Even though its model is “more relevant than ever,” the owner of QVC and HSN said lengthy supply chain delays continue to stymie attempts to “stabilize the business.”
In a Nutshell: Nearly three-quarters, or 72 percent, of Qurate’s QxH first-quarter purchase orders were delayed, with home goods backlogs stretching to six months, CEO David Rawlinson told Wall Street analysts Friday.
The Zulily parent is struggling to manage a “more dependable supply chain structure going forward,” though China’s Covid shutdowns and Russia’s war in Ukraine are causing new problems, he said.
“We believe the video commerce aspects of our business model are more relevant than ever, but we need to address inventory, operational and execution challenges as we stabilize the base business,” Rawlinson said. “This work brings us back to the fundamentals. We need to curate great merchandise, offer it at attractive values, present it in an engaging manner and deliver a superior customer experience so that customers repeat.”
Rawlinson believes Qurate’s QxH streaming division can generate new revenue streams and attract more customers.
Like virtually everyone else in retail, Qurate faced rising freight rates and higher marketing and warehouse labor costs on top of escalating inflation. Rawlinson also cited “new rates and surcharges for shipments waiting to be processed and higher fixed inventory obsolescence and bad debt costs.”
Qurate is working to transform the restructured QxH business that includes QVC and HSN’s U.S. operations, though the revival “will take time,” Rawlinson said, adding, “we do not anticipate our recovery and turnaround will be a straight line.”
Challenges on the inventory, operations and execution front hampered QxH even before supply chain disruptions, shipping delays and a December Rocky Mount distribution facility fire in North Carolina that affected roughly 25 percent to 30 percent of the company’s capacity.
Meanwhile, QVC International’s European performance suffered from supply chain and product scarcity. Demand in its largest market of Germany, already in the low-single digits before Russia’s Ukraine invasion, slumped by more than 30 percent in the war’s wake.
Revenue at mom-and-kid-focused Zulily fell on supply chain challenges and marketing that failed to deliver to acquire and convert customers, partly as a result of inflation. Terry Boyle came aboard as brand president and CEO in March.
Cornerstone, the catalog division for apparel and home brand Garnet Hill, and Frontgate, Ballard Designs and Grandin Road’s home goods, turned in the best quarterly performance companywide, thanks to “sustained consumer interest in home furniture and décor” as well as earlier outdoor furniture sales “as consumers anticipate longer shipping times,” Rawlinson said.
Chief financial officer Jeff Davis said QxH shoppers gravitated more toward clothing and less so toward electronics and home as its “best customers” flocked to “top brands, denim, dresses, swimwear and activewear” to lift apparel revenue 2 percent. Accessories declined 15 percent mostly on lower demand for leather handbags and casual and athletic footwear, reflecting supply chain disruptions for raw materials like leather, he added.
With inventory up from a year ago, Qurate’s “merchant teams are reducing future purchases and inventory receipts,” Davis said. “We are revising buyer incentive plans to install a greater accountability for sales, gross margin and inventory levels.”
QVC International product margins fell on unfavorable returns, lower shipping and handling revenue mostly because of reduced unit volume. Cornerstone saw demand drive sales of home decor, fabrics, seasonal items and apparel and textiles at Garnet Hill.
Net Sales: Revenue for the three months ended March 31 fell 14 percent to $2.88 billion from $3.34 billion in the year-ago quarter.
By business, revenue at QxH was down 13 percent to $1.68 billion. Revenue at QVC International also tumbled 13 percent to $670 million. Zulily’s revenue declined 38 percent to $232 million from $377 million. Cornerstone’s revenue bucked the trend by growing 19 percent to $297 million in the quarter.
Earnings: Qurate’s $106 million in operating income fell short of $373 million a year ago.
QvH operating income was $42 million, versus $257 million a year ago. QVC International’s operating income shrank 29 percent to $88 million, while Zulily’s loss widened to $38 million from an $18 million loss a year ago. Cornerstone reported a 14 percent gain in operating income to $24 million from $21 million.
On an adjusted OIBDA, or operating income before depreciation and amortization, basis, total operating income declined by 35 percent to $335 million from $517 million year ago.
CEO’s Take: “We are learning through this process which of our partners are the most dependable, and we are learning through this process what regions are the most resilient,” Rawlinson said of the company’s work to improve its supply chain structure.