Qurate Retail, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Curate Retail, Inc. 2020 year-end earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press star 1 on your telephone. As a reminder, this conference is being recorded February 26th. I would now like to turn the conference over to Courtney Chunn. Chief Portfolio Officer.

Please go ahead. Thank you. Before we begin, we'd like to remind everyone this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent forms 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, and Curate Retail expressly displays any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Curate Retail's expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIDDA margins, free cash flow, and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations, including preliminary notes and Schedules 1 through 3, can be found in the earnings press release issued today on our earnings presentation, which are available on our website. Today, speaking on the earnings call, we've got Curate Retail President and CEO Mike George, Curate Retail Group CFO Jeff Davis, and Curate Retail Executive Chairman Greg Massey. Please note we publish slides to accompany the earnings release. These slides are available on our website. Now I'll turn the call over to Mike.

Thank you, Courtney, and good morning, everyone. Thank you for joining us today. We had a very strong finish to the year. We sustained top-line growth across all business segments as our team responded with agility to meet our customers' rapidly shifting needs in the stay-at-home environment. and to adapt offerings and events in the face of substantial product shortages and shipment challenges, all while significantly pulling back on promotional activity. We drove robust new customer growth and made good gains on our long-term strategic priorities in all businesses. We maintained tight financial management and drove strong overall net revenue, and free cash flow growth and return capital to shareholders, even as we invested to keep team members safe and provide them with enhanced pay and benefits. Additionally, we continue to support our community's well-being with innovative programs such as our Small Business Spotlight in partnership with the National Retail Federation Foundation to help small businesses challenged by COVID-19, including a second phase launched in August supporting Black-owned businesses. We publicly announced new corporate responsibility commitments with time-bound measurable targets focused on protecting our environment, curating products responsibly, and championing inclusion and empowerment. I am particularly proud to report that we received a 100% rating on the Human Rights Campaign's 2021 Corporate Equality Index, the nation's foremost benchmarking survey measuring corporate policies and practices related to LGBTQ workplace equality. This recognition is a credit to our entire team and to their commitment to fostering a culture where all team members can do their full selves and do their best work. We are grateful for the commitment and the resilience every team member demonstrated this past year, while grappling with all the personal challenges this pandemic has wrought. In appreciation, at year end, we awarded a special one-time bonus to all regular and temporary team members who were not eligible for other bonus or success share programs. Now turning to the numbers. In Q4, we grew revenue 6% and EBITDA 13% in constant currency. And for the year, we grew revenue 5% and EBITDA 8%. We generated free cash flow of nearly $2 billion for the year, up more than 200%, supporting our ability to return cash to shareholders through special dividends and share buybacks. We continue to experience rapid new customer growth across all business units and all markets, with more than 2.8 million new customers added in T4, that's up 33% to last year, giving the total new customers for the year to 7.6 million, a 25% increase. COVID-19 has pushed millions of consumers to interact with retailers and brands online, and many will continue to do so long after the pandemic is over. We believe this is a fundamental long-term shift in consumer behavior. And given the vast array of online shopping choices consumers now have, our record acquisition and stable retention of new customers speaks powerfully to the relevance and the stickiness of our platforms and our experiences. Now taking a closer look at QHH's performance in the fourth quarter, As in the prior two quarters, we delivered outstanding growth across all home categories, partially offset by continued softness in our fashion businesses, although I'd note that we did gain share in apparel, accessories, and beauty in a down market, and a steep decline in consumer electronics. Excluding consumer electronics, net revenue at QXH increased 6% in the fourth quarter. The moderation in revenue growth in the prior two quarters reflected two main drivers that are unique to Q4. First, a late season snowstorm impacted our northeastern fulfillment centers, which forced us to move up cutoff dates for guaranteed Christmas delivery, costing us a final weekend of holiday selling. Second, we had significant product shortages in late November and December. These shortages were driven by vendor challenges keeping up with rising demand, compounded by chip shortages, factory delays, density of shipping containers in Asia, and significant backlogs at the West