Qurate Retail, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Curate Retail 2021 Quarter 1 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 May 7th. I would now like to turn the conference over to Courtney Chun, Chief Portfolio Officer. Please go ahead, ma'am.

Thank you. Before we begin, we'd like to remind everyone that 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 disclaims 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 OIVDA margin, free cash flow, and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and schedules one through three, can be found in the earnings press release issued today on our earnings presentations, which are available on our website. Today, speaking on the earnings call, we have Curate Retail President and CEO Mike George, Curate Retail Group CFO Jeff Davis, and available for Q&A, Curate Retail Executive Chairman Greg Maffei. Please note we've published slides to accompany the earnings release. And I'll also point you to our annual report and the letter to shareholders, which provides an overview of the ongoing evolution of the business. It's a great read. Both of these documents are available on our website. Now I'll hand the call over to Mike.

Thank you, Courtney, and good morning, everyone. Thank you for joining us today and for your interest in Curate Retail. I'm delighted to report outstanding results for the first quarter. Our team delivered strong top and bottom line growth across every business unit and every market driving 13% revenue growth and 32% orbital growth in constant currency. This is our best quarterly performance since the formation of Curate Retail in 2018. We built sales momentum through the quarter, driven by the reemergence of the fashion business and improving customer sentiment, aided in part by stimulus actions. We drove broad-based customer gains across all business units, We welcomed 1.6 million new customers in the quarter, up 35% from the prior year, and served 10.8 million total customers, up 9%. We also made important progress on key corporate responsibility initiatives, and this week published our inaugural corporate responsibility report, guided by the United Nations sustainability development goals. It details our commitments and our ambitions to protect the environment curate products responsibly and champion empowerment and belonging. And also includes disclosure aligned with the SASB framework. So please check out the report at the Curate Retail Group website. As part of this work, we're expanding our highly successful small business spotlight in 2021 to support 100 entrepreneurs of diverse backgrounds, providing them with on-air and digital exposure and other pro bono services centered around heritage months, including National Military Appreciation Month, Pride Month, and National Hispanic Month. Now, through the pandemic, our team members' safety and well-being remains our paramount focus. And among other actions, we're providing all team members up to eight hours of paid time off to facilitate vaccine adoption. We anticipate reopening our offices this September employing a hybrid working model for most office-based team members, blending remote and onsite work based on their preferences and the needs of the role. This will enable us to consolidate our global real estate footprint and reduce operating costs in future years. Looking forward, we are encouraged by the macro environment, the strength of overall consumer demand, the rebound in fashion, the positive outlook for retail sales, and the acceleration of digital trends. We continue to closely monitor supply pressures, inflationary challenges, and any shifts in consumer spending patterns. But the unique combination of our extensive digital video ecosystem, highly differentiated customer experiences, and strong and growing base of loyal shoppers is without rival and positions us well for the future as we emerge from the pandemic and adapt to the new realities. Turning to QXH, the team delivered outstanding revenue growth in the first quarter, driven by three key factors. First, we achieved the most balanced growth across categories that we've experienced since the pandemic began, with five of six categories growing or essentially flat. Jeff will provide more details. Second, this balanced category growth grow balanced customer performance. We continue to enjoy strong growth among new customers of 20% in the quarter, and we remain encouraged by the projected lifetime value of these acquired customers. As we gain more experience with a large class of new and reactivated customers who joined us over the course of 2020, we've become even more confident in their stickiness and projected lifetime value. 15% of last year's new class made a purchase in the first quarter of this year. That's a comparable rate to prior years, but with a much larger class. As a result, last year's new and reactivated class drove approximately one-third of our Q1 growth. Additionally, our best customers returned the growth, with sales up 5% year over year. Now, we've shared over the last year that best customer retention remains stable, and we were confident that their sales would turn positive as the fashion business rebounded, and that's exactly what we saw this quarter. Third, we continue to benefit from the strength of our video and digital reach. With a 6% increase in the total minutes viewed on our five networks, more than 25% growth in visitors to our online properties and 20% growth in online sessions. Our Orbit of Margin expansion reflects in part the benefit of our multi-year effort to realize synergies from the HSN acquisition, which is our work on strategic vendor sourcing, along with our disciplined promotional stance. We reinvested some of these savings in performance marketing and the expansion of our digital ecosystem to support long-term healthy growth. Progress on our strategic priorities has, in fact, been