Q3 2022 iMedia Brands Inc Earnings Call
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Hello, and welcome to our media brands, Inc. Third quarter 2022 earnings call. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Alex.
Mr. Berger Vice President Deputy General Counsel. Please go ahead Alex.
Good morning, and thank you for joining US we issued our Q3 earnings release earlier. This morning, if do not have a copy it is available through the news section of our IR website at <unk> media brands Dotcom.
This release is also an exhibit to the form 8-K, we filed this morning.
A webcast recording of this call will be available via the link provided in today's press release as well as on our IR section of our website.
Some of the statements made during this call are considered forward looking and are subject to significant risks and uncertainties.
These statements reflect our expectations about future operating and financial performance and speak only as of today's date, we undertake no obligation to update or revise these forward looking statements.
We believe the expectations reflected in our forward looking statements are reasonable, but give no assurance such expectations or any of our forward looking statements will prove to be correct for additional information. Please refer to the cautionary statement in today's earnings release, and our SEC filings.
Mainly we will make references to non-GAAP measures on this call such as adjusted EBITDA.
Please refer to our earnings release for further information about these measures, including reconciliations to the most comparable GAAP measures where possible with reasonable efforts.
Now I would like to turn the call over to the CEO of I'm media brands, Tim Peterman Tim.
Thank you Alex and good morning, everyone I'll start today with the obvious it's a tough environment out there. Some challenges we expected like the struggling U S economy, and something we did not like the extended question conflict.
Although we intellectually understand all of these are short term in nature, it's still significantly rises our risk rate alright risks and job security risks and fundamental consumer centric business models.
Risks and our investments in our loans. Therefore today I'd like to start with three topics that I know our investors prioritize today.
Net liquidity and working capital in February we explained our debt and liquidity management plan and I'm excited to say that we are positioned to exceed all of our goals stated that from a working capital perspective year to date. This year, we have generated $5 million in positive working capital last year at this point, we had used 41 million in working cap.
So which means this year, we have improved our working capital management by roughly $46 million from a debt reduction perspective during our capital markets day in February we talked about a 25 million dollar target for debt reduction by year end to date, we have reduced our debt by $7 million on November eight we executed an L O.
Why with a real estate firm to sell three of our medias four buildings for $48 million and a sale leaseback transaction because of our roughly $380 million in Nols our gain on this transaction, we will see them tax free.
We remain confident we will close this transaction in Q4 and our goal is actually to close in December .
In terms of our use of the 44 million in estimated net proceeds we plan to retire the $28 5 million Green Lake term loan and used the remaining $16 million to reduce our ABL loan, which in short increases our working capital to fund our growth. This means combined we are positioned to reduce our debt by roughly 50.
Or 200% of our target.
Our interest savings alone next year, it will be over $4 million with that an important update complete let's turn our discussion to our core our television networks shop, HQ123, T V shop, Bulldog PV and shop, HQ health and how we are engaging our customers in this challenging environment that will likely be here for several key.
Orders from an overall company perspective before we move into each network. Our customer report card is great for the seventh successive quarter I media posted year over year customer file growth in Q3, this quarter by 15% and as we discussed in our last earnings call our strategy to increase.
The upcoming Q3 promotional activity turned out to be very successful today. Unlike many of our previous earnings calls I'd like to start our conversation talking about 123 T V are vibrant and growing television network in Germany. In spite of the Russian conflicts ongoing negative impact on the German economy and the tenor.
The resources under the new leadership of Michael Linker, President and Eberhard Coym, CFO and T. L. O I am pleased to share their progress today as they continue to successfully optimize merchandise margins increased price points drive viewership engagement and improve profitability.
Couple of Kpis that will demonstrate their success Q.
Q3's, net revenue per customer was 132 euros, which was a 4% increase over Q2, Q3s average selling price was 21.4 euro a 14% over Q2 and one of the foundational elements.
