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Qurate Retail, Inc. (NASDAQ:QRTEA)
Q3 2018 Earnings Conference Call
Nov. 9, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Qurate Retail Incorporated 2018 Q3 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press *1 on your telephone. As a reminder, this conference is being recorded November 9th. I would now like to turn the conference over to Courtnee Chun, Senior Vice President of Investor Relations. Please go ahead.

Courtnee Chun -- Senior Vice President, Investor Relations

Thank you. Before we begin, we'd like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about business strategies, including new initiatives, market potential, stock repurchases, future financial performance, market conditions, the integration of HSN and expected benefits and synergies, carriage agreement renewals, future impact of accounting changes, future expenses, sales demand, customer growth, new service and product launches, and other matters that are not historical facts.

These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including, without limitation, possible changes in market acceptance of new products or services, market conditions conducive to repurchases, the availability of acquisition opportunities, competitive issues, regulatory issues, and continued access to capital on terms acceptable to Qurate Retail.

These forward-looking statements speak only as of the date of this call, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Qurate Retail's expectations with regard thereto, or any change in events, conditions, or circumstances on which any such statement is based.

On today's call we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, adjusted EPS, and constant currency. The required definitions and reconciliations, including preliminary notes in Schedules 1 through 3, can be found in the earnings press release issued today, which is available on our website.

Today, speaking on the call, we have Qurate Retail President and CEO, Mike George; CFO, Mark Carleton; and Executive Chairman, Greg Maffei.

A couple of housekeeping items before we get started. As a reminder, at the beginning of 2018, we changed our revenue recognition in accordance with new accounting standards related to recognizing branded credit card income as revenue, rather than an offset to SG&A expense. Throughout our comments, unless noted, we'll discuss Q3 net revenue results for QVC U.S., HSN and zulily as if the credit card income remains an offset to SG&A expense, as it was in 2017.

We believe this provides the most comparable review of our year-over-year performance. In accordance with new accounting standards, we also now recognize revenue at the time of shipment rather than delivery. We did not adjust our results for this change in our comments on this call because this impact is expected to balance out over the course of the year.

For Q3, the new delivery-based standard increased Qurate Retail's reported net revenue growth approximately 65 basis points, operating income margin approximately 30 basis points, and adjusted OIBDA margin of approximately 20 basis points. Our reported results and the impact of the revenue recognition changes are included in our earnings release issued this morning and in our SEC filings. Now, I'll hand the call over to Mike George.

Mike George -- President and Chief Executive Officer

Thank you, Courtnee, and welcome to everyone on the call. We have several topics to cover today, including improved performance across a number of businesses in the quarter, progress on key strategic initiatives, including important developments we announced last month, addition the addition of our new group CFO, Jeff Davis. Jeff has just started with us and I've asked him to join the call today to introduce himself.

First, a quick financial overview. Our solid third quarter results demonstrate continued execution of our strategy to engage our customers with compelling products across multiple shopping platforms. Qurate Retail revenue increased 2%. Operating income decreased 6%. Adjusted OIBDA was essentially flat. GAAP EPS was $0.16. And adjusted EPS was $0.37.

Looking at highlights across our portfolio, QVC U.S. increased revenue and showed solid margin expansion, helped by improved trends in average selling prices. Customer engagement on broadcast and new platforms continued to grow. QVC International delivered local currency revenue growth in nearly every market, and reduced the margin pressure from the prior quarter. HSN achieved good progress in several key areas -- sales, viewership, digital engagement, and new customer acquisition.

Our initiatives to expand our product assortment and reduce promotional activities played an important role in the improved financial performance. Zulily once again posted an outstanding quarter, driven by continued strong customer acquisition, and at Cornerstone brands, Ballard Design and Garnet Hill delivered strong results, which were offset by continued softness at Frontgate and Grandin Road.

We continue to generate healthy customer engagement across our video commerce business units. In the U.S., TV viewing minutes on QVC and QVC-2 grew 2% and viewing minutes on our digital sites and on non-traditional platforms like Facebook Live, YouTube, Roku, Apple TV, and our newest platform extension, the QVC app on Amazon Fire TV, increased at a significant rate.

We launched the Amazon Fire app in September, with streaming access to all three QVC networks, and subsequently added on-demand content. HSN generated improvement trends, as year-over-year performance for TV viewership and daily visitors through its digital platforms improved significantly compared to the first two quarters of the year.

