Michael Porter - VP, Finance Bob Rosenblatt - CEO Tim Peterman - CFO

Eric Wold - B. Riley Mark Argento - Lake Street Capital Market Thomas Forte - Maxim Group Alex Fuhrman - Craig-Hallum

Greetings and welcome to the Evine Live First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A question-and-answer Session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now turn the conference over to Mr. Michael Porter, Vice President of Finance. Thank you, Mr. Porter. You may now begin.

Good morning and thank you for joining us today. Joining me on today's call is our CEO, Bob Rosenblatt and our CFO, Tim Peterman. Bob will provide his thoughts on our business and Tim will follow with the highlights of our financial and operational performance. We issued our earnings release earlier this morning, if you do not have a copy of our earnings release, you may obtain a copy through the News section of our Investor Relations website at evine.com. Some of the statements that we make during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today's date. We undertake no obligation to update publicly or revise these forward-looking statements for any reason. We believe the expectations reflected in our forward-looking statements are reasonable, but give no assurance such expectations or any of our forward-looking statements will prove to be correct. Please refer to the Safe Harbor section in our earnings release today and our SEC filings for additional information. Finally, certain of the financial information disclosed on this call includes non-GAAP measures such as adjusted EBITDA. The information required to be disclosed about these measures including a reconciliation to net income, the most comparable GAAP measure is included in the earnings release. The earnings release is also in exhibit to our Form 8-K that can be accessed through the SEC filings section of our Investor Relations website. Now I would like to turn the call over to Bob.

