Felise Glantz Kissell - HSN, Inc. Judy Schmeling - HSN, Inc. Mindy Grossman - HSN, Inc..

Eric J. Sheridan - UBS Securities LLC Neely J. N. Tamminga - Piper Jaffray & Co. Tom Forte - Maxim Group LLC Jason Boisvert Bazinet - Citigroup Global Markets, Inc. (Broker) Anthony C. Lebiedzinski - Sidoti & Co. LLC Barton Crockett - FBR Capital Markets & Co. Heather N.

Balsky - Bank of America Merrill Lynch Alex Joseph Fuhrman - Craig-Hallum Capital Group LLC Matthew J. Harrigan - Wunderlich Securities, Inc..

Ladies and gentlemen, good morning and welcome to the HSN, Inc. Third Quarter 2016 Earnings Conference 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, 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 and President of Cornerstone Brands. Judy will initially 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.

In addition, on today's call, there will be references to certain non-GAAP financial measures. These are described in more detail on 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 like to turn the call over to Judy Schmeling.

Judy?.

Good morning. Our third quarter results were affected by a confluence of internal and external factors.

This included the underperformance of certain categories at HSN, the continued weakness in outdoor within the Cornerstone portfolio, a challenging retail environment, and consumer mindshare distractions, including the high-followed Presidential race that culminates tomorrow.

We completed the divestiture of TravelSmith and Chasing Fireflies within the Cornerstone portfolio. Our third quarter results included their performance of the data sale on September 8.

Associated with the divestiture, we recorded a loss on sale of $11 million which included charges of approximately $4 million related to transaction costs and employee and a lease liabilities. We are now 100% focus on the key brands that will drive the portfolio and best aligned with our long-term vision.

HSNi sales decreased 5% in the third quarter or 3% excluding the divested businesses. Gross profit was down 140 basis points with operating expenses decreasing $11 million or 5% excluding non-cash charges and the loss on sales. Diluted earnings per share was $0.38 versus $0.64 in the prior year.

Adjusted earnings per share was $0.52 compared to $0.70 a year ago. At HSN, sales decreased 4% to $570 million. Sales grew in apparel and accessories and wellness offset by decreases in other categories most notably fitness, infomercial, and electronics.

We had lower shipping revenues primarily due to increased promotions and changes in our shipping tables as we simplified and standardized our shipping rates for our customers. Digital sales grew 7%, with digital penetration increasing 430 basis points to 45%. HSN's return rate improved 30 basis points and units shipped grew 1%.

Average price point decreased 5% primarily from changes in product mix and higher clearance activity, most notably in fashion, which was also impacted by the timing of a clearance event.

Gross profit decreased 7% to $190 million, with gross profit margin down 130 basis points to 33.3%, largely due to a decrease in shipping revenues, and to a lesser extent, higher clearance activity. Adjusted operating expenses decreased 4% to $132 million and improved 10 basis points as a percentage of sales to 23.2%, excluding non-cash charges.

This improvement reflected a decrease in employee-related costs, primarily incentive compensation and bad debt expense. Including non-cash charges, operating expenses decreased 4% to $143 million. Adjusted EBITDA decreased 14% in the third quarter to $58 million. Operating income decreased 16% to $47 million.

At HSN, to improve our top-line sales, we're pursuing product and brand opportunities, intensifying our targeted customer acquisition strategies and optimizing our digital capabilities. As part of our supply chain optimization initiatives, we began phasing in our expanded automation capabilities in our Piney Flats, Tennessee distribution center.

In October, the facility experienced issues in its ability to fulfill certain orders within our traditional shipping timeframe. We implemented (05:30) plan to address this development, including shifting some warehousing and distribution operations to our other facilities.

We are issuing customer credits and appeasements, expediting shipments and taking other measures to improve our customers' experience. We have assembled a team of both external and internal resources to resolve these issues as quickly as we can.

We expect to incur incremental cost related to this issue in the range of $10 million to $15 million during the fourth quarter. We take seriously our customers' strong loyalty and trust in us. And as a result, we are incurring costs such as expedited shipping, incremental labor and consulting costs and issuing customer credits and appeasements.

We still expect to realize financial and operational benefits of our supply chain optimization initiatives and increased labor efficiencies, more efficient space utilization, lower transportation costs and faster customer deliveries upon the project completions.

Before I review our financial results at Cornerstone, I want to share a few of my observations since becoming President in August. I've spent time visiting each brand and listening to our team members through strategic plan reviews, one-on-one and group meetings with senior leaders and hosting town hall meetings.