fundamental to both sales and Orbit of Games. Curating special products at compelling values with stories that inspire and excite is the heart of our business. In the first quarter, we built on strong customer followings developed with leading designers, influencers, and entrepreneurs such as Layla Ali and Bethany Frankel, and We by Living in Yellow in the fashion category, and Chef Anne Burrell in culinary. We also continue to expand our product and brand range in on-trend categories, including in apparel, launching Seed to Style, featuring organically sourced cotton, and in beauty, eSalon, a customized home hair color system, along with hair, skin, and nail care brands Balsonic, Spa Ritual, and Finishing Touch Flawless Salon Nails. And I'm pleased the lines of Estee Lauder that I mentioned on the last call performed very well. We also drove strong results on key events, capitalizing on opportunities to offer compelling virtual experiences outside our studios. We broke sales records with our annual St. Patrick's Day event, taking the customer to Ireland for inspiration. In gardening, We took the customer to greenhouses and nurseries and into the backyards of our favorite guests, offering an incredible selection of plants, tools, equipment, and decorative garden accents from our portfolio of national, exclusive, and private label brands. And we educated the viewer on how to achieve the perfect outdoor oasis. These events are just a few examples of our ability to translate our strengths in content and entertainment and in product curation into captivating moments that attract large audiences and drive high sales volumes. We expanded our leadership in multicultural beauty, offering new products, stories, inspirations, and expertise, including premiering the new program Shades of Beautiful on HSN and launching new brands, Butter and Urban Skin RX. We continue to extend video reach and relevance, ensuring we have relevant, fresh content across traditional, new, and emerging platforms. In late March, we teamed with Byrdie, a shoppable online and mobile beauty content platform, to create a year-long livestream collaboration of quarterly programming called the Byrdie Beauty Hour, helping viewers discover the best in skincare and beauty, featuring editorial insights and products curated by Byrdie and QVC. The content is available over multiple platforms including Facebook, YouTube, QVC.com, our QVC2 channel, OTT devices, Birdie.com, and Birdie's social presence. This collaboration is one of many examples of how our strategic initiatives across product curation, digital, video, and social engagement, content creation, and marketing, and community building come together to create a compelling platform for retail brands and content partners alike to access large, attractive audiences. Now turning to QVC International, the team delivered another strong performance with double-digit top-line growth, significant dividend margin expansion, customer growth in all markets, and gains across all categories. The consistent strength of our international markets over many years further reinforces our confidence in the long-term health and vitality of our global shopping platform. Zulily built momentum this quarter with significant new brand launches such as Land's End, Benefit Cosmetics, and Ann Taylor, continued growth of its factory direct platform, strong gains across home, apparel, and beauty, and outstanding new customer growth up 81% supported by more diversified marketing programs. Zulily is uniquely positioned, one of the few scaled, profitable e-commerce pure plays, targeting moms and focused on the burgeoning off-price segment with a loyal following of high-value customers. We're bullish about its long-term growth prospects as the team executes on great fresh finds, daily discovery through frictionalized personalized shopping, frictionless personalized shopping, and diversified marketing to sustain high levels of customer acquisition. At Cornerstone, the team delivered extraordinary revenue growth, topping 40% with the continued surge in home spending benefiting Frontgate, Ballard Designs, and Grandin Road. Barnard Hill also had a terrific quarter on the strength of home textiles and a rebound in apparel. We are especially excited about the long-term prospects at Cornerstone, centered at the sweet spot of the home nesting trend, as the team focuses on building out proprietary assortments and pivoting to a digitally-driven marketing strategy coupled with a strategically placed store network. In summary, I am extremely proud of our Curate retail team, delivering outstanding results with broad-based gains across all businesses and markets, balanced across customer segments, categories, and digital platforms. But more important than what the team achieved is how they achieved it, with an unwavering focus on the customer, with care and concern for each other's well-being through the darkest days of the pandemic, with an unrelenting commitment to driving innovation and advancing our strategic priorities. and with a renewed dedication to creating a culture of belonging, to supporting our communities, to protecting our environment. Now, I recognize that some skeptics may attribute recent strong results exclusively to stay-at-home tailwinds and conclude that we may struggle post-pandemic. So I'd like to take this head-on and recap why we believe our business that exits the pandemic is far enhanced from the one that entered it. Put simply, the environment in which we operate is forever changed, and the progress we've made over many years of strategic investment positions us perfectly for the world we now face. The pandemic has accelerated many long-standing trends in retail and created some new ones. Comfort with online shopping, use of video streaming services, and engagement on social platforms are at all-time highs. These in turn are fueling a steady