Thanks Michael, good morning everyone, and thank you for joining our call. As we all know, it is a choppy retail environment today for both investors and consumers, so I'm pleased that Evine is off to a good start. We achieved the guidance we provided for both top line and bottom line and we continue to improve our company's position both strategically and tactically to deliver on our stated goals for top line growth and improved profitability this year. Our gross strategy is based on continuing to build our stable of proprietary and exclusive brands as well as continuing to use our national, multi-platform distribution to showcase less or known compelling merchandise that cannot replicate our kind of reach in today's retail landscape. Our merchandising team is continually in the markets seeking out these brands. In conjunction with our broadcasting and marketing teams, we then provide the expertise and support to help the vendors tell their stories in a way only interactive video commerce can. Before I walk through our first quarter business by business results, I'd like to update you on the three pillars of our growth strategy. The first pillar is to grow our stable of proprietary and exclusive product offerings and lesser known but compelling brands that will further differentiate us from our competitors whether on-air, online or brick and mortar. I'm happy with the progress we are making here. A perfect example of a compelling but lesser known brand our merchants cultivated, our relationship with Mac-Kenzie-Childs, which premiered on Evine just a couple of weeks ago. Launching with a custom-branded set and graphics package via on-air, mobile and online, our ability to create an engaging story that brought this exclusive brand to life demonstrates the power of interactive video commerce. This premier beat our expectations by more than 200% and we sold through virtually all product that was available to us from that vendor. But as I have said, to do this well at scale and at margins our shareholders expect within a merchandise mix customers prefer, it is not a goal to be achieved over night. The good news is that we did most of the emotionally difficult work last year of reducing our company's revenue in the ubiquitous low margin consumer electronics business. It was the right thing to do for us for our long term shareholder growth. To help us build our future product pipeline, we established an important partnership last year with Tommy Hilfiger and Tommy Mottola, who continue to provide relationships, brands and ideas that give Evine a competitive advantage in securing the types of brands we seek. In addition, it enables us to build our product pipeline faster than the traditional approaches. In the first quarter alone, we launched 17 new brands, which is good progress and you'll see even a more accelerated progress in the back half of the year. The second pillar is to create and deliver compelling live interactive content and commerce. This is our secret sauce that I believe we do better than anybody else. This is where we bring together our quote live on location entertainment content featuring compelling personalities, celebrities and hosts who interact on our multiple platforms to produce narrow cast personal shopping experiences. A great example from the first quarter was our Invicta Ocean Voyage Live programming event that took our fans inside and behind the scenes of an Invicta theme three-day Caribbean cruise. It was both compelling entertainment and productive commerce. Another example in the first quarter was our launch of the Evine Beauty Experience featuring a new innovative and interactive studio that allows us to use various forms of social media to communicate with guests and bring our full Beauty team in the conversation with the customers. Two final examples that are progressing nicely are our recent launched interactive Warehouse Sale and beyond backstage concepts that stream live on Facebook and YouTube. This strategy is intended to increase the number of regularly scheduled programs we offer. Appointment viewing concepts like Style Forecast on Monday nights, Paula Deen's Sweet Home Savannah on Tuesday evenings, Wake Up In Style on Saturday mornings and The Sizzle on Sunday mornings work in tandem with our live event strategy to offer our customers something personal and unique. And the third pillar to our growth strategy is to aggressively expand the quality, quantity and technology of our content distribution, which will help drive customer growth and purchase frequency. Our 12-month customer file remains relatively flat as we continue to increase our composition of higher purchase frequency and higher lifetime value customers. We are making progress here as well, which bodes well for the long term value creation. For our first quarter, although our total customer base was down slightly, our average purchase frequency increased to 4.8 items during the quarter, which was a 12% increase over the same period last year. In addition, we grew our 12-month wearable categories active customer file by 1.4%. That category has the highest lifetime value for our company. We have several tactics in play, helping us to build on those successes. Tactic 1 is to improve and expand our online mobile and social distribution platforms. In the first quarter, 50.6% of our sales were digital. This is an increase year-over-year of 180 basis points. Our mobile sales again have increased as a percentage of digital sales 48% for the first quarter compared to 45.6% to the same period last year. We also continue to improve our engagement on all social platforms including Facebook, Instagram, Pinterest and YouTube and our sales from emerging over-the-top platforms like Apple TV, Roku and Amazon Fire continue to grow. We also continue to explore partnerships with the newer and still nascent but important platforms were online distribution that will help us engage with the millennials who consume videos differently from earlier generations. In summary, our online distribution strategy remains focused on engaging all age groups using targeted data and machine learning. There was a recent research report that highlighted that the Gen X Risen Boomers [ph] combine buying power and