Qurate Retail, Inc.

Ladies and gentlemen, welcome to the Curate Retail Inc 2024 Q2 earnings call. During the presentation, all participants will be in the 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 will be recorded August 8. I would now like to turn the call over to Claire Adams, Senior Manager, Investor Relations. Please go ahead.

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 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. Please note that we have published slides to accompany the earnings release. On today's call, we will discuss certain non-GAP financial measures, including Adjusted Oibida, Adjusted Oibida Margin, Free Cash Flow, and Constant Currency. Information regarding the comparable GAP metrics along with required definitions and reconciliations, including preliminary note and schedules 1-2, 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 CFO Bill Lafford, and Curate Retail Executive Chairman Greg Moussaie. Now I'll hand the call over to David Rawlinson.

Thank you, Claire, and good morning to everyone. Thank you for joining us today and for your interest in Curate Retail. We delivered a solid quarter of earnings while revenue was in line with overall discretionary retail and a challenged macro backdrop. We expanded gross margin and grew Adjusted Oibida through our continuing focus on cost and efficiency. Total company revenue declined, which reflected lower volume, particularly at QXH and Cornerstone brands. QXH revenue was pressured by macro factors, including inflation, as consumers continue to spend mostly on necessities and less on discretionary purchases. The housing market has continued to pressure the Cornerstone business as existing home sales and housing starts are historically low and mortgage rates remain at peak levels. Despite these macro and top-line pressures, we are pleased to report gross margin expansion for the fifth consecutive quarter with margin expansion at all of our business units. These gains were due to continued product margin and fulfillment improvement for my Project Athens initiatives. In addition to gross margin gains, we remained disciplined in cost management and lowered total company SG&A expenses, resulting in total company Adjusted Oibida growth and Adjusted Oibida margin expansion for the fourth consecutive quarter. We improved profitability in our core video commerce businesses with QXH Adjusted Oibida of 5% and QVC International Adjusted Oibida of 8% and constant currency. Total company profitability was pressured by a decline in Cornerstone from continued housing market challenges, as well as some incremental marketing expense. Looking at the QXH business in more detail, this quarter we invested in the Age of Possibility campaign we launched in April, where we gathered 50 powerful influential women, including celebrities, businesswomen and activists, to be QVC brand ambassadors. Since launch, we have experienced strong initial reactions to this campaign with 38 billion earned media impressions, 330,000 new Facebook community members, a nearly 200% increase in the number of QVC social followers and more than a million visits to QVC's campaign website. We saw strong demand from Age of Possibility related brands in Q2, with collective demand for the existing 12 brands up low double digits after the campaign launch and particular strength from Valerie Parhill, Kim Corbell, Apparel and Beauty and Doris Dalton's Doll 10. One of our Age of Possibility quintessential 50 is Jennifer Dawson. We would like to wish Jennifer and all of those who celebrate Happy National Pickleball Day. We are also pleased to announce that we recently signed a multiyear agreement with USA Pickleball, the fastest growing sport in America for three consecutive years. Pickleball had 8.9 million players in 2023 and 50,000 attendees and 2.6 million television viewers for its 2023 national championship. QVC will be the exclusive retail partner and exclusive broadcast partner of USA Pickleball for its Golden Ticket events as well as its nationals tournament each November. QVC will broadcast the tournaments live on QVC+, create unique behind the scenes content and curate products in partnership with USA Pickleball. Now, moving on to QXH customers and merchandise. On a quarterly basis, QXH customer count declined 5% in line with our volume decline. However, as you can see on slide 8 of our presentation, our count on a trailing 12-month basis was down only 1% sequentially in the 12 months ending June 30th compared to March. This continues to show stabilization of our fall. Our existing customers continue to purchase at healthy levels, spending on average $1,665 and purchasing 32 items in the 12 months ending June 30th. That is up 8% and 6% -on-year respectively. Retention of our existing customer fall was also up in the quarter. At QVC, our best customers, those who buy 20 or more items annually, also continue to purchase at very attractive levels. In