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VVTV > SEC Filings for VVTV > Form 10-Q on 8-Dec-2011All Recent SEC Filings

Show all filings for VALUEVISION MEDIA INC

Form 10-Q for VALUEVISION MEDIA INC


8-Dec-2011

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our accompanying unaudited condensed consolidated financial statements and notes included herein and the audited consolidated financial statements and notes included in our annual report on Form 10-K for the fiscal year ended January 29, 2011. Cautionary Statement Regarding Forward-Looking Statements The following Management's Discussion and Analysis of Financial Condition and Results of Operations and other materials we file with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by us) contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding guidance, industry prospects or future results of operations or financial position made in this report are forward-looking. We often use words such as anticipates, believes, expects, intends and similar expressions to identify forward-looking statements. These statements are based on management's current expectations and accordingly are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained herein due to various important factors, including (but not limited to): consumer preferences, spending and debt levels; the general economic and credit environment; interest rates; seasonal variations in consumer purchasing activities; changes in the mix of products sold by us; competitive pressures on sales; pricing and gross profit margins; the level of cable and satellite distribution for our programming and the associated fees; our ability to establish and maintain acceptable commercial terms with third-party vendors and other third parties; our ability to successfully manage and maintain our brand name and marketing initiatives; our ability to manage our operating expenses successfully and our working capital levels; our management and information systems infrastructure; challenges to our data and information security; changes in governmental or regulatory requirements; litigation or governmental proceedings affecting our operations; the risks identified under Item 1A in our fiscal 2011 reports on Form10-Q (including this report) and under "Risk Factors" in our Form 10-K for our fiscal year ended January 29, 2011; significant public events that are difficult to predict, such as widespread weather catastrophes or other significant television-covering events causing an interruption of television coverage or that directly compete with the viewership of our programming; and our ability to obtain and retain key executives and employees. Investors are cautioned that all forward-looking statements involve risk and uncertainty. The facts and circumstances that exist when any forward-looking statements are made and on which those forward-looking statements are based may significantly change in the future, thereby rendering the forward-looking statements obsolete. We are under no obligation (and expressly disclaim any obligation) to update


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or alter our forward-looking statements whether as a result of new information, future events or otherwise.
Overview
Company Description
We are a multichannel electronic retailer that markets, sells and distributes products to consumers through TV, telephone, online, mobile and social media. Our principal form of product exposure is our 24-hour television shopping network, ShopNBC, which is distributed primarily through cable and satellite affiliation agreements, and markets brand name and private label products in the categories of Jewelry & Watches; Home & Electronics; Beauty, Health & Fitness; and Fashion. We also operate ShopNBC.com, a comprehensive e-commerce platform that sells products appearing on our television shopping channel as well as an extended assortment of online-only merchandise. Our programming and products are also marketed via mobile devices - including smartphones and tablets such as the iPad, and through the leading social networking sites such as Facebook, Twitter and YouTube. We have an exclusive trademark license from NBCUniversal Media, LLC, formerly known as NBC Universal, Inc. ("NBCU"), for the worldwide use of an NBC-branded name for a period ending in May 2012. Pursuant to the license, we operate our television home shopping network and our Internet websites, ShopNBC.com and ShopNBC.tv.
Our investor relations website address is www.valuevisionmedia.com. Our goal is to maintain the investor relations web site as a way for investors to easily find information about us, including press releases, announcements of investor conferences and corporate governance. We also make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as practicable after that material is electronically filed with or furnished to the SEC. The information found on our website is not part of this or any other report we file with, or furnish to, the SEC.
Products and Customers
Products sold on our multi-media platforms include primarily jewelry & watches, home & electronics, beauty, health & fitness, and fashion. Historically jewelry and watches have been our largest merchandise categories. More recently, our product mix has been shifting to include a more diversified product assortment in order to grow our new and active customer base. The following table shows our merchandise mix as a percentage of television home shopping and internet net sales for the years indicated by product category group:

