Q4 2021 Qurate Retail Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Keurig retail incorporated 2021 Q4 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.
Reminder, this conference is being recorded February 25th I would now like to turn the conference over to Courtney Chun Chief portfolio Officer. Please go ahead.
Thank you good morning, before we begin we'd like to remind everyone that this call includes certain forward looking statements within the private Securities Litigation Reform Act of 1995 actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent Form 10-K 10-Q filed by our company and QVC.
These forward looking statements speak only as of the date of this fall and curate retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any.
Forward looking statements contained herein to reflect any change in great reach out expectations with regard there to or any change in events conditions or circumstances on which any such statement is based.
Please note, we published slides to accompany the earnings release on today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA adjusted OIBDA margin free.
Free cash flow and constant currency information regarding the comparable GAAP metrics, along with required definitions and reconciliation is where do you preliminary note and schedules one through four can be found in the earnings press release issued today on our earnings presentation, which are available on our website.
Today speaking on the earnings call, we have curate retail president and CEO , David Rawlinson <unk> retail group CFO , Jeff Davis, and curate retail executive Chairman, Greg to say no.
Now I'll hand, the call over to David.
Thank you Courtney and good morning to everyone. Thank you for joining us today and for your interest in jewelry retail.
For the full year total company revenue declined 1% and adjusted OIBDA declined 5%, reflecting the weakness in the back half of the year, primarily related to supply chain constraints product scarcity and cost inflation.
Today, well, mainly discuss our fourth quarter performance. This earnings release follows our pre release in January during.
During the initial weeks of the fourth quarter <unk> experienced improved performance from Q3, and we expect that trend to continue to SA to revenue increased low single digits October as we benefited from Carrie and other advanced orders as well as from consumer starting their holiday shopping.
Earlier than normal.
November revenue softened a bit it was down low single digits due to supply chain challenges and the underperformance of our replacement product choices.
In December we saw a meaningful deterioration as revenue declined mid teens December weakness reflected ongoing supply chain constraints and customers, including their holiday shopping earlier than normal. According to internal surveys in early December nearly half of <unk>.
C. H S. EMS customers indicated they had already completed or nearly finished their holiday shopping.
December results were also impacted by uncertainty around the omicron barrier and the Bayou with Rocky mountain, which affected our ability to ship product and meet guaranteed delivery times.
We did not expect our fourth quarter results to deteriorate at this rate and thought it was important to issued a pre release for transparency.
As we entered this turnaround we will continue to try to help them understand.
We understand our progress.
Obviously, we're not pleased with our Q4 performance the team and I are focused on the turnaround of this business that will modernize the value proposition stabilize the core flagship brands and exploit growth opportunities we see.
So confident in our ability to deliver although we know that it will take time to rebuild some aspects of the business and to innovate.
Yeah.
Well, we are concentrating on increasing the value proposition and establishing a new growth path, we will maintain our focus on cost control and free cash flow generation, we will be disciplined on the expense side and believe that we can maintain strong free cash flow, while we weather through the current environment and invest in.
Thank you Sir.
Our fourth quarter performance at <unk> in particular was impacted by three main factors temporary drivers execution challenges and longer term macro headwinds, let me provide a bit more context for each.
First temporary drivers include a continued supply chain challenges, including missing key electronics product deliveries the tragic fire at our Rocky Mount North Carolina fulfillment center earlier than normal holiday shopping by consumers' uncertainty around the omicron.
Area and inflation, which both led to suppress demand among our customer base.
Finally cost in a place for fulfillment center labor freight and marketing.
Second we faced some execution challenges simply say that we made merchandise choices that did not perform particularly in home and electronics.
Our matrix <unk> Sage organizational design that slowed decision, making continued to be a drag on our ability so quickly and effectively adjust in a dynamic market.
Finally of course, we continue to.
Place some longer term headwinds, including strengthening the linear TV rights and intensifying competition for the attention of our core customer.
Let me explain how these factors affected <unk>.
Despite our communicating upstream to better anticipate supply chain delays and disruptions continue to impact our ability to procure products on a timely basis, approximately 30% the tram specific vessels or cancel within days or weeks of scheduling.
Carriers.
Jim at U S ports on the West coast spreads in the East coast ports and to Savannah, Georgia with CUSA utilizes.
Vessels that anchor at U S ports were delayed by up to 45 days, making shipping times hard to predict and a shortage of U S Road trucking capacity further exacerbated shipping challenges. These factors led to delayed receipt of our purchase orders in Q4.
The majority of <unk> purchase orders arrive later that scheduled and of those purchase orders. The average delay Tom was about four weeks.
Supply chain disruptions and therefore, the inability to have the right product at the right time caused us to shift a substantial portion about today's special values, our TSV and todays specials are two yesses.
So what we have with the TSB that QVC and nearly two thirds of the TFS is at Hs Yeah were shifted in Q4 compared with about one third in the prior year quarter for <unk> as I described last quarter, this low product availability and the need to shift to sub <unk>.
