Arthur W. Singleton - HSN, Inc. Rod R. Little - HSN, Inc. William C. Brand - HSN, Inc. Judy Schmeling - HSN, Inc..

Barton E. Crockett - FBR Capital Markets & Co. Mark Rosenkranz - Craig-Hallum Capital Group LLC.

Ladies and gentlemen, good morning and welcome to the HSN, Inc. Second Quarter 2017 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 Art Singleton, Senior Vice President, Treasurer and Investor Relations. Mr. Singleton, please go ahead..

Good morning, everyone, and thank you for joining us. On this morning's call, we have the members of the Office of the Chief Executive, Rod Little, Chief Financial Officer; Bill Brand, Chief Marketing Officer of HSNi and President of HSN; and Judy Schmeling, Chief Operating Officer of HSNi and President of Cornerstone Brands.

Rod will initially review our financial performance, then Bill and Judy will review their respective business units. As always, some of the statements made on this call may be forward-looking and as such, are subject to the 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 Securities and Exchange Commission and available on the company's web site. HSNi does not undertake to publicly update or revise any such 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 in the company's earnings release and SEC filings available on the HSNi web site.

You are encouraged to refer to the press release and SEC filings to review the reconciliation of these non-GAAP financial measures for the most directly comparable GAAP results. I will now turn the call over to Rod..

One, building upon our proprietary product pipeline and investing in key consumer growth categories and experiences; two, optimizing our digital platforms, particularly mobile; three, driving customer acquisition, engagement and spend; and four, developing and leveraging talent across the organization.

At HSNi, sales were down 4% in the second quarter. However, after adjusting for the effects of the two Cornerstone brands we divested in September of last year, HSNi sales were down 2%. HSNi's digital sales increased 3% adjusting for the divestitures, while penetration increased 260 basis points to 55%. Gross profit decreased 40 basis points to 36.1%.

Operating expenses were down $25 million or 9%, primarily resulting from anniversarying last year's $20 million asset impairment charge related to the divested brands. Our GAAP results were also impacted by $5 million of transaction costs related to the pending acquisition of HSNi by Liberty Interactive Corporation.

Excluding the non-cash charges, which include the impairment charge and transaction costs, operating expenses decreased $4 million or 2%. GAAP EPS was $0.62 and adjusted EPS was $0.63 compared to $0.50 and $0.74, respectively, last year.

The current year's results were affected by additional cost of approximately $3 million or $0.03 per share related to the continued implementation of our supply chain optimization initiative at the Piney Flats, Tennessee facility. At the HSN segment, sales decreased 4% to $532 million.

Sales grew in Wellness and Home, offset by decreases in Electronics, Beauty and Jewelry. Bill will provide more context in his remarks. We also had lower shipping revenues, largely from changes in our standard shipping rates that took effect last August, as we had previously articulated, and increased promotions.

Digital sales grew 2%, with digital penetration increasing 280 basis points to 46%. HSN's return rate improved 160 basis points, primarily due to experiencing lower overall return rates across many product categories and a mix shift to categories with lower return rates. Average price point decreased 7%, largely due to product mix.

Units shipped increased 2%. Gross profit decreased 5% to $187 million, with gross profit rate down 30 basis points to 35.1%, primarily driven by a decrease in shipping revenue and higher fulfillment costs related to annual rate increases with HSNi's outbound shipping carriers and the supply chain optimization cost noted earlier.

Lower inventory reserves, due to a change in accounting estimate of $3.3 million as well as higher product margins, driven by sales mix, partially offset the increased costs. As anticipated, we moved through some older, yet highly reserved inventory, allowing us to end the quarter in a cleaner inventory position.

Operating expenses increased 4% or $6 million, driven by $4 million in allocated transaction costs related to the pending acquisition. We also had increases in employee-related costs, bad debt expense and supply chain optimization-related consulting fees.

