Welcome to the Qurate Retail Inc. 2019 Q4 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 26.

I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead..

Thank you. Before we begin, we’d like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent Form 10-K filed by our company and QVC with the SEC.

These forward-looking statements speak only as of the date of this call, 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.

On today’s call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, and constant currency.

Information regarding the comparable GAAP metrics, along with required definitions and reconciliations including preliminary notes and schedules 1 through 3, can be found in the earnings press release issued today, which is available on our website.

Today speaking on the call, we have President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. These slides are available on our website. Now, I’ll hand the call over to Jeff Davis..

one, we have fully lapped the benefit of HSN’s renegotiated carriage agreements; two, we have continued to experience reduced tax factor and duplicate facility and labor cost through Q2 as we complete remaining Phase 1 milestones of our network optimization.

Three, as we prepare to decommission the previously announced fulfillment centers, we will take additional inventory clearance actions to reduce associated transfer cost to other facilities. Four, we will continue to take a disciplined approach to invest in marketing.

And five, incentive compensation was variable in 2019, and we expect this to be a headwind in 2020. To partially counterbalance these pressures, we are taking a number of action – cost actions, while continuing to realize the integration synergies and expect to increase product margins through strategic sourcing initiatives.

Turning now to QVC International. In constant currency, full year and Q4 net revenue grew 1% on 5% higher ASP, partially offset by 3% lower volume and reduced shipping and handling revenue. For the fourth quarter and full year, adjusted OIBDA margin improved 40 basis points and 80 basis points, respectively.

For both periods, these gains were primarily from the closure of operations in France, partially offset by lower product margins and higher fixed cost, which included expenses associated with the new international structure that Mike will describe shortly.

At Zulily, revenue declined 18% in Q4 and 14% for the full year due to the factors that Mike will discuss shortly also. Full year operating loss eroded substantially, primarily due to the $1 billion noncash impairment charge Zulily incurred in Q3.

For the fourth quarter and full year, adjusted OIBDA margin declined 270 and 280 basis points, respectively. The margin erosion primarily reflects the deleverage of supply chain and fixed cost from a double-digit revenue decline, partially offset by lower marketing spend because the management team remained diligent to a total rate return.

At Cornerstone, excluding the improvements business that closed in Q4 of 2018, revenue grew 1% in Q4 and was relatively flat in the fourth quarter – sorry, for the full year, it was flat for the full year, and adjusted OIBDA grew $6 million in Q4 and $3 million in the year.

The business gained momentum in the second half of the year led by gross margin initiatives in its home brands, lower marketing expenses and execution of operating model enhancements to reduce certain fixed operating expenses. Looking at the business more broadly, we have not experienced a material impact from tariffs to-date.

We are pleased that a Phase 1 agreement was reached between the U.S. and China, and we’ll continue to monitor developments. Moving now to capital expenditures, cash flow and capital structure. Capital expenditures were $76 million in Q4 and $325 million for the full year on a cash basis, which is 2.4% of net revenues.

The increase from 2018 was primarily due to the U.S. fulfillment network optimization and continued investment in IT and commerce platforms. Total capital expenditure for the full year were below our guidance, primarily due to the classification of certain leasehold improvements as other assets.

For 2020, we anticipate growth CapEx to range from $300 million to $320 million on a cash basis. Over time, we expect CapEx to return to a more normalized rate of 2 to 2.2x – excuse me, to normalized rate of 2% to 2.5% of net revenues.

We grew free cash flow on an operating basis at Qurate Retail in 2019 with an increased focus on working capital management, lower transaction related cost and cash taxes, and we’re able to offset reduced adjusted OIBDA and higher capital expenditures.

In 2020, we expect to further improve free cash flow conversion to reduce overall capital expenditures and additional working capital actions, such as more closely aligning our vendor payment terms with our new Easy Pay, FlexPay everyday program announced in January.

We are an early adopter in this space years ago and have a long track record in managing our program, where the customer default rate is below 1.5% of net revenue.

Qurate Retail estimates that its average annual effective tax rate over the next three years will be in the range of 15% to 18%, including federal, state and foreign taxes net of tax credits generated by Qurate Retail’s green energy investments.

Our effective tax rate in 2020 and 2021 will be lower than this range and will increase significantly thereafter due to the expiration of certain green energy tax credits at the end of 2021.

We are actively exploring new green energy investments that will generate tax post – tax credits post 2021, but have not yet closed on these investments at this time. In addition, Qurate Retail’s book tax rate in 2019 was impacted by various one-time items outlined in our earnings press release.