I came away energized by the talent and commitment through our success. I believe that we have opportunities to more effectively leverage the business as a whole, particularly in key areas, such as digital and customer insights to harness the power of the portfolio.

While the immediate retail environment and competitors (06:58) that remains very challenging, we're focused on reestablishing top-line growth by accelerating product development, driving brand awareness, intensifying our central (07:11) retail efforts and expanding our digital presence, including site optimization and experience and increased digital marketing strategy.

Turning now to performance at Cornerstone, sales were down 8% to $253 million. Excluding the results of TravelSmith and Chasing Fireflies, sales decreased 3%, primarily due to continued weakness in the outdoor category as well as deliberate reductions in catalog circulation in the home brands.

Catalog circulation, excluding the impact of TravelSmith and Chasing Fireflies, was down 6%. Both Garnet Hill and Improvements demonstrated sales growth in the quarter. Gross profit at Cornerstone decreased 11% to $90 million. Gross profit margin decreased 150 basis points to 35.6%.

Excluding TravelSmith and Chasing Fireflies in the results, gross profit rate declined 90 basis points to 35.5%, largely from lower product and shipping margins, driven by increased promotional activity in the home brands which has been impacted by a highly competitive and promotional marketplace.

In addition, we moved certain in-season inventory including outdoor that we expected to address as stated in the last earnings call. Adjusted operating expenses excluding non-cash charges and the loss on sales decreased 6% to $85 million. Excluding TravelSmith and Chasing Fireflies, operating expenses were down 3% to $77 million.

Operating expenses were lower, primarily reflecting less catalog costs as we tightly managed circulation, combined with decreases in employee-related costs, primarily incentive compensation. Operating expenses were unchanged at $100 million that included non-cash charges and the loss on sale.

Cornerstone's adjusted EBITDA was $5 million, a decrease of $6 million from the prior year, or $3 million excluding TravelSmith and Chasing Fireflies. Operating loss which included the loss related to the sale of the two businesses was $10 million compared to operating income of $2 million in the prior year.

Our fixed cost of approximately $7 million annually will be reabsorbed by the remaining Cornerstone brands following the divestiture. These costs are largely tied to fixed expenses related to our distribution centers and will be reduced over time. We currently have 2.7 million shares remaining under our existing share repurchase program.

This year, we have purchased 357,000 shares to date including 124,000 shares in the third quarter. Our board also just approved a quarterly cash dividend of $0.35 per share payable December 20 to shareholders of record as of September 7.

Before turning the call over to Mindy for a strategic review of the business, I want to reaffirm our commitment to drive long-term profitable growth at HSNi. We remain cautious given the challenging retail environment, combined with our immediate focus to energize certain merchandising categories across our brands.

We continue to believe in our opportunities to drive commerce through innovation, technology, and contents.

Mindy?.

Thank you, Judy. Good morning, everyone. At HSNi, we are taking strategic actions to return the business to a growth trajectory with a focus on maximizing profitability.

We made progress in certain areas, yet our overall performance in the third quarter, as Judy articulated, was impacted by lower sales and specific merchandising categories in HSN, continued weakness in the outdoor segment within the Cornerstone portfolio and a difficult overall consumer environment in which we are operating.

As we all know, there have been challenges in the retail sector that were compounded in the third quarter by disruptive and distracting political climate which affected consumer buying patterns in general and viewership, in particular.

I'm confident that we will manage through these immediate headwinds by expanding our proprietary merchandising pipeline and destination programming, elevating our content, digital, and data capabilities, extending our distributed commerce platform which includes experiential retail and maximizing a focused portfolio.

We have actions underway on all these fronts to improve long-term performance which I will be reviewing. Digital remains an essential part of our strategy to optimize our contents across the multiple distributed commerce platform. HSNi digital now represents 53% of sales, an increase of 330 basis points over the prior year.

Mobile grew 17%, now reflecting 22% of our total business and 42% of digital sales.

At HSN, we're implementing strategies to ignite the business, including the expansion of our proprietary product portfolio, accelerating our content generation and optimizing our digital assortment and platforms to complement the traditional brand experience of our live content, giving customers additional reasons to engage with us.

We operate in more digestible video content and distributing it through alternative channels that appeal to both existing and new customers. We also remain focused on energizing our merchandising categories by infusing newness, pace and variety with all of these measures up in the quarter.

And as we just announced this morning, I'm extremely pleased about the appointment of Carmen Bauza as Executive Vice President and Chief Merchandising Officer for HSN.

As you are all aware, it was important that we hire the right caliber of executive for this vital role who has the diversity of experience to lead the seasoned merchandising and planning teams and be a team member of the HSN executive committee.