                                                     For the Three-Month                  For the Nine-Month
                                                        Periods Ended                       Periods Ended
                                               October 29,        October 30,      October 29,         October 30,
                                                  2011               2010              2011               2010
Merchandise Mix
Jewelry & Watches                                   50 %                53 %            52 %                 55 %
Home & Electronics                                  28 %                30 %            29 %                 30 %
Beauty, Health & Fitness                            14 %                10 %            13 %                  9 %
Fashion (apparel, outerwear, & accessories)          8 %                 7 %             6 %                  6 %

Our product strategy is to continue to develop new product offerings across multiple merchandise categories as needed in response to both customer demand and in order to maximize margin dollars per minute in our television and internet shopping operations. Our multichannel customers are primarily women between the ages of 40 and 69, married, with average annual household incomes of $50,000 or more. We believe our customers make purchases based on our unique products, quality merchandise and value. Over the past fiscal year, we have changed our product mix in order to diversify our product offerings, which we believe will drive new and active customer development and the retention of repeat customers.

Company Strategy
As a premium multichannel electronic retailer, our strategy is to offer our customers differentiated quality brands and products at a compelling value proposition. We also seek to provide today's consumers with flexible programming formats and access that allow them to view and interact with our content and products at their convenience - whenever and wherever they are able. Our merchandise positioning aims to make us a trusted destination for quality and an authority in a broad category of merchandise. We focus on creating a customer experience that builds strong loyalty and a growing customer base.

In support of this strategy, we are pursuing the following actions to improve the operational and financial performance of our Company: (i) broadening and optimizing our product mix to appeal to more customers and to encourage additional purchases per


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customer, (ii) increasing new and active customers and improving household penetration, (iii) increasing our gross margin dollars by improving merchandise margins in key product categories while prudently managing inventory levels,
(iv) reducing our transactional operating expenses while managing our fixed operating expenses, (v) growing our Internet business with expanded product assortments and Internet-only merchandise offerings, (vi) expanding our Internet, mobile and social networking reach to attract and retain more customers, and (vii) maintaining cable and satellite carriage contracts to shorter terms of one to two years while seeking cost savings opportunities and improved channel positions.

Our Competition
The direct marketing and retail businesses are highly competitive. In our television home shopping and e-commerce operations, we compete for customers with other television home shopping and e-commerce retailers; infomercial companies; other types of consumer retail businesses, including traditional "brick and mortar" department stores, discount stores, warehouse stores and specialty stores; catalog and mail order retailers and other direct sellers.

In the competitive television home shopping sector, we compete with QVC Network, Inc. and HSN, Inc., both of whom are substantially larger than we are in terms of annual revenues and customers, and whose programming is carried more broadly to U.S. households than our programming. The American Collectibles Network, which operates Jewelry Television, also competes with us for television home shopping customers in the jewelry category. In addition, there are a number of smaller niche players and startups in the television home shopping arena who compete with our Company. We believe that our major competitors incur cable and satellite distribution fees representing a significantly lower percentage of their sales attributable to their television programming than do we; and that their fee arrangements are substantially on a commission basis (in some cases with minimum guarantees) rather than on the predominantly fixed-cost basis that we currently have. At our current sales level, our distribution costs as a percentage of total consolidated net sales are higher than our competition. However, one of our key strategies is to maintain our distribution fixed cost structure in order to leverage our profitability as we grow our business. On a total dollar basis, management believes that we currently have one of the lowest distribution costs within the industry.

The e-commerce sector also is highly competitive, and we are in direct competition with numerous other internet retailers, many of whom are larger, better financed and/or have a broader customer base than we do.

We anticipate continuing competition for viewers and customers, for experienced home shopping personnel, for distribution agreements with cable and satellite systems and for vendors and suppliers - not only from television home shopping companies, but also from other companies that seek to enter the home shopping and internet retail industries, including telecommunications and cable companies, television networks, and other established retailers. We believe that our ability to be successful in the television home shopping and e-commerce sectors will be dependent on a number of key factors, including (i) increasing the number of customers who purchase products from us and (ii) increasing the dollar value of sales per customer from our existing customer base. Results for the Third Quarter of Fiscal 2011 Consolidated net sales for our fiscal 2011 third quarter were $135,187,000 compared to $132,283,000 for the fiscal 2010 third quarter, which represents a 2% increase. We reported an operating loss of $5,369,000 and a net loss of $6,350,000 for the fiscal 2011 third quarter. We had an operating loss of $3,596,000 and a net loss of $5,814,000 for the fiscal 2010 third quarter.