<unk> had less play of dollars significantly and uniquely impacts our business demand sales on days, where we shifted our TSB Rts offer is on average generated two points lower demand compared to a day that continued as scheduled.
This also impacts our customer bottle typically we over index in home and electronics in Q4, and these categories, we're more relevant to new and react to customer acquisition.
The need to shift so many of our offers on short notice and the performance of our product choices affected our ability to generate demand for <unk>.
Similarly in the home and electronics categories, and therefore, among new and reactivated customers are pre bought options and other actions. We identified on our last call were insufficient to counter product shortages and were a significant driver of the softness in the home and electronics.
Categories, and the resulting impact to our customer file from a customer perspective, we estimate that new and reactivated customers contributed to more than 60% of <unk> ship sales declined in the quarter.
Growth in our fashion categories, partially offset the weakness in home and electronics, we shifted airtime to fashion and grew apparel, 19% beauty returned to growth up 4% this quarter, marking the first quarter of growth since the second quarter of 2020.
Gains in these categories were primarily driven by the highest strata and our best customer cohort, who over index to apparel and beauty.
Our best customer cohort as a core driver of the <unk> business.
This cohort has been remarkably stable over the years.
For example, <unk>.
QVC U S. It comprises about 16% of our customer accounts and accounts were about 70% of our ship sales. Although there has been slight contraction and the best customer file in the last 12 months, our best customers are still behaving largely in line with the.
<unk> patterns and their average spend and items purchase has increased over the past 12 months, while our best customers remained solid we are focused on retract recapturing growth in new and reactivated customers throughout the year as they serve as a funnel into our best customer.
Wow.
Turning back to the total customer file even with the overall sales decline and reduce customer count the average spend per customer or existing new and reactivated cohorts. All grew in Q4. We believe that this is a positive indicator that when we do.
Do have compelling products at the right time, our customers remain engaged it also demonstrates that the business continues to have pricing power during an inflationary top most notably among our proprietary brands, where we will continue to invest.
<unk> OIBDA declined due to sales deleverage and cost inflation.
Jeff will discuss this in more detail.
One driver of the decline was marketing we invested in a national advertising campaign to raise ability and consideration of the QVC and HSN brands in the fourth quarter.
Surveys indicate that the campaign elevated prospective customers opinion of a.
In consideration for both brands, but we do not think it was a substantial driver of sales. This was a one time you bet and although we will continue to experiment with brand marketing going forward, we are reducing marketing spending in 2022.
Let me now provide an update on our rocky Mount fulfillment Center.
The fire that occurred on December 18th was a tragic event that resulted in the loss of a contract or colleague.
As well as disruption to our business that impacted all of our team members and the local community.
Since then we have been highly engaged in supporting our approximately 2000, Rocky Mount team members and the community impacted by the fire.
I am truly grateful for the outpouring of support we have received from the local community our partners and our customers and for our team members' commitment to each other.
To minimize those.
The disruption to our operations in the short term.
We are leveraging our fulfillment center network, excluding Rocky Mount <unk> operates eight fulfillment centers in the U S.
In response, we diverted incoming orders to other fulfillment centers hard goods were sent to Bethlehem, Pennsylvania, Suffolk, Virginia, Florida, and South Carolina in Ontario, California.
Soft goods were diverted to Bethlehem and Ontario.
We do not expect a material impact to incoming fulfillment center operations by leveraging our existing network and have already largely recovered our inbound fulfillment capabilities delivery performance is still degraded but improving.
Rocky Mountain is Qvc's primary return center for hard goods and while we are still making good progress, bringing down our backlog of returns processing, which are at normal seasonally higher levels. We are ensuring our customers can receive expedited refunds as we worked through this challenge.
We are working on longer term plans for order fulfillment and returns processing and just signed a lease for a new site next door Florence fulfillment center to handle hard good returns.
Before I move on to other business units, let me provide insight into what we're doing at U S sites with respect to the three main factors that impacted our Q4 performance.
We know the retail industry as a whole is facing some of the same temporary drivers we faced this quarter, namely supply chain constraints.
However, these challenges have had an outsized impact on our products of the day model that is different from other retailers.
We anticipate most of the supply chain pressure will persist through the first half of the year and then abate and frankly, we will need to better navigate. This dynamic we are organizing now to be more agile when facing these sorts of challenges.
As it relates to execution challenges, we are actively taking steps to stabilize the business and laid the groundwork for improving our long term performance. Although we are in the early stages of this turmoil turnarounds, we have already begun to take tangible action we.
We are taking a new leadership approach ex U S sites Leslie Ferraro, former president of <unk> departed on January 14th.
We are rolling out a new go forward operating model for our two flagship brands QVC and HSN. This will include enhancements to how we run the digital merchandising and streaming parts of those businesses I look forward to sharing more on this so.
With respect to longer term head rooms, we are pushing hard in formulating our go forward growth in digital strategies and we have intense work streams underway. We are moving towards an organization that has increased focus agility and accountability, we will maintain a focus on core.