Carmen is known as a consumer-centric brand builder and change agent with extensive consumer and retail experience, including leadership role at Walmart, L Brands and The Walt Disney Company.

Carmen spent the past 10 years as a Senior Leader at Walmart, most recently serving as a Senior Vice President of one of their largest, multi-billion dollar sales division at the company that included consumables and health and wellness, as well as having oversight of innovation and systems.

Prior to this role, she was DMM of their beauty and personal care business and credited for the transformation of this category. Carmen was also on the Board of Directors of Walmart de México.

We believe that Carmen's breadth of knowledge, combined with her extensive involvement in Hispanic and Latino communities as a target demographic for us, makes her an ideal chief merchant and culturally diverse thought partner. Carmen's belief in HSN and our unique approach to retail commerce is a testament for our future growth opportunities.

Returning specifically to HSN's results, sales in the quarter were down 4%, primarily from sales decline in fitness and infomercials, which we have discussed on previous calls. Also after comping a very successful exclusive launch of Microsoft Windows 10 in the prior year, sales were down in electronics.

As we articulated on our last call, while we had slightly improved sales performance in July, the business softened in August and September which we believe was magnified by consumers shifting their attention to high-profile media events such as the Olympics and Presidential Election campaigns.

These factors impacted our on-air sales although we continued to see performance in HSN's digital sales which grew 7% in the quarter.

Our best customers remain loyal with their file count unchanged, while new customers were down, largely due to decreases in our fitness infomercial categories resulting in a 4% decline in the overall active customer files. We have specific actions under way to reinvigorate our customer pipeline by leveraging our customer analytic capabilities.

During the quarter, we increased our investments in prospecting new customers and reengaging lapsed customers through marketing efforts across online platforms including Google Display Network, Facebook Custom Audiences and Yahoo custom display campaigns.

We're also utilizing direct mail communications as appropriate, and we have intensified our personalization campaign which leverage real-time analytics off a more relevant messages to targeted customers.

In addition, as part of our frictionless commerce effort, we launched Apple Pay later in the quarter offering consumers another fast, easy checkout option to further entice engagement. While all of these customer acquisition efforts are in the early stages, we are encouraged by the initial results.

As I noted earlier, HSN's digital sales increased 7% with penetration growing 430 basis points and now representing 45% in HSN sales. Traffic, orders and conversion rates were up but the average order value is down slightly due to lower price points.

Aside from some fitness and infomercials, digital sales grew in every category, most notably fashion, home, beauty and electronics. We recently advanced our product attribution and filtering capabilities within specific categories such as beauty to improve our customer experience.

We plan to expand these enhanced features across our product portfolios. Our distributed commerce digital initiatives have the ability to transform where consumers can engage and shop with our designers' brands and products.

For example, we created our first-ever shoppable video which allow customers to view and purchase items as part of our exclusive launch of Serena Williams fall runway collection during Fashion Week. This shoppable experience was featured on HSN.com and People.com and was streamed across multiple platforms including Vogue.com.

In addition, we launched a virtual reality experience with the HSN app that allow viewers to feel they were actually at the show, resulting in a 21% increase on our average daily mobile app installs. Our social efforts, which also included a Facebook Livestream event and activity in Twitter and Instagram generated 34 million impressions.

Mobile sales increased 21% with mobile now representing 23% of the overall business and 52% of digital sales. We continue to enhance our contents including additional image and video capabilities.

We are currently developing our next-generation mobile app, which will enable us to offer a highly personalized and engaging experience based on customer profile, preferences, and usage. So I'll now turn to the primary categories that most impacted the third quarter.

Similar to last quarter, fitness was a large contributor to our sales declines as we significantly reduced airtime given the consumer shift from larger equipments, which typically commands higher price point to social and digital health, particularly wearable, an emerging area and high growth business for us.

We do expect to have growth in this category in 2017 as we invest in the overall health and wellness fitness with new technologies that are coming to market. The infomercial category, we continue to be impacted by a lack of innovation driven by a higher media cost during this election cycle.

This current environment cycles the cadence of new product introductions to the platform. We do feel more positive about future opportunities that have arisen in this category as the product pipeline, as we generate it.

After two years of solid growth, sales in electronics were down following our exclusive prior-year launch of Windows 10, as I mentioned earlier, making it a more challenging comparison. Sales grew in Smart Home, a strategic growth area for us that we will continue to invest in going forward.

So turning now to categories that had increased sales performance in the quarter. In fashion, we continue to distort top trending business, including celebrity apparel and footwear from designer brands and personalities, such as Vince Camuto and Wendy Williams, both of which experienced solid performance in the quarter.