Turning to synergy capture, we executed well in Q3, realizing $11 million in run rate synergies that benefited operating income, of which approximately $9 million benefited adjusted OIBDA, and the remaining $2 million related to equity compensation expense. This brings the total for the first nine months of the year to $25 million, and we remain on track for $37 to $44 million for the full-year of 2018, including the additional synergies announced in October.

The solid financial results and improving customer trends demonstrate that QVC U.S. is returning to its historic performance profile, and that HSN is responding as we expected to our strategic initiatives. We still have lots of work to do here, but we're now on a path that enables us to look deeper into the opportunities to drive profitable growth and value creation from our combined video commerce platform. The power of our video commerce model aligns well with the shopping habits of the next generation of consumers who discover products through highly engaging social and mobile experiences, and are voracious consumers of video.

As we announced a few weeks ago, we're taking steps to more fully leverage the power of this U.S. video commerce platform, and accelerate our digital initiatives by bringing together QVC U.S. and HSN into a new QXH business unit. We believe this initiative will generate new revenue opportunities and improve customer service, as well as operating efficiencies and incremental cost synergies. We've taken steps to further streamline operations, especially at HSN to increase agility and better leverage the strength and resources of Qurate Retail.

And finally, we're integrating QVC and HSN's fulfillment networks through consolidation of our distribution facilities, beginning in the Eastern U.S., a move that will greatly benefit customers by enhancing delivery speeds and lowering our service cost. Our recently announced initiatives are expected to generate an additional $120 to $125 million in annual cost synergies by 2022, bringing our total estimated run rate cost strategies to $320 to $345 million by 2022.

We anticipate reinvesting synergies into digital markets and other sales growth innovations, while also driving adjusted OIBDA growth. We'll make thoughtful investment choices focused on what's best for the long-term health of the business. As a result of these initiatives and the previously announced decision to close Cornerstone's Improvements facility in Cleveland, we incurred $43 million in transaction costs in Q3 related to severance that are excluded from adjusted OIBDA.

I'm very pleased to welcome Jeff Davis as CFO of Qurate Retail Group. Jeff came to us through a thorough executive search, and I'm excited to have an accomplished partner lead our global finance organization as we execute on our value creation strategy. He brings 30 years of financial leadership at major retailers, including J.C. Penney, Darden, and Walmart. Jeff is with us today, and I'd like to invite him now to introduce himself.

Jeffrey A. Davis -- Chief Financial Officer

Thank you, Mike, and good morning, everyone. I'm delighted to join Qurate Retail at a time when we have a great opportunity to build on what is already a legendary retail company led by a global iconic brand. With my background in traditional retail, I'm well versed in the challenges of transitioning business models to the digital and social world we live in today. What excites me about Qurate is that our video commerce business already resides in a place where many traditional retailers would love to be.

We certainly have hard work ahead, but Qurate Retail is a capital-efficient model that continues to grow customers and creates content that is distributable across a continuum of platforms through which shoppers are moving. It's a tremendous opportunity at a vital moment in retail. I've spent my first few weeks with Mike and the team diving into the business and the work that's under way. I look forward to meeting many of you at the investor event next week and in the months to come. Now I'll turn it back over to Mike.

Mike George -- President and Chief Executive Officer

Thank you, Jeff. Let's now move to the operational review of each of our businesses, starting with QVC U.S. Revenue grew 1% in the quarter, adjusted for the impact of the credit card classification. Pricing trends improved, with ASP up 1% on flat unit volume as a result of better management of offer prices and improved product mix.

As you may recall, last year, a systems outage at the end of Q217 delayed shipments, shifting approximately 1% of sales into Q317. Adjusting for this shift, revenue grew 2% in the quarter, demonstrating our sales growth trends have been relatively constant over the course of the year, despite facing a steeper year-over-year comparison this quarter.

Looking at our category performance in the U.S., we saw strong growth in accessories, particularly in footwear from key brands such as Skechers, Vionic, and Vince Camuto, and the launch of Koolaburra by UGG, as well as strength from loungewear and intimates. Beauty and consumer electronics rebounded from a Q2 decline to growth in Q3 in electronics, home security, streaming devices, and OLED TV gross sales. In beauty, growth in our core and emerging brands was driven by strong consumer reaction to our digital store expansion and digital marketing investments. We also drove demand through several major new launches, including an extremely strong launch of Urban Decay exclusively on our digital platforms, followed a few weeks later by on-air premier.

Our home category declined, primarily due to softness in home improvement, which was partially offset by gains in home décor, reflecting our successful Christmas in July programming, as well as health and fitness. We continue to reduce jewelry airtime, and once again saw improved productivity per minute as we focused on delivering a better customer experience through targeted jewelry events. QVC operating income increased 12%, and its operating income margin expanded, primarily due to lower purchase accounting amortization, partially offset by the transaction cost.