rise in live stream shopping, one of the most talked about retail trends of the last year. At the same time, the pandemic has brought about a renewed focus on creating a comfortable, productive, and inspiring home life as work becomes more flexible and less office-based. This is fueling demand for home-related merchandise and further increasing consumer engagement with live TV, with live streaming, and on-demand digital video content. The rule of trusted personalities and social influencers in discovery and purchase decisions continues to expand. And an ever-growing portion of consumers demand that retailers and brands be everywhere they are with relevant, engaging, video-rich experiences seamlessly integrated across virtual and physical touchpoints. These massive shifts in consumer behavior perfectly align with the strengths of our business model and with the strategic investments we've made. We bring four unique and expanding capabilities to this evolving digital and home-based lifestyle. I want to take a moment to comment on each of these four capabilities. First, we've built an expansive and innovative digital video ecosystem. One of the fundamental keys to the adoption of live stream shopping in the West is overcoming the fragmentation of video platforms and the cost of video reach. Our unique state-of-the-art video platform reaches hundreds of millions of potential customers in a highly cost-effective manner through pay TV, with attractive channel placement on nearly all major cable and satellite providers across seven countries and 14 networks, reaching 81 million homes in the U.S. and 124 million homes outside the U.S. Free over-the-air TV, including an incremental 15 million cord cutting or cord never homes in the U.S. Digital live streaming TV, And in the last 18 months alone, we've added placement on paid services like YouTube TV, Hulu Plus Live TV, and AT&T Now, and free services like Zumo, and smart TV streaming services such as Samsung TV+, LG Channel+, and Vizio Smartcast. Our interactive streaming shopping app features multiple QVC and HSN networks and extensive on-demand content available on Roku and Amazon Fire TV, among other places with cumulative downloads of 68% and 280% respectively in the last year, and on the LG Shoptime app reaching 12 million devices. Extensive social streaming presence on Facebook Live, YouTube, Instagram, and TikTok, and the ability to move quickly to trial relevant new technologies and platforms when they emerge. And our own QVC and HSM websites and apps which integrate extensive live feeds and on-demand videos throughout the shopping experience. Second, our scale and resources provide powerful benefits and tangible value and savings to our customers, including thousands of buyers around the world on the hunt for amazing curated discoveries and an organization restructured over the last 18 months to significantly expand the resources focused on new product discovery. Extensive global design, development, and sourcing capabilities to translate great ideas into compelling merchandise for our own brands and in partnership with leading celebrities and influencers with a significant expansion in the product categories brands and influencers supported in the last 18 months. Multiple state-of-the-art studios in five countries producing more high-quality live content than any other television programmer in the world. A fulfillment network nearing the completion of a multi-year restructuring in the U.S. to reduce delivery times and improve efficiency, all supported by a treasure trove of customer data we're increasingly deploying to create more personalized marketing and shopping experiences. Third, our unique content and customer experience. We have spent 40 years refining the art and science of telling engaging stories through live video shopping in ways that inform and inspire, drive impulse and urgency, build trust and lasting relationships, and bring customers back to our platforms nearly every day. This stands in stark contrast to most live stream shopping today which is focused on one-off marketing events that build no relationships, and will struggle to create enduring value. And fourth, this experience drives remarkable customer longevity and engagement, more akin to the stability of a subscription business than a typical retail model. As a result, we can promise any brand who comes to our platforms the opportunity to tell their story directly to the world's most engaged shoppers. In 2020, our best customers at QVC US represented 69% of our sales. They visited our websites or apps 36 times per month. They watched our TV programming 19 days per month. They engaged extensively on our social platforms. They purchased 69 items. And they retained at an astounding rate of 99%. And these metrics have been remarkably stable year after year. Yes, customer loyalty and frequency has always been the foundation of our business, and we've demonstrated through the pandemic that this experience is also relevant to historic numbers of new customers who are showing the same stickiness as prior generations, equally likely as their forebears to become best customers. Now, critics suggest that we are challenged with an aging customer base. It's a refrain we have heard for decades. But the facts are clear. Though I have regrettably aged 16 years since taking on this role, our average customer hasn't aged one darn bit. In fact, the average age of our customer at QVC has actually declined slightly. We are uniquely well-positioned at this inflection point. As a leader in video commerce, e-commerce, mobile commerce, and social commerce, with a unique combination of capabilities and assets present everywhere our customers, prospects, and partners want us to be, confident we can deliver sustainable growth and generate strong cash flow for our investors for years to come. And with that, I'll turn the call over to Jeff.

