iMedia Brands, Inc.

Hello, and welcome to iMedia 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. It's now my pleasure to turn the call over to Alex Wasserberger, 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 you do not have a copy, it is available through the news section of our IR website at imediabrands.com. This release is also an exhibit to the Form 8K 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. Finally, 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 iMedia 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 some we did not, like the extended Russian conflict. Although we intellectually understand all these are short-term in nature, it still significantly rises our risk radar, right? Risks in job security, risks in fundamental consumer-centric business models, risks in our investments and our loans. Therefore, today I'd like to start with three topics that I know our investors prioritize today, debt, 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 then. 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 capital, 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 target for debt reduction by year-end. To date, we have reduced our debt by $7 million. On November 8th, we executed an LOI with a real estate firm to sell three of iMedia's four buildings for $48 million in a sale-leaseback transaction. Because of our roughly $380 million in NOLs, our gain on this transaction will seem 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 use 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 million, or 200% of our target. our interest savings alone next year will be over $4 million. With that important update complete, let's turn our discussion to our core, our television networks, ShopHQ, 123TV, ShopBulldogTV, and ShopHQ Health, and how we are engaging our customers in this challenging environment that will likely be here for several quarters. From an overall company perspective, before we move into each network, our customer report card is great. For the seventh successive quarter, iMedia 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 123TV, our vibrant and growing television network in Germany, in spite of the Russian conflict's ongoing negative impact on the German economy and its energy resources. Under the new leadership of Michael Hoenke, President, and Eberhard Koim, CFO and COO, I'm pleased to share their progress today as they continue to successfully optimize merchandise margins, increase price points, drive viewership engagement, and improve profitability. A couple KPIs that will demonstrate their success. Q3's net revenue per customer was €132, which was a 4% increase over Q2. Q3's average selling price was €21.4, a 14% over Q2, and one of the foundational elements of what the company is doing today to improve its profitability. Q3's 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% 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 and Eberhard are also working with their technology team headed by Emmanuel. I'm going to make this an attempt. Margiana, who is their technology lead, and they are doing an amazing job bringing their shopping auction widgets to Shop HQ for a soft launch in December or early January. We're 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, an unbelievable schedule of great shows,

of new brands and returning brands for our customers.

As a matter of fact, we continue to attract former brands who are returning to us, including Joyce Girard, Gems in Vogue, Naturally Danny Sayo, 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 consumer 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 the 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 Shaq's products would be a perfect fit for our audience. However, rather than force a 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 Shaq and the ABG team, and we wish them the best. In conjunction with this contract termination, we incurred a one-time non-cash charge of $10 million in Q3. Finally, as I'm sure you read in our recent release, Shop HQ relaunched on DISH yesterday on the very same two channels we occupied before, channels 134 and 244. 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 a little bit better. From an operating expense perspective, our general administrative costs were up about $10 million, driven by the SHAC write-off. In terms of our selling and distribution costs, the $4 million reduction this year is related primarily to the content distribution costs 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 $0.72 per common share. This again included the $10 million SHAC 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 transaction 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 $177 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 $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. Now we'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. 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 long-time follower of the video retailing category, historically there's been more resilience. The customer's held up better than, call it, the target Walmart customer. Can you compare how this environment's 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 that you think are applicable?

Sure, Tom. It's a 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 2008 and 2009, at least for this company, and e-commerce in general. Because as we think about our performance this year, our advertising arm, IMDS, continues to outperform expectations and really although they would we believe even more outperform they've certainly done better than previous year and are growing well so that has not been affected and that helps our television networks as a balance and also as a catalyst offering advertisers that come on as well as brands 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 these things that are very centric to TV retailing, very centric to 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. We have margins year over year that are the same. I've already talked about how Shop HQ was more promotional in Q3, and therefore its gross margin was going down. But that was balanced by an improvement in margin from our Germany TV network, 123 TV, by Christopher and Banks, and certainly by IMDS. So the durability of our business model to withstand surprises like a dish or disruption in carriage or even macroeconomic pressures like we have in the U.S. or in Germany is pretty solid. The results speak to that. A 6% decline in revenue and flat margin while getting a surprise disruption from DISH and facing down these promotional environments, we feel very good about it. That's the reason that we have spent the last three years constructing this framework to have four television networks, each supported by three revenue streams.

Thank you. As a follow-up, now that you're back on DISH, how do you think about your carriage, again, for Shop HQ, and how do you think about your opportunities in the future to potentially improve the cost of carriage?