Cost control and free cash flow generation, while also launching new initiatives designed to drive growth on new media and new platforms in the medium term.
We are planning to host an investor event in Q2, where we will discuss these initiatives in greater detail.
Now turning to the other non QM sage businesses.
At QVC International we experienced similar supply constraints and product scarcity in Europe as we did in the U S.
Approximately 35.
It's a 40% of our <unk> in the UK and Germany needed to be shifted every plan. While this was down slightly from about 45% in Q3, it still had a significant impact on our European businesses.
<unk> was not affected as much by these challenges it was broadly flat versus 2020 with strong growth versus 2019.
QVC international deployed and scale its new advanced analytics platform across all European markets in 2021.
Innovation is designed to drive enhanced pricing decisions.
QVC international experienced softer revenue in the back half of the year.
Don't want to lose sight of the fact that it generated solid revenue and OIBDA gains for the full year up 2% and 8% in constant currency respectively.
Cornerstone was the star performer once again.
We generated record revenue at each of the brands in Q4, as we continued to benefit from strong demand for home products as well as for apparel and home textiles Echo on the deal.
The demand strength reflects cornerstones above average customer demographic Bob.
Absence of promotions that successful efforts to expand and refresh this product assortment.
We also benefited from our retail expansion and stores being opened all time compared to Q4 of 2020.
We opened new Ballard design stores in Nashville in November 2020, and Houston in Q1, 2021 .
Given this strong performance and growth and the success of existing brick and mortar stores with a brand. We look forward to continued investment in this business and intend to open three retail stores in the back half of 2022.
At Jubilee the trends that I described on our last call continue.
Alex scarcity impacted our ability to generate demand national brands, which comprised approximately one third of new Lilly sales declined 30% in the quarter.
Xu Lilly experience deleverage through the P&L driven by the sales decline.
Increased supply chain costs for the new Lily to reduce marketing spend and raise prices.
Marketing inefficiencies were primarily a result of iOS privacy changes and cost inflation and Sue Lilly's marketing channels.
Further exacerbated the impact of reduced marketing spend and other cost reduction actions taken all these factors led to a 37% I'm sorry, 37% decline in traffic in Q4.
Lilly is refocusing around moms, who make purchasing decisions or their households, we continue to believe this is a large addressable market that is currently underserved. Accordingly, we are prioritizing enhancing the experience for these moms, while providing great breast product bonds.
And it tends to cost management to allow us to deliver on our value proposition.
This business will have to shrink to grow getting control over its unit economics, reestablishing our core value proposition that once again resonates with our core customer and reinvigorating the top line around this new base.
Before I turn the call to Jeff to discuss each business in more detail, let me close with some perspective.
We are we are at both a challenging and exciting moment for cure rate.
We are fully focused on the headwinds facing are still successful and profitable video commerce business.
While those headwinds are too often exaggerated they are real.
Internally, we are being honest about those challenges and what it takes to overcome them.
One of those challenges involves moving with more urgency frankly consumer behavior has evolved more quickly than how is our business model.
To recapture market share, we must catch up that will involve new skills, new talent and new pace.
As we shared at our Investor Day last November we are starting from a position of strength and video commerce.
Our digital ecosystem is unique.
No other retailer has our combined reach and broadcast television globally and the distribution, we have expanded into live streaming social and digital platforms. We have 30 plus years of large video selling experience and have developed core skills that other retailers.
Do not possess.
Our experience in retail leadership team is dedicated to serving our customers. As a result, we have a highly loyal customer base that truly trust and connects with our host and own our platform on a regular basis, we have the infrastructure reach and partnerships.
And the cash flow and balance sheet.
<unk> support our growth ambitions and provide returns to shareholders.
We will make this business better every day.
But we also understand that we are on a journey that will be measured by months and quarters not days and weeks. It is hard work it will tail, making some hard decisions decisions on people and cost but it is also invigorating because we know that the world is evolving.
So I need a prominent human centered personalized digital video commerce player.
That should and will be us and the rewards were getting there will be substantial.
We look forward to sharing more as our plans progress and actions. We're taking now I will turn the call to Jeff for a more detailed review of each of our businesses.
Yeah.
Yeah.
[laughter].
Thank you David and good morning, everyone.
Unless otherwise noted my comments compare financial performance for the three months ended December 31.
2021 to the same period of 2020.
Starting with <unk> X H revenue of $2 $5 billion declined 7%, primarily on lower unit volume overall.
Overall customer counts declined in comparison to the strong growth we experienced in 2020.
However, the average spend and number of items purchased per customer increased 12, and 11% respectively.
E Commerce revenue of $1 6 billion declined 6%.
Through though increased 40 basis points and penetration.
As shown on slide six we experienced a shift in category mix, primarily into apparel and beauty and a reduction in home and electronics.
Apparel increased 19% driven by best customers in combination with our largest exclusive and proprietary brands with strength in classic and contemporary Ware.
