Qurate Retail, Inc. Reports First Quarter 2019 Financial Results

ENGLEWOOD, Colo.–(BUSINESS WIRE)–Qurate Retail, Inc. (“Qurate Retail”) (Nasdaq: QRTEA, QRTEB) today
reported first quarter 2019 results. Highlights include(1):

Operating results:

  • Qurate Retail revenue decreased 4% to $3.1 billion

    • Revenue decreased 3% in constant currency(2)
    • eCommerce revenue of $1.8 billion or 59% of total revenue
  • Qurate Retail reported diluted EPS of $0.13; adjusted EPS(3)
    of $0.35
  • QxH revenue decreased 4% to $1.9 billion
  • QVC International revenue decreased 5% to $644 million, as reported

    • Revenue increased 1% in constant currency
  • Zulily revenue decreased 5% to $397 million
  • Cornerstone revenue decreased 10% to $187 million, as reported;
    decreased 4% excluding Improvements
  • Realized total run-rate cost synergies of $67 million to-date through
    March 31st

Corporate updates:

  • From February 1st through April 30th,
    repurchased 5.9 million QRTEA shares at an average price per share of
    $20.36 and total cost of $119 million

“Our first quarter performance was disappointing amidst a changing
retail and media landscape,” said Mike George, President and CEO of
Qurate Retail. “Our recent results have been more variable as we
navigate the evolution of our business model and the integration of HSN,
fine-tune our investments, and strike the right balance between sensible
revenue growth, margin expansion, new customer acquisition and our
strategic initiatives. We are taking a disciplined approach, investing
in initiatives to drive high-quality customer growth and engagement,
broaden and deliver our assortments, particularly across new digital
platforms, and optimize our fulfillment network. Our customer
fundamentals remain strong, including customer count, retention and
purchase frequency. We are confident we are taking the right actions to
deliver attractive operating margins and free cash flow for the
long-term.”

Corporate Updates

On December 31, 2018, Qurate Retail completed a restructuring whereby
HSN and its subsidiaries (excluding Cornerstone) became subsidiaries of
QVC, Inc. The restructuring is intended to better facilitate
cross-platform initiatives across the QVC and HSN businesses. Following
the restructuring, QVC, Inc. is comprised of the businesses of QVC US
and HSN (collectively “QxH”), and QVC International. During the first
quarter of 2019, Qurate Retail changed its reportable segments to
combine QVC US and HSN into one QxH reportable segment and is presenting
prior period information in this press release to conform to this change.

Discussion of Results

Unless otherwise noted, the following discussion compares financial
information for the three months ended March 31, 2019 to the same period
in 2018.

Qurate Retail has realized total run-rate cost synergies of $67 million
to-date through the first quarter and expects to realize total run-rate
cost synergies of approximately $165 – $170 million in 2019, inclusive
of amounts related to stock compensation expense.

 

FIRST QUARTER 2019 FINANCIAL RESULTS

   
(amounts in millions)     1Q18     1Q19     % Change

% Change
Constant
Currency(a)

Revenue
QxH $ 1,926 $ 1,857

(4

)%

QVC International(b) 676 644

(5

)%

1

%

Zulily 419 397

(5

)%

Cornerstone 207 187

(10

)%

Intersegment eliminations   (1 )     NM  
Total Qurate Retail Revenue (pro forma) $ 3,227   $ 3,085  

(4

)%

(3

)%

Former Liberty Ventures corporate and other(c)   3      
Total Qurate Retail Revenue (as reported) $ 3,230   $ 3,085  
 
Operating Income
QxH $ 267 $ 247

(7

)%

QVC International(b) 89 79

(11

)%

(8

)%

Zulily (28 ) (13 )

54

%

Cornerstone (9 ) (7 )

22

%

Unallocated corporate cost(d)   (17 )   (18 )

