iMedia Brands, Inc. (IMBI) Q3 2020 Earnings Call Transcript
Published at 2020-11-24 11:48:03
Greetings, and welcome to the iMedia Brands Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Tim Peterman, CEO of iMedia Brands. Thank you. You may begin.
Good morning, everyone, and thank you for joining. This is Tim Peterman, iMedia Brands’ CEO. Before I go into my prepared remarks, I would like to cover a few housekeeping items. We issued our Q3 earnings release earlier this morning. If you do not have a copy, you can access it through the Investor section of our website at imediabrands.com. This release is also an exhibit to the Form 8-K filed this morning. I would also like to remind everyone that this call will be available for replay through December 8, 2020, starting today at 11:30 A.M. Eastern. A webcast replay will also be available via the link provided in today’s press release, as well as the investor section of our website. Some of the statements made 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 performances, and speak only as of today’s date. We undertake no obligation to update 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. For additional information, please refer to the Safe Harbor statement in today’s earnings release and our SEC filings. Finally, we will make references to non-GAAP measures on this call, such as adjusted EBITDA. The information required to be disclosed about these measures, including reconciliations to the most comparable GAAP measures, are included within our earnings release. With these housekeeping items complete, let’s begin. As with our last call, I would like to reiterate that iMedia Brands continues to be focused on taking every step it can during these uncertain times to keep its employees, vendors, customers, guests, and their families safe. Q3 was a strong financial report card for us, as our entrepreneurial-minded employees and vendors continue to use their imagination and grit to perform within our new, more accountable processes. This new approach I installed last year has infused our cultural personality with trust and passion, and it's those two emotions that are most responsible for driving our results, like Q3 adjusted EBITDA was $6.4 million, a $7.4 million improvement over the same prior year period. Year-to-date, adjusted EBITDA was $15.5 million, a $24.7 million improvement over the same prior year period. Q3 gross margin was 37.4%, a 130 basis point improvement over the same prior year period. Year-to-date, gross margin was 37.2%, a 370 basis point improvement over the same prior year period. Q3 net sales were $109 million, a decline of 5% compared to the same prior year period, which was the best year-over-year quarterly net sales performance in more than two years. This success was primarily driven by 49 exciting new brands launched so far this year that have generated approximately 21% of our year-to-date net sales, the highest percent in any nine-month period in our company's 30-year history. In August, we were pleased to see that our equity raise was oversubscribed and the participation from high-quality institutional investors was meaningful. Regarding our Q3 balance sheet, cash was $19 million, an $8.7 million improvement from prior year-end. Net debt at the end of Q3 was $33.6 million, a $25.1 million reduction from prior year-end. The company's debt structure is composed of a credit facility that provides up to a $90 million revolving line of credit, subject to a borrowing base and a term loan that matures in July, 2023. Our inventory balance at the end of the third quarter was $72 million, an $11 million decrease from the same prior year period. Regarding Q3 capital expenditures, we invested approximately $1.2 million on capital projects, primarily reflecting investment in our websites and infrastructure. In terms of our Q4 outlook, we believe the company will post adjusted EBITDA in the mid to high single-digit millions. As a reminder, from a tax perspective, the company has approximately $393 million in federal NOLs that are available to us to offset future taxable income. In terms of our journey to become a leading interactive media company growing a portfolio of lifestyle television networks, consumer brands, and media commerce services, we achieved several important milestones during Q3. In early 2020, we premiered our Learning to Cook with Shaq Television Program on both ShopHQ and Shop Bulldog TV. As always, our goal is to maximize the sales of Shaq products on these networks. However, for the first time, we also plan to unlock the promotional power of our networks to drive the creation of a meaningful brick-and-mortar retail opportunity. This would be a first for TV retailing from our perspective, and I'm proud to announce the achievement of that milestone in October when our Shaq kitchen products launched in over 2,000 Target and Sam's Club stores. Another milestone achievement was the launch of our newest 24/7 TV retailing network, ShopHQ Health. As we announced in August, we launched this network in 15 million homes, and I'm happy to report it is off to a great start. Today, I would like to provide more color on why we launched this service, and what type of programming products and services it will offer, and why we are so excited about it. Last fall, we launched Shop Bulldog TV by using ShopHQ's existing strength in men's categories, as the initial competitive advantage to create this live 24/7 TV retailing channel, dedicated to men and women who are shopping for their men. ShopHQ Health was launched for the same reason. ShopHQ's existing strength in beauty and health categories are being utilized as the initial competitive advantage for this new 24/7 TV retailing channel, dedicated to self-improvement for men and women. To be specific, we define self-improvement as products