Q3 2022 Qurate Retail Inc Earnings Call
Welcome took your rate retail 2022 Q3 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 you have a question. Please press star one on your telephone keypad.
As a reminder, this conference is being recorded November 4th.
I'd now like to turn the call over to Courtney Chun Chief portfolio Officer. Please go ahead.
Thank you.
While we begin we'd like to remind everyone that this call includes certain forward looking statements within the meaning.
Private Securities Litigation Reform Act of 1095, 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, and 10-Q filed by our company and QVC with the SEC. These forward looking statements speak only as of the date of this call I'm curious retail expressly disclaims any obligation.
And are undertaking any upgrades to older patients any forward looking statements contained herein to reflect any.
The change in current Retail's expectations with regard there to you or any change in events conditions or circumstances on which any such statement is based.
Please note we've 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 cash flow and constant currency.
Regarding the comparable GAAP metrics, along with required definitions and reconciliations you pretty preliminary note and schedules one through four can be found in the earnings press release issued today or our earnings presentation, which are available on our website today speaking on the earnings call, we have great retail president and CEO .
And.
Retail group interim CFO , Jeff Hathaway, and curate retail executive Chairman, Greg Mcknight now I'll turn the call over to David Rawlinson.
Okay.
Thank you Courtney and good.
To everyone. Thank you for joining us today and for your interest and curate retail looking.
Looking at our Q3 results. Our performance was the result of several factors. Some of these are external which we are managing through like all are in retail and some of our internal for which we are focused on driving better outcomes through improved execution and project at <unk>.
Our project to happen in June we said, we expected fiscal 2022 to be the base last year and that our transformation will not be linear we made progress in Q3 moving from the assessment phase of Athens to in depth planning, we expect to start seeing deep execution and.
<unk> results in 2023.
And the third quarter total company revenue declined 9% in constant currency.
Modest sequential moderation in the rate of decline from Q2, driven by better execution and the easier compares.
Like all in retail, we managed against macro headwinds, including inflation continued war in Ukraine, and rising interest rates that negatively impacted consumer sentiment in the U S. The University of Michigan consumer sentiment index declined 20% year on year and September 2000.
'twenty two.
We also faced several extraordinary events that impacted performance, namely we approach the death of Cleveland Elizabeth in the U K with respect keeping our customers team members and the mood of the nation.
We stopped all programming for two five days following her passing and used airtime to pay tribute to the claim and we estimate this period, coupled with the 10 days of mourning impacted QVC U K sales by approximately $10 million. We also prioritize the safety of our <unk>.
Team members based in Florida during hurricane year switching to pre recorded programming and Louisville, our programming for four days and we estimate sales impact was approximately $3 million to $5 million in Q3.
Total company adjusted OIBDA declined 54% in Q3 in constant currency. This reflects approximately 100 basis points and lower product margins due to planned promotions as we work to reduce our inventory, particularly at HSN elevated inventory level.
<unk> are pressuring margins across retail and we're no different we begun taking action to move through excess inventory earlier than others in retail due to capacity constraints following the loss of our Rocky Mount facility.
While this has pressured our margins year to date it has improved our inventory position as I will discuss more shortly.
Adjusted OIBDA also reflected sales deleverage and elevated cost we continue to work through excess inventory amplified by impacts of the rocky Mount buyer, leading to high levels of detention and demurrage expenses as well as inflationary pressures and shipping fuel packaging labor rates.
And marketing we are also lapping the benefits of the price increases we took last year. Despite elevated costs, we elected not to raise prices. This year, primarily due to the macroeconomic environment and consumer sentiment, but also to manage our promotional cadence as we took action to address.
Excess inventory.
That said, we have made progress on reducing inventory.
We had excess inventory based on the retail and supply chain environment, but also compounded by the December 2021 tragic buyer of our former Rocky Mount fulfillment Center, we moved through a portion of this inventory in Q3 through clearance actions and receipt management in Q S. H inventory ended the <unk>.
<unk>, 5% lower than the prior year, we do expect inventory clearing actions to create margin pressure at least through the end of 2022.
We are focused on our turnaround and have started to experience initial progress when key area I'd like to highlight is attracting leadership talent to drive the transformation of the business.
Scott Barnhart joined in late September as Chief operating officer in this role he leads supply chain procurement global business services, and corporate real estate and workplace services for all curate brand globally as well as customer service for all U S brands and fulfillment center operations for QVC.
The us and Hsen, Scott brings deep experience, leading global retail supply chains for multiple fortune 500 companies, including Cardinal Health Aramark and Conagra brands.
COO role is new to curate retail group and having a dedicated leader responsible for our supply chain and execution of our strategic plan is key to improving our performance.
Sonya remodel him joined as president of streaming and leaves our screaming commerce business.
As an experienced CEO and general manager with expertise and a proven track record of success building streaming businesses. Most recently, she led Amazon Prime video channels business.
Due to that she was founding CEO and president of bread box. The first of its kind streaming video on demand offering from the Uk's two national broadcasters BBC and ITV.
Streaming is an important future growth lever of our business by adding senior and her qualifications, we expect to meaningfully grow our audience and product sales on streaming platforms over time.
Yes.
Safety BOE joined as Chief merchandising officer of QVC U S. She is developing and leading merchandise strategy across all platforms as well as overseeing qvc's buying planning and programming organization and our design development and sourcing team, which is our in house agency that bring.