In Q4, we issued a total of $500 million of senior secured notes in the retail bond market at a coupon of 6.25% for a duration of 49 years. At December 31, 2019, QVC’s consolidated leverage, as defined in our revolving credit agreement, was 2.4x as compared to a permissible 3.5x.

More recently, in February 2020, we issued another $575 million of senior secured notes in the institutional bond market at a coupon of 4.75% for a duration of seven years.

Upon closing the February 2020 issuance, we reduced the total capacity of our senior secured revolving credit facility by $700 million, which now provides for a $2.95 billion of total capacity. When our 10-K is filed later today, you will notice a material weakness in our internal controls.

We’ve made significant progress on this front, fully remediating one material weakness in the UK and improving our overall IT access controls globally, with the exception of certain access controls in Germany. We are committed to fully remediating these issues in the very near-term. Now I’ll turn the call over to Greg. Is Mike here? Mike is on..

This is Mike. Yes, I’ll take it. Thank you, Jeff. Thanks, Jeff, and good morning, everyone. 2019 was obviously a challenging year for us for QxH and Zulily, as those disappointing results continued into Q4. However, despite the revenue and OIBDA decline and the accelerated capital investment, we grew free cash flow at Qurate Retail Group for the year.

And importantly, we advanced a number of the strategic priorities we outlined at our November Investor Day.

While we still have much work in front of us, we’re confident the actions we’re taking will enable us to capitalize on changing industry dynamics to lead at the intersection of retail, media and social, offering a third way to shop that is highly differentiated from both brick-and-mortar and transactional e-commerce.

Before reviewing our business segments, let me briefly comment on the coronavirus outbreak. Our first priority has been to take appropriate measures to ensure the health and safety of our team members and partners in the region.

Our sourcing and quality assurance teams are now gradually returning to work, and factories are beginning to restart production. While the situation remains fluid, we do anticipate ongoing supply chain disruptions and are actively developing contingency plans to mitigate the impact of any shortfalls in product supply.

Across the company, Zulily has been the most affected to-date since it carries minimal inventory and has a large China direct ship business. As a result, we’ve had to remove a number of daily events and product lines from our Zulily offerings, causing a meaningful sales impact.

It’s too early to assess potential sales challenges at our other businesses, but we will continue to take actions as developments unfold. Turning now to our QxH business. Our performance challenges in Q4 were largely consistent with the issues we described on our last call. Looking at our category performance.

Home revenue declined $40 million in Q4 and $128 million in the full year. The largest pressure in home came from the closure of HSN’s Ingenious Design subsidiary, which we’ve now fully lapped. We also saw continued pressure in the premium mattress segment, as that business shifts to lower-priced alternatives.

This erosion was partially offset by gains in gourmet food, in floor care, including leading brands iRobot, Dyson and Sharp; and in personal care With Philips Sonicare and Waterpik. In fashion, which includes apparel, accessories and footwear, revenue declined $17 million in Q4 and $49 million in the full year.

This performance primarily reflects a tough industry cycle, with all three categories down for the year according to market data from NPD. We’re generally holding our share, but not offsetting industry softness.

Earlier in the year, recognizing the weaker industry trends, we reduced our inventory purchases for the second half of the year and cut back Q4 apparel air time. Beauty revenue declined $23 million in Q4 and $27 million in the full year.

We’re seeing weakness in a few of our largest brands, as we face a highly competitive marketplace with expanding distribution and slowing industry growth. We continue to focus on diversified assortments with good growth in emerging brands, like Beekman 1802, Lancer and Belle Beauty.

Consumer electronics revenue declined $6 million in Q4, but increased $12 million in the full year. While we saw strength in wearables, including Fitbit; and audio with brands such as Bose, we continue to see erosion in laptops, tablets and TVs, which also puts pressure on ASPs.

In jewelry, revenue declined $11 million in Q4 and $71 million in the full year driven primarily by reduced airtime, which is partially offset by improved productivity.

Our focus on increasing sales per minute by concentrating our airtime on a handful of highly engaging jewelry events that drive tune in, enabled us to substantially reduce the rate of decline in the category. Now turning to the customer view. Overall, the decline in customers in the last 12 months is consistent with the revenue decline.

For existing customers, count declined 3% in Q4 and 2% for the full year. For new customers, count declined 2% in Q4 and was down slightly in the full year. The Q4 decline is a reversal from recent growth trends, primarily due to a difficult comparison in Q4 of 2018 when we grew new customers 10% at QVC.

For reactivated customers, count declined 2% in Q4 and 4% in 2019 driven largely by the softness in apparel, which is a key category for this cohort. As we outlined at Investor Day, our overall performance in 2019 was impacted, we believe, by three key factors.

