Presentation to MOI Global: October 2, 2020 NOTE: FOR INFORMATION/EDUCATION ONLY • This presentation is for informational and educational use only. Sullimar Capital Group (“S.C.G.”) is NOT a registered investment advisor. S.C.G. is merely a trade name that one family invests under. This presentation is a not an investment recommendation. Nothing in this presentation is investment advice. Investment decisions should be made only after talking to an investment advisor and determining the investment is suitable for a particular portfolio. An investment in Qurate Retail, Inc. carries a substantial amount of risk. • All information in this presentation is opinion based, biased, and requires verification. The intended audience is a group of investment professionals, specifically members of The Manual of Ideas. The author owns shares of Qurate Retail, Inc. and should be presumed to have motivation to increase the company’s share price.
2 NOTE: NOT ADVICE OR SOLICITATION • S.C.G. makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in this presentation. Any assumptions, opinions and estimates expressed in this presentation constitute S.C.G’s judgment as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. S.C.G. does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation.
• S.C.G. is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.
• THIS PRESENTATION DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF QURATE RETAIL, INC. OR ANY OTHER COMPANY.
3 What is Qurate?
• Qurate Retail Group is comprised of: • QVC • HSN • zulily • Cornerstone Brands • Ballard Designs • Chasing Fireflies • Frontgate • Garnet Hill • Grandin Road
4 Who Does Qurate Serve?
• In 2018 and 2019 55% and 44%, respectively, were women between the ages of 35-64. • If you’d like to be overly punitive, you could assume 40% of the customers are older than 60. • Per Social Security Administration, as 65 year old woman currently has 20.45 years of life left. https://www.ssa.gov/oact/STATS/table4c6.html • A key issue is determining how many of those years are spent consuming. • Almost certainly correlated to stock market and wealth effect.
5 Where do those customers spend
• Per the Bureau of Labor Statistics, age cohorts total spend differs in the following ways:
https://www.bls.gov/opub/btn/volume-4/pdf/consumer-expenditures-vary-by-age.pdf
6 Where do those customers spend
• Per the Bureau of Labor Statistics, age cohorts spend in the following ways:
https://www.bls.gov/opub/btn/volume-4/pdf/consumer-expenditures-vary-by-age.pdf
7 Where do those customers spend
• Per the Bureau of Labor Statistics, age cohorts spend in the following ways:
https://www.bls.gov/opub/btn/volume-4/pdf/consumer-expenditures-vary-by-age.pdf
8 What Does Qurate Say about The Customer?
• Mostly women; • Above-average income, above- average household wealth, very engaged in life. • More likely to be involved with community, church, hobbies… • Avid shopper. • She shops everywhere. She's more likely to shop every one of the following destinations than the average shopper.
9 How does Qurate Sell?
• Fundamentally, Qurate sells through screens.
Note: Easy to see “Phone” and laugh. Many of these calls may be customers clarifying what a product is and then placing an order. Remember, customers can’t touch the products. Also creates a feeling of connection when someone dials into QVC or HSN. 10 Isn’t Qurate Tied to the Bundle?
• Overwhelmingly, Qurate is tied to the cable bundle. However, they are trying to pivot. • An important distinction here vs. many other companies tied to the bundle is Qurate only generates revenue when a customer takes an affirmative action. There is no passive revenue generation in this entity.
11 Customer Acquisition: Quantity
“So every year we add over 2 million new customers, despite the fears of cord-cutting and all the rest and that line has generally been going up over time. We had a bit of a bubble due to a number of good things that happened in 2014 and 2015, but generally a pretty good line.”
Source: 2018 Investor Day
12 Customer Acquisition: How
“We must have the right products when the customer is searching for it, we must be in stock at all times, and the Qurate analytics team is helping us identify opportunities to maximize this business. In addition, we leverage the group's new performance marketing function. This is a new capability to the business with a key focus on measurement and return on investment.”
13 Customer Acquisition: Who
“Well, the interesting thing is that the average age of new customers coming into the businesses has never been younger and the average demographic of the customer base overall hasn't aged a year. I think it's starting to get slightly younger because the business is able to constantly generate a very, very large number of new customers and then get them to behave from a loyalty perspective and a spending frequency perspective largely as older classes of cohorts of customers have behaved.”