As part of our strategy to drive commerce on non-traditional platforms, we intensified our partnership with Wendy to include daily promotions on our highly followed, number one syndicated talk show as well as social activations leading up to our appearance on HSN and the launch of her Shoe Closet in a primetime special on The List and on HSN.com.

Higher clearance sales did impact the category's overall profitability, as we exited an intimate and shapewear brands and due to timing of a clearance event. Health and wellness was another category that demonstrated strength as a result of our focus on building a strong foundation with our wellness expert, Andrew Lessman.

Andrew offers not products but also educates our customers on the benefits of a healthy lifestyle. We're identifying additional opportunities to amplify our efforts, including expanded programming in our Monday Night series, as an example, as well as additional remote and digital content to create a more personalized experience.

Sales were up in our Ingenious Designs business as a result of our expanded retail footprint to the Joy Mangano brand. And we also launched Joy's new innovative luggage collection that we will be introducing at broader retail in the upcoming months. Turning now to the Cornerstone portfolio.

With Judy's new role as President of Cornerstone, I feel we have the right leadership, focus and strategy to unlock the value of our brands.

With the divestiture of TravelSmith and Chasing Fireflies, combined with our focus on proprietary product development, digital investments and experiential retail, we have a clear path forward notwithstanding some of the current challenges.

In the third quarter, as we discussed on our previous call, we expected that our performance in our stores would be weak given the trends in the season. However, we were pleased with the performance at both Garnet Hill and Improvements.

Garnet Hill has consistently executed in a challenging apparel environment in both sales and profitability because of its unique positioning focused on elevated and differentiated products, events and social engagement to build community.

Improvements, a solution-oriented brand, is developing proprietary product, enhancing its digital platform, and advancing its HSN partnership.

During the quarter, we appointed Geoff Brownrigg as the new President of Improvements, a retail veteran with over 30 years of experience and particular expertise in sourcing, innovation and new market and business development. We look forward to Jeff's contribution.

Digital penetration at Cornerstone reached 70%, an increase of 210 basis points from the prior year. Nearly all brands experienced an increase in digital penetration. Mobile sales grew 7% with mobile comprising 20% of the overall business and 28% in digital sales.

Given that over two-thirds of Cornerstone's business is digital, we are investing to make our digital experiences more customized, immersive and engaging.

For example, late in the quarter, we launched an innovative augmented-reality-designed solution for Ballard Designs and Frontgate, leveraging the capabilities of a mobile device and in installed apps. Users can virtually place desired objects in their own homes and engage with more than 1,000 of our home décor offerings.

This easy-to-use technology utilizes the device's camera to scan the room and overlay the products in a realistic 3D immersive experience showing the size, color and aesthetic of the furniture in that specific room. We plan to expand this capability to other brands as appropriate.

As part of our distributed commerce strategies, we're continuing to invest in our Ballard Designs studio stores in key markets, where we have the data and customer knowledge to drive our own traffic and expand the customer touchpoint with our brands.

Our unique environment brings service and customization to a new level in a modern setting that inspires consumers to become their own decorator and designers. We have seen increased demand and higher lifetime value customers in the overall region where our physical experiences resides.

This includes a higher spend per customer, higher orders per customer and a higher repurchase rate. We've developed a very deliberate cadence going forward with the opening of additional Ballard Designs experiential destinations in key markets, including Natick, Massachusetts outside Boston and Roosevelt Field, Long Island in the first half of 2017.

We will also be unveiling our prototype Frontgate experience outside of Dallas in the first half of 2017. We're excited about this vocation which will showcase the breadth of the brand, bringing the entire Frontgate assortment in lifestyle alive (24:35) for the first time.

Part of our expanding commerce platform strategy, Grandin Road debuted its first ever interactive retail concept store at Macy's Herald Square in the heart of New York City using an interactive haunted house installation that showcased the brand's Halloween décor.

This collaboration was an opportunity to build brand awareness for Grandin Road while driving traffic for Macy's. We believe such collaborations with other retailers can be extremely powerful and create greater experiences that offer additional opportunities for us.

And as I've mentioned previously, in addition to our Hampton's pop-up location, our Garnet Hill brands have created an innovative trend, affordable boutique made from a shipping container.

This pop-up boutique offers customers an opportunity to physically interact with our product assortments, showcasing both home and apparels to an immersive brand experience and live event creating local affinities.

As we enter the fourth quarter and look towards the important holiday season with many customers not even able to see past the outcome of tomorrow's election, the macro environment remains challenging. As Judy mentioned earlier, in October, we experienced issues in the implementation of our warehouse automation project.

