Felise Glantz Kissell - Vice President, Investor Relations Judy Schmeling - Chief Operating Officer & Chief Financial Officer Mindy Grossman - Chief Executive Officer & Director.

Neely J. N. Tamminga - Piper Jaffray & Co (Broker) Timothy E. Chiodo - UBS Securities LLC Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC Trisha Dill - Wells Fargo Securities LLC Barton E. Crockett - FBR Capital Markets & Co. Anthony C. Lebiedzinski - Sidoti & Co. LLC Matthew J. Harrigan - Wunderlich Securities, Inc.

Victor Anthony - Axiom Capital Management, Inc..

Ladies and gentlemen, good morning and welcome to the HSN, Inc. Fourth Quarter and Full Year 2015 Earnings Call and Webcast. This call is being recorded. Following the conclusion of today's discussion, the HSNi team will be taking your questions.

With that, I'd now like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations. Ms. Kissell, please go ahead..

Good morning, everyone, and thank you for joining us. On this morning's call, we have Mindy Grossman, Chief Executive Officer of HSNi; and Judy Schmeling, Chief Operating Officer and Chief Financial Officer. Judy will first review our financial performance, Mindy will then strategically discuss the business.

As always, some of the statements made on this call may be forward-looking and as such, are subject to many factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements.

Additional information regarding these factors, as well as various risks and uncertainties, can be found in HSNi's earnings release filed with the U.S. Securities and Exchange Commission and available on the company's website. HSNi does not undertake to publicly update or revise any forward-looking statements.

Also, on today's call, there will be references to certain non-GAAP financial measures. These are described in more detail in the company's earnings release and SEC filings available on the HSNi website.

You are encouraged to refer to the press release and SEC filings and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results. With that, I would now turn the call over to Judy Schmeling, HSNi's COO and CFO.

Judy?.

Thank you, Felise, and good morning, everyone. As we reviewed on the last earnings call, our fourth quarter results would be impacted by heightened promotional activity in the marketplace, the performance of certain brands and merchandising categories, and the tough comps from the prior year.

At HSNi, these factors resulted in sales down 2%, with digital sales up 1%, comping 10% sales growth and 12% digital sales growth in the prior year. Adjusted EBITDA decreased of 3% due to Cornerstone's performance and adjusted earnings per share of $1.15 compared to $1.22 a year ago.

Our strategic priority is positioning HSNi for long-term growth through a balanced approach of driving sales and gross profit, while intensely managing operating expenses given the current retail environment. At HSN, sales decreased 2% to $779 million, with digital sales increasing 1%.

Sales increased in electronics, wellness and home, offset by decreases in categories, such as jewelry and culinary. Our improvement in home was driven by the wholesale expansion of our Ingenious Designs business associated with the Joy Mangano brand into other retail outlets.

While we continue to air our direct-response television marketing campaign featuring Keith Urban in the fourth quarter, a business we viewed as opportunistic. Sales were down from the prior year.

The incremental sales from our expanded wholesale distribution that I just mentioned, offset by lower demand in our direct-response business represented a benefit of approximately 1% to HSN's sales. HSN's return rate improved 30 basis points and units shipped increased 2% with average price point down 5%, primarily driven by product mix.

Our loyal customers purchased more units while gravitating to lower price point products, particularly in electronics.

Gross profit decreased 4% at HSN with gross profit margin down 50 basis points to 32.4%, primarily due to the one-time impact of recognizing $5 million of breakage income in the prior year related to the reversal of certain customer credits.

Excluding those adjustments, gross profit decreased 2% with gross profit margin down 10 basis points, principally from higher shipping promotions and greater electronic sales, partially offset by increased product margins and favorable product mix.

We continuously review our organizational structure to ensure we effectively align our investment and talent with our best growth opportunities. As a result, during the quarter, we were able to consolidate these sources in several areas, which we expect will reduce annual operating expenses by $9 million going forward.

We eliminated approximately 70 positions and incurred severance-related costs of approximately $2 million associated with these actions. Operating expenses, as a percentage of sales, improved 30 basis points to 19.4%, excluding non-cash charges and the severance costs I just mentioned.

This improvement was largely due to lower compensation and the timing of certain marketing events, partially offset by increased bad debt expense associated with greater electronic sales, which typically carry higher bad debt write-offs. As a result, HSN's adjusted EBITDA increased 1% to $101 million in the fourth quarter. Turning now to Cornerstone.

