Attention Shoppers:
No Easy Answers in Hard-Sell Economy
By Mike Farrell -- Multichannel News, 11/11/2007 7:00:00 PM
While the days of blowout revenue and cash-flow growth may be well behind them, the two largest cable home shopping networks — QVC and HSN — are beginning to see some light at the end of the tunnel.
QVC, which is owned by Denver-based media giant Liberty Media, has long been the gold standard for home shopping networks. Between 2001 and 2005, revenue at the network averaged 14.4% growth and cash flow rose an average of 18% during that same time frame.
That phenomenal performance started to show signs of slowing down in 2006, when revenue growth was only 9.2%, while operating cash flow grew a healthy 21.4%. The slowdown was even more evident in the first half of this year — revenue grew 6.2% in the first six months of 2007 (compared to 8.8% in the first half of 2006) and operating cash flow rose 3.3% (versus 13.3% in 2006).
In the second quarter, QVC revenue grew 4% to $1.69 billion and operating cash flow rose a paltry 1% to $383 million.
| QVC | ||
|---|---|---|
| Revenue | Operating Cash Flow | |
| In billions. SOURCE: SEC filings |
||
| 2006 | $7.1 | $1.7 |
| 2005 | $6.5 | $1.4 |
| 2004 | $5.7 | $1.2 |
| 2003 | $4.9 | $1.0 |
| HSN | |
|---|---|
| Year | Revenue Growth |
| SOURCE: SEC filings |
|
| 2006 | flat |
| 2005 | 6% |
| 2004 | 8% |
| 2003 | 9% |
SECTOR-WIDE SUFFERING
Over at the second largest shopping network, HSN, the results weren’t any better.
Although the network’s parent IAC/InterActiveCorp does not break out HSN revenue separately (it is lumped together with catalog sales and online sales in its retailing category), growth rates have been steadily dropping.
Things have been tough all over the sector. On Oct. 26, ValueVision Media, the parent of ShopNBC, announced that CEO William Lansing stepped down at the request of the board of directors. ValueVision, which in the interim will be headed by chairman John Buck, also said it would reduce its earnings guidance for the year.
Revenue growth at ValueVision for the year is now expected to be in the low single digits — instead of between 6% and 8% — and cash flow is expected to be in the $5 million to $10 million range. ValueVision had previously forecasted cash flow would be in the $15 million to $20 million range.
HSN has had a rockier road than QVC. Revenue at the No. 2 home shopping network dipped 2.9% in 2002, rose 9% in 2003, 8% in 2004 and 6% in 2005. In 2006, revenue growth was essentially flat at the network.
On Nov. 5, IAC said that it would split the company into five parts — IAC, HSN, TicketMaster, LendingTree and Interval International — to remove some of the complexity from the company. As part of the deal, the HSN unit will include its TV operations, its hsn.com Web site and its Cornerstone Brands portfolio of catalogs, Web sites and retail locations.
The announcement came several months after IAC contemplated selling HSN to Liberty, which owns about 24% of IAC shares.
Last month, Liberty CEO Greg Maffei said at an investor conference that talks between the two broke down because of valuation.
“We’re not happy carrying a minority stake, but over the long haul it would be difficult to imagine exchanging our stake for something that is undervalued,” Maffei said at the Natixis Bleichroeder Hidden Gems conference in October.
SIMILAR PROBLEMS
The networks are also grappling with some of the same issues: new management, a sluggish economy, high gold prices that have hurt the jewelry business — a staple for both networks — an older-skewing subscriber base and growing inventory.
Natixis Bleichroeder analyst Jeffrey Shelton, who covers IAC and QVC parent Liberty Media, said that while QVC has had an impressive run during the past several years, the train is slowing down for the sector as a whole.
[Editor’s note: An analyst team member or member of Shelton’s household has a financial interest (equity position, long) in Liberty Media Interactive. Natixis Bleichroeder Inc. and/or its affiliates make an over-the-counter market in the stock of IAC/InterActiveCorp and Liberty Media Interactive.]
“QVC has done well for many years, but it started to slow down in the fourth quarter last year,” Shelton said. “HSN has been in perpetual turnaround mode, although the second quarter numbers were a bit encouraging.”
QVC management has been well aware of the declines and has been making moves to correct them. In December 2005, long-time QVC president and CEO Doug Briggs retired, and QVC hired Michael George, a former chief marketing officer and general manager at computer giant Dell Inc., as president. George assumed the CEO role in April 2006.
VOLATILE JEWELRY MARKET
During its second quarter conference call with analysts to discuss quarterly results, George said that the single biggest factor in the decline was the volatile jewelry market – higher gold prices led to a double-digit decline in QVC’s 14-carat gold business. But George said during the call that QVC wasn’t blameless regarding the poor performance.
“Candidly, some of our performance challenge in jewelry is self inflicted,” George said on the August conference call. He added that in trying to reduce the impact of higher prices, QVC simplified its gold jewelry designs; offering a cheaper, lighter product for consumers. That was soundly rejected by customers and QVC had to reverse course, focusing on upgrading the quality of its offerings.
“We’re seeing very positive early results, as we’ve begun to go back to what works for us in gold and silver,” George said on the call.
George also said the sluggish economy is becoming a factor in lower sales, but added that will just force QVC to work harder.