We're activating strategies to enable us to make customer commitments during peak holiday seasons and we continue to be focused on the longer term financial and operational benefit for our supply chain transformations. At HSNi, we're making deliberate and strategic changes in our business to improve our performance.

And while some of our actions will take time to be fully realized, we have several initiatives currently underway for the fourth quarter and here are just a few. At HSN, we kicked off our holiday season with the most robust gift assortments we've ever offered.

We've also created a content theories (26:25) highlighting the experts that make shopping at HSN unique, including Curtis Stone in kitchen, Anna Griffin with crafts and holiday decorations, Trish McEvoy with beauty and Jeffrey Banks to the home.

The season also includes television personality host, Wendy Williams; inventor and entrepreneur, Joy Mangano; and entertainer Michael Bublé who just returned to HSN for a live performance exclusively debuting his latest album and fragrance integrating commerce and content.

In electronics, we have a robust and compelling portfolio of products and offers and we're excited to be one of only five retailers to be the launch platform offering exclusive new Star Wars drones to coincide with new Star Wars movie premiere.

Our holiday cook series currently underway highlights celebrity chefs such as Wolfgang Puck, Curtis Stone, and Ming Tsai. One of many special events, we will be premiering during the season including others in beauty and health and wellness.

As we reposition our jewelry portfolio, we recently launched an exclusive collection from Jay Strongwater, a luxury brand with a strong design aesthetic and following. We will be expanding the brand into home décor and collectibles.

To support all of these efforts and to build additional awareness of HSN this holiday, we have developed our most aggressive holiday marketing campaign ever, doubling the number of customer touch points' impacts.

American Dreams is also one of our most important initiatives, celebrates our heritage of entrepreneurship and our ability to support and build brands and businesses. We've aligned with key partners to extend our reach and share our message that invention starts here.

We will be featured in Good Housekeeping magazine, which comes out next week, highlighting those entrepreneurs who were finalists in the HSN and Good Housekeeping product search, all with proprietary products who will be launching those products on HSN.

We're also featured on CBS's hit series, Hatched, with a dedicated HSN presence as we identify new entrepreneurs with innovative products that we can exclusively bring to market.

Additionally, we've teamed up with award-winning entrepreneur and the creator of Dreamers Ventures, Liliana Gil Valletta, to launch Project American Dreams, a nationwide search to discover, mentor and fast-track product innovations created by Latino entrepreneurs on HSN in partnership with the National Hispanic Chamber of Commerce.

We're also expanding our partnership with Facebook to create a multi-segment Facebook live show that features HSN partners and product offerings with a unique behind-the-scenes perspective, and we're using Facebook to promote our intensified partnership with Visa as part of our Visa Checkout campaign, further extending our frictionless commerce experience.

At Cornerstone, we will continue to take strategic actions to optimize the brands and expand commerce platforms and digital-centric experiences while focusing on expense discipline. With Judy as President of the Cornerstone portfolio, I strongly believe that she will be a catalyst to maximize performance across the brand.

Although outdoor is largely behind us, we've seen a slower start to seasonal décor, a category that we're known for. However, we were proactive given trends and did intentionally enter the holiday season with a more conservative approach to inventory on the seasonal décor side of the business while we invested more in interiors, gifts and home décor.

Our brands have initiatives underway with an emphasis on customization and strategic partnership, leveraging the experts and authorities that extend our brand reach and give us added exclusivity and product development capabilities.

Ballard Designs had expanded its partnership with interior designer, Bunny Williams, with the launch of a new furniture collection. This is the first time she's ever designed furniture outside of her own company. The introduction coincides with the launch of Bunny's new book, (30:39).

In addition to our extensive customization in furniture and textile, this holiday season we will also be launching on-demand monogramming at our flagship Ballard Designs studio store in King of Prussia and our most recent location in Tysons Corner.

Garnet Hill is building on the key strength of their proprietary cashmere shops and exclusivity with Eileen Fisher. During the quarter, the brand will also introduce its new Judy Ross for Garnet Hill collections with a high profile textile designer and will be selectively testing into key categories of cashmere and gifts in menswear.

In closing, we are focused on driving improved results and taking advantage of the power of our platform and our brands, notwithstanding the challenges in the current environment. We continue to strategically review all areas of the business to leverage opportunities and maximize performance.

And I am confident that we're taking the right steps to restore long-term growth and value creation for our shareholders. And now, we'd like to open up the call to your questions. Thank you..

And our first question comes from Eric Sheridan of UBS. Your line is now open..

Thank you for taking the question. Maybe a big picture question for Mindy.