Sales were down 1% to $320 million with digital sales up 2%. Overall, sales grew in home, led by Grandin Road and Ballard Designs. Frontgate sales were slightly down due to a lower than anticipated customer response in certain categories, particularly seasonal items.

In apparel, Garnet Hill sales strengthened, and we remain pleased with the progressive improvement of this brand. As previously articulated, we continued to address performance challenges in TravelSmith and Chasing Fireflies. Gross profit at Cornerstone was relatively unchanged at $119 million.

Gross profit margin increased 20 basis points to 37.4% driven by improved product margins, particularly at Garnet Hill and Grandin Road. Certain brands have higher promotional activity due to the competitive environment and unseasonably warm weather.

Operating expenses as a percent of sales, excluding non-cash charges, increased 150 basis points to 32.8%, primarily from circulation, as we didn't gain sufficient top line sales to leverage our catalog costs. We did make deliberate investments to build the active customer files for Garnet Hill and Grandin Road due to their solid performance.

Additionally, we incurred costs associated with Garnet Hill's new satellite location in Exeter, as well as opening up our new Ballard Designs experiential retail destination in King of Prussia, Pennsylvania. Cornerstone's performance resulted in adjusted EBITDA of $15 million, a decrease of $4 million from the prior year.

We are strategically assessing all aspects of the portfolio, while simultaneously taking aggressive actions to right-size the business to reflect lower demand trends in certain brands. This includes rationalizing circulation, implementing pricing and promotional strategies to stimulate demand, as well as tightly managing inventory levels.

At HSNi, our fourth quarter effective tax rate was 37%, consistent with the prior year. Our full year effective tax rate for 2015 was 37%, compared to 38% in the prior year. Excluding the impact of a one-time item in 2014, the effective tax rate would have been 37%.

While our overall growth in inventory in 2015 was less than in 2014, as we strategically managed inventory, we are carrying some excess inventory in certain brands and categories that could impact margins in the immediate term as we clear through this merchandise.

In the fourth quarter, we repurchased approximately 130,000 shares and more than 1.1 million shares in 2015 through yesterday's close. We have 2.9 million shares remaining under our current share repurchase authorization. HSNi returned $656 million to shareholders in 2015 through share repurchase, ongoing dividend and a special cash dividend.

Before turning the call over to Mindy for a strategic review of the business, I want to reinforce that we are keenly focused on improving our performance, while simultaneously executing on our strategic initiatives to drive long-term growth.

We expect to capitalize on our growth opportunities as the year progresses, when our deliberate actions to reposition certain merchandising categories and brands can be fully recognized.

In the immediate term, the retail environment is extremely tenuous, and we are navigating through this climate cautiously, maintaining a strong emphasis on managing expenses.

We remain confident in our unique business model that leverages a long history of extensive direct-to-consumer knowledge and capability, compared to the vast majority of retailers who are just beginning this journey.

Our direct-to-consumer expertise, coupled with our ability to create content for experiential shopping, while engaging our passionate loyal community of customers, provides us with a distinct competitive advantage in the marketplace for long-term success.

Mindy?.

At HSN, we're focused on leveraging our unique ability to be a launch platform for entrepreneurs with innovative products, the foundation on which our company was built. As a part of this effort, we are intensifying our American Dreams series, which features new products from aspiring entrepreneurs.

This monthly series is an important part of our merchandising and programming strategy to not only fill our pipeline with new products and ideas, but also reinforce our culture of innovation and brand building. We debuted our first-ever American Dreams, Today's Special just a few weeks ago.

In addition to Daymond John, who is an inaugural member, Randi Zuckerberg will be joining the American Dreams entrepreneurial panel with a focus on technology. We are pleased with the initial results from our new series just launched, called, Deal Hunter, featuring Tory Johnson, host of Good Morning America's popular Deals and Steals.

We are partnering with Tory to bring new brands and exclusive deals to HSN every month. Tory is already having an impact, with her premier generating nearly 25% new customers to HSN.

We work directly with DreamWorks creative, filmmakers and consumer product teams to develop a unique assortment of products in conjunction with the launch of Kung Fu Panda 3 in late January. Our very own chef, Ming Tsai, has a role in the film, bringing a new level of authenticity and crossover to HSN's movie events.