Coast ports. As the business that focuses on key items featured for the day, rather than broad, always-on assortments, last-minute shortages in these key items can be highly disruptive. While these shortages result across many categories, these are the greatest pressure in electronics, which normally represents over 20% of our sales in Q4, about double the normal mix. As a result, we were unable to meet demand for smart home items, tablets, and audio products. Additionally, in certain subcategories, such as gaming devices, that were particularly strong in the market, we intentionally don't have a meaningful presence given an unattractive margin profile on a customer base that is typically lower lifetime value than our target demographic. While the electronics challenges significantly impacted our revenue growth, there was not a meaningful impact at all to the growth due to the lower margins on electronics. Looking ahead, we do not believe that the impact of product shortages through 2021 will be nearly as significant as they were in Q4. We expect the global supply chain will begin to stabilize, and in the interim, we're taking stronger actions to increase our oversight of the inbound product flow from our vendors. Additionally, the much smaller mix of electronics in the first three quarters of the year significantly reduces our exposure. We drove strong growth in new customers at QXH, up 18% in the quarter, especially impressive in light of the consumer electronics decline, as that category brings in the largest share of new customers most holiday seasons. Excluding electronics, new customer growth was 36%. And over 60% of new customers in the quarter came in organically. either going directly to our websites or customer service agents, or finding us through organic search or organic social, with the remainder acquired through disciplined investment and performance marketing. These results highlight the combined power of our TV reach, our brand reputation, our social presence, and word of mouth coupled with highly effective digital marketing programs. And we remain highly encouraged by both the quantity and the quality of new customers we're attracting. Looking back at the customers acquired in the second and third quarters, 26% have made at least a second purchase within 90 days of joining. That's partly above last year's rate. And the percentage of these new customers who hit the 20-item purchase threshold that we considered a best customer in just their first 90 days is similar to prior years. So in addition to a record number of new customers in 2020, we added more new customers who have already become best customers than any year in our company's history. We advanced our strategic priorities, focused on driving sustainable long-term growth in our global video commerce business. As a reminder, our strategic efforts for both QXH and QVC International Our focus is around five themes, curating special products at compelling values, extending video reach and relevance, reimagining daily digital discovery, expanding and engaging our passionate community, and delivering joyful customer service. I'll briefly comment on a few of these priorities. As part of our focus on expanding and engaging our passionate community, we continue to invest in enhanced customer acquisition, development, and personalization initiatives to both increase our overall addressable customer base and retain and enhance the spend of existing customers. Our efforts included successfully testing new advertising programs, such as YouTube and TikTok, to reach new audiences, building on our success with personalized content and email communications to increase customer engagement and spend, and expanding personalization on the website to create calls to action based on shopper browsing behavior. We continue to expand video reach and relevance with the addition of new streaming platforms, including LG TV's Shoptime app and Pluto TV, the leading free TV streaming service. And last month, TVT debuted on YouTube TV, which has more than 3 million subscribers. QVC is the only live screen shopping channel on YouTube TV, which is available across smart TVs, streaming media players, smartphone apps, tablets, computers, game consoles, and smart displays. We continue to see strong growth of our own streaming app, which integrates extensive live, on-demand, and original content from QVC and HSN. Downloads of the app on Roku were up 63% in 2020, with average monthly viewers up 47%, and downloads on Amazon Fire TV were up over 240%, with monthly viewers up 75% since the start of 2020. Even as we see growing interest in our livestream shopping offerings, we also continue to benefit from high engagement with our traditional linear TV offerings, with the number of homes tuning in to a QXH network per day up 14% year-over-year in Q4. The reach and relevance of our networks and platforms and sophisticated development, sourcing, marketing, fulfillment, and customer service support makes us a highly attractive partner, as well as new brands alike, as we make strides on our strategic priorities to curate special products at compelling values. Our Big Fine program, which in 2021 virtual, helps us find new brands from up and coming entrepreneurs with compelling stories that we know our customers will love. From 2,400 entries from 60 different countries, 92 exciting new brands across apparel, accessories, jewelry, beauty, home, culinary, and