Qurate Retail, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Curate Retail Incorporated 2021 Q4 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 25th. I would now like to turn the conference over to Courtney Chun, Chief Portfolio Officer. Please go ahead.

Thank you. Good morning. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Investigation 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 FCC. 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 expectation with regard thereto or any change in events, conditions, or circumstances on which any such statement is based. Please note, we publish slides to accompany the earnings release. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIDA margin, free cash flow, and constant currency. Information regarding the comparable gap metrics along with required definitions and reconciliations, including preliminary note and schedules one through four, 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 have Curate Retail President and CEO David Rawlinson, Curate Retail Group CFO Jeff Davis, and Curate Retail Executive Chairman Greg Maffei. Now I'll hand the call over to David.

Thank you, Courtney, and good morning to everyone. Thank you for joining us today and for your interest in Curate Retail. For the full year, total company revenue declined 1% and adjusted EBITDA declined 5%, reflecting the weakness in the back half of the year, primarily related to supply chain constraints, product scarcity, and cost inflation. Today, we'll mainly discuss our fourth quarter performance, this earnings release, follows our pre-release in January. During the initial weeks of the fourth quarter, QXH experienced improved performance from Q3, and we expected that trend to continue. QXH revenue increased low single digits in October, as we benefited from carry-in of advanced orders, as well as from consumers starting their holiday shopping earlier than normal. November revenue softened a bit and was down low single digits due to supply chain challenges and the underperformance of our replacement product choices. In December, we saw a meaningful deterioration as revenue declined mid-teens. December's weakness reflected ongoing supply chain constraints and customers concluding their holiday shopping earlier than normal. According to internal surveys, in early December, nearly half of QVC and HSM's customers indicated they had already completed or nearly finished their holiday shopping. December results were also impacted by uncertainty around the Omicron variant and the fire at Rocky Mount, which affected our ability to ship product and meet guaranteed gift delivery times. We did not expect our fourth quarter results to deteriorate at this rate. and thought it was important to issue the pre-release for transparency. As we enter this turnaround, we will continue to try to help the markets understand our progress. Obviously, we are not pleased with our Q4 performance. The team and I are focused on the turnaround of this business that will modernize the value proposition, stabilize the core flagship brands, and exploit growth opportunities. We feel confident in our ability to deliver although we know that it will take time to rebuild some aspects of the business and to innovate. While we are concentrating on increasing the value proposition and establishing a new growth path, we will maintain our focus on cost control and free cash flow generation. We will be disciplined on the expense side and believe that we can maintain strong free cash flow while we weather through the current environment and invest in the future. Our fourth quarter performance at QXH in particular was impacted by three main factors, temporary drivers, execution challenges, and longer-term macro headwinds. Let me provide a bit more context for each. First, temporary drivers included continued supply chain challenges, including missing key electronics product deliveries. the tragic fire at our Rocky Mountain, North Carolina fulfillment center. Earlier than normal holiday shopping by consumers, uncertainty around the Omicron variant and inflation, which both led to suppressed demand among our customer base, and finally cost and inflation for fulfillment center labor, freight, and marketing. Second, we faced some execution challenges. Simply stated, we made merchandise choices that did not perform, particularly in home and electronics. Additionally, a matrixed QXH organizational design that slowed decision-making continued to be a drag on our ability to quickly and effectively adjust in a dynamic market. Finally, of course, we continue to face some longer-term headwinds, including shrinking linear TV reach and intensifying competition for the attention of our core customer. Let me explain how these factors affected QXH. Despite our communicating upstream to better anticipate supply chain delays, disruptions continue to impact our ability to procure product on a timely basis. Approximately 30% of trans-Pacific vessels were canceled within days or weeks of scheduling by the carriers. Congestion at U.S. ports on the West Coast spread to the East Coast ports and to Savannah, Georgia, which QXH utilizes. Vessels that anchor at U.S. ports were delayed 5 to 45 days, making shipping times hard to predict. And a shortage of U.S. road trucking capacity further exacerbated shipping challenges. These factors led to delayed receipt of our purchase orders in Q4. The majority of QXH's purchase orders arrived later than scheduled, and of those purchase orders, the average delay time was about four weeks. Supply chain disruptions, and therefore the inability to have the right product at the right time, caused us to shift a substantial portion of our today's special values, our TSVs, and today's specials are TSs. Approximately half of the TSBs at QVC and nearly two-thirds of the TSs at HSN were shifted in Q4, compared with about one-third in the prior quarter for QXH. As I described last quarter, this low