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Results of Operations

                 Selected Condensed Consolidated Financial Data
                                   Operations
                                  (Unaudited)
                                                     Dollar Amount as a                       Dollar Amount as a
                                              Percentage of Net Sales for the          Percentage of Net Sales for the
                                                 Three-Month Periods Ended                 Nine-Month Periods Ended
                                              October 29,          October 30,         October 29,          October 30,
                                                 2011                  2010               2011                  2010
Net sales                                        100.0  %              100.0  %           100.0  %              100.0  %
Gross margin                                      37.2  %               35.6  %            37.7  %               36.5  %
Operating expenses:
Distribution and selling                          35.2  %               32.3  %            34.2  %               34.8  %
General and administrative                         3.6  %                3.4  %             3.6  %                3.7  %
Depreciation and amortization                      2.4  %                2.3  %             2.3  %                2.7  %
Restructuring costs                                  -  %                0.3  %               -  %                0.2  %
                                                  41.2  %               38.3  %            40.1  %               41.4  %
Operating loss                                    (4.0 )%               (2.7 )%            (2.4 )%               (4.9 )%



                            Key Performance Metrics
                                  (Unaudited)
                                       For the Three-Month                                For the Nine-Month
                                          Periods Ended                                     Periods Ended
                                 October 29,        October 30,                    October 29,        October 30,
                                    2011                2010          % Change         2011               2010          % Change
Program Distribution
Total Homes (Average 000's)          80,728             76,768           5.2  %        79,366             76,032            4.4  %
Merchandise Metrics
Gross Margin %                         37.2 %             35.6 %     +160bps             37.7 %             36.5 %     +120 bps
Net Shipped Units (000's)             1,188              1,317          (9.8 )%         3,480              3,590           (3.1 )%
Average Selling Price          $        105       $         93          12.9  %   $       108       $         99            9.1  %
Return Rate                            24.6 %             20.8 %     +380bps             22.8 %             20.2 %     +260 bps
Internet Net Sales %                   44.1 %             40.5 %     +360bps             45.0 %             39.8 %     +520 bps

Program Distribution
Average homes reached, or full time equivalent ("FTE") subscribers, grew 5% in the third quarter of fiscal 2011, resulting in a 4.0 million increase in average homes reached versus the prior year comparable quarter. The increases were driven primarily by increases in our digital cable programming distribution footprint as well as by continued growth in satellite programming distribution. We anticipate that our cable programming distribution will increasingly shift towards a greater mix of digital with continued improvement in channel positioning and channel adjacencies, which we believe results in increased subscriber viewership. Nonetheless, because of the broader universe of programming choices available for viewers in digital systems and the higher channel placements commonly associated with digital tiers, the shift towards digital systems may adversely impact our ability to compete for television viewers even if our programming is available in more homes. Our television home shopping programming is also simulcast live 24 hours a day, 7 days a week through our internet websites, www.ShopNBC.com and www.ShopNBC.TV, which is not included in the foregoing data on homes reached.

Cable and Satellite Distribution Agreements We have entered into cable and direct-to-home distribution agreements that require each operator to offer our television home shopping programming substantially on a full-time basis over their systems. The terms of these existing agreements typically range from one to two years. Under certain circumstances, the cable or satellite operators or we may cancel the agreements prior to their expiration. If certain of these agreements are terminated, the termination may materially or adversely affect our business. Failure


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to maintain our cable agreements covering a material portion of our existing cable households on acceptable financial and other terms could materially and adversely affect our future growth, sales revenues and earnings unless we are able to arrange for alternative means of broadly distributing our television programming.

Net Shipped Units
The number of net shipped units during the fiscal 2011 third quarter decreased 10% from the prior year's comparable quarter to 1,188,000 from 1,317,000. For the nine months ended October 29, 2011, net shipped units decreased 3% from the prior years comparable period to 3,480,000 from 3,590,000. We believe the decrease in units shipped during fiscal 2011 is primarily due to our lower than expected quarterly and year-to-date sales growth and the increase in our average selling price discussed below.