electronics were selected for launch. and two-thirds of the brand's owners identified as women or minority-owned. During the fourth quarter and full year, we also added many premium brand partners. For example, QVC-US expanded its close relationship with Estee Lauder to now include MAC, Clinique, and Too Faced in addition to the namesake brand. Based on this success, we also began offering Estee Lauder in the UK in the fourth quarter. We also launched unique, exclusive, and timely collaborations with leading designers and entrepreneurs, such as Jason Wu's size-inclusive fashion line. And we created engaging new types of content, such as our original series, Curtis Stone's Travel Cook Repeat, which contributed to a 33% sales growth for the Curtis Stone cookware brand this quarter. Looking forward, we're leveraging our new merchandising organization, with the added resources and structure we put in the product discovery and business development. To go after high growth or emerging products and categories that we believe will be highly relevant for the consumer this year. In home, these include new proprietary and exclusive cookware and home decor brands as we build out our global design development and sourcing services and increase differentiation in these hot trending categories. For the enthusiast, increased focus on sporting goods, crafts, pools and spas, and games. For the cook, specialty kitchen electrics, from bread makers and ice cream makers to vacuum sealers, pasta makers, and wine sellers, along with plant-based food and wine products. To stay healthy, connected fitness equipment and wellness and hygiene products, from mattresses with virus blockers to easy sanitizing products, cleaning and disinfecting, air purification, and face coverings. On the fashion side, we're focused on expanding assortments in comfort at-home wear, athleisure and outdoor apparel, and wear, wash, and go footwear. And we're tapping into multiple growing beauty segments, including multicultural beauty and vestige and salon beauty. Turning now to QVC International, the team delivered exceptional performance in the quarter, with double-digit revenue in order to grow, including revenue and orbited growth in every market and across most categories, and strong new customer acquisition up nearly 30%. The broad trends in our international business mirror those in the U.S., with particular strength in the home categories and among new customers. However, product shortages were not nearly as significant, as most markets didn't face the same inbound supply constraints that we saw at the West Coast ports. Additionally, our international markets are making much smaller purchase orders, and therefore have more flexibility to meet their needs. I would also note that electronics represents only 5% of the international mix in the fourth quarter. We continue to see the benefit of having strong local teams in each market with highly attuned to country and regional needs, coupled with the test and learn mentality of our teams to lean into our global video commerce strategic priorities with a particular focus on enhancing daily digital discovery, including developing a new live streaming app built around user-generated content that's now in beta phase, deploying dropship capabilities to expand digital-only assortments, and expanding digital marketing. Our international team is also taking the lead on building and deploying new machine learning capabilities to optimize pricing and maximize airtime productivity, among many other applications, capabilities we expect to roll out globally as they are developed. Delily is gaining momentum on its great fresh-fine strategy, introducing premier brands London Fog, Honest Company, Mango, Ann Taylor, Hunter Boots, Pujo Boss, Vans, and Macy's, along with over 1,400 new long-tail vendors launched in 2020, largely through its China Direct program. The team is also making good gains diversifying its marketing program, building a new influencer-based affiliate network and strengthening its outbound marketing. Given this progress, we chose to ramp up our marketing spend in the quarter, yielding outstanding 74% new customer growth at Zulily and providing a strong foundation to continue growing into 2021. Cornerstone had another outstanding quarter with record revenue and adjusted EBITDA, benefiting from the surge in home spending, and we are excited about the long-term prospects for this business. Cornerstone had strong growth in home office, storage, outdoor living, and home decor, coupled with a focus on building highly differentiated for proprietary assortments. We saw continued strong margin expansion as the team pulled back significantly on promotional activity, along with improved marketing efficiency. I'd like to close with a few thoughts on 2021. We're confident that all our hard work positions as well successfully navigate this fluid environment. Given the pace of vaccine availability, we will not reopen our offices before September at the earliest. Our highest priority remains the safety of our team members, both those working onsite and those working remotely. I am excited for the year ahead of us, despite the uncertain background. The macro trends we're seeing perfectly aligned with our capabilities and our strategic priorities. The increasing focus on live stream shopping from Amazon Live to TikTok demonstrates that our business has never been more