and services within the traditional TV retailing categories of health and beauty. However, we are equally focused on offering products and services, in what today is referred to as telehealth. Telehealth is different from telemedicine, in that telehealth refers to a broader scope of health-related products and services, consumed by people in their homes via interactive video, delivered to them via cable box, the Internet, over-the-top services like Apple TV or Roku, or over-the-air services from broadcasters, whatever the form of delivery. We believe telemedicine refers specifically to remote clinical services, while telehealth refers to broader health products and services such as mental health, spirituality, and weight loss. Today, we size the U.S. telehealth marketplace at about $11 billion, and it's expected to grow by 30-plus percent for each of the next five years. The core customer in this space is the same core customer iMedia interacts with today, men and women who are 45 and older. The growth in this marketplace is being driven by consumers who are seeking the purchase of an advanced level of health education, products and/or services at lower costs via interactive video in their own homes. Based on these characteristics, we think we are strategically situated to capture a meaningful share of this growing marketplace. In closing, I would like to say that these are important times here at iMedia, as we continue on our path to become a growth company. Thank you for your time this morning. I will turn the call back over to the operator for Q&A. operator?
Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Mark Argento with Lake Street Capital. Please proceed with your questions.
Hey, Tim, good morning. Congrats on a nice quarter. Just wanted to dig in a little bit on the customers. The number that stuck out to me, 31% growth in new customers, and also 21% of sales coming from new brands. Could you maybe peel the onion a little bit on that in terms of where - how are you getting the customers? How are they finding the new brands that you guys have on the network? Maybe just get in - get a little deeper into those two areas, that would be really helpful? Thanks
Sure thing, Mark. The - around customers, it's interesting. If you think about the headline we provided in the press release, it talks about our active customer file from Q3 growing by 4%. And for perspective, our Q - at this time last year, our Q3 customer file declined by 14%. So the question of what we've been doing to have such a dramatic change year-over-year, all revolves around two things, right? The - and we've talked about this before. One would be the programming, the static programming calendar, and the introduction of programs that happen on the same week, each week, so customers can build their viewing habits. That is an important element of change for us that began last Q3 really at the end, and came through and it's just building momentum as it goes. And then the second is obviously the new brand launches. I think, particularly with the - when you're turning a company around from a decline even to flat and then to growth, you really have to keep the product assortment fresh with new products and really new brands for the folks to engage with. So really in virtually every category, from food, where we had great introductions from companies like SeaBear and Will's Kitchen to collectibles, we had all sorts of coins and collectibles in that category. Two, our core home brand introduced a few new brands - sub-brands themselves, like Mackenzie-Childs Glow; in beauty, things like Be Alive. All of these different elements in every single category, we had strong product launches, and those are important. Yes, well, I guess, I’d say it this way. They’re important if they're successful. So, the idea that we launched that many and that they generated 21% of our revenue is really the key thing. And that's the difference. That’s the highest we've had ever as a company. So I think that it's really both of those things working together that created the turnaround on the customer file.
Great. And then in terms of the brands, it seems like - at least the last press release you guys put out, you had some pretty decent name brands that a lot of consumers would. Are you getting better looks at brands? Or are the brands looking at your platform maybe a little differently than they have in the past?
Great question, Mark. The – so some of the brands that you're referring to probably are the Karl Lagerfeld and the DKNY fashions, G.H. Bass footwear. As you - as I know you know, we do the 3PL services for G3, and I've done that for quite some time and scaled it last year. And those are some of the brands that they represent. So it’s just really - as we build our relationships in the community, if you will, we are establishing better and stronger brand on the networks. And that would be national brands like that. It's always nice to complement proprietary and exclusive brands with these more well-known brands. And then there's the ones like Oakley Sunglasses and Elan. And even when you balance those against Heather Dubrow’s proprietary brand that we launched, it's just really that mix that the customers like to see that is - has been working for us. And it's really nothing more fancy than our merchants just being very offensive-minded in asking the questions of some of these brands that I would say two, three, four years ago, weren’t really considering the TV retailing marketplace as a big sales channel opportunity. But I think that's changed over the last couple of years certainly. I know that if you look at across the spectrum of TV retailing from QVC to HSN to us, most of the higher end fashion brands have tried or are on our network. So it's - I think it's just a good statement about our channel in its entirety.