Beauty returned to growth up 4%, we shifted more airtime to beauty as discussed in our Q3 call and experience growth in skincare and devices.
Home declined 14% versus Q4 last year that was up slightly from Q4 2019.
Third to last year demand was lower most notably in fitness and wellness kitchen, electrics cookware and kitchen accessories.
Electronics declined 12% with demand challenges, primarily in audio and gaming related to product availability.
Prolong supply chain challenges longer term macro cost pressures and fewer new and reactivated customers.
First our home and electronics businesses.
In the fourth quarter, we typically over index in the categories, which attract more new and reactivated customers than our fashion categories. This contributed to the tough comp to 2020, and new and reactivated customer count.
Adjusted OIBDA.
A $374 million declined 23% and adjusted OIBDA margin decreased 310 basis points.
Looking at the main components of the margin compression.
Gross margin was unfavorable 180 basis points, primarily due to higher fulfillment expenses and lower product margins.
<unk> expenses increased due to elevated costs for labor freight rates and shipping materials as well as surcharges for containers waiting to be processed.
Product margins were supported by higher margin category.
Higher margin category mix, particularly in apparel and greater penetration of shipping and handling revenue.
Unfortunately, this was more than offset by increased inbound logistics cost and comping favorable returns in the prior year.
As indicated last quarter, we continue to take pricing actions to particularly offset inflationary cost pressures. These actions were implemented primarily in our proprietary fashion categories and to a much lesser extent across our non proprietary and national brands.
In aggregate, our pricing actions were neutral to overall product margins.
Operating expenses were unfavorable 20 basis points, primarily due to increased hours and higher labor rates for customer service.
Our SG&A was unfavorable 110 basis points, primarily due to higher marketing spend and bad debt.
Partially offset by lower administrative costs.
Marketing increased 140 basis points approximately half of this increase was related to our national advertising campaign and the remainder was primarily cost inflation.
Bad debt reflects favorable prior year provision adjustments, which were partially offset by favorable category and customer mix, which yields lower default rates.
Administrative costs were largely favorable from reduced incentive compensation accruals par.
Partially offset by fixed cost associated with the QVC to returning to live programming. We are now broadcasting 13 live hours per day, and 91 hours per week on QVC too.
Now, let me address the financial impacts for the fire of our Rocky Mount fulfillment center, which process approximately 25% to 30% of our QVC U S volume and served as QVC U S is primary turn center for hard goods.
The building was significantly damaged by the fire and we closed for the foreseeable future.
We have taken steps to mitigate disruptions to the operations, including diverting inbound orders to other fulfillment centers.
We will continue to leverage qvc's existing fulfillment centers in the near term as David mentioned and are working to address the seasonably higher backlog and returns.
For the year ended December 31st 2021, we incurred approximately $250 million of fire related costs, including $130 million loss of inventory.
$87 million loss of fixed access fixed assets.
And $29 million in other fire related costs, which includes 21 million of non reimbursable costs, primarily related to shutdown PE and severance expense.
Based on the provisions of our insurance policies, we have determined that the recovery of certain fire related cost is probable.
As of December 31, we recorded an insurance receivable of $129 million.
Net of a $100 million in insurance proceeds already received in the fourth quarter.
All fire related costs net of insurance recoveries are recorded below adjusted OIBDA.
We are still in the process of accessing the.
The damage to the property and submitting relevant insurance claims we expect to continue to record additional costs and recoveries until the insurance claim is fully settled well.
Well, we have taken steps to minimize the overall impact to the business in calendar 2022, we expect a negative impact to net sales tied to the inventory loss as well as increased warehouse and logistics costs.
Moving to QVC International My comments will focus on constant currency results.
Revenue declined 5% on lower unit volume.
While revenues softened a bit from the third quarter, it increased 4% compared to Q4 2019.
Our European businesses face similar supply chain and product scarcity challenges has Q X H.
PVC in Japan, which is less impacted by supply chain constraints was essentially flat in Q4, but grew 11% from Q4 2019.
Customer counts declined from a strong gains of 2020, yet increased 2% compared to 2019.
E Commerce revenue was down 4%, while penetration increased 100 basis points.
QVC International experience declines primarily in home beauty and electronics for similar reasons as Q X H.
Compared to 2019, the business generated growth in home apparel and beauty.
Despite the revenue decline adjusted OIBDA increased 2% and adjusted OIBDA margin expanded 160 basis points in the fourth quarter.
Gross margin improved 120 basis points, primarily due to favorable inventory obsolescence and improved product margins, which were partially offset by higher fulfillment costs.
Product margins reflect favorable returns and higher liquidation recoveries.
Inventory obsolescence reflects improved inventory quality and lapping higher reserve positions in 2020.
Fulfillment costs were unfavorable due to higher freight rates in the European markets and increase labor rates caused by supply chain pressures.
Operating expenses were unfavorable approximately 20 basis points, primarily due to higher TV commissions from increased carriage cost in Japan and deleverage in Europe .