luxury goods in 2016 was still estimated to be about four times that of the millennial age group. We understand that personal video consumption preferences are evolving and our goal is to remain nimble to engage with all customers using the platforms that they prefer. Tactic 2 is to add new targeted television distribution while reducing packets [ph] of underperforming television distribution. Much like balancing our merchandising mix, we continue to balance the quality of our distribution on television. Our goal is to reach more targeted customers based on the data we have. This is our 'more channels in the right home' strategy with a focus on adding secondary channel opportunities if the categories or personalities we are partnering with warrant such a targeted focus. Now in terms of our first quarter performance, our top line revenue was down 6.3%. And although we provided guidance to our stakeholders last quarter to expect this revenue decline, I want to make sure we are all clear as to why it did so. The driver continues to be a result of our strategy to grow the number of customers who have a high lifetime value and reduce the number of customers who have low lifetime value. That is why we continue to rebalance the size and composition of our consumer electronics category and why we tested lower price points in our watch category this quarter. We're to [ph] increase the composition of higher lifetime value customers as a percent of our total file. In terms of a more detailed merchandising category-by-category review for the first quarter, let me begin with our jewelry and watches category which represented 41% of total merchandise sales. Our success in jewelry is primarily driven by our proprietary brands and well-executed events and that was again through this quarter. These brands include Gems en Vogue, the Gem Insider, NYC II Jewelry, Artisan Silver by Samuel B., Gem Treasures and Diamond Treasures. Jewelry events allow us to tell the stories behind the different jewelry brands and pieces in a way that resonates with our customers and drives strong productivity. Our first quarter events included our Tucson Live and Chinese new year events in February, Diamond Day in March and Gem Week and Artisan Day in April. These events continue to produce strong results and showcase our strengths in creating unique and exciting video. Within watches, we had some puts and takes during the quarter. On the positive front, our Invicta Ocean Voyage Live event in February was immensely successful as I mentioned before. This event gave us the opportunity to interact in person with some of our best customers while also offering more than 100 new designs and styles. The new products were well-received by our customers and the event produced our best productivity for this category in the quarter. However, as previously mentioned, we also tested a new watch strategy based on lower priced point selections designed to grow high lifetime value customers. Unfortunately, this test did not resonate as much as we had hoped with our higher price point collector customers. And as a result in the back half of the quarter, we needed to work through some of excess inventory, which hurt us both from a productivity and margin rate standpoint when compared to last year. Next is our beauty category which represented 15% of merchandise sales for the first quarter. Our core exclusive brands like Skinn Cosmetics, ISOMERS, Beekman 1802 and Consult Beaute continue to perform well. Beekman 1802 celebrated its second anniversary with us in March with many sellouts and continues to grow into one of our most exciting brands. Consult Beaute also celebrated its second anniversary with us in April by adding Consult Health products to the assortment. We're excited to see the solid results of this new product launch and think it represents a strong opportunity for the brand by leveraging off-air opportunities such as continuity programs. Next is our fashion and accessories category which represented 22% of merchandise sales for the first quarter and was the best performing category during the quarter. Our strongest brands continue to be our proprietary brands such as Kate & Mallory, Indigo Thread and also Casuals. Combined during the quarter, proprietary apparel grew 14% compared to the last year and that was on top of a 39% growth in the first quarter of 2016. This was truly exceptional work done by the fashion team. In the first quarter, we launched a new proprietary accessories brand called Firenze Bella that exceeded expectations and filled a wide space to this high ASP product group. The last product category is our home and consumer electronics category which represented 22% of merchandise sales for the first quarter. The home business continues to be a priority for us. With its potential to serve our customer base and attract a wide range of new customers. We had a number of new concepts launched during the quarter and feel confident that we have added some new brands into our mix that we can grow. In February, we launched Pet Shop with John O'Hurley; in March we launched Julia Knight Entertaining; and in April we launched Donny Osmond Home, then Fully Décor [ph] and Lindsay Soko Home Solutions. We are gaining significant traction in our home business and I'm excited about the opportunity and potential we have in this category. Our consumer electronics business continues to be strategically reduced from the top line perspective as we eliminate lower contribution margins typical of the branded and commoditized product offerings within this category. Our revenue performance was in-line with our reduced air time in the quarter which was down 38%. We believe we are near the end of right-sizing our consumer electronics business. The second quarter is planned to be the last quarter of heavy pressure caused by a reduction of lower margin consumer electronic products on revenue. We are off to a good start in fiscal 2017. We expect to grow the top line of our company in the second half of the year. We expect to do this while continuing to strengthen our balance sheet and improve profitability. I will now hand the call over to Tim to walk through our financial, operational and content distribution results in more detail.