Thank you, Mike, and good morning, everyone. We delivered strong revenue and EBITDA growth at Curate Retail for the quarter. Revenue grew 13 percent and EBITDA grew 32 percent on a constant currency basis. I'll remind you that Q1 2021 had one less day due to leap year in 2020. We estimate the one less day understated our year-over-year revenue growth by approximately one percentage point. Let's start with QXH. Revenue grew 8% through continued momentum in the home category, growth of our customer base, and reduced customer returns, largely driven by category mix. E-commerce revenue increased 12%, and penetration improved 200 basis points. Total customers grew 8%, with new growing 20%, reactivated up 10, and existing up five. As illustrated on slide seven of our earnings presentation, we continue to experience a swing in category mix into home from primarily apparel. However, our first quarter mix shift moderated to approximately 200 basis points from approximately 500 basis points in previous quarters. Revenue in home increased 14%, with particular strength in gardening, spring decor, gourmet foods, fitness equipment, health supplements, face coverings, and air purification. Consumer electronics returned to growth, up 16% on strength in laptops, portable power, audio devices, and smart homes. And most importantly, the fashion categories rebounded as demand for beauty, apparel and jewelry recovered late in the quarter. Accessories grew substantially, up 12% on loungewear, non-leather handbags, sunglasses, and active footwear. Beauty declined slightly, reflecting gains in bath and body, beauty devices, and skin care, offset by continued lower demand for color cosmetics. Apparel returned to strong growth in late February and March with high demand for denim, swimwear, and prints. But for the quarter, apparel was down 3%, which is a significant trend improvement from previous quarters. Adjusted oibida grew 19%, and adjusted oibida margin expanded 160 basis points. Looking at the components of adjusted oibida, Gross margin was relatively flat, primarily due to favorable product margins offset by fulfillment pressure. The favorable product margins were primarily due to reduced customer returns, strategic sourcing initiatives, and promotional pullback, which more than offset category mixed margin pressure. The fulfillment burden was due primarily to higher freight rates and surcharges, higher labor costs, including COVID-related pay, which were partially offset by sales leverage of fixed costs. Operating expense was 25 basis points favorable, primarily due to lower credit card fees and favorable commissions due to e-commerce penetration, partially offset by higher customer service costs. SG&A was a net 150 basis points favorable, primarily from favorable bad debt expenses that reflect lower customer default rates, reduced payment installments, and comping conservative provision adjustments from the prior year, coupled with lower administrative expenses, reflecting sales leverage and reduced travel expenses. These tailwinds were partially offset by elevated marketing expenses to drive new customer acquisition, retention, and brand awareness. and rekindle relationships with avid and elite customers across fashion categories. Over the past several quarters, adjusted OIBDA margin rates increased were largely led by product margin expansion, commission leverage, and improved bad debt expense. These advances were partially offset by freight rate increases, network optimization, and marketing investments to acquire and retain new customers and expand existing customer spend. Looking ahead to the remainder of 2021, we expect adjusted EBITDA margins to be relatively flat for the remainder of the year. This reflects ongoing headwinds from freight and wage rate increases, reduced productivity pressure as we exit our Lancaster and Roanoke fulfillment centers, continued marketing investments, and relatively flat that debt expense as we anniversary prior year favorable provision adjustments. These headwinds will be offset by network optimization investments turning to a tailwind. Positive category mix impact and favorable administrative expenses. We recently completed a sale of our secondary corporate campus in Westchester, Pennsylvania as part of our new hybrid work approach. And a distribution center in Lancaster, PA is part of our network optimization program for total proceeds of $40 million. We will lease back the Lancaster facility through the end of the year as we fully decommission the site. Moving to QVC International, which continued to generate growth across all markets and categories with strong customer gains, increased e-commerce revenue and penetration. and my comments will focus on constant currency results. Revenue grew 15% with strong growth across all markets. Total customers grew 7%, with new up 23%, reactivated up 6%, and existing up 5%. E-commerce revenue grew 25%, and e-commerce penetration increased 390 basis points. Business generated broad-based gains in every category, led by home, apparel, and beauty. And our adjusted EBITDA increased 38%, and adjusted EBITDA margin expanding 320 basis points. So gross margins improved 140 basis points due to higher product margins, which primarily reflect favorable product returns and pricing management. We also benefited from favorable fulfillment expenses driven by sales leverage and higher average selling price. These gains were partially offset by higher inventory obsolescence, primarily due to continued outlet store closures and proactive inventory management. Operating expenses were favorable by approximately 90 basis points, primarily due to commissions and customer service, reflecting higher e-commerce penetration, sales leverage, and renegotiated contracts. And SG&A was favorable by approximately 80 basis points, primarily due to sales leverage and administrative expenses. Moving to Zulily, revenues grew 19%, driven by broad-based gains across categories led by home, apparel, and beauty, as well as customer gains and growth in its factory direct business. Total customers grew 12%, and new customers, as Mike had mentioned, grew 81%. Adjusted OIBDA increased $4 million, and adjusted OIBDA margin expanded 100 basis points, primarily due to higher product margins and leverage of administrative expenses, which was partially offset by higher fulfillment costs. Moving to the cornerstone, which once again delivered outstanding results with record first quarter revenue and adjusted OIBDA. Revenue grew 41% driven by sustained momentum in the home brands on the strength of core home decor, interior furnishings, and outdoor categories. And Garnet Hill accelerated growth from the fourth quarter on the strength of apparel and home textiles. E-commerce grew 46% with 250 basis points improvement in e-commerce penetration. Adjusted Oibida increased $29 million, primarily due to the leverage of administrative and marketing expenses and expanded product margins. These gains were partially offset by higher fulfillment costs, primarily freight rates and surcharges. To quickly review our balance sheet and cash flow, in Q1, CapEx was $47 million, and we spent $56 million on renewals of multi-year TV distribution contracts. While we do not provide forward guidance, recall 2020 was an off-cycle year for TV distribution contract renewals, with only $56 million being spent for the entire year. Average annual spend on contract renewals is approximately $130 million. Free cash flow was negative $6 million in Q1. Free cash flow was burdened by cash outlays outlays for accrued liabilities associated with prior year incentive bonuses, multi-year TV carriage contracts that I mentioned earlier. Note that free cash flow excludes equity investments outside our green energy portfolio, but including our investment in Comscore in March, which is traded up very nicely. This year, we expect to return to a more normalized level of free cash flow conversion in the range of 45 to 55 percent. 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 on our base and will not serve as a source of working capital this year. Looking at our debt profile, on March 31st, we had $75 million drawn under our QVC revolver and approximately $2.85 billion of capacity. We had $739 million of cash and cash equivalents, and our leverage ratio, as defined in the QVC revolving credit facility, was 1.9 times. We continue to return capital to shareholders through share repurchases, and from January 1 through April 30 of this year, we repurchased 5 million shares for a total cost of $61 million. In closing, our performance demonstrates the competitive advantage of our business model. We are operating at the inflection point of accelerated online shopping, wide adoption of video streaming, and growing customer engagement on digital platforms. Business results reflect the progress we made through years of strategic investment to capitalize on these trends and position us as a leader in video, digital, mobile, and social commerce. We remain confident in our ability to sustain future growth and cash flow generation. We appreciate your continued interest in Curate Retail and hope you all stay safe and healthy. I'll now open the call up for questions and turn it back over to the operator.