What the company is doing today to improve its profitability Q3s, ending inventory was 23% lower than Q2's, ending inventory, which means not only are they doing it with margin and with balance they're doing it in a very fast turning inventory environment. In addition, Q3 staffing costs were 15 <unk>.
Sent lower than Q2 staffing costs, so hats off to Michael and Eberhard, who are doing a great job. In addition to growing the core business Michael when they have a hard are also working with their technology team headed by Manwell I'm going to make this an attempt marshy Anna.
Who is there technology lead and they are doing amazing job, bringing their shopping auction widget to shop HQ for a soft launch in December or early January very excited about this opportunity and we can talk more about that during the Q&A session.
Let's now turn our attention to shop HQ as the team there is well prepared for the holiday season, with a great level of inventory and unbelievable schedule of great shows and the number of new brands and returning brands for our customers.
As a matter of fact, we continued to attract former brand who are returning to us, including Joyce Gerard Gems en Vogue naturally Danny Seo and Elizabeth Grant International in the past these brands in aggregate generated over $50 million in annual revenues for shop, HQ and we feel great about their return our strategy to drive can.
Tumor engagement in Q4 will be based on the same type of promotional activity that we did in Q3, it won't dominate our selling efforts like it has done with other retailers, but it will be an important component also related to shop HQ as we did in Q2 with some of our smaller online marketplace businesses that we decided to either sell or shut down.
We completed a very disciplined capital allocation process with a shop HQ teams in Q3 and as a result, we made the decision to end our relationship with Shaquille O'neal, sometimes in this business you are surprised and this is really one of those times back in early 2020, we felt JAKKS products would be a perfect fit for our audience. However.
Rather than forced to fit that was just not there we felt an amicable parting was best for both sides I have nothing but absolutely great things to say about shack in the a b G team and we wish him the best.
In conjunction with this contract termination, we incurred a onetime noncash charge of $10 million in Q3 finally as I'm sure you read in our recent release shop, each SKU relaunched on dish yesterday on the very same two channels, we occupied before channels 134 and $2 44.
I can't say enough good things about the dish team and we are excited to be engaging again with some of our best customers on the dish platform now I'd like to give you my perspective on our overall financial performance in the third quarter.
Revenue was a little softer than we anticipated and our adjusted EBITDA was little bit better from an operating expense perspective, our general and administrative costs were up about $10 million driven by the shack write off.
In terms of our selling and distribution costs. The 4 million reduction. This year is related primarily to the content distribution cost from dish and charter carriage of Bulldog and health last year that were not present this year.
Our third quarter net loss was $21.3 million or 72 cents per common share. This again included the $10 million shack charge regarding liquidity and capital resources as of the end of Q3 total unrestricted cash was $9 1 million as I previously mentioned, we expect to complete the $48 million sale leaseback.
Action in Q4, we plan to use our Nols to offset the tax gain and our planned use of proceeds is to reduce debt and increase working capital regarding our outlook for the fourth quarter 2022, we expect the holiday season to be challenging and promotional accordingly, we anticipate reporting net sales of approximately one <unk>.
Hundred and $77 million, which is a 9% decline over the same prior year period.
We anticipate reporting adjusted EBITDA of approximately $16 million, which is a 6% increase over the same prior year period. We continue to expect to post positive quarterly earnings per share in Q4 2022.
For the full year, we anticipate reporting revenue of approximately $588 million, which is a 7% increase compared to full year 2021, we expect to report full year 2022, adjusted EBITDA of 39 million, a 7% decline compared to prior year as a final reminder, from a tax perspective, we have approximately <unk> <unk>.
$380 million in federal Nols that should be available to us to offset future taxable income. Thank you for your time. This morning, Tom and I are now pleased to take any questions.
Thank you and I will be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star one one moment. Please while we poll for questions. Our first question today is coming from Thomas Forte from D. A Davidson your line is now live.