Adjusted OIBDA margin increased 30 basis points after normalizing for the change in revenue recognition for private-label credit card income. The primary drivers included improved product margins, which reflected fewer shipping and handling promotions and mix shifts; lower TV commissions that reflect our growth on digital platforms; and lower personnel costs, which were primarily driven by reduced management incentive compensation, largely due to a change in QVC's bonus accrual methodology. These gains were partially offset by higher warehouse costs as we ramp up our facility in Ontario, California; higher bad debt expenses, which reflect comparing to favorable reserve adjustments in the third quarter last year; as well as costs for outside services in our investment in digital marketing.

Moving on to QVC International, revenue grew 1% in U.S. dollars and 2% in constant currency, as ASP increased 3% and unit volume declined 2%. We were pleased with our local currency revenue in nearly every market. We delivered constant currency gains in electronics and beauty, and saw declines in apparel, jewelry, and accessories.

Operating income margin increased 40 basis points, reflecting lower purchase accounting amortization. Adjusted OIBDA margins declined 110 basis points. While this was an improvement from our Q2 results, it still fell well below our expectations. Approximately half of the contraction was due to lower gross margins that was primarily due to lower product margins driven by mix shifts in Germany from fashion to home; lower TSV margins in Germany and Italy; and increased clearance activity primarily in Germany and Japan. The remainder of the contraction was primarily due to higher fixed cost and marketing expenses.

At HSN, we are continuing to execute well on our turnaround strategies, and we were delighted to see the strong progress on several fronts in the quarter. Comparable results were helped by the impact of Hurricane Irma last year, which HSN estimated at the time to be an approximately $13 million negative hit to revenue and $5 million hit to adjusted OIBDA. Even with this impact, we saw progress quarter-over-quarter in key leading indicators -- viewership, digital engagement, new customer acquisition, and sales, reflecting our continued focus on broadening our product assortment, and improving mix, and leaning more into digital marketing.

We're also seeing positive impact from our efforts to align our shipping and handling approach with QVC's, as well as continued focus on managing clearance and promotional activity, with gross margins up about 30 basis points in the quarter. Operating income and margin declined, primarily due to purchase accounting amortization and the severance costs related to the restructuring announced in October.

Adjusted OIBDA improved due to the gross profit improvement and lower TV commission, customer service, and bad debt expenses. Now I'll note that HSN's OIBDA includes the accounting impact related to our renewed, multi-year carriage agreement with a major partner, which provides better channel placement, and an HD channel for our main HSN network. We're aligning new carriage agreements at HSN with the QVC model, which is balanced more toward a variable cost structure tied to sales, along with an upfront distribution rights payment that is amortized over the life of the agreement.

So this benefits adjusted OIBDA, but increases amortization expenses. The structure of this agreement favorably impacts Q3 adjusted OIBDA. And just to be clear, this benefit is not included in our HSN synergy estimates. This is only a classification change. As additional carriage agreements are renewed, we expect to change them according to this new methodology as well.

Our efforts to drive top line improvement started with broadening HSN's product assortment and rebuilding inventories in support of that. There are some early signs that our broader assortment is driving more engagement, especially digitally. Daily visitors over digital media improved in the third quarter, and sessions and traffic trends strengthened. Viewership of the HSN and HSN-2 networks also improved.

We're in the midst of adding approximately 100 brands to the HSN assortment in the second half of the year, with more than 50 of those scheduled for Q4. The launches include new brands, proprietary brands, and also crossover brands that have traditionally been on QVC. I'll call out a few success stories, starting with Beekman 1802, which was the most successful beauty premier in the history of HSN and QVC, which generated 177 sell-outs, and the Today's Special on HSN on the premier date sold out by 2:00 p.m.

In apparel, we launched Skinnygirl with Bethenny Frankel, with more than half of her on-air assortment selling out. Dooney & Bourke, a popular handbag brand long associated with QVC, also delivered for HSN in Q3, significantly exceeding our sales plan. The sleep category was strong for us, including a successful Today's Special for My Pillow, another brand shared with QVC, as well as a solid launch for Select Comfort mattresses, a line that carries a high price point relative to what we typically offer at HSN.

In the home category, we leveraged our relationships with InstaPot and Keurig, which together exceeded our expectations. Finally on the proprietary brand front, we saw solid initial results for Curations, our new private fashion label, and are looking forward to launching another proprietary line, Kitchen HQ, later this month. As we increase our assortments, launch dozens of new brands, and implement new digital initiatives to make HSN content more accessible, drive new customers, and increase engagement, we're also invested in repositioning and refreshing the HSN brand.