product availability and the need to shift to suboptimal and less planned offers significantly and uniquely impacts our business. Demand sales on days where we shifted our TSV, our TS offerings, on average, generated two points lower demand compared to a day that continued as scheduled. This also impacts our customer volume. Typically, we over-index in home and electronics in Q4, and these categories were more relevant to new and reactive customer acquisitions. The need to shift so many of our offers on short notice and the performance of our product choices affected our ability to generate demand, particularly in the home and electronics categories and therefore among new and reactivated customers. Our pre-buy options and other actions we identified on our last call were insufficient to counter product shortages and were a significant driver of the softness and the home and electronics categories, and the resulting impact to our customer file. From a customer perspective, we estimate that new and reactivated customers contributed to more than 60% of QXH's shift sales decline in the quarter. Growth in our fashion categories partially offset the weakness in home and electronics. We shifted airtime to fashion and grew apparel 19%. Beauty returned to growth of 4% this quarter, marking the first quarter of growth since the second quarter of 2020. The gains in these categories were primarily driven by the highest strata and our best customer cohort, who over indexed to apparel and beauty. Our best customer cohort is a core driver of the QXH business. This cohort has been remarkably stable over the years. For example, at QVC US, it comprises about 16% of our customer count and accounts for about 70% of our ship sales. Although there has been slight contraction in the best customer file in the last 12 months, our best customers are still behaving largely in line with historical patterns, and their average spend and items purchased has increased over the past 12 months. While our best customers remain solid, we are focused on recapturing growth in new and reactivated customers throughout the year as they serve as a funnel into our best customer file. Turning back to the total customer file, even with the overall sales decline and reduced customer count, the average spend per customer for existing, new, and reactivated cohorts all grew in Q4. We believe that this is a positive indicator that when we do have compelling products at the right time, our customers remain engaged. It also demonstrates that the business continues to have pricing power during an inflationary time, most notably among our proprietary brands, where we will continue to invest. QXH Oibida declined due to sales deleverage and cost inflation. Jeff will discuss this in more detail. One driver of the decline was marketing. We invested in a national advertising campaign to raise affinity and consideration of the QVC and HSN brands in the fourth quarter. Surveys indicate that the campaign elevated prospective customers' opinion of and consideration for both brands, but we do not think it was a substantial driver of sales. This was a one-time event, and although we will continue to experiment with brand marketing going forward, we are reducing marketing spending in 2022. Let me now provide an update on our Rocky Mount fulfillment center. The fire that occurred on December 18th was a tragic event that resulted in the loss of a contractor colleague, as well as disruption to our business that impacted all of our team members and the local community. Since then, we have been highly engaged in supporting our approximately 2,000 Rocky Mountain team members and the community impacted by the fire. I am truly grateful for the outpouring of support we have received from the local community, our partners, and our customers, and for our team members commitment to each other. To minimize the disruption to our operations in the short term, we are leveraging our fulfillment center network. Excluding Rocky Mountain, QXH operates eight fulfillment centers in the U.S. In response, we diverted incoming orders to other fulfillment centers. Hard goods were sent to Bethlehem, Pennsylvania, Suffolk, Virginia, Florence, South Carolina, and Ontario, California. Soft goods were diverted to Bethlehem and Ontario. We do not expect a material impact to incoming fulfillment center operations by leveraging our existing network and have already largely recovered our inbound fulfillment capabilities. Delivery performance is still degraded but improving. Rocky Mountain is QVC's primary return center for hard goods, and while we are still making good progress bringing down a backlog of returns processing, which are at normal, seasonally higher levels, we are ensuring our customers can receive expedited refunds as we work through this challenge. We are working on longer-term plans for order fulfillment and returns processing. and just signed a lease for a new site next to our Florence fulfillment center to handle hard good returns. Before I move on to other business units, let me provide insight into what we're doing at QXH with respect to the three main factors that impacted our Q4 performance. We know the retail industry as a whole is facing some of the same temporary drivers we faced this quarter. namely supply chain constraints. However, these challenges have had an outsized impact on our product of the day model that is different from other retailers. We anticipate most of the supply chain pressure will persist through the first half of the year and then abate. And frankly, we will need to better navigate this dynamic. We are organizing now to be more agile when facing these sorts of challenges. As it relates to execution challenges, we are actively taking steps to stabilize the business and lay the groundwork for improving our long-term performance. Although we are in the early stages of this turnaround, we have already begun to take tangible action. We are taking a new