And Ming created an exclusive offering for us related to the movie. DreamWorks also developed custom animation videos and content pieces that brought the characters from the movie to life, across our platforms, as well as exclusive games for HSN Arcade.

We will be intensifying our strategies in beauty, recognizing its importance in attracting and assimilating new customers and deepening their lifetime value.

Our strategies include leveraging makeup artistry brands and doctor brands with enhanced storytelling, teaching moments, digital experiences, social media and overall meet the experts interactions.

We're also expanding our national brand assortment particularly in prestige with products uniquely created for us to provide a point of differentiation in the marketplace. In apparel and accessories, our Buy Now Wear Now strategy contributed to the category's most recent success.

Our spring fashion series, which just launched emphasizes Layer Now Lighten Later, providing us with more flexibility to manage unpredictable weather patterns, while still offering new fresh items and colors into our assortment. Premieres will include Sperry, Harve Benard, Tiki and Jay Godfrey, and an exclusive handbag collection from Vince Camuto.

In culinary, we will be launching our new partnership with Allrecipes, the world's largest food focus social network with a community of 40 million home cooks, consuming 3 billion pages of food inspiration annually.

As a part of this partnership, we will be premiering the unique cookware products on our digital platform in conjunction with our March Cooks Event and introducing the Allrecipes community to HSNs prominent celebrity chef.

We're also excited about the premier of personal financial guru, Suze Orman, selling the complexities of financial planning as we reinforce HSN as a destination for our customers who trust us to provide value-added services that will be beneficial to them.

And before moving to Cornerstone, we continued to extend our frictionless commerce capabilities on alternative platforms, launching next month the ability for customers to transact seamlessly on our Apple TV app.

At Cornerstone, we are critically assessing the portfolio with a focus on optimizing our greatest opportunities within our strategic growth brands. Ballard Designs will intense its efforts to leverage the success we've seen in our newly opened retail destination.

We are pursuing strategies to capitalize on additional opportunities with this experiential concept. In fact, we will be opening a new destination at Tysons Corner outside Washington, DC later this year.

We continue to strategically expand Frontgate's product assortment and have developed a distinct interiors business with specific collections to the master suite, spa and bath and living areas. This diversified expansion gives us both the opportunity to gain share of wallet and reduces our reliance on outdoor and seasonal.

We are also expanding our more contemporary offering with the Porta Forma brand. Grandin Road is leveraging the positive customer response to its core interior furnishing offers and home organization products and will be featuring new outdoor collections.

These efforts will be supported through the series of short videos that will be integrated with social media campaigns. Garnet Hill is deepening its Buy Now, Wear Now strategy, focusing on seasonality and consumer trends. We were pleased with the Garnet Hill pop-up location in Bridgehampton, but we extended into the holidays.

It's a concept that we will continue in 2016 with additional new and innovative locations. In closing, transformation and even disruption are the new realities of retail and in a world where consumers are gravitating to experiences from travel to technology.

While many retailers are trying to invent themselves, we're already considered an experiential destination. We continued to challenge ourselves to participate in this evolving landscape in a more meaningful way for a differentiated direct-to-consumer capability.

We remain focused on execution at the highest level, working cross-functionally across the organization to drive growth.

We will extend our reach to leverage our vast content across traditional and alternative platforms, curate differentiated products and experiences, build communities with customers, and employ frictionless commerce by eliminating purchase barriers.

While we recognize there is immediate work ahead of us, we remain confident that our unique business model will enable us to lead in this new commerce landscape. So now we will take questions, but before we do, talking about volatile weather patterns, we are under a tornado watch right now.

We don't anticipate disruption, but we'll certainly let you know if there are any problems. So now I will take questions..

Thank you. And our first question comes from the line of Neely Tamminga of Piper Jaffray. Your line is now open..

Good morning, and I hope you guys are safe out there? All right..

Welcome to Florida..

True. All right. So first primary question for Mindy, and my follow-up is going to be for Judy here.

But on the front-end for you, Mindy, when we look at some of your higher-end brands at Cornerstone, we're trying to disaggregate a little bit more of some of the broader commentary we're hearing around the promotional environment versus what's truly kind of is there a slowdown in underlying consumer demand out there for that product, whether it'd be stock market, election, taxes.

So some color there would be helpful on how you feel like you guys remain differentiated? And for Judy, on the follow-up question, if I may, the role of FlexPay, I think was pretty – it was exercised quite a bit maybe in Q4 last year, if I remember correctly from the call last year.