I think one of the bigger topics that's come up with investors as we move through the quarter and ahead of results is really the long term of how much of what's going on from a competitive environment is secular in nature, how much of it is cyclical, how much of what's going on in the business right now is being driven by macro impacts you're seeing in terms of the way people shop.

I'd love to get a little more color of teasing out all of those, what you're seeing on the competitive landscape, how much of this is shopper habits as a result of what you're seeing in the macro environment, as much color as you can would be very helpful? Thanks, Mindy..

Sure. And, Eric, I think it's a confluence of a lot of those things. There is definitely competition out there. We're certainly cognizant of that and people's expectations are such that we have to be able to differentiate ourselves as much as possible.

Hence, a lot of the things that we are doing to build the business for the long term and whether they be investments in design and proprietary product development, investments in our content and digital capabilities, investments in our supply chain to be able to meet customers' expectations which continue to rise and to be able to focus on how we're creating very unique experiences whether they be digital, whether they be physical or any way we reach the customer.

The second piece of that, and it relates to how we are aggressively pursuing customer acquisition while certainly satisfying our existing customer, is the world of distributed commerce and our ability to be able to leverage our brands, our products and our content externally across broader platforms.

We don't see the environment or at least the competition in the environment, abating. I mean, we're all looking to gain share of customer's wallet which is why we are making the investments we're making, which is why we feel confident about our brands and our products especially moving forward..

Thank you..

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

Great. Good morning. I have a question for Judy and a question for Mindy. Judy, you talked and highlighted, which was an encouraging impression to hear about some of the top-line growth initiatives for Cornerstone.

Could you speak to a little bit more specifically about some initiatives to help either offset some of the competitive pressures on the cost side or just overall improvements in profitability for next year as you've on-boarded there? And then for Mindy, as we think about Q4, it sounds like you have a great gift assortment lined up.

Electronics though are on my mind personally as I think about kind of how (35:03) over-SKU it seems in Q4 around holiday gift giving? And just wondering if you could speak to your assortment there and how you're feeling about it, just sort of some of the things going on with like Samsung, et cetera. Thanks..

Sure. I'll take the question, and then let Judy really talk about Cornerstone where she's really spend a lot of time on that second part of the question. So going into the fourth quarter, there's no question that electronics – and I would call electronics and gadgets and things like digital health, are all going to be important.

We feel good about our assortment. We have very significant relationships across the electronics brands from HP to Dell to Bose to Samsung, notwithstanding some of their challenges, but we're pretty discreet about what products we really think are going to be right for our audience.

We're still in drone land and other categories, and we have a pretty robust lineup for the fourth quarter, where we feel good about where we are..

And in terms of on the Cornerstone brand portfolio side, historically, we have managed the business with a consolidated back end and each individual brand is focused on their front-end business.

And while that, it will definitely continue, one of the things that we've been really talking about is leveraging the power of the total on the front end as well and really recognizing some of the similarities and dissimilarities between the businesses and how can we capitalize on that moving forward.

I think a couple of our key areas are product development. We have great brands, and we need to accelerate more on that unique product development and develop additional categories as well. We're also really leveraging more of our digital and shifting more of our spend away from traditional catalogs.

We're testing different types of marketing strategies and seeing some strength in some of those categories to attract new customers. And then thirdly, just really elevating our customer insight more fully across all of our brands. And we have continued to add additional talents to our business. We hired a new President of our Improvements brand.

We are also elevating digital talent across the portfolio. And we also have someone in charge of our retail business who's very experienced in the business to be able to help drive our retail footprint..

Great. Thanks, guys. Best wishes out there..

Thank you. And our next question comes from Tom Forte of Maxim Group. Your line is now open..

Great. Thanks for taking my question. Wanted to ask first of, how confident you are that you have the Cornerstone portfolio where you wanted to be as far as these further adjustments go.

And then wanted to talk about, how should we think about in today's challenging environment with either distractions or the tough consumer environment, how your use of FlexPay has changed? Are you using it more or less? And then are you seeing on a by category basis, variance in your Today's Special, meaning that beauty is still doing well, but consumer electronics is underperforming.

Is it consistent with your overriding performance on a by category basis?.

Sure. So, relative to the Cornerstone portfolio, obviously we've divested it down and we have the five brands now that are remaining in the portfolio and that's our key focus. And to really grow those businesses and I think that this is more focused primarily in the home category, is really going to help us accelerate that.

Of course, anything changes, but that really is our focus and we're committed to really turn those businesses around. Your second question relative to FlexPay, yes, definitely FlexPay remains a unique driver for the HSN side of the business. We have increased our utilization of FlexPay, but really and truly, it is more on the her side of the category.