Thank you very much, sir. As a reminder, ladies and gentlemen, it is star one on your telephone keypad if you wish to queue for a question today. We'll now move to our first question over the phone, which comes from Jason Haas from Bank of America. Please go ahead. Your line is now open.

Good morning. Thanks for taking my questions and congrats on the strong quarter. So Mike, you talked about being pleased with what you're seeing with regards to new customer retention rates. I'm curious if you're seeing those retained customers begin to ramp up their spend, especially in your fashion categories, which I know are key for your best customers. And then does that give you confidence in your ability to lap the compares as they get tougher in the remainder of the year?

Thanks, Jason. Appreciate your comments and question. We are seeing the new customers ramp their spending in ways that are pretty consistent with what we've seen in past years. And as you know, given the rebound in the fashion business, it gives sort of that much more opportunity for these new customers to engage with us in a broad way. And of course, you see a range of behavior, but we're definitely seeing a comparable number of new customers move up the kind of spend ladder, even getting all the way to the best customer spend within their first year or so. Very pleased with both the retention and kind of the ramp of spend of those customers. You know, we're not going to offer any forward-looking guidance on the rest of the year, but I would reiterate what I said during my comments, which is, you know, we're very encouraged by consumer confidence. We're very encouraged by what's been a stronger than anticipated rebound in fashion. And so even though we're lapping these tough home compares, we like what we're seeing. We like that our customer base has more resources at our disposal, savings, good stock market, good housing market, and kind of more things to buy as she starts to get back out into the world, engages with fashion. in a broader way. So, we like how we're positioned and, you know, confident about how things look for the future.

Thanks. That's a great caller. So, as a follow-up, Jeff, I believe you mentioned, if I caught it right, that you're expecting orbital margins for QXH to be flat in the remainder of the year. Is that the case each quarter? I think the compares get a little bit harder in the second half. So, I'm just curious on how we should think about the cadence there.

Yeah, so as we look at – my comments were really for the totality, the quantum of the rest of the year. From quarter to quarter, you'll have some fluctuation. But as I mentioned, just a number of different programs with respect to how category mix rebounds as we see more of a – Some of the investments that we've made in network optimization, turning more positive force in the back half to offset some of the other pressures that we're having with respect to sort of near-term fulfillment pressures around wage rates and freight rates.

Thanks, that's helpful. And maybe a last one, if I could squeeze one more in. Just on capital allocation, looks like you repurchased a similar, I guess slightly less than you did in the fourth quarter. So just curious how you're thinking about repurchases going forward and if there's potential for any sort of special dividend or any other means of capital return. Greg, do you want to take that?

I was going to take it, Mike, but you can take a first shot and I'll be happy to chip in.

No, sorry, I was turning it over to you. So go ahead.

Oh, it's great. Look, over the last year, as you know, we've had one special dividend of a preferred stock and two special cash dividends, and we've increased the buyback from what was a low rate to a higher rate. The stock did move up dramatically during the period, and like most companies, we have a grid, and sometimes when the stock moves during the period, that means you buy less. We will continue to look at the high free cash flow generation we expect this year. and how best to apply it. I think you should expect that we will be looking for a large payout as a percentage of that high free cash flow, and what form it takes, whether it's another special cash dividend or whether it's increased buyback, we'll continue to evaluate.

Got it. Very helpful. Thanks.

Thank you.

We'll now move to our next question, which will come from Oliver Wintermantle from Evercore.

Please go ahead. Your line is now open.

Yeah, thanks, and good morning. Mike, when I heard your comments, you know, it sounds like you don't expect that your strong performance was really just driven by the pandemic and the nesting trends. So for the rest of the year then, should we look at two-year trends or two-year stacks to be relatively flat in sales, or do you expect that to decelerate?

