QVC Group Inc. (QVCAQ) Earnings Call Transcript & Summary

Thanks, everyone, for joining us today. This is the Qurate Retail Group session. For those who don't know me, I'm Jason Haas. I cover video commerce and retail hardlines and Qurate here at Bank of America. Really excited to have everyone joining us today. And also, welcome, David Rawlinson, CEO of Qurate Retail Group. So thanks again for being here.

Of course.

So diving right into questions. You guys recently announced some new leadership changes. Can you just talk us through what the rationale was for those?

Yes. I appreciate the question. First of all, great to be here. Glad to see everybody both in person and virtually. And thank you for your interest in the company, and thank you for doing this, Jason. So we did, we announced some changes. Going back to the beginning, QVC and HSN were brought together really for 2 purchase purposes, I would say. You might think about it as front end and back end. Back end were things like combining supply chain and sourcing organizations and call center organizations, customer service, et cetera, that went extraordinarily well. We're able to take a lot of cost out and get a lot of efficiencies. And then you might think about some things on the top end, what we came to call QxH, which was essentially a management layer that's set above the Q and the H businesses. I think that was a bit less successful. And what you found is that top layer, as it was managing growth brands, started to manage them to similarity instead of difference. I told the joke once that Q and H were basically like 6-and-2 combination and we were on the way to taking 6 plus 2 and making it equal 7. We have Q and H and are often in the same homes. And so it's really important that they have different product portfolios that they appeal to different customer segments. And what we're starting to find was 2 things. The first is some of the confusion among what the 2 brands meant. And they mean really distinct things to their customers, to the vendors, to the employees who work for them. So confusion there. And then number 2 was really confused decision-making because it became complicated to know. This was an H brand historically, and then it goes up to QxH. And then there's a question, should it be a Q brand? Should it be replaced by a common brand between the 2? And so there was a matrix structure that we found wasn't good for decision-making and, importantly, wasn't good for predictability and accountability. And so we restructured to bring really dedicated leadership to both Q and H. We put 2 fantastic guys, Robert Muller and Mike Fitzharris, who were probably some of the best operators in the company and had operated large pieces of the company before to great success, and gave them real accountability with a real mission to grow those brands, to master the value propositions for their specific customers, to refresh the product portfolio and just to bring us to a level of execution in those core beautiful flagship profitable brands that I think has been lagging in the prior period.

That's great. Alongside that announcement, you also announced that you were setting up a new streaming digital-focused business unit. So can you just talk about the rationale for creating this and what's going to be done differently there going forward?

Yes, of course. Well, we think streaming is a big opportunity in the future. If you actually look at the business, we're still primarily driven by our linear TV business, especially under the flagship QVC and HSN brands. That's what brings in most of the retail revenue. But if you look at the number of households we're in, if you had -- what we call reach, if you look at the number of households we're in, today we're actually in just as many or more households through streaming as we are through linear TV. What's not true is we're not taking advantage of that reach and translating it into retail sales yet. And so what we decided to do was to take that streaming business, separate it, give it real investment, real leadership, real focused attention and to build out that piece of the portfolio. If that ever becomes even a fraction as productive as what we've already done in linear TV, it changes the course of the business. And we think we have real line of sight of how to do that. But we weren't going to do it unless we really focused on it. And so this new business unit is first about focusing on getting better growth relevance, penetration productivity out of what's already a very attractive streaming TV reach. If you look, we're on all the platforms. We're on XFINITY, we're on Comcast, we're on YouTube TV, Apple TV, Google TV, LG, Samsung. So we're on all the right places. It's now just about converting that reach into actual revenues. And so we're going to get really concentrated on that. The other thing we're going to do in the new business unit is we're looking at how do we play in this new live streaming ecosystem. It's pretty clear it's going to be massive. Everybody who estimates what it's going -- what that market is going to look like says it's going to triple, double or triple over the next 3 to 4 years. There are a lot of nascent efforts. Nobody has really mastered it yet. We think we have a massive opportunity and right to play in it. And so we also, in the new business unit, are going to be concentrated on a number of attack efforts, new efforts and partnership efforts to make sure that as that part of the ecosystem grows, we're participating alongside it.