Thanks, Bob, and good morning, everyone. I'll start with providing some additional financial details. Consolidated net sales for the first quarter were $156.3 million, which was a 6.3% decrease year-over-year and on the high end of our expectations we set for the quarter as Bob mentioned earlier. Our return rate was 18.8% in the first quarter, which was an improvement of 40 basis points year-over-year. This improvement was driven by decreased return rates within our fashion and beauty categories. Our average selling price in the first quarter was $54, a 13% decrease year-over-year. This was primarily attributable to lower ASPs experienced in the watch category test and the strong performance of our fashion category in the quarter that added mixed pressure. Our gross margin percentage declined 80 basis points during the quarter to 36%. Gross profit dollars decreased $5.2 million in the first quarter. This decline in gross margin dollars and rate was primarily driven by the softness in our watch category due to the previously mentioned test and the resulting markdown activity on this inventory in the back half of the quarter. We expect another quarter of sales and margin rate softness in our watches category as we work through the rest of this inventory, but not to the extent of what was experienced in the first quarter. First quarter operating expenses totaled $56.9 million, which was an $8.1 million or 12% decrease over the prior year. This was attributable primarily to reduced content distribution costs, reduced management transition costs and other reductions from our continued profit improvement initiatives. Also included in operating expenses are cost related to our primary operational functions -- our fulfillment center, customer solutions group and the credit and payments group. We started off the year well in all three functions. In the customer solutions group, our most important KPI is our live agent contact rate, which measures the post-sales support calls compared to units sold. We again improved this metric during the quarter, this time by 230 basis points over last year. This improvement continue to be driven by better execution on the front end which results in reduced customer service problems on the back end as well as a focus on first call resolution by the customer service team. This improved and helped drive a 12% reduction in transaction cost per unit in the quarter compared to last year. In our fulfillment center, we had our first full quarter of using our new warehouse management system, which went fully live in the fourth quarter fiscal 2016. I am pleased with our performance to date as our Bowling Green Kentucky Fulfillment Center is experiencing the best productivity that we have seen in recent years with a 10% improvement over first quarter of 2016. In our payments and credit group, we increased our private label credit card penetration during the quarter by 220 basis points compared to the same period last year. In addition to helping build a strong [indiscernible] with our customer, the use of the Evine card helped reduce our credit interchange and other credit card processing fees. Variable cost for the quarter were down compared to last year as a combination of lower credit card fees and bad debt expense, coupled with improved efficiencies at our fulfillment center, offset slightly by a decline in ASP which drove a 7% increase in net shipped units. Total wearable expense as a percent of sales was approximately 9.6% for the first quarter, which was down 40 basis points from the prior year. Our content distribution has remained stable as Evine's reach continues to be about 87 million homes as of the end of the first quarter. However, we reduced our distribution expense in the quarter by 3.2 million year-over-year driven by continued contract negotiations. In addition, we are proceeding on plan with our previously announced fall transition to broadcasting in full HD TV. As Bob noted earlier, our content distribution strategy is to engage both our core customers and the Gen X and boomer age groups and our margin customers in the millennial age group. As virtual MSOs like YouTube TV, Hulu Live TV and Direct TV now grow, we are working to be there. As our phone customers transition to the internet, we will engage with our mobile app on their smartphones. And while Nielsen's third quarter 2015 audience report noted television viewer's shift in ages below 49 decline slightly, Nielsen also noted viewership in our core customer ages of 50 plus slightly increased. Our plan is to grow targeted video distribution using the most popular technologies of the day. We generated adjusted EBITDA of approximately $3.1 million in the quarter. This was a slight decrease year-over-year because of the declines in revenue in gross margin that we discussed were mostly offset by the decreases in operating expenses. As for the balance sheet, we ended the quarter with cash and restricted cash of approximately $26 million, which was a decrease from the $33 million at the end of fiscal 2016. The decrease in cash was driven by two opportunistic transactions we executed that were previously announced. First on January 31, 2017, we use cash on hand to buy back $4.4 million shares of our common stock for approximately $4.9 million or $1.12 per share in a private transaction with NBC Universal Media, a subsidiary of Comcast Corp. Second, on March 21, 2017, we've paid down $9.5 million or approximately 60% of a Great American Capital Partners high interest term loan, using a combination of cash on hand and our lower interest PNC credit facility. Along with our cash, we ended the quarter with approximately $12 million in additional availability on our PNC credit line which gives us a total liquidity position of approximately $38 million as of the end of the first quarter. Our inventory for the quarter finished at $75.6 million, which is up from our first quarter 2015 balance of $63.6 million. This increase in inventory is slightly more than planned as a result of early receipts at the end of the quarter. Primarily, the growth is a result of shifting out of the drop ship consumer electronics category from prior year that did not require inventory investments. We'll be through this year-over-year inventory change by the third quarter. In terms of outlook for the second quarter of 2017, we expect revenues to decline in the 3% to 5% range. This expected sequential improvement reflects the completion in the second quarter of our rebalancing of our merchandising mix to reduce slow margin consumer electronics that we'll begin to do in the second quarter of 2016. From a bottom line perspective, we expect the post net income and EPS that is also in line with the second quarter of last year. For the full year 2017, we continue to expect sales growth in the low single digits, which showed sequential improvement in each quarter so that revenues will be down mid-single digits in the first half of the year and show growth in low single digits in the second half of the year. We continue to expect adjusted EBITDA to be in the $18 million to $22 million range, which will be a growth of 11% to 36% year-over-year. Our fiscal year expectations include a 53rd week in fiscal 2017. For full year 2017, we also expect to invest approximately $8 million in capital expenditures, weighted heavier in the first half of the year related to our transition to HD TV. Lastly, we mentioned previously that we are considering several channel share proposals to monetize a portion of our Boston Channel spectrum while preserving our ability to distribute Evine programming in Boston via our station and that process continues. With that, I'd like to turn it back to the Operator so we can take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Eric Wold of B. Riley. Please go ahead.