As we've talked about, Tom, the entire secret of Shop HQ's profitability growth is around reducing the 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 is centered to reducing the cost in the future, but also in increasing the productivity. So we work with our distributors to make sure that we're 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 of Shop HQ. In addition, it's about our smaller networks, Shop HQ Health, Shop Bulldog TV. All of those contribute to drive down the 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, our smaller networks, cost as a percent, cost from the distributor, as well as revenue productivity in our flagship, Shop HQ, is critical. For example, 123TV already has a content distribution cost as a percent of their net sales in the mid to low single digits. So they're already in the place that ShopHQ will be, we believe, in the next 12 to 18 months.

Thank you for taking my questions, Tim. Thanks, Tom.

Thank you. Next question today is coming from Mark Argento from Lake Street Capital. Your line is now live.

Hey, Tim, just a couple quick ones. I was hoping you could feel the onion a little bit. It looks like units are up pretty nicely on a year-over-year basis. ASPs are down, customers up. Maybe just talk a little bit about what you're actually seeing, you know, with the customers right now as you move into the holidays.

Sure thing, Mark. The numbers you're seeing are aggregated between 123TV and Shop HQ. So, you know, there's That's the first point we need to make is that 123TV's units, their average, when we talk about ASP or AOV, the ASP 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 the 123TV business and their customer profile was we need to make sure that the ASP is growing in a way in categories that they do well in so that 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 five units or four units. And 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 ASP will start to move up again. That's just simply fixing the challenges of 123 TV, which were exactly the same as they were at Shop HQ when I returned in the middle of 2019. These are fundamental things we know how to fix. That was one of the exciting things we saw in the opportunities of 123 TV beyond the strategy and what I would call the catalyst of bringing their expertise for gamification into into Shop HQ, which, as I noted, we're doing a soft launch of their auction shopping widget. I'll give away the secret sauce of it's today's top auction 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 and disrupting travel.

Just to follow up on the domestic business, from an inventory perspective, how are you feeling about the mix of product relative to what you think consumers are gravitating towards here as you move into the holidays?

Great question. Always one that you have to read the room. I think that 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. And those customers, the reason it's so risky is that if you get it wrong, you're sitting on a lot of inventory, and those customers only come around once. So you saw us. really move out of consumer electronics for the holiday season in 19 and 20 and 21, and we really only focus on our core wearable strategy. The elements that we do have, some of the gaming stuff and some of the fun stuff we do have, is stuff that we sell year-round from the drones and the cars and these other things, and we do those internally so we can avoid the other mousetrap of consumer electronics, which is the low margins. So that's, you know, we feel like we have a great selection of product for Shop HQ. And some of the brands on Shop HQ were in better positions as well. Christopher and Banks, for example. Last holiday season, we had some late shipments still because of the 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 there in the holiday season for Christopher and Banks.

Last question for me. You talked a little bit about capital allocation and prioritizing, you know, liquefying the balance sheet as much as possible. Is there anything that would prohibit you guys from potentially doing a buyback of any sort here with the equity in a market cap of roughly 15 million bucks? Even a small amount of dollars would go a long way there. But is there anything that's prohibiting you guys at this point? Now hopefully once you get the deal closed on the sale lease back from potentially buying back some stock.

Great question. It is one that we wrestle with all the time. Right now we're focused on obviously the debt reduction and closing the transaction. In terms of the additional liquidity and what the IRR would be on that additional liquidity and how it's deployed, we talk about that all the time with our board and our stakeholders. And we'll make that call when it comes up. But certainly there is an opportunity, a very large, as I would call it, a large disconnect between the equity value and 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. And certainly in certain circumstances, at one-time events, buybacks do have impact. I am a subscriber to the book, The Outsiders 8, where they talked about certain opportunities for stock buybacks.

Thanks, and good luck. Thanks, Mark.

Thank you.

Next question is coming from Eric Wolfe from B. Reilly Securities, your line is now live.

Thank you. Good morning, Kevin. A couple questions. First off, on the sale leaseback, can you Maybe kind of talk about how that played out versus what you may have expected when the board first approved going forward with that a few months ago. Anything come out better, worse than you may have thought? And then is there a plan, especially to lose a fourth building that was not included in this? Any plans for that separately?