Great. Thanks, one question one follow up so as a longtime follower of the video retailing category historically, there's been more resilient customers held up better than call. It.
Target Walmart customer.
Can you compare how this environment affecting your core customer versus other periods that were challenging such as the great recession in 2008, 2010 or any other periods of macroeconomic weakness do you think are applicable.
Sure Tom.
Great question.
If you take a step back and say what are we doing here, which is we're really building television networks today that have three supporting revenue streams advertising E Commerce and E Commerce.
That by itself is very different than in 2000.
Nine at least for this company and E Commerce in general.
As we think about our performance this year our advertising arm continues.
To outperform expectations and really although they win we believe even more outperform they've certainly done better than previous year, and our growing well so that has not been affected.
That helps our television networks as a balanced and also as a catalyst offering advertisers that come on as well as brand this opportunity for digital advertising and on air talent television. So number one the revenue streams are more balanced that gives us the opportunity to withstand some of that.
Things that are very centric to television retailing very centric retail when you take another step back and say, okay. Well how is it that we for example were able to maintain our margin in this environment right that was a very challenging environment. We just went through in Q3.
Martin engineer over here that are the same I've already talked about how shop HQ was more promotional in Q3, and therefore gross margin was going down but that was balanced by an improvement in margin from our Germany.
The network 123 television by Christopher <unk> banks, and certainly by I M. D. S. So the durability of our business model to withstand surprises like a dish.
Disruption in carriage or even macroeconomic pressures like we have in the U S and Germany is pretty solid and the end result speak to that.
6% decline in revenue and flat margin while.
Getting a surprise disruption from dish and facing down these promotional environment, we feel very good about it. So that's the reason that we have spent the last three years constructing this framework to have foreign television networks each supported by three revenue streams.
Thank you and then as a follow up.
Now that you're back on dish, how do you think about your carriage again first shop HQ and how do you think about your opportunities in the future.
They improve the cost of carriage.
And as we've talked about Tom the entire secret of shop, HQ is profitability and growth is around reducing our percent of well really our content distribution cost as a percent of net sales.
Our dish renewal was an important step forward for us in the future each of our renewals et cetera to reducing the cost in the future, but also in increasing the productivity. So we work with our distributors to make sure that were being promoted to make sure. We're in the HD neighborhood. It isn't just always about cost it's about both cost and about driving.
The core productivity and shop HQ. In addition, it's about our smaller networks shop, HQ health shop, Bulldog TV all of those contribute to drive down our content distribution cost as a percent of net sales.
It is a journey that we began as you know two years ago and each year, we're making progress in bringing it down because all three of those strategies are smaller networks cost as a percent of costs from the distributor as well as revenue productivity in our flagship shop HQ is critical for example want to treat T V.
Already has a.
Distribution costs as a percent of that their net sales in the mid to low single digits. So they're already in the place that shop HQ will be we believe in the next 12 to 18 months.
Thank you for taking my question Tim.
Thanks, Tom.
Thank you next question today is coming from more courage Untold from Lake Street Capital. Your line is not a lot.
Yeah.
Just a couple of quick ones just was hoping you could peel the onion, a little bit it looks like units are up pretty nicely on a year over year basis, our asps were down.
Customers are maybe just talk a little bit about what you're actually seeing you know with the customers right now as you as you move into the holidays.
Sure thing Marty.
The numbers, you're seeing are aggregated between one to three television and shop HQ. So you know there was.
That's the first part we need to make is that one to three Tvs units there their average.
When we talk about ASC or at a L V. A S. The average selling price.
Is not even half of what shop HQ is and that was one of the core things that was important for us to fix at are the ones, who treat T V business and their customer profile was we need to make sure that the E. S. P is growing in a way in categories that they do well and so.
When we do promotional events or we do free shipping or we engage the customer and we have to pick pack and ship. It we're not doing 10 units to get to $100. We're doing you know five units or four unit and though that critical business model shift is what you see every single quarter.