the 12 months ending June 30th, they bought 76 items and spent $3,950 on average, up 3% and 6% -on-year respectively. We had modest growth in new customers in the second quarter, marking the fourth consecutive quarter of new customer growth. On a trailing 12-month basis, the number of new customers increased 7%. From a merchandise perspective, consumers remain mindful of their wallet and selective of their discretionary spending. In culinary, demand grew for innovative kitchen electrics, such as Ninja wood-fire grills and ice cream and ice makers. We also saw strength in cookware from our celebrity chefs, Carla Hall, Wolfgang Puck, and Curtis Stone. In electronics and home, we saw strength in functional products, such as portable power from EcoFlow, e-bikes, neckbands, and new launches from Dr. Gundy and OMI and Supplements. Skechers, Rikah, and Revitalon sold well in footwear. Celebrity and new merchandise launches helped excite our customers in fashion. These included brands from our new Q50 brand ambassadors, as well as new apparel launches from Christine Brinkley, Katy Perry's Shoe Line, and our 30th anniversary collection with Diane Gilman. Our customers responded less favorably to clearance apparel, swimwear, handbags, and higher-cost items such as mattresses and furniture, as well as lawn, garden, and crafts. QXH produced its best adjusted OIDA-DOT margin rate in the past eight quarters, even with investment in the Age of Possibility campaign to better serve the attractive demographic of women 50-plus, as well as the leveraging of fixed costs due to lower volume. Adjusted OIDA-DOT margin was driven by gross margin expansion and favorable administrative expenses. Bill will provide more details on our adjusted OIDA-DOT expansion momentarily. QVC International delivered another very solid quarter. We reported stable revenue and adjusted OIDA-DOT growth for the fourth consecutive quarter. Revenue performance was led by QVC UK and Japan, mid- and low-single digits, respectively. Both countries saw sales growth in most categories with the UK seeing particular strength in beauty, jewelry, accessories, and home, and Japan seeing strength in jewelry, electronics, and apparel. QVC's international adjusted OIDA-DOT growth was driven by strong product margin expansion and cost control, partially offset by fulfillment pressure from higher volume wages and carrier rates. At Cornerstone, revenue declined 14% due to low demand from the continued housing pressures I mentioned earlier. Despite this, we generated gross margin expansion from lower supply chain costs. The gross margin gain was more than offset by the leveraging of SG&A costs, resulting in a $6 million adjusted OIDA-DOT decline. Now looking at programming, total minutes viewed on our five channels were down 1% this quarter. Including streaming, total viewership was up 1%. Our streaming business is seeing strong momentum while still relatively small compared to our traditional channels. Revenue, total minutes viewed, and monthly active users all grew well over double digits in Q2. On our last call, we announced that New York Times bestselling author, activist, actor, and writer, Dizzy Phillips, was returning to late night to host a talk show exclusively on QVC Plus, our streaming platform. The show demonstrates how celebrity content attracts viewers. In May and June, 63% of the show's viewers were new customers. According to a survey on social media, the show reached viewers across generations with more than 80% of viewers 49 or younger. Looking into the second half of 2024, we anticipate consumers will remain selective in their spending, giving continued macro challenges, and with the election and the Olympics competing for airtime. During this time, we plan to continue disciplined cost management and expect to realize further margin expansion from our ADDMS initiatives. We're also pleased to announce that we have hired Mara Sirhal as the new Chief Merchandise Officer of QVC US. Mara replaces Stacey Boe, who was appointed President of HSN in February. She joined QVC in late July and brings with her more than 20 years of experience in merchandising, product, and brand developing and sourcing. Most recently, she was Chief Merchant and Brand Officer for Saks Off Fit. Prior to that, she held leadership roles with Bed Bath & Beyond and Macy's. We're excited to welcome her to this key leadership role in our largest business. In conclusion, we delivered another solid quarter of earnings, sustaining revenue consistent with the overall discretionary market, generating gross margin expansion, and adjusted OIDA-DAW growth. We remain steadfastly focused on executing Project Athens, and we are positioning our business for growth and demand generation in future years. We look forward to providing more information on future calls and at Investor Day. Now I'll turn the call over to Bill to discuss the financial results of each of our businesses in more detail.