Source: Stream by Mosaic Interview of a “Former Executive at QVC”
14 Customer Behavior: Engagement
“The goal continues to be make sure you distribute yourself everywhere consumers are consuming video. I think that it becomes harder to catch people's eyes, if you will, because it's not flipping through the channels anymore. Ultimately, the distribution team is extremely experienced and has great relationships across the video distribution environment. I believe they can work to get the businesses placed in the right place. Then the question is how do you drive viewership take up. If it’s a download, download and then viewership and engagement. I think that again, it comes down to can you build compelling, relevant programming that's going to be relevant to those people watching each platform.”
Source: Stream by Mosaic Interview of a “Former Executive at QVC”
15 The Key To This Business:
Super Users – Whichever slide below is accurate demonstrates the importance of a subset of users. Retention matters a lot to the cohort math, which is why both slides are shown.
Sources: 2019 Investor Day and Qurate Retail Business Overview found at https://ir.qurateretail.com/static-files/48e91a49-27a7-4ec6- 91b0-994f9f2a8589 Note: The number recast in these slides is a concern.
16 Super User Habit Formation
According to an expert interview, Mike George once said consumers watch QVC for 100 hours before making their first purchase. Quantifying the metrics in the previous slide: • 69 Items/year = 5+ items per month • 35 Web Visits Per Month • 1+ per day • May result in conversion 1 of 7 times • 18 Days Per Month Viewing TV Station • How many other businesses are visited every other day? • Flex and Easy Pay offer 0% interest installment payment plan. Creates steady stream of payments and mind share. • Who else uses this to keep sales flowing? AAPL?
17 Customer Behavior: Stability
Source: 2018 Investor Day
18 Customer Behavior: Keep It In the Family
“What's absolutely impressive to me, as somebody that's been inside the business, is the parity of the customer metrics across market. The average age demographics swings a little bit from market to market, but it's relatively tight. But as far as the customer loyalty metrics and average number of units purchased, revenue coming from repeat customers year in year out, it's just amazing to see how constant those numbers are across the markets. All of that's been disclosed in various investor meetings across the years. It's just one of those things that the model and how QVC operates to build that customer loyalty and takes a customer-centric and a customer-focused view engenders great loyalty from the customer once they decide that QVC is a place that they enjoy spending time with. A retailer they enjoy spending time with in discovering great products, new products, new inventions, and really spending time with. Interestingly enough, the customer views QVC as part of their family. [inaudible] over the hump of retaining that customer from the first purchase the customer behavior is very, very similar.”
Source: Stream by Mosaic Interview of a “Former Executive at QVC”
19 COVID is an Opportunity For Qurate:
Qurate’s flexible business model helps all parties (customers and suppliers) in this time of need.
20 TV Adaptability
A fellow Qurate Retail Shareholder witnessed Qurate pivot its sales approach in real time. According to him, there is a room that monitors incoming calls and engagement. When the host mentions a word like “beach” and the phones ring the person in the control room communicates with the host to let them know that word created engagement. The host can then tailor the sales pitch in real time.
21 Inventory
“So all of these businesses, whether it's the Today's Special Value thru QVC to Today's Special for HSN or the Daily Deal of the Day for Zulily, all these businesses are based around getting unique inventory that you can't often get on Amazon, or Walmart, or all the others and/or inventory that is branded and basically driving customers because of the experiential and discovery driver, which is quite different driver to an Amazon or a typical e-commerce company. That's the basic model here. To then put some restrictions on it, whether those are restrictions around it's only available for today or it's only available for three days in the case of Zulily, and forcing behavior around the customer to buy in the moment as an impulse buy. So that's a very big part of the model here.” Source: Tegus Interview
22 Internet Adaptability
“Think about years ago when we had [Technical Difficulty] (02:34:18) channel that required signals, antennas, an amazing amount of technology that cannot easily be replicated, it was a monumental task. We don't have those constraints on digital any longer. Moving from linear programming to short-form and on-demand, we can slice and dice our on-air content in a myriad of ways. This is something we have done historically and we will continue to do. Think of HSN and Roku. We've created beauty in electronic channels and thanks to metadata tagging, that is done and those channels are automatically created each and every day based upon new content that's generated. But looking forward, we also have enormous capabilities to generate video content and our digital channels provide a limitless platform for that content to exist. Of course, limitless content has no value if it isn't searchable. And that’s where the metadata comes in. We are building our capabilities to robustly describe, attribute and tag that content, making it easy for the consumer to discover the things she loves and come back to us time-and-time, minute-by-minute, and hour-and-hour every day, which brings us to our second area, which is curation. Metadata is the unlock for content curation. It's marrying the data we collect from our content and the data we collect from our consumer behaviors. Machine learning helps us connect the two. It's fast, it's efficient, and it's extremely cost-effective, and allows us to move beyond creating channels for our customer to allowing her to create her own shopping channels.” Source: 2018 Investor Day