We rolled out the refresh across all platforms in early September, modernizing the brand expression to appeal to our target customers with updated digital graphics and photography, on-air graphics, [inaudible], and models. So lots of work to do, but the early signs of progress are encouraging, and we think we're in a good position to start building momentum.

The zulily team continued its strong momentum and delivered another outstanding quarter, it's fourth straight with double-digit growth. Jeff Yurcisin officially came on board during Q3 as zulily's new leader, and has already embraced the zulily culture and energized the team. I feel confident in his ability to execute on zulily's growth strategy. We're also grateful to Lori Twomey, our interim zulily leader, who led the team successfully for several months and now continues in her role as Chief Merchant.

Revenue increased 18% at zulily, driven by continued strong customer acquisition. We ended the quarter with a record 6.6 million active customers, reflecting the continued success for our marketing strategy, coupled with offering compelling events with boutique and national brands, and our growing assortment of China-direct brands. Operating loss improved 14%, and adjusted OIBDA grew 50%. Operating income margin increased 320 basis points, and adjusted OIBDA margin was up 90 basis points, driven by sales growth, higher product margins, and fixed costs and operating leverage. These gains were partially offset by higher fulfillment and marketing expenses.

This quarter also marked the first anniversary of the zulily branded credit card successful launch, with more than 240,000 open card accounts to date. Including this credit card income as part of new revenue recognition standards did not materially impact results in Q3. I would note that the change in accounting standards to recognize revenue at the time of shipment rather than delivery had a more significant impact on zulily than our other businesses. Under the prior accounting methodology, revenue would have increased 15%, operating loss would have improved 5%, and adjusted OIBDA would have increased 17%. This accounting change is expected to have a negative impact on reported results in the fourth quarter, but as we've discussed, will be neutral on a full-year basis.

Turning to Cornerstone, sales declined 7%, primarily from demand softness in Frontgate and Grandin Road. Ballard Designs registered record revenues in the quarter, and continues to deliver solid growth to digital and retail channels. Garnet Hill also continues to demonstrate strong momentum in apparel, contributing to sales growth of 6%. Operating income declined due to purchase accounting amortization and severance costs.

Adjusted OIBDA declined $14 million due to the lower sales, and inventory provision associated with the Improvements operation closure, and the timing of catalog expense recognition due to the accounting standard change.

We've made steady progress on strategically positioning the Frontgate brand as we refresh and tighten the product assortment. At Grandin Road, we're excited that we recently hired a new president, Jackie Ardrey, and we're looking forward to her leadership to help drive improved performance for that brand. As I mentioned, the Cornerstone results include the impact of integrating improvements into HSN and the subsequent closure of the direct operations in Cleveland, Ohio.

Overall, the move is expected to reduce Cornerstone's annual revenue by approximately $70 million, with essentially a neutral impact to adjusted OIBDA. In Q3, we incurred $9 million in costs for inventory liquidation, severance, and lease liabilities, $6 million with an inventory obsolescence provision that was included in cost of goods, and $3 million was for severance costs and lease liabilities, which was below the adjusted OIBDA line. We're making good progress and are on track to complete the integration and facility closure by year end.

We remain confident the strategic brand work at Cornerstone, along with more compelling assortments driven by proprietary and differentiated product, will deliver the sustainable growth in revenue and gross margins required for the business. Before wrapping up, we're entering the busiest period of the holiday shopping season. Since this our first holiday season as the combined Qurate Retail, I wanted to provide some color around our biggest holiday initiatives.

We're creating an array of original digital and social content across the portfolio from QVC and HSN to zulily and Cornerstone brands like Frontgate and Garnet Hill, leveraging key moments in the shopping season like Black Friday and Cyber Monday, as well as special events and tie-ins that appeal to our customers. Our QVC and HSN brands are coordinating on a number of initiatives, including a 6-week long Black Friday sweepstakes production called More to Love, with cash prizes available to email entrants.

As HSN on Black Friday, we'll be simulcasting on Facebook Live for the entire 24-hour period. QVC is leveraging its mobile and digital gift guide to drive inspiration and recommendations, while HSN is zeroing in on gift idea tiers under $50 and $30, offering expanded food and toy assortments, and building in special free shipping and flex pay days to create extraordinary values for our customers. Both QVC and HSN are creating sets and special configurations of our most popular beauty brands, and tapping into gifting trends and categories like cooking and dining, and apparel and accessories, among other categories.