And as you saw from my commentary, in particular, in terms of bad debt expense, that has actually declined over the year. So, we feel like we're using it effectively and we will continue to do so..

So, on your question around TSs, obviously, in the fourth quarter, as we discussed earlier, electronics, what I would call, gadget gifts, gifts in general across the portfolio, really become the big drivers of the business, particularly over the key holiday weekend time period.

In addition, we tend to really also focus on events within the fourth quarter so they could be 24-hour culinary events with a focus on the best gifts. The fashion business becomes a little bit more focused on food, outerwear, et cetera, and we're seeing – we've been strong on the fashion side of the business.

But there's no dramatic shift in what we're seeing in terms of what we maximize in the fourth quarter. Obviously, I mentioned some changes in, let's call it fitness and infomercial. We just launched Copper Fit, which we actually feel good about and we'll also be continuing in the fourth quarter.

So some momentum there that we haven't had prior last couple of quarters. But again, it's a real focus on what people really both need and want in this fourth quarter, and that's been the focus of the TSs, as well as ensuring that we have great value in proprietary products..

Thank you..

Thank you. And our next question comes from Jason Bazinet of Citi. Your line is now open..

Just one quick question on shipping. You mentioned some of the new policies that went into effect in August.

How do you feel about your shipping and handling policies now? In other words, is this sort of a gradual step down as you sort of harmonize to the new competitive environment or you think you sort of are where you'll be sort of 1, 3, 5 years from now in terms of the policies and prices?.

I think we feel good about the recent changes we made in the shipping tables at HSN, which I think is an incentive for customers.

However, we're not naïve that over the course of time, we're going to continue to harmonize and look at what is going to make us more competitive, and I think it's the landscape we're dealing with, but we feel that this recent change will be positive..

Okay. Thank you..

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

Good morning and thank you for taking the question.

So as far as the issues that you have with your distribution center, I appreciate that you quantified that $10 million to $15 million, so if you could just clarify, is that mostly going to be cost of goods sold and then to a lesser extent, higher SG&A for the incremental labor?.

Hi, Anthony. Yes. It is a combination of expedited shipping and labor which does hit our gross profit line as well as in incremental labor and customer credits and appeasements. Right now, we don't have it broken out between what that is. This is a very large range that we have just identified at this point in time.

We will, as we get further into dissecting it, where we'll be able to tell you exactly what lines that would hit..

Okay.

And will this be all in the fourth quarter or could some of this spill over to the first quarter of next year?.

Yeah. Right now, we believe that it's going to be localized into Q4. There could be some spillover impact into Q1. And right now, we're just in the middle of finalizing our strategies and course correcting. So, let's say it's our goal to make sure it's only in Q4..

Got it. Okay. And then also as part of your cost decreases that you have done, I know some of that is because of lower catalog circulation. Some of that is also lower incentive compensation and so on.

So kind of going forward, how much of these decreases are kind of more permanent in nature and how much are more variable?.

Yeah. Most of the cost reductions so far have been more of a permanent nature with the exception of course incentive compensation. We would like that to increase in the future..

Sure..

But we've really balanced it throughout. We want to make sure that we're not starving the business from a growth potential. So, we are looking into other areas to say how we've pulled back too much, say for instance, on circulation.

Are there key areas that we should be looking at reinvesting in? Should we be reinvesting more in some digital marketing? So, we're constantly making that balance between all of our costs..

Great. Thank you..

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

Okay. Great. Thanks for taking the question. I was curious about the trajectory of the top-line trends, if we could get a little bit more color on what happened intra-quarter and what's happening so far this quarter if you're able to give us any color.

It looks like things were flattish or maybe up a little bit in July and then went pretty steeply south in August and September.

And I was wondering if you could quantify what August and September looks like in terms of the year-over-year trend in the TV shopping segment and if you're seeing any abatement or any change in that trend so far in the fourth quarter..

So, Bart, as you know, when we talked last quarter and we gave a tiny bit of color because people understand our July is unique compared to other retailers, so we were somewhat more positive.

But to your point, we did see deceleration in August and September more than we had anticipated based on the environment and, actually, as you can see, although digital sales remained strong, we definitely saw some shifts.

So having said that, I'm just kind of loathe to talk about any particular month and I'll just say, as I've said earlier, we feel good about what we have in place for the fourth quarter and our focus and obviously are prepared going into the peak holiday season with best products, best offers, and the light marketing investments to drive the business..

Okay.

I mean, if I could just follow up a little bit, do you see specific trends in your business so far in the fourth quarter that give you some optimism that the top line trajectory should look better in TV shopping?.