How did the role of FlexPay compare like this Q4 versus last Q4 with that lower AUR? Did you need to exercise it as much or not to kind of drive that conversion? Thanks..

Okay. So certainly it's a very distracting environment right now between the election, the environment, the market.

But on the Frontgate side in particular or in Cornerstone in general, March is really the critical month of the quarter, as you know, the first quarter is our smallest quarter, and we start up with outdoor in – really big in March for those rollouts.

Now, we certainly feel we have a diversified assortment, a much stronger interiors assortment at Frontgate, which we've really been developing, as well as other new developments, we feel we're a little bit more balanced. But we know we're cautious going into that period..

Yeah, the consumer, you know, I think from a demand standpoint, specifically on the higher end, has been – Frontgate, we do see that they vote or – more with their stock market versus their income, so we do think that that's had some impact on our business, but really and truly it's more of a promotional nature in the category as a whole, particularly as it's related to seasonal.

And related to your question on FlexPay, actually this year we pulled back on FlexPay more versus the prior year. If you look at our cash flow statement you'll see that we had less uses of FlexPay in general.

That was partly because, last year, we had higher bad debt write-offs in the first part of the year related to some of the electronic FlexPay, so we didn't offer it as freely across the board to drive demand. And we do feel that we put in more credit policies on the go-forward to be able to offer those to the more qualified customer, if you will.

So our conversion on those is still quite strong. We continue to use FlexPay obviously as a demand lever. But I think we're leaning a lot more into the her side of the home, where we know our best customer buys a lot, going a little bit deeper on those product categories, and being more strategic as we go forward on electronics.

Now, I would say some of that is going to be also dependent by product category. Not all electronics is the same in terms of bad debt write-off, so there is some differences between them..

Thanks. Stay safe, you all..

Thank you..

Thank you. And our next question comes from Timothy Chiodo of UBS. Your line is now open..

Hi. Good morning. Thank you. In for Eric Sheridan this morning.

Our question is around, you mentioned Apple TV, but also in the past, obviously, TiVo, Roku, Amazon Fire, I just want to see if there's any help you can give us on how big those might be so far in terms of either users or engagement, really just any metrics you can help us with around those? Thank you..

Sure. I'd say that we're actually – some of those are very small obviously in the total scheme of HSN sales. But Roku is by far the most advanced, the one that we have the most sales on. They've been a great partner. We have also launched recently an HSN electronics channel specifically on Roku.

So we are learning quite a bit about consumer behavior with us being on all those platforms. We do see that there is deeper engagement once they're on those platforms. So we are encouraged by that.

But again, relative to – the current business volume is definitely small, but we think that all of those alternate platforms provide us with the ability to provide our content to that customer where ever she is and we do see that when it's coupled with the Shop by Remote technology, it is incrementally even more engaging with the consumer and they transact faster..

We're also working diligently to elevate the experience at every one of those platforms as an ongoing strategy, to really be as immersive, seamless, give the right video content, so as we have launched new experiences, you really see the elevation of the brand..

Okay. Very helpful. Thank you.

And am I missing any there, TiVo, Roku, Apple TV, Amazon Fire, are there any others?.

Well, we have Samsung and LG as well..

Right. Okay. Very helpful. Thanks a lot..

Thank you. And our next question comes from Alex Fuhrman of Craig-Hallum Capital. Your line is now open..

Great. Thank you for taking my question. I wanted to ask a little bit more about the line of Joy Mangano products at Target and Macy's and some other retailers.

If you could talk a little bit about the margins and just the economics of that relationship? And then as you look across the portfolio of proprietary brands you have, is there anything you're seeing from that retail rollout with Joy Mangano that you think could be extended to other brands that you have?.

Well, I'll take kind of the – kind of product piece, and Judy can get into some of the margins. So I just want to remind everyone that we actually did have products in Target, Bed Bath & Beyond and Container Store prior, but just in a less expansive way.

So with the opportunity of the movie and all of the PR, et cetera, we partnered with each of those retailers, including a strategic partnership with Macy's to really roll out a full Joy Mangano environment of her innovative products from mops to pillows, to steamers, to hangers, very much around organization, et cetera. So that roll out is complete.

It was significant. If you look at Macy's, it was – and it still is full shop. We had the Macy's Herald Square windows. And again, we are as pleased as they are with initial response.