Absolutely. Thanks, Mark.
Thank you. Our next question is coming from the line of Tom Forte with D.A. Davidson. Please proceed with your questions.
Great. Thanks for taking my questions. So, Tim, I had a handful of questions, so just go one at a time. The first question I have is, when I think about holiday and I think about e-commerce, I'm concerned about inventory levels and I'm concerned about logistics capacity. Meaning, I'm worried that even for Amazon, they're not going to have gifts in stock that consumers want. And even for Amazon, they're going to have a hard time getting it to the consumer in time for holiday. So can you talk about, does video retailing in general have an inventory advantage on Amazon? I know oftentimes you make large buys for things you feature on air. And then what gives you confidence in your logistics efforts to be able to get the gifts to consumers in time for holiday?
Thanks, Tom. Good question, and certainly relevant right now. The - so let's take the first part, which is really the inventory. We feel really good about how we have managed our inventory. It started way back in January, which is, this time last year, as you may recall, we were caught shorthanded in terms of the type of inventory that sells best in this season. And last holiday season, we were really doubling down in the CE category, because that was going to fill the gap, where traditionally, because of the proprietary and exclusive products, our reason for being is that, our Q4 this year is not really dependent on CE. In fact, it's a very minimal part of our Q4 strategy this year. And so as a result, I would say that we are not pressured in terms of delays in logistics and getting those products in. I will say, of the small amount of hours we've had in CE, there is that pressure, and that is a real thing. But in the other categories that we're in that our strength, you just go down the wearable categories of beauty, fashion, jewelry, watches, health, we are not seeing that same kind of pressure. So it's - I wouldn't say we're that smart. I would just say that coincidentally, our strengths are not in CE products that are available everywhere. And I think those are where you're going to see the most pressure from a logistics receipt perspective. And I also think that you're going to see pressure from UPS and FedEx, and we've already been navigating through that as has everybody else because of the sheer volume going on. I think both of those things create some pressure for some retailers that are in that space of consumer electronics, but I don't expect, based on everything we know so far with respect to UPS and FedEx that we are facing any unusual pressure.
Okay, wonderful. So two more. At their Analyst Day last week, QVC said that they're starting to have data to support that older millennials are engaging with their platform, which I thought is remarkable and kind of went against the stereotype that it's just baby boomers. I know your demographics are a little different, but can you talk about how younger consumers are engaging with your different brands?
That’s an interesting question and an interesting perspective. Certainly, our destination in terms of taking share from QVC and HSN as they engage with the younger consumer, is where we see the biggest opportunity for us. And we've talked about that in the past. We do think that the customer starting at 45 and up is - continues to be our target. However, the migration of those customers to OTT is certainly something that we are focused on. The migration of those core customers to HD only in some markets, is certainly a focus of our attention. And when we look at the products that we're selling, we don't - we are not actually targeting and embracing that millennial in the same maybe focus that QVC and HSN are. I'm not sure what they mean by the older millennial. Is that - what would you characterize as the age of an older millennial?
In the 30s. Yes. So I would say that there are - I’d say the 40s - in the human condition, a 40 year old sees themselves as 30 in the mirror. So I'd say that we're still focused on the 45 and up, who see themselves as a 35 and up. And we are more focused on their migration and viewing habits and what platforms they're most interested in engaging in, that being social, or certainly doing a lot more on the influencer side and on the - it ranges from influencing to social like Instagram. We’ve had a lot of great programs on that, and we're selling differently on those platforms. So what we're doing are two minutes short sales with our hosts and our guests that are engaging more of our core customers on those social platforms. And we're certainly improving our apps, our OTT, over-the-top apps, in terms of how the next generation, call it the 40 year old and up, are engaging in cutting the cord and engaging with platforms like Roku, Apple TV, Samsung smart TVs. As you know, last Q4, we acquired Float Left Interactive, which we feel and is a leading OTT app maker. And they are right now in the process of upgrading and overhauling our existing apps so we can better engage again with our core customers in these new internet-based video platforms.
