Qurate Retail, Inc.

Welcome to Curate Retail 2022 Q3 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, you will have a question. Please press star 1 on your telephone keypad. As a reminder, this conference is being recorded November 4th. I would now like to turn the call over to Courtney Chun, Chief Portfolio Officer. Please go ahead.

Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the name of the Private Securities Litigation Reform Act of 1995. Actual events and 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 QDC 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 upgrades 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. Please note that we have published slides to accompany the earnings release. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIDA, adjusted OIDA 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 four, can be found in the earnings press release issued today or 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 Interim CFO Jim Hathaway, and Curate Retail Executive Chairman Greg Maffei. Now, I'll turn the call over to David Rawlinson.

Thank you, Courtney. And good morning to everyone. Thank you for joining us today and for your interest in Curate Retail. Looking at our Q3 results, our performance was the result of several factors. Some of these are external, which we are managing through, like all are in retail, and some are internal, for which we are focused on driving better outcomes through improved execution and Project Athens. In laying out Project Athens in June, we said we expected fiscal 2022 to be the baseline year and that our transformation would not be linear. We made progress in Q3, moving from the assessment phase of Athens to in-depth planning. We expect to start seeing deep execution and impact on results in 2023. In the third quarter, total company revenue declined 9% in constant currency, a modest sequential moderation in the rate of decline from Q2. driven by better execution and easier compares. Like all in retail, we managed against macro headwinds, including inflation, continued war in Ukraine, and rising interest rates that negatively impacted consumer sentiment. In the US, the University of Michigan Consumer Sentiment Index declined 20% year-on-year in September 2022. We also faced several extraordinary events that impacted performance. Namely, we approached the death of Queen Elizabeth in the UK with respect, keeping our customers, team members, and the moods of the nation in mind. We stopped all programming for two and a half days following her passing and used air time to pay tribute to the Queen. And we estimate this period, coupled with the 10 days of mourning, impacted QVC-UK sales by approximately $10 million. We also prioritized the safety of our HSN team members based in Florida during Hurricane Ian, switching to prerecorded programming in lieu of live programming for four days, and we estimate its sales impact was approximately $3 to $5 million in Q3. Total company adjusted EBITDA declined 54% in Q3 in constant currency. This reflects approximately 100 basis points and lower product margins due to planned promotions as we work to reduce our inventory, particularly at HSN. Elevated inventory levels are pressuring margins across retail, and we're no different. We've begun taking action to move through excess inventory earlier than others in retail due to capacity constraints following the loss of our Rocky Mount facility. While this has pressured our margins here today, it has improved our inventory position, as I'll discuss more shortly. Adjusted OIDA also reflected sales deleverage and elevated costs. We continue to work through excess inventory, amplified by impacts of the Rocky Mount fire, leading to high levels of detention and demurrage expenses as well as inflationary pressures in shipping, fuel, packaging, labor rates, and marketing. We are also lapping the benefits of the price increases we took last year. Despite elevated costs, we elected not to raise prices this year primarily due to the macroeconomic environment and consumer sentiment, but also to manage our promotional cadence as we took action to address excess inventory. That said, we have made progress on reducing inventory. We had excess inventory based on the retail and supply chain environment, but also compounded by the December 2021 tragic fire at our former Rocky Mountain Fulfillment Center. We moved through a portion of this inventory in Q3 through clearance actions and receipt management. And QXH inventory ended the quarter 5% lower than the prior year. We do expect inventory clearing actions to create margin pressure at least through the end of 2022. We are focused on our turnaround and have started to experience initial progress. One key area I'd like to highlight is attracting leadership talent to drive the transformation of the business. Scott Barnhart joined in late September as Chief Operating Officer. In this role, he leads supply chain, procurement, global business services, and corporate real estate and workplace services for all Curate brands globally, as well as customer service for all U.S. brands and fulfillment center operations for QVC-US and HSN. Scott brings deep experience leading global retail supply chains for multiple Fortune 500 companies, including Cardinal Health, Aramark, and Conagra Brands. The COO role is new to Curate Retail Group. and having a dedicated leader responsible for our supply chain and execution of our strategic plan is key to improving our performance. Sonia Srimahen joined as president of streaming and leads our streaming commerce business. She is an experienced CEO and general manager with expertise and a proven track record of success building streaming businesses. Most recently, she led Amazon's Prime Video Channels business Prior to that, she was founding CEO and president of BritBox, the first of its kind streaming video on demand offering from the UK's two national broadcasters, BBC and ITV. Streaming is an important future growth lever of our business. By adding Soumya in her qualifications, we expect to meaningfully grow our audience and product sales on streaming platforms over time. Stacey Bowe joined as Chief Merchandising Officer of QVC US. She is developing and leading merchandise strategy across all platforms, as well as overseeing QVC's buying, planning, and programming organization, and our design, development, and sourcing team, which is our in-house agency that brings new brands, products, and concepts to life. Stacey brings extensive merchandise experience and a proven ability to help omnichannel, multi-category retailers differentiate themselves, engage customers, and drive sales. Most recently, she led global e-commerce and digital marketing for G3 Apparel Group. She spent more than 20 years at Macy's, serving in a variety of executive leadership roles. Merchandise strategy and its integration with our programming is central to our business. Having a strong leader here will allow us to better serve our customers, attract new ones, and grow revenue. Lastly, Linda Aiello joined Curate as Chief People Officer. She leads the full team member portfolio, including team member experience, talent management, diversity, equity, and inclusion. She brings more than 20 years of international experience leading people functions at modern technology businesses and luxury fashion brands. Most recently, she was Chief People Officer at Stitch Fix. Prior to Stitch Fix, Linda served in senior people roles at Salesforce and Uber. We are only as good as the people who come to work every day in the culture we create. Adding a senior people leader with Linda's proven background will contribute to attracting and retaining the talent and building the culture we need to transform the business. On this topic, Team member engagement and morale are critical in a turnaround for us to deliver Project Athens. I'm pleased to report that Curate Retail Group earned a 2022 U.S. Great Place to Work certification, the Global Authority on Workplace Culture, and Employee Experience. In addition, our own internal surveys revealed meaningful gains in our team member engagement and confidence in the company's strategy and leadership. Now I'll provide updates on the five pillars of Project Athens that we communicated in late June, where we are pleased to see initial traction. First, from an overall perspective, we formed a transformation office to work with the teams for successful execution of Project Athens. The office is led by Scott Barnhart, our new COO. Reporting into Scott is a dedicated chief transformation officer, Bill Hunter, who has been with the company for 14 years and is singularly focused on delivering our strategic initiatives. Pillar one of Project Athens is focused on improving the customer experience and growing these relationships. The presidents of QVC-US and HSN have been in their position for about eight months. We experienced a moderation in the rates of decline for QXH customer count from the first half of 2022. Total QXH customer count declined 11% in Q3 versus mid-teens in the first half of 2022. While total count declined, the average spend per customer increased 3%, and the average number of items per customer increased 6% in Q3. Customers remain engaged with total minutes viewed up 8% in Q3, which was slightly stronger than Q1 and Q2. With better execution and an improved merchandise portfolio, we will be better suited to serve our engaged audience. Pillar 2 was all about improving execution of our core processes. In July, we began putting the today and the special back in today's special value and today's special by shortening their availability to only one day and offering our best price for that day, driving a greater sense of urgency. we experienced a moderation in the rate of decline in TSV performance. We also experienced fewer shifts of our today's special value in Q3 versus the first half of the year. QVC-US shifted 36% of its TSVs in Q3, down from 50% in Q1 and 75% in Q2. HSN shifted 40% of its TSs and Q3, down from 60% in Q1 and Q2. Pillar three is about lowering our cost to serve. We experience meaningful cost pressures in Q3, some from external macro factors, inflation and excess inventory, and some from sales deleverage, and some from our investments. We are intently focused on removing costs from our business and we'll have more to share on that in the future. For today, I'll simply reassert the point we made when we unveiled Project Athens. We have identified hundreds of millions of dollars of cost-driven adjusted or without opportunities. We anticipate seeing these impacts flow through in 2023 and pick up momentum in 2024. We have begun detailed plans on cost initiatives across the organization and in the businesses where the need is more immediate, like Zulily, we have already begun execution. We improved our inventory position in Q3 with more than a 70% decrease in the numbers of trailers at our fulfillment centers by the end of Q3 compared to the end of Q1. That said, we continue to face capacity constraints at our fulfillment centers and incremental detention and demurrage costs. We expect to realize lower costs in Q4 due to the reduction in trailers. We also anticipate better capacity utilization as we have secured third-party logistics providers to alleviate some of the capacity constraints. We are close to attaining our normal operating goals for order to delivery times in our current fulfillment network. And going into the holiday season, we believe our fulfillment centers are well-staffed. Killer 4 is focused on optimizing the brand portfolio. In the third quarter, Zulily introduced free shipping and handling for orders of $89 or more. As a result, they saw a stabilization in conversion rates and an increase in average order value. While national brand product was limited for most of Q3, Zulily has since attracted several national brands capitalizing on industry-wide excess inventory. which will be beneficial moving forward. The percentage of Zulily's revenue from national brands increased to 53% in Q3 from 47% in Q3 2021. Looking forward, Zulily is focused on attracting more national brands, improving the customer experience on its site, and efficiently ramping marketing through more diversified channels. Cornerstone brands sustained revenue growth with record Q3 revenue at each of its home brands, Front Gate, Ballard Designs, and Grandin Road. These gains were partially offset by softness at Garnet Hill and apparel. Cornerstone opened its West Palm Beach Design Center in late September. Pillar 5 is focused on building high-growth businesses anchored in our strengths. We were pleased that the average number of monthly active users of our streaming service, QVC+, and HSN+, increased more than 40% in Q3 compared with Q2. We continue to expand our distribution. Our streaming apps are now included on Samsung Smart TVs and on Cox's Contour platform. In addition, HSN has now joined QVC on YouTube TV. We look forward to reporting more progress under Somya's leadership. As we look to the fourth quarter, QVC will be a presenting partner of this year's Christmas Spectacular, starring the Radio City Rockettes, which will open November 18th at Radio City Music Hall. QVC will have terrific exposure to the approximately one million people who attend the Christmas Spectacular, as well as the millions of Rockettes fans worldwide on social media. The Rockettes will perform and appear live from Radio City during QVC's annual live shopping nonstop holiday party this weekend, November 5th and 6th. QVC.com will feature a curated collection of products selected by the Rockettes through the holiday season. Over this same weekend, we'll host our nonstop party, which is a continuation of 2021's 49-hour event success. It will feature dozens of celebrities, fashion designers, hosts, customer favorite brands, and special popping guests. Content will be broadcast and streamed live across all QVC channels on virtually every platform and device, including QVC, QVC2, our website, mobile app, and social pages, and QVC Plus and HSN Plus streaming services. Shoppers will find amazing holiday deals and early Black Friday sales prices on a curated assortment of gift ideas. In summary, we are in the early stages of project assets. We now have a dedicated transformation office, as well as key new executive leadership talent. In the near term, We do anticipate increased promotions due to elevated inventory throughout retail. This is industry-wide and will impact us as well. We also recognize that consumer sentiment is lower than last year, primarily driven by macroeconomic challenges. That said, we are intensely focused on the execution of Athens and reiterate our 2023-2024 outlook we unveiled in June with stable revenue and double-digit KGARs for OEBITDA and free cash flow. We are motivated and confident in our ability to deliver on Project Athens. We look forward to reporting progress in future calls and seeing you at Liberty's Investor Day on November 17th. I am pleased to welcome Jim Hathaway, our interim CFO, on our call today. He will provide more details for each of our four business units momentarily. Before I turn it to Jim, I want to thank Jeff Davis for his service as our CFO for the past four years. When Jeff left, we named Jim Hathaway Interim CFO. Jim joined us in May 2021 to lead Finance for QXH and is intimately familiar with our unique business. Prior to Curate, Jim spent more than 20 years with PepsiCo Frito-Lay, and various financial leadership roles of increasing responsibility. Most recently, he led financial planning and analysis for Frito-Lay North America, a division of PepsiCo. Now, I'll turn the call to Jim to discuss the details of each business unit.