SG&A was favorable approximately 60 basis points, primarily due to lower management incentive accruals, which was partially offset by fixed cost deleverage.
Moving to cornerstone.
Revenue of $357 million grew 8% with record Q4 revenue at each of its brands driven by sustained demand for interior furnishings.
Core case goods fabrics seasonal and bath products as well as in apparel.
In textiles, and Garnet Hill.
E Commerce revenue of $274 million increased 10% and penetration rose 100, and 160 basis points.
Adjusted OIBDA of $34 million decreased $6 million due to higher inbound logistics costs.
Excluding these higher logistics costs adjusted OIBDA would have grown in the fourth quarter.
Looking at Zillow revenue of $351 million declined, 30%, reflecting product scarcity for national brands and the marketing inefficiencies that David mentioned.
As a result of our annual impairment.
My assessment.
We recorded a $363 million noncash impairment charge had Xu Lei Xu.
233 million was attributable to goodwill and the remainder was related to its trade name.
While it Jeff while this aggregate charge is included in operating income is excluded from adjusted OIBDA.
Adjusted OIBDA loss declined $19 million, primarily due to sales deleverage, partially offset by higher.
Product margins reduced marketing spend and lower incentive accruals.
We are taking the decisive cost actions in response to Zillow lease business performance. For example, we will exit their fulfillment center in Bethlehem, Pennsylvania in the back half of 2020 to this.
This facility handles approximately 25% of pseudo lease volume and we do not anticipate the closure to have a negative impact on customer experience.
Turning our attention to the consolidated balance sheet and cash flow.
Capital expenditures were $244 million in 2021, and we spent $187 million on renewals of television distribution contracts.
For 2022, we anticipate capex to range from $265 million to $295 million and renewals for TV distribution agreements to approximate $80 million to $90 million.
Free cash flow was $611 million in 2021.
The year over year decline was primarily attributable to prior year improvements in working capital due to strategic sourcing actions and the reduction in customer installment payments, which were not repeated in the current year.
In addition, we're carrying increased amounts of in transit inventory and higher amounts of capitalized inbound freight.
And in calendar 2021 was a odd year cycling on cycle year excuse me for the TV distribution contract renewals.
Looking at our debt profile in December 31st we had $481 million drawn on the QVC revolver with $2 8 billion available capacity, our average our leverage ratio as defined by the QVC revolving credit facility was two one times and we are committed to our.
Two five times leverage target.
In November and December we exchanged and redeemed all of the 3.5% MSI exchangeable debentures for a net cost of $315 million.
<unk> repurchased a portion of the 4% exchangeable debentures as part of our tax and liability management.
With that I'll turn it over to Greg.
Thank you Jeff.
I want to Echo David's comments, we were extremely disappointed by the Q4 and full year results.
Nonetheless.
I think we're all excited by David's leadership and the changes he is spearheading across the organization is already taking action.
I expect more to come.
Despite the disappointing results of the year, we did return meaningful capital to shareholders during 2021, including.
The $488 million dividend.
Special cash dividend, we paid in November .
About $100 million through interest payments the oldest somebody.
He preferred.
And the repurchase of about 10% of our share count in 2021 based on the shares outstanding at the beginning of the year, including total repurchases in the fourth quarter of $168 million.
We also continue to improve that profile as you've heard.
Took action at both the holdco level and the alcohol levels and manage our debt, including exchange and redemption, Jeff mentioned above the three 5% MSI exchangeable in the fourth quarter.
<unk> does still benefit from a strong free cash flow profile.
Despite.
Navigating a challenging execution environment.
And we remain committed to delivering value to our shareholders, including some return of capital and proactive management of our debt and tax liabilities. We will continue to chip away at the remaining exchangeable to manage that holdco debt.
In summary, we are committed to shareholder returns and David lead this business into the next chapter of digital innovation and the return to growth.
Thank you listening audience for your continued interest in <unk> retail and now operator, we'll open the line for questions. Thank you.
Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again, everyone. If you'd like to ask a question press star one at this time.
Alright, and we will take our first question from Oliver Winter mental with Evercore. Please go ahead.
Yeah, Good morning, guys.
I had a question. Thanks, thanks for giving us the cadence throughout the fourth quarter.
Could you maybe I know you don't guide, but because this is a.
The trends in December were were very weak so.
Could you maybe give us a little bit of update on how the business is trending year to date and we are.
The 222 months into the quarter that would be helpful.
Yeah. Thank you Oliver did you get to hear from you I don't think we want to guide to the quarter.
Would say that we I noted in my comments that our December was down mid single digits before bottoming out.
And so that changed as we went through.
Of December so I would not read a head.
What happened in December to think that it continues and to and to future quarters, but other than that I don't think we want to get into too much forecasting our Q1 guidance.
Okay. Thanks.
And then the other question I had was you mentioned.
Three impacts in Q S H wouldn't temporaries and execution, but then I think the third one you mentioned increased competition.
Could you could you maybe.
<unk> that a little bit what you're seeing there in the competitive space.