Great. So you sort of touched upon my last question there, which is, historically again for video retailing, it was my understanding that the core consumer needed to engage with the programming, I don’t know if as many as five times before he or she got comfortable, and then started purchasing. It may be too early, but on the over-the-top platforms you're talking about, Roku and Amazon Fire TV and things of that nature, are you seeing similar behavioral patterns, where they engage with your programming on Roku, and then after a certain hurdle, they start converting? Again, it may be too early to tell, but I'd love to hear your thoughts.
Yes. So the phenomenon you're talking about is, I believe in, and we see it in our data in the more defined areas of, call it MSOs or MVPD. So we know, for example, the maturing of a home that has recently launched with one of our television networks, and this is industry-wide, whether it's advertising-supported or TV retailing, that it takes a while for them to mature. The customer begins to engage. They see it on the channel. They watch it. They - it's a couple of different touch points, and they begin to engage. It's the same way that we view data when we look at viewership. We know when viewership starts to climb. In TV retailing, we don't monetize that, but it's a great early indicator that the home is maturing and the viewership, and then the engagement follows. And that same phenomenon you're talking about with the OTT happening and maturing, is very early, but it is also prevalent in terms of how we market to customers. So, think about the world of attribution, right? The more times you touch that customer with an email, with the television signal, with a social, all of those different touch points then engage and then eventually result in a purchase. So, I do think we'll see the same thing with OTT, but you're right in that it's too early for us, and too small for us to really gauge it. But we do see some of our best customers, and we measure how they interact on our new platforms. And we are trying to take that data to learn from it. But I would say, overwhelmingly though, in terms of measuring OTT in the priority of things, our bigger priority right now is on the personalization of our existing customers, and watching how - and using the data that we do have, to engage with them in a more meaningful way on a personalized basis, whether that's email, whether that's SMS, whether that's when they're calling to talk to us. It's those touch points that we think have a higher conversion yield for our revenue model today. Not to say that OTT, as it matures, will not provide that. And we do believe it will provide the same kind of KPIs.
Excellent. Sorry. You inspired me to ask one more question. So historically, there was a point in time where I would argue that for QVC, HSN, and ShopHQ, there was a halo effect. So, to the extent that one or more of those efforts were doing well, that cast the halo effect on video retailing in general. QVC certainly seems like it's got its groove back. Do you feel like there's a potential for a halo effect? Are you seeing a halo effect at ShopHQ?
Well, that's a great question. And I would just like to answer it with, we're fiercely independent and we don't think we need a halo effect. We think that our brands are on their own ramp. But yes, I do believe that QVC and HSN - well, certainly QVC and HSN is finding its way again inside the overall organization, are very well run organizations. And the more they engage customers and they have a good experience, then the more we will be able to take share from them as our channels - they are a good experience in TV retailing. So I do think that that's true. The better they do, the more and easier it is for us to acquire new customers as well. I was kidding a little bit about that, but I do think that our growth perspective is really how we execute on continuing with the ShopHQ product assortment development, how we continue to build Bulldog into a really interesting deep vertical for men and for women shopping for men, and certainly ShopHQ Health around the area that you traditionally think of as beauty and health in the TV retailing arena, but also in this whole, I would call it emerging, if people aren't familiar with it, telehealth area, where I think the interactive video component of healthcare and that remote element of healthcare, particularly around some of the broader issues of weight loss, addiction, all these mental health issues, just self-improvement and goal-setting, whether that's financial or what it might be, I do think that interactive video component is something that we're tailor made to pursue, because particularly the customer set of 45 and up, we share with them. And that's why I wanted to make those comments in my prepared remarks, and also talk about it as we think about how we get new customers in the future.
Great. Thank you for taking my questions and keep up the good work, Tim.
[Operator instructions]. Our next question is coming from the line of Alex Fuhrman with Craig-Hallum. Please proceed with your questions.
Great. Thanks very much for taking my question, and, Tim, congratulations on another really strong quarter here. It sounds like you've identified quite an opportunity here in the telehealth market. Can you talk a little bit about how that's going? I know it's early, but can you tell us a little bit about what you've seen so far? And then as you kind of look into 2021, what are some of the signposts you’re going to be looking for in terms of engagement, as you ultimately make the decision to scale into more homes over time?