That's great. That segues well to my next question. We often get asked about what's happened overseas in China in terms of their video conferencing industry has really blown up. I think there's a question of it's a when, not if it starts to really take off in the U.S. So I'm curious why you feel like it hasn't yet, if you feel like it's starting to take off. And just -- you've sort of already mentioned on it, but just how you're going to position yourselves to take advantage when it does. When do you start to see that like growth inflection here?

Yes, it's a great question. I think McKinsey last year came out with a study, I may get these numbers off a little bit, but I think live stream shopping in China was something like $171 billion in 2020. It's supposed to be over $400 billion in 2022. Just exploding. It's nothing like that in the U.S. yet, but we think it's coming. We think that's why there's so many startups in the ecosystem trying to figure it out because all these venture capitalists and entrepreneurs sort of think it's coming too. And so we believe in it. And not only do we believe in it, we believe we have every right to win in that space. And so part of what this new business unit is going to do is to make sure every part of that ecosystem, we're touching. I've probably talked personally to 30 or 40 entrepreneurs. I've talked to most of the large companies who were doing experiments in the space. So I think I have a pretty good feel for where it's headed and where it's going and how we can play in that and make sure we're right in the center of this ecosystem as it grows. And if we can capture over the next few years just a fraction of that growth, it's transformational for what the economics of this company looks like.

Related to that, can you talk about, I guess, specifically for the QxH segment, just what the value perception is there in terms of your vendors, suppliers, customers, just sort of how that brand is viewed today and I guess what the opportunity is.

Yes, it's a great question. So there's still nothing quite like it in retail, right? And so I think it's easy to forget that. First of all, these are very large retail brands relatively, right? And if you look at QVC, QVC by revenue is bigger than Zoom or Airbnb or the NHL. I don't think people think of it like that, right? If you look at HSN, HSN is bigger than a company like DocuSign. It has more revenue than The New York Times just as a stand-alone HSN brand. So these are very substantial profitable retail properties. And then there's just no equivalent to moving the level of product that we can move through these brands. I don't know if you saw last week, I think, there were a number of articles in the press about Jessica Simpson. She has a dressing line. In one show, one day on HSN, she sold 16,000 dresses. And so there's just no equivalent to that really in the rest of the retail universe. And so I think we have continued to have a massive opportunity for our vendors, for our partners, for some of our celebrity guests to create real value. And then if you look at the pricing of our today's special values, they're still some of the best values you can find in all of retail, often on products that you can't get anywhere else. And so feel really good about the core assets. Now what I would say is there's probably a little bit of a sense that HSN and QVC are a little bit dated, a little bit older customer, a little bit linear TV. And so we think that's in the evolution, not a transformation. But we do think we have to evolve, we have to become fresher, fresher in our products, fresher in our marketing, fresher in our portfolio. And we obviously have to forcibly become more digital. But the core, the flagship core brands still do something at a rate and a scale that's really unequaled in retail.

Got it. Shifting gears a little bit. Can you talk about recent performance in terms of your customer retention metrics? And also, what you're seeing in terms of best customers specifically?

Yes. So our best customers are still Marvel, right? They have retention rates right at almost 90%, 1-year retention rates. And they disproportionately are our revenue, and they sort of stick with us through thick and thin. We see just a touch of weakness in our newest best customers. We had a big crop of customers, as you know, Jason, you've talked about it, that came through the pandemic. Some of those newest best customers, we've seen a little bit of lag, but our best customer still remains, by and large, very strong. Our new and reactivated customers are a place where we've had some weakness, I would say. Reactivated retention rates are actually above 50%, and they're about where they have been historically. Our new retention rates are down a couple of points from what we've normally seen historically. And so that's some work we've got to do. I think there are a lot of causes to it. New customers tend to come in buying home and electronics. Home and electronics have been weak for us in the last few quarters, some of that supply chain, some of that's intentional choices. The other thing that's interesting about new customers is their second purchase tends to be from the same category as their first purchase. So we brought in during the pandemic a lot of new customers on electronics and home. And then we deemphasized electronic in home and went to things like fashion. And so they didn't have an opportunity to make their second purchase. What we know is if we get 2 repeat purchases, we usually have a customer for life the majority of the time, but we lost some opportunity to get that second purchase. The marketing markets were really tough for us in Q4. Marketing prices were up 30%, 40%. Some weekends, marketing prices were up 50%. And so the efficiency of acquiring new customers were down for us. And then, of course, some of the supply chain difficulties. We just didn't have the products the new customers wanted in time, and the tragic fire we had at our Rocky Mount distribution center didn't help us do us any favors there either. So we are -- lots of causes. We're really focused now on new and reactivated but especially new customers. It will be important as we go more digital, it will be important to streaming. And it's ultimately a growing business, has a growing customer file. You don't turn that around overnight, but we are determined to get back to a place where our customer file is really growing.