Yeah, absolutely so.
Right.
Part of what we saw through the through the fourth quarter. Among competitors of course, we saw them taking some price in regard to inflation, but we also saw store traffic go back up we saw a lot of brick and mortar either re open our at.
Type of campaign driving people back to stores. You also saw an increase in digital marketing, which drove some digital marketing inflation.
Throughout the throughout the market.
And then finally, a click and collect order online and pick up at store also grew substantially and so you saw the market sort of rebalancing from online back to a more natural mix probably of offline and I think you also saw people.
Getting our house in getting.
Offline touch in terms of how they balance.
Balanced they're shopping so we're definitely we definitely saw those trends and I think it just makes for a.
Once again a richer.
In a competitive environment than what we've faced as the pandemic concentrated.
Some of the trends.
Got it thanks, very much and good luck.
Thank you.
Our next question will come from Jason Haas with Bank of America. Please go ahead.
Thanks, Good morning, and thanks for taking my questions. So David David I'm curious now that you've been here for some time and have a chance to assess the business I'm curious as you start to think about the go forward strategy, what what areas of the business. You are looking at what changes are you thinking to making gypsum group performance.
Yeah I appreciate the question.
I would say a number of things I think first we just have to.
Continue getting better every day in terms of execution.
Some of that is about a culture of accountability some of that is about structure and making sure that we.
We have the people who can make decisions real time at all levels in the organization. So we're thinking carefully about organizational design to make sure. We can act with accountability, but also urgency and speed and that only becomes more important as the world gets more dynamic part of the <unk>.
Those things by the way are important is because we do still have very strong core assets to take advantage of so if you look at.
If you look at the past year actually minutes viewed.
It was up every quarter. This year, we had over 65 billion minutes viewed in 2020 , one and <unk> and that was a number that was up well over 4% almost 5% for the year and so at the core our core assets are still very strong we have to be able to convert.
Those core assets into sales and so an awful lot of that is about execution I think part of the execution Challenge also is making sure we have the right products at the right time some of that supply chain, but also some of that is product vision and so we're really taking a look at our.
Merchandising operation and what needs to be true for how we operate there to make sure we're getting in front of consumer demand and consumer trends.
From there I would I would say Ah, we know that outside of linear television the opportunity and livestream shopping social social shopping is very substantial and we're under indexed to those areas relative to their relative areas of growth.
And so we have to pivot the business. So that we were taking advantage of those of those spaces. We have every right to win in those spaces. I think our competitors are looking for us to win in those spaces, but we have to be there competing to truly take advantage of them and so where we are.
We are organizing a little bit differently.
To make sure that we have dedicated resources dedicated vision and those spaces. I'll also say, we're adding some talent and I'll have more to say on that later, but we've already made a couple of hires in the digital space that are going to help us take the different help us take a different view about how to get there.
With some amount of with some amount of speed.
We'll have more to say on all of these things we're doing a top to bottom.
Estimate we're also looking at things like compensation, where remix thing how we look at some short term incentives to drive a good behaviors for boat.
Responsibility for topline growth and bottom line.
Performance and so we think there's a lot of opportunity because there are substantial places of growth that we are fully participating and then we have poor asset light limits views that are actually growing that if we can draw.
It drives increased efficiency in the use of those core assets also provides a real opportunity for the company. Some of those things are structural some of those things are cultural we're concentrating on all of them. While also understanding that the ship doesn't.
<unk> turned over overnight, it's going to take some time it will take I think I've said in the script that it's going to be measured in months and quarters not days and weeks, where we're going to do this with the eye towards long term value creation for our shareholders and we're going to do it.
Responsible way that respects the stability of the asset we have and a really special culture of caring and commitment to each other and our customers within the company.
Thanks, That's helpful. You mentioned TV minutes viewed being up and I know, we've talked a lot about on previous calls about the fact, you picked up a lot of customers throughout the pandemic. So I'm curious what you're seeing now in terms of retention rates do you feel still feel good about your ability to keep those customers or I.
I guess now that you know maybe posted omicron things Youre trying to open up a little bit more are you starting to see any sort of higher higher churn in that customer base.
Yeah. Thank you for that.
There are a number of pieces to that answer so let me walk through a few different components. The first is I think we.
We believe that newly acquired digital customers some of those bumper crops with customers that we got during the pandemic, we're less invested in our core video content and the increased competition from brick and mortar reopening and the buy online pick up at stores did change.
So the retention dynamic.
Lately among that customer group.
I would also say.
That historically once we have a customer retaining them is highly dependent on getting the second and third purchase after which they basically become customers for life, usually a new customer purchases in the same category for their second and third purchase that they did.
Or their first purchase after the first purchase is a home purchase or an electronics purchase because those other categories that are best for attracting new customers and of course, both home innovations and electronics were down sharply and so what that often means that you bring in somebody early on in our home.
In our electronics category, and then to deemphasize those categories. So you don't get a second purchase and that increases the churn dynamics and we certainly saw some of that and those.