New brands products and concepts to life.
Safety brings extensive merchandise experience and a proven ability to help omnichannel multi category retailers differentiate themselves to engage customers and drive sales.
Most recently, she led global ecommerce and digital marketing for G. III apparel group. She spent more than 20 years at Macy's serving in a variety of executive leadership roles merchandize strategy and its integration with our programming is central to our business, having a strong leader here will allow us to better.
We serve our customers attract new ones and grow revenue.
Lastly, Linda a yellow joined tier rate as chief people officer. She leaves the full team member portfolio, including team member experience.
Management diversity equity and inclusion.
She brings more than 20 years of international experience, leaving people functions, a modern technology businesses and luxury fashion brands. Most recently she was chief people officer at Stitch fix prior to stitch fix Linda served in senior people roles at Salesforce and Uber were only as good as the people who.
Come to work every day and the culture, we create adding a senior people leader with Linzess proven background will contribute to attract attracting and retaining the talent and building the culture, we need to transform the business.
All of this topic team member engagement and morale are critical in a turnaround for us to deliver a project Athens I am pleased to report that curated retail group earned a 2022 U S. Great place to work certification the global authority on workplace culture and employee experience.
In addition, our own internal surveys revealed meaningful gains in our team member engagement and confidence in the company's strategy and leadership.
Now I'll provide updates on the Bob pillars of project Athens that we communicated in late June where we are pleased to see initial traction.
First.
From an overall perspective, we formed a transformation office to work with the teams for successful execution of project assets. So office is led by Scott Barnhart, our new CLO reporting into Scott is a dedicated chief transformation Officer, Bill Hunter, who has been with the company for 14 years.
And is singularly focused on delivering our strategic initiatives.
<unk> won a project Athens is focused on improving the customer experience and growing these relationships the president's of QVC U S and HSN I've been in their positions for about eight months, we experienced a moderation in the rates of decline for <unk> customer count from the first half.
2022, total <unk> customer count declined 11% in Q3 versus mid teens in the first half of 2022.
Our total count declined the average spend per customer increased 3% and the average number of items per customer increased 6% in Q3.
Customers remain engaged with total minutes viewed up 8% in Q3, which was slightly stronger than Q1, and Q2 with better execution and an improved merchandise portfolio, we will be better suited to serve our engaged audience.
Pillar two was all about improving execution of our core processes and July we began putting that today and the special back in today's special value and today's special by shortening their availability to only one day and offering our best price for that day, driving a greater sense of urgency in Q3.
We experienced a moderation in the rate of decline in TSB performance. We also experienced fewer shifts of our today's special value in Q3 versus the first half of the year.
QVC U S shifted 36% of its Tvs TSB in Q3 down from 50% in Q1, and 75% in Q2, Hs and shifted 40% of its <unk> in Q3 down from 60% in Q1.
And Q2.
Pillar three is about lowering our cost to serve we experienced meaningful cost pressures in Q3, some from external macro factors inflation in excess inventory and some from sales deleverage and some from our investments we are intently focused on removing cost per.
Our business and we'll have more to share on that in the future for today I'll simply reassert. The point, we made when we unveiled project assets. We have identified hundreds of millions of dollars of cost driven adjusted OIBDA opportunities. We anticipate seeing these impacts flow through in 2023.
And pick up momentum in 2024, we have begun detailed plans on cost initiatives across the organization and in the businesses, where the need is more media like zoom literally we have already begun execution.
We improved our inventory position in Q3 with more than a 17% decrease in the numbers of trailers at our fulfillment centers by the end of Q3 compared to the end of Q1.
Ed we continue to face capacity constraints at our fulfillment centers and incremental detention and demurrage costs, we expect to realize lower costs in Q4 due to the reduction in trailers. We also anticipate better capacity utilization as we have secured third party logistics providers to alleviate.
Some of the capacity constraints.
We are close to obtaining our normal operating goals awarded to delivery time, and our current fulfillment network and going into the holiday season, we believe our fulfillment centers are well staffed.
So look for is focused on optimizing the brand portfolio.
And the third quarter Zulli introduced free shipping and handling orders of $89 or more as a result, they saw a stabilization in conversion rates and an increase in average order value while national brand product was limited for most of Q3 through Lilly has attracted several.
National brands capitalizing on industry wide excess inventory, which will be beneficial moving forward the percentage of <unk> revenue from national brands increased to 53% in Q3 from 47% in Q3 2021.
Looking forward. So Lilly is focused on attracting more national brands, improving the customer experience on this site and efficiently ramping marketing through more diversified channels.
Cornerstone brands sustained revenue growth with record Q3 revenue at each of its home brands, Brian Gay Ballard designs and Grandin Road. These gains were partially offset by softness at Garnet Hill and apparel cornerstone.
Cornerstone opened its well West Palm Beach design Center in late September .
<unk> is focused on building high growth businesses anchored in our strength.
We were pleased that the average number of monthly active users of our streaming service QVC, plus and HSN plus increased more than 40% in Q3 compared with Q2.
We continue to expand our distribution our streaming apps are now included on Samsung Smart Tvs and on Cox's can tour platform. In addition, HSN has now joined CBC on Youtube TV, we look forward to reporting more progress under <unk> leadership.