Average Selling Price
The average selling price, or ASP, per net unit was $105 in the fiscal 2011 third quarter, a 13% increase from the comparable prior year quarter. For the nine months ended October 29, 2011, the ASP was $108, a 9% increase from the prior year's comparable period. The quarter and year-to-date increases in the ASP were driven primarily by unit selling price increases within our jewelry category as well as an increased sales mix of jewelry items within the combined jewelry and watches product category.

Return Rates
Our return rate was 24.6% in the fiscal 2011 third quarter as compared to 20.8% for the comparable prior year quarter, a 380 basis point increase. For the nine months ended October 29, 2011, our return rate was 22.8% as compared to 20.2% for the comparable prior year period, a 260 basis point increase. We attribute the increase in the 2011 quarterly and year-to-date return rate primarily to changes in the product sales mix as well as greater sales of higher price point items, primarily jewelry, which historically have higher return rates. We continue to monitor our return rates in an effort to keep our overall return rates in line and commensurate with our current product sales mix and our average selling price levels.

Net Sales
Consolidated net sales for the fiscal 2011 third quarter were $135,187,000 as compared with consolidated net sales of $132,283,000 for the fiscal 2010 third quarter, a 2% increase. Net sales during the first two months of the third quarter were up approximately 9%, however during the month of October, net sales declined approximately 10%. The increase in quarterly consolidated net sales from the prior year reflects the impact of a 20% sales decrease in our consumer electronics product category along with a 13% sales decrease in watches during the quarter. In the prior year third quarter, consumer electronics represented 16% and watches represented 25% of our net sales mix. Sales shortfalls in our consumer electronics and watches product lines during the 2011 third quarter offset double-digit sales increases in our jewelry, home, health & beauty and fashion & accessories product lines. Net sales shortfalls in our consumer electronics category during the quarter were primarily related to organizational turnover and overall execution which negatively impacted our performance within the consumer electronics product category. While we have taken specific actions to address the organizational and execution challenges within consumer electronics, we anticipate continued weakness in this category through the fourth quarter and to a lesser degree into the first quarter of fiscal 2012. Net sales shortfalls in our watch category during the quarter coincided with a reduction in airtime. Third quarter sales were also favorably impacted by our wider product assortment during the quarter and through the success of our increased offers and usage of our ValuePay installment program. Consolidated net sales for the nine months ended October 29, 2011 were $410,857,000 as compared with consolidated net sales of $383,437,000 for the comparable prior period, a 7% increase. The increase in year to date consolidated net sales from the prior year is due to higher net sales in almost every major product category, with double-digit sales increases in our jewelry, health & beauty and fashion & accessories product categories. Year-to date consolidated net sales were also favorably impacted by our wider product assortment during the year and through the success of our increased offers and usage of our ValuePay installment program. Consolidated net sales for the nine months ended October 29, 2011 also increased as a result of higher shipping and handling revenues due to fewer free shipping promotions. Our internet net sales increased 11.3% and 21.1%, respectively, during the third quarter and first nine months of fiscal 2011 over prior year and our e-commerce sales penetration was 44.1% during the third quarter of fiscal 2011 and 45.0% for the first nine-months of fiscal 2011 as compared to 40.5% for the third quarter of fiscal 2010 and 39.8% for the first nine months of fiscal 2010; driven primarily by strong cross-channel promotions from our core television channel, online marketing efforts, unique internet only product offerings and mobile and social media platforms.