These increases were partially offset by lower stock-based compensation expense, due to the departure of our CEO during the quarter. Excluding the transaction costs and non-cash charges, HSN's operating expenses increased 4% or $5 million. Adjusted EBITDA decreased 24% in the second quarter to $50.5 million.

Operating income decreased 29% to $39 million. Now, turning to Cornerstone. On an as reported basis, sales were down 3% to $289 million. Gross profit decreased 4% to $110 million and gross profit rate decreased 70 basis points to 37.9%.

Operating expenses decreased $30 million to $93 million, primarily due to the asset impairment charge of $20 million recorded in the prior year and the impact of the divested businesses. Cornerstone's adjusted EBITDA was $21 million, an increase of $5 million or 29% from the prior year.

Now to review Cornerstone's results, excluding the impact of the divested businesses, sales increased 3%. Digital sales grew 4%, with penetration increasing to 70%. Gross profit increased 1%, while the rate decreased 80 basis points.

Excluding the divestitures, non-cash charges and allocated acquisition-related transaction fees, operating expenses were consistent with the prior year. Adjusted EBITDA increased 4% to $21 million. Our Board just approved a quarterly cash dividend of $0.35 per share payable September 22 to shareholders of record as of September 6.

So, as we prepare for the pending acquisition by Liberty, we remain focused on optimizing our portfolio, building our capabilities for growth that include efficient and effective resource allocation and a rigorous expense management discipline, all to drive shareholder value. I will now turn the call over to Bill..

StoreSmith focused on organization, AutoSmith on auto, and FieldSmith for lawn and garden; three new proprietary brands for us. In beauty, we experienced weakness, with the exception of makeup and nails, which continues on a strong trend driven by expanded assortment, new brands and exclusive value from national brands.

In jewelry, we did have growth in Jay King, Heidi Daus, gold and pearls, but we were challenged in our silver business as well as several of our designer jewelry brands. In electronics, it was a very competitive quarter. We saw softness in mobile phones, PCs and TVs, trends in line with the overall retail industry.

We shifted attention to Smart Home and Home Office categories, critical areas of focus for us as we have this unique ability to help customers understand how best to leverage all this new technology in their homes.

This strategy is also aligned with our Connected Life destination programming, which we launched in May and will be key focus in September when we celebrate 40 years of innovation at HSN. Turning to our go-to-market strategy, the continued optimization of our digital experiences resulted in improved conversion, especially on mobile.

Sales in digital were up 2% in the quarter, with penetration increasing 280 basis points to more than 46%. Mobile remains our fastest-growing channel, with sales in the second quarter growing 9%, now making up 26% of our total business and 56% of all digital sales.

Digital remains our largest driver of customer performance, with growth entirely coming from mobile. Over the last 12 months, we've seen a 10% increase in mobile customers and we will soon be improving our app experience with the planned launch of a new iPhone app later this quarter. This will help us maximize the upcoming holiday shopping season.

And following the successful relaunch of the HSN Community experience last quarter, we're now extending that editorial content across our digital properties. This further positions HSN as the leader of editorial programs shopping. As we develop multichannel pathways for our customers, we're excited about two more projects underway.

Later this month, we will launch HSN Now, a video-on-demand shopping experience developed in partnership with TVPage. We are creating a watch experience that allows customers to control their viewing experience online. They'll be able to watch their favorite brands, top items, or they can shop by trends.

This new tool will also allow us to leverage video inspiration even more throughout the entire shopping journey. Additionally, we will be launching live programming on HSN2 this month and leverage HSN2 for the creation of short-form videos. We can now generate hundreds of short-cell clips for our digital and VOD platforms through our HSN2 initiatives.

These efforts all reinforce our recognition that consumers are changing how they watch content on TV, over-the-top, on digital and social platforms. We have invested in OTT, including channels on Roku, Samsung, LG and TiVo and several others. We're creating specialty channels and new ways to discover our content and shop with us.

As we move to the customer front, for the 12-month rolling quarter, our customer file is down 5.5%. Nearly 90% of this is the result of new and reactivated customers. A big part of the decline is lapping the non-repeat event of the Joy movie from Q1 of last year. Excluding this event, our 12-month file would be down 2%.