As we look to the fourth quarter QVC will be presenting partner of this year's Christmas spectacular starring the radio City Rockettes, which will open in November 18th at Radio City Music Hall, QVC will have terrific exposure to approximately 1 million people who are <unk>.
And the Christmas spectacular as well as the millions of broadcast fans worldwide on social media. The Rockettes will perform in the peer lobb from radio city. During <unk> annual lost shopping nonstop Holiday Party. This weekend November 5th and sixth PVC Dot Com will feature a cure.
A collection of products selected by the rockettes through the holiday season.
Over the same weekend, we will host our nonstop party, which is the continuation of 2021 49 hour event success.
It will feature dozens of celebrities fashion designers host customer favorite brands and special popping guests content will be broadcast and streamed live across all QVC channels on virtually every platform and device, including QVC QVC to our website mobile app.
And social pages, and QVC, plus and HSN plus streaming services shoppers will find amazing holiday deals and early Black Friday sales prices on a curated assortment of gift ideas.
In summary, we are in the early stages of project assets.
Now have a dedicated transformation office as well as key new executive leadership talent in the near term, we do anticipate increased promotions due to elevated inventory throughout retail this is industry wide and will impact us as well. We also recognize that consumer sentiment is lower than last year.
Primarily driven by macroeconomic challenges that said, we are intensely focused on the execution of Athens and reiterate our 2023 2024 outlook, we unveiled in June with stable revenue and double digit CAGR for EBITDA and free cash flow.
We are motivated and confident in our ability to deliver our project Athens, we look forward to reporting progress in future calls and seeing you at Liberty's Investor Day on November 17.
I am pleased to welcome Jim Hathaway, our interim CFO on our call today, he will provide more details for each of our four business units momentarily.
Before I turn it to Jim I want to thank Jeff Davis for his service as our CFO for the past four years when Jeff left we named Jim Hathaway interim CFO , Jim joined US in May 2021 to lead finance for <unk> Xa and.
It is intimately familiar with our unique business prior to cure rate, Jim spent more than 20 years with Pepsico Frito lay and various financial leadership roles of increasing responsibility. Most recently he led financial planning and analysis for Frito lay North America, a division of Pepsico.
Now I will turn the call over to Jim to discuss the details of each business unit.
Thank you David and good morning, everyone unless otherwise noted my comments compare financial performance for the three months ended September 32022 to the same period in 2021, starting with <unk> revenue declined 8%, primarily on lower unit volume E. Commerce revenue declined 8% in line with you.
Overall revenue performance recall that in Q3 of 2021, we experienced inbound freight delays that impacted our ability to secure product on time last year. In addition, we saw an increase in advance orders in Q3 of 2021 that shipped in Q4 of last year. This benefit in Q3 of 2022 revenue.
And this dynamic is expected to reverse in Q4 of this year, we like the broader retail industry are facing excess inventory, we made and are making conscious efforts to reduce our inventory through promotions and clearance actions as David mentioned, we got started on this earlier than others in retail by necessity due to the rock.
Mount tragedy, which has had a longer lasting impact on our project margins, but is leading to improvement in our inventory balances year over year. This promotional activity was mostly in the home category in areas, such as seasonal decor storage and organization cookware kitchen electronics home office in gaming, but also in fashion such as loungewear.
Home revenue declined 9%, which was an improvement from the first half of the year in Q3, we experienced lower demand primarily for seasonal cleaning heating air purification bed and Bath and garden, partially offset by gains in food apparel declined 2% against 8% growth in Q3 of 2021.
<unk>, which demonstrates solid two year performance weakness this quarter was primarily in contemporary apparel.
Beauty declined 10%, primarily due to weaknesses in bath and body and prestige skincare.
<unk> declined 10%, primarily due to lower demand for handbags, and luggage intimates and casual and athletic footwear electron.
<unk> electronics revenue declined, 11%, which was an improvement from our over 25% declines in Q1 and Q2. The Q3 softness was primarily in computers and home office.
Adjusted OIBDA experienced meaningful pressure declining 56% with adjusted OIBDA margin decreasing 930 basis points looking at the main components of the margin compression.
Gross margin declined 530 basis points, primarily reflecting unfavorable fulfillment expenses product margins and obsolescence expenses.
Fulfillment expenses reflect capacity and operational inefficiencies that resulted in a detention and demurrage costs higher freight rates fueling wages, largely due to inflation higher rents at fulfillment centers and up from the sale and leaseback and sales to leverage these headwinds were primarily offset by savings from decommissioning our Lancaster, Pennsylvania.
And yet in Roanoke, Virginia fulfillment centers last year.
Product margins decreased primarily due to our inventory reduction actions, especially at HSN as well as lower shipping and handling revenue. We also lapped the price increases we started in Q3 of 2021, we did not repeat these increases in Q3 of 2022 due to the macro environment. These pressures were partially offset by favorable returns.
And a mix shift into apparel.
Inventory obsolescence increased primarily due to higher current year reserve provisions, we reduce <unk> inventory of 5% year over year, which was an improvement from the increase in Q2, reflecting rigorous efforts on inventory management and more disciplined buying behavior.
Operating expenses were unfavorable 110 basis points, primarily due to commissions and customer service commissions were primarily due to expanded over the air distribution iron Tenga scripts and Nexstar.
Increased customer service expenses reflected sales deleverage and increased wage rates.
SG&A was unfavorable approximately 290 basis points fixed cost pressure was primarily due to sales deleverage and investments in video commerce ventures in higher.