It's exciting to see the breadth of opportunities we have across our retail platforms to engage with customers through digital and social channels in the biggest shopping season of the year. In closing, our solid Q3 results were another step forward in improving execution at our largest brands and further integrating our businesses. We grew revenue and expanded margins at QVC U.S., improved results at HSN, and delivered an outstanding quarter at zulily.

Our customer acquisition and engagement trends continue to move in the right direction. Our business enjoys attractive customer dynamics, and we're making strategic investments in performance marketing to drive customer growth and deepen engagement. Additionally, we're accelerating our digital initiatives on many fronts, as reflected in our recent announcement. More to come on all of that in our presentation next week. And now I will turn the call over to Mark.

Mark D. Carleton -- Chief Financial Officer

Thank you, Mike. Let's take a quick look at the liquidity picture. At the end of the quarter, Qurate Retail had attributed cash and liquid investments of $532 million, and $7.5 billion in principal amount of debt. QVC's total debt to adjusted OIBDA ratio as defined in our credit agreement was approximately 2.4x, which includes zulily's adjusted OIBDA, as compared to a maximum allowable leverage ratio of 3.5x. Total leverage for Qurate Retail Group, which includes Q, zu, HSN, and Cornerstone, was approximately 2.3x.

I'll hand it over to Greg.

Greg Maffei -- Chairman

Thanks, Mark. During the quarter, we repurchased Qurate Retail stock and for the period October 1st through October 31st, we bought back $247 million of shares. Marriott Vacations Worldwide completed its acquisition of ILG and we received cash and just under a 6% stake in Marriott Vacations. Subsequently, on supply 26th, we sold that for gross proceeds of $313 million, a portion of which settled in the fourth quarter. Our total after-tax proceeds are estimated to be about $475 million, including both the initial cash received and the subsequent sale of VAC Equity.

As a reminder, we will be holding our annual investor meeting on November 14th in New York. I hope to see a bunch of you there, and there will be video. If you'd like to register, and see the agenda, please use the link on our homepage. We appreciate your continued interest in Qurate Retail. And with that, operator, we'd like to open up for questions.

Questions and Answers:

Operator

Thank you. If you would like to ask a question, please press the * key followed by the digit 1 on your touchtone phone, and also make sure your mute button is turned off to allow your signal to reach our equipment. We'll take the first question today from Eric Sheridan with UBS.

Eric Sheridan -- UBS Securities -- Analyst

Thanks for taking the questions. Maybe going back to the reorganization that was announced in October. I just wanted to know any granularity we could get as think about some of the costs versus some of the synergy benefits, not only in Q4, but as you think about to '19 and beyond, just so we have our pencils sharpened correctly on how that works through the financials? Then secondly, on the buyback, just want to make sure I remember this right. I think there was a goal of sort of returning around a billion or the free cash flow from the year to shareholders. Just want to make sure what you had previously communicated as measured against the $623 million you bought back through the end of September. Thanks, guys.

Mike George -- President and Chief Executive Officer

I'll take the first part, and Greg, let you comment on the buyback. We laid out kind of a cost benefit expectations in the announcement we made in mid-October, so I won't go into a lot more detail on that right now. We will show a schedule at next week's investor day that shows the year-by-year flow of those both synergy benefits and one-time costs. We'll get a little more granular on the year-by-year flow of that next week. That's on the cost benefit side. Again, just as a reminder, we said $120 to $125 million of total cost benefit, of which about $40 million would be achieved in 2019. But we'll share our full schedule next week.

We do expect much in the way of revenue benefit as well, so this was as much a strategic combination as it was about cost savings. We don't put a specific metric to the revenue benefit. As you can see, even in some of the early results from Q3, when we were still working as two independent business units, we're just finding a lot of traction in aligning brands, programming, across the two businesses.

And we're particularly encouraged to see that when customers do cross over from one brand to the other brand, they increase their total spend with us. So we know it's a good thing to manage these two businesses in an aligned way strategically and to get customers to cross over. So we'll get very granular on the cost benefits, but I would just note that I think the biggest benefit is enabling us to achieve long-term revenue targets that we have for the company. Greg, you want to comment on the buyback side?

Greg Maffei -- Chairman

I would just agree with you, Mike, I think the cost benefits are concrete, real, and short-term. The longer-term strategic benefits and revenue synergies are putting the two businesses together and the way it solidifies our strength in the video commerce and related e-commerce areas is harder to measure, but has a lot of long-term impact.

We are on target to about a billion dollars for the year. Some of that will be price dependent, but I expect we're going to be in that range.