Our best customer and credit card customers continue to outperform across the 12-month customer file. Our best customer performed up slightly at 0.6% and our credit card customers continue to be a bright spot for us, up 4.6%.

And as we mentioned last quarter, Visa Checkout continues to be a strong performer, contributing to our incremental customer file adds. We continue to invest in lifecycle marketing activities with increased personalization and targeted market reach, with the goal of restoring growth to our customer file and increasing sales.

In Q2, we launched two machine-learning campaigns in partnership with IBM that showed a lift in customer engagement. We are going to continue to work closely with IBM to maximize the potential of this capability. In addition, our personalized special offer emails and abandoned shopping cart campaigns have increased reach and engagement with customers.

As I said last quarter, to drive long-term overall growth, we need to expand our reach and enhance our brand awareness, relevancy and consideration. This has been our focus across the business and was highlighted on our 40th birthday activities in July, including performances by Sheryl Crow and Keith Urban, which drove engagement and sales.

Our experiential cooking events with Curtis Stone and Kimberly Schlapman from Little Big Town, both educated and entertained and we were thrilled to introduce new personalities to HSN, like New England Patriots Rob Gronkowski, that drove high engagement on our social channels.

This month, we're celebrating 40 years of entrepreneurs, a tribute to our HSN heritage as the original TV retailer, and a moment to honor and celebrate our strong roster of innovators and inventors, founders like Joy Mangano, Diane Gilman, Anna Griffin and Giuliana Rancic, as well as dreamers like the new entrepreneurs we launch every week through our American Dreams program.

With all that said, we acknowledge that we are operating in a very competitive environment. We are taking appropriate actions needed to improve performance, but remain cautious with the current consumer climate. We have a strong team and strategy in place.

We remain focused on delivering stronger sales, a healthy customer file through great products and content-driven experiences that set our brand apart in the marketplace. With that, I will turn it over to Judy..

Thanks, Bill. Good morning, everyone. In Q2, we saw sales growth of all of our brands with the exception of Improvements. Overall, sales grew 3%, excluding the impact of divested businesses. Digital sales and penetration continued to grow.

Digital penetration, excluding Chasing Fireflies and TravelSmith, finished at 70% with digital sales growing 4%, an increase of 110 basis points to the prior year. We continued to strategically reduce catalog circulation by brand where appropriate and are investing more in retail and digital marketing to drive our overall demand.

As a result, catalog circulation, excluding Chasing Fireflies and TravelSmith, declined by 7%. While we still have work to do, we continue to see improved trends with product margins and gross profit. Our gross profit rate declined 70 basis points this quarter compared to reduction of 130 basis points in Q1.

The decline in Q2 was due to shipping promotions in the home brands, lower shipping rate tables at Ballard Designs, and unabsorbed fixed costs associated with the divestiture of Chasing Fireflies and TravelSmith, offset by improved product margins.

Our focus on digital in Q2 included the launch of a checkout redesign for all brands; a new single-screen checkout that reduces known areas of friction and provides a best-in-class user flow.

We also made enhancements to our product-configurator tool, optimized site speed and made updates across all of our mobile properties to enhance the user experience. Notably, late last month, we launched our redesigned web site for Ballard Designs.

This is the first of a significant update to the Ballard Designs' digital experience, elevating the site look and feel, focusing on design services and creating an increasing immersive experience.

Stage two will include additional functionality, as well as layout changes that will go live later this year, including a tighter integration of content and commerce. I'll take a moment to describe several key events with our brands in Q2 and a few look aheads to Q3.

Continuing on the efforts at Ballard Designs, we had a successful launch of our Miles Redd collection, including exclusive coverage in a print edition of House Beautiful and on Architectural Digest's web site reaching more than 2 million people across both channels.

In addition to this designer collaboration, Ballard Designs is also partnering with House Beautiful to tell our furniture customization story. The magazine will release our very first native ag units, which consists of a six-page spread at the front of the book for their September issue.