Higher wages and corporate rent post the sale leaseback.
Marketing reflects investments to expand our commerce platforms cost inflation and lower efficiency of marketing spend.
Bad debt pressure reflects increased current year provisions, though bad debt as a percent of net revenue was less than 1% in Q3.
Moving on to QVC International.
My comments will focus on constant currency results revenue declined 5%, primarily on lower unit volume and reduced shipping and handling revenue our largest European business, Germany, and the UK declined in the low double digits and as David mentioned experienced a cautious consumer sentiment from historic inflation, particularly for energy <unk>.
War in Ukraine, and the interruption of program in the UK. Following the death of the Queen QVC, Japan was less impacted by these factors. However, and grew mid single digits E. Commerce revenue decreased 5% in line with overall revenue.
QVC international experienced declines in home beauty, and accessories, which were partially offset by modest gains in apparel and jewelry.
Adjusted OIBDA decreased 35% and adjusted OIBDA margin declined 530 basis points. The primary factors of the margin compression were lower gross margin and higher fixed cost.
Margin declined 190 basis points driven by the following factors product module has declined reflecting lower initial margin due to inventory reduction actions and lower shipping and handling revenue due to reduced unit volume.
Inventory obsolescence costs reflected increase reserves for specific slow moving inventory that is expected to be liquidated in Q4 fulfillment.
Fulfillment cost reflects sales deleverage and higher labor costs caused by increased minimum labor rates and COVID-19 related staffing challenges as well as higher freight rates in European markets.
SG&A was unfavorable or favorable primarily due to higher fixed costs and marketing expenses fixed costs rose due to higher wages and benefits as well as software and it project costs marketing pressure included an investment to support our growing Japan business.
The U S dollar strengthened significantly against the yen Euro and the pound these currency changes mostly impact the translation of our international markets into U S dollars. They have limited impact on our direct purchases of cost and goods are two largest markets are Japan, and Germany, Japan has limited U S dollar direct purchases.
<unk> and Germany negotiated direct purchases in euros, our UK operations purchased only about one third of its direct direct goods in U S dollars.
Moving on to cornerstone.
Revenue grew 8% with record performance at each of its home brands front gate valve designs and granted road driven by demand for Bath case goods home furniture, and Halloween products. These gains were partially offset by reduced demand for apparel at Garnet Hill.
E Commerce revenue increased 10% and penetration rose 150 basis points adjusted OIBDA decreased 58%, primarily due to higher inbound transportation costs detention and demurrage fees for storage and handling and higher marketing costs, which were partially offset by initial margin gains looking at.
Xu Lilly revenue declined 39%, primarily due to lower unit volume, reflecting limited availability of national branded product in the quarter and marketing inefficiencies due to cost inflation. This caused you alluded to reduce marketing spend affecting its customer acquisition and retention.
Adjusted OIBDA due Lilly declined 47%, primarily due to the deleverage of fixed costs, which were partially offset by favorable marketing expense fulfillment and product margins.
Now I'll discuss two technical areas from Q3 <unk>.
First due to challenging economic conditions weakened business performance the decline in our stock price and a significant increase in discount rates used we accelerated our annual impairment assessment as a result, we have taken a noncash impairment charges of $2 7 billion.
At <unk> and $366 million at Lilly. These charges are related to the respective businesses goodwill and trade names of HSN as Lilly and are included in operating income, but excluded from adjusted OIBDA.
Second you will see in the 10-Q filed later today that we identified a material weakness in our internal controls over financial reporting.
Identified weaknesses, specifically relates to change management and user access processes around information technology controls at Lilly. It also affects qf's age because one of the affected systems is used by Culex age. The control deficiencies did not result in any identified misstatements, we have <unk>.
<unk> a remediation plan that is expected to bring this matter to closure in the near term.
So, let's turn to the balance sheet and cash flow.
Total capital expenditures were $171 million for the nine months ended September 32022, and we spent $36 million on a renewal of our television distribution contract contracts. Our total free cash flow for the nine months ended September 32022 was a use of $105 million.
Versus a source of cash of $218 million last year the year over year decline was primarily attributable to lower cash from operations driven by operating results and unfavorable working capital. Despite the year over year favorability in inventory outflows working capital headwinds were more timing driven with.
Uses of cash from payables this year related to inventory purchased in 2021, some of which remained in transit due to supply chain inefficiencies working capital was also impacted by increased taxes paid this year related to liability management at the end of 2021.
These headwinds were partially offset by lower payments for TV distribution rights and insurance proceeds related to fixed assets are free cash flow includes insurance proceeds received year to date, given the inventory loss and impact of our results related to the Rocky Mount fire on a last 12 months basis, our free cash flow was.
$288 million.
Yes.
Included in our free cash flow in the first nine months of 2022 was $280 million in insurance recoveries related to the Rocky Mountain fire $184 million of which is recognized in cash flows from investing and the remainder in operating cash flows.
As we communicated on the last call in July we completed five additional sale leaseback property transactions and we received approximately $443 million in cash proceeds we recorded a $277 million gain on the sale of these assets in Q3, which was included in operating income and excluded from adjusted OIBDA proceeds from there.
The sale were used to pay down our revolving credit facility.
Tax liabilities for these sites will be largely payable before year end 2022 for these transactions. We entered long term lease arrangements for the properties at attractive rates with annual rent payments of $47 million that will impact <unk> adjusted OIBDA.