Good morning, Ali. Again, I'm going to shy away from any concrete guidance for the rest of the year as is our normal practice. So again, I can't add much more color other than to say that encouraged by the performance of the business, encouraged by the strong level of consumer confidence, encouraged by this re-emergence of fashion, and also just encouraged by this much larger installed customer base that we have a year into the pandemic. And that, as I mentioned in my comments, that behavior we're seeing from her to come back Those that were acquired last year are coming back this year. They're spending at historically traditional rates. So we do think we have a lot working in our favor. We certainly recognize the steep comps, especially in the home categories. And we won't put an aggregate number on our expectations. But net-net, we feel good about the consumer. We feel good about the installed customer base. We feel good about the strategic programs we've put in place to find more and more ways to reach consumers and surround her with high quality content. We'd like the diversity of our merchandising mix and, you know, we're charging forward.

Got it. Thank you. And then, Mike, one more. You mentioned in your prepared remarks that you're seeing some inflationary pressure and some supply issues. And I saw, you know, inventory was down this quarter. Maybe if you could give us a little bit more details, what you're seeing out there in inflation and supply issues and how you think you're going to navigate this year. For example, in inflation, are you trying to put prices through to the end customers? Thank you.

Yeah, we're definitely seeing, as all retailers are, various dimensions of, I would say, cost inflation by three big categories. One that we've talked a lot about and Jeff mentioned is just higher freight rates as the demand for both inbound freight and outbound freight exceeds the supply, and prices tend to rise when that happens. So we're paying more for freight. You know, we're certainly seeing wage pressure, and we're committed to being market competitive with our team members on wage rates and our fulfillment centers, and so there's some pressure there. And then there's just cost pressure from product shortage. and how that drives up costs. So, yes, we're seeing inflation, but as you can see in our results, you know, we've been able to overcome those inflationary pressures, and we think the whole industry is acting in a highly disciplined way, trying to manage through these various challenges, trying not to get overly promotional. And so, you know, in some cases, we have had to, you know, past pricing through and our cornerstone business as an example where the freight increases are the most impactful given just the bulky size of those products. You know, you definitely have to pass some on to the customer. We're trying to do that in a judicious way. We're trying to stay disciplined on promotions. And so we think we're able to kind of outrun those inflationary pressures with the offsets that Jeff talked about and it's why we're projecting relatively stable orbit rates, but within that is some built-in inflation, some recovery of that, but then some other good programs to offset so that we can stay neutral in the aggregate.

Thanks very much, and good luck.

Thank you.

Our next question now comes from Ed Yurma from KeyBank Capital Markets.

Please go ahead. Your line is now open.

Hey, good morning. Thanks for taking the questions. I guess first, very helpful slide deck. I think I noted there was a 200 basis point difference in apparel penetration versus first quarter of 20, but maybe just provide some more historical context. If we look at where apparel is as a percent of mixture and kind of peak a cycle, where is it versus where you're at today? And maybe just in general terms, how much incremental margin is apparel versus company average?

So apparel is definitely still down in Q1 from peak for sure. And it's probably, if you look at apparel, it had been relatively flattish to slightly down in the couple years preceding the pandemic. So we're probably a few hundred basis points off of peak. and we do believe still room to recapture a lot of share and mix in apparel. You know, in terms of the margin rate, it certainly comes with a higher margin rate, and we think that will be, you know, one of the positives that Jeff mentioned to kind of rest of your orbital rate. But I would note that it also comes with a higher return rate. So to some degree, product margin rate and return rate tend to offset each other to some degree. So you'll get some mix-related benefit and product margins from the rebound of apparel, which will be meaningful. But portions of that will be offset by what you then expect to see as a higher level of returns that just comes with the category. And that's part of why we have a higher product margin rate in apparel. long way of saying three to 400 basis points at least of mixed below peak and room to grow and some modest mixed benefit that comes with that.

Got it. And maybe a bigger picture question. Certainly you likely benefited or you have during COVID with your new customers, right? She was at home, maybe turned on cue for the first time in some period of time. As she starts to venture out and engage in more activity out of the home, how do you, you know, what initiatives do you have in a way to make sure that you continue to drive continued viewership of that consumer or maybe if she's not turning into queue, maybe engage with you digitally? Thanks.

Yeah, thanks. You know, first, it's really a multidimensional strategy to kind of surround this new consumer, new customer with, you know, compelling content wherever she's traveling. So, That consumer is just simply at a different threshold of engagement and online shopping and social streaming and video streaming. That's not going away, right? So when that new customer is visiting YouTube, not associated with our business but just engaging in YouTube, If we have something that's going to be of interest to whatever she's engaging with on YouTube, we're going to present that to her in a really compelling platform. Or if she's a much younger consumer, she's going to rediscover us on TikTok with fun 15 to 30 second videos created by the TikTok creator community. We're going to go back to her with great, you know, with a certain demographic, maybe great actual physical catalogs of gourmet food offerings. But we just, you know, as you know, we believe in serendipitous discovery, you know, fueled by our push. So we want to push our platform in front of her on whatever digital medium she's engaged in, in a way that's relevant to however she's engaging on that digital medium, and have a really nice success getting her then to come back for those additional purchases. And as you know, it only takes a few purchases to lock someone into being a customer for life. So if we can get that second and third purchase, you know, we know we're in great shape for the long term.