First and most importantly, we’re operating in a rapidly changing industry context with long-term headwinds from declining linear TV viewership and growing brand proliferation, which leads to shorter and more volatile product life cycles.

In fact, 10 of our larger brands, which represented just 12% of 2019 demand sales accounted for more than 100% of our 2019 sales decline.

While it’s a natural part of our business that most brands hit a peak level and then begin to decline, we’re finding that it is taking more to get new brands to scale fast enough to fully offset these large brand declines. And momentarily, I’ll share more on our product curation strategies to respond to this challenge.

And while these industry pressures are real, this changing landscape also creates new opportunities for us, as consumers access more and more types of media in more ways than ever before, and the growth of transactional e-commerce has led to a desire for alternatives that are more authentic, engaging and experiential, which we believe caps into our core DNA.

Second, exacerbating these long-term trends, we saw a cyclical slowdown in fashion and, to a lesser extent, in beauty, which together, have been our top growth drivers for several years.

And finally, we experienced some short-term pressures, a combination of organizational disruption associated with all the changes we’ve made, along with purposeful choices to close down Ingenious Design subsidiary due to its high cost structure and invest in restructuring our fulfillment network to improve service levels and lower cost over the midterm.

So despite a disappointing year, we believe our platform is as relevant today as ever, with its enormous global scale, the unparalleled consumer reach with low marketing spend, the focus on highly curated product discoveries offered at compelling values with flexible payment options, immersive video-rich experiences and intense social engagement, all leading to astounding customer engagement and loyalty.

The recent explosion of direct-to-consumer brands, coupled with the inevitable pressures those brands are now facing at the cost of sustaining customer reach, is proving so high, both highlights customers’ desire for something more in the shopping experience and also underscores the efficiency and attractiveness of our brand-building platform.

As we shared at Investor Day, we’re intently focused on accelerating five strategies that will enable us to take advantage of what this platform has to offer.

First, curate special products at compelling values; second, extend video reach and relevance; third, reimagine daily digital discovery, making our websites and apps every bit as engaging and sticky as our traditional live TV experience.

Fourth, expand and engage our passionate community, reaching new customer – customers and increasing the engagement of our existing users through loyalty, personalization and expanded performance marketing; and finally, deliver joyful customer service by meeting our customers’ rising delivery expectations and injecting moments of joy throughout the service journey that deepens our emotional connection to the brand.

This morning, I’d like to provide an update on the first two, curating great products and distributing our content everywhere to consumer access video. Our business starts with special products at amazing values, and so our product curation strategy is at the center of everything we do.

To win in today’s environment, we need to increase product differentiation, drive a greater pace of product innovation, both ourselves and with our vendor partners, increase our pace of expansion into adjacent and underserved categories, expand our capacity for product discovery and devote more resources to nurturing brands through their life cycles.

We’re ramping our proprietary and exclusive offerings, creating differentiation and driving innovation by expanding our design, development and discovery capabilities across categories.

2019 successes included the launch of Northern Nights and South Street Loft bed in a box programs at home; Potion 54 by Jill Martin in beauty; and G by Giuliana in apparel, among many others.

In 2020, we’ll bring the launch of at least 10 major new brands developed through our in-house design and development capability, including the relaunch of IMAN at HSN next week. We’re tackling underpenetrated categories like athleisure and outerwear, and ones where we feel we’ve underleveraged our strengths, like size inclusivity.

In 2019, we introduced key national athleisure brands as well as proprietary offerings, including New Balance by Isaac Mizrahi, Merrell LOGO and a proprietary Zuda brand, with three more proprietary launches coming in 2020.

In outerwear, we saw great success with new age Arctic Expedition and Laurier Montreal and are further expanding our offerings in 2020. And QVC and HSN have been leaders in size inclusivity for decades offering virtually all fashion products in the full-size range at one uniform price.

Now we’re further expanding the range, adding sizes 4x and 5x in many brands and in underserved categories, like outerwear and activewear. In 2020, for the first time, we’ll be launching brands that are designed and developed from the outset with a larger size perspective in partnership with two highly regarded body positive influencers.

We’re also taking steps to enhance our organizational focus on discovery and innovation. Recall in 2018 that we combined the QVC and HSN merchandise organizations to take a more holistic category view.

In 2020, we’re investing in more specialized capabilities to enable our buyers to spend more time in the market, curating special finds and less time on administrative functions.

Last summer, we conducted The Big Find, a nationwide search for the next big brands in beauty, fashion and jewelry, with two successful launches from the search in Q4 and an additional 38 in Q1 alone, with more to follow.

