HSN, Inc. Reports Second Quarter 2016 Results

 
Net sales decreased 4%
Digital sales up 2% with sales penetration of 53%
Diluted EPS was $0.50; Adjusted EPS was $0.74

Company entered into a letter of intent to sell its TravelSmith and Chasing Fireflies businesses and recorded a non-cash asset impairment charge of $20.4 million, or $0.24 per diluted share
Company announced today that Judy Schmeling, currently COO and CFO of HSNi, has assumed the role of President of Cornerstone.

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HSN, Inc. (HSNIV) (NASDAQ:HSNI) reported results for the second quarter ended June 30, 2016 for HSN, Inc. (“HSNi” or “Company”) and its two operating segments, HSN and Cornerstone.
Second Quarter 2016 Results vs Second Quarter 2015 Results

HSNi’s net sales decreased 4% to $854.3 million. HSN’s net sales decreased 3% to $557.2 million. Cornerstone’s net sales decreased 5% to $297.1 million. HSNi’s digital sales grew 2% with penetration increasing 270 basis points to 52.6%.

In the second quarter of 2016, Cornerstone initiated a formal plan to sell TravelSmith and Chasing Fireflies, two of the apparel brands within its portfolio. In July 2016, the Company entered into a non-binding letter of intent with an exclusivity period of 30 days to sell these businesses. Assuming the parties can reach a final agreement, the Company expects the transaction to close in the third quarter of 2016. The Company recorded in the second quarter of 2016 a non-cash asset impairment charge of $20.4 million, or $0.24 per diluted share.

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HSNi’s operating income, which includes a non-cash asset impairment charge of $20.4 million related to the assets held for sale of TravelSmith and Chasing Fireflies recorded within the Cornerstone segment, decreased 35% to $46.2 million. HSN’s operating income increased 3% to $55.1 million. Cornerstone’s operating loss was $8.9 million compared to operating income of $17.2 million in the prior year.

HSNi’s Adjusted EBITDA decreased 8% to $82.4 million. HSN’s Adjusted EBITDA decreased 3% to $66.3 million. Cornerstone’s Adjusted EBITDA was $16.1 million, a decrease of $5.7 million.

Diluted EPS, which includes a non-cash asset impairment charge of $0.24 per diluted share, was $0.50 compared to $0.78 in the prior year. Adjusted EPS was $0.74 compared to $0.81 in the prior year.

HSNi’s board of directors approved a quarterly cash dividend of $0.35 per share payable September 22, 2016 to shareholders of record as of September 7, 2016.
“HSNi’s results were impacted by the performance of certain merchandising categories at HSN as well as a weaker season and a greater promotional environment in the outdoor business at Cornerstone,” stated Mindy Grossman, CEO of HSN, Inc. “Recognizing that we are navigating in a challenging macro environment, we are focused on execution, combined with disciplined operating expense management and optimizing operational efficiencies.

“At HSN, we are accelerating our targeted customer acquisition strategies and intensifying our efforts to drive product demand through proprietary products, new programming, and partnerships to improve our top-line performance,” added Ms. Grossman. “At Cornerstone, we are concentrating on the brands within the portfolio that have the greatest growth opportunities, including our expanded retail distribution channels. As a result of this strategic focus, we have entered into a letter of intent to sell our TravelSmith and Chasing Fireflies businesses.

“I am also excited to announce that Judy Schmeling, currently COO and CFO of HSNi, has been appointed President of Cornerstone Brands. In addition to her new role, she will continue to serve as COO of HSNi and will remain CFO during the transition until a permanent successor is appointed. Judy has extensive strategic and financial expertise and over 20 years of experience at the company across all areas of the business. I have great confidence that she is the right leader to drive the Cornerstone business.”
HSN Segment Results for the Second Quarter 2016

HSN’s net sales were $557.2 million, a decrease of 3% from the prior year. Sales grew in electronics and beauty, offset by decreases in other product categories and in shipping revenues. Approximately one-third of the decline in net sales was attributable to the conclusion of a direct-response television marketing campaign in the prior quarter. Digital sales grew 5% with penetration increasing 330 basis points to 43.6%. The return rate improved 60 basis points to 17.4%; units shipped decreased 2%; and average price point decreased 2%.

Gross profit decreased 6% to $197.1 million. Gross profit rate decreased 120 basis points to 35.4% primarily due to an increase in shipping promotions, higher inventory reserves and changes in product mix. The change in rate was also negatively impacted by favorable settlements of vendor claims in the prior year. Operating expenses decreased 9% to $142.0 million primarily due to decreases in employee-related costs and bad debt expense and a $3.0 million charge in the prior year related to the planned closure of one of HSN’s distribution centers. Excluding non-cash charges and the $3.0 million severance charge, operating expenses as a percentage of net sales were 23.5% compared to 24.7% in the prior year.

Operating income increased 3% to $55.1 million. Adjusted EBITDA decreased 3% to $66.3 million.

Cornerstone Segment Results for the Second Quarter 2016

Cornerstone’s net sales decreased 5% to $297.1 million primarily due to weakness in the outdoor category within the home brands and lower catalog circulation. Catalog circulation decreased 6%. Digital sales penetration increased 200 basis points to 69.4%.

Gross profit decreased 10% to $114.7 million. Gross profit rate decreased 200 basis points to 38.6% primarily due to lower product and shipping margins driven by higher promotional activity.