Gross Profit
Gross profit for the fiscal 2011 third quarter and fiscal 2010 third quarter was $50,242,000 and $47,049,000, respectively, an increase of $3,193,000, or 7% . The increase in the gross profits experienced during the quarter was driven primarily by the year-over-year quarter sales growth and a shift in our third quarter sales mix to higher margin product categories, particularly health


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& beauty. Gross profits during the quarter also increased as a result of increased shipping and handling margins due to increased rates charged as a result of product mix changes and reduced freight costs during the quarter. For the first nine months of fiscal 2011 gross profit was $154,902,000, an increase of $14,960,000 or 11% over $139,942,000 for the comparable prior year period. Gross margin percentages for the third quarters of fiscal 2011 and fiscal 2010 were 37.2% and 35.6%, respectively, a 160 basis point increase. On a year to date basis, gross profit percentages were 37.7% for fiscal 2011 and 36.5% for fiscal 2010; a 120 basis point improvement. The increase in the gross margin percentages experienced during the quarter and year-to-date periods was driven primarily by a higher sales mix of higher margin product categories such as jewelry, within our combined jewelry and watches product category, and health & beauty, improved shipping and handling margins and a lower sales mix of lower margin consumer electronics and a decrease in our inbound inventory freight costs.

Operating Expenses
Total operating expenses for the fiscal 2011 third quarter were $55,611,000 compared to $50,645,000 for the comparable prior year period, an increase of 10%. Total operating expenses for the nine months ended October 29, 2011 were $164,440,000 compared to $158,914,000 for the comparable prior year period, an increase of 3%.
Distribution and selling expense increased $4,825,000, or 11%, to $47,577,000, or 35.2% of net sales during the fiscal 2011 third quarter compared to $42,752,000 or 32.3% of net sales for the comparable prior year fiscal quarter. Distribution and selling expense increased during the quarter primarily due to increased program distribution expense of $2,861,000 related to a 5% increase in average homes and improved channel positions obtained in certain markets. The increase over the prior year's quarter was also due to increased credit card fees and bad debt expense totaling $905,000 each as a result of the overall increase in net sales and order transactions over the prior year comparable quarter, increased salaries and consulting costs of $839,000 and increased share-based compensation expense of $573,000. These distribution and selling expense increases during the quarter were offset by decreases in advertising and promotion expense of $513,000.
Distribution and selling expense increased $6,551,000 or 5%, to $140,366,000, or 34.2% of net sales during the nine months ended October 29, 2011 compared to $133,815,000 or 34.8% of net sales for the comparable prior year period. Distribution and selling expense increased on a year-to-date basis primarily due to increased credit card fees and bad debt expense totaling $2,842,000 each as a result of the overall increase in net sales and order transactions over the prior year comparable period. The increase over the prior year's fiscal year-to-date total was also due to an additional $2,743,000 in program distribution expense related to a 4% increase in average homes and improved channel positions in certain markets, increased bonus accruals of $635,000 and increased restricted stock share-based compensation expense of $915,000. The distribution and selling expense increases during the year were offset by decreases in advertising and promotion expense of $1,451,000.

General and administrative expense for the fiscal 2011 third quarter increased $379,000, or 9%, to $4,824,000, or 3.6% of net sales, compared to $4,445,000, or 3.4% of net sales for the comparable prior year fiscal quarter. For the nine months ended October 29, 2011, general and administrative expenses increased $789,000, or 6%, to $14,796,000 or 3.6% of net sales compared to $14,007,000 or 3.7% of net sales for the comparable prior year period. General and administrative expense increased during the quarter primarily as a result of increased share-based compensation of $302,000. General and administrative expense increased on a year-to-date basis primarily as a result of increased share-based compensation of $739,000 and increased bonus accruals of $350,000, offset by a $412,000 gain recorded on the disposal of a piece of operational equipment.
Depreciation and amortization expense for the fiscal 2011 third quarter was $3,210,000 compared to $2,997,000 for the comparable prior year fiscal quarter, representing an increase of $213,000, or 7%. Depreciation and amortization expense as a percentage of net sales for the three month periods ended October 29, 2011 and October 30, 2010 was 2.4% and 2.3%, respectively. For the nine months ended October 29, 2011 depreciation and amortization expense was $9,278,000 compared to $10,215,000 for the comparable prior year period, representing a decrease of $937,000, or 9%. The increase in depreciation and amortization expense during the third quarter was primarily due to increased amortization expense attributable to our renewed NBC trademark license. The decrease in depreciation and amortization expense on a year-to-date basis is due . . .

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