You touched on some of the factors that impacted 4Q in your response there. I'm curious how much you see -- how much of the impact was temporary factors versus things that are maybe internal mix execution or sort of fixable things that you can do on your end? And just sort of like what the time line is for when you can resolve those different issues?

Yes, it's a great question. So I would say there are a whole host of temporary factors that are real and had a real impact, right? So I talked about the fire. But obviously, supply chain difficulties have been very real. Just to give you some stats. So we had something like 30% of our vessels that we hired to come over canceled. Transit times on the water were delayed between 5 and 45 days. Something like half of our -- over half of our deliveries came late. And the average late delivery was about 4 weeks late. So when you're trying to hit a Christmas deadline and you get something 4 weeks late, you're missing a lot of the key buying opportunities. And so those things are just tough. I think this has been a once-in-a-generation supply chain hit that eventually will stabilize. We hope to see some stabilization in the second half of the year, so some of those type of things will heal themselves. I think the retail market cannot support the current inflation and advertising market rates. I think that's going to settle out a bit over time. So some of that stuff has been temporary. It's real. It will get better over time. I also think there's some execution and I've tried to own up to this. I think, for example, we made some purchases in the fourth quarter that didn't pan out. They weren't as attractive to our customers, we thought. And then we've been in -- we had this matrix structure that made decision-making really difficult while we had an increasingly dynamic world where we needed to respond more quickly than ever, and that was a bad match. And so one of the reasons I decided so quickly in my tenure to restructure it is because we have to be able to move as quickly as the world moves or more quickly. I talk internally a lot about operating at the metabolic rate of the world around us. And I don't think we were always doing that. And so that's the execution piece. And that doesn't cancel out the real temporary disruptions, but I think it has a real impact. And then there are just some macro headwinds, right? There is cord cutting when we have a big linear TV business. I think there's an increasing battle for eyeballs. You also saw in retail some shifts. So for example, click and collect at the store really exploded in the fourth quarter. Obviously, that's a change in consumer behavior, which is not an option for us. And so there's a little bit of consumer changes coming out of the pandemic that are longer-term headwinds that we have to battle as we refresh our value proposition. And so I think of sort of long term, more structural-type headwinds, execution headwinds and then the temporary disruptions as roughly equal. You can make arguments about what the exact proportion is.

On the fourth quarter call, you talked about some merchandising missteps. So I'm curious if you could just talk about what those were and what changes you're making now to improve those going forward.

Yes. I think quite simply -- so it's been tough on our merchandising organization when you don't know what product's coming in that win. I don't know how you plan around that. I think we've gotten a little bit better, but we need to be even better still. And then it's been a little bit difficult because things have been so dynamic to know what to buy in advance. And I think we made some poor choices in terms of what to buy in advance. I think we understand why and we'll be better at that. But fundamentally, merchandising really has always sat at the heart of our company. And I think potentially, we lost sight of that a bit. And so we're going to make some real changes. The first change is we're bringing more into merchandising. So it's not just going to be buying. It's going to be planning, it's going to be programming, and we're creating a more end-to-end merchandising operation at the center of the company. And we're also currently bringing in some rather large merchandising talent into the organization, and I look forward to sharing more names and talking more about some of that talent very soon.