Thank you and good morning. A couple of questions. I guess one, we've now seen your ASP kind of hover around this $54 level like you're selling in two quarters, but knowing there are some issue with lower priced watches in Q1, you're still going to work through some of that consumer electronics transition during Q2, do you see this as the right level to drive more trial in purchase [ph], especially on the shift to mobile, or is this still going to move slower? And then I have a follow-up after that.

Hey, Eric, it's Bob. Thanks for the question. My guess is that we may see it move up a little bit. We'll be opportunistic with it. We have a new GMM in CE and one of the things we're working through with that is as opposed to doing a lot of the stuff that we've done in the past that were available in other distribution channels, we are looking at doing some more private label and things in that area. So we hope to be able to lift -- we expect to be able to lift the average retail there as well as the average margin there. So there's good work going into that. Rob, who's responsible for CE and home has only joined us a couple of months ago, so should start seeing the fruits of his labor relatively quickly. I think in overall, we have a plan that we're working on to start driving up ASPs in general. However, we're also looking at that also be able to continue to drive higher margin versus what we were at last year. So all in all, I would say we probably will see for part of the second quarter and definitely in the third and fourth quarter, we will start seeing ASP increase.

Thank you. And then any comments around the outlook for HD, second channel penetration this year? Kind of what you're seeing so far from those markets you've done this in terms of purchase frequency, new customer acquisition?

Hey, Eric. This is Tim. I'll take that question. Yes, in terms of HD distribution, we know from our internal experience that we experience about 30% lift when we move into this new neighborhood. That matures over time, 16 to 18 months, but we know that there is lift. So it continues to be one of our priorities to add new distribution. Obviously, we're launching with full broadcast HD TV this fall. So we're going to complement that with more HD distribution and it's very important for us.

Any thoughts on penetration levels and to your end over next year?

Nothing that we can forecast for you today.

Okay. And just a final question on the Boston TV station. When you do come to a decision to monetize some of that capacity, is that something that would be a one-time event to the P&L balance? Is that something you expect to be kind of an ongoing lease or reoccurring revenue from that opportunity?

Well, we're looking at a couple of different scenarios. It would definitely affect the balance sheet. In other words, we're looking to monetize to take in cash and whether that's a one-time or reoccurring fee, that is our plan. In terms of expense or hitting the P&L, it really wouldn't hit the P&L because we're going to continue to broadcast on that station our signal.

Perfect. Thank you, guys.

You're welcome.

Thank you. The next question is from Mark Argento of Lake Street Capital Markets. Please go ahead.

Hi. Good morning, guys. Couple of questions. First off, maybe, Tim, could you help me think about what the guidance or revenue growth would look like if you backed CE out of the full year? Basically isolating CE pro forma, what type of growth would you expect to business, non-CE to grow out for the year?