In early 2022, we agreed the terms for the sale and leaseback of our U K and Germany fulfillment centers. We expect these transactions to close early in the first quarter of 2023, we anticipate receiving gross consideration of approximately 68 million pounds for our UK fulfillment center and 97 million euros.
For the German facility and expect to use proceeds to reduce debt.
Looking at our debt profile on September 30, we had $545 million drawn on the QVC revolver with $2 7 billion of available capacity, our leverage ratio as defined by the QVC revolving credit facility was two times, we have ample cushion relative to the four five times maximum net leverage covenant threshold.
And our credit facility. This net leverage covenant includes the adjusted OIBDA of QVC cornerstone and zoo Lily.
Thank you again for your interest and with that ill turn the call over to Greg.
Thank you.
David and the entire <unk> management team are obviously very focused on stabilizing.
This year.
There is a weak macro environment and a highly <unk>.
Promotional environment, among retailers and that intensity is clearly impacting Q as well as the broader retail market, but we do also acknowledge many areas, where we need to improve.
The operating performance at several of the businesses.
Importantly, we did make progress on inventory reductions in the third quarter and are on track for longer inventory reduction actions.
Should lead to working capital improvements and improve free cash flow.
David has attracted a top quality team to support its plans.
Any actions under the pillars.
Liberty and acute teams are very focused on driving balance sheet improvements that we made in Q3 and forward.
We did pay down the revolver with proceeds from the sale leaseback that was completed in July .
As you heard we have a European series of sale leaseback transactions that are signed and will provide additional capital.
The estimated gross proceeds of approximately $170 million.
Current exchange rates.
We expect to close that early in the first quarter of 'twenty, three and again intend to use those proceeds to further reduce debt.
We do look forward to seeing you at our annual Investor Day on Thursday November 17th as David mentioned.
Please visit the IR calendar on our website for registration details.
We will be hosting our annual Q&A session, if you'd like to submit questions. In advance you can E mail them to investor at Liberty Media Dot Com.
And with that operator, we'd like to open up for questions.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is there any question queue you.
You May press Star two if you will.
To remove your question from the queue.
So participants using speaker equipment, it may be necessary to pick up your handset before pressing just darkies once again Thats star one at this time, one moment, while we poll for our first question.
Our first question comes from Oliver Winter mantle with Evercore. Please proceed.
Yes, good morning.
I had a question regarding working capital.
How should we how should we think about that.
In the fourth quarter.
The very important holiday quarter.
You said that inventory should.
It should get better so it should be.
And that positive from from that but maybe you could give us a little bit more details how do you think about working capital into the fourth quarter.
Great. Thank you for that question.
As I look to.
Q3, the what we discussed was the exchange between better usage of inventory and a reduction in our inventory levels and higher payables I don't want to give guidance on Q4, but if you look at the last two years, we've had an exchange from a turning down our inventory levels disproportionately.
On the payables should catch up as we discussed.
And one other question.
Oh, yes.
On page eight in your in your presentation.
<unk>.
Chose customer count it looks like existing new and reactivated customers are now below pre pandemic levels.
Just wanted to see in the short term.
How do you plan to stabilize the customer please thank you.
Yes. This is David Thank you for the question, we did see customer count declines I think there are a number of drivers ill click through them relatively quickly and then talk a little bit about what we're seeing and what we're doing.
<unk>.
I think part of it is a need for better merchandise. Obviously, we've not had access right time right product right value right hosts in quite the way we would if we were operating in a normal environment and that has a particular impact on our on our business model.
And I would say there are some categories like beauty that had been especially impacted by the fire.
Fire at Rocky Mount.
I would also say I think we've been particularly weak and attracting new customers over the last few quarters.
Some of that because new customer.
Really center around our ability to attract new customers really centers around consumer electronics and home products, which were all difficult coming out of the <unk>.
Pandemic and then finally I would just point out if you look at our customer count by cohort, we did see a very large crop of <unk>.
Large.
Low quality customers that we attracted during the pandemic, which are still working their way out of our out of our numbers.
Terms of what we're doing to address it really the first action when I talked about in my comments, which was <unk>.
<unk> the TFS in TFS availability it goes back to the execution of our core business model.
We know that when we execute on our today's special and today's special value. It increases the attraction of new customers and the stickiness of our best customers for reference is as a result of some of these actions that we've taken we did see.
We did see improvements in the rate of decline so for Rts in TSB fees for the quarter, we were down low teens compared to high teens and low <unk> in the first half. So we are starting to see that perform better and I think that will flatter our cluster.
Per account as we continue to improve there. We are also bringing guests back into studios during the pandemic.
Went to remote guest and we've gotten consistent feedback that that made our presentation less interesting and so we think thats going to we think thats going to help.
On the merchandise side, we've talked about some of the talent we brought in on the merchandise side. We also had a global vendor summit here at our headquarters where we brought in all of our top vendors and talk to them about what we needed to do to get to more.
Bashan and different types of refresh cycles across our assortment and so we think we're on the path to getting new more excitement.
Citing assortments to bring to customers again, I would point to some early signs of the rate of our total customer count decline did moderate in Q3. It was down 11% in the first half of this year it was down 20 or down 17% in Q.
One and 16% in Q2, so we do see that we're making progress in stemming that the colon I would also say that the rate of new customer count.