Thanks, Alex. I will take the first question about health, and then we'll talk a little bit about engagement, which is an important component, not only in the new homes, but I'll get to that second. So in health, the - so as we talked about with Bulldog and with ShopHQ Health, the goal really is to use our existing strengths to have an initial competitive advantage to engage our customers and new customers in the topic, in the vertical of which both of these are, but in particular, health. And so, we're using our best brands and our best guests and vendors, who traditionally provide a certain product on ShopHQ, to create new products for us in ShopHQ Health. So it's these ideas of people they recognize and high-quality vendors that can move with us, and specialize in this area, that we think will give us this initial start to dive into this vertical. And then once these customers start to engage with us on the traditional topics, these other areas of, let's call it - let's take weight loss for example. There’s all sorts of interactive goal-setting and interactive video applications out there today, where folks are seeking different ways and cheaper ways to maintain that type of information and discipline in their lives. And that is an area that we think, once they find a trusted source like ShopHQ Health, that we can even provide advertising supported services and other types of services to these customers, to make sure that they have a higher conversion with our content. So, it's a step-by-step process and it doesn't happen overnight. That's why, as we did with Bulldog, you'll see us roll out original programming night by night, as we add distribution. With Bulldog, we introduced three nights of original programming where it was dedicated Bulldog programming. And you'll see the same thing in Q1 as we roll out original programming for ShopHQ Health. And as those days mature, and those new subs are added, then we add an additional night of original programming. And we see that evolution taking place throughout 2021. So, with new - to your second question, with new homes, you'll see new original programming. They work hand in hand to engage these customers.
Great. That's really helpful, Tim. And then if I could just ask also about the partnership with Shaquille O'Neal, and that's certainly very interesting. It sounds like quite an opportunity, seeing your product in Target stores and Sam's Club as well. Can you talk a little bit about the economics of that relationship, your partnership with Authentic Brands Group and Shaquille O'Neal? Who’s taking the inventory risk, et cetera? Just curious to get a little bit of a better sense of what ShopHQ's role in that product assortment is?
Sure. The - Shaquille, first off I'd like to say, is just an absolute great partner. It does - he’s constantly innovating with us as we build what we think will be a very big brand. So let's start back at the beginning of why we partnered with Shaquille. And that was the idea is, when you have a personality and someone like Shaquille that resonates with so many different types of folks, and it's so authentic in everything he does, the idea of using our television network as a promotional platform to build a larger brick-and-mortar retail opportunity, was really something that was, I call it unusual, if not precedent here in TV retailing. And so this spring, we started with that and we did a lot of different types of shows with Shaquille, and we developed everything from food to different types of tabletop, to different types of kitchenware. And we found the absolute best product we felt that would work, based on what our customers voted on during the spring. And so, as we did that, we then started to focus on testing more in infomercials on that best product that we found in TV retailing. And then further identified, okay, now we have a very small list of what we now know and have tested, are the best products that we think will work in retail. And that's what we engaged Target and Sam’s Club and other retailers with. And that's how we were able to secure all those stores. Now, as you talked about at the very beginning, we have great partners in this new model that we're working with. Authentic Brands Group, obviously very important group, very seasoned operators. They are - Shaquille is a partner with them. And as a result, we became a partner with them, and they've been very helpful in not only with Shaquille, but in other brands that they have, because they are obviously very interested in this new model that we're creating, where we control a national television network to create commerce opportunities at retail. The other partner that we have in this, Tristar is an excellent partner as well. They are the men that helped us design, with Shaquille, all the different types of kitchen products. And they have very strong relationships in the retail ecosystem. And they were critical in our efforts to secure this retail distribution that we announced a couple of months ago. So, both of those partnerships are important. I can't say enough about Shaquille, Perry, his management team. They're all - they've all been critical in the development of this opportunity. And it's - in terms of the economics, certainly it's public information, I believe that our relationship with ABG is a three-year term, and there's a royalty associated with that. And in terms of the economics and TV retailing, certainly they're just the normal economics of us offering any kind of product on our air. And our partnership with ABG and Tristar, we haven't really gone into publicly about how we're sharing the proceeds of the retailing sales, but when we do, you'll be the first to know, Alex, and we'll just use that publicly.
Well, I appreciate that, Tim. Thanks very much.
Okay. Thank you, Alex, for that. Those were both important questions.
And there are no further questions at this time. I would like to hand the call back over to Tim Peterman for any closing comments.
Thank you, Robert. Thanks again, everybody, for your time this morning. We appreciate your time and attention and look forward to talking to you soon.
Thank you. This does conclude this morning's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.