Hey, Mark. This is Tim. We haven't really provided that kind of details for our revenue model, but I can tell you this in terms of trending. We began to reduce the category in those lower contribution margin items in Q2 of last year and as you can imagine, Q3 and Q4, the heaviest quarters for CE. So when you think about this year, the biggest dealters [ph] are going to be in Q3 and then Q4. So Q2, I think you can think about the sequential percent of CE moving through the year Q2, Q3 and then the most in Q4. That's what we will lapping over this year.

CE right now or in Q1 as a percentage of total sales, I know you have lumped it together with home, but if you were to break that out, what would that look like?

It's very small, Mark. That's the whole purpose of what we're doing.

Right. So it's in consequential at this point. But backing that out though, for the full year, you guys most likely would be -- your other businesses are effectively growing -- I guess is what I'm trying to get at. If you backed up the CE exposure?

Yes. Just by the very nature of the opportunity of having more air space if you will, shell space if you will, to be able to do that as we're bringing in the incremental brands that as we said, we have put a very big push on bringing in new brands, quadruple what we had last year. We very much expect to be able to have those start replacing and really winning off of any of the low contribution margins, CE items. I do also want to say that that being said, there are CE opportunities out there that we look at individually and if there is contribution margin, especially when you combine it with the accessory areas that CE provides, as well as the warranty areas, that there are winning formulas out there, but it's certainly, I don't believe, is anywhere near what it used to be, what CE used to provide from that standpoint.

And Mark, just to follow up on that point, yes, we do see our wearables category growing as you can see on our customer file. That group is growing 1.4% which is a good early predictor of growth for the future.

Great. And then two things, Bob, you can touch on the 17 new brands you launched. Were you able to source these brands? Are your merchandisers the ones out kicking tires on this? Is that Tommy and crew bringing new ideas to you guys? Where are you guys seeing the new activity from or the new brand sourcing from?

Sure. It's a mix of all of those things. Tommy, and Tommy, and Morris Goldfarb as well call me probably on a weekly basis to introduce me to brands that they speak with that they think are opportunities for us. We've got a pretty great hit rate in terms of several of the brands that are coming on that we think are going to give us a lot of extra push in different categories that we're not in right now. But I have to say the thing that is most exciting for me here and has been since day one is we have a merchandising group here. That is the seasoned merchandising group that really takes me back to the days when I was in Bloomingdale when the merchants were truly entrepreneurial and truly ran their own businesses. And as opposed to -- I'm going to say perhaps some of the other video commerce areas where I kind of pictured as a line out the door where people that have potential product come into this mill and are able to hit their dollars per minute or not, and if they hit their dollars per minute, they're allowed to have another shot at being on again. We have a real merchandising organization that builds brands -- merchandising and marketing areas that build brands. So a lot of what we're getting now is there's a real big reception to the fact that we now have probably five or 10 brands that we took from almost scratch or almost not given the kind of platform that is available to most other companies. And while ecommerce and bricks and mortar suffer from being able to tell a story, what we're finding is brands, especially like Beekman 1802 is an example or MacKenzie-Childs that we mentioned earlier, have an opportunity to be able to sell full price merchandise and be able to tell their story about why the product should be bought, how they source it -- and I think that retailing is really about storytelling and I think that we have a merchandising and marketing groups that really are great at being able to do that, and I think that as bricks and mortars find it more challenging to be able to tell stories in a wide way without spending an awful lot of money and ecommerce continues to struggle in terms of actually making profit, we seem to have figured out a formula to be able to bring in brands, nurture them, grow them and make them successful. So the corroboration has really allowed us almost through word of mouth as well as the Tommy, Tommy, Morris connection, as well as great merchants to really be able to drive the growth here.

Then a last question for me. In terms of the watch category, it sounds like you guys are experimenting with some lower price points, didn't like the results. Didn't you guys try that about a year ago if I 'm not mistaken? I just wanted to juxtapose what you did this past quarter with a year ago.