Well, I don't think it's "TV shopping". I think that we live in a much broader landscape. And clearly, what I articulated is things that we're doing in the fourth quarter and what we're seeing. And a lot happens as you know. So, am I going in, thinking we're in the right place and doing the right things, yes..

Okay. And then if I could just clarify one other thing here, you mentioned Piney Flats as an issue in the fourth quarter.

Was that an issue in the third quarter at all or was it really just a fourth quarter situation?.

It's fourth quarter..

Okay. Great. Thank you very much..

Thank you. And our next question comes from Heather Balsky of Bank of America. Your line is now open..

Hi. Thank you for taking my call. I was hoping you could just speak to your inventory composition at HSN, how you're planning given the challenging environment and your ability to chase, if sales are better than expected..

Actually, I feel good about where we are in inventory. As we had said on the last call, we had a real focus on making sure that we had the right inventory and that we were going to manage into that, in areas such as apparel or jewelry or any other home businesses.

So as you can see, we don't feel that we're in a bad place at all on the inventory side of the business..

Great.

And if sales are better than you expect, do you have ability to chase sales?.

Yeah. One of the great things about this business is the flexibility that we have, particularly in certain categories. So, we will obviously, as we've done in quarters in the past, maximize as effectively as we can. We have great partners who are willing to certainly work with us to support being able to maximize the business as well..

Great. Thanks..

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

Great. Thank you for taking my question here. Definitely you guys have made quite a bit of progress on reducing some of your fixed expenses.

Heading into the key holiday season here, have you guys – where do you guys stand, I guess, in terms of making all of your part-time and seasonal hires that you'll need for your distribution center? Do you feel pretty good that you can continue to show progress on expenses with that in mind for the fourth quarter? And then just as an unrelated follow-up, obviously, the election's been a headwind for all of the TV shopping companies out there.

Historically, when you look for, 8, 12 years ago, how long does it normally take for things to start to bounce back? Is that something that we might start to see as early as Wednesday or Thursday, or are people pretty much going to be consumed with the post-election coverage for a week or two? Just trying to get a sense of when that has normally turned around in the past..

Yeah. What I have found is that uncertainty in general is an anathema to retail, so, not that there will be certainty no matter what happens. But I do think that there will at least be finality especially going into the fourth quarter. So, I'm hoping that that will abate, which is kind of what we have actually seen in the past.

Now, has it turned the switch? I can't tell you that, but I do think that having this behind us across retail will be a good thing..

Yeah. I think certainly this election year has been somewhat unique. So, having said that, that remains to be seen and then what happens in the media. In terms of your question on the labor, at our other facilities, we are fully staffed.

Obviously, it's related to the Piney Flats situation that we are increasing our labor there to be able to have that throughput. We're holding job fairs, et cetera. At this point in time, we don't see an issue with that, but that is definitely one of the things that we're having incremental cost related to our issue there..

All right. Thank you very much..

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

Thank you. I was curious on the Chief Merchandising Officer position. I mean, there's sort of a glamorous, McKinsey-like brand-building side to it. Then, there's sort of the filings basement, what's going to be the hot item? You and Bill were kind of functionally doing that along people in your verticals.

I mean what did you learn from the experience? And then, I guess, secondly, with Carmen Bauza, how desirable do you see the Walmart experience in terms of the demographics of the customer over there and their marketing rep relative to yours? Thanks..

Great question. We are thrilled to have Carmen join the company. As you know, this was a very important position for us to fill. We were not going to compromise, and we were looking for very, very specific qualifications.

And to your point, we were looking for the quantitative and qualitative side of someone, someone who had deep strength and understanding of strategy but also the creative muscle to not just manage our team but work across the team and interfaced with all our external constituencies, which as you can imagine, are very, very diverse.

I think the combination of her years with The Walt Disney Company or years with L Brands, particularly at Bath & Body, and then her experience at Walmart, really gave her the diversity of consumer segments, product development, strategic segmentation of businesses and actually even if you look at a number of the things she did at Walmart, for example, elevated the entire beauty business.

Another thing that we felt was very strong was her real knowledge of the health and wellness category, which is a big focus for us going forward. And in terms of – I obviously did that job including a number of other roles and Bill and I to your point have been in there.

And I really think that this role has to be able to in a way be a big orchestra leader across a lot of different categories to be able to drive collaboration, to be able to understand the idea of programming, marry to product, marry to planning.

So, I think to have found someone who has that sort of scope and skills are really going to have a great impact on the business and talks to the perspective that this is a big growth opportunity..

Thanks, Mindy..

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Ms. Grossman for closing remarks..

Well, thank you, everyone. We look forward to talking to you soon and having a great holiday season. 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..