23 Can They Actually Pivot?
“The statistic that Mike widely quotes is ‘At any given point in time, for every QVC buyer watching QVC there's ten non- customers watching QVC.’ There's those people that are still ‘Well, I don't know if I trust,’ whether it's a trust factor or some hesitancy on consumers to buy. But then they've seen the product, they've seen the demonstration, then they'll go into another store and say ‘Oh, that’s what I saw on QVC. Look at that,’ and pick it up. You can see that the tail of an exposure on QVC for interest in a brand or a product online is very long. It's an extremely valuable distribution partner for a brand or a vendor. Based on that, that symbiotic relationship keeps QVC having access to great products, new product launches, and at great value. They win on both ends of the product life cycle. They win on product launches. They can be the first to bring you the new technology because who else can better explain what's happening then the head of sales for Dell computer. At one point, it used to be Michael Dell came on QVC. You can have the brand owner speak directly to the consumer with no intermediary. Who better to tell your story? Then they win on the end of life cycle because of the ability to do a blowout closeout and not have inventory sitting around in retail distribution impacting your ability to sell the next generation of product.
24 COVID: A Sustainable Bump
“In mid-May, we made the decision to pull back substantially on a variety of promotional activities to provide a better foundation for healthy long-term…On an order demand basis, we saw low to mid-teens growth before the pull back and lower to mid single digit growth after, but at more attractive margins. The total active customer base increased significantly, up 14% at QxH and 9% at QVC International.” “In 2Q, we were able to be there for her as she moved from cleaning, the fitness and self care, to home office, to entertainment and puzzles that indoor decor to pool and garden, to food, to cookware and gadgets, the mask, sanitizers and air purifiers. And our focus on unique, differentiated and exclusive products with compelling personalities and a focus on the entrepreneur, keep us out of the commoditized price driven e-commerce fray and appeal to the spirit of the times...” “We're thrilled with the quality of the new customers we're seeing, and we do have multiple initiatives underway to keep them. So let me start with the quality and the profile. Broadly, I would say these new customers look and act like new customers in past years, and we just have a lot more of them. We grew new customers in every single product category. We grew new customers both in our off-air businesses as well as our on-air business, so engaging and coming to us both with sort of the more traditional TV programming as well as digital programming. The key metrics we look at to assess value like propensity to keep those customers at the 14, 30, 60-day mark are all at or above our prior-year performance and even look at what percentage of new customers become best customers in their very first couple of months and on that date, they just look as good or better than prior classes. But the only modest difference is she's slightly younger, maybe a year or two younger than we typically see with new customers. But other than that, just looks like a very strong profile. That said, we don't want to take it for granted.“
Source: 2q20 Earnings Call
25 Capital Allocation: Mistakes HSN Acquisition Problems
This is a new capability to the business with a key focus on measurement and return on investment. And we're going to ingrain that into the HSN business. They'll help us hone in on the most engaging content for our customers, helping those deliver more what she wants and keep her shopping with us. And of course, across all the channels, it's about serving up that engaging content, being a place that she wants to visit because we deliver inspired shopping experiences.
Now to move on to promotional, and there's been a lot of talk about moderating our promotional intensity, and it's truly been across the board at HSN, an overreliance on FlexPay, deep discounting and using free shipping and handling as a promotional lever.