Now to win with special products, we also have to ensure that every item, inclusive of shipping and handling charges, is offered at a compelling value relative to the market. In January, we took another big step forward in our value story by offering Easy Pay at QVC U.S. and FlexPay at HSN on substantially every item we sell.

This has been a popular – this has become a popular payment option, especially among younger consumers, as other retailers now provide similar programs but typically at a much higher operating cost. We believe these product initiatives will prove instrumental in our return to growth.

But we’ve also acknowledged it will take some time for these programs to scale sufficiently to offset the erosion in some of our larger brands.

Of course, none of our product curation investments matter if we can’t get these discoveries in front of the consumer, which leads me to our second priority, extending our video reach and relevance across platforms.

While we face short-term pressures as cord cutting accelerates, we firmly believe we’re entering a new era, supported by multiple investments and innovations that will fundamentally reshape and enhance our unique video shopping platform and expand our potential customer base.

The future of video shopping is increasingly about ubiquitous distribution, new methods of discoverability, more tailored and relevant lifestyle content and interactivity that puts the viewer in control of the experience. And so let’s go through each of these four components. First, ubiquitous distribution.

Simply stated, we need to be wherever the consumer accesses video content. While our MVPD homes have declined from a peak of 99 million in 2015 to 80 million today, a vast majority of consumers in our target demographic still have a pay-TV service.

It’s our multi-year investments in five networks with attractive channel locations still provides a unique advantage over every other retailer. And as early as 2012, we began introducing over-the-air distribution, which has grown rapidly as an alternative to pay-TV. And today, we’re at approximately 11 million OTA homes.

The growth of virtual MVPD alternatives, also known as digital skinny bundles, provides another distribution opportunity. And in Q4, we launched on AT&T TV NOW, and we anticipate additional – adding additional major distributors this year. We’re leading innovation in over-the-top offerings with multiple partners.

We’ve teamed up with the major streaming service device providers, including Roku, Amazon Fire TV and Apple TV. Last year, we launched a greatly enhanced streaming app on Roku and Amazon that combines the best QVC and HSN content. With Roku, we saw a 58% growth in our net app installs over the prior year to 2.9 million by year-end.

And we rank among their top 25 free TV and movie apps out of an overall universe of 16,000 channels. We’re partnering with TV manufacturers to offer our linear streams directly, including recently launching QVC and HSN networks on Samsung TV Plus, XUMO and LG Channel Plus.

We’re working with our cable distributors to access homes that only subscribe to their broadband offering, such as the Comcast Flex streaming service, an alternative to their Xfinity platform for homes without a video subscription. We continue to focus on digital video aggregators, like YouTube, Instagram and Facebook.

And of course, we’re also focused on our own digital platforms and have seen significant growth in viewing minutes of our linear feeds in both our web and app platforms. And we’re in the early stages of exploring relationships with other programmers and audience aggregators to leverage their access.

For example, in September, we launched our most popular program, In The Kitchen with David, on CBS’s new lifestyle OTA and streaming network, Dabl. We expect to be announcing new relationships later this year that will introduce us to other new audiences. The second component of the video shopping platform of the future is discoverability.

Direct search interfaces, voice-activated remotes and connected smart devices are all changing the way viewers find content, compounded by the growing fragmentation of devices and services.

So to address this shifting landscape, we’re leaning into new ways to develop audiences, working with our partners to achieve prominent positioning through initial channel selections, featured carousels, addressable advertising, banners, screen savers, tune-in messages and electronic program guide placements.

Leveraging these types of techniques has led to some of our early wins with Roku. The third component is ensuring we’re offering relevant tailored content that fits the platform and the audience. We’ve significantly increased our investment in a variety of new shoppable and lifestyle content, as I’ve shared on recent calls.

Finally, we aim to be a leader and an innovator as television platforms become increasingly interactive, creating whole new possibilities for the video shopping experience. We’re already seeing the power of putting the user in control of the content, as she is when watching our current streaming app on Roku or Amazon.

Later this year, we anticipate taking the next step, bringing the market a holistic shopping and lifestyle streaming service with a pay-TV partner that will create an even more immersive and convenient retail experience.

We remain intently focused on our strategic plan to return to profitable growth at QxH and compete in this dynamic retail and media marketplace.

We’re working on a number of initiatives, which makes the timing of our return to top line growth hard to predict, and we also recognize several macro factors that will – we will need to navigate in 2020, including the coronavirus impact, the Olympics and the U.S. presidential election.

However, even with these expected sales pressures, we do anticipate that with the progress we’re making on margins, cost and synergies, in the later part of the year, we will start to see, as Jeff noted, a moderation in the OIBDA yield pressures that we began to experience in the second half of 2019.