Thanks so much. We'll now move to our next question over the phone, which comes from Oliver Chen from Cowan.

Please go ahead. Your line is now open.

Thank you very much, Mike and Jeff. Mike, regarding live streaming and the thoughts around fragmentation, what do you see happening over time and how will Curate be prepared to be competitive there? I would also love your thoughts on content and how content has evolved and which changes will be more sticky in terms of what the customer likes in terms of the creative and content and engagement factors as you think about innovation there as well.

Great. Thanks. Thanks, Oliver. You know, a couple of thoughts. At the highest level, I think we've got to be in constant test, learn, innovate mode because, you know, this ecosystem is going to continue to evolve in ways that are hard to predict. I don't know that we ever see kind of really substantial consolidation like there is in China where you can have one or two big platforms that just dominate, you know, live stream shopping. I just think you're seeing a consumer that is engaging across every social platform depending on the consumer and this almost infinite variety of ways consumers are accessing live TV, whether it's a digital skinny bundle or Roku device or directly through their Samsung Smart TV. I just think you see this explosion of ways in which consumers access content in both a sort of lean back linear mode and in a lean-in interactive and navigation mode. And so we are trying to win on both sides. Wherever she is in a lean-back mode that consumes TV content or live stream content, we want to be there. Wherever she is in a lean-in mode, whether that is engagement on a social platform, or navigating our streaming app which is a highly interactive app, we just want to be there and try to understand what behaviors and she wants to demonstrate and what she's most interested in. And I think we'll just continue to learn as we go. On the second part of the question about content, again, a great time of discovery. And I think it's not widely understood just how big our competitive advantage is in content, because the amount of content we produce, our experience base in content creation, the resources at our disposal globally, are just overwhelming. And the thing we've learned is that these live streaming platforms are content beasts. And to be able to have great high-quality content that's fresh every day so she wants to come back every day is this huge barrier that others are finding. And so we're just going to continue to test and learn. And what's striking to us is the diversity of content that works. So everything from a 30-minute original series with Curtis Stone where he travels around the world and cooks great dishes and we help you discover culinary innovation around the world. That's a fun 30 minute show, no selling involved, but brings people into our streaming app and gets them engaged in it to on the other end of the spectrum. How do you engage someone in a six or 15 second interval on Tick Tock, it's really kind of all of the above. And I think too early to say what will be most common other than I think there'll be a variety. I think it'll be extensive. And I think we've got the scale and resources to go after it.

Thanks, Mike. And on sustainability and ESG, from the lens of the consumer, what do you think will be increasingly important? And from the lens of stakeholders of Curate, what metrics are you focused on in terms of visibility and tracking?

Yeah, you know, our view is we've got to take a really comprehensive approach because different, kind of to your question, different stakeholders have different areas of focus. And what's most important is that we do right for ourselves, that we as a curate team are proud of the way in which we're engaging in the world around us. So, you know, what are the things that are important? I think they're really embedded I would encourage you to read our corporate social responsibility report and also the commitments we've published because they kind of reflect what we think is most important. But in the protecting the planet category, we're focused on obvious issues around emissions, recyclability, how do we really drive our customers to recycle, so just sort of reducing waste and emissions throughout the supply system, getting rid of single-use plastics in our facilities. So a series of commitments along those lines. And then around product sourcing, I think that's a critically important area. So really trying to make sure that we're doing all we can around where we source product, who we source from, use of different fibers and materials. to reflect what the society cares about today. And then finally, on our pillar around empowerment, we want to create thriving communities. And thriving communities to us are diverse communities. We've set goals for ourselves for diverse representation in our leadership ranks. We've set goals for ourselves about how we create a thriving community of entrepreneurs and support entrepreneurial development, which we think our consumers have a lot of passion for seeing how we're embracing the small business community. So long answer, but sort of all of the above we think are important.

Okay, thanks. That's really helpful. Lastly, Jeff, on the increase in marketing investments, how are you pursuing that composition as you think about engagement and also, you know, balancing the media mix and thinking about new versus existing engagement? Thank you.

Yeah. You know, Oliver, it's a great question because, you know, as our marketing teams are looking at sort of the duality of continuing to attract and expand the spend with new customers and, you know, how do you continue to reach them across a number of different platforms and where we believe that we will get the, you know, appropriate returns. So we're definitely leaning in there. But yet also, as Mike had mentioned, with the opportunity to re-engage and expand and revitalize our experience with our avids and elites who have a much larger purchasing velocity and something that we believe is the opportunity to continue through personalization and through the opportunity to have some push notifications, if you will, recognizing her and the other platforms in which she is engaged is some of the areas that we're looking at really leaning into, and quite honestly, we're getting some great results from it.