To your point, we are evaluating other businesses that we might have and are there strategic partnerships, whether they be permanent or certain times of the year, which may make sense for us to partner with somebody having a physical presence..

In terms of the margin and how we view the business, obviously, we've actually been in retail for quite a number of years with the brand. We did a much more major launch of that this past fourth quarter and are really seeing where the brand can go. I'd say it's still very much in the early stages, we're very pleased with the performance so far.

Obviously, as a wholesaler, the product margins are going to be less, because the retailer's are obviously enjoying margin as well.

But from a product pricing to the consumer, we're very much on parity with those businesses to make sure that HSN is also going to be the distortion vehicle in terms of more items offered to the consumer at better value, if you will.

So I think what remains to be seen as we go forward is, how much more velocity can go through those brands, what is our marketing cost in total as a percentage of that.

So I think in particular, I should point out that we did enjoy a benefit, as I pointed out in my script, of the sales increase in Q4 related to that retail volume that we won't have in Q1, that's going to be now more of a pushing into Q2 for replenishment models, whereas the marketing costs associated with those products in retail occurred in Q1.

So there is so much of a timing shift that we didn't originally anticipate, but we do anticipate that over the year that will level out for future quarters..

Great. That's very helpful. Thank you very much..

Thank you. And our next question comes from Trisha Dill of Wells Fargo Securities. Your line is now open..

Great. Thanks very much for taking my questions. First, I just had a follow-up on the consumer and the promotional environment. I'm just wondering if you can comment on how the environment looks so far this quarter, whether or not it's stabilized a bit since Q4? And then you mentioned higher shipping promos again as a headwind to gross margin in Q4.

I think last quarter you talked about that being more reactionary rather than planned. So just wondering if you saw sort of that same dynamic in Q4, and what that might mean for the next several quarters? Thanks..

So I would say that we haven't really seen a tremendous difference in the environment with the exception of the fact that we don't have the weather-related issues that we certainly came up against in the fourth quarter, which affected our seasonal and warmer weather businesses, I mean, that was very distinct.

But if you look at our categories of business specifically, at HSN, the merchandise changes, what we said, we are in the process of course correcting, the strategy is in place as I outlined, and we have said that we see sales to improve over the course of the year. We have to control what we can control, notwithstanding the environment.

Judy mentioned kind of the net impact on the IDL business, but I would also include that in Q1 last year, we had a notable contribution from the Keith Urban direct response business, which we won't have this year. And I already spoke about Cornerstone, obviously, March being a critical month. So that's kind of an overview of how we're seeing things.

But as we both mentioned in our call, we're realists and we want to be able to be very focused on managing our business and looking at expense and looking at other things, because we can't predict the environment..

From a shipping and handling perspective, Trisha, I think that we always anticipate that Q4 is going to be highly promotional from a shipping and handling perspective. That is the nature of a holiday season. So I think that we went into that with our eyes wide open and much of that was planned as a part of our business.

I think that it continues to be something that consumers are demanding, so I think as we continue to go forward, we are doing everything we can to be able to continue to offer promotional free shipping, handling or order value shipping or reduced shipping, whatever that different cadence can be.

And we're trying to do as much as we can to offset the impact of that, whether it's being working with our vendors to be able to fund some of that, increase our product margin as a result of that, or as I mentioned previously, our warehouse automation project, which we're going to do a soft launch of that in the second quarter of this year.

And we do anticipate that that's going to realize this year savings somewhere between $5 million and $10 million on the cost side, which will help offset some of the impact of that. And annually, on a go-forward basis, we believe that that project is going to save us about $20 million a year.

So again, we're trying to do as much as we can to be able to offset what we know is, you know, that's slow inevitable leak in terms of shipping and handling to the consumer..

Thanks. Very helpful..

Thank you and our next question comes from Barton Crockett of FBR Capital Markets. Your line is now open..

Okay. Great. Yeah, I wanted to poke a little bit more at the expense and the margin, which was a highlight this quarter, I mean you guys seem to do a good job hanging on the margin in a tough retail environment.

You know, looking ahead to 2016, could you just update us on how much CapEx you expect to spend? And then more broadly, how do you feel about your ability to hang on to your EBITDA margin across both HSN and Cornerstone if we continue to have this kind of sluggish top line environment with the shipping and handling pressures, but the cost benefit of the automation that you described?.

