QURATE RETAIL, INC. REPORTS

FIRST QUARTER 2018 FINANCIAL RESULTS

 

Englewood, Colorado, May 10, 2018 – Qurate Retail, Inc. ("Qurate Retail") (Nasdaq: QRTEA, QRTEB) today reported first quarter 2018 results.  Highlights include(1):

 

First quarter operating results:

 

Corporate updates:

 

“We are pleased to continue our positive revenue performance at QVC and zulily,” said Mike George, Qurate Retail’s President and CEO. “QVC US grew revenue for the third consecutive quarter and QVC International continued its track

record of growth. zulily built on the momentum from late 2017 and generated mid-teen sales gains.  In addition, QVC and zulily posted solid new customer acquisition in the quarter, and QVC continued to extend its reach to developing platforms like Roku and Facebook Live and grow customer engagement.  While HSN and Cornerstone results remain challenged, we are confident in our ability to turn around both businesses.”

 

“We were pleased to complete the split-off of GCI Liberty, creating an asset-backed stock for our company that has been renamed Qurate Retail, Inc.  This new streamlined structure allows us to hone our focus on offering the most engaging shopping experiences through a collection of like-minded businesses,” said Greg Maffei, Qurate Retail Executive Chairman.  “Among our other holdings, we expect the announced sale of ILG to net approximately $200 million of after-tax cash proceeds and approximately $325 million in Marriott Vacations equity.”

 

Corporate Updates

On March 9, 2018, Qurate Retail, Inc. (formerly Liberty Interactive Corporation (“Liberty Interactive”)) and GCI Liberty, Inc. (“GCI Liberty”) completed the series of transactions that effected the split-off of GCI Liberty.  As a result, the former QVC Group common stock became an asset-backed stock. In addition, Liberty Interactive changed its name to Qurate Retail, Inc. effective as of April 9, 2018.  Qurate Retail, Inc. includes QVC, Inc., HSN, Inc. (“HSNi”) (which includes the Cornerstone brands), and zulily, llc (collectively, “Qurate Retail Group”), which are wholly owned subsidiaries, as well as minority interests in ILG and FTD and various green energy investments.  

 

Prior to the split-off of GCI Liberty, certain assets and liabilities were reattributed from Liberty Interactive’s former Liberty Ventures Group to its QVC Group (the “Reattribution”), as summarized in Qurate Retail’s press release issued on March 9, 2018.

 

Discussion of Results

Unless otherwise noted, the following discussion compares financial information for the three months ended March 31, 2018 to the same period in 2017.  For purposes of presentation herein, the pro forma results of operations in this press release include historical HSN and Cornerstone results for comparison purposes. This is intended to supplement and enhance the information related to prior periods. The impacts of purchase accounting resulting from our acquisition of HSNi have not been reflected in these historical results.

 

Qurate Retail adopted the new U.S. accounting standard regarding revenue recognition (ASC 606) as of January 1, 2018. Accordingly, QVC, HSN and zulily recognize credit card income for their branded credit cards as part of net revenue rather than as an offset to SG&A expense. This change positively impacted Qurate Retail’s revenue in the first quarter of 2018 and Qurate Retail is providing comparable results in addition to GAAP results where applicable. The zulily-branded credit card was first implemented in the third quarter of 2017 and this change did not have a material impact on zulily’s reported revenue in the first quarter of 2018.  

 

In addition, under new revenue recognition standards, Qurate Retail now recognizes revenue at the time of shipment as opposed to delivery.  Operating results for QVC and zulily in the first quarter of 2018 as presented in this press release include a modest positive impact due to this adjustment, with a more significant impact at zulily than other segments, but this impact is expected to balance out over 2018. As such, comparable results presented in this press release are not adjusted to exclude this change.  HSNi previously recognized revenue at the time of shipment, so there is no impact to HSNi’s reported results.

 

FIRST QUARTER 2018 FINANCIAL RESULTS

 

 

FIRST QUARTER 2018 NET INCOME AND ADJUSTED NET INCOME

 

 

QVC US

QVC US realized year-over-year sales gains in all categories, except jewelry and electronics in the quarter. Operating income margin expansion reflects lower amortization as a result of the roll-off of purchase accounting amortization from Qurate Retail’s acquisition of QVC. Adjusted OIBDA margin(2) contraction primarily reflects ASP deleverage, an unfavorable return rate primarily driven by comping a very favorable returns adjustment in the first quarter of 2017,   an increase in bonus accrual due to a change in QVC’s bonus accrual methodology and higher fixed costs and marketing expenses, which were partially offset by lower bad debt.