Thank you. Best regards.

We'll now move on to our next question over the phone, which comes from Michael Coppola from J.P. Morgan. Please go ahead. Your line is open.

Hi. Good morning, and thank you for taking my question. slide you guys provided on you know it was page six picture of the category performance for qx qxh excuse me um was very helpful i was curious if you guys had thoughts about how you know what categories are shifting as the united states reopens and even if you could provide color um you know sequentially throughout q1 what categories kind of came back month to month as well thank you yeah sure i'll take that um

You know, so the home category, as you can see from the numbers, kind of maintained strength through the quarter as we started to lap much steeper home growth in March. On a relative basis, it started to soften, as you would expect. But, you know, continued broad-based strength in home. That will now start to lap as we get into much deeper comparison in home. Electronics has been a more up-and-down category through the pandemic. You know, we suspect that's what it will look like through the rest of the year. But as we point towards Q4 and the critical holiday season, given that we suffered from substantial consumer electronic shortages last Q4, we actually think there's room there that could be, you know, very compelling to get that business back to healthy growth. So it's an area that we actually have an easier compare just because of the supply shortages we shared with you on our last call. Accessories has been pretty strong for a few quarters, and we see that business continuing to be strong. And we think it'll get healthier as it moves away from a few categories like loungewear, non-leather handbags, and active footwear into a broader range of categories as the consumer starts to go out more, maybe wants a leather handbag, starts to want to get out new footwear. Apparel is the big story. Apparel has been substantially negative. It returned to strong growth in March. We were pleased with the strength of the rebound across multiple categories in apparel, and we look to apparel to be a big grower through the rest of the year. Beauty is growing across most categories, as Jeff shared. The one category that isn't growing is color cosmetics, which I don't think will grow until we get past wearing masks. So that's a wild card. I think there's real upside force in beauty. We just can't quite predict exactly when that color cosmetics business will rebound, but it's fallen off so substantially over the last year that I think we'll hit a point of pent-up demand in color cosmetics, and we're confident that the other aspects of beauty will stay strong. And then finally, we don't talk about it very much, but jewelry, which has been a difficult business for us, we've purposefully downsized it over the last few years. It was basically flat in In the first quarter of this year, which is substantially better than historic trend, we think we found a good formula that's working for us. And so we think we can get that business stabilized and even potentially growing as we move through the year. So kind of excited about the range of categories that are performing and the optionality that gives us as we go forward.

Great. That's very helpful. I appreciate it. And this is the last one for me. I know you guys mentioned in the press release that you sold, I believe it was the Westchester Corporate Campus as well as a distribution facility for $40 million. Should we be thinking of those as one time in nature or there's any plans for further asset sales? And that's all for me. Thank you.

Thanks. Jeff, you want to take that?

Yeah. So just to be clear, we actually had two separate corporate campuses, if you will, in Westchester. It was the second location that we actually consolidated. As we continue to look at our sort of hybrid ways of working going forward, understanding what our team member needs are to be either onsite or remote, We believe that there will be continued opportunity for us to take a look at our office space to the extent that we will be able to reduce that office space. We will look to do so. We do have some other facilities in which, from a customer service perspective, we actually closed last year, and those customer service individuals are working from home permanently, and we are working to monetize those in the appropriate time also.

Awesome, thank you guys. Thanks.

And our last question now comes from William Brewster from Sillimar Capital Group.

Please go ahead, your line is now open.

Hey guys, how you doing? Mike, nice to see the business continuing to execute and with your announced departure coming up in the not too distant future, it's nice to see everything coming together that I know that you've worked really hard to, uh, to make sure, um, you know, is working as a well-oiled machine. I was curious on that note, um, what, you know, looking back in the past, um, the HSN integration, I think caused, uh, some, some issues within the organization. I was hoping that maybe you could talk about what, what maybe we should expect from a succession planning, And, you know, if you're willing to talk a little bit about Leslie's role in the organization and, you know, just kind of how you all are thinking about making sure that there's no hiccups as you get ready to depart, it'd be great.

Thanks so much for the comment and question. You know, we do feel really good about where the business is performing now, and it's not due to me. It's really due to a terrific leadership team and highly engaged team members, and just, you know, years of hard labor, including, as you noted, you know, a challenging integration just because these integrations usually are challenging. And, you know, we made a number of changes in HSN business and brought teams together in different ways. It always takes longer to get through those things than probably we estimate, and so maybe we were a little overly optimistic at the speed with which we could get the through those complicated changes. But, you know, we now look at an organization that is fairly stable, you know, in terms of, you know, through the big parts of integration, just a terrific senior leadership team with a number of very strong recent additions, including Leslie. So we really like the stability of the senior leader team, deep level of experience, along with some talented new folks. And we have a really clear strategic focus, which is why we keep