(6

)%

Total Qurate Retail Operating Income (pro forma) $ 302   $ 288  

(5

)%

Former Liberty Ventures corporate and other(c) (8 )
Total Qurate Retail Operating Income (as reported) $ 294   $ 288  
 
Adjusted OIBDA
QxH $ 369 $ 352

(5

)%

QVC International(b) 107 101

(6

)%

(1

)%

Zulily 27 17

(37

)%

Cornerstone 3 3

%

Unallocated corporate cost(d)   (9 )   (13 )

(44

)%

Total Qurate Retail Adjusted OIBDA (pro forma) $ 497   $ 460  

(7

)%

Former Liberty Ventures corporate and other(c) (5 )
Total Qurate Retail Adjusted OIBDA (as reported) $ 492   $ 460  

____________________

a)   For a definition of constant currency financial metrics, see the
accompanying schedules.
b) Includes QVC Germany, QVC Italy, QVC Japan and QVC UK. Includes QVC
France through March 13, 2019.
c) First quarter 2018 includes the results of the former Liberty
Ventures Group consolidated in Qurate Retail’s results through March
9, 2018, prior to the split-off of GCI Liberty.
d) Includes corporate costs incurred at Qurate Retail, Inc. but not
allocated to any business segment. Approximately half of the
unallocated corporate cost in the first quarter of 2019 relates to a
one-time legal settlement included in adjusted OIBDA.
 

FIRST QUARTER 2019 NET INCOME AND
ADJUSTED NET INCOME
(3)

 
(amounts in millions)         1Q18     1Q19
Net Income(a) $ 142 $ 55
Adjusted Net Income(b) $ 204 $ 151
 
Basic weighted average shares outstanding (“WASO”) 476 433
Potentially dilutive shares   5   1
Diluted WASO   481   434
 
GAAP EPS(a) $ 0.30 $ 0.13
Adjusted EPS(b) $ 0.42 $ 0.35

____________________

a)   Represents net income and diluted net income per share from
continuing operations attributable to Series A and Series B common
stockholders as presented in Qurate Retail’s financial statements.
b) See reconciling schedule 3.
 

QxH

QxH reported sales declines in home, jewelry and beauty, which were
partially offset by gains in electronics with modest growth in fashion
(apparel and accessories). QxH generated strong sales growth in off-air
products; however, these gains were not sufficient to offset lower sales
of on-air items. Operating income and adjusted OIBDA margin(3)
contraction was primarily due to higher inventory management costs,
fulfillment and marketing expenses, which were partially offset by lower
TV distribution commissions and higher product margins. Lower TV
distribution commissions at QxH are in part due to the accounting
treatment for certain renewed HSN carriage agreements (described below).
Operating income also included higher amortization expense related to
the amortization of HSN carriage agreements.

Beginning in the third quarter of 2018, HSN began renewing TV carriage
agreements with certain distribution partners, which provided multi-year
upfront payments that are amortized over the life of the agreements,
versus its previous convention of expensing quarterly payments as
incurred. This accounting change has a positive impact on QxH’s adjusted
OIBDA with a corresponding increase in QxH’s amortization expense, which
is neutral to operating income each period and cash neutral over the
life of the agreements.

QVC International

US Dollar denominated results were negatively impacted by exchange rate
fluctuations, primarily due to the Dollar strengthening 8% versus the
Euro, 6% versus the British Pound and 2% versus the Japanese Yen. The
financial metrics presented in this press release also provide a
comparison of the percentage change in QVC International’s results in
constant currency (where applicable) to the comparable figures
calculated in accordance with US GAAP for the first quarter of 2019.

QVC International constant currency sales gains were driven primarily by
growth in Japan and Germany, partially offset by declines in Italy and
modest softness in the UK. Operating income and adjusted OIBDA margin
contraction was primarily due to lower product margins, which were
partially offset by a lower inventory obsolescence provision. As
previously announced, QVC closed its television and digital platforms in
France on March 13, 2019.

Zulily

Zulily revenue decreased due to lower unit volume driven by a decrease
in new customers and lower frequency of purchases from existing
customers, as well as lower average selling price. Product categories
that led the sales decline were apparel (kids and women) and home.
Zulily’s results were affected by less efficient customer acquisition
spend on certain digital marketing channels and the impact of sales tax
collection in additional states. Operating loss improved due to a
decrease in purchase accounting amortization as certain intangible
assets became fully amortized in the fourth quarter of 2018. Adjusted
OIBDA declined primarily due to lower sales, higher fixed costs
associated with increased technology-related headcount and higher
freight expenses, which were partially offset by higher product margins.

Cornerstone

Revenue declined primarily driven by the shutdown of the Improvements
catalog business effective December 2018 and a soft start to the year at
the Frontgate and Grandin Road brands. Excluding Improvements, revenue
declined 4%. Operating loss and adjusted OIBDA performance principally
reflected the impact of lower revenue and gross margin pressure from
promotional activity and fulfillment expense deleverage, which were
partially offset by lower marketing and operating costs. The operating
loss also benefited from lower purchase accounting amortization.

 

FIRST QUARTER 2019 SUPPLEMENTAL METRICS

 
(amounts in millions unless otherwise noted)     1Q18     1Q19     % Change    

% Change
Constant
Currency(a)

QxH
Cost of Sales % of Revenue 64.0 % 65.0 % 100

 bps

Operating Income Margin (%) 13.9 % 13.3 % (60 )bps
Adjusted OIBDA Margin (%) 19.2 % 19.0 % (20 )bps
Average Selling Price $ 54.59 $ 54.48

(0

)%

 

Units Sold

(4

)%

 

Return Rate(b) 17.5 % 17.4 % (10 )bps
eCommerce Revenue(c) $ 1,032 $ 1,031

0

%

 

eCommerce % of Total Revenue 53.6 % 55.5 % 190

 bps

Mobile % of eCommerce Revenue(d) 63.6 % 67.4 % 380

 bps

LTM Total Customers(e) 10.8 10.9

1

%

 

 
QVC – International
Cost of Sales % of Revenue 62.6 % 62.6 % 0

 bps

Operating Income Margin (%) 13.2 % 12.3 % (90 )bps
Adjusted OIBDA Margin (%) 15.8 % 15.7 % (10 )bps
Average Selling Price

(4

)%

 

1 %
Units Sold

0

%

 

eCommerce Revenue(c) $ 245 $ 251

2

%

 

8 %
eCommerce % of Total Revenue 36.2 % 39.0 % 280

 bps

Mobile % of eCommerce Revenue(d) 70.0 % 73.5 % 350

 bps

LTM Total Customers(e) 4.8 4.7

(2

)%

 

 
Zulily
Cost of Sales % of Revenue 73.7 % 74.3 % 60

 bps

Operating Income Margin (%)

(6.7

)%

(3.3

)%

340

 bps

Adjusted OIBDA Margin (%) 6.4 % 4.3 % (210 )bps
Mobile % of Total Orders 69.9 % 74.2 % 430

 bps

LTM Total Customers(d) 6.1 6.5

7

%

 

 
Cornerstone
Operating Income Margin (%)

(4.3

)%

(3.7

)%

60

 bps

Adjusted OIBDA Margin (%) 1.4 % 1.6 % 20

 bps

eCommerce Revenue(c) $ 147 $ 135

(8

)%

 

eCommerce % of Total Revenue 71.0 % 72.2 % 120

 bps

____________________

a)   For a definition of constant currency financial metrics, see the
accompanying schedules.
b) Measured as returned sales over gross shipped sales.
c) Based on net revenue.
d) Based on gross US Dollar orders.
e) LTM: Last twelve months.
 

Taxes

Qurate Retail estimates that its ongoing annual effective tax rate will
be in the range of 17% – 20% including federal, state and foreign taxes,
net of tax credits generated by Qurate Retail’s green energy
investments. This estimate excludes the impact of one-time tax items and
is subject to adjustment.

Share Repurchases

From February 1, 2019 through April 30, 2019, Qurate Retail repurchased
approximately 5.9 million shares of Series A common stock (Nasdaq:
QRTEA) at an average cost per share of $20.36 for total cash
consideration of $119 million. Since the creation of our existing common
stock (including its predecessors, the QVC Group and the Liberty
Interactive Group) in May 2006, Qurate Retail has repurchased shares for
aggregate cash consideration of $8.9 billion, representing approximately
58% of the shares outstanding in May 2006. All repurchases up to August
9, 2012, the date on which the QVC Group stock was recapitalized to
create the Liberty Ventures common stock, were comprised of shares of
the combined stocks. The remaining repurchase authorization for Qurate
Retail is approximately $179 million.

FOOTNOTES

 

1)

 

Qurate Retail’s President and CEO, Mike George, and Executive
Chairman, Greg Maffei will discuss these highlights and other
matters on Qurate Retail’s earnings conference call which will
begin at 8:30 a.m. (E.D.T.) on May 10, 2019. For information
regarding how to access the call, please see “Important Notice”
later in this document.

2)

For a definition of constant currency financial metrics, see
the accompanying schedules. Applicable reconciliations can be
found in the financial tables at the beginning of this press
release.

3)

For definitions and applicable reconciliations of adjusted
OIBDA, adjusted OIBDA margin, adjusted net income and adjusted
EPS, see the accompanying schedules.

 

NOTES

Cash and Debt

The following presentation is provided to separately identify cash and
debt information.

(amounts in millions)         12/31/2018     3/31/2019
Cash (GAAP) $ 653 $ 508
 
Indemnification Asset(a) $ 79 $ 110
 
Debt:
QVC senior notes(b) $ 3,775 $ 3,775
QVC bank credit facility 1,320 1,438
Other subsidiary debt(c)   188      
Total Qurate Retail Group Debt $ 5,283 $ 5,213
 
Senior notes(b) 791 791
Senior exchangeable debentures(d)   1,517     1,512  
Corporate Level Debentures   2,308     2,303  
Total Qurate Retail, Inc. Debt $ 7,591   $ 7,516  
Unamortized discount, fair market value adjustment and deferred loan
costs
  (218 )   (73 )
Total Qurate Retail, Inc. Debt (GAAP) $ 7,373   $ 7,443  
 
QVC, Inc. leverage(e) 2.2x 2.3x

____________________

a)   Indemnity from GCI Liberty, pursuant to an indemnification agreement
with respect to the 1.75% exchangeable debentures due 2046 (the
“Charter exchangeable debentures”) issued by Liberty Interactive LLC
(“LI LLC”), as described in this press release.
b) Face amount of Senior Notes and Debentures with no reduction for the
unamortized discount.
c) Other subsidiary debt at December 31, 2018 consisted of capital
leases. Due to the adoption of a new lease accounting standard in
the first quarter of 2019, capital leases are now recorded in other
current and long-term liabilities and not included in total debt.
d) Face amount of Senior Exchangeable Debentures with no reduction for
the fair market value adjustment.
e) As defined in QVC, Inc.’s credit agreement. Includes QxH, QVC
International and Zulily adjusted OIBDA.
 

Cash at Qurate Retail decreased $145 million in the first quarter as
share repurchases, capital expenditures and other investing activities
more than offset cash from operations and net borrowings.

Total debt at Qurate Retail decreased by $75 million in the first
quarter primarily due to the reclassification of QVC’s capital leases as
current and long-term liabilities pursuant to the new lease accounting
standard adopted in the first quarter of 2019, partially offset by
increased borrowing under QVC’s bank credit facility.

In April 2019, QVC repaid the $400 million outstanding balance on its
3.125% senior secured notes due 2019 using borrowings under its bank
credit facility.

Qurate Retail benefits from an indemnification agreement with GCI
Liberty with respect to its Charter exchangeable debentures. The
indemnification agreement compensates Qurate Retail for any payments
made in excess of the adjusted principal amount of the debentures to any
holder that exercises its exchange right on or before the put/call date
of October 5, 2023. This indemnity is supported by a negative pledge in
favor of Qurate Retail on the 1.0 million reference shares of Class A
common stock of Charter held at GCI Liberty that underlie the Charter
exchangeable debentures. The indemnification asset on Qurate Retail’s
balance sheet is valued based on the estimated exchange feature in the
Charter exchangeable debentures. As of March 31, 2019, a holder of the
Charter exchangeable debentures does not have the ability to exchange,
and accordingly, the indemnification asset has been classified as a
long-term asset. There is $332 million principal amount of the Charter
exchangeable debentures outstanding as of March 31, 2019.

Important Notice: Qurate Retail, Inc. (Nasdaq: QRTEA, QRTEB)
President and CEO, Mike George, and Executive Chairman, Greg Maffei,
will discuss Qurate Retail’s earnings release on a conference call which
will begin at 8:30 a.m. (E.D.T.) on May 10, 2019. The call can be
accessed by dialing (800) 458-4121 or (323) 794-2093, passcode 3078914,
at least 10 minutes prior to the start time. The call will also be
broadcast live across the Internet and archived on our website. To
access the webcast go to http://ir.qurateretail.com/events-and-presentations.
Links to this press release and replays of the call will also be
available on Qurate Retail’s website.

This press release includes certain forward-looking statements,
including statements about business strategies and initiatives and their
expected benefits, market potential, future financial prospects and
performance, Qurate Retail’s estimated 2019 effective tax rate, market
conditions, statements about the indemnification by GCI Liberty, the
expected benefits (including synergies) of the acquisition of HSNi and
the related intercompany restructuring,
the continuation of our
stock repurchase program and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties
that could cause actual results to differ materially from those
expressed or implied by such statements, including, without limitation,
possible changes in market acceptance of new products or services,
competitive issues, regulatory matters affecting our businesses,
continued access to capital on terms acceptable to Qurate Retail,
changes in law and government regulations that may impact the derivative
instruments that hedge certain of our financial risks, the availability
of investment opportunities and market conditions conducive to stock
repurchases.
These forward-looking statements speak only as of
the date of this press release, and Qurate Retail expressly disclaims
any obligation or undertaking to disseminate any updates or revisions to
any forward-looking statement contained herein to reflect any change in
Qurate Retail’s expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is
based. Please refer to the publicly filed documents of Qurate Retail,
including the most recent Forms 10-K and 10-Q, for additional
information about Qurate Retail and about the risks and uncertainties
related to Qurate Retail’s business which may affect the statements made
in this press release.

NON-GAAP FINANCIAL MEASURES

This press release includes a presentation of adjusted OIBDA, which is a
non-GAAP financial measure, for Qurate Retail, QVC (and certain of its
subsidiaries), Zulily and Cornerstone together with a reconciliation to
that entity or such businesses’ operating income, as determined under
GAAP. Qurate Retail defines adjusted OIBDA as revenue less cost of
sales, operating expenses, and selling, general and administrative
expenses, excluding all stock based compensation, and excludes from that
definition depreciation and amortization, certain purchase accounting
adjustments, separately reported litigation settlements, transaction
related costs (including restructuring, integration, and advisory fees)
and impairment charges that are included in the measurement of operating
income pursuant to GAAP. Further, this press release includes adjusted
OIBDA margin which is also a non-GAAP financial measure. Qurate Retail
defines adjusted OIBDA margin as adjusted OIBDA divided by revenue.

