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VVTV > SEC Filings for VVTV > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for VALUEVISION MEDIA INC

Form 10-Q for VALUEVISION MEDIA INC


6-Jun-2014

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 is qualified by reference to and 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 February 1, 2014.
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 SEC (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. Any statements contained herein that are not 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; the ability to achieve the most effective product category mixes to maximize sales and margin objectives; competitive pressures on sales; pricing and gross sales margins; the level of cable and satellite distribution for our programming and the associated fees or estimated cost savings from contract renegotiations; our ability to establish and maintain acceptable commercial terms with third-party vendors and other third parties with whom we have contractual relationships, and to successfully manage key vendor relationships; our ability to manage our operating expenses successfully and our working capital levels; our ability to remain compliant with our long-term credit facility covenants; our ability to maintain and successfully execute our long-term growth strategy; our ability to successfully transition our brand name; continued public statements about the Company and other actions by an activist shareholder, and our ability to minimize our costs and avoid management distraction in connection therewith; the market demand for television station sales; 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 "Risk Factors" in our Form 10-K for our fiscal year ended February 1, 2014 and any additional risk factors identified in our periodic reports since such date; significant public events that are difficult to predict, 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, retain and offer meaningful compensation to our key executives and employees. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this filing. We are under no obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.


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Overview
Our Company
We are a multichannel electronic retailer that markets, sells and distributes products to consumers through TV, telephone, online, mobile and social media. We operate a 24-hour television shopping network, ShopHQ, which is distributed primarily through cable and satellite affiliation agreements, through which we offer brand name and private label products in the categories of jewelry & watches; home & consumer electronics; beauty, health & fitness; and fashion & accessories. We also operate ShopHQ.com, a comprehensive e-commerce platform that sells products which appear 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, and through the leading social media channels.
In May 2013, we announced our intention to rebrand our 24-hour television shopping network, ShopNBC, and our companion e-commerce internet website, ShopNBC.com and on January 31, 2014, we officially transitioned to our new brand, ShopHQ and ShopHQ.com, to reinforce our positioning as the shopping headquarters for customers.
Our investor relations website address is ShopHQ.com/ir. Our goal is to maintain the investor relations website as a way for investors to easily find information about us, including press releases, announcements of investor conferences, investor and analyst presentations 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, proxy statements and all amendments to these filings 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 media channel platforms include primarily jewelry & watches, home & consumer electronics, beauty, health & fitness, and fashion & accessories. Historically jewelry & watches has been our largest merchandise category. We are working to shift our product mix 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 shopping and internet net merchandise sales for the years indicated by product category group:

                               For the Three-Month
                                  Periods Ended
                               May 3,       May 4,
                                2014         2013
Merchandise Category
Jewelry & Watches                47%          48%
Home & Consumer Electronics      26%          30%
Beauty, Health & Fitness         14%          13%
Fashion & Accessories            13%          9%

Our product strategy is to continue to develop and expand new product offerings across multiple merchandise categories based on customer demand, as well as to offer competitive pricing and special values in order to drive new customers and maximize margin dollars per minute. Our multichannel customers - those who interact with our network and transact through TV, internet and mobile device - are primarily women between the ages of 35 and 65, married, with average annual household incomes of $70,000 or more. We also have a strong presence of male customers of similar age and income range. We believe our customers make purchases based on our unique products, quality merchandise and value. Company Strategy
As a 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 a shopping headquarters for 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) expand and diversify our product assortment to appeal to more customers, to increase the purchase frequency of active customers and to increase customer retention rates,
(ii) attract, retain and increase new and active customers and improve household penetration, (iii) increase our gross margin dollars by maintaining merchandise margins in key product categories while prudently managing inventory levels,
(iv) enhance our customer experience through a variety of investments in technology,


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promotional activity and improved and competitive service, (v) manage our fixed operating costs and variable transaction expenses, (vi) grow our internet and mobile business with expanded product assortments and internet-only merchandise offerings, (vii) expand our internet, mobile and social media channels to attract and retain more customers, and (viii) maintain cable and satellite carriage contracts at appropriate durations and cost while improving distribution productivity through better channel positions and dual illumination or multiple channels.
Our Competition
The direct marketing and multichannel retail businesses are highly competitive. In our television shopping and e-commerce operations, we compete for customers with other television 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.
Our direct competitors within our industry include 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 customers in the jewelry category. In addition, there are a number of smaller niche players and startups in the television shopping arena who compete with us. 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 we do; 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 fixed distribution cost structure in order to leverage our profitability as we grow our business.
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 have a broader customer base than we do.
We anticipate continuing competition for viewers and customers, for experienced television shopping personnel, for distribution agreements with cable and satellite systems and for vendors and suppliers - not only from television shopping companies, but also from other companies that seek to enter the television 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 multichannel retailing industry will be dependent on a number of key factors, including expanding our digital footprint to meet our customers' "watch and shop anytime, anywhere" needs, increasing the number of customers who purchase products from us and increasing the dollar value of sales per customer from our existing customer base. Summary Results for the First Quarter of Fiscal 2014 Consolidated net sales for the first three months of fiscal 2014 were $159,701,000 compared to $151,354,000 for the first three months of fiscal 2013, which represents a 6% increase. We reported operating income of $1,052,000 and net income of $460,000 for the first three months of fiscal 2014. We had operating income of $1,684,000 and net income of $1,023,000 for the first three months of fiscal 2013.


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Results of Operations
                 Selected Condensed Consolidated Financial Data
                                   Operations
                                  (Unaudited)
                                        Dollar Amount as a
                                  Percentage of Net Sales for the
                                     Three-Month Periods Ended
                                    May 3,              May 4,
                                     2014                2013
Net sales                           100.0%              100.0%

Gross margin                         37.6%               37.7%
Operating expenses:
Distribution and selling             31.1%               30.6%
General and administrative           4.3%                3.9%
Depreciation and amortization        1.4%                2.1%
                                     36.8%               36.6%
Operating income                     0.8%                1.1%



                            Key Performance Metrics
                                  (Unaudited)
                                               For the Three-Month
                                                  Periods Ended
                                           May 3,   May 4,
                                            2014     2013     Change
Program Distribution
Total homes (average 000's)                87,034   84,955      2%
Merchandise Metrics
  Gross margin %                           37.6%    37.7%    (10) bps
  Net shipped units (000's)                1,913    1,497       28%
  Average selling price                     $76      $93       (18)%
  Return rate                              22.2%    22.5%    (30) bps
  Internet net sales % (a)                 44.7%    46.2%    (150) bps

Total Customers - 12 Month Rolling (000's) 1,402 1,152 22%

(a) Internet sales percentage is calculated based on net sales that are generated from our ShopHQ.com website and mobile platforms, which are primarily ordered directly online. Program Distribution
Average homes reached, or full time equivalent ("FTE") subscribers, grew 2% in the first quarter of fiscal 2014 over the comparable prior year quarter, resulting in a 2.1 million increase in average homes reached during that same period. The increase was driven primarily by increases in our footprint as we expand into more widely distributed digital tiers of service with improved channel positions. During fiscal 2012, we made low-cost infrastructure investments that have enabled us to launch an up-converted version of our digital signal in a high definition ("HD") format and that improved the appearance of our primary network feed. As of May 3, 2014, our up-converted high definition feed is carried in approximately 7 million households. We believe that having an HD feed of our service will allow us to attract new viewers and customers. Our television home shopping programming is also simulcast live 24 hours a day, 7 days a week through our internet website, www.ShopHQ.com, 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 network over their systems. The terms of the affiliation agreements typically range from one to five years. During the fiscal year,


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certain agreements with cable, satellite or other distributors may expire. Under certain circumstances, the cable operators or we may cancel the agreements prior to their expiration. Additionally, we may elect not to renew distribution agreements whose terms result in sub-standard or negative contribution margins. If the operator drops our service or if either we or the operator fails to reach mutually agreeable business terms concerning the distribution of our service so that the agreements are terminated, our business may be materially adversely affected. Failure to maintain our distribution agreements covering a material portion of our existing 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
For the three months ended May 3, 2014, net shipped units increased 28% from the prior year's comparable period to 1,913,000 from 1,497,000. We believe the increase in net shipped units during the first three months of fiscal 2014 reflects the continued broadening of our merchandising assortment, the decline in our average selling price and the overall growth in net sales as discussed below.
Average Selling Price
The average selling price, or ASP, per net unit was $76 for the three months ended May 3, 2014, an 18% decrease from the prior year's comparable period. The decrease in the ASP, which is a key component in our customer acquisition efforts, driving impulse shopping and increasing repeat customers, continues to reflect strong growth within our fashion & accessories category, which typically has lower average selling prices as well as a general shift to lower price points in our other merchandise categories, particularly beauty, health & fitness. The decreases in our ASP are consistent with our long-term strategy to further broaden and expand our product assortment of lower priced items to reach a broader audience, however, we expect to have less of a decrease in our average selling price in the upcoming quarters of fiscal 2014 versus last year. Return Rates
For the three months ended May 3, 2014, our return rate was 22.2% compared to 22.5% for the prior year comparable period, a 30 basis point decrease. The decrease in the return rate was driven by slight decreases in our return rates within our fashion & accessories and beauty, health & fitness categories. We continue to monitor our return rates in an effort to keep our overall return rates commensurate with our current product mix and our average selling price levels.
Total Customers
Total customers purchasing over the last twelve months increased 22% to 1.4 million. We believe the increase in total customers is primarily due to continued diversification of our merchandise at lower price points as well as a product mix shift from the jewelry and watches category to the fashion and accessories and other product categories. We also believe that our improvements in customer satisfaction and channel positioning also contributed to overall customer growth.
Net Sales
Consolidated net sales for the three months ended May 3, 2014 were $159,701,000, as compared to consolidated net sales of $151,354,000 for the comparable prior period, an increase of 6%. The increase in consolidated net sales was driven primarily by sales improvements in the fashion & accessories, watches, health & beauty and home product categories. Our e-commerce sales penetration, that is, the percentage of net sales that are generated from our ShopHQ.com website and mobile platforms, which are primarily ordered directly online, was 44.7% compared to 46.2%, respectively for the first three months of fiscal 2014 compared to fiscal 2013. Overall, we continue to deliver strong internet sales penetration. Moreover, our mobile penetration increased to 31.5% of total internet orders in the first quarter of 2014 versus 22.8% of total internet orders for the comparable prior year period. Gross Profit
Gross profit for the first three months of fiscal 2014 gross profit was $60,006,000, an increase of $2,973,000 or 5%, from $57,033,000 for the comparable prior year period. The increase in the gross profits experienced during the first three-months of fiscal 2014 was primarily driven primarily by the year-over-year sales increase discussed above. Gross margin percentages for the first three months of fiscal 2014 and fiscal 2013 were 37.6% and 37.7%, respectively, a 10 basis point decrease. The slight decrease in the first quarter gross margin percentage reflected increased levels of shipping and handling promotional activity in the quarter versus prior year, offset partially by a shift in product mix during the quarter to fashion and accessories which typically have higher margin percentages.


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Operating Expenses
Total operating expenses for the three months ended May 3, 2014 were $58,954,000 compared to $55,349,000 for the comparable prior period, an increase of 7%. Total operating expenses for the first quarter of fiscal 2014 includes activist shareholder response charges of approximately $1,045,000. Excluding shareholder activist response costs, total operating expenses as a percentage of net sales were 36% during the first quarter of fiscal 2014 versus 37% for the prior year comparable period.
Distribution and selling expense increased $3,477,000 or 8%, to $49,729,000, or 31.1% of net sales during the three months ended May 3, 2014 compared to $46,252,000 or 30.6% of net sales for the comparable prior year period. Distribution and selling expense increased primarily due to increased program distribution expense of $1,595,000, relating to a 2% increase in average homes reached during the year as well as investments made associated with improved channel positions which began in the second half of fiscal 2013. The increase over prior year was also due to increases in variable credit card processing fees and other credit expenses of $729,000, customer service and telecommunications expenses of $332,000, salaries, wages and consulting costs of $135,000 and advertising and promotion expense of $150,000. Total variable expenses during the first quarter of fiscal 2014 were approximately 8.4% of total net sales versus 7.5% of total net sales for the prior year comparable period. The increase in variable expense as a percentage of net sales coincides with our reduction in average selling price and resulting 28% increase in net shipped units during the first quarter. To the extent that our average selling price continues to decline, our variable expense as a percentage of net sales could increase as the number of our shipped units increase. Program distribution expense is primarily a fixed cost per household, however, this expense may be impacted by growth in the number of average homes reached or by rate changes associated with improvements in our channel position.
For the three months ended May 3, 2014, general and administrative expense increased $1,065,000, or 18%, to $6,957,000, or 4.4% of net sales, compared to $5,892,000, or 3.9% of net sales, for the prior year period. General and administrative expense increased primarily as a result of costs related to an activist shareholder response of $1,045,000. Excluding shareholder activist response costs, general and administrative expense totaled $5,912,000, or 3.7% of net sales during the first quarter of fiscal 2014.
Depreciation and amortization expense for the three months ended May 3, 2014 was $2,268,000 compared to $3,205,000 for the comparable prior year period, representing a decrease of $937,000, or 29%. Depreciation and amortization expense as a percentage of net sales for the three months ended May 3, 2014 and May 4, 2013 was 1.4% and 2.1%, respectively. The decrease in depreciation and amortization expense was primarily due to decreased amortization expense of $1,000,000 associated with the expiration of our NBC trademark license. Operating Income
For the three months ended May 3, 2014, we reported operating income of $1,052,000 compared to operating income of $1,684,000 for the comparable prior year period, representing a decrease of $632,000. Our operating results for the first quarter of fiscal 2014 decreased primarily as a result of higher distribution and selling and general and administrative expense incurred during the quarter (as noted above), offset by increased gross profit and a decrease in depreciation and amortization expense.
Net Income
For the three months ended May 3, 2014, we reported net income of $460,000 or $0.01 per share on 49,844,253 weighted average basic common shares outstanding ($0.01 per share on 56,340,970 diluted shares) compared to net income of $1,023,000 or $0.02 per share on 49,226,515 weighted average basic common shares outstanding ($0.02 per share on 54,653,674 diluted shares) for the comparable prior year period. Net income for the three months ended May 3, 2014 includes costs related to an activist shareholder response of approximately $1,045,000 and interest expense of $391,000. Net income for the three months ended May 4, 2013 includes interest expense of $378,000, offset by interest income totaling $11,000 earned on our cash and investments.
For the first three months of fiscal 2014, net income reflects an income tax provision of $201,000. The fiscal 2014 first quarter tax provision included a non-cash expense charge of approximately $197,000, relating to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset that is not available to offset existing deferred tax assets in determining changes to our income tax valuation allowance. As we continue to amortize the carrying value of our indefinite-lived intangible asset for tax purposes, we expect to record additional non-cash income tax expense of approximately $591,000 over the remainder of fiscal 2014. For the first three months of fiscal 2013, net income reflects an income tax provision of $294,000, which included a non-cash tax expense charge of $290,000 related to changes in our long-term deferred tax liability related to the tax amortization of our indefinite-lived intangible FCC license asset. We have not recorded any income tax benefit on previously recorded net losses due to the uncertainty of realizing income tax benefits in the future as indicated by our recording of an income tax valuation allowance. Based on our recent history of losses, a full valuation allowance has been recorded and was calculated in accordance with GAAP, which places primary importance on


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our most recent operating results when assessing the need for a valuation allowance. We will continue to maintain a valuation allowance against our net deferred tax assets, including those related to net operating loss carry-forwards, until we believe it is more likely than not that these assets will be realized in the future.
Adjusted EBITDA Reconciliation
Adjusted EBITDA (as defined below) for the three months ended May 3, 2014, was $5,513,000 compared with an Adjusted EBITDA of $5,795,000 for the comparable prior year period.
A reconciliation of Adjusted EBITDA to its comparable GAAP measurement, net income, follows, in thousands:

                                                             For the Three-Month
                                                                Periods Ended
                                                             May 3,        May 4,
                                                              2014          2013
Adjusted EBITDA (a)                                       $    5,513      $ 5,795
Less:
   Activist shareholder response costs                        (1,045 )          -
. . .
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