I this this was probably a little bit before my time, but I can tell you that as we are using much more research and much more deep analysis in terms of our brands, there was a drive in some of the watch categories to try to drive new customers based on doing specifically lower pricing and what we found through the analysis that we did -- and this is really the first time we've gotten in to the data as deep as we have -- we have a unique opportunity and position in the watch area where lower pricing is not as important as almost as though these pricing actually almost gets in the way that our focus is really to find more customers that are like our current watch customers who have no problem spending $300 to $400 average retail on a product. Although there was a drive trying to figure out how low can you go to be able and see what the return on investment is from lifetime value, we found that it does not work for us as well. If there's an example today we have on Disney and Invicta, join together, do Pirates of the Caribbean watch today which we had as today's special and it's almost completely sold out already. I think that average price is over $200. It seems that our customers are much more willing to spend more money and those are the customers that we're focused on getting more of.

Great. Thanks, guys.

No problem.

Thanks, Mark.

Thank you. The next question is from Tom Forte of Maxim Group. Please go ahead.

Great. Thanks for taking my question. I want to talk about gross margin and your gross margin profile. So when it does settle in this transition out of consumer electronics, I think you had a good quarter in fact and I know that there are some short term issues going on with watches, but on a longer term basis, what could your gross margin look like? Is it too optimistic to think you could get closer to 40%? So when you cycle out of low margin consumer electronics, what could your longer term gross margin profile look like?

Hey, Tom, this is Tim. When you think about our margin migration and how we reestablished margins last year particularly in Q3 as we mixed out of the CE category, I think those are about steady stay. I don't think you're going to see us moving more than 100 basis points above those over the period of time. So when you think about how we're going to close the gap on our bottom line margin as it relates to our other competitors in the area, 11% to 12% from a bottom line perspective, one of the things that will change for us is our distribution [indiscernible] as a percent of net sales. That will continue to go down as we've evidenced in Q1 and Q4 of last year as both we renegotiate packets of TV distribution that isn't as productive as we'd like and as we grow the top line. I think that's going to be a big difference maker for us in terms of profitability over the next 12 to 24 months.

I think probably -- it's Bob -- the biggest opportunity that we have on the gross margin line is the efficiencies that we're doing that we started about a year ago with the merchandise itself and figuring out how to optimize the lifetime of a product and we're doing really well in terms of being able to drive optimal order quantities and all the way through how much merchandise we have left at the end in terms of how to be able to dispose of it at the optimum gross margin. I think Tim's point were probably in those areas, we're in a good place. I'd like to believe that through the hard work that we're doing in terms of figuring out the right order quantities and also being able to make sure that the merchandise, we get the best pricing we can throughout the process and have the least amount left over that we have to figure out how to give away the discount, I think that hopefully we'll be able to continue to maintain the higher margins that as you know, went up last year a really significant amount.

Okay. And then my second question is capital expenditure looks like it was high on a year-over-year basis. What was the difference in spend versus last year and how should we think about CapEx for full year this year?

Hey, Tom. The capital spend that we talked about, it's $8 million for the full year and it's going to be a bit heavier in Q1 and Q2 and the heavier spending is related to the HD conversion that's launching in the fall. That is the heavier component, but year-over-year, it will be about 20% plus below capital spend from last year.

Thank you.

Thank you. The next question is from Alex Fuhrman of Craig-Hallum. Please go ahead.

Thank you for taking my question and certainly, congratulations on another quarter with strong execution. Something I'd like to get a little bit more color on that, that you talked about on the conference call, Bob, just the notion of trying to have categories that are going to bring in customers with a higher lifetime value versus maybe some of the watch or CE customers who had a lower lifetime value. Can you give it a little bit more color on what that specifically means? Is that customers who tend to stay longer or spend more frequently? And when and exactly how we should start to see this impact the numbers going forward?