Sure. So in terms of our annual CapEx spend, it's going to continue to be in the $60 million to $70 million range.

In 2016, we will be completing our warehouse automation project, which is a good chunk of that spend, but we are also going to be embarking at HSN on our next wave of transformation, which is our merchandising platform, which was originally developed in the 1990s.

So we do anticipate that that is going to take us a couple of years to be able to implement that project, but we'll be able to continue to drive further margins within our business, as well, at HSN. So we're very excited to get that project off the ground.

So to your question on EBITDA margins, we are obviously doing everything that we can, as evidenced by our reorganization, to be able to continue to improve our EBITDA margins giving the sluggish top line and shipping and handling headwinds.

So I think that from our perspective today, we anticipate that we'll continue to be able to improve that over the course of the year from where we have been, but obviously we – it is dependent upon some top line movement as well.

I can't say that the, let's call it the product event programming and strategic collaboration pipeline is robust, but obviously, it's going to get executed as we progress through the year, but it's very robust, what's coming..

Okay. That's encouraging on that side.

And just to clarify on the CapEx, the $60 million to $70 million range for 2016 and a couple of more years on the merchandising platform, should we read that to think that the $60 million to $70 million range is something we'll see for the next couple of years 2016, 2017 type of setup?.

Yeah, you know, Barton, I think that we have a lot of opportunities, they continue to drive cost improvements. So once we finish with the merchandising system or even possibly concurrent with that, we're going to be replacing the order management system at HSN, which was also built in the 1990s.

We feel that there's a lot of opportunity for us to continue to do that.

And on the Cornerstone side, as well as we look at the store openings for Ballard, does that make sense to continue to go a little bit deeper in that if we're seeing continued traction in the business, as well as getting more synergies out of our business there on the order management side as well.

So I'd say for the next couple of years, that's what we are planning on. Obviously, we'll continue to update you, should that change, but from our current perspective, we are looking in that same range for the next couple of years..

Okay. That's great. Thank you very much..

Thank you. And our next question comes from Anthony Lebiedzinski of Sidoti & Company. Your line is now open..

Good morning. Thank you for taking the questions.

So my first question is, if you could perhaps attempt to quantify the impact of the warmer weather on your business in the fourth quarter? And as a follow-up, I just wanted to drill down a little bit more into the gross margin by each segment? HSN on an adjusted basis, down only 10 basis points even though you did have a shift to more lower margin electronics, I just wanted to get a little bit more details about that.

And then Cornerstone, what drove the gross margin improvement there? Thank you..

So there were two primary areas that were impacted by the warmer weather. On the HSN side, it was very much in the home side, and somewhat in the apparel and accessories side.

So on the home side, we traditionally have very strong sales in things like heaters, fireplace, flannel bedding, fleece and all of that, and it was definitely – snow blowers, the things you put on your windshields, things that have traditionally had a strong trajectory. So we definitely saw that, which is why we're moving to some of that inventory.

On the Cornerstone side, it was more in the seasonal products. We definitely saw a pullback in Christmas decor and trees and the green and reddish, as I think people just felt that they weren't investing in that or they weren't feeling it, so those were the primary areas. And seasonal is a business that's in Frontgate, in Grandin and in Ballard.

Now, some of those brands they were able to have other things to make up for it. On the fashion side, I think that the teams have done a good job of trying to be more – a little bit more Buy Now Wear Now.

So Garnet Hill was able to perform and we had some residual on the HSN side, primarily in heavier weight outerwear and let's call it more cold-weather boots, but I would say the home side is really where most of the pressure came from..

Got it..

Yeah, and in terms of on HSN, the gross profit margin was down slightly excluding the one-time issue, and that was primarily as we were really working with our partners on product margin, really sharpening our pricing to consumers, as well as having less clearance activity, and the clearance activity that we had was really old reserve stuff.

We got a benefit of that reversal of the inventory reserves. As I did mention on the call, though, we do have some excess merchandise carrying over into Q1 that will pressure our margins, as Mindy mentioned, for all the things that we couldn't sell in December. So that will have some impact as we move forward.

On the Cornerstone side, that was definitely a bright spot in terms of margin improvement from an overall basis, while we did have some businesses that had more drainage, we had other ones that had improved product margin compared to the prior year, and that's going to be partly because for instance in Grandin Road, we had taken all of that issues early on in Q3, so they went into Q4 being much cleaner..

Okay. Thank you..