Coupled with our additional focus on working capital efficiency and prudent capital management, we anticipate seeing improvements in our free cash flow conversion this year as well. Now let’s shift to QVC International.

We continue to be encouraged by our solid international performance led by QVC Japan, where the team drove strong broad-based execution across product and programming, effectively mitigating the challenges of the consumption tax increase that went into effect October 1.

As we look forward, QVC International will continue to focus on margin enhancement initiatives, including rebalancing the promotional activity and optimizing airtime, product mix, inventory efficiency and TSV margins.

To support our strategies to drive long-term growth in international, we recently announced a new international structure with strategic investments in new cross-market teams to drive digital growth, enhance performance marketing and brand development, deep and advanced analytic resources and drive region-wide merchandising strategies and vendor partnerships.

Turning to Zulily. Their performance remained highly challenged due to continued headwinds in customer acquisition cost, along with lower purchase frequency from new and existing customers. And while Zulily faces challenges on several dimensions, compounded in the short term by the coronavirus outbreak, we continue to see longer-term opportunity.

We believe Zulily serves a large addressable market of consumers who are willing to trade speed of delivery for meaningful product savings.

To address the current challenges, we continue to add top talent to the organization, including, in just the last several months, hiring a new Chief Merchant, a Chief Marketing Officer, a leader for performance marketing, a leader for new business development and a leader for machine learning and data, all of whom bring strong backgrounds in innovating across retail, technology and customer experience.

We have remained disciplined on marketing returns and reduced marketing spend 11% year-over-year in Q4. We’ll continue to experimenting with new marketing channels to find more efficient acquisition vehicles.

On product, the new Chief Merchant and Business Development leader are highly focused on acquiring new brands and products, both leading national brands and unique finds. These product and market initiatives are combined with actions to improve the customer experience.

In October, Zulily launched its Best Price Promise as a foundation to increase transparency and earn customers’ trust. We’re also redeploying savings from our reduced marketing spend in the new pilot shipping and returns programs, and we’ve improved site functionality in areas like product search, shop by category and home page videos.

Finally, we’ll also benefit from cost actions taken last summer, and we’ll maintain a disciplined focus on cost management going forward. At Cornerstone, we built momentum in the second half of the year led by strength in the home brands. Ballard Design generated record Q4 revenue, highlighting the success of its retail stores.

Grandin Road delivered record Q4 OIBDA driven by seasonal business. As we look forward, Cornerstone will be focused on sustaining momentum in home brands, particularly with Ballard’s retail expansion, Frontgate’s outdoor assortment and Grandin Road’s home furniture and accessories.

In summary, while our 2019 and Q4 results were disappointing at QxH and Zulily, we remain resolutely focused on our strategic plan.

We are confident in our business model and our core strengths of curated discoveries, immersive video-rich experiences and the ability to aggregate live audiences of highly engaged customers across multiple commerce platforms. And with that, I will turn it over to Greg..

Thanks, Mike, and I’d slightly flip script. Let’s review our capital allocation for 2019 across the areas we had previously mentioned. First, we are investing in the business for the future. We deployed $325 million in CapEx in 2019.

It was a little bit elevated due to some IT and fulfillment center initiatives, which will start to pay back at the end of this year and further ramp in 2021. Part of those were obviously related to our HSN integration. We expect CapEx to be lower in 2020. Second, managing our tax exposure.

We repurchased $98 million of MSI exchangeable bonds and hedged our remaining exposure through total return swaps. Lastly, return of capital to shareholders. We repurchased $392 million of QRTEA shares. Given the volatility of the stock and the results, we remain cautious on the buyback.

While the business is experiencing some headwinds now, we still note it generates strong free cash flow, and we will prudently and opportunistically allocate it. Please mark your calendars for our Annual Investor Meeting in New York on Thursday, November 19. We appreciate your continued interest in Qurate Retail.

And operator, now, I’d like to open the line for questions..

Thank you. [Operator Instructions] We’ll go first to Eric Sheridan at UBS..

Thanks so much for questions lot in there. So maybe two, if I can.

On the virus disruption to the inventory and sort of your food chain, is there a way to quantify what you’re seeing of how that might translate into headwinds to revenue, either in Q1 or Q2? Obviously, it’s a moving situation, so nobody has an edge probably much beyond those types of time periods.

But is there a way to quantify as to what you’re seeing in real time, so we can translate into what kind of headwinds you’re seeing as potential for the business going forward? And then to Jeff’s part of the commentary, there’s a lot to unpack in there.