Taken together, they've had a significant impact on our business, but they've also diminished the perceived value of our products. We've had pressure on ASP in part because of a shift away from electronics, but also with the mindset to driving to that lowest price. We can't win a race to the bottom, but we need to pivot internally, think about value, think about helping our customers, to think about value and not just price.
To do this, we need a better balance across all our categories. We need to balance it with new. We need to have all favorites. But in other words, our mantra really needs to be about value, not just about price. If someone's buying just because of the promotional initiative, it's not a win for us on the long-term. When it's the right product, the promotion doesn't matter. So our focus has to be on curating that great product, on telling the story and telling the value proposition to our customer.
Source: 2018 Investor Day
27 HSN: Potential Is On “The Come”
“I think the M&A strategy is to integrate HSN. Quite candidly, the reason I left was because I didn't want to spend five years doing integration project. I have done that in my career previously, a lot of companies, and I didn't want to spend my three to five years doing this integration. It's a big deal. When we announced the deal, it was announced at about $100 million of annual synergies. My models at the time indicated it would be worth up to $400, and that was exactly what was then published. So now it's just on the $400 million a year expected annual synergies. That's a big deal because if the multiples let's say is six times EBITDA, getting $400 million out, it's at least $2-3 billion dollars of value. But I think the M&A strategy right now is to drive value after the acquisition that they have made, which could be worth a couple of billion dollars for shareholders. They've been very clear about the synergies that are coming. The timing of the synergies, I think, we can talk about because this is a big hairy project. I think if you go back and look at the last couple of years we invested the presentations, I think they are starting to see some delays in the timing of the synergies. An example being Bethlehem, the warehouse, which was supposed to open at the end of last year, has been delayed by the court or whatever. So this is a big hairy project that they're taking on to bring what was effectively 30-40 years of legacy companies together into one company, QXH. But if investors can see out the end of this project, I think there's a really interesting, powerful thesis here because they will clean up the supply chain, that's where the biggest synergies are coming from, it's from the operations area.”
Source: Tegus Interview of Former VP, Corporate Development & New Ventures
28 zulily Problems
The zulily acquisition resulted in a $1.0Bn impairment in 2019 (see page II-16 of 2019 10-k). Why? “The zulily acquisition was basically QVC's first foray into pure play e-commerce. When we were looking at the acquisition, the company had done a great job of customer acquisition. So it had really grown fast. So when we acquired it, it was over a billion dollars in revenue. Most of the flash sales models had basically dropped off at about $500 million or $600 million. Zulily had kept going and was really built around driving customer acquisition. So in the same way that QVC really never did any of this historically, Zulily was the perfect complement in the sense that they knew exactly how to drive customer acquisition. So it was all done through e-mails. You had to put in your e-mail, just even to look at the website, and they got up to about five million customers by the time we acquired them. So it was really a great case study around customer acquisition, but the problem that Zulily had was they couldn't keep those customers. They were driving the flywheel faster around customer acquisition and costs were going up… Zulily had a lot of capability around performance marketing, which was beneficial for the group as a whole, and all of this is public information. Also, Zulily had some interesting machine learning and some AdTech that sat on the demand side of the Facebook supply. So there was a lot of interesting assets there. Certainly, for the first couple of years of the acquisition, I think growth continued. Then in the last year or so, they've had a couple of really tough quarters. In fact, last year, revenues went down significantly, I think, about over 10%. So that's an interesting thing here. It's less around the merchandising mix and it's more around, I think, how customers are adapting to the broader e- commerce landscape here. So the flash sales model, the three-day sales model is still there, it's still valuable, but I think consumers now have a much broader choice of retail models. I think that means they've got to keep innovating the three-day flash sales model in order to keep customers coming back every day.” Source: Tegus Interview of Former VP, Corporate Development & New Ventures
29 Fixing zulily
The strategy of introducing numerous categories to zulily failed. Mike George now says “Zulily also delivered strong revenue…Reflecting an important strategic pivot, the organization refocused all consumer-facing activity on its original target of moms with kids at home. The team leaned into Zulily's core brand attribute of fresh finds at amazing values, adding more than 800 new vendors in the first half, supported by topical events relevant to the stay-at-home customer. Fabric face masks have been one of their most successful offerings, selling over three million units as the team is able to move quickly to secure supply early in the crisis. Zulily also made great strides refocusing its marketing programs, significantly reducing friction in clients from Facebook, improving look-alike targeting and enhancing outbound marketing. After a difficult year, we're encouraged to see the team's hard work to reposition the Zulily business gaining traction, fueled by the e- commerce tailwind, reinforcing in our view the fundamental attractiveness of the Zulily value proposition.”