That's great. In terms of -- I know you don't have guidance for the rest of the year. But I'm curious, at least from the category performance, I think there was a lot of talk past few quarters about the fashion category starting to reaccelerate. I think you're starting to see that. I know you have some easy compares in terms of home and electronics. So I'm just curious how you're thinking about category performance as we move through this year.

Yes, it's great. We do think there's some real opportunity in fashion. We're excited about that. And we're doing a number of new things. I think Lands' End launched in February digitally, I believe. And we think that's a real opportunity. Swim is white space for us. We've never really leaned into swim as a category. We're launching swim now and have a really exciting lineup. And so that's going to be an exciting opportunity for us that's new and that's white space. I think denim is doing very well and continuing to see good momentum in denim. We have some national brands there, but our proprietary brands are actually doing very well in denim. I would say in dresses, we need to pick up some momentum again. March is really the start of dress season. What our customers are telling us is dresses do well for big occasions. That's going to be part of it, but it's just as much about the ease of sort of one-piece dressing in this coming season. And so we're getting prepared for that. So it's a combination of sturdy-ing up the places where we're strong but feel like we should be stronger. But we're also taking some risk and going after some white space where we see opportunity. And we feel pretty good about the level of success that's available to us in a lot of those categories. So we feel good about that category going forward.

Are you starting to see the fashion stuff shift a little bit more towards outside the home because I know for a while, there was a lot of like lounge wear-type stuff?

Yes, we are. Athleisure is still a growing category. We just launched a new proprietary athleisure brand that's doing pretty well. And so the consumer seems to be getting out of lounge wear at the home, but you don't quite see the sort of externally focused dressing that you would have seen for the pandemic. The consumer seems to be in a little bit of a middle place right now. And so we're going to be on that journey with them.

Got it. So switching gears a little bit. Can you just talk about what impact you're seeing to the business today from the fire that you had at the Rocky Mount facility? And I don't know if you could say at this point if it's still being decided, but just any sort of initial thoughts on whether that facility will be rebuilt or not?

Yes, I appreciate the question. So first of all, of course, we had a contractor who was a loss of life. It was a real tragedy and just as much a tragedy for the roughly 2,000 people who worked with us in that facility. And so our thoughts go out there. I was on the ground within a few days of the fire and I got to spend some time with the local community. And it's really -- just really a tough unfortunate accident. That facility handled 20%, 25% of our volume in the U.S. so really substantial. It also disproportionately handled our hard good returns. And so we've mostly rerouted the traffic through other parts of our distribution network. We have a pretty full distribution network in the U.S. And we've been able to handle the volumes. And so we're actually regaining our prior performance. We've added some space in South Carolina outside of Florence, South Carolina to help with some returns and some shipping on the East Coast. So we feel good about our recovery plan out of Rocky Mount. We haven't made any decisions yet about whether to rebuild there. Those will come in the coming weeks and months. We're looking at it very seriously. I would say we're really looking at it with a view towards where do we need to be to have a competitive value proposition 5 years from now in the retail landscape as consumer expectations for delivery continue to evolve. And so we're looking at an overall network design schema that's designed to create competitive advantage in the coming years in terms of delivery. And so we're viewing this decision in that context.

Got it. Switching gears again a little bit. I want to take on the international business. I know I think for years now, it's done -- slightly outperformed the domestic business. So I'm curious like what's generally driven that. And just anything else you'd say since I know it doesn't always get asked about a lot, but it's important.

Well, our international colleagues thank you for thinking that it's important. I do think they get forgotten sometimes. It's a very substantial scaled business. And we were in love with a lot of the properties we have there. So our Japanese business is fantastic. That business has grown, I think, 10 out of the last 11 quarters. Great execution, great value proposition. They've just done a lot of things really well and had real momentum in that business. So we're really proud of them. In Europe, I would say, in the U.K. and Germany, they faced a lot of the same pressures but with a little less intensity. I think cost cutting is -- or cord cutting is a little bit less intense there. The supply chain issues have been pronounced but a little bit less intense. So by comparison, QVC in the U.S., today's special values, we had to move about half of them. HSN, we had to move 2/3. In Europe, it's been 30% to 40% where we have the item of the day, and we've had to move it because we didn't get it in time for supply chain. So same dynamic, but a little bit less intense. So we've had to face into that, but we just haven't had to face into it to quite the same extent. I also think just the environment there is not quite as competitive as what we've seen in the U.S. and the same being true in Italy. So we continue to be bullish on our international businesses. We continue to think there's opportunity to accelerate growth in those businesses. And we think just like in the U.S. that on the temporary disruption side and some of those as we come out of that towards the second half of the year and early next year, it ought to give some natural lift to those businesses as well.