Qurate Retail believes adjusted OIBDA is an important indicator of the
operational strength and performance of its businesses, including each
business’ ability to service debt and fund capital expenditures. In
addition, this measure allows management to view operating results and
perform analytical comparisons and benchmarking between businesses and
identify strategies to improve performance. Because adjusted OIBDA is
used as a measure of operating performance, Qurate Retail views
operating income as the most directly comparable GAAP measure. Adjusted
OIBDA is not meant to replace or supersede operating income or any other
GAAP measure, but rather to supplement such GAAP measures in order to
present investors with the same information that Qurate Retail’s
management considers in assessing the results of operations and
performance of its assets. Please see the attached schedules for
applicable reconciliations.

In addition, this press release includes references to adjusted net
income and adjusted earnings per share, which are non-GAAP financial
measures, for Qurate Retail. Qurate Retail defines adjusted net income
as net income, excluding the impact of acquisition accounting
amortization (net of deferred tax benefit), mark to market adjustments
on certain public debt and equity securities and other one-time
adjustments. Qurate Retail defines adjusted earnings per share as
diluted earnings per share plus the diluted per share effects of certain
adjustments, net of tax.

Qurate Retail believes adjusted net income and adjusted earnings per
share are important indicators of financial performance due to the
impact of purchase accounting amortization, mark to market adjustments
and other one-time items identified in Schedule 3 below. Because
adjusted net income and adjusted earnings per share are used as measures
of overall financial performance, Qurate Retail views net income and
diluted earnings per share, respectively, as the most directly
comparable GAAP measures. Adjusted net income and adjusted earnings per
share are not meant to replace or supersede net income, diluted earnings
per share or any other GAAP measure, but rather to supplement such GAAP
measures in order to present investors with a supplemental metric of
financial performance. Please see the attached schedules for a
reconciliation of adjusted net income to net income (loss) and adjusted
earnings per share to diluted earnings per share, in each case,
calculated in accordance with GAAP for Qurate Retail (Schedule 3).

This press release also references certain financial metrics on a
constant currency basis, which is a non-GAAP measure, for Qurate Retail.
Constant currency financial metrics, as presented herein, are calculated
by translating the current-year and prior-year reported amounts into
comparable amounts using a single foreign exchange rate for each
currency.

Qurate Retail believes constant currency financial metrics are an
important indicator of financial performance, in particular for QVC, due
to the translational impact of foreign currency fluctuations relating to
its subsidiaries in the UK, Germany, Italy and Japan, as well as its JV
in China. We use constant currency financial metrics to provide a
framework to assess how our businesses performed excluding the effects
of foreign currency exchange fluctuations. Please see the financial
tables at the beginning of this press release for a reconciliation of
the impact of foreign currency fluctuations on revenue, operating
income, adjusted OIBDA and average selling price.

SCHEDULE 1

The following table provides a reconciliation of Qurate Retail’s
adjusted OIBDA to its operating income calculated in accordance with
GAAP for the three months ended March 31, 2018, June 30, 2018, September
30, 2018, December 31, 2018 and March 31, 2019, respectively.

 

CONSOLIDATED OPERATING INCOME AND PRO FORMA
ADJUSTED OIBDA RECONCILIATION

 
(amounts in millions)     1Q18     2Q18     3Q18     4Q18     1Q19
Qurate Retail, Inc. Operating Income $ 294 $ 358 $ 237 $ 435 $ 288
Depreciation and amortization 163 159 167 148 153
Stock compensation expense 23 23 21 21 19
Impairment charges 33
Operating company level transaction related costs 8 2 43 15
Corporate level transaction related costs   4        
Qurate Retail, Inc. Adjusted OIBDA (as reported) $ 492 $ 542 $ 468 $ 652 $ 460
Former Liberty Ventures Group adjusted OIBDA(a)   5        
Qurate Retail, Inc. Adjusted OIBDA (pro forma) $ 497 $ 542 $ 468 $ 652 $ 460

Contacts

Qurate Retail, Inc.
Courtnee Chun, 720-875-5420

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