We also continue to grow our retail store footprint with the opening of our Ballard Designs Studio in Roosevelt Field, New York late last month and are on track for the opening of our Stravent (20:24) store in the fourth quarter. Retail store expansion was also a key highlight for our Frontgate brand.

Our much anticipated flagship store in Plano, Texas soft opened on July 21 to tremendous feedback, including positive media coverage from local print and broadcast media, as well as strong initial sales numbers, reinforcing an appetite for this type of in-store experience and Frontgate's new retail format.

We believe this is the right momentum as we prepare for the grand opening on September 7. Additionally, we are relocating our location at Phipps Mall in Atlanta, which will have its soft opening on September 29, followed by a grand opening in the fourth quarter. Grandin Road is in full force in its Halloween seasonal focus.

The Halloween Haven shopping experience launched online July 13, including The Faces of Halloween video which also has a shoppable version, editorial content on our watch-it-work blog and how-to videos that are being used across various social and digital channels.

In partnership with Good Housekeeping, Grandin Road will have a digital social takeover and sweepstakes for Halloween Haven. Good Housekeeping Magazine has a circulation of more than 4.3 million alone. At Garnet Hill, we continue to be pleased with the growth and trajectory of the brand.

Garnet Hill had a record first half, delivering substantial gains in top and bottom-line performance. The apparel business continues to drive the growth, with additional strong performance from the exclusive Eileen Fisher Home business.

The brand will continue to leverage its strong digital penetration and focus on brand building, with the fourth quarter brand campaign aimed at driving brand reach and new customer acquisition. As I shared last quarter, I remain excited and energized about the potential for the Cornerstone brands.

I continue to see the opportunity to improve performance by leveraging the business against the scale of the portfolio and pooling our strong talent.

The strategies we have in place to differentiate ourselves is playing out and we will continue to focus on our strategic pillars of creating innovative, differentiated and customizable products, increasing customer acquisition and retention, and improving the digital experience as we move forward.

Before we open it up to Q&A, I wanted to provide an update about the pending acquisition of HSNi by Liberty Interactive Corporation, which we announced on July 6. The parties are working through the regulatory approval process and the transaction currently is expected to close during the fourth quarter.

We will not be able to provide any additional information regarding the transaction or regulatory approval process during the Q&A portion of this call. We will now open the call to questions..

Thank you. Also, to allow everyone the opportunity to ask questions, we ask that you have one question and one follow-up if needed. Our first question comes from Barton Crockett with FBR. Your line is open..

Okay. Thanks for taking the question. I wanted to ask about the disclosure, I think that Bill made about the decline in customer file, which I think you said was around 5% and attributed I think mainly to new and reactivated. I want to make sure I understand what you mean by mainly new and reactivated.

Am I correct to interpret this as, there's a normal kind of churn in the legacy and you just didn't get enough new and reactivated this period to offset that decline, and normally you'd get more new and reactivated coming in? Is that essentially what happened?.

Thanks, Barton. So in terms of growing our business, we've been focused for a number of years now on a healthy customer file and where we have our strength is with our loyal customer. We continue to see her shopping with us more frequently than ever, spending more and an increase in units.

Where I pointed out our decrease in new customers, our new customers that are discovering our experience and I think that's a reflection on the world changing and how we're investing across our TV landscape, our digital landscape, our social channels to build that engagement, build that awareness of HSN.

So, not comping those new numbers and those customers that we haven't seen for over 12 months is what I was referencing on the reactivated side. So it's a discovery opportunity for us.

We're working with our merchants to create the right product experiences that attract new, while keeping our current customers engaged, and we're making sure that through our digital marketing activities that we're really looking out there at customers that are shopping, that look like our customers, that just haven't discovered HSN.

And I think the climate is obviously very competitive and we are fighting that to really attract as many as we can. But we did see a short fall, as I pointed out, a big chunk of that was a non-repeat event of a huge customer event driven by a Hollywood movie opening for us.