leadership approach at QXH. Leslie Ferraro, former president of QXH, departed on January 14th. We are rolling out a new go-forward operating model for our two flagship brands, QVC and HSN. This will include enhancements to how we run the digital merchandising and streaming parts of those businesses. I look forward to sharing more on this soon. With respect to longer-term headwinds, we are pushing hard and formulating a goal for growth in digital strategies, and we have intense work streams underway. We are moving toward an organization that has increased focus agility, and accountability. We will maintain a focus on cost control and free cash flow generation while also launching new initiatives designed to drive growth on new media and new platforms in the medium term. We are planning to host an investor event in Q2 where we will discuss these initiatives in greater detail. Now turning to the other non-QXH businesses. At QVC International, we experienced similar supply constraints and product scarcity in Europe as we did in the U.S. Approximately 35 to 40 percent of our TSVs in the U.K. and Germany needed to be shifted and replanned. While this was down slightly from about 45 percent in Q3, it still had a significant impact on our European businesses. Japan was not affected as much by these challenges and was broadly flat versus 2020 with strong growth versus 2019. QVC International deployed and scaled its new advanced analytics platform across all European markets in 2021. This innovation is designed to drive enhanced pricing decisions. while QVC International experienced softer revenue in the back half of the year. I don't want to lose sight of the fact that it generated solid revenue and OBDA gains for the full year of 2% and 8% in constant currency, respectively. Cornerstone was the star performer once again. We generated record revenue at each of the brands in Q4, as we continue to benefit from strong demand for home products, as well as for apparel and home textiles at Garnet Hill. The demand strength reflects Cornerstone's above average customer demographic file, the absence of promotions, and successful efforts to expand and refresh its product assortment. We also benefited from our retail expansion and stores being open full-time compared to Q4 of 2020. We opened new Ballard Design stores in Nashville in November 2020 and Houston in Q1 2021. Given this strong performance and growth and the success of existing brick and mortar stores for the brand, we look forward to continued investment in this business and intend to open three retail stores in the back half of 2022. At Zulily, The trends that I described on our last call continued. Product scarcity impacted our ability to generate demand. National brands, which comprise approximately one-third of Zulily's sales, declined 30% in the quarter. Zulily experienced deleverage through the P&L, driven by the sales decline. Increased supply chain costs forced Zulily to reduce marketing spend and raise prices. Marketing inefficiencies were primarily a result of iOS privacy changes and cost inflation in Zulily's marketing channels, which further exacerbated the impact of reduced marketing spend and other cost reduction actions taken. All these factors led to a 37% decline in traffic in Q4. Zulily is refocusing around moms who make purchasing decisions for their households. We continue to believe this is a large addressable market that is currently underserved. Accordingly, we are prioritizing enhancing the experience for these moms while providing great fresh product bonds and intense cost management to allow us to deliver on our value proposition. This business will have to shrink to grow, getting control over its unit economics reestablishing a core value proposition that once again resonates with our core customer and reinvigorating the top line around this new base. Before I turn the call to Jeff to discuss each business in more detail, let me close with some perspective. We are at both a challenging and exciting moment for Curate. We are fully focused on the headwinds facing our still successful and profitable video commerce business. While those headwinds are too often exaggerated, they are real. Internally, we are being honest about those challenges and what it takes to overcome them. One of those challenges involves moving with more urgency. Frankly, consumer behavior has evolved more quickly than has our business model. To recapture market share, We must catch up. That will involve new skills, new talent, and new pace. As we shared at our Investor Day last November, we are starting from a position of strength in video commerce. Our digital ecosystem is unique. No other retailer has our combined reach in broadcast TV globally and the distribution we have expanded into live streaming, social, and digital platforms. We have 30 plus years of live video selling experience and have developed core skills that other retailers do not possess. Our experienced retail leadership team is dedicated to serving our customers. As a result, we have a highly loyal customer base that truly trusts and connects with our hosts and own our platform on a regular basis. We have the infrastructure reach and partnerships, and the cash flow and balance sheet to both support our growth ambitions and provide returns to shareholders. We will make this business better every day, but we also understand that we are on a journey that will be measured by months and quarters, not days and weeks. It is hard work and will entail making some hard decisions, decisions on people and costs. But it is also invigorating because we know that the world is evolving to meet a prominent, human-centered, personalized, digital video commerce player. And that should and will be us. And the rewards for getting there will be substantial. We look forward to sharing more as our plans progress and actions are taken. Now, I'll turn the call to Jeff for a more detailed review of each of our businesses.