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Soft Landing In Store For Shopping Nets

9/12/2009 3:00 PM Eastern

The first half of the year was a roller-coaster ride for most home-shopping channels, but as the economy begins to smooth out some of the kinks heading into the second half of the year, so too have initiatives begun by the biggest players in the space started to soften the economic blow.

Both industry juggernaut QVC and No. 2 shopping channel HSN have made moves in the past 12 months to reconfigure their product mixes, make their programming more compelling and more effectively manage inventories. Given the improvement both showed in the second quarter, those initiatives appear to be making a difference and are causing executives at both shops to be optimistic for the back half of the year.

Janco Partners analyst Murray Arenson said that for the most part, the two home-shopping giants appeared to be weathering the economic malaise, but through distinctive approaches.

'The outlook has definitely improved,” Arenson said. “You have to look at it in the context of the overall retail and consumer environment. In both cases there were pretty promising operational improvements.”

Arenson is backing up that enthusiasm with hard numbers — he increased his full-year cash flow estimate for HSN to $143 million from $117 million. Arenson now expects QVC's 2009 cash flow to be about $1.6 billion, compared to his previous estimate of $1.4 billion.

At QVC, which saw marked improvement in the second quarter — revenue was down 4% in the period compared to 9% to 12% declines in previous periods — CEO Mike George said all signs point to continued momentum for the rest of the year.

“Q3 and Q1 were challenging periods for us,” George said, adding that the improvement was due to a combination of a bettering economy and past initiatives taking hold.

“Consumer spending certainly didn't pick up, but I think it stopped falling,” George said. “The economy clearly bottomed out to some extent. But it was also because of a number of programs we had been building on for the past 12 to 18 months.”

The economy has played havoc with major retailers — Nordstrom's second-quarter sales dipped 6.2% and its net profit declined 27%, while Macy's second-quarter sales were down 9.7% — but there are some recent signs of recovery. For starters, retail sales were down 2.9% in August, the 12thstraight month of declines but better than the 3.8% drop that Wall Street expected. And the performance was an improvement over the 5.1% decline in July, leading some pundits to opine that the worst may be over.

At HSN, CEO Mindy Grossman is having an even better year — revenue for the first half of 2009 for the shopping network declined just 1% while operating cash flow rose 5%. Grossman, who joined HSN from apparel giant Nike in late 2006, began a two-year project to transform the shopping channel into a lifestyle network in 2007, revamping the product mix, changing vendors and targeting a new demographic — young, hip women.

The relaunch officially occurred in July 2007 and involved shedding about $150 million worth of brands, including some that were generating strong revenue but didn't fit in with the overall vision for the company. The focus, according to Grossman, was not only on differentiating HSN from the competition, but on reinvigorating the HSN brand in the eyes of its customers.

That transformation meant mixing higher-end, higher-value products like handbags from Carlos Falchi (priced between $50 and $450 each), electronics from Canon, Sony and Gateway and health and beauty products from Lancome, Bliss and Clarins with lower-priced fare. Also among the mix are products from celebrity experts in their respective fields — such as cookware from well-known chefs Wolfgang Puck and Emeril Lagasse; apparel from celebrity designer Stefani Greenfield; and home-design products from designer Nate Berkus.

Currently the product mix at HSN, which is always subject to change, is about 48% beauty, apparel and accessories with the remainder in the home categories.

QVC, which has a long history of celebrity and designer-themed product lines, is launching a new show aimed at internationally known clothing designer Isaac Mizrahi in December. In the fall, shows around Bravo reality star Rachel Zoe and singer Jessica Simpson are scheduled. And the network will continue its live broadcasts from this month's Mercedes-Benz Fashion Week in New York.

While George said QVC has high hopes for those programs, he stressed that the network does not partner with just any celebrity.

“We would never go the route of having a celebrity endorse a product line,” George said. “It's more about iconic people — it could be [Dell Computer CEO] Michael Dell selling Dell computers — which he does every December. It has to be someone with a legitimate role with the product.”

Grossman said HSN's success in a tough environment can be tied to two things: the rebranding initiative and a focus on cost efficiency.