Source: 2Q20 Earnings Call
30 Capital Allocation: Going Forward Recent Financial Transaction
In August 2020, Qurate Retail Group announced a transaction that: • Paid $1.50/sh cash dividend; • Paid a $3.00/sh preferred dividend, yielding 8% for 10 years; and • Resulted in a very levered common equity stub with a proforma market cap of ~$2.5Bn. Current market cap is ~$3.1Bn.
32 Doesn’t This Transaction Show a Lack of Faith?
No. It shows a lack of stupidity. • The most common pushback has been that Qurate should have kept buying shares. That is a lack of creativity on analysts’ part. • With this transaction Greg Maffei, Qurate’s capital allocator, demonstrated flexibility of thought and creativity. Interestingly, the cost basis of the preferred shares was higher than $100/preferred share, which enabled common shareholders to sell the preferred at par and take a loss. Greg Maffei’s comments in 2019 • “We have been tried to be consistent over the last several quarters with the view that our capital allocation philosophy, which has been primarily focused on share repurchase over the last several years. It has been somewhat disappointing in light of the results we’ve had in the performance of the stock. So, we’ve tried to become more opportunistic and buy less on an absolute basis and more on a opportunistic basis and try and find attractive entry points for that.” See 3q19 earnings call. • “Given the volatility of the stock and the results, we remain cautious on the buyback. While the business is experiencing some headwinds now, we still note it generates strong free cash flow and we will prudently and opportunistically allocate it….As far as returning capital to shareholders, we remain cautious. There is volatility both in the business and in the marketplace, and we’ll wait for the year, as the year goes through on rather what we do with capital on — in that regard.” See 4q19 earnings call.
33 Qurate’s Official Position
In March 2020, Mike George said the following at the Bank of America Merrill Lynch Consumer and Retail Technology Conference:
“Well, I think when I look at the current share price and generally even the reaction to our Q4 results to me it just reflects this wall of worry that some investors have that we don’t share about whether we can sustain long-term growth in an environment where admittedly linear TV viewing has been declining. And so I think investors have looked at down 3% or so sales performance in 2019 at QxH and wondered if that’s about harbinger of the future. We’ve also had some a little bit of margin pressure in 2019 but again I think investors have looked at that and said, I wonder if that’s the new normal, I wonder if Qurate but more specific QxH can continue to generate the kind of high free cash flow conversion that historically has had. Our view is positive on all those questions.”
34 Financial Overview Historical Financial Performance
36 Historical Financial Performance
37 Historical Financial Performance
38 A Dismal 2019
Financial performance in 2019 was negatively impacted by • Integration issues causing difficulties in merchandising (Source: IR and interviews) • Pullbacks in promotion (Source: 1q19 Earnings Call) • Shutting down an unprofitable HSN product line (Source: 3q19 Earnings Call) • Product mix, which hit the industry negatively as well (Source: 3q19 Earnings Call) • 3% customer attrition (Source: 3q19 Earnings Call)
39 2019 Mitigants
SCG based our investment on Super Fan engagement. Existing customers are important, but Super Fans are the engine. Despite Qurate’s lackluster financial performance, through TTM 9/30/19 the entity saw increases of: • 7% in TV viewership, • 105% in digital livestream sessions, and a • 30% increase in HSN digital livestream sessions. • NOTE: Digital livestream sessions are off a low base.
It’s admittedly concerning that increases in engagement didn’t result in sales increases.
40 Why Qurate May Be A Terrible Idea
Is 1q20 the future or a result of the world stopping in March?