 

As a result of Qurate Retail’s adoption of ASC 606, QVC US has classified approximately $26 million of revenue from its private label credit card program in net revenue for the three months ended March 31, 2018. Excluding the impact of this accounting adjustment, QVC US revenue grew 2% in the first quarter of 2018. This change also had an approximately 40 bps impact on reported adjusted OIBDA margins.

 

QVC International

In the first quarter, QVC International experienced year-over-year constant currency(3) sales growth in all categories except apparel, which was down slightly. The operating income margin expansion primarily reflects lower amortization and the adjusted OIBDA margin(2) contraction primarily reflects higher freight, lower product margins and higher fixed costs, which were partially offset by lower marketing expenses.

 

US Dollar denominated results were impacted favorably by exchange rate fluctuations. The Dollar weakened versus the Euro, British Pound and Japanese Yen 15%, 12% and 5%, respectively. The financial metrics presented in this press release also provide a comparison of the year-over-year percentage change in QVC’s results in constant currency(3) (where applicable) to the comparable figures calculated in accordance with US GAAP for the first quarter of 2018. 

 

HSN

Although HSN’s results are only included in Qurate Retail’s results beginning January 1, 2018, we believe a discussion of HSN’s stand-alone results compared to the prior year period promotes a better understanding of the overall results of its business. HSN has reclassified certain costs between line items to conform with Qurate Retail’s reporting for ease of comparability for the periods presented. 

 

In the first quarter, HSN revenue declined in all categories, except beauty.  Average selling price declined primarily driven by a product mix shift away from electronics, which typically carry higher price points.  Return rate improved due to a continued positive trend in several categories.  The decline in operating income margin is primarily due to purchase accounting amortization and transaction related costs. Adjusted OIBDA(2) margin declined primarily due to higher inbound and outbound shipping costs and deleveraging of fixed costs due to the decrease in net revenue, offset by higher product margins, lower personnel expenses driven by integration-related synergies and lower bad debt expense. 

 

As a result of Qurate Retail’s adoption of ASC 606, HSN has classified approximately $4 million of revenue from its private label credit card program in net revenue for the three months ended March 31, 2018. Excluding the impact of this accounting adjustment, HSN revenue declined 10% in the first quarter of 2018. This change also had an approximately 7 bps impact on reported adjusted OIBDA margins.

 

zulily

Revenue increased in the first quarter primarily due to a 12% increase in total orders placed, driven by a 24% increase in active customers year-over-year.  An active customer is defined as an individual who has purchased at least once in the last twelve months, measured from the last date of a period. Operating loss and adjusted OIBDA(2) improved due to increased sales and leveraging operating and SG&A expenses.  The adoption of ASC 606 regarding changes around revenue recognition for zulily-branded credit card income did not materially impact zulily’s reported results. 

 

Cornerstone

Revenue declined in the first quarter of 2018 primarily driven by weakness in the home segment, particularly in Frontgate and Grandin Road’s outdoor businesses, partially offset by growth at Garnet Hill. Operating income and adjusted OIBDA(2) declines were primarily driven by lower sales, partially offset by lower operating expenses due to reduced catalog circulation.  Catalog circulation decreased, consistent with ongoing efforts to re-balance investments towards the digital and retail segments to drive demand. Operating income was also impacted by purchase accounting amortization.

 

FIRST QUARTER 2018 SUPPLEMENTAL METRICS

 

Taxes

Qurate Retail estimates that the 2018 effective tax rate will be in the range of 20% - 23% including federal, state and foreign taxes, net of tax credits generated by Qurate Retail’s green energy investments. This estimate excludes the impact of one-time items and is subject to adjustment.

 

Share Repurchases

From February 1, 2018 through April 30, 2018,  Qurate Retail repurchased approximately 8.7 million Series A QVC Group shares (Nasdaq: QRTEA) at an average cost per share of $26.46 for total cash consideration of $231 million. Since the creation of the QVC Group stock (including its predecessor, Liberty Interactive Group) in May 2006, Qurate Retail has repurchased shares for aggregate cash consideration of $8.0 billion, representing approximately 52% of the shares outstanding at the time of the creation of the Qurate Retail stock.  All repurchases up to August 9, 2012, the date on which the QVC Group stock was recapitalized to create the Liberty Ventures common stock, were comprised of shares of the combined stocks. On March 8, 2018, Qurate Retail’s board of directors authorized the additional repurchase of approximately $700 million of QVC Group common stock. The remaining repurchase authorization for Qurate Retail as of May 1, 2018 is approximately $1.1 billion. 