Declined moderated in Q3 as well we were down mid teens in Q3, compared with 30% declines in each of the first two quarters. So it's a work in progress we recognize that we have to have a healthy customer file to get back to a growing business, we've been moving against the size of that.
Billy and we're encouraged by some of the early signs of moderation, we've seen and decline in customer count and hopefully more.
Moving towards a position, where we can start to grow that count again.
Thank you very much and good luck.
Thank you.
Our next question comes from Jason Haas with Bank of America. Please proceed.
Hey, good morning, and thanks for taking my questions. So I had a couple of ones.
And then cornerstone unduly I thought that maybe what are you seeing better stabilization in results.
Just given that we had talked about on the last earnings call.
I think we had mentioned as well about the better buying environment out there so.
I'm curious if you are seeing better inventory availability and if not now when would you expect that to us.
You should see some benefit from that top line stabilization.
Yes <unk>.
It's a great question, we are definitely seeing much.
Much better inventory availability.
Have signed on a couple of hundred new.
Brands of various types, including.
15 to 20 National brands those will be launching in November and December those 15, 20 tier one national brands are all brands that we haven't had over the last 18 months. So we're seeing a type of availability we haven't seen.
In some time and we think this will increase site conversion. We also think it will help to stabilize revenue it's taken a bit of time for us to get these on the site and start promoting them to your question, Jason There's just a lag cycle the brands have to realize that.
<unk> needs to Lilly as an excess inventory outlet, we have to negotiate timing we have to establish some setup to get the inventory shipped and then we have to run the promotion on the site and so it's a three or four months cycle and so we will just start you'll just start to see that.
Different this month and next month and the level of availability of the brands on site. The other thing I would just point out which is it's not only about getting the tier one brands. It's also about the level and depth of the assortment that we have available to us, which we've also seen expanding Barry.
<unk>.
Spanning very substantially last thing I'll point out is the leadership <unk> been there about eight months now and I think as you go through the holiday.
Season, Youll see a number of changes in crude including the new shipping offer including a real diversifying away from Facebook into other marketing channels and we've already seen pretty strong improvements in the unit economics of the business. So I would agree with you.
It hasn't.
Numbers haven't come through quite as quickly I think as we would all have hoped but I think we're in a good position now.
Had a question I think also about cornerstone.
Thanks, Yes on cornerstone I'm curious for.
For the overall business you called out a lot of.
Macro and external headwinds and I'm curious why those werent.
It doesn't seem like they were much of a factor for cornerstone on the revenue growth has been really strong.
It looks like the gross margin was a bit a little bit weaker I think you called out some freight charges there, but just curious why havent those macro.
Challenges effective cornerstone as much as the rest of the business.
Yes, it's a great question I'd point to a few things I think.
First essentially all cornerstone.
Product is proprietary a private label.
So because of that is insulated a bit from the.
<unk>.
Some of the discounting pressure and the other things that are going on in retail.
That's first second I think a direct marketing skill set catalogs paper customer by customer category by category is even more valuable in the current environment actually think there is some benefit to being catalog folk.
When youre seeing the type of inflation that we've seen in some of the digital marketing environment and so what I think.
We used to look like.
Our weakness now looks like a bit of a bit of a strength I'd.
Also say, we've seen continued increases in investment around home, both indoor and outdoor I think there was some in.
That that might moderate coming out of the pandemic, but what we've seen is people shifting their wallet.
More consistently to doing things to upgrade their home whether that's.
Grills outside our.
Patios outside we've seen a much longer leg to outdoor furniture than we are.
Thunder than we've seen in the scene.
In prior years, and we're also continuing to see really strong.
NAMIC for people to continue to upgrade their their home and so a lot of those trends look stickier than I think.
The common wisdom.
<unk> and so all of those things.
Make us think that this.
Revenue growth profile of cornerstone continues to look strong going into going into next year and then of course next year, we've talked about we're going to continue opening.
At a deliberate pace stores.
For the cornerstone brands, especially Ballard designs. The stores have continued to perform extremely well continue to grow and continues to have good profitability and so we think continuing to open stores in underpenetrated areas should be.
Even an additional positive for the cornerstone story.
That's great that armington. Thank you.
Our next question comes from William Reuter with Bank of America. Please proceed.
Paired remarks, when you discussed.
<unk> shipments and their delay from the third quarter to the fourth quarter of 'twenty. One it seemed like you were kind of indicating that the challenge that the comparisons are going to become more difficult in the fourth quarter. So some of these trends that we've seen in the third quarter could get even more challenging was that the message we were supposed to take away from that.
Yes, So we had an exceptional event last year, given everything that was happening in supply chain, where we took a lot of advanced orders that didnt ship. So I think it's fair that's a <unk>.
In the compare help a little bit in Q3 heard a little bit in Q4, just because of when that revenue is recognized we don't recognize it until it's until its shift so.
That's there in the numbers, it's not up.
It's not a massive swing the numbers, but we just wanted to highlight that it was there was an impact I would say.
We saw improvements in levels of decline in moderation coming in.
And to this quarter I've talked about some of the underlying drivers of that and I think we're going to we're going to continue to hit the execution on those and so we.
We anticipate continuing to be able to make progress.
That's helpful and then it sounds like you are pleased with the progress you've made on clearance of inventory.
It seems like the fourth quarter is going to still have a pretty substantial.