relevant than it is today. However, the key to success is not the latest technology or the flashiest influencers. It's building lasting relationships customer by customer. The fundamentals of great shopping have not changed. It's still about the power of human connection and the joy of discovery, wandering into your favorite shop, or in today's world, your favorite virtual shop, having interesting conversations, learning the stories behind the products, and getting inspired. As the pioneers of both livestream shopping and leveraging influencers, we have the experience, expertise, and global infrastructure to be the partner of choice for established and new brands alike seeking to reach customers at scale in an engaging way. And we have the financial strength to support our continuing investment in innovation, both in how we reach customers with personalized messages and how we engage with them on new platforms and new technologies. I am confident we will emerge from the pandemic stronger well positioned for sustainable long-term growth. And with that, I'll turn the call over to Jeff. Thank you, Mike, and good morning to everyone. As Mike mentioned, we delivered strong revenue in the orbit of growth at Curate Retail in both Q4 and the full year. So let's get started with QXH. Revenue grew through continued momentum in home category, expansion of our customer base, and reduced customer returns. E-commerce revenue grew 6%, and penetration improved 270 basis points in the quarter. For the quarter total, customers grew 6%, with new growing 18%, the activated up 13%, and existing up 2%. While we only have access to comparable HSN customer data going back five years, We believe this is the largest new customer class in the history of both QVC-US and HSN. As illustrated on slide eight of our earnings presentation, we continue to have a sizable shift in category mix into home and away from primarily electronics and apparel. Revenue in home increased 17% as consumers maintain their focus on family and well-being with strong demand for fitness and wellness products, food and kitchen electrics, home decor and furnishings, and household, home environments, and cleaning products. Consumer electronics declined 17%, primarily from the supply chain pressures that Mike has mentioned. Yet, we were able to satisfy customer demand in several higher-priced subcategories such as home office and computers, and delivered increased overall product margins. With respect to our fashion categories, accessories grew 6% on the strength of loungewear and non-leather handbags. Beauty declined 10%, reflecting lower demand for cosmetics in the pandemic. And apparel and jewelry remained challenged in line with general market conditions but we did see pockets of strength in active wear and outerwear. Adjusted Orbita grew 10%, and adjusted Orbita margin expanded 130 basis points. Gross margin improved 200 basis points, which was led by 360 basis point expansion and product margin. Approximately 50% of this expansion was split equally between strategic sourcing initiatives, and promotional pullback. Another 20% from reduced customer returns and 15% from pricing to partially offset freight surcharges and rate increases. Given the impact of strategic sourcing work, I wanted to provide some additional background. Recall we initiated this work in 2019 as part of our overall synergy commitment. By bringing QVC and HSN merchandise groups together, we were able to work with our vendors across both brands on a broad program to reduce end-to-end supply chain costs, optimize assortments around vendors offering the greatest sales and margin productivity, and create new arrangements such as marketing funds to grow the brand. We started the work in just two categories and expanded across all categories through 2020. We'll begin to anniversary the benefits of this work towards the middle of 2021. Finally, fulfillment costs increased 150 basis points, primarily due to ongoing productivity challenges in our fulfillment centers from adhering to COVID protocols, freight surcharges and rate increases, which were partially offset by improved path factor. Operating expense, with 10 basis points unfavorable, primarily due to higher customer service and longer average call times associated with executing our upsell initiatives and addressing shipping status questions, partially offset from favorable conditions. SG&A, with 60 basis points unfavorable, comprised primarily of 180 basis points, which was split equally across marketing and administrative costs. Marketing reflects our continued investment to acquire, retain, and engage customers. Our total marketing spend while rising was still only 2% for QXH net revenue in 2020. We expect to increase the spend on average 50 basis points annually if we see attractive opportunities to further grow at attractive returns. Administrative costs are primarily due to our higher incentive compensation accruals. This marketing and administrative pressures were partially offset by 125 basis points of savable bad debt expense, which primarily reflects lower customer default rates and fewer offered installment payments associated with the pullback and promotional activities. In closing QXH, we remain on track to deliver 370 to 400 million cumulative HSN synergies through 2022, and we are over 70% complete as of year end. Moving to QVC International, which continues to generate very strong across