Those initiatives helped the bottom line — HSN reduced inventories by $73 million in the second quarter, compared to the prior year and by $6.5 million sequentially, while growing cash flow by 14% in the period — and also helped HSN shift its image. And while the term “lifestyle network” may be bandied about a bit too liberally — George jokingly said the term is close to becoming a cliché — it probably most accurately describes what both QVC and HSN are trying to become. Rather than just shopping channels selling lower priced products, they are actively trying to offer products that fit with their core audience and the way they live their lives. And they are doing it on several different platforms: To Grossman, the TV is just one tool of many to capture as much revenue as possible.

“If you really look at it, our vision is truly not to be looked at as a television-shopping network, but a lifestyle network of experience that can be leveraged on TV, online and the iPhone, as well as on third-party sites.”

Grossman added that the idea is to create a brand that encourages engagement, meaning that customers watch the channel, surf the Web site and read e-mail reminders of programming or product offerings on their mobile devices. That is continuing to take hold — for instance, online accounts for about 30% of sales, up from 28.6% last year. HSN also believes that technology will play a big role in its growth — it has launched HD capability in about 3 million homes and expects to expand that footprint significantly in the next few years. The company also offers a “shop-by-remote” functionality to all Dish Network's subscribers, in Time Warner Cable's Oceanic cable system and is trialing the service with Comcast in several markets. Last month, HSN also launched an iPhone application that includes a “shake2shop” feature which with a shake of the device generates random product recommendations as well as deals and promotions targeted at HSN's mobile customers.

“The more we allow the customer to be in control, the more they like it,” said vice president of HSN advanced services John McDevitt.

George said technology also is a major driver for QVC — it has HD available in 19 million homes and growing and is working on several interactive initiatives, including a shop by remote function and mobile initiatives.

George said that QVC currently has several interactive functions in the United Kingdom — such as an ability to navigate from live shows to delayed programming and even to product-specific shows like a beauty channel — that he would like to move to the U.S. On the mobile front, QVC is readying an iPhone app and already has some mobile service in the U.S. — it is more pronounced in Japan, where mobile accounts for about 8% of sales.

Although there are obvious similarities — both are trying to create brands that offer customers products they can get nowhere else — there are a few key differences between the two home-shopping giants.

While HSN has focused more on beauty, accessories and jewelry (it launched 13 new jewelry products in the second quarter alone), QVC has strong sales in consumer electronics, kitchen and cooking products and beauty and handbags while slightly downplaying apparel. QVC also has taken the opposite tack from HSN on the average price of its products. While HSN has actively tried to lower its average price point, partly reflecting the economic climate and sensitivity to changes in its customers' financial situation — it was down 4% in the second quarter to $59.82 — QVC's average price has risen.

George said that is in part because QVC continues to sell big-ticket electronic items — he said sales of 42-inch and 50-inch flat-screen TVs are strong — and partly because the network has focused more on value than price.

While George said that QVC still strives to offer the lowest prices it is not looking to hawk lower quality merchandise.

“What we're not doing is going downmarket,” George said. “Our average selling price has been increasing fairly significantly.”

George said that in the case of QVC, the shopping channel has been outperforming the traditional retail sector and in many cases is taking away share from big box retailers.

SHOPPING AROUND
How the two largest home-shopping channels have performed:

Q2 '09 % Change 1H09 1H08 % Change
Source: Individual company reports
HSN:
Net Sales $454.2 (1%) $929.2 $939.9 (1%)
Adj. EBITDA $38.4 14% $73.6 $70.1 5%
QVC
  Q209 % Change 1H09 1H08 % Change
Net Sales $1,700 (4%) $3,300 $3,600 (8.3%)
Adj. OIBDA $373 (4%) $692 $774 (11%)

“When you think about the price points we carry on the apparel and accessories side of the house, we're competing against Macy's, Nordstrom's, Kohl's,” George said. “As a general statement, there has been a pretty clear share shift away from those kinds of players. People are getting a little tired of the malls and deteriorating customer service and paying a little more attention to our format.”

 

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