Just want to know if we can better – get some better granularity on sort of the headwinds and tailwinds without guidance per se. But as you look out to 2020 and you’re lapping against some things there were headwinds and tailwinds in the margin structure in the business, how to better sort of throw some guardrails around that.

Thank you so much, guys..

Thanks, Eric. I’ll take the first one, and then Jeff will take the second. On the virus disruption, it is very hard to assess the impact.

So today, I would say everyone’s best guess is that we’re looking out to three to four week in production given the time the factories have been closed, maybe another four to six weeks transportation risk given the various bottlenecks that are anticipated, so clearly, a slowdown in getting product to all of our markets.

How quickly those factors were able to ramp back up, whether there up, whether there are future outbreaks and then, most importantly, our ability to shift out of the products we were anticipating coming and leaning into other products, all impact the result.

So fortunately, with the QVC and HSN models, where we’re making decisions every day as to what items to script on the show, if an item is not available, we can go to something else.

So in the short term, we see relatively limited sales impact, if some of our big, today’s special value or other really significant programs were to get materially delayed, we would unlikely be able to adjust enough to fully offset that pressure. But at this point, it’s a little too early to see that.

So we expect some impact, very hard to dimensionalize if it will be significant or not, with the exception of Zulily, which, as I mentioned, has seen an immediate sales hit on top of the base sales pressures they’ve been experiencing because they have a more immediate relationship to those supply pressures.

And then, Jeff, I’ll let you take the second question..

Mike, I think he’s having some technical difficulties, if you want to take that one..

So I think your question, Eric, was just around kind of headwinds and tailwinds in 2020. So I’ll try to summarize that at a high level. And as Jeff can get back on, he can add to it. The biggest pressure point is network optimization, which is causing a negative impact on both the freight and fulfillment lines.

That pressure does get better later in the year, but we do expect two to three quarters of pressure with some improvement as we get late in the year. That ultimately flips to a positive impact on the P&L, but we’ll have pressures through a large part of this year, and then that gets better.

The other pressures on the P&L are just the fact that we didn’t pay incentive compensation last year, so we’ve got – we’ll have some incentive cost and build on our fixed costs. As you know, we continue to invest in performance marketing. That’s a little bit more of an evergreen investment.

We’ve generally been able to more than offset that through the synergies. So I would say the big variable in the year, we feel pretty good about product margins and the work we’re doing to improve product margins.

And so the big variable in the year is both sustaining the investment in performance marketing and getting through this bubble of cost with network optimization, which will be negative in the front half, start to gradually turn more positive as we get later in the year..

We’ll go next to Edward Yruma at KeyBanc Capital Markets..

Hey, guys. Good morning. Thanks for taking the questions. I guess first more of a housekeeping question. Just as we do some math on 2019, how much of a lift was the closure of France to gross margin and just trying to think about in context as you will lap it in March? And then second, I know you had some comments on expanding Easy Pay.

I guess, what percent of sales is Easy Pay today, what you wanted to get to? And just help assure us, since you won’t do some of the difficulty issues, I think, with some sloppy pay behavior about two years ago. Thank you..

Let me start with the Easy Pay question. So we do use Easy Pay. We’ve offered it on a substantial number of our products over the years, and I’m just speaking to the U.S. market now. It’s a little different internationally. We did make the decision at the start of the year to offer it on substantially all items.

Customers then have a choice as to whether they take that offer or just pay full price, and some do both.

So we don’t – when we think about impact on the P&L of expanding these pay offerings, we don’t necessarily see a substantial – we don’t anticipate a substantial impact from that program because it’s largely we’re trying to codify where we’ve been going previously, which is, again, make it broadly available as a consumer benefit of shopping with Q and H.

So to me, that’s the new normal. We feel good about that program. We think it just enhances the value offering to the consumer, gives us one more reason to shop and to make the experience easy because you don’t have to worry about which item is going to get Easy Pay.

So effectively, kind of universal Easy Pay as a go-forward approach at Q and FlexPay at H. And I don’t know if Jeff is back..

Yes. I’m going to answer the France question..

We can. You can take the France question..

Okay. I did not hear the France question. I was getting redialed back in.

Could they ask the question one more time, please?.

Yes. I was just trying to understand, I know you cited in the gross margin commentary and the press release that France did – the closure of France, there was a lift to gross margin. Just trying to understand kind of what was this aggregate impact in 2019.

And then I know you’re going to begin to lap the closure, I think, in March of this year, so trying to understand the dynamics there. Thank you..

Yes, thank you. About 50% of the margin improvement overall was related to France and the closure that occurred earlier this year..

Thank you..