Substantial amount of this do you expect you will be largely done by the end of the fourth quarter or this should these efforts continue on into the first or second quarter of next year.
Yes, it will depend a little bit on how.
The fourth quarter performs of course, we feel very good though about the position, we're going to be and coming through the the fourth quarter, it's possible that there could.
<unk> be some hangover as we go into Q1, but we feel pretty good as we look out across the.
Across the universe.
If you look at it.
In PD data some other industry data. It suggests the market's up about 20% in excess inventory across retail.
<unk> about 5% so we're going into this.
A lot more claims in the overall retail environment and we think we will continue to improve on that number as we go through the fourth quarter. So there may be some hangover going into into Q1, but we think we'll largely be through.
Getting clean on inventory and getting to a level, where more happy with as we go into Q1.
Okay, and then just lastly for me, you're clearly, making a lot of efforts to accelerate your streaming business.
Do you have a sense for what percentage of your of your sales are coming from <unk>.
Streaming.
At this point I know it may be difficult, but maybe you have some sense for where that is and where you think it maybe will go over the next year.
Yes, so we havent, we havent broken that out up until now we are looking at how to give you some additional visibility and how to think about our streaming in context, So I would say.
It's not a primary driver today, but it has been growing.
Very quickly it's material, but I wouldn't say, it's a primary driver of.
Results.
What we've seen in terms of customers as the streaming customer we think is.
As valuable or potentially more valuable than a linear TV customers. So we've been happy as we've gotten to know the customers even as we as we've grown the service but.
But eventually medium to long term I think as people continue to move from linear to streaming it will be an increasingly big and important part of our portfolio I think in the U S streaming reach overall and the broader market has already surpassed linear TV.
Reach I think we passed that threshold this year.
I think there'll be a lag for Ross, but over time I would imagine.
That we will replicate some of those same dynamics so it's definitely.
Emphasis.
Great I'll pass it on thanks.
Our next question comes from Carla Casella with Jpmorgan. Please proceed.
Hi, Thanks for taking the question.
I'm wondering did you buy back any of the senior exchangeable debentures in the quarter I noticed that the balance came down a little bit I'm not sure. If that's just.
Carrying value or if you purchase them.
Hey, Carla it's been arent, we did purchase some we actually purchased it for.
$41 million current or adjusted principal amount and $45 million debentures for a cash cost of $24 million.
Yeah.
Okay great.
And then the sale leasebacks.
The two additional ones in Europe beyond this do you have.
What are your remaining kind of material owned properties.
We do have several additional material properties I think.
The interest in doing additional sale leasebacks, we'll be opportunistic and dependent on market conditions, but we will continue to look at opportunities across the portfolio.
Okay, Great and then looking at the customer count I know you've got this question before but so acute.
We see it's down 16% year over year, 13% from pre pandemic and 6% since the first quarter.
Are there any when do you expect to see potential stabilization in that customer count.
Are you seeing any any green shoots yet.
Okay.
Yes so.
Appreciate the question say a couple of things the first is.
We sort of look at customers.
Broking out within the business by new occasional returning and our best customers I would say our best customers have held up better than our total customer file.
And so.
We're pleased with that.
And certainly the spending behavior of our best customers have been extremely strong growing in the quarter.
Our new customers have been a potential source of weakness often being down in the first half being down and.
In the 30% range and so that's been a real drag now new customers in our model are not nearly as valuable as best customers. So they account for less but for the long term health of the customer file they're very important and we've cut that we have.
But that rate of decline for new customers by more than half already and we're going to continue to hammer away at making our profit value proposition.
Much more attractive for new customers.
On the overall customer file like I pointed out before we have seen.
<unk> seen.
A moderation in the rate of decline, we think we know why we're driving that moderation and we think we know the tools we have at our disposal to continue.
To continue working on getting back to a stabilized growing customer Bob.
Okay, Great and then just one on the <unk>.
The business interruption, you mentioned that you filed or submitted your claim just trying to understand the magnitude of that claim be greater or is it less than the damage insurance claim proceeds.
<unk> already received.
Right.
David do you want me to take that.
Sure.
Yes, I would say we filed the claim.
Theres negotiations going on I don't know that we're ready to comment at this point, whether its going to be bigger or smaller than the property amounts that we've gotten that.
Okay, but it is material like those property amounts have been are alright.
And I just don't know that.
We expect it to be material.
Okay.
And then just a clarification.
<unk> got plenty of revolver capacity now you've got some near term maturities. So will you use your revolver can you use it to take out near term debt.
We can use the revolver to take out near term debt I think we're being.
Prudent with respect to interest expense.
Current interest rates realm.
Relative to our.
Really low coupons on some of the near term maturities so more likely if we were to use the revolver.
For example for the March 2023 maturity, we would just do it just prior to maturity as opposed to <unk>.
Proactive.
Purchase.
Okay, Great I understand thank you.
Our next question comes from Hale Holden with Barclays. Please proceed.
Hi, good morning, Thanks for all the detail. This morning, I just had a quick question on.
The TSP MTS statistics that you gave in the script.
I'm surprised that you're still shifting a lot of them I guess, given what looks like.
Better inventory flow through than what you had last year, so any color there would help.
Okay.
Yes, so we have we.
We have seen some moderation and that I would say the supply chain is better than it was last year for sure.
<unk> is not fully healed.
Yes, so we still there still is.