Increased customer profile basis.
In.
<unk> of the quarter and how it played out.
Think about 60% of the sales decline in <unk> in Q4 was attributable to the relative weakness and a new and reactivated customers.
The last piece that I would I would point out in that regard is that we saw real inefficiencies in digital marketing digital marketing costs in Q4 were up 30% to 40%.
Some days like Black Friday, and key weekends in December we actually saw a digital marketing costs up something like 50%.
Part of how we get a customer to repeat is by reaching them through our digital marketing channels and in a world, where that's more expensive and we're making different return on investment trade offs, we weren't able to hit them with quite as much activity to encourage long term behavior.
As we might typically do so so.
Hum.
I think looking back at those customer cohorts I think there are a number of reasons why we have seen.
A little bit of an elevated churn dynamic among that customer base.
I guess I would be encouraged by two things. The first is we.
We have continued to see.
Those customer new customer demographics for those that stay they are maturing into our best customers at something close to historical rates and once they become best customers, they're continuing to be as boy, you're and that's prolific in terms of their.
Shopping behaviors as our historical best customers always have been and so we are still filling the funnel the best customers what some of those bumper crops of a pandemic.
Pandemic fuel new customers.
Thanks, that's good to hear I appreciate the color.
Okay.
Alright, and next question will come from Edward <unk> with Keybanc capital markets. Please go ahead.
Hey, Thanks, very much for taking the question I guess two for me first you outlined a lot of initiatives.
Initiatives Youre working on right some seem to be kind of maybe more easy to rectify in the short term merchandising issues missteps and then maybe some of our structural issues and where you have to maybe augment the talent pool and I guess as you dimensionalize the timing around it turned and I know you're not guiding but how should we think about the sequencing of things you can affect quickly that we should see the responses who are versus.
What is going to take longer and then as a follow up you guys have done a good job of returning capital to shareholders with the stock down here I guess, how do we think about your openness to share buyback. Thank you.
Yeah I'll take the first part and then let Greg also comment on the second part of the second part of the question I think they are basically.
I think there are basically three time horizons right. So there are some things that are purely temporary that we would expect to see it get better.
The near to medium term I think supply chain challenges, we expect to abate in the second half of the AR in the second half of the year, obviously, we're dealing with some things.
Like a five year with Rocky Mountain, where we're having to restructure the supply chain a bit is that that that's had an impact.
I think some of the near term execution challenges like you said some of the structural changes, we're making should lead to some incremental improvement over time and so I think there's things we can hit relatively quickly.
They are longer term things like the rebalancing of our sales composition, two new and growing.
Media and augmenting away from our linear TV dependence, which is still a very good profitable business for us, but making sure that we have the right mix of revenue between linear and.
New media over the top other types of streaming that will take that will take more time.
And we'll have to we'll have to build that over time. So I think there's some things we can do in the short term I also think we'll get some help in the short term as the world returns to a bit of a more normal pace.
But I think that the changing the overall architecture of the composition for how we drive revenue and how we generate demand.
The business and ultimately produce profits that'll take a little bit more time, although I will say, we don't believe we have forever. We're in a dynamic market. We have competitors, who are trying to do we're trying to figure this space out and so while we recognize that it's going to take some time.
Moving every day like it has to be done tomorrow.
Greg do you want to say anything about our capital allocation.
Thank you David and thank you for the question.
Look we I.
Made my statement I think you heard some words from David Jeff, which reinforced that.
This business has a strong cash flow this business has been a.
Strong performer for a long time, we were extremely disappointed with what occurred.
2021 in the fourth quarter in particular, so we will be cautious and watch some of that I do expect we have an opportunity to return to growth and pursue some particular growth in some of the new lines around digital that David mentioned.
<unk>.
We were certainly surprised with the volatility of our working capital that also has an impact on our free cash flow obviously.
And we're watching our debt levels. So we're gonna put that mix together all of those factors and look forward to potentially returning to return of capital via share repurchase as we have done historically, but we're going to weigh those factors that make that decision at the right time.
Thanks, so much.
And our next question will come from William William Reuter with Bank of America. Please go ahead.
Hi.
Just a follow up on that last question. It sounds like you will not be repurchasing shares in the near term is that the short answer to that.
I think you heard my answer and you can interpret it as you wish I Didnt say that I said, we're going to watch the business and as it improves or moves or we get comfort and certainty, we'll probably lean in harder.
Okay, sorry, it was just that there was a.
Little bit of a discussion there about as things improve and as those things improve then you would weigh those factors. So I kind of thought that that was referring to the fact that it wasn't near term.
Okay.
The second question.
<unk> is on a lot of these challenges you guys gave pretty helpful comments on our first half outlook, even if it wasn't guidance a lot of those things aren't since I'm in the first half of the year. There are some things such as the customer mix in terms of new customers in there over indexing.
The home category as well as electronics those will obviously change in the first half is it fair to say that the first half and a lot of ways will look like the first the fourth quarter, though.