We’ll move next to Oliver Wintermantel at Evercore ISI..

Yes, thanks very much. I had a question that you mentioned that free cash flow, you expect that to improve in 2020. And I was just wondering to see what the use of that free cash flow would be in 2020..

Well, why don’t you – this is Greg. Mike, why don’t you just – if you want to add anything about the operating free cash flow and how you feel about it, and then I’ll talk about uses..

Yes.

I would say we feel really good about our ability to continue to expand free cash flow conversion in 2020 in a number of programs, in addition to all the efforts we’re doing to strengthen OIBDA performance as we move towards the latter part of the year, a number of programs to improve working capital efficiency, some new trade payable terms, among other actions, coupled with just a lower level of capital spend as we move through some of the bubble of our network optimization work as well as somewhat lower payments to our distribution partners.

So we think this can be a good year for expanded free cash flow conversion. And then I’ll let Jeff talk – I’ll let Greg talk about use of cash..

first, investing in the business; and second, managing our tax exposure. So let’s talk about that one for a second. We have, as you know, gone out and repurchased a bunch of the exchangeable bonds. We’ve hedged a bunch.

And I think we’ll continue to look at ways to manage that down and potentially including investing in other kinds of tax advantage investments for the so-called green investments that we’ve made to date that, we think, have generated very attractive IRRs and returns on capital. As far as returning capital to shareholders, we remain cautious.

There is volatility, both in the business and in the marketplace. And we’ll wait for the year as the year goes through – on, rather, what we do with capital on – in that regard..

Okay. Thanks very much..

We’ll take our next question from Heather Balsky of Bank of America..

Hi, thank you for taking that question. I was hoping you could talk a little bit more about your shipping and handling strategy. You spoke a little bit at the November Investor Day. And also it looks like shipping and handling at QxH was down a bit in the fourth quarter just based on my math. So just curious what’s going on there? Thanks..

Thanks, Heather. I would say we just continue to evaluate both at an item level and an event level how we want to deploy shipping and handling. We have gradually reduced shipping and handling revenue and a little more substantially in Q4, as we have focused on making sure that we are competitive. It kind of takes a couple of forms.

It takes and some – one form is that we include shipping and handling with the price of the item, where we think that, that’s sort of a market standard to do so. And then we also run events, all day events, flash events where we’ll offer free shipping as a benefit. You expect that to be higher in Q4. We definitely see that.

The promotional intensity goes up every Q4. It was high a year ago. It was high this year compounded by the short selling season. And to a little bit more intensity on those key weekends to make sure you’re as competitive as you could be.

I would note that even with a pullback in shipping and handling revenue, as we got more aggressive on promotions, you’ll note that our impact of product mix or product margin was about flat. That’s very slightly down, and that shipping and handling cost shows up in product margin.

So we were able to offset the shipping and handling investment as improvement in product margin rate. So we felt good about our ability to be pretty competitive in the marketplace, but also offset some of that shipping and handling investment in product margin rate.

And so as we move forward front, it’s all about continuing to work with our vendors to make sure we have the most optimized costing we can get and then to make the right surgical choices as to how to bring that item forward and what mix of price promotion and S&H we use to deliver value to the consumer, but also get to the margins that we need..

If I can add to that also, Mike, you bring up the point working with our suppliers and supporting a number of these events. One of the elements that supports us from a product margin also is when the vendor will provide us support for shipping and handling on certain items and/or events, which also helps us to maintain that overall margin rate..

Thank you. And as another question, you talked about 10 brands representing 12% of your sales and all of your decline.

Can you talk about the other 88% of your business and what you’re seeing in different categories across that? How do we – is the rest of the business growing then?.

So I mean, the math is the rest of the business is growing in aggregate, right, because those 10 are more than 100% of the decline. And again, I want to be a little cautious with that fact because you always have big brands that are in decline. It’s just the nature of this business.

It’s all about moving brands up a life cycle and then managing them down a life cycle.

But I would say, right now, we’re feeling sort of the double pressure of a little bit greater pressure from that sort of tough brand phenomenon decline, a little bit compounded this year by the fact that a couple of those brands are associated with this Ingenious Designs business that we closed, so they were kind of unanticipated exits.

And those are obviously much harder to manage. So a little more pressure from that top brand decline.

And while the other brands are, in aggregate, growing, we’re not – they’re just not growing at quite the rate to get us to positive total growth, and that’s where kind of all the actions I’ve described on product curation are all about feeding the top of the funnel with a broader range of brands, getting more creative about how we nurture those brands through the life cycle known that it’s crowded marketplace for brands today and just making sure we’re using the platform in the best way to tell the best stories, to find even more unique offerings like through our Big Find program, more exclusive offerings through our earlier development program, we just are finding that we need to – none of those things are brand new to our arsenal, but we need to use those things at an even higher level of intensity to get to the most moderate declines among the top brands and, more importantly, get all the other brands to be growing at an even faster rate..

