into the fourth quarter pre buying some and.
Inventory, where necessary, making sure that we had a better position and electronics than we had last year, a better position and apparel than we had last year because those are both very important category for.
For the fourth quarter, and then also being very targeted would take a surprise.
So that we can cover some of the increased costs. So we feel like.
And the things we can't control, we've tried to be as forceful as possible.
What's just a tough market environment for everybody in the industry when it comes to supply chain issues.
Thank you.
Thank you. Our next question comes from Jason back in that city.
Thanks to quick questions, you mentioned that demand sales were greater than capital revenue in the quarter.
Would you.
Is it reasonable for us to assume that all of that will reverse and become a tailwind to GAAP revenues the supply chain normalizes or is there.
Risk and the street, making that assumption because of elevated cancellations or.
Incentives that are booked as contra revenues or something to to to make the customer happy given the delays. That's my first question.
And then second you mentioned something on the on the free cash flow in the quarter.
You said customer installments are now included in the base and is no longer incremental I just didn't understand what that meant if you could just expand on that comment that'd be great. Thanks.
Maybe I'll start talking about advanced orders a little bit.
And.
I'll turn it over to Jeff for.
More commentary on advanced orders of free cash flow. So there definitely was.
Where elevated advanced orders in the third quarter, we do expect some of that carryover to ship into the fourth quarter and so we do expect this deviation between demand and net revenue to stabilize and.
And maybe even reverse.
And before quarter. So we do see that normalizing in stabilizing and we're seeing that in the business, Jeff anything you would add or anything you want to touch on for the free cash flow.
Sure. So on the free cash flow you or call last year was a sort of a once in a lifetime opportunity for us to reset.
Customer expectations with respect to the number of installments that we were providing.
While we were providing a.
Installments on all products that we were offering we were reducing some of the upper and.
Installment opportunities.
And in doing so it kind of reset and is now part of our base going forward. So last year, where it would have been a a positive.
Opportunity for us in reducing the.
Member of installments, it's now part of our base going this year, it's now any.
Sort of marginal adjustment to that which would have any impact on our free cash flow going forward.
I understand thank you.
Thank you for taking the next question from really I'm really tired with bank of America.
Good morning.
Retailer's with.
With regard to their ocean freight the vendors pay those other ones, they're responsible for some of that when.
When you talk about elevated street is that mostly domestic or are you paying for the a lot of the ocean freight that's coming from manufacturing facilities.
Yeah, do you want to talk to that.
Jeff.
Lily.
So a lot of the product that we bring in especially if it's with direct sourcing in a given a little bit of details too.
10% to 20% of our product we're actually the importer of record we are paying for that ocean freight coming in as.
As well as on a domestic basis.
Depending on the particular brand.
Taking QVC for example, we have a higher percentage of our product whether it is quote collect where we actually are paying for the product.
At the.
Suppliers back door, and then we're responsible for getting it to our facilities versus in Hs and brand where it is more prepaid where that is already included the phrase is included in the product costs to get it all the way to our heart doors. So it it kind of runs across.
Different brands differently, but also having a high concentration of direct sourcing we are responsible for being that product from overseas.
Okay, and then you mentioned that you have pushed through I think you guys sent a portion of the cost increases that you've been seeing is there any way to put that into context, what portion of car elevated cost you and pushed through at this point.
Yeah I don't this is David I don't think we're prepared.
Quantify that what I would say is we've taken a couple of costs.
Creases.
We're continuing to see cost increase of the market at competitors as well. We we think that that will continue we haven't seen any substantial diminishment of demand and price. We took an R. Two exits business. We took one in July and one on September despite the inquiry.
In July we still had a very strong.
Smith and in July we're going to continue to look at price.
Given some of the challenges for cause and the business, we're going to be surgical we have Ah.
Keen eye on what's happening in the market and making sure that our.
Value proposition for our customers.
Stay intact, but.
We think there's a level of inflation the pricing across the market, we're going to join in that given the continuing continuing cost pressures.
And then just passed through others, maybe the other thing I would I would just say that passes over to Jeff.
Because of these price increases we we have seen average sale prices increase at all of our businesses I think I've talked about a 4% increase in my in my script. So that has been a bit of a tailwind and we haven't seen downside to it so far so we're going to we're going to continue to be.
Be smart, but where it makes sense will will continue.
To move there, Jeff anything to do with that.
No I think you've covered it thank you.
Okay and then just lastly for me you guys were at and that Library four nine times. The one time dividend is gonna push that up a little bit is two and a half times still your net leverage target.
Yes, two five times or better we should clarify given that we are substantially below two and a half.
But we should also point out that we anticipate that free cash flow will cover the dividends and so we don't anticipate going higher and leverage as a result.
Great to hear all past the others.
May be some short term timing issues, but on an ongoing basis will not move.
Understood. Okay. Thank you.
Thank you our last question comes from <unk> service Silly My capital group.
Hey, guys, David Nice to hear you on the call Greg Congrats on the Braves.
I'm Gonna try to keep this one short.
So it seems to me that.
The rebuttal presumption is that this business is the decline I think that the customer count as a nice screen shoot to look at.
With respect to the amount of attention that has to be given to digital going forward I am curious and maybe this is a better investor day question, but how you think about zulily.