41 IF 1q20 Is The Future This is a Problem
42 What Qurate Says
Is 1q20 the future or a result of the world stopping in March? • “As we previewed on our Q4 call Zulily sales fell sharply when it couldn't source product after China's lockdown in early February. Remember that the Zulily model holds limited inventory and has a significant China direct ship component. In March when COVID hit Europe and the US, we saw a major disruption across our businesses.” • “We also experienced significant product margin pressure as the business mix shifted from higher margin fashion products to lower margin home categories. Additionally, we incurred incremental costs as we adjusted our practices to ensure team member safety and well-being.” Source: 1Q20 Earnings Call
43 Qurate Provided Her an Escape
“We knew she was looking to stay socially connected to the world around her even while being physically separated. We try to speak to her in an authentic way to put her into our homes and our lives in ways that created more intimate connections and shared experiences and to shift our programming, merchandising and events for the products and the stories she cares most about. We did not know whether she would be interested in buying but we knew we could offer her a respite in the gloomy 24 hour news cycles. We wanted to be her place, her place for advice, entertainment and community and a source of joy, hope and inspiration. We moved quickly to tailor content across, across our on-air, online and social channels. (inaudible) worldwide QVC businesses, we quickly shifted the products featured on air to reflect the dramatic swings in the customers’ interest and buying behavior. We tore out most of our on-air programming calendar and invented new programs that would speak to the moment, such as Love Your Home with (inaudible) at QVC US, an afternoon on-air mini series that leveraged insights in the trending categories, a new viewing pattern which is a notable increase in afternoon TV viewing. We made significant changes in our online merchandising as well. QVC, HSN and Zulily, all issued curated home essentials checklists, for example, focusing on newly trending categories including home, sanitation, food and storage, fitness tools, tech resources for distance learning and beautification.…” Source: 1Q20 Earnings Call
44 And She Engaged
At QxH we’ve seen impressive growth in the number of homes viewing QVC or HSN TV networks each day, up over 10%. We're also seeing significant growth in live stream viewing. In fact, viewing of our live and original content is up over 100% across social platforms with programs like Coffee Talk with David Venable drawing large audiences. And traffic to our website is especially strong, up over 30% with even higher growth rates from nine customers. And QVC US social reach is up over 75% in April with engagement over – up over 50%. Zulily has seen similar increases with web traffic up nearly 30% and engagement trends across our Cornerstone brands on our international markets are equally encouraging. This higher engagement is in turn translating into healthy growth in our customer base.”
Source: 1Q20 Earnings Call
45 So Qurate Leaned In
“Looking at the surge in new customers at QxH for example, nearly two thirds of these new customers are coming to us organically, a reflection of the power of our brands and reach and the remaining third are discovering us through paid marketing and the percent of these new customers who are making a second purchase within a 14-day or 28-day window is comparable to classes from prior years, an early but strong indicator that these new classes may have a similar lifetime value. Given the success we're seeing adding new customers, coupled with declining marketing costs, we're increasing our marketing spend to both attract more new customers and increase the retention of those new customers. We've seen improved efficiency across all marketing channels including paid social which gives us a powerful platform to highlight our unique shopping experience and we're moving quickly to convert new customers into lifetime customers with campaigns that build relationships by focusing on what makes us unique and targeted emails, digital nurturing through retargeting and the piloting of additional social channels and ad formats.”
Source: 1Q20 Earnings Call
46 Takeaway
1. Qurate is a melting ice cube and Greg Maffei gets common equity’s money out in creative ways. 2. Qurate is not a melting ice cube and the company rerates. 3. Given the above, SCG’s fair value estimate is between $8.50-9.50/sh. The “blue sky” scenario here would be Mr. Market continuing to distrust Qurate’s operating results. That would enable Mr. Maffei to retire an extraordinary amount of shares. Consensus FCFCE estimates range at $900mm/year for the next 4 years. Today’s market cap is ~$3.1Bn.
47 Important Issues to Consider
IF you are interested in this idea consider: • Debt – Complicated debt structure. Common in Malone entities. • Easy/Flex Pay – 0% interest installment plan. Historically good at managing credit risk. Good tool to drive demand in recessions. “Like layaway but I get it now.” • International Business – Very Stable.
48 Appendix
Snapshots of debt prices below. Prices as of 10/02/20. Attached in response to John’s question:
49 Contact Info
Feel free to contact me at • [email protected] • @BillBrewsterSCG on Twitter
PLEASE REACH OUT TO ME IF I AM WRONG ON ANYTHING.
Thank you for your time.
-Bill
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