Operator

We'll now take the next question from Barton Crockett with B. Riley FBR. Please go ahead.

Barton Crockett -- B. Filey FBR -- Analyst

Thanks for taking the question. I guess a couple things. One of them I was very interested in our discussion of a new TV carriage agreement for HSN in the quarter. I understand there's not perfect detail which, means there's a limit on what we're able to know incrementally. But in general, I think one of the things a lot of us have wondered is there an opportunity to have HSN TV carriage moved to something that's closer to the type of features and economics that QVC has been getting in the U.S.? I'm just wondering if you can comment on whether this HSN deal in any way moves in that direction meaningfully?

Mike George -- President and Chief Executive Officer

I would make a couple comments, Barton. Overall, we feel high confidence in the synergy targets we've already shared related to affiliate savings. There may be upside beyond that, but we're not at the point where we would be confident declaring that, but we certainly feel very good about at a minimum hitting the targets that we have shared. One of the things I've talked about is we're going to look at both quality of carriage and cost reductions on the carriage.

Depending on the agreement, some agreements may lean more toward let's reinvest savings in quality, and others might lean more on bring cost savings to the bottom line. I would say with this recent carriage that we renewed, we saw both absolute cost savings separate from the accounting classification, but I would say it's more about quality in this particular case. We've got HD carriage, which we had not had previously; we got an additional channel placement, and we did see real impact in the quarter, so we could directly see the sales lift from those moves.

So again, carriage to us is as much about get better quality to drive better sales as it is drive savings. This one had a little bit of both, more weighted, I would say, to the driving sales piece of it than the cost savings, but it did have both.

Barton Crockett -- B. Filey FBR -- Analyst

Okay. And just so we understand maybe at a little bit better level the materiality of this, would you say this was a major operator or a small one? When you talk about the shift of expense into DNA versus opex, is that all of the carriage fees or just a portion of them that is accounted for differently?

Mike George -- President and Chief Executive Officer

Just a portion of them. I won't comment on operator itself. I mean, certainly a good-sized operator. I won't go beyond that. Again, the structure mirrors QVC structurally. So there are these upfront payments that help you secure the good channel positioning that are amortized over time. But still, the bulk of the expense is still incurred on an operating basis. So it's a variable-based cost structure associated with our sales performance that hits the operating line. I would say the bulk of the expense, but there is a chunk that gets moved to this upfront placement fee approach with amortization over time.

Barton Crockett -- B. Filey FBR -- Analyst

Okay. Then just one other topic quickly. There have been times historically where your business when there are big events on TV that people are watching where people watch less TV shopping and maybe do a little bit less business with you. I'm just wondering if you could tell us if these mid-terms which had so much of the country riveted had that type of impact on viewership of QVC and HSN or not?

Mike George -- President and Chief Executive Officer

Yeah, I wouldn't want to comment specifically on anything in the quarter. Certainly, in a mid-term year, you're going to have some viewership distraction. You're going to have some impact on marketing spend and effectiveness when you're competing with a lot of other forms of marketing spend. But beyond that, I wouldn't want to comment on any specific impacts on the company in the quarter.

Barton Crockett -- B. Filey FBR -- Analyst

Okay, all right. Great. Thanks a lot.

Operator

We'll go to Edward Yruma with KeyBanc. Please go ahead.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Good morning. Thanks for taking my questions. First, I know you had struggled toward the end of last year and early this year with inventory outages at HSN or too tight of buys under the previous management team. How do you feel about your inventory positioning and composition as we head into holiday? Then again as a follow-up, in the core Q business, you've done a good job recently of turning the needle from a new customer perspective. As they cohorts of consumers are aging, or these new customers, how are they behaving differently than maybe your legacy Q customer? Thank you.

Mike George -- President and Chief Executive Officer

Thanks for the question. On HSN inventory, I would say that the absolute levels of inventory have largely normalized. I think we've gotten back to where we need to be from a level of inventory. Of course, the harder part is making sure you have the right inventory. We're certainly still in that mode of trying lots of new things. Some work, some don't. It's one of these things where you increase your batting average over time as we get more experience. So we feel good that we've gotten the inventory levels back to where they need to be. I feel good that a number of the new initiatives are working and have resulted in a material improvement in the sequential revenue trend, Q2 to Q3, and our goal is to keep on that path as we see how the customer responds to the various things we're trying.

In terms of new customers, I would say overall we're very encouraged by the quality of new customers. Fundamentally, we're seeing new customers perform at comparable levels to any prior class, so aggregate new customer health is strong. Lifetime value is consistent with what we've seen in past years. So as the business has moved toward digital and acquired more customers on digital, and reaccelerating customer growth, we're really holding on quality and really encouraged by that.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Great. Thanks so much.