 

FOOTNOTES

 

NOTES

The following financial information with respect to Qurate Retail’s equity affiliates and available for sale securities is intended to supplement Qurate Retail’s condensed consolidated statements of operations which are included in its Form 10-Q.

 

Fair Value of Public Holdings

 

 

 

 

Cash and Debt

 

The following presentation is provided to separately identify cash and debt information.

 

Pro forma cash at Qurate Retail decreased $323 million in the first quarter as share repurchases and debt repayments more than offset cash from operations. Total debt at Qurate Retail Group decreased by $300 million primarily due to repayment under QVC’s credit facility. 

 

Qurate Retail benefits from an Indemnification Asset, presented in the preceding table, pursuant to an indemnification agreement with GCI Liberty with respect to the Charter exchangeable debentures issued by LI LLC for any payments made in excess of the adjusted principal amount of the debentures to any holder thereof that exercises its exchange right on or before the put/call date of October 2023 (the "Exchange Indemnity"). The Exchange Indemnity, which is supported by a negative pledge in favor of Qurate Retail on the referenced shares of Class A common stock of Charter held at GCI Liberty that underlie the Charter exchangeable debentures, will not apply to any Charter exchangeable debentures purchased by LI LLC, as described below. Also, pursuant to the indemnification agreement, each of Qurate Retail and LI LLC will use commercially reasonable efforts to purchase, in one or more privately negotiated transactions, a tender offer or other purchase transactions (each, a "Purchase Offer") with respect to the outstanding Charter exchangeable debentures, on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty, by September 9, 2018.  GCI Liberty will indemnify LI LLC for the difference between the purchase price of a purchased debenture pursuant to a Purchase Offer and the cash delivered in the reattribution with respect to such purchased debenture, plus any tax benefits associated with early extinguishment of such purchased debenture (the "Repurchase Indemnity"). An aggregate of $583 million in cash was delivered from the former Liberty Ventures Group to the former QVC Group in the Reattribution with respect to the Charter exchangeable debentures. GCI Liberty's Exchange Indemnity obligation and the number of shares subject to the negative pledge will be ratably reduced with respect to any Charter exchangeable debentures repurchased by Qurate Retail in connection with the Repurchase Indemnity.  

 

Important Notice: Qurate Retail, Inc. (Nasdaq: QRTEA, QRTEB)  President and Chief Executive Officer, Mike George, and Executive Chairman, Greg Maffei,  will discuss Qurate Retail’s earnings release on a conference call which will begin at 11:00  a.m. (E.D.T.) on May 10,  2018.  The call can be accessed by dialing 800-239-9838 or 323-794-2551, passcode 1166173,  at least 10 minutes prior to the start time.   The call will also be broadcast live across the Internet and archived on our website.  To access the webcast go to http://www.qurateretail.com/events.  Links to this press release and replays of the call will also be available on Qurate Retail’s website.

 

This press release includes certain forward-looking statements, including statements about business strategies, market potential, future financial prospects, market conditions, sales demand, statements about the Purchase Offers and indemnification by GCI Liberty, the integration of HSNi, the expected benefits of the acquisition of HSNi, the expected benefits of the sale of ILG, new service and product offerings, the monetization of our non-core assets, the continuation of our stock repurchase program and other matters that are not historical facts.  These forward-looking statements involve many risks and uncertainties that could cause actual results to differ

materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory matters affecting our businesses, continued access to capital on terms acceptable to Qurate Retail, changes in law and government regulations that may impact the derivative instruments that hedge certain of our financial risks, the availability of investment opportunities and market conditions conducive to stock repurchases.  These forward-looking statements speak only as of the date of this press release, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Please refer to the publicly filed documents of Qurate Retail, including the most recent Forms 10-K and 10-Q, for additional information about Qurate Retail and about the risks and uncertainties related to Qurate Retail's business which may affect the statements made in this press release.