From us and you'll see that the units will start to calm down again and move the ASB will start to move up again, that's just simply fixing the one of the challenges in one can train T V, which were exactly the same as they were a chop HQ when I returned into the in the middle of 2019. These are fundamental things we know.
Fix that was one of the exciting things, we saw and the opportunity for one to three television beyond the strategy, Andy what I would call the catalyst of bringing their expertise for gamification into shop, HQ, which you know as I noted, we're doing a soft launch of their auction shopping with it.
I'll give away the secret sauce.
Today's top option instead of today's top value, but both will be featured on shop HQ as we tweak that model and that consumer experience and we head down the path for the spring of next year around doing the same thing in disrupting travel.
Just to follow up on the domestic business from an inventory perspective, yeah. How are you feeling about your kind of the mix of product relative to what consumers are gravitating towards zero as we move into the holidays.
Great question always one thing you have to.
Read the room I think that the.
The most important thing we discovered in the last call. It four years was that that idea of capturing what the customer wants and the imagination of the customer that's timely and that you can often bet wrong on is around consumer electronics, and the big items like that and what you're taking in.
Customers. The reason, it's so risky is that if you get it wrong youre sitting on a lot of inventory and those customers only come around once.
So you.
You saw us really move out of consumer electronics for the holiday season.
<unk> 19 in 2020, one and we really only focus on our core wearable strategy.
At elements that we do have some of the gaming stuff and some of the funds definitely do have it's definitely sell year round from the from the drones cars and these other things and we do those internally. So we can avoid any other mouse trap of consumer electronics, which is the low margin. So that you know that we feel like we have a go.
Great selection of product for shop, HQ, and some of the brands on shop, HQ, where and better positioned us well Christopher <unk> banks. For example, last holiday season, we had some late shipments still because of logistics, we were able to get all that in in the first quarter and it's just been waiting to be sold.
For nine months and that is so we feel like we're in great shape, they're in the holiday season for pressure on banks.
Well, it's a question for me you'd talked a little bit about capital allocation.
You know look required the balance sheet as much as possible is.
Is there anything that would prohibit you guys from potentially doing a buyback of any sort here with your equity.
And a market cap of roughly 15 million box, even a small amount of dollars would go a long way there but is there anything that's preventing you guys. At this point no hopefully once you get the deal closed on the sale leaseback.
Potentially buying back some stock.
Great question. It is one that we wrestle with all the time no right now we're focused on obviously, the the debt reduction and closing the transaction.
The additional liquidity and what the IRR would be on that additional liquidity and how it's deployed and we talk about that all the time with our board and our stakeholders and we will make that call. When it comes out but certainly there is an opportunity a very large [laughter] as I would call. It a large disconnect between the.
On the equity value of the enterprise value as it relates to the business, what we're doing and what we've done. So we think that's going to work itself through.
Certainly.
Certain circumstances.
And at one time events buybacks do have impact I am.
Subscribers to that it's just the book the outsiders eight where they think that was the name of it where they talked about certain opportunities for stock buybacks.
Thanks, and good luck.
Thanks Mark.
The next question is coming from Eric Wold from B Riley Securities. Your line is that a lot.
Thank you good morning, Tim.
A couple of questions I guess first off on the sale leaseback.
Can you maybe kind of talk about.
How that played out versus what you would have expected.
When the board first approved going forward.
If he wants to go anything come out better or worse, you may have thought and then is there a plan either personally to lose a fourth billing that was not included in the same plants were back separately.
Hi, Eric Good morning, and yes, it's great question, let's talk about the.
Taking a step back again, what when we start we started in I wouldn't say August September we were looking at the large disconnect.
In our market cap and some of the risks out there in the market and obviously there was a concern that.
At that time that we felt around our liquidity and debt and even though we pre announced that we were going to be moving forward to reduce our debt by $25 million. My belief was there's two ways to walk out of the woods. When there's such a large disconnect in that continue to operate and then demonstrate that the balance sheet and the company.