Operator

Next is Heather Balsky with Bank of America.

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Thank you for taking my question. I guess to start to piggyback off of Eric's question earlier, can you talk about with regard to synergies how you're thinking about reinvestment back into the business and how much might flow through to the bottom line?

Mike George -- President and Chief Executive Officer

Heather, I would say it's early to give a specific framework for that. We certainly expect some to flow to the bottom line and some to be reinvested. But actually, it's going to be real-time decisions as we move through the next few years as to what feels like it has the maximum return for the company. Clearly, the biggest single source of reinvestment would be digital marketing. As you know, we have a very low digital marketing spend today. We think it can be an additive to sales growth over time as we ramp it up. But we won't ramp it up if it is negative in its net present value.

We'll ramp it up, even if it costs us for the quarter if it has a positive lifetime value associated with it. I would say the big gating factor in giving you a more specific answer is, quite frankly, how effective we are in spending back on digital marketing. We'll be disciplined about that. We'll only do it if it has a positive return over time. But if it's doing that and it's driving sales growth, you might see us sweep more of the savings into that kind of a spend. On the flip side, if we're really not getting that benefit, then we'll push that kind of savings to the bottom line.

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Great. With regard to ASP, it was positive this quarter. I was curious if you can talk about what you saw with regard to your initiatives around pricing in ASP?

Mike George -- President and Chief Executive Officer

We were very encouraged after several quarters of erosion in ASP to get back to stability and even a little bit of growth in ASP. It wasn't any one thing that drove it, but really a number of initiatives. At the most macro level, the mix shift of the business -- I talked about strong growth in consumer electronics and in accessories, and those are two of our higher price point categories. So mix shift was favorable to us, a little bit offset by the decline in jewelry, which is also high price point, but on balance favorable mix. But even within categories that are lower price point categories like the core or household, we saw a healthy increase with ASP.

I think it's a lot about just focusing on every offer. Making sure we're pushing ourselves to give the customers the best quality offer at the best value. Not always go for the lowest price option, but the option that's best quality, best value. Looking hard at the TSV line. Looking hard at other key items. Part of it is mix, and that will ebb and flow as the broad mix of the business evolves over time. That was favorable in the quarter. Part of it is just the real micro focus on getting the right offers in the marketplace.

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Thanks. I'm going to throw in one last one on the balance sheet. I was just curious if we could get an update on how the company is thinking about leverage, in particular the exchangeables, and if there's an update there.

Mike George -- President and Chief Executive Officer

I'll let Greg or Mark take that.

Mark D. Carleton -- Chief Financial Officer

I think we continue to look at ways to refinance or take out and manage that exchangeable process. Obviously, part of that is related to the tax efficiency that we get from the interest relative to those, and certainly, the liquidity that we have. I think our capital allocation strategy relative to that is unchanged. Where we see the returns and perhaps buying back or taking out some of those exchangeables early, we will continue to do that. If we see the value in buybacks or in investments back into the business or perhaps buying other companies, we'll look at that as well. But we certainly have a strategy on the exchangeables and that's unchanged.

Greg Maffei -- Chairman

I think that's right, Mark. I would add only one thing. We have also gone into making tax-related investments which have high rates of return to some degree generate tax attributes that offset the tax negative attributes we will eventually have to pay.

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Thank you again.

Operator

We'll go to Jason Bazinet with Citi.

Jason Bazinet -- Citigroup Global Markets -- Analyst

I just had one question on the revenue recognition at the time of shipment as opposed to delivery. You said it was a favorable in Q3, but you said it will normalize over the full year. I didn't quite understand that. Presumably, you always ship before you deliver. And so I would think that would be a pull-forward this year and then normalize next year. Do you mind just explaining that?

Mike George -- President and Chief Executive Officer

You're still comparing a 365-day period from a year ago to this year, so you're not actually counting more or less days in the year. So it's just a matter of what your comparison is. So when we give you these comparisons, either on an adjusted basis or under the old -- either under the current basis or under the old methodology, both of them are comparing same number of days this year to same number of days of shipments the prior year, it's just a matter of what time period you're referencing. If in one particular quarter, depending on what days you're including, it might have a positive or a negative impact, but it's essentially neutral over the full year.

Mark D. Carleton -- Chief Financial Officer

Essentially, you change the time up front and what -- you lose two or three days of one year, but in the next year, you still have exactly 365 days, and you still have that period from December 28 to December 31 in one year's results. It just may be in the change that's a different three-day period than it was the other three-day period. Once we get to a full year, we have a full 365 days of results in those numbers.