Thank you, David, and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the three months ended June 30, 2024, to the same period in 2023. Starting with QXH, revenue declined 4% due to lower unit volume and shipping and handling revenue partially offset by higher average selling price. From a category perspective, QXH experienced growth in jewelry, which was offset by declines mainly in beauty, apparel, and accessories. Home revenue decreased 1% due to soft demand for gardening and food. Apparel declined 4% due to soft demand for clearance and spring apparel, partially offset by gains in certain brands related to QVC's Age of Possibility, as well as Diane Gilman's 30th anniversary celebration at HSN. Beauty declined 9%, reflecting lower demand for bath and body. Accessories declined 5% due to lower demand for loungewear and handbags. Electronics declined 11% due to softness in computers and smart home. Jewelry grew 12%, reflecting successful firelight lab-grown diamonds and a today's special value for ultra-fine silver. Adjusted OVDA margin increased 110 basis points, driven by continued gross margin gains. Gross margin expanded 160 basis points, driven by favorable product margins and fulfillment expense. Product margins increased 105 basis points due to higher initial margins from Project Athens initiatives, partially offset by lower shipping and handling revenue. Fulfillment expenses improved 60 basis points due to efficiencies from Athens and average selling price leverage. SG&A was unfavorable approximately 55 basis points, of which 105 were from higher marketing expenses, partially offset by lower administrative costs. Marketing expenses increased due to the launch of QVC's Age of Possibility campaign in April and associated brand marketing. Administrative expenses declined as we comped Project Athens related costs in the prior year period. We continue to be disciplined in our cost management to sustain adjusted orbital margin gains while investing in future growth. Sales to leverage has been impacting the business in a challenged macro backdrop. We believe the marketing investments we are making are important in driving the business for the long term. Moving to QVC International. My comments focus on constant currency results. Revenue was flat, reflecting a 4% increase in units shipped, offset by a 3% lower average selling price and unfavorable returns. QVC UK and Japan led our performance at mid and low single digits respectively. Germany declined low to mid single digits. From a category perspective, QVC International experienced constant currency growth in jewelry, beauty and electronics with a decline in home. Adjusted orbital increased 8% and adjusted orbital margin expanded 75 basis points. Gross margin increased 10 basis points driven by increased initial margins due to a mixed shift to higher margin products and favorable vendor negotiations. Product margin gains were partially offset by higher fulfillment costs, reflecting higher unit volume and increased wages and freight rates reflecting inflationary pressures. SG&A was favorable primarily due to lower marketing and outside service costs. Moving to Cornerstone. Revenue declined 14% as we experienced soft demand across our home brands due to challenges in the macro environment. Gross margin expanded 320 basis points due to favorable supply chain costs. These gains were more than offset by the leveraging of SG&A expenses, resulting in adjusted orbital decreasing 6 million compared to last year. Turning to cash flow and the balance sheet. In the first half of 2024, pre-cash flow was a source of $164 million versus a source of 6 million last year, excluding insurance proceeds. In the second quarter of 2023, we received $280 million in insurance proceeds related to the Rocky Mountain Fire. The increase in cash flow net of insurance proceeds was primarily due to lower payments for TV distribution rights this year. In the first six months, we spent $13 million on TV renewals, on renewals of our TV distribution contracts and $94 million on capital expenditures. Looking at our debt profile. As of June 30th, 2024, net debt was $4.7 billion, down $179 million from March 31st. We reduced the revolver balance by $70 million in the second quarter and had $1.2 billion drawn on the QVC revolver with $1.9 billion in available capacity. In terms of cash balances, Curate Retail had total cash of $1.2 billion, of which $315 million was at QVC Inc., $116 million was at Cornerstone, $470 million was at Liberty Inactive LLC, and $309 million was at Curate Retail Inc. Our leverage ratio as of Q2, as defined by the QVC revolving credit facility, was 3.1 times compared to our maximum covenant threshold of 4.5 times. Please note that covenant OVDA includes the adjusted OVDA of QVC Inc. and Cornerstone and a portion of projected cost savings. QVC leverage ratio increased from March 31st primarily due to certain addbacks no longer impacting the calculation. Finally, on an administrative note, on June 10th we received another notice from NASDAQ that QRTEA's closing bid price had fallen below $1 per share for 30 consecutive business days. As in the past, this notice begins a period of 180 calendar days to regain compliance, which means the stock needs to have a closing bid of $1 or more for 10 consecutive business trading days for continued listing on NASDAQ. While there may be an additional grace period we could be eligible for, we remain focused on sustaining improved execution and financial performance. Q2 was the fifth consecutive quarter of gross margin expansion and the fourth consecutive quarter of adjusted OVDA growth. We affirm that our debt level is manageable and our current cushion is sufficient in relation to the 4.5 times maximum net leverage covenant threshold stipulated in our credit facility. Now I'll turn the call over to Greg.

Thanks, Bill. As you just heard, it's another solid quarter in a difficult macro environment. Great to see continued gross margin expansion and adjusted OVDA growth. The QRAE team is focused on execution and making progress on new and creative initiatives like streaming in the age of possibility. We're also paying close attention to the balance sheet. You heard about reducing the revolver balance by $70 million, adjusted OVDA improvement and net debt paydown improving leverage, and we will continue to assess incremental opportunities to improve the balance sheet. Our annual investor day will be Thursday, November 14th in New York. Please save the date. Additional details will be provided soon, and we hope to see many of you there. With that, operator, we'll open the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star one on a telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while the question queue polls. The first question comes from Carol Mantenson with Jeffery's Company. Please go ahead.

Good morning. I'm trying to get a little bit of an insight onto the consumer. I mean, certainly understanding that they're pulling back on discretionary, but then I look at your breakdown where jewelry sales were up 12%. What are you seeing kind of on that trend for consumer spend? Is it getting worse? And what's the health of the consumer that you guys see out there?

Yeah, it's a good question. I'd say it's a hard read. I'd make a couple of observations. You have as much access to the macro data as I do, but obviously we're paying attention to variable interest rate environments and the effect that has on spending, unemployment rate, taking up continued pressure on housing. Obviously a lot of things going on in the external environment, elections around the world, Olympics, other things that could affect consumer sentiment. I would say the biggest things we're seeing from our consumer are continued being very choiceful. That's not quite the same as the pocketbook being closed, but it does mean that you have to really excite. When a customer is excited, there's not necessarily massive price sensitivity. We're continuing to be able to sell at volume high-priced electric bikes at times, high-priced jewelry at times. But on the margin, the willingness to make purchases where she's not extremely excited by the value, I would say is softer than it has been. I would say anything that feels more like a necessity continues to have reasonable demand. We also see a little bit of trading down and a little bit of value seeking, not extraordinary. We haven't seen, for example, a big fleet of clearance, but we are seeing maybe a touch more price sensitivity at things around our average sell price. I don't see so far the bottom falling out of the consumer. I do see a consumer that looks to be a bit under stress and who's being choosy when they're approaching their purchases. I would say I think that read across is consistent for us and what I'm largely seeing across discretionary retail.

Then when we look at improving margins through the second half of the year in that environment, is that going to be driven by Project Athens savings or are there other additional programs underfoot?

Yes, it's mostly Project Athens. But keep in mind, Project Athens operates across a wide variety of variables. So Project Athens has hundreds of work streams, some of which are going to things like how we source our products and being able to source more efficiency and take some cost out of the sourcing. Some of Project Athens is going at fulfillment expenses and fulfillment rates. Some of Project Athens is going after vendor negotiations where we're not participating in the making of the product, but we're just buying it from vendors. Some of it's going after making sure we're pricing it correctly and maximizing on a willing to spend basis from our customers. So it's a combined effort across things that are having the positive effect on margin. And we still think we have some room to go on those initiatives.

Okay, and just lastly, my standard question every time, when you look at your capital structure, how are you thinking about that going forward?

This is Ben Oren. Go ahead, David, sorry.

No, go ahead, Ben. Go ahead.

I think our primary focus is on extending runway. Okay, we have debt coming due in 2025 that will be managed by either the revolver or free cash flow. And then going forward, debt that's due in 26, 27, and 28 as the business continues to deliver metric improvement and the markets continue to be or improved for us, we'll look for a transaction sometime in 2025 or at the latest, early 2026 to address the revolver. And we're going to use free cash flow in the interim to continue to reduce debt.

Thank you very much. Appreciate it.

Thank you. The next question is from Carla Casela with JP Morgan. Please go ahead.

Hi, great. Thanks for taking the question. I'm wondering if you could give us any color in terms of just sequential performance through the quarter or any kind of an exit rate, what you're seeing going into three Qs, you're seeing any change in key trends?

Yeah, I wouldn't point out big changes in key trends other than to say, you know, our viewership participates in the larger, what you might call a viewership economy. So when you're going through something like the election, the big events like the attempted assassination, vice presidential selections, the Olympics, some of the international markets, political events going on in those markets, those can have relatively temporary effects on viewership. So we're managing through those events. And then I think the general macro consumer is behaving about as you would expect if you read across all of the macro consumer data that you see. I wouldn't point out any trends outside of those going through the quarter or the start of this quarter.