 

 

 

 

 

 

NON-GAAP FINANCIAL MEASURES

 

This press release includes a presentation of adjusted OIBDA, which is a non-GAAP financial measure, for Qurate Retail, QVC (and certain of its subsidiaries), zulily, HSN and Cornerstone together with a reconciliation to that entity or such businesses’ operating income, as determined under GAAP.  Qurate Retail defines adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses, excluding all stock based compensation, and excludes from that definition depreciation and amortization, certain purchase accounting adjustments, separately reported litigation settlements, transaction related costs (including restructuring, integration, and advisory fees) and impairment charges that are included in the measurement of operating income pursuant to GAAP.  Further, this press release includes adjusted OIBDA margin which is also a non-GAAP financial measure.  Qurate Retail defines adjusted OIBDA margin as adjusted OIBDA divided by revenue.

 

Qurate Retail believes adjusted OIBDA is an important indicator of the operational strength and performance of its businesses, including each business' ability to service debt and fund capital expenditures.  In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance.  Because adjusted OIBDA is used as a measure of operating performance, Qurate Retail views operating income as the most directly comparable GAAP measure.  Adjusted OIBDA is not meant to replace or supersede operating income or any other GAAP measure, but rather to supplement such GAAP measures in order to present investors with the same information that Qurate Retail's management considers in assessing the results of operations and performance of its assets.  Please see the attached schedules for applicable reconciliations.

 

In addition, this press release includes references to adjusted net income and adjusted earnings per share, which are non-GAAP financial measures, for Qurate Retail.  Qurate Retail defines adjusted net income as net income, excluding the impact of purchase accounting amortization (net of deferred tax benefit), mark to market adjustments on certain public debt and equity securities and other one-time adjustments. Qurate Retail defines adjusted earnings per share as diluted earnings per share plus the diluted per share effects of certain adjustments, net of tax.

 

Qurate Retail believes adjusted net income and adjusted earnings per share are important indicators of financial performance due to the impact of purchase accounting amortization, mark to market adjustments and other one-time items identified in Schedule 3 below.  Because adjusted net income and adjusted earnings per share are used as measures of overall financial performance, Qurate Retail views net income and diluted earnings per share, respectively, as the most directly comparable GAAP measures.  Adjusted net income and adjusted earnings per share are not meant to replace or supersede net income, diluted earnings per share or any other GAAP measure, but rather to supplement such GAAP measures in order to present investors with a supplemental metric of financial performance.  Please see the attached schedules for a reconciliation of adjusted net income to net income (loss) and adjusted earnings per share to diluted earnings per share, in each case, calculated in accordance with GAAP for Qurate Retail (Schedule 3).

 

This press release also references certain financial metrics on a constant currency basis, which is a non-GAAP measure, for Qurate Retail.  Constant currency financial metrics, as presented herein, are calculated by translating the current-year and prior-year reported amounts into comparable amounts using a single foreign exchange rate for each currency. 

 

Qurate Retail believes constant currency financial metrics are an important indicator of financial performance, in particular for QVC, due to the translational impact of foreign currency fluctuations relating to its subsidiaries in the UK, Germany, Italy, Japan and France, as well as its JV in China.  We use constant currency financial metrics to provide a framework to assess how our businesses performed excluding the effects of foreign currency exchange fluctuations.  Please see the financial tables at the beginning of this press release for a reconciliation of the impact of foreign currency fluctuations on revenue, operating income, adjusted OIBDA and average selling price.  

 

 

SCHEDULE 1

 

The following table provides a reconciliation of Qurate Retail’s adjusted OIBDA to its operating income calculated in accordance with GAAP for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018, respectively.

 

CONSOLIDATED PRO FORMA OPERATING INCOME AND ADJUSTED OIBDA RECONCILIATION

 

SCHEDULE 2

 

The following table provides a reconciliation of adjusted OIBDA for QVC (and certain of its subsidiaries), zulily, HSN and Cornerstone to that entity or such businesses' operating income (loss) calculated in accordance with GAAP for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018, respectively.  As there are no material reconciling items between adjusted OIBDA and operating income for the QVC China joint venture for the referenced periods, no reconciliation has been provided. 

 

BUSINESS SEGMENT ADJUSTED OIBDA RECONCILIATION 

 

 

 

SCHEDULE 3 

 

The following table provides a reconciliation of Qurate Retail’s adjusted net income to its net income and adjusted earnings per share to diluted earnings per share, in each case, calculated in accordance with GAAP for the three months ended March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018, respectively.