Hi, Alex. Thanks for the kind comments. We'd like to start with the CE component of it. A lot of this has to do as you know, with the fact that CE is pretty much available just about everywhere at this point in time and it's really commoditized. I guess a year ago, we saw a lot as we study our customer file, there's a lot wanting done [ph] on the CE side. So people will come in, they will essentially price shop on the web and they will essentially just try to choose whatever is the cheapest item because it's a branded item that's available everywhere. And that customer, although might have a big unit retail for the first item that they buy, what we find is that the reoccurrence of them coming back and buying from us, because there are alternatives for them to buy from, is not great. I will say on the watch side, the watch side is a very large lifetime value customer and that both on watches and jewelry that once customers engage with us and like what they see, they are customers that have a huge lifetime value. They continue to come back several times a year, usually on average and it's much easier as we continue to narrow cast the way that we're focusing on the customer to be able to through emails and through social media and through all the new ways of being able to use SCM and SEO, to be able to really drive an individual experience to those customers and also through our website and through our mobile apps. We are getting really good at being able to say, 'Well if this customer bought this, then there's a likelihood that they're going to want to buy that.' And the first step of that was being able to put the analytics together to determine who those customers were and what's the best way to target them. We think we've done a lot of the hard work on that already. The next part of that is to be able to actually look at it as closely to instead of doing let's say an email blast to all of our customers or to many of our customers, is to really use the analytics that we have and the analytical science that we own to be able to figure out who's the best people to send what to, based on what they've looked at before and to be able to drive to that. So while CE is definitely one of those. At least CE in the terms of merchandise that's available everywhere else -- and I guess I would say that of almost all the brands, if people are going to buy just based on price which a lot of people do, then I don't think that's necessarily the game that we need to be in. I think we need to be in the game of being able to get fans. Now, whether they're of a certain product, or a certain type of product, or a personality, or even a show host, what we need to do is make sure that we find the right people to be able to do that with. As we discussed in the beginning of each year with the most important priorities are for the company, what we try to look at is how do we figure out as opposed to getting just the highest retail or the highest unit sale on something, it's how do we build the product. So in Beekman 1802 is an example. We know that people that like to watch the Beekman 1802 show, we know a lot about how they live, what they like, when they want to be replenished and what we're doing is we're literally using the machine learning and science to be able to focus in on those customers.

That's really helpful. Thanks. And then if I could ask secondly on distribution and selling expense. Tim, I think you mentioned that the lower expense there was either some contract negotiations. Can you give us a little bit more color on that with that related to the cable and satellite fees that you pay? And if so, was this one-off legacy agreement that was just kind of getting to market rates for the first time, or is this may be indicative of a trend that somebody's rate could be moving lower as the contracts come up for negotiation?

Hey, Alex. It's a variety of different elements at work in that line. It's a pretty big line item. Not only do you have the efficiencies and cost reductions that we have been able to accomplish in the fulfillment center and in the customer solutions from a transaction per order and from a productivity perspective by increasing that by 10%, we've also had some sturdy progress in the credit and payments group, which those are big numbers in there. In addition, the area around content distribution that you described, there's a variety of many, many different contracts moving at many different places and maturity. But I can tell you that overall, our strategy is to look at our distribution on a market-by-market basis. As Bob talked about, this targeting data and this machine learning, we have a tremendous amount of historical evidence on what you perform well and what categories perform well and why. And when we find anomalies to those patterns, we go in and we try to figure out if it can be improved. If it can't be improved for one reason or another, then we sit down and talk to the distributor about a cost that makes sense for us. So what you're seeing in these subsequent quarters is the yield from that process.

That's really helpful. Thank you very much.

Thank you. There are no further questions in the queue at this time. I would like to turn the conference back over to management for closing remarks.

Thank you. I just want to take a moment to thank our shareholders, our employees and our customers. We're working as hard as we can to build the company that you're proud of. I think you've seen some good results. We've seen some good results over the last four or five quarters. We are going to continue to work as hard as possible. This job is never-ending in terms of finding improvements. Our excitement and passion continues as it should and we're always working to deliver the shareholder value. So thanks for joining the call this morning and I hope all of you have a great rest of the week.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.