He is much stronger than what the market is giving it credit for so taking buildings that were you know.
A fair market value of $45 million all four of them.
And turning that into cash and deploying that cash in a at a higher return was obviously the answer until we moved into that timeframe of August September and as we had more and more inbound traffic and interest in our buildings, particularly in the bowling Green area, whereas you know those distribution centers. There are very valuable that's the one.
Area of the country, where you have all the distribution networks, because that's the area of the country that reaches the highest percent of customers in the U S. In one day. So those are driving all sorts of velocity of offers we partnered with B Riley, who obviously are there real estate firm is.
So many of the buildings believe it or not right around us in Eden Prairie, So having them partner with US and then even expand the reach and make it more competitive was where we moved into in the October .
And really the September October timeframe. So we're very happy with the partner that we have and that's also very important where winters partner for a good chunk of time, so you'd want to make sure that.
Our partner that you know and that Hasnt been body of work that you can trust. So once we had that and we had a good price and remember when you look at the price you have to look at the balance between the price of the sale leaseback and the lease payments that you're making we've restructured our business in Q2, and we always continue to maximize our cost.
Structures to make sure that when we bring that lease and it's not really lowering our margin level, but as we as we move into clothing Youre right. We are doing a sale leaseback transaction with three of the four buildings that we own there's a second building here in Eden Prairie, Minnesota.
Office that we really don't need and we will be putting that up for market and in Q1 and that has not been a part of the sale leaseback transaction because it doesn't need to be we're just going to sell that building outright.
Got it helpful and then.
Secondly on <unk>.
Inventory levels kind of it could be obviously moved up in Q3 expectations for inventories in Q4, and I guess more specifically as you think about you reaffirming our path.
EPS in the fourth quarter.
And in EBITDA.
$16 billion range can you kind of connect the dots between.
That EBITDA and what you think.
Cash flow operating cash flow could look like in the fourth quarter on a core basis.
Sure.
When you think about working capital and that's something we as we talked about earlier.
Something we feel like we do well even in tumultuous times so.
Year to date working capital increase of $5 million. We also think that we'll do the same type of working capital management in Q4, and that will really be driven by the our inventory levels and the inventory levels will come down. If you note on our first three quarters of 2022, a lot of our working capital.
But it was around the decrease in accounts receivable and that's been a three year effort of ours to reduce the amount of value paid and what our customers use value pace of work.
We've moved our percent of sales undervalued pay which is our installment sales basis from as high as 60 65 down into the 50.
Peggy range, so that is producing more cash upfront something that we're in 10 full amount and we don't believe is affecting sales either so when you think about Q4, our strategy. There is really a reduction of.
The inventory that we're carrying in.
That is also going to have you know that's going to be the driver for the working capital management in Q4.
If that answers your question here.
I appreciate it.
Thank you.
Thank you. The next question is coming from Alex Fuhrman from Craig Hallum Capital Group. Your line is now live.
Hey, Thanks, very much for taking my question, Tim I wanted to ask about the return to dish can you give us a sense of you know.
How that process unfolded as the you know how how long you would've expected to be off of dish for and and now that you're back in your original channel placement can you talk about how how that customer has come back is it performing in line with how you were in those channels originally or you know what.
And it probably takes a little bit of time to bounce back.
Productivity, but any any color you can provide us with the return to dish I would be very helpful.
Sure thing Alex.
Were comfortable were not that good right. We've only been alive now for 24 hours. So I would say that when it's too early to tell the velocity of migration back to the performance levels, but we're very encouraged by it.
And when you think about you know where we are and how we are.
Today with dish you Gotta go back a year from now really.
The Jeffrey Jessica Gregory who runs our content distribution has done a great job in terms of managing all the different elements of our distribution and we knew the renewal coming up with dish in June of this year was going to be a tough one because as we stated is we have to lower our content distribution cost.