It's David I'm not sure exactly how to answer that question without without giving giving guidance I think we've said what we can what we can say.
Okay. Thanks for taking my questions.
And next we'll hear from Michael Coppola with J P. Morgan. Please go ahead.
Great. Thanks for taking our questions you guys redeemed some of those exchangeable notes this quarter I think even within that cost you guys said was 359, which I'm curious do you guys expect to repurchase a similar amount kind of every quarter or so going forward as part of your ongoing liability management, and then kind of as a in conjunction with that can you.
Minus what the tax liability associated with that is as well and what where that stand out as at year end.
I'll, let ben or in our treasurer.
Yeah sure I would say the MSI exchangeable was a refinancing that was a unique opportunity going into yearend and potential changes to the tax regs in 2022.
On a go forward basis, and similar to what we did with the T mobile or sprint.
Exchange bowls, we look to try to proactively manage those depending on our cash balance depending on other needs for cash.
And depending on the amount of capacity we have for deductions.
For interest expense and so we will continue to do that if liquidity allows on a regular basis to the extent that we do more than that.
It would just be taking a look at it opportunistically.
Okay, great. Thank you and then just another question we had was on the fewer customer accounts.
You guys elaborate a little bit on the breakdown of that between online versus TV and if there's any particular differentiation among the key age cohorts there as well.
Yeah sure. So we don't break out new customers buy.
Online versus versus TV.
I think.
Make two observations though.
The first is.
Online new customer growth.
Is disproportionately impacted by our performance marketing.
And when.
Performance marketing experiences that type of inflation that we saw in the back half of 2020 one.
Our ability to effectively.
Bring hum.
New customers in the online.
Is hampered.
I'd also say that.
That product portfolio does make a difference on mine as well as people do branded and product specific searches and if you don't if you don't have those you don't have the opportunity to drive sales and traffic to your website. So a lot of the ways that we normally drive new customers on <unk>.
One I think were especially difficult I would say on the linear TV broadcast side.
The story is a little bit more stable.
People find us overtime and found the value proposition attractive and so we do see we do see spikes depending on the product portfolio that we're showing on that.
Today's special value, where today's special.
On the linear television side for sure, but I would say the the number and type of acquisition that we get from that side of the house seems to be a little bit more stable and predictable over time than what we've seen digitally.
Yeah, the only thing I would add to that while it's not a direct correlation.
We did see a higher penetration of e-commerce sales and our overall.
Net revenue this particular quarter, which is an indication of how that customer is really engaging with us through digital media mediums.
So there is some indication that as you think about online versus potentially direct linear customer that there is a higher penetration on the online side.
Great. Thank you that's all from us happy to pass it off.
And our last question will come from Jason Bazinet with Citi. Please go ahead.
I just had a question for Mr. Buffet, you mentioned that working capital.
It was a little bit of a surprise to you and I didn't know if that was a commentary on the quarter or the year.
If there if you if you have any suggestions for us in terms of what surprised you with receivables or payables or inventory.
Yes.
I'll comment and certainly David and Jeff can add if you look working capital was a large source of free cash flow in 2020, and it was a large use in 2021 and particularly in the fourth quarter.
Jeff commented on some of that and that our inbound freight in particular was so high during 2021 due to the well described well known problems around shipping from places like China.
And we had a large amount of inbound freight costs, which got caught up in it.
Our working capital and inventory. That's one example of sort of the volatility we had there.
And I think that was larger than it has many years past and as I said a source in 'twenty than it used in 'twenty, one which had an impact on free cash flow.
Andrew what might you add.
Yeah, what I would add to that.
Greg I think you hit the nail on the head.
Yeah. The other component is that we had a higher percentage of bar a higher level of inventory in transit as a result of these delays coming into the country as well as getting it ultimately to the filament centers.
The inventory.
Of course if.
If it wasn't available for us for the particular.
Erin time, we've now carry that into 2022, we feel very comfortable with the quality of that inventory and customer reactions to these particular products and then sort of offsetting on the imbalance is that these inventories came in.
We had to of course pay for them and many times, we didnt have the opportunity to get them in their appropriate time slot for sale. So you have this imbalance.
Payables being lower and carrying a little higher inventory levels as a result, though.
Some of these.
Delays.
And then if I could just one quick follow up it does that does that mean, you said the supply chain issues you expect to persist through the first half of this year as the corollary to this will likely continue to be a use of cash until things normalize and then become a source.
Yes, without giving any guidance on this our expectation is that we will continue to adjust our purchasing behaviors to account for some of the delays that we're seeing.
And as we work through our inventory levels and adjusting some of the relationship payable terms with our customers.
This is something that we could see persist through the first half of the year.
Okay. Thank you.
Thank you for the question, Jason and thank you to all the other listeners and questioners.
Thank you again for your continued interest in <unk> retail.
Look forward to speaking with you next quarter, if not sooner.
I think we're done operator.
Thank you and everyone. This concludes today's call. We thank you again for your participation you may now disconnect.
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Yeah.
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