nearly all categories with strong new customer gains and increased e-commerce revenue and penetration. My comments will focus on constant currency results. Revenue grew 10% with strong growth across all markets led by Japan, Germany, and the UK. Total customers grew 10% in the quarter with new up 28%, reactivated up 3%, and existing up 8%. For the year, QVC International attracted 1.2 million new customers, a record number for any year in the last 10. E-commerce grew 23% and e-commerce penetration increased 500 basis points. The business generated broad-based gains in nearly every category led by home and beauty. An adjusted EBITDA increased 16% and adjusted EBITDA margin expanding 90 basis points. A little more detail. So from a gross margin basis, it improved 120 basis points, primarily due to higher product margins, which reflect reduced customer returns, strategic sourcing initiatives. We also benefited from favorable fulfillment expenses driven by sales leverage and a higher average selling price. These gains were partially offset by higher inventory obsolescence, primarily due to outlet store closures and proactive inventory management. Operating expenses were favorable by approximately 50 basis points, primarily due to lower commissions reflecting higher e-commerce penetration, sales leverage on fixed-rate contracts, and renegotiated carriage contracts. SG&A was unfavorable, primarily due to incentive compensation and marketing investment to acquire, retain, and once again engage customers partially offset by lower administrative expenses and sales leverage. Moving to Zuloy, revenue grew 11% driven by outstanding gains in home and hard lines, as well as strong customer growth. Total customers grew 11% and new customers grew 74%. Adjusted EBITDA declined $7 million and adjusted EBITDA margin Declined 170 basis points primarily due to higher freight costs from international product mix, seasonal wages at our fulfillment centers, as well as incentive compensation accruals and marketing expenses. These pressures were partially offset by improved product margins and leverage of administrative expenses. Moving the cornerstone, once again delivering outstanding results in record revenue and adjusted co-orbita. Revenue grew 30% driven by sustained momentum in the home brands on the strength of core home decor outdoor categories. Barnard Hill returned to growth on the strength of home textiles and its cashmere products. Suggested boycott increased $28 million, primarily due to product margin gains in home brands and reduced promotions, as well as leverage of administrative and marketing expenses. These gains were partially offset by higher freight rates and surcharges. So let's quickly review the balance sheet and cash flow. CapEx with $92 million in Q4 and $257 million for a full year, which is a reduction from our initial 2020 indications. For 2021, we anticipate CapEx to range from $265 million to $300 million. TV distribution payments were $56 million in 2020, reflecting an off year of a two-year cycle for multi-year contract renewals. While we do not provide forward guidance, fiscal 21 will be higher than 2020. On average, our amortization of TV distribution payments average $130 million annually. As Mike said, we generated nearly $2 billion of free cash flow in 2020. This outsized growth was driven primarily by improved cash flow from operations. Working capital benefited from the extension of vendor payment terms, pullback of customer installment payments, reduced inventories, and increased accruals for management incentive bonus and returns. Separately, you recall we also received $267 million of pre-tax proceeds from the sale of a green energy investment in 2020. We expect to return to a more normalized level of free cash flow conversion in the range of 45 to 55%. Recall we generated substantial working capital improvements in the first half of 2020 from pulling back on offered installment payments, which reduced accounts receivable and strategic sourcing, which increased accounts payable. These items are now in our base and will not serve as a source of working capital this year. Finally, the accruals for incentive and other bonus compensation will be paid in the first half of the year, and these items will create more difficult compares for free cash flow in the first half of 2021. Looking at our debt profile, at the end of the year, we had nothing drawn under our revolver, and $2.9 billion of capacity. We had $806 million of cash and cash equivalents, and our leverage ratio as defined by our QVC revolving credit facility was two times. In closing, we have multiple paths to sustain net revenue and organic growth. As we look forward to 2021, we believe the same digitally driven macro consumer trends will continue with elevated home demand, supporting new and occasional customer growth, and upside with best customers as behaviors shift back to fashion. Morbid margins are reinforced by rebalancing our category mix, continued realization of our strategic management incentives, initiatives, and reduced commissions from increased e-commerce penetration and contract negotiations. These positive drivers will be partially offset by prevailing increases in freight and competitive labor rates as experienced across the industry, and increased marketing to support customer acquisition, retention, and expanded audience development. And now I'll turn the call over to Greg.