iMedia Brands, Inc. (NASDAQ:IMBI) Q2 2022 Earnings Conference Call August 24, 2022 8:30 AM ET
Company Participants
Tim Peterman – Chief Executive Officer
Tom Zielecki – Senior Vice President and Chief Financial Officer
Conference Call Participants
Victoria James – D.A. Davidson
Mark Argento – Lake Street Capital Markets
Eric Wold – B. Riley Securities
Alex Fuhrman – Craig-Hallum Capital Group
Operator
Greetings and welcome to the iMedia Brands Second Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Tom Zielecki, Senior Vice President and Chief Financial Officer for iMedia Brands. Thank you. You may begin.
Tom Zielecki
Good morning, and thank you for joining us. We issued our Q2 earnings release earlier this morning. If you do not have a copy, you may access it 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 of the call will be available via the link provided in today’s press release as well as on the 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 safe harbor 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?
Tim Peterman
Thank you, Tom and good morning everyone. Although we did have a few short term revenue bumps in the road that I will discuss in a moment, our uninterrupted progress in building our four core brands that resulted in a 38% growth in our 12-month customer file has made me even more bullish on the sturdiness of our growth strategy in choppy economic times and on our abilities to achieve our long-term goals.
For example, during Q2 our Television Networks launched 20 exciting new brands and many of these new brands aired on more than one of our television networks. A few examples are ShopHQ launched GLAMAZON Beauty with Kim Baker, our first fully inclusive color cosmetics line. Kim is the founder of GLAMAZON and a celebrity makeup artist whose work has been seen on top TV broadcasts across the globe.
ShopHQHealth launched LifeVac, and FDA registered Class II medical device used as a rescue device when in a chocking emergency and we’ve sold over 10,000 units across all our networks this quarter.
ShopBulldogTV launched NFL watches by Invicta, the fourth year in a row for our exclusive partnership with the NFL and Invicta. This year we featured eight new NFL watches in classic Invicta collections; Pro Diver, Coalition Forces, and Bolt.
1-2-3.tv launched Talika, a well-established French beauty brand for skin, bath and body. It premiered in July and was instantly a big performer for the TV network and already has multiple shows returning in August. Our Christopher & Banks business outperformed our expectations again, generating over $23 million in net sales for the 2022 spring season, a 79% growth compared to the 2021 season. We believe this success is driven by its popular television programming on ShopHQ that creates the awareness that drives strong performance at the five CB retail store locations and on its digital platform.
Our online advertising business iMDS also continues to perform well from a revenue and profitability perspective. In addition, iMDS just successfully renewed 10 of its top cable and ISP clients for their continued usage of iMDS’ hosted website products. To provide some perspective on the scale of these renewals, these deals collectively secure iMDS as the exclusive provider of website hosting and advertising services for these cable and ISP providers to their 9.5 million U.S. homes that on average generate about 3 million monthly unique visitors.
In terms of those short term revenue bumps in the road that I mentioned earlier, let’s talk about each. Regarding the DISH renewal, remember we chose to not renew DISH because we couldn’t agree on terms. It didn’t happen to us. We decided the short term hit to the top line and the less so hit to the bottom line was worth the pain to achieve our strategic goal of increasing ShopHQ’s overall profitability by replacing less profitable carriage deals.
Now that being said, DISH has been a great partner of ours for over 20 years and I expect together, we will figure out agreeable renewal terms in the fourth quarter. And if we don’t, then ShopHQ will find replacement carriage that does achieve its profitability targets and DISH will fill our spot with another television network.
Regarding that second revenue bump, it is a consequence of our relentless focus on capital allocation and simplification or as Churchill said, out of intense complexities, intense simplicities emerge. Every day here at iMedia we work to simplify our goals and processes to improve our yield as a team. This means we will often pivot our tactics to improve, and sometimes we decide it’s best to simply exit. It doesn’t mean these businesses failed financially or bad ideas. Most often we exit because the resources and time to develop the businesses further didn’t make sense or is distracting our attention from our core four flagship brands.
To that end during Q2, we exited four small businesses for these reasons; our i3PL business, which was a pick, pack and ship service we offered to ShopHQ vendors and third parties, ShopJewelryHQ and LaVenta our two smallest television networks, and TheCloseOut.com and OurGalleria.com, which were our two online marketplaces.
Regarding that last speed bump, the Russian conflict, yes, this is one that is not in our control, but we also expect it to be short-term. We believe it’s increasingly impacting our near term sales opportunity for 1-2-3.tv in Germany, which is our nationally distributed television network to Germany’s 40 million plus television homes. For perspective, the German economy is heavily export oriented, the largest exporter in Europe and the third largest in the world. So the continuing logistic delays and challenges that you see today are disproportionately impacting the German economy.
In addition, Germany exports 0.8% of its GMP to Russia and that is estimated to decline about 80% because of these sanctions. Germany is also strong in industries that use a lot of energy. For example, automobile manufacturing, and those businesses are suffering from the rising energy prices in Germany. We believe these economic pressures coupled with an 8.5% inflation rate and the general concern about the war not far away is really impacting the German consumer spending on discretionary spending, which is what we do at 1-2-3.tv.
That being said, our 1-2-3.tv team in Germany is moving at a lightning pace, implementing synergies with ShopHQ, continuing to build their gamification engagement with consumers, and also equally important building our auction shopping widget that we plan to soft launch this fall to disrupt both the television retailing marketplace here in the U.S. and the digital shopping for travel services here in the U.S.
Before I turn it over to Tom to review our financials and provide our guidance for the third quarter, I of course must quote Churchill once more. If you have an important point to make, don’t try to be subtle or clever. Use a pile driver, hit the point once, then come back and hit it again. So here I go. We believe our ability here at iMedia to grow in these uncertain times centers on our unique business strategy designed to grow three separate revenue streams, eCommerce, advertising, and services, each focused on the same core customer demographic that begins at the age of 50.
These three revenue streams monetize our delivery of compelling, interactive entertainment to our boomer customer on all customer platforms, linear television, connected TV, online, mobile social, brick and mortar retail and this helps us as a company traverse pain points that may arise in any one revenue stream. Like logistics costs and eCommerce and it also allows us to capture opportunities by a rise in another revenue stream, like first party data and digital advertising.
With that, I will turn the call over to Tom. Tom?
Tom Zielecki
Thanks, Tim and good morning, everyone. For the quarter, we posted $133 million in net sales, a 17% increase over the same prior year period. Year-to-date we posted $288 million in net sales, a 27% increase over the same prior year period. Q2 gross margin is 36.3%, a 597 basis point decrease versus the prior year. This was driven primarily by our decision to adjust our near term ShopHQ gross margin expectations during the quarter to keep sales flowing in the, in this recessionary economy.
As Tim mentioned, our 12-month customer file increased 38%, which was primarily driven by solid performances at ShopHQ, rate performance at Christopher & Banks, and the addition of 1-2-3.tvs customers into our accounts. Our-12 month customer file excluding 1-2-3.tv, grew by 18%. Q2 loss was $11 million or $0.42 per common share. This included $5 million in one-time charges resulting from our divestitures and staffing reductions in the quarter.
Regarding our outlook for the third quarter, we anticipate reporting net sales of approximately $138 million, which is approximately 6% growth over the same prior year period. We anticipate reporting adjusted EBITDA of approximately $8 million, which is approximately a 20% decrease over the same prior year period.
Thank you for your time this morning. Tim and I are now pleased to take any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Victoria James with D.A. Davidson. Please proceed with your question.
Victoria James
Good morning. Thank you for taking my question. So the first one I’ve got is what is enabling ShopHQ to outperform its video retailing peers, such as like HSN and QVC, and what gives you the confidence that you can continue to do so in the future?
Tim Peterman
Hi Victoria, thank you for the question. It’s great seeing you in your conference earlier of this week. So when you think about ShopHQ and what we talked about with our enterprise strategy of how we have these different revenue streams working together, ShopHQ is a linear television network. It’s available nationwide and it has its challenges in this economy, just like everybody else. However, the things that help us remain more durable than would otherwise be is, the complimentary assets that we have that work with.
For example, iMDS, which is our digital advertising platform, many of the products that we have, we have opportunities to create dedicated digital advertising form to support in addition to the television exposure. So that cross promotion is always very helpful as we think about ways to, the ways to combat the economy and the pressures that come with it.
Christopher & Banks is another great example. That’s a brand that was 300 million with so many customers just chomping at the bit to try to understand where they can buy their clothing again and where they can do these style outs. And so that being on ShopHQ creates a growth path above and beyond what a normal brand would launch because it had 7 million customers that have been around for 50 years.
And so when we have brand or anomalies in the model, like Christopher & Banks growing disproportionally, when you have advertising to support the television distribution that those are two unique assets that don’t really happen at any of the other competitors in e-commerce, whether that’s QVC or whether that’s Jewelry TV. So these unusual moments in our model help us overcome what would otherwise be pressure with that respect from the economy. It’s not that we don’t feel it. It’s just we have different stocks in our portfolio rather than just all bonds.
Victoria James
Fantastic. And then if I can just sneak in one more, my second question would be, can you give your current thoughts on your core customer? How is she handling stock — the changes in the stock market and home market price volatility, and maybe also inflation?
Tim Peterman
Thanks, Victoria. So that was like a softball pitch for me, because I get to wax on about our core customer, which is all we really talk about here in this business. All of our brands are focused on the same demographic, which really again, starts at 50 and she, you’re right, primarily at least with ShopHQ is primarily female, but we also have men on ShopHQ as well. The core customer in our experience and what we’re seeing in the data isn’t as impacted if you will as I would say, some of the younger demographics, and that is a variety of reasons, but just the sheer size and growth of our demographic is what has helped us grow our customer file for example.
When I reported the results today, our total customer file 12 months grew by 38%. Now I’ll — to be apples-to-apples, let me take 1-2-3.tv out of it, the German TV retailer, and just look at in the U.S. we grew by 18% and that just doesn’t happen overnight. Remember we were for years in a negative position and then about a year and a half ago started to peak into zero, and now we’re growing much faster.
So the core customer that we’re engaging with this boomer that as I’ve talked about in the past from the U.S. Census Bureau grown 34% over the last 10 years, they are concerned about the economy certainly, concerned about the recession or what you could say was two consecutive quarters of negative GDP growth, whatever you want to call it. But they are concerned about those elements. They’re concerned about the upcoming election. All of those things are concerning, but they’re not as impactful in my view as the folks that have less discretionary income or are not used to the emotional engagement of TV retailing, which is fundamentally different than the flat experience of a digital or even a retail experience when you’re going into the mall.
So this emotional engagement, along with the boomer, that’s more set in their ways, along with the boomer that has discretionary income that isn’t going to react like they’re in a precedent time. This economy’s tough, but it’s certainly one that everybody that’s in that age group has seen before and it shall pass as well.
Victoria James
Thank you so much for your time this morning.
Tim Peterman
Thanks Victoria.
Operator
Thank you. Our next question comes from line of Mark Argento with Lake Street Capital Markets. Please proceed with your question.
Mark Argento
Hey, Tim and Tom, just a couple quick ones. Can you take I think or Tom, you had mentioned you guys have done some headcount reductions, maybe talk a little bit about where you guys stand right now and full time equivalents, and you at the, you know, are you at a level that you think you can grow the business at around with the heads you have?
Tim Peterman
Hey, Mark, this is Tim, thanks for that question. It was I that was talking about that, the in the release and such. As you’ve known us pivot and innovate our business model these last three or four years as we grow Q2, and when we talked about in Q1, our $20 million target of expense reductions on our March to be EPS positive in Q4, there were a couple things that we wanted to make sure everybody understood, which is our priorities. And again, this year, it’s all about growing our four core brands. It’s about reducing our debt from $15 million to $20 million. It’s about being EPS positive in Q4.
Those priorities have consequences and some of those consequences mean that the business has to innovate in the historical way it used to work. So as we think about staffing reductions, some of them of course are performance oriented where you’re looking at trying to move in certain directions, but a lot of it is reinventing how we do things. It is not, I hate to even use such a pat analogy, but the buggy whip, it is the idea of doing the same thing with less people is just not successful.
So for example, when we move to a static programming calendar in ShopHQ, which meant that the reason we did it was to build viewership. So consumers would be able to see that we have the same show on the same week with the same products and the same host that builds viewership patterns. That also as a consequence allows us to reshape how internally we were staffing that function and not changing it every minute was a big way that we were able to reduce our operating costs.
So when you think about our staffing reductions, it isn’t about the idea of doing more with less. It’s really about doing it differently. And that’s what we’ve demonstrated we do over and over again, as we March towards this Q4 EPS cost, which is precedent for the company and for ShopHQ. So hopefully that answers your question.
In terms of [indiscernible] we don’t really provide that information. But I would say that on average as the business evolves, I think if you wanted to say there was a percent of staffing, you could put it in a 10% to 15% range, and that would be a realistic assumption.
Mark Argento
Great, that’s helpful. And then just remind us the balance sheet kind of where you’re sitting today, because you’ve $20 million in cash. I know you had mentioned doing a kind of actually doing a sale lease back, just walk us through?
Tim Peterman
Certainly Mark. As I hit, talked a little bit before, one of our priorities this year was, as we put the pieces together last year, to make sure that we could scale advertising revenues and eCommerce revenues and service revenues, we came out of the year call it, I’d say, $15 million to $20 million too high in debt. We’d like to be a company that has is below 2.0 in terms of ratio. So we talked about this movement through the year and that movement through the year of creating excess cash to reduce our net debt, was going to be funded from reducing our inventory, which remember we started the year with call it a $115 million, $120 million in revenue. I’m sorry, in inventory and we were going to march that down through the year. That would be one source.
I can tell you that it has been successful for us. We were at, I believe, $115 million in inventory at the end of Q1 and at the end of Q2 we’re at $103 million, $104 million and so that is on path. Another source was our equity raise maximizing that was something that was important to us and we felt we had the timing to do it at the beginning of Q2 was important, given what we think is going to go on with the economy and the back half and then just the profitability of the company. So if you took our picture right now, as they say to get your picture took, we would say that our net debt at the end of Q1 I would call it $184 million and our net debt at the end of Q2 is $172 million, so call that $12 million.
So in terms of our journey to get to the end of the year with a $15 million to $20 million reduction in debt, we’re halfway there. And the better quarters are coming, but that is very important because I know I’ve said this before, but our priorities have consequences. And a lot of times there is some short term disruption as a result of that. And an example would be the DISH, our election not to renew DISH until we get the right terms. So these are all very important because it’s very important for us to reach those two primary goals, that being EPS positive Q4 and getting us down below 2.0 in our leverage ratio.
Mark Argento
Great, I appreciate it. Good luck.
Tim Peterman
Thanks Mark.
Operator
Thank you. Our next question comes from the line of Eric Wold with B. Riley Securities. Please proceed with your question.
Eric Wold
Thank you. Good morning. Couple questions, I guess one, just a follow on question from the last set of questions on kind of balance sheet and all that. Can you walk us from the adjusted EBITDA guidance this year of $41 million to a cash flow number, thinking about, the carriage payment, interest expense all that, and kind of, how those two shake out compared to each other?
Tim Peterman
Well, so Eric, nice to hear from you again. I think the question is, what are the elements that exist between our adjusted EBITDA and net income?
Eric Wold
More, more cash flow, just pure cash.
Tim Peterman
Okay. So, well when you think about free cash flow, then you’re putting in the working capital management, which is what we talk about today. So I would say if you think about free cash flow, the important things for us to accomplish are, one, the reduction of inventory, that is important because as we talked about at the end of last year, we had quite a bit of use of cash in the buildup of inventory to avoid logistic delays that we incurred the year before. So moving that back down into normal levels was going to be important. That’s probably the single biggest element of working capital that is driving that excess cash to create the debt reduction opportunity. When you think about overall free cash flow then you have to obviously think about the adjusted EBITDA and then non-cash charges.
And then there is a cash amortization piece in our business that we’ve talked about before called broadcast rights. You’ll see over time, fairly quickly as we continue to rebuild ShopHQ that that cash amortization broadcast rights will be coming down. And you’ll see that in Q2, Q3 and Q4 because remember this was, these were the rights we paid cable carriers to secure because we were pretty broken in 2019, to secure the same placement, to secure the same place on the dial.
So we had a shot at building the company back again, the video service back again. And now three years later, our success with ShopHQ, the programming, the new brands, the viewership, all of those elements are making it less of a requirement to have a guarantee because now the MSOs and ISPs that are carrying us are incentivized to keep us in a great spot because they’re making more money, the more money we make. So I think you’ll see from a difference between adjusted EBITDA, net income or free cash flow, that element will be going down as well.
When you think about what we’ve talked about with net debt, you’ll see our interest obviously come down as well. That is something that is, we’re very mindful of as we move into 2023 and 2024, but it isn’t an event. We — what we’ve always tried to explain is that, we move in a very direct, but a very non-Camelot or non-pendulum swinging way. So the reduction of our debt is going to come $20 to — could be $20 plus this year, then about the same next year and net interest will come down as well. So those are the — and hopefully that answers your question on the elements between adjusted EBITDA and net income or free cash flow if that’s, whatever proxy you want to use.
Eric Wold
No, that’s helpful. Do you have an actual number we can kind of point to for that $41 million of EBITDA to what the cash flow number would be? So kind of instead of walk in the elements you actually kind of dollar amount?
Tim Peterman
Well, we haven’t provided a working capital guidance for the year. What we have provided for the year are two KPIs, the revenue and the adjusted EBITDA. And then certainly happy to talk to you afterwards about any type of assumptions on working capital, but that’s not something we’ve ever really disclosed, although you could track us and you could track us right now on the main element of that working capital, which is the inventory. And I’d say that our report card is pretty good right now, given that it’s down, call it $12 million and just like with the net debt and cash being up, we expect that to continue. So that should be helpful.
Eric Wold
Got it. And then just final question, the four businesses that you shutdown in the quarter, I know you noted as a $7 million impact to sales in the quarter. I guess one, is that a good kind of annualized quarterly numbers that a four times seven would have been a $28 million-ish for kind of an annualized basis, and were those four on a combined basis contributing to EBITDA or they are still in negative EBITDA build mode?
Tim Peterman
Great question, so yeah, they were on the lower end of that profitability scale for the very reasons of the capital allocation process that we talked about, which is, as we, as I mentioned in my remarks, it doesn’t mean these businesses are bad. They’re actually really good businesses. In particular, TCO, the CloseOut and the marketplaces and even the TV networks. But as we stayed brutally focused on our four core brands, and when I say focus, it’s not just our resources, our cash or those sorts of things, it’s management’s time and attention. And the — so to answer your question about run rate, yes I would say that’s a fine proxy to look at. TCO was the partnership that we were in, again, that business will go on. We exited selling our interest back to the original partners.
OurGalleria, remember we had a dual strategy on marketplaces, which were two different personalities. Instead of taking those two new personalities what we’re really doing is opening up a much stronger e-com presence on ShopHQ to take advantage of the over 5 million monthly unique, to take advantage of our advertising platform that can actually drive even more traffic to ShopHQ. So we’re putting more wood behind one arrow versus shooting multiple arrows on this marketplace concept.
In terms of the impact from Jewelry and the LaVenta networks, these are ideas that we still love and that we still may one day do, but we believe that the best use of resources and management time and attention over the next 18 months is to really grow the core ShopHQ networks brand, which is ShopHQ, Health and Bulldog. Those are the core along with 123tv. So as a consequence, as you see us pivot and look at our — does our capital allocation expectations are they being met, these four in particular were we decided at the end of the day during, at the beginning of Q4, Q2, then it was time to exit.
Eric Wold
Helpful, thank you.
Tom Zielecki
Yep. Thanks Eric.
Operator
Thank you. [Operator Instructions] Our next question comes from line of Alex Fuhrman with Craig-Hallum Capital Group. Please proceed with your question.
Alex Fuhrman
Great, thanks for taking my questions. Tim, I wanted to ask about the decision not to renew your carriage with DISH, was rate really the biggest factor here? And now that you’ve had a little bit of time operating the business without carriage on DISH, are there any learnings you can share about how much, if any of that business you were able to recapture from DISH users, maybe viewing your content online or on other carriage providers, any color on how that went would be helpful? And then I guess just thinking, counted down the road, if it made sense to end your carriage with DISH in the short term, could that also be an option in the long-term or are you pretty committed to getting back on DISH?
Tim Peterman
Great questions, Alex. I’ll try to piece them one by one. So for example, the DISH, us being transparent about our DISH negotiation is really what we’re just trying to explain is, a consequence of the priorities we just talked about, which is ShopHQ and we’ve talked about this for about a year, needs to reduce their carriage costs. And as a result of that, we have to really focus on rate and that, so to your answer your first question, it was about rate. DISH is a great partner, great platform.
Like I said, we’ve been around for 20 years, but we have to make tough decisions and those tough decisions start with; if we’re not going to achieve our goal of reducing our carriage costs, then we have to think about another way of doing it. And so when I talked about us being down from DISH in Q2, Q3, and in the forecast I put a Q4, do I think we will solve it earlier? I do. Do I want to manage expectations? Yes. That’s why I put it out there, but in the event that for some reason we can’t, as partners come together on that, on the term of rate, then it is a very self-fixing process Alex. We have all sorts of distribution opportunities out there.
The learnings of dropping DISH is, it’s painful, right? No one wants to look at the revenue and go, wow, that’s going down. And that’s why this company in the last 30 years has never done it. So we’re making the hard decisions for the long-term shareholder growth that might come with a little full contact because this is full contact to fix these issues.
We are in discussions with all sorts of companies about potential replacements for that carriage. I don’t want to replace the carriage and the cost. We have budgeted for DISH until I know for certain, that it isn’t a platform that we can come to terms with and grow with. Once if that decision is, or if there’s enough data that we say, okay, this cannot be won, then there’s all sorts of other opportunities in the satellite world, in the MSO world, in the broadcast world. The over the air broadcast section of video consumption in the U.S. is growing the fastest.
You think about the — people talk about cord-cutting, what they don’t talk about is the, what is it, just get 30% growth in the OTV over-the-air OTAs, it’s pretty significant. And as a platform and it is something that we’re looking at as well and we’ve gotten great response on that. So there’s multiple avenues for our video to reach our consumers, but we believe in good partners. We’ve been a long-term partner for them. We think we’ll figure it out. But like I said, it’s not, DISH is not an issue. It is a point we wanted to bring out for transparency. It’s really an opportunity we don’t want to let pass.
Alex Fuhrman
Great, that really, that makes a lot of sense. Thanks for that explanation, Tim. And then just following up on that, are there any other major carriage agreements that you have coming due in the next year? And can you talk about just how generally those renegotiations have gone, has there been any sort of a trend in rate or terms?
Tim Peterman
No, there’s nothing imminent coming up for renewal. And when you think about why DISH? DISH was probably on the low end or not probably, is on the low end of profitability for all of our carriage and that’s why you see this happening. All of other platforms are very good and we feel great about them and — but there are no short term renewals coming up that would be of question.
Alex Fuhrman
Okay, that’s very helpful. Thanks Tim.
Tim Peterman
Thanks Alex.
Operator
Thank you. Ladies and gentlemen, there are no further questions at this time. I’ll turn the floor back to Mr. Peterman for any final comments.
Tim Peterman
I just want to say again, thank you everybody for your time today. We look forward to seeing you again very soon in about a quarter.
Operator
Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
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