But overall, I continue to have confidence in the businesses and our loyal customers. We know when they're here, they're shopping and so that gives me confidence that our product portfolio is strong, that our engagement tools are strong, our overall experience is strong.

I am now working with our teams on how do we open those floodgates, how do we help more and more people discover HSN..

Okay. And if I could just follow-up, I mean, one of the secular questions that swirls around this group is, are people just going to watch a TV channel like HSN less and would that essentially be fewer people walking in front of your store front? QVC on their side have said they have already seen a decline in viewership.

Are you seeing a decline in viewership? Is that part of what's affecting this number here?.

I think we see a change in consumer behavior, which is the investments that we're making in our content activities and how to distribute that content across more platforms to get in front of more customers.

So, I think overall you can see the industry trends and how people are watching TV, watching live TV and we've been able to counteract that by this engagement that we have with our current customers and keeping them here, and then leveraging new tools to engage with additional customers. So certainly....

Can I just – I'm sorry. I'm sorry to interrupt you.

And then, I just wanted to ask one final thing is, I know you're not going to talk in detail about the QVC merger, but in general thematically, is that merger something that you think might have real potential to turn around this new customer kind of blip down that you've experienced?.

Our focus on the HSN business is, as I've been mentioning, to drive our overall healthy customer file. As we've been mentioning, our product portfolio and making sure we have the right mix that attracts those customers, while keeping our current customers engaged.

And I think going forward, it will always be our focus here at HSN to drive that healthy customer file..

Yes. And Barton, it's Rod here. I think one of the theses for the acquisition if you read what has been stated publicly is, this is a stronger combination together.

And so, we do some things well, they do some things well and putting that together, it's just a more powerful combination to pool resources and go after consumer segments and people maybe not considering us today. So yes, we agree with that..

Okay. Great. Thank you..

Thank you. Our next question comes from Mark Rosenkranz with Craig-Hallum Capital. Your line is open..

Hey, great, thanks for taking my questions. Wondered if you could talk about the HSN side of business. We've seen some press results in the recent quarters, especially in this one.

You previously discussed how you anticipated some improvements in the back half of the year for a number of reasons, lap in the shipping changes and changing of the merchandise mix.

Just wondering if you had any comments on how things have started in July and if you still see that type of improvement in the back half of the year?.

Yes. So as we've articulated before, we do expect to see improvement in the back half and that's certainly what the team is focused on. That said, it is a very competitive environment and we do expect that sequential improvement in back half for the reasons that you cited, including the lapping of shipping.

I met with our Chief Merchant yesterday, Carmen Bauza; we went through again our holiday strategy. We've looked at the product. We'll continue to do that. We feel very good about how we're positioned from a product mix standpoint going forward, and we are doing everything we can to drive that demand..

Yes. And Mark, I would also add, from our perspective, I wouldn't get hung up too much on quarter-over-quarter performance. I know you can draw a conclusion. If you do that, as we've said consistently, at least for the last six months, we view this as a halves business.

If you put the first half together and you look at the second half in comparison, we do believe the numbers will improve as we move forward. There's four reasons that Bill touched on, the merchandising, product pipeline piece of that which we think will be stronger. But the shipping rate table you mentioned, we lap that this month, in August 15.

So we get more like-for-like as of August 15. We lap the Chasing Fireflies, TravelSmith divestiture in September, so we get more like-for-like on the Cornerstone side.

And then, if you recall, we had a significant one-time spending in the back half of last year, primarily consolidated into quarter four around the supply chain optimization initiative in that start-up, which we will not have this year.

So the totality of all of that is what makes us feel better and then just the everyday work on the execution that Bill mentioned comes on top, which we think will also be better..

Okay, great, that's helpful. Thanks for taking my questions..

Thank you. There appear to be no further questions in queue. I'd now like to turn the call back over to Mr. Little..

I think we're done for the day. Thank you, everybody. Appreciate the time..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day..