Thank you. And our next question comes from Matt Harrigan of Wunderlich. Your line is now open..

Oh! thank you. This is bit of a fuzzy question, but every year around this time, PwC, the consultancy out of London, comes out with their total retail survey. One of the interesting findings this year was that some of these top brands have actually accreted value at five times the S&P average over the last 15 years. The U.S.

list, I mean top 10% guys, it's a lot of retailers. Fortunately you or QVC aren't on the list.

But with everything so image-oriented and trying to keep the consumer entertained and all that, how do you feel about your brand equity and how it translates to your equity market cap and the momentum you have with the consumer? Clearly, that's been a focus area for you.

It's pretty hard to quantify, but just sort of is interesting, fuzzy question, I thought I'd run it by you..

No, no.

It's interesting commentary, because as we all know there have been a lot of studies that have come out of late whether that's this shift of consumers experiences, the importance of loyalty and brands and the importance of creating a differentiated destination that's going to have meaning with the consumer, and we definitely believe that is important.

We feel that we have brands with very strong equity that are content driven, meaning brands. We have very loyal customer constituencies and the more we become sophisticated in our utilization of data analytics to use them to create further meaning with our customers.

I think the second thing that's important, and certainly on the HSN side is, we have always had entertainment and storytelling as a core part of our strategy.

Going forward, we want to continue to put that on steroids, because we feel that the more experiential we can be and the things that we have tested, whether it be our Monday night show programming or American Dreams, our Steals and – our Deal Hunter with Tory Johnson, our partnerships with the movie studios, which we have a number of plans throughout this year and reinvigoration of our music series, all of that is very important to keep engagement and destination.

And we're applying the same things to our other brands as well. And it means different things to different brands.

The Ballard store, it – we don't even call it a store, it's a design studio, and the amount of engagement we're having, the store actually has a design studio in the center of the store, you can – using technology and throwing up your Pinterest boards.

These sort of things I think are critical for both brand equity, consumer engagement and creating a differentiated experience..

When you look at Amazon perceptively launching a proprietary clothing brand, I don't know whether that would install some of the elements that you have in terms of the nexus with the consumer and storytelling and social and all that.

Is that anything that gives you a pause or do you think it's kind of lost within a very broad retailing landscape?.

You know, we're constantly looking at what everyone is doing in the landscape, because we have to. We have to be cognizant of anything that's going to be a sea change or a shift.

And we take all of that and then we say, well, what is our proprietary point of differentiation and why is someone going to shop with us? And we don't – if you look at our fashion business, if you go on hsn.com, we're in the middle of our spring fashion series.

There is so much content and editorial that it's not just selling clothes, right? We're integrating beauty into fashion, into accessories. We're using Stylitics to really create a very different editorial experience, and that's what we have to do, as well as storytelling.

So for today, it's not just private label products, it's Giuliana Rancic on air talking about style and why her products are right for the season. So that really creates a different point of differentiation for us..

Thanks, Mindy..

Thank you. And our last question comes from the line of Victor Anthony of Axiom Capital. Your line is now open..

Thanks. Thanks for taking the questions. Just a few. The first one is, maybe you could just give us an update on your relationship with Liberty, QVC? Has that changed? That's one. The second is, on your leverage ratio, I think you're comfortable – you've said you're comfortable with I think 3.5.

Anything to update us there? And third, on your warehouse automation, I think the cost savings you talked about in the back half, maybe can you help us allocate where those cost savings are, just mostly COGS, OpEx, CapEx, so I get a sense of how I should think about that?.

Sure. Nothing has changed with our relationship with Liberty, they still have two board seats. They own 38.5% of the company. In terms of, I think your second question was on our debt leverage. Actually, we've never said 3.5 times. We said 2 to 2.5 times, just to be clear on that, you must be confusing us with someone else.

So we're very comfortable in that general range.

And then I think your third question – I'm sorry, what was the third question?.

Just the cost savings from your warehouse (55:53)....

Oh! The cost savings. So yes, so we expect that, like I said, that'll be once we launch, that'll be in the back half of the year. And that does hit our cost of sales line. So it does hit gross profit..

Okay. Thank you..

Thank you. And I'll now turn the conference back over to Ms. Grossman for final remarks..

Well, thank you, everyone. I look forward to touching base, and you'll be happy to know that tornado has passed. So we will talk to you soon. Thank you..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day, everyone..