Jeffrey A. Davis -- Chief Financial Officer

And you may be, as Mark suggested, comparing quarters, which are off by a couple of days, but they will still contain in future quarters the exact same number of sales and/or shipping days.

Jason Bazinet -- Citigroup Global Markets -- Analyst

Understood. Very helpful. Thank you.

Operator

We'll now go to Alex Fuhrman with Craig-Hallum Capital Group. Please go ahead.

Alex Furhman -- Craig-Hallum Capital Group -- Analyst

Thank you very much for taking my question. I wanted to ask about some of the new brands that you have launching on HSN in particular. It seems like a really big opportunity to get some of those crossover brands that have been big on QVC for many years, and including a lot of the proprietary brands on QVC. What I'm wondering is, how are you planning on marketing the exclusivity and the uniqueness of the things you carry? It seems like you've always done a very good job in the past of really highlighting your proprietary brands on QVC and explaining to the customer how they can't find them anywhere else or can't find this particular item or price. I'm just curious on how you plan on translating that message as you have some of these brands available on HSN, but presumably still just on H and Q and nowhere else in the retail landscape?

Mike George -- President and Chief Executive Officer

Thanks for the question, Alex. I would say that as we're thinking about the cross-brand strategy, we're trying to be very thoughtful about exactly that question and still preserve exclusivity within QVC and within HSN. So when we look at the crossover brands we're sharing, and a number of the examples I used, like Keurig, we're really looking at sharing major national brands where customers do expect to find those brands in a number of retailers. So historically we might have had let's say an exclusive agreement at QVC where that brand could not be available at HSN. Now we can open that up and make these brands available at both QVC and HSN. HSN has similar agreements with their brands that we can now open up as well.

That relates to national brands. We would still then try, even within those national brands, to have an offer at QVC at a certain point in time that is a unique offer that only QVC has, and a different kind of offer or configuration at HSN that is unique to HSN. Then on the proprietary brand side, where we have full exclusivity and you don't find those brands at other retailers, in general we're actually still trying to keep those constrained to either QVC or HSN. So, for example, thinking about very successful proprietary brands at Q like Isaac Mizrahi. At this point, our plan would not be to have that brand available at HSN.

On the flip side, we're using the same team that helps create our proprietary brands and source those brands to source new proprietary brands for HSN that again can be exclusive to H. So long way of saying we think exclusivity matters. We still think exclusivity within Q and H matters so that we're giving customers more choice. Then where we'll get the crossover benefit are these really meganational brands where we're more competing against a number of other retailers, and we can consolidate and extend our share capture.

Alex Furhman -- Craig-Hallum Capital Group -- Analyst

That's really helpful. Thank you, Mike.

Mike George -- President and Chief Executive Officer

Thanks.

Operator

We'll go to Victor Anthony with Aegis Capital.

Victor Anthony -- Aegis Capital -- Analyst

Thanks, guys. Congrats on the execution. A few questions. First one on the buy-in other company's comment you made on the discussion on the capital allocation strategy. What sort of efforts would you consider adding to the firms? And maybe you could just talk about your general M&A strategy. Second, on the China tariffs, trade wars, any sort of impact to the business? And third, this is more of a high-level question I tend to get every once in a while about you guys. How does QVC HSN fit into the mix of the broader, the media retail, technology sectors? The business does cut across several ongoing secular trends, whether it be media viewership, whether it be LTT, retail moving to the internet, what else? Maybe social media time spent, mobile transition. Within all of that, what are you most excited about over the next probably five years, and what concerns you the most? Thanks.

Greg Maffei -- Chairman

Mike, would you like to take a shot first or would you like me to?

Mike George -- President and Chief Executive Officer

I'll let you go first.

Greg Maffei -- Chairman

Thanks. Look, on the issue of acquisitions, we have spent the last few years I would say trying to provide a more focused Qurate. We have done two scale acquisitions. We've done some smaller ones, but two scale ones, which was bringing in the balance of HSN, and buying zulily. Both of those I think were highly consistent with the original QVC business. Obviously, HSN in particular, where we already had a 38% take. That having been said, and we think that process has been a good process.

That having been said, I would point out historically when we were Liberty Interactive and we had two trackers, we effectively moved a series of capital events across from QVC utilizing QVC's cash flow to fund over at the other side of the house, which turned into a very lucrative investment in Charter and/or Liberty Broadband. So we have tried to signal the market we're more focused, