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QVC Owner’s Inventory Bloat Isn’t as Bad As the Average

Revenue fell 13 percent at Qurate Retail Inc. in the third quarter.

In a Nutshell: The QVC, HSN and Zulily owner cut debt by 9 percent at the end of the third quarter to $5.91 billion from $6.47 billion in the second quarter. The West Chester, Penn.-based company finished Q3 with $624 million in cash, or 11 percent from $561 million the year before. The $443 million it got from selling five properties helped the company repay some debt. Qurate also received insurance payouts for a North Carolina fulfillment center fire nearly one year ago.

Interim chief financial officer James Hathaway told investors in a conference call that the company has $2.7 billion available on its revolver, which he framed as an “ample cushion.”

The company said it’s making progress on the Project Athena turnaround focused on improving the customer experience, enhancing execution, lowering costs, optimizing the brand portfolio, and building high-growth businesses.

The company has hired Scott Barnhart as chief operating officer, Soumya Sriraman as president of streaming, Stacy Bowe as chief merchandising officer, and Linda Aiello as chief people officer to power its transformation.

Sagging consumer sentiment didn’t help Qurate’s third-quarter sales, nor did the passing of Queen Elizabeth, which pried $10 million in U.K. sales from the company’s coffers, Qurate president and CEO David Rawlinson said. Then there’s the $3 million to $5 million QVC lost when it switched to pre-recorded programming for four days during Hurricane Ian.

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Promotions cut into margins as well during Q3 as Qurate worked to clear inventory that piled up from supply chain backlogs plus the North Carolina fire.

“We do expect inventory clearing actions to create margin pressure at least through the end of 2022,” Rawlinson said. He expects “some hangover” into the first quarter though the company should handle most of the overstock before January.

“If you look at NPD data, some other industry data, it suggests the market’s up about 20 percent in excess inventory across retail. We’re down about 5 percent. So we’re going into this a lot more clean than the overall retail environment, and we think we’ll continue to improve on that number as we go through the fourth quarter,” Rawlinson said.

The mom-and-baby Zulilly business signed a “couple of hundred new brands of various types, including 15 to 20 national brands,” which should boost conversion and support revenue, according to Rawlinson.

Executive chairman Greg Maffei said the company is trying to trim inventory to free up working capital and cash flow. European sale-leaseback transactions should also unlock about $170 million in gross proceeds at current exchange rates.

Net Sales: Total revenue for the third quarter ended Sept. 30 fell 13 percent to $2.74 billion from $3.14 billion. Qurate said its e-commerce sales fell 13 percent to $1.7 billion.

Revenue for QxH, ie QVC and HSN, slipped 8 percent to $1.66 billion from $1.81 billion in the U.S. QVC International revenue fell 21 percent to $554 million from $699 million. Zulily revenue dropped 39 percent to $200 million from $328 million. Sales in the Cornerstone business encompassing Frontgate, Grandin Road and Garnet Hill rose 8 percent to $327 million from $304 million.

Most promotions and clearance sales focused on home inventory, with some targeting fashion products such as loungewear. Quarterly home revenue declined by 9 percent, while apparel was down 2 percent against growth of 8 percent in the same year-ago quarter. Contemporary apparel underperformed, Hathaway said. In addition, accessories fell by 10 percent on lower demand for handbags, luggage, intimates and casual and athletic footwear.

Earnings: Qurate reported an operating loss of $2.61 billion from operating income of $274 million a year ago.

By business segment, QxH posted an operating loss of $2.25 billion against year ago operating income of $219 million. QVC International reported a 46 percent drop in operating income to $52 million from $97 million. Zulily widened its operating loss to $403 million from a loss of $40 million, while Cornerstone’s operating income plummeted 88 percent to $2 million from $16 million a year ago.

On an adjusted OIBDA basis, or operating income before depreciation and amortization, total operating income dropped 57 percent to $185 million from $432 million in the year-ago quarter.

CEO’s Take: “We made progress in Q3, moving from the assessment phase of [our three-year strategic plan Project] Athens to in-depth planning. We expect to start seeing deep execution and impact on results in 2023,” Rawlinson said.