So sticking with the other non-QxH businesses, I was going to ask about Zulily. I'm curious, that business, I know it's not performing where you'd like it to be. Curious to what extent that's been internal issues versus the external environment.

Yes, great question. I think for Zulily, it's actually mostly external environment. Zulily has been hit by a perfect storm. First of all, it's no secret that business model really survives on excess inventory, which gives us an opportunity to take great branded product, often branded product, and give special deals to our customers. And we're in a historic lack of excess inventory because of the supply chain issues. I think that may be starting to lighten up, and we're seeing some early signs of that, but certainly historic. They're a more marketing-heavy organization at a time of really insane digital marketing inefficiency. They have a lower price point at a time when price per package has been going up really dramatically. And so they've just had about everything thrown at them that a business can have thrown at them. And so I think they will get better in part just because the market around them gets better. And we're back into an environment that, that business model was designed to do well in. We don't -- we're -- we'll have something to announce, I think, very soon in the next week or so in terms of leadership for Zulily. And so we're really excited about that and think that's going to -- has the opportunity to make a real business. I think if you think about the business longer term, right, this was a business that was $1.6 billion and had single digit, mid-single-digit OIBDA margins for the business. And we think that, that underlying strength of the business is still there. So we need to do some things right, get the new leadership in place. We need some of these abnormal areas of the market to sort of calm down a bit. And then we think we can get back to a growing profitable Zulily business, but it will take a little bit of time.

That's great. I have a similar question for Cornerstone, which has obviously performed better. So I guess my question for that one would be to what extent, if at all, you think that's been driven by external environment, people spending more on housing-related products versus what you're doing internally to really drive that business?

Yes, it's great. So external environment certainly has helped. Cornerstone has been just superstar. It's just been -- every single one of the sub-brands in Cornerstone, I think, had a record year last year. So just seeing an extraordinary level of growth. And we do think that the -- we do think that the pandemic has helped some. But it's also just been good execution, right? Those businesses do a phenomenal job. The vast majority of the things that you find in all of the Cornerstone brands are proprietary product. And in fact, in those businesses by and large, they do that original customer research, they find the opportunity in the market, they design it, they source it, they bring it direct to the customer, either in a store or a catalog. So most of what you buy at one of the Cornerstone brands, you can only buy there, whether it's Frontgate, Ballard Design, Garnet Hill, Grandin Road. And so it's a really fantastic business model that really works. The other thing we found and I would say -- so there have been some tailwinds that have helped. There have also been some headwinds. The paper market, these are mostly catalog businesses, has been really challenged. And so we were actually 20% below the circulation we wanted in the fourth quarter, and we saw those sorts of sales increases despite the fact that one of our main marketing channels was challenged. The other opportunity is we think there's -- we've seen great performance out of retail stores, physical stores in the Cornerstone brand. So we opened, I think, 3 last year. And we're going to open another couple in the second half of this year. And we love the economics we're seeing out of the physical retail. We think there's a real opportunity to continue accelerating the growth of the Cornerstone brands by leaning a little bit into the retail environment as things open back up. That was also one of the things that was a tailwind in the fourth quarter for us as we got people back into the stores. So yes, I feel extremely good about what the path looks for all of the Cornerstone brands.

That's great. So we're starting to near the end of our session. So I'm going to just signal. If anyone has a question, you can just signal with your hands and we'll bring a microphone around to you. I have a few more, but if you want to, the opportunity is there. So while we're collecting questions, I'll come in to my next one, which is again on sort of Cornerstone and Zulily. I mean I think the market doesn't really give much credit for these businesses. I often get asked the question if there's any sort of way to unlock the value for those, how integral are they to Qurate overall, and what's sort of the long-term plan for those businesses?

