QVC Group, Inc. Q3 FY2023 earnings call

Management Statement and Operational Highlights

• Project Athens is progressing with tangible results, including first quarterly OIBDA growth since Q2 2021 and moderation of revenue decline from first half of 2023.
• Gross margin improved at core video commerce businesses. Free cash flow grew $464 million year-over-year in first 9 months of 2023.
• Workforce reductions enacted. Conducted deep dive customer analysis and implemented actions to stabilize customer file, with new customers growing 8% in Q3 (first growth since Q1 2021).
• Focus on holiday season with strong merchandise assortment. QVC has brand extensions, limited time collections, new product launches; HSN has new merchandise and exclusive partnerships.
• QVC International implementing transformational program focused on margin opportunities, content, and broadcast strategies.

Segment Performance

• QXH: Grew OIBDA 41%. Revenue declined 3%, partially offset by 1% increase in average selling price and 6% increase in average spend per customer. Adjusted OIBDA margin increased 380 basis points. Gross profit grew 480 basis points due to favorable fulfillment, product margins, and inventory obsolescence. Category performance saw turnaround in home, growth in accessories, softness in apparel and electronics.
• QVC International: Constant currency revenue increased 1%. Adjusted OIBDA increased 23%, adjusted OIBDA margin improved 210 basis points. Growth stronger in UK and Germany; Japan flat, Italy declined. Driven by improved product margins and lower inventory obsolescence.
• Cornerstone: Revenue declined 13%. Adjusted OIBDA increased 10% due to favorable supply chain costs and lower detention/demurrage costs, partially offset by increased promotional activity and higher fixed costs. Planning to open 5 new retail stores by first half of 2024.

Guidance

• Expect double-digit CAGR in OIBDA and free cash flow and stable revenue through 2024.
• Devote free cash flow to debt repayment. Continues to assess incremental opportunities to improve balance sheet. Look forward to Annual Investor Day on November 9.

Risks

• Discretionary retail backdrop poses challenges. Impact of inflation, particularly on groceries and gas, affecting customer spending.
• Geopolitical events, interest rates, and consumer sentiment can impact revenue and profitability. Lower-income customers more affected by economic conditions.

Question and Answer

Q: Jason Haas asked about spending behavior of newer customers and if they graduate to best customers.

A: David Rawlinson said new customers' repeat purchase behavior is encouraging, and they tend to graduate to best customers at similar rates to historical trends.

Q: William Reuter's questioner asked about category trends.

A: David Rawlinson and Bill Wafford discussed category trends, noting customer willingness to spend on high-price items but caution with less urgent or value-perceived purchases, and response to special events across categories.

Q: Carla Casella asked about new customers, product margin favorability, and cost reduction sustainability.

A: David Rawlinson and Greg Maffei responded, discussing new customers' progression, product margin trajectory, and sustainability of cost reductions including freight and further efficiency opportunities.

Q: Unidentified Analyst asked about customer count decline moderation and lower-income customers.

A: David Rawlinson explained highest churn is from least frequent purchasers, and core customers are insulated to some extent by wealth and economic factors, while less wealthy customers are more impacted by the economy.

Q: Hale Holden asked about viewership improvement.

A: David Rawlinson said 15% viewership improvement is due to programming and stability in the customer file, including linear channel growth and digital platform potential.