Okay. And then in the past, you have commented about the average spend per customer on kind of like an existing customer versus a best. Any changes there? I mean, we have existing at about $1,600 and the best at like $3,900. Any changes in that or any changes in your best customer numbers as part of your kind of core customer?

Yeah. So for the quarter existing customers and keep in mind, existing is about half the count. Existing is about half the count and the vast majority of the dollars. So for existing customers on a trailing 12 month, I'm sorry, about 32 items of 6% year on year and spend was $1,665. That's up 8% year on year. The other thing we were encouraged by for existing customers, we saw retention tick up a bit year on year. And then for best customers and best customers purchased on average 76 items over the last 12 months, that's up 3% year on year. And they spent on average $3,950 and that's up 6% year on year.

Okay. That's great. And then one more. E-commerce was up nicely as a percentage for both US and international. I'm just wondering, is the e-commerce business similar in terms of profitability as the core business?

Yeah. I mean, Carla, I think if you think about they're both direct to consumer businesses on the fulfillment side, potentially depending on product mix on what's there, you could see a little bit of different margin structure. But by and large, economics are the same as when you think about something coming off a television as well.

Okay, great. Thank you so much.

Thank you.

Thank you. The next question is from William Rauter with Bank of America. Please go ahead.

Hey, guys. Good morning. This is Rob on for Bill, just one from us. Appreciate you guys discussing Project Athens savings. But I was wondering if you could maybe touch on freight cost expectations for the remainder of 2024 and maybe any updated thoughts related to any disruptions in the Red Sea.

Thank you.

Sorry. Yes. So we're seeing, continuing to see some disruption. I think in the US, we have relatively little exposure. I think about 15% of our volume comes through the Suez Canal, so it hasn't been a big impact. We've seen more impact in Europe. About 75% goes through the canal. We've been targeting vessels that are going through alternative routes, and we've had some success there. It has caused some volatility in supply for our European businesses, but we've generally now built in more buying time and vendor order lead times to help counteract that. So I wouldn't say it's been a huge impact on the business. What's actually been a little bit more impactful has been over the course of Q2, the availability of vessel capacity has come in, and that's resulted in a shortage in the global ocean vessel capacity. That's a driving up rate, especially on the spot market. So those rate increases were manageable in Q2, but we are anticipating more volatility on deliveries and container prices as we go into Q3. So that plus the potential labor negotiations with the East Coast longshoremen are both things we're paying a lot of attention to. Very helpful.

Thank you. Thank you. Ladies and gentlemen, the last question for today is from Hale Holden with Barclays. Please go ahead.

Thank you. I have two quick questions. The first one is the cash you disclosed at Cornerstone. Is that a new disclosure or I don't recall it in the past, or is that sort of the cash that's been there in the last couple of quarters?

I think we were just making sure that we were being comprehensive in the disclosure when we were talking about the cash at the various entities is all.

Okay. And then my second question is just to follow up on the shipping question. Have you seen any of your, I guess really mainly Pacific freight carriers break your contracted rates and push you more into spot, or are they still holding their earlier in the year contracted rates?

Yeah, I would say we operate in a combination of spot and contract rates. Right. So there has, you know, David talked about the pressure with available capacity that we saw during the period. But I think, you know, the teams have done a pretty good job of managing the combination of spot and, you know, kind of term contracts, you know, across the portfolio to maintain freight rates.

Got it. And then one final one. I know this has come up on the last couple of calls, but anything you can tell us to help us understand what you may or may not be able to do to mitigate tariffs, depending on, I guess, which way the coin flips on the election.

So we have since, really since the supply chain crisis tried to create some diversity and our sources of supply, you know, Less than half of our assortment ends up being impacted by by tariffs and even that half the tariff rate is sort of sort of mid teens. We think we have a number of continued avenues available to us to diversify supply. So we don't we don't see a scenario either in no matter which way the election unfolds that creates a level of difficulty around tariffs that are not manageable for us, given where we are today.

Great. Thank you so much. I appreciate it.

Thank you, operator. I think we're done and thank you to the listening audience for your interest in curate. We look forward to speaking with you next quarter, if not sooner.

Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.