Jumping in.
In arrivals and availability.
And we're still some of our vendors are in better position than others in terms of their catch up with their with their own with their own.
Supply chain the other.
The other piece of it of course is as we've gotten through the inventory at Rocky Mount.
Some.
Lumps in that inventory and Theres also some changes and what we need to do as we discover what's available and what's not and the promotional and the promotional calendar. So all of those things I think have continued to make.
The calendar, a little more unstable than we'd like but it was a lot better in the third quarter than it was in the first half and I think we feel pretty good about being able to operate much more in line with our normal promotional calendar in Q4.
And then and then sort of as a follow up on that in the EBIT bridge or margin bridge that you guys provided.
I saw the sort of the margin decline for merchandise margins, but.
I would think on a go forward basis, but there could be a meaningful benefit to shipping cost just given what we're seeing on ocean freight.
Any color you could tell us on what that could look like next year would be helpful.
Thank you for that question, we spend a lot of time reviewing the shipping rates and what I would offer up is that we do start to see.
Declines in shipping rates in the marketplace and we have seen stabilization broadly similar to the broader market and our supply chains from oceangoing freight which is a large portion of our business.
I would just point out there is there are some substantial lags.
For two reasons first.
It just takes those lower rates.
Show up on the on the P&L from the time that you've contracted before it gets on the water before it gets here and before it flows through the numbers second.
Some of the shipping rates are at spot prices, but a lot of it is also on contract and so in some of those areas you have to roll off of the contracted rate.
Rates before you can take advantage of the lower spot market rates that are in the market and so it does look like it will be.
It does look like it will be a good guide going forward, but it will come into the P&L and give us relief overtime.
Great. Thank you I look forward to checking off a sail this weekend.
Our next question comes.
Okay.
Our last question comes from Steve <unk> with 40 10 capital. Please proceed.
Yes, hi, thanks.
Just a two part question.
I was a little surprised given all the initiatives you've announced in the sales decline.
Costs were up so much can you I imagine there's some temporary costs in there can you highlight I guess, how much was temporary and then kind of related to that is just you've given EBITDA guidance, which.
On the surface sounds good is up double digit.
But.
The pace seems to keeps going down so can you be more explicit on what double digit means.
What's the base may be so that we have an understanding of what your actual targets may be a few years out. Thanks.
Yes, great let me.
I'll hit the second part first.
I think we.
Tabled. It are we established the base year is 2020 to intentionally given some of the puts and takes getting through this year. We think we'll have a cleaner.
<unk> and read going into $2023 2024. So that's why we we stated that like that but I think we'll be able to give you a little bit more detail as we land 2020.
Two when we're able to talk about what project athans looks like going forward, but I don't think we're prepared to announce new targets today.
In terms of.
Cost pressures.
I'll take a little bit of time with this one because I think it's important.
I would really bucket the cost pressures in the four buckets.
It's important to separate them because what we have to do against them is a little bit different so I would I would think about fulfillment.
Other inflationary impacts our inventory liquidation efforts.
<unk> deleverage across the P&L so on fulfillment.
<unk> supply chain is the largest driver of costs by a lot. This really has two components to it. The first is Rocky mountain, we just had to hire more people because we're more manual rocky Mount was one of our largest and most efficient.
Processing facilities, we also have more expensive transportation and routing because we don't have coverage that is good and that part of the country. The other part of Rocky Mount was we now had capacity constraints. So we had to go out and lease more buildings that we also have.
The lead more inventory and trailers. So all of those were costs that should be coming out of the P&L and I would I would point out that we've made substantial progress so I talked about the trailers coming.
And two I think Q2.
We had a 1000 trailers.
Across the Bay areas.
<unk> in the network were down at the end of Q3 to 275 trailers and since the end of Q3, we've gotten that down even further so things like detention and demurrage, which were <unk>.
Penalizing in this quarter over time should work their way out in terms of other inflationary impacts which is sort of the second category, that's where you see marketing cost the digital marketing environment has been been tough, although I would hope that comes down we've also invested a little bit although not a material driver into our.
Screaming business on marketing.
On the gross margin line, obviously, and we've been moving to get rid of some excess promotions. We started that early we've made substantial progress that's had a material impact on margins. We think we will continue to see that impact through 2022.
Should see that start to moderate in 2023, and then finally on sales deleverage in the P&L I would just say when you are.
Down 9% constant currency, when youre seeing that sort of down it's just hard to remove SG&A at in period at the same rate of the sales decline.
Decline, we also because of the overall consumer environment. Unlike last year Werent able to counteract very much of it by taking price that's both because of the environment and because we are being more promotional to move inventory what I would say is we're attacking all of these areas even.
And if you can't get it in periods. So we're exiting multiple leases around the world Xu Lily has already tasted very strong action in terms of right sizing head count across the business of course, we're also.
Very intentionally managing head count if you look at the head trauma across the business.
Spike the increases that we've had to deal with to deal with Rocky Mountain overall business head count is still notably down year over year. So we've kept.
Really tight grasp on how costs are flowing through the business and then I think as we go into next year and as we stand up the transformation office, we only intend to accelerate these sorts of costs.
Great. Thank you very much.
Yes.
So operator, I think we are done for the day and to our listening audience. Thank you for your interest in carry and as we said we hope to see many of you in a couple of weeks in New York.
That's it for this morning.
Thank you.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.