Hi, Eric. Good morning. And yes, great question. Let's talk about it. Taking a step back, again, when did we start? We started in, I would 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 at that time that we felt around our liquidity and debt. And even though we preannounced 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 and that's continue to operate and then demonstrate that the balance sheet and the company's liquidity is much stronger than what the market's giving its credit for. So taking buildings that were a fair market value of $45 million, all four of them, and turning that into cash and deploying that cash in a higher return was obviously the answer. And so we moved into that time frame of August, September, and as we had more and more inbound traffic and interest in our buildings, particularly in the Bowling Green area, where, as 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 were driving all sorts of velocity of offers. We partnered with B. Riley, who obviously The real estate firm is, you know, has sold 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, you know, really the September, October timeframe. So we're very happy with the partner that we have. And that's also very important. We're with this partner for a good chunk of time. So you want to make sure that it's a a partner that you know and that has a good body of work that you can trust. So once we had that and we had a good price, and remember, when you look at a 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 in, it's not really lowering our margin level. But as we move into closing, you're 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 in Q1, and that has not been 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 inventory levels, it moved up in Q3. Expectations for inventories in Q4. I guess more specifically, do you think about reaffirming positive EPS in the fourth quarter and EBITDA in the $16 million range? Can you connect the dots between that EBITDA and what you think operating cash flow could look like in the fourth quarter on the core business?

Sure. When you think about working capital, that's something we, as we talked about earlier, something we feel like we do well even in tumultuous times. So a 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 inventory levels, and the inventory levels will come down. If you note on our first slide, three quarters of 2022, a lot of our work in capital management was around the decrease in accounts receivable. And that's been a three-year effort of ours to reduce the amount of value pay and what our customers use value pay. So we've moved our percent of sales under value pay, which is our installment sales basis from as high as 60, 65 down into the 50, you know, 50 range. So that is producing more cash up front, something that we're intentful about and we don't believe is affecting sales either. So when you think about Q4, our strategy there is really the reduction of the inventory that we're carrying. And that is also going to, you know, that's going to be the driver for the working capital management in Q4, if that answers your question, Eric.

Exactly. I appreciate it. Thanks, Tim. Okay. Thank you.

Thank you. Next question is coming from Alex Furman from Craig Callum 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 how that process unfolded? Is this how long you would have expected to be off of Dish 4, and now that you're back in your original channel placement, can you talk about how that customer has come back? Is it performing in line with how you were in those channels originally? I imagine it probably takes a little bit of time to bounce back to full productivity, but any color you can provide us with the return to Dish would be very helpful.

Sure thing, Alex. We're good, but we're not that good, right? We've only been alive now for 24 hours, so I would say that 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 where we are and how we are today with DISH, you've got to go back a year from now, really. 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, we have to lower our content distribution costs. It's a 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 spent a year making sure that we would 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 terms that we were seeking, and obviously DISH felt like they needed to stick to their guns about the terms they were seeking. I've seen this before. Traditionally, and that's why I guided to the end of the year, it traditionally takes 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. We're a small company, but DISH is a big company, and they have much bigger networks. So what you have to face, and I've seen this before at my time at IEC with USA Network and Sci-Fi, where 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 and a lot of these other channel conflicts that DISH was going through. So we were able to sit down and really talk with DISH. Like we said, we've been partners with them for 20 years. Nobody wanted to go through what we were going through. So once we resolved it, then there was just a process of going through the sign-up again and getting all the slots right 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 can't say enough, again, about the customers that are there and the team at DISH. We were all working towards the same strategy of, you know, finding a place that we both felt good about, and that's what we were able to do.

Great. That's really helpful, Tim. Thank you for that. And then, yeah, I know it's early to talk about numbers for 23, but just as it relates to the sale leaseback, you know, what is that going to do to the numbers in aggregate, you know, as you consider the lease payments and presumably a reduction in debt-related interest expense?

Yeah, Alex, when you think about our business and our performance, This is, you know, like we're at the tipping point, if you will, when, you know, a year and a half ago I talked about being EPS positive in Q4, and that is an important thing for 2023 as well. You know, we first had to fix the revenue, first had to fix the expense structure, then the customer file, then the revenue, then we put our pieces together, and now we're off to the races. But if you think about our year-to-date performance and you say, well, you know, I hear all that good news, but year-to-date we've lost, what's the net income in the $40 million range year-to-date. 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 it works something like this. Call us a 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 22 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 SHAC write-off that I mentioned earlier. So that does not happen again next year. The other chunk, the next biggest chunk would really be the $14, $15 million in non-cash depreciation and or stock comp. Again, non-cash, not an issue. But as you mentioned earlier, the $16 million in interest that we've paid year-to-date is 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 of 25 and coming in at 50. We expect to see our interest alone drop in the $4 million to $6 million range, depending on the complexities of how we use the additional sale proceeds 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. It also means that, as I've talked about before, the 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 four television networks. That's what we've done. It's messy. We are through that phase, and that's why we're excited about 2023. That's terrific.

Thanks very much, Tim.

Thanks, Alex.

Thank you.

We reach the 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 their time again today, and... Have a happy holiday, and we'll talk soon.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.