“We do think that the general softness that we’ve been seeing in the retail marketplace and the somewhat skittish consumer spending is impacting us and we’ll simply need to execute at higher levels to outrun some of that softness that we’ve all been seeing in the general retail marketplace,” George said on the August conference call.
STEPPING UP TO THE PLATE
QVC has started to step up to the plate, attempting to diversify its product mix and driving underserved categories such as beauty. But, George added that there is still a long row to hoe.
“I’m clearly disappointed with our pace of this. I would have expected us to be at a better place by now, so I don’t want to predict the timing of a turnaround until we’re really confident that we see it,” George said on the conference call. “We think we’re on the right track, but I think we have some more bumps in the road as we continue to re-sort the merchandise to where we need it to be.”
QVC also launched an aggressive rebranding campaign in September, “iQdoYou,” its first in its 21-year-history. On the second quarter conference call, Maffei said that the campaign was not an effort to attract younger viewers — the average QVC viewer is female and about 50 years old, the same demographics as HSN — but instead to freshen up the brand and possibly to devote more marketing dollars to QVC.
“It’s about also really just beginning a marketing campaign,” Maffei said on the call. “There’s been virtually zero marketing dollars applied to the QVC brand, to QVC at all. And, I don’t expect that kind of change radically, but I do expect we’re going to have limited test marketing in opportunities that we use.”
While QVC deals with marketing issues, HSN has had to battle burgeoning inventories that have hurt profit margins as the network has to devote air time to unloading the merchandise at a heavy discount. But HSN, which named former Nike executive Mindy Grossman as president in April 2006, appears to be getting its arms around a solution to the inventory issue.
“We’ve been fighting this inventory issue since the beginning of the year, when we bought to an overaggressive sales plan,” IAC executive vice president and chief financial officer Tom McInerney said on the company’s second quarter conference call with analysts in July. “It wasn’t until the back half of the second quarter that we really felt we had made progress addressing the issue.
For example, at the end of the first quarter, HSN carried gross inventories that were $49 million (25%) above prior year amounts. By the end of the second quarter, those inventories were $18 million (8%) above prior year levels
“We ran a number of dedicated clearance days, reduced purchases and took other actions to make substantial progress, although we still view inventory as too high in certain areas,” McInerney said on the conference call. “As such, we expect Q3 gross margins to again be down year-over-year, albeit to a lesser extent than in Q2.”
HSN is already showing some improvement. In the third quarter, revenue was up 5%, compared to 3% in the second quarter.
Morningstar research analyst Sumit Desai said in an August research report that the higher than expected revenue growth was a good sign, but added the company is not out of the woods yet.
“While we’re not ready to throw in the towel on HSN just yet, we expect continued difficulty in turning this business around,” Desai wrote in the report.
MARGIN PRESSURE
Margin pressure has been a big problem for the network according to Desai.
“HSN is suffering from several quarters of poor merchandising decisions, which have negatively impacted sales growth and margins,” Desai wrote. “The company has put a new management team in place for HSN, but it will likely take some time to fix its problems.”
Shelton wasn’t as concerned about margins as he was about revenue growth. And he said he was encouraged by the 3% gain in the second quarter.
“If anything, the turnaround is going to be led by top line growth, not margins,” Shelton said.
Grossman came on board with high expectations: She was head of Nike’s global apparel business and grew the company’s women’s business from niche unit to a multibillion dollar operation.
While Grossman has yet to have that kind of impact on HSN, the company has made several changes since she joined, signing celebrities like chef Wolfgang Puck and Tori Spelling to promote their own lines of cooking products and jewelry, respectively; partnered with fashion magazine Elle for “HSN Fall Fashion Week;” and signed celebrity designers to promote their own lines of fashion and beauty products.
HSN also has made moves to expand the product line and embarked on a much publicized effort to tie in music stars with its Web site.
In May, HSN made cuts from Memory Almost Full, a new release from former Beatle Paul McCartney, available on its Web site.
HSN also has spearheaded efforts to allow viewers to order using their remote controls.
HSN’s Shop by Remote has already launched trials with a few cable companies, including Time Warner Cable’s Oceanic division in Hawaii and Cablevision Systems, as well as EchoStar’s Dish Network. HSN is distributed to a total of 90 million homes, and 15 million of those have access to the interactive application.
Most HSN customers prefer ordering through the TV, if they have the option, according to John McDevitt, HSN vice president of advanced services. “It’s about 30 seconds to order on the TV versus 2 minutes to do a phone call,” he said in an earlier interview with Multichannel News’ Telco TV newsletter.
EXPANDING TELCO OFFERINGS
HSN also is contemplating expanding the service to telephone company video offerings.
The shopping channel is already on the lineups of Verizon Communications’ FiOS TV service and AT&T’s U-verse TV.
“The first thing is, you want to be sure you do the basics right,” HSN’s executive vice president of affiliate relations Peter Ruben said in an earlier interview with Telco TV. “With both telcos and cable, the technology needs to be in place to develop good interactive applications.”
While the jury is still out on how successful Grossman and her team will actually be, she already has the firm support of her boss, IAC/InterActiveCorp chairman Barry Diller.
“The early teething problems that come with having a new group of people are working their way through the system,” IAC chairman Diller said on the company’s second quarter conference call in July. “It’s not going to be overnight, but we are very confident that as time goes on, that HSN is going to be very competitive.”
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