ENGLEWOOD, Colo.--(BUSINESS WIRE)--Aug 8, 2018--Qurate Retail, Inc. ("Qurate Retail") (Nasdaq: QRTEA, QRTEB) today reported second quarter 2018 results. Highlights include (1):

Second quarter operating results:

Qurate Retail revenue of $3.2 billion Qurate Retail eCommerce revenue of $1.9 billion Qurate Retail reported EPS of $0.40 and adjusted EPS (2) of $0.45 QVC US revenue up 4% as reported, up 2% on a comparative basis excluding impact of new accounting standards regarding credit card income Total QVC mobile penetration was 66% of QVC.com orders, a 320 basis point increase QVC US mobile penetration was 65% of QVC.com orders, a 300 basis point increase HSN operating income margin decreased due to purchase accounting, while adjusted OIBDA (2) margin increased due to reduced promotional activity and progress on cost saving initiatives zulily revenue grew 13%, operating loss decreased 7% and adjusted OIBDA (2) grew 12% Strong customer growth at QVC and zulily

Corporate updates:

Repurchased approximately $418 million principal amount of 1.75% Charter exchangeable debentures ILG and Marriott Vacations Worldwide merger expected to close end of August From May 1, 2018 through July 31, 2018, repurchased 9.6 million QRTEA shares at an average price per share of $21.86 and total cost of $209 million

“We continued our sales growth at QVC and the strong momentum at zulily, as well as initial profit improvement at HSN as we implement our operating strategies,” said Mike George, Qurate Retail’s President and CEO. “We are showing solid early execution on strategic priorities to expand and engage our customer base across platforms and achieve attractive operating synergies. Qurate realized strong growth in its total customer count, led by zulily and QVC, and significantly grew customer engagement as we increased exposure on emerging video and social platforms and continued to strengthen our performance marketing capabilities. Qurate Retail’s unique position at the intersection of key trends in retail, together with our operational execution, will set a strong foundation to drive sustainable growth and long term value creation.”

Corporate Updates

On March 9, 2018, Qurate Retail, Inc. (formerly Liberty Interactive Corporation (“Liberty Interactive”)) and GCI Liberty, Inc. (“GCI Liberty”) completed the series of transactions that effected the split-off of GCI Liberty. As a result, the former QVC Group common stock became an asset-backed stock. In addition, Liberty Interactive changed its name to Qurate Retail, Inc. effective as of April 9, 2018 and eliminated its tracking stock capital structure effective May 23, 2018. Qurate Retail, Inc. includes QVC, Inc., HSN, Inc. (“HSNi”) (which includes the Cornerstone brands), and zulily, llc (collectively, “Qurate Retail Group”), which are wholly owned subsidiaries, as well as minority interests in ILG and FTD and various green energy investments.

Discussion of Results

Unless otherwise noted, the following discussion compares financial information for the three months ended June 30, 2018 to the same period in 2017. For purposes of presentation herein, the pro forma results of operations in this press release include historical HSN and Cornerstone results for comparison purposes. This is intended to supplement and enhance the information related to prior periods. The impacts of purchase accounting resulting from our acquisition of HSNi have not been reflected in these historical results.

Qurate Retail adopted the new U.S. accounting standard regarding revenue recognition (ASC 606) as of January 1, 2018. Accordingly, QVC, HSN and zulily recognize credit card income for their branded credit cards as part of net revenue rather than as an offset to SG&A expense. This change will positively impact Qurate Retail’s revenue for 2018. Qurate Retail is providing comparable results in addition to GAAP results where applicable and the narrative in this press release is presented excluding the impact of this accounting adjustment. The zulily-branded credit card was first implemented in the third quarter of 2017 and this change did not have a material impact on zulily’s reported revenue in the second quarter of 2018.

In addition, under new revenue recognition standards, Qurate Retail now recognizes revenue at the time of shipment as opposed to delivery. This accounting change had a modestly negative impact on reported results for Qurate Retail in the second quarter, but this impact is expected to balance out over 2018. As such, comparable results presented in this press release are not adjusted for this change. HSNi previously recognized revenue at the time of shipment, so there is no impact to HSNi’s reported results.

Qurate Retail realized $8 million in cost synergies in the second quarter related to the HSNi acquisition, of which approximately $6 million benefited operating income and adjusted OIBDA (2) and the remaining $2 million relate to equity compensation expense. Qurate Retail remains on track to achieve $35 - $40 million of cost synergies in 2018.

