iMedia Brands, Inc. (NASDAQ:IMBI) Q3 2022 Earnings Call Transcript

iMedia Brands, Inc. (NASDAQ:IMBI) Q3 2022 Earnings Call Transcript November 22, 2022

iMedia Brands, Inc. misses on earnings expectations. Reported EPS is $-0.72 EPS, expectations were $-0.32.

Operator: Hello and welcome to iMedia Brands Inc. third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. If anyone should require Operator assistance, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Alex Wasserburger, Vice President, Deputy General Counsel. Please go ahead, Alex.

Alex Wasserburger: Good morning and thank you for joining us. We issued our Q3 earnings release earlier this morning. If you do not have a copy, it is available through the News section of our IR website at imediabrands.com. This release is also an exhibit to the Form 8-K we filed this morning. A webcast recording of this call will be available via the link provided in today’s press release as well as on our IR section of our website. Some of the statements made during this call are considered forward-looking and are subject to significant risks and uncertainties. These statements reflect our expectations about future operating and financial performance and speak only as of today’s date. We undertake no obligation to update or revise these forward-looking statements.

We believe the expectations reflected in our forward-looking statements are reasonable but give no assurance such expectations or any of our forward-looking statements will prove to be correct. For additional information, please refer to the cautionary statement in today’s earnings release and our SEC filings. Finally, we will make references to non-GAAP measures on this call such as adjusted EBITDA. Please refer to our earnings release for further information about these measures, including reconciliations to the most comparable GAAP measures, where possible with reasonable efforts. Now I would like to turn the call over to the CEO of iMedia Brands, Tim Peterman. Tim?

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Tim Peterman: Thank you Alex, and good morning everyone. I’ll start today with the obvious – it’s a tough environment out there. Some challenges we expected, like the struggling U.S. economy, and some we did not, like the extended Russian conflict. Although we intellectually understand all of these are short term in nature, it still significantly rises our risk radar, right – risks in job security, risks in fundamental consumer-centric business models, risks in our investments and our loans. Therefore, today I’d like to start with three topics that I know our investors prioritize today: debt, liquidity, and working capital. In February, we explained our debt and liquidity management plan and I’m excited to say that we are positioned to exceed all of our goals stated then.

From a working capital perspective, year-to-date this year we have generated $5 million in positive working capital. Last year at this point, we had used $41 million in working capital, which means this year we have improved our working capital management by roughly $46 million. From a debt reduction perspective, during our capital markets day in February, we talked about a $25 million target for debt reduction by year end. To date, we have reduced our debt by $7 million. On November 8, we executed an LOI with a real estate firm to sell three of iMedia’s four buildings for $48 million in a sale-leaseback transaction. Because of our roughly $380 million in NOLs, our gain on this transaction will seem tax-free. We remain confident we will close this transaction in Q4 and our goal is actually to close in December.

In terms of our use of the $44 million in estimated net proceeds, we plan to retire the $28.5 million Green Lake term loan and use the remaining $16 million to reduce our ABL loan, which in short increases our working capital to fund our growth. This means combined, we are positioned to reduce our debt by roughly $50 million or 200% of our target. Our interest savings alone next will be over $4 million. With that important update complete, let’s turn our discussion to our core, our television networks: ShopHQ, 123tv, Shop Bulldog TV, and ShopHQ Health, and how we are engaging our customers in this challenging environment that will likely be here for several quarters. From an overall company perspective before we move into each network, our customer report card is great.

For the seventh successive quarter, iMedia posted year-over-year customer file growth in Q3, this quarter by 15%, and as we discussed in our last earnings call, our strategy to increase the upcoming Q3 promotional activity turned out to be very successful. Today, unlike many of our previous earnings call, I’d like to start our conversation talking about 123tv, our vibrant and growing television network in Germany. In spite of the Russian conflict’s ongoing negative impact on the German economy and its energy resources, under the new leadership of Michael Hoinka, President, and Eberhard Kuom, CFO and COO, I’m pleased to share their progress today as they continue to successfully optimize merchandise margins, increase price points, drive viewership engagement, and improve profitability.

A couple KPIs that will demonstrate their success: Q3’s net revenue per customer was €132, which was a 4% increase over Q2. Q3’s average selling price was €21.4, a 14% over Q2 and one of the foundational elements of what the company’s doing today to improve its profitability. Q3’s ending inventory was 23% lower than Q2’s ending inventory, which means not only are they doing it with margin and with balance, they’re doing it in a very fast turning inventory environment. In addition, Q3 staffing costs were 15% lower than Q2 staffing costs, so hats off to Michael and Eberhard, who are doing a great job. In addition to growing the core business, Michael and Eberhard are also working with their technology team, headed by Manuel – I’m going to make this an attempt – Margianna , who is their technology lead, and they are doing an amazing job bringing their shopping auction widget to ShopHQ for a soft launch in December or early January.

We’re very excited about this opportunity and we can talk more about that during the Q&A session. Let’s now turn our attention to ShopHQ as the team there is well prepared for the holiday season with a great level of inventory, an unbelievable schedule of great shows, and a number of new brands and returning brands for our customers. As a matter of fact, we continue to attract former brands who are returning to us, including Joyce Giraud, Gems En Vogue, Naturally Danny Seo, and Elizabeth Grant International. In the past, these brands in aggregate generated over $50 million in annual revenues for ShopHQ and we feel great about their return. Our strategy to drive consumer engagement in Q4 will be based on the same type of promotional activity that we did in Q3.

It won’t dominate our selling efforts like it has done with other retailers, but it will be an important component. Also related to ShopHQ, as we did in Q2 with some of our smaller online marketplace businesses that we decided to either sell or shut down, we completed a very disciplined capital allocation process with the ShopHQ teams in Q3 and as a result, we made the decision to end our relationship with Shaquille O’Neal. Sometimes in this business you are surprised, and this is really one of those times. Back in early 2020, we felt Shaq’s products would be a perfect fit for our audience; however, rather than force a fit that was just not there, we felt an amicable parting was best for both sides. I have nothing but absolutely great things to say about Shaq and the ABG team, and we wish them the best.

In conjunction with this contract termination, we incurred a one-time non-cash charge of $10 million in Q3. Finally, as I’m sure you read in our recent release, ShopHQ re-launched on Dish yesterday on the very same two channels we occupied before, channels 134 and 244. I can’t say enough good things about the Dish team and we are excited to be engaging again with some of our best customers on the Dish platform. Now I’d like to give you my perspective on our overall financial performance in the third quarter. Revenue was a little softer than we anticipated and our adjusted EBITDA was a little bit better. From an operating expense perspective, our general and administrative costs were up about $10 million, driven by the Shaq write-off. In terms of our selling and distribution costs, the $4 million reduction this year is related primarily to the content distribution costs from Dish and charter carriage of Bulldog and Health last year that were not present this year.

Our third quarter net loss was $21.3 million or $0.72 per common share. This again included the $10 million Shaq charge. Regarding liquidity and capital resources as of the end of Q3, total unrestricted cash was $9.1 million. As I previously mentioned, we expect to complete the $48 million sale-leaseback transaction in Q4. We plan to use our NOLs to offset the tax gain and our planned use of proceeds is to reduce debt and increase working capital. Regarding our outlook for the fourth quarter 2022, we expect the holiday season to be challenging and promotional; accordingly, we anticipate reporting net sales of approximately $177 million, which is a 9% decline over the same prior year period. We anticipate reporting adjusted EBITDA of approximately $16 million, which is a 6% increase over the same prior year period.

We continue to expect to post positive quarterly earnings per share in Q4 2022. For the full year, we anticipate reporting revenue of approximately $588 million, which is a 7% increase compared to full year 2021. We expect to report full year 2022 adjusted EBITDA of $39 million, a 7% decline compared to prior year. As a final reminder, from a tax perspective we have approximately $380 million in federal NOLs that should be available to us to offset future taxable income. Thank you for your time this morning. Tom and I are now pleased to take any questions.

Q&A Session

Operator: Our first question today is coming from Thomas Forte from DA Davidson. Your line is now live.

Thomas Forte: Great, thanks. One question and one follow-up. As a long time follower of the video retailing category, historically there’s been more resilience, the customers held up better than, call it the target Wal-Mart customer. Can you compare how this environment is affecting your core customer versus other periods that were challenging, such as the Great Recession in 2008 – 2010, or any other periods of macroeconomic weakness that you think are applicable?

Tim Peterman: Sure Tom. It’s a great question. If you take a step back and say, what are we doing here, which is we’re really building television networks today that have three supporting revenue streams: advertising, T-commerce, and e-commerce. That by itself is very different than in 2008 and 2009, at least for this company and T-commerce in general, because as we think about our performance this year, our advertising arm, IMDS, continues to outperform expectations and really although we believe even more outperform, they’ve certainly done better than previous year and are growing well, so that has not been affected and that helps our television networks as a balance, and also as a catalyst offering advertisers that come on, as well as brands, this opportunity for digital advertising and on-air television.

So number one, the revenue streams are more balanced, that gives us the opportunity to withstand some of these things that are very centric to TV retailing and very centric to retail. When you take another step back and say, okay, how is it that we, for example, were able to maintain our margin in this environment, right – that was a very challenging environment we just went through in Q3. We had margins year-over-year that are the same. I’ve already talked about how ShopHQ was more promotional in Q3 and therefore its gross margin was going down, but that was balanced by an improvement in margin from our Germany TV network, 123tv, by Christopher & Banks, and certainly by IMDS, so the durability of our business model to withstand surprises like a Dish disruption in carriage, or even macroeconomic pressures like we have in the U.S. or in Germany, is pretty solid, and the results speak to that.

A 6% decline in revenue and flat margin while getting a surprise disruption from Dish and facing down these promotional environments, we feel very good about it, so that’s the reason that we have spent the last three years constructing this framework to have four television networks each supported by three revenue streams.

Thomas Forte: Thank you, and then as a follow-up, now that you’re back on Dish, how do you think about your carriage again for ShopHQ and how do you think about your opportunities in the future to potentially improve the cost of carriage?

Tim Peterman: As we’ve talked about, Tom, the entire secret of ShopHQ’s profitability growth is around reducing our percent of–well, really our content distribution costs as a percent of net sales. Our Dish renewal was an important step forward for us in the future. Each of our renewals is centered to reducing the cost in the future but also in increasing the productivity. We work with our distributors to make sure that we’re being promoted, to make sure we’re in the HD neighborhood. It isn’t just always about cost, it’s about both cost and about driving the core productivity of ShopHQ. In addition, it’s about our smaller networks – ShopHQ Health, Shop Bulldog TV. All of those contribute to drive down the content distribution costs as a percent of net sales.