Operating expenses, which include the non-cash asset impairment charge of $20.4 million related to the assets held for sale of TravelSmith and Chasing Fireflies, increased 12% to $123.6 million. Excluding non-cash charges, operating expenses decreased 6% to $98.6 million and were 33.2% as a percentage of net sales compared to 33.6% in the prior year due primarily to lower catalog and advertising costs.

Operating loss, which includes the non-cash asset impairment charge of $20.4 million, was $8.9 million compared to operating income of $17.2 million in the prior year. Adjusted EBITDA decreased $5.7 million to $16.1 million.

Liquidity and Capital Resources

As of June 30, 2016, HSNi had cash and cash equivalents of $54.8 million compared to $63.9 million at December 31, 2015 and $74.2 million at June 30, 2015. Net cash provided by operating activities for the six months ended June 30, 2016 increased $15.8 million to $88.1 million compared to $72.3 million in the prior year primarily due to lower investment in inventories that was partially offset by higher utilization of HSN’s Flexpay offering. During the six months ended June 30, 2016, HSNi reduced the balance outstanding under its revolving credit facility by $18.0 million.

As of June 30, 2016, total debt was $609.5 million, resulting in a ratio of total debt to Adjusted EBITDA, as defined in HSNi’s credit agreement, of approximately 1.8x as compared to a maximum allowable leverage ratio of 3.5x.

HSNi’s board of directors approved a quarterly cash dividend of $0.35 per share payable September 22, 2016 to shareholders of record as of September 7, 2016.

Since inception of its most recent share repurchase program authorized in January 2015, HSNi has repurchased a total of 1.2 million shares at an aggregate cost of $69.6 million at an average cost of $59.02 per share. As of June 30, 2016, there were 2.8 million shares remaining under the existing share repurchase authorization.
About HSN, Inc.

HSN, Inc. (Nasdaq:HSNI) is a $4 billion interactive multichannel retailer with strong direct-to-consumer expertise among its two operating segments, HSN and Cornerstone. HSNi offers innovative, differentiated retail experiences on TV, online, via mobile devices, in catalogs, and in brick and mortar stores. HSN, a leading interactive multichannel retailer which offers a curated assortment of exclusive products combined with top brand names, now reaches approximately 94 million homes (24 hours a day, seven days a week, live 364 days a year). HSN.com offers a differentiated digital experience by leveraging content, community and commerce. In addition to its existing media platforms, HSN is the industry leader in transactional innovation, including services such as HSN Shop by Remote®, the only service of its kind in the U.S., the HSN Shopping App for mobile handheld devices and HSN on Demand®. Cornerstone comprises leading home and apparel lifestyle brands including Ballard Designs®, Chasing Fireflies®, Frontgate®, Garnet Hill®, Grandin Road®, Improvements® and TravelSmith®. Cornerstone distributes approximately 325 million catalogs annually, operates seven separate digital sales sites and operates 14 retail and outlet stores.
HSN, INC.’S PRINCIPLES OF FINANCIAL REPORTING

HSNi reports Adjusted EBITDA, Adjusted Net Income and Adjusted EPS, all of which are supplemental measures to GAAP. These measures are among the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. HSNi endeavors to compensate for the limitations of the non-GAAP measures presented by providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. We encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures contained in this release and which we discuss below.

Definitions of Non-GAAP Measures

Adjusted EBITDA is defined as operating income excluding, if applicable: (1) non-cash charges including: (a) stock-based compensation expense, (b) amortization of intangibles, (c) depreciation and gains and losses on asset dispositions, and (d) goodwill, long-lived asset and intangible asset impairments; (2) pro forma adjustments for significant acquisitions; and (3) other significant items. Significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, thereby affecting the comparability of results. Adjusted EBITDA is not a measure determined in accordance with GAAP, and should not be considered a substitute for operating income, net income or any other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a helpful measure for those evaluating companies in the retail and media industries. Adjusted EBITDA should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Adjusted EBITDA has certain limitations in that it does not take into account the impact to HSNi’s statement of operations of certain expenses, gains and losses that are excluded from the company’s definition of Adjusted EBITDA.

Adjusted Net Income is defined as net income available to common shareholders excluding, net of tax effects, if applicable: (1) goodwill, long-lived asset and intangible asset impairments, (2) pro forma adjustments for significant acquisitions, (3) discontinued operations and (4) other significant items. Significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, thereby affecting the comparability of results. We believe Adjusted Net Income is useful to investors because it represents HSNi’s consolidated results taking into account charges which are not allocated to the operating businesses such as interest expense and taxes, but excluding the effects of goodwill and asset impairments, significant acquisition-related adjustments, discontinued operations and certain other significant items.

Adjusted EPS is defined as Adjusted Net Income divided by diluted weighted average shares outstanding. We believe Adjusted EPS is useful to investors because it represents, on a per share basis, HSNi’s consolidated results, taking into account charges which are not allocated to the operating businesses such as interest expense and taxes, but excluding the effects of goodwill and asset impairments, significant acquisition-related adjustments, discontinued operations and certain other significant items. Adjusted Net Income and Adjusted EPS have certain limitations in that they do not take into account the impact of goodwill and asset impairments, significant acquisition-related adjustments, discontinued operations and certain other significant items. Therefore, we think it is important to evaluate these measures along with our consolidated statement of operations.

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