Thank you..

We’ll go next to Alex Fuhrman at Craig-Hallum Capital Group..

Great. Thanks very much for taking my question. I wanted to ask about your different product categories. It seems like consumer electronics was up for you guys in 2019 at QxH, whereas the other categories were negative.

I know it’s early, but just looking into 2020, do you feel that there is sufficient innovation out there in the consumer electronics landscape for that product segment to continue to grow for you? Or do you think other categories might be taking over as leadership for you this year?.

I think – thanks for the question, Alex. I think it is early to tell. I wouldn’t say that it feels that the innovation is so compelling that we’re confident in that business. We tend to – our mindset has always been that we’ll have up years and down years with consumer electronics based on the cycle.

And so let’s get everything else growing in a consistent way as we can. And then we can either benefit from electronics or try to mitigate any negative impact. I mean, certainly, in some spaces, audio continues to be – audio trends continue to be hot and new items there and wearables as well.

But we have seen a slowdown in smart home as that business just took off very rapidly, and now we’re anniversary-ing those big increases in smart home. And so that is, I would say, for now, moderating. And of course, the places where we are seeing growth do tend to be lower ASP than the classic computer, tablet, the TV market.

So I would say it’s this category, we approach cautiously in 2020, not necessarily looking to huge growth, but also not sure we face huge pressure either..

Okay. That’s very helpful. Thank you..

Now we’ll go next to Thomas Forte at D.A. Davidson..

Great. Thank. Thanks, Mike. On the coronavirus, though, I wanted to ask about how should we think about broadly it’s impacting the business from a disruption standpoint, distracting the consumer.

And then how should we think about it in geographies that are affected, such as Italy?.

Yes. Thanks, Tom. It’s a good question. It is hard for us to read. I would just take a moment to recognize and appreciate all of our team members in Italy. We are headquartered in Milan.

So they’re going through a tough time right now, and I’m grateful for that leadership team and all their efforts to make sure our team members and partners in Milan are safe. So far, we’ve been able to operate the Milan business without disruption, but certainly taking it day by day.

And certainly, our Japanese team members and China team members have felt the brunt of this as well. I would say that to date, we’re not experiencing any meaningful impact on consumer demand through our markets. So we’re not seeing the kinds of pressures folks would say.

Big brick-and-mortar businesses in Asia are folks that are heavily dependent on tourist trade, how they’re seeing it. The wildcard for us is the one you’ve hit on is if it just creates a substantially negative halo on consumer sentiment and obviously connected to the bat. We know our consumers are sensitive to the stock market.

And so that intersection of stock market pressures and consumer sentiment pressures certainly could impact demand. We haven’t seen it to date. But depending on how this plays out, we can’t rule out that risk..

Great. Thanks a lot..

And we’ll go next to Jason Bazinet at Citi..

I hate to belabor at this point.

Can I just go back to the margin – international margins? In the release, it implies that the France closure was sort of so large and it was offset by a bunch of items, that the aggregate margin expansion we saw was smaller than the impact that the French closure would have had if you didn’t have all those other offsets.

Yet in the Q&A, you said the France closure was 50%, if I heard you right, of the overall margin expansion in international. I just got confused.

Can you – can we just go back to that and clarify?.

Yes. So essentially, the France business, which in 2018 would have had some losses associated with that business, as you were going through 2019, you would not have been incurring those losses as a result of the exit of that market in mid-March.

So that was actually a year-over-year sort of tailwind for us as we were going through the course of the year.

The other offsets to that, though, were really for the international markets somewhat in fixed cost as they were continuing to take actions with respect to their operating model and, as Mike had mentioned, some of the actions they were taking with respect to centralizing and regionalizing a number of their efforts..

So – but the losses that we were incurring in France must have been quite large. Is that the right takeaway? But we just didn’t see the full benefit because of those offsets. I just want to understand how you got 50% of the overall margin expansion was France related.

It’s more than 100%, is it not?.

No. No, it’s not..

Okay. I’ll take it offline. All right, thank you, Jeff..

Thank you to all for your interest in Qurate. Thank you for your questions. As always, we look forward to speaking with you on next quarter’s call, if not before. Thanks very much to the team in Seattle, the team in Pennsylvania and here in Colorado. With that operator, I think we’re done..

Thank you. And that does conclude today’s conference. Again, thank you for your participation..