Critical component of our strategy to lower the content distribution costs as a percent of sales. So we knew it might be a challenge. We did we spent a year, making sure that we wouldn't be prepared for the worst case scenario, which we didn't expect which would be the non renewal. So when that happened then we knew that we had to.
Stick to our guns about the the terms that we were seeking and obviously dish felt like they needed to stick to their guns about their terms they were thinking.
We see I've seen this before in traditionally and that's why I got into the end of the year.
Traditionally takes a time to not only then for both partners to realize that there's a place in the middle that we can get to but also once that decision is made it doesn't happen overnight either.
We're a small company, but dish is a big company and they have much bigger networks or what what you have to face and I I've seen this before at my time at IAC, which USA network and Syfy when we had the biggest networks and we had the fastest treatment or even at Scripps with HGTV and food you get priority treatment when they're very big like that we're not as big as Disney.
These other channel conflicts that dish was going through so we were able to sit down and really talk with dish wouldn't like when he said we've been partners with them for 20 years Nobody wanted to go through what we're going through so once we resolve the then there was just a process of going through the the sign up again and getting all the slots.
And making sure we're on the same channels as we were before so I have to say that it happened faster than I expected, even though it was a painfully long five six months.
But that was something that we were expecting and that we wanted to guide to I I can't say enough again about the customers that are there and the team at dish. We we were all working towards the same strategy of.
Finding a place that we both.
Felt good about and that's what we're able to do.
Great. That's really helpful. Tim. Thank you for that and then I know, it's early to talk about numbers for 'twenty three but just as it relates to the sale leaseback what is that going to do through the numbers in aggregate.
Consider the lease payments and and presumably a reduction in debt related interest expense.
Yeah, Alex works, when you think about our business and our performance.
This is as you know like we're at the tipping point, if you will win.
And a half ago I talked about being EPS positive in Q4, and and that is an important thing for 2023 as well as you know we first have to fix the revenue effect of fixed expense structure than the customer filed and the revenues and we put our pieces together and now we're we're off to the races, but the if you think about our year to date performance and you say well you know.
I hear all of that good news, but year to date, we've lost with the net income and a $40 million range year to date, and but if you break those pieces down and you think about the core business and then the below the line costs or the integration costs, it's a very compelling picture and if it works something like this call it.
Year to date net income loss of 40 million, what's not going to be there next year well, we have about 20 of that 40 million net income loss about 'twenty two of it is related to one time costs related to either the integration of the four acquisitions, we made in 2021 or really half of it is the shack.
Write off that I mentioned earlier, so that that does not happen again next year. The other chunk that is the next biggest chunk would really be the $14 million to $15 million of noncash depreciation and stock comp again noncash not an issue, but as you mentioned earlier the $16 million in interest.
That we've paid.
Year to date, it's too high and that's why we talked about it in February and that's why we're doubling the target that we established at the beginning of the year twenty-five it's coming in at 50, we expect to see our interest alone dropping the $4 million to $6 million range, depending on the complexities of how we use the additional sale pro.
<unk> from the sale leaseback, so all of those elements along with the core business.
If you Peel the onion that way you look at the elements I just mentioned the core business is profitable today and we're fixing. These other one time events. So the multiplier effect of that next year is pretty significant and that's why we're as excited as we are as fixing the balance sheet also fixes the profitability and the capital structure from an interest.
Perspective that it also means that as I've talked about before the big players are on the field here in terms of assets and our strategy. We're not seeking any more acquisitions that was what was important about 2021 to get the durability of having three revenue streams together for our for TV networks, that's what we've done.
It's messy, we're through that phase and that's why we're excited about 2023.
That's terrific thanks very much Jim.
Thanks, Alex.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Tim for any further or closing comments.
I just want to thank everybody for your time again today and have.
Have a happy holiday and we'll talk soon.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.