QVC US

QVC US realized year-over-year sales gains in apparel and accessories, which were partially offset by declines in home, beauty, electronics and jewelry. Gross margins were flat, excluding the impacts of ASC 606, primarily driven by higher initial product margins due to mix shift and freight savings, partially offset by higher warehouse costs due to average selling price (“ASP”) deleverage. Selling, general and administrative expense increased primarily due to higher bad debt expense resulting from a favorable bad debt adjustment in the second quarter of 2017, and higher fixed costs, including an increase in bonus accrual due to a change in QVC’s bonus accrual methodology. The change in QVC’s bonus accrual methodology has been a headwind in the first half of 2018 but will even out for the full year. These factors were partially offset by lower customer service costs due to the increase in digital and mobile penetration. Operating income margin expansion primarily reflects lower amortization as a result of the roll-off of purchase accounting amortization from Qurate Retail’s acquisition of QVC. Adjusted OIBDA margin (2) contraction primarily reflects the aforementioned SG&A factors.

As a result of Qurate Retail’s adoption of ASC 606, revenue for the three months ended June 30, 2018 includes an additional $26 million of revenue from its private label credit card program which was previously classified as an offset to selling, general and administrative expenses. Excluding the impact of this accounting adjustment, QVC US revenue grew 2% in the second quarter of 2018. This accounting change increased reported SG&A and had an approximately 120 bps positive impact on reported gross margins and an approximately 40 bps negative impact on reported adjusted OIBDA margins. These results are not adjusted to reflect the impact of ASC 606 as it relates to recognizing revenue at the time of shipment rather than delivery, which had a modest negative impact on reported revenue and adjusted OIBDA in the second quarter.

QVC International

In the second quarter, QVC International experienced year-over-year constant currency (3) sales growth primarily in home, accessories and beauty, which was partially offset by declines in apparel, jewelry and electronics. The contraction in operating income margins and adjusted OIBDA margins (2) primarily reflects lower product margins as a result of heightened clearance activity in Germany and the UK and higher freight and warehouse costs in the UK and Japan due to ASP deleverage, as well as higher fixed costs and higher commissions in Japan. The operating income margin compression was partially offset by lower amortization.

US Dollar denominated results were impacted favorably by exchange rate fluctuations. The Dollar weakened versus the Euro, British Pound and Japanese Yen 9%, 7% and 2%, respectively. The financial metrics presented in this press release also provide a comparison of the year-over-year percentage change in QVC’s results in constant currency (3) (where applicable) to the comparable figures calculated in accordance with US GAAP for the second quarter of 2018.

HSN

Although HSN’s results are only included in Qurate Retail’s results beginning January 1, 2018, we believe a discussion of HSN’s stand-alone results compared to the prior year period promotes a better understanding of the overall results of the business. HSN has reclassified certain costs between line items to conform to Qurate Retail’s reporting for ease of comparability for the periods presented.

In the second quarter, HSN’s sales mix shifted to home, accessories and beauty from apparel, jewelry and electronics. ASP increased primarily due to sales mix and reduced clearance and promotional activity. Return rate improved due to the sales mix shift toward product categories with lower return rates and a continued positive trend in several categories. The decline in operating income margin is primarily due to purchase accounting amortization. Adjusted OIBDA (2) margins increased, demonstrating initial progress on HSN’s strategic initiatives, primarily due to higher product and shipping margins and lower bad debt expense, partially offset by higher inventory obsolescence reserves and deleveraging of fixed cable and warehouse costs due to the decrease in revenue.

As a result of Qurate Retail’s adoption of ASC 606, HSN has classified approximately $3 million of revenue from its private label credit card program in net revenue for the three months ended June 30, 2018. Excluding the impact of this accounting adjustment, HSN revenue declined 12% in the second quarter of 2018. This change had an insignificant impact on reported adjusted OIBDA margins.

zulily

Revenue increased year-over-year in the second quarter primarily due to a shift in marketing strategy which drove strong customer acquisition. Operating loss and adjusted OIBDA (2) improved due to increased sales and leveraging operating expenses, partially offset by higher transportation and SG&A expenses. Operating loss improvement was also partially offset by higher amortization of software. The adoption of ASC 606 regarding changes to revenue recognition for zulily-branded credit card income did not materially impact zulily’s reported results in the second quarter. The impact of ASC 606 as it relates to recognizing revenue at the time of shipment rather than delivery had a negative impact on reported revenue and adjusted OIBDA in the second quarter.

Cornerstone

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