Yes. It's a great question. So -- and these are always hard questions because it's impossible to answer precisely. Look, I think we're always looking for opportunities to increase shareholder value, and we're always going to look at every opportunity to do that. And I think you're right that we don't get the credit for them. They're both very valuable businesses, and I don't think that's fully reflected in the stock price today. I think that's clear. What is also clear to me though is I think Zulily is going to be more valuable in 2 years than it is today as we exit this turnaround. And I think as we continue to prosecute the growth strategy at the Cornerstone brands, Cornerstone is going to be more valuable in 2 years than it is today. And so the most direct path to value creation is to complete the turnaround in Zulily and then continue to grow Cornerstone brands as we're doing it. And as we do that, we'll continue to look at any and all options. And the great thing about having valuable brands is there are always a lot of options available to you.

Another question that I get, it's been picking up a little bit more is just with the rise of buy now, pay later firms given that that's something that you've been offering for a long time to your customers. Have you seen that there's any sort of competitive risk that now, a customer who maybe was buying a Qurate could go to a department store and get that same sort of payment option? Or do you feel like it's not really a threat in terms of losing customers because of that?

Yes. So it's certainly -- the world has discovered our little secret, I guess. QVC and HSN really were, in some ways, the original buy now, pay later with our Easy Pay and FlexPay options. My observation is the buy now, pay later market is just starting to shake its way out. Interest rate environment is changing. You're starting to see, I think, some of the underlying economics of those firms look a little bit different as we get more visibility into them. So I think the market is a little bit unstable now. It's probably not sustainable in its current form. What's great about our buy now, pay later promise is that it's -- I think we can operate at a lower cost and do a better job with it than the other things in the market. Our default rates on FlexPay and Easy Pay are less than 2%, which I think is industry-leading. And so what we do, we do better than I think what the buy now, pay later firms are offering. But it is true that there are more places where you can pay on installment payments or pay with delayed payments over time. And so that adds some richness to the competitive environment. But we really like our competitive positioning in the space versus others. We still think we can do it better. We still think we do it with less risk and a better value proposition than the others. And there are also opportunities given how much there is going on in the market to be opportunistic given our history in the space.

Thanks. And then for my last question is just on something we've been asking a lot of companies at our conferences just on the impact of inflation in your business and to what extent you'll be able to pass on higher cost, if need be, to your customers.

Yes. So last year, we took price increases at every one of our businesses and every one of our brands, every single one of them. And we'll continue to do that. I would say, I think we increased price less than the average of the price increases in the market. And so I think even though we were increasing price, our value relative to competitors probably got even better. My sense of consumer sentiment is between foreign affairs concern, inflation concerns, some real weakness we're starting to see in the optimism of the core consumer mindset, especially in the U.S., the value is going to be even more important in the future than it is today. So we're going to continue to be opportunistic to take price increases when it makes sense, but we're going to continue to have a real focus on total value to the customer. And total value for us is both how much you're paying for the item and how much you're paying to get the item to you. It's sort of total basket cost. We're going to make sure we maintain a really competitive price position versus our competitors. And we'll take price as we can within the confines of that in the inflationary environment. I think the other place we're seeing impacts on the inflationary environment, of course, is in cost. It was a very expensive year in terms of fulfillment, freight, marketing. Hopefully, some of those things will stabilize a bit over time. And then as I already said, the impact on consumer sentiment because I do think it has a bit of a depressing effect on some consumer sentiment we've seen in some of our different groups of demographics. So we have a really close eye on it. I do think in an inflationary environment, operating a set of businesses that are so value-focused, QVC has a Today's Special Value every day. HSN has a Today's Special every day. These are value-based value propositions for our customers that ought to be an opportunity given the environment that I think we're heading into.

That's great. All right. So we're out of time. So we'll leave it there. Thank you all for joining us. And thank you, David, for joining us as well.

Awesome. This was great. Thank you for paying attention to our story. Please stay close to it. I think we're doing a lot of really exciting things. I think it's going to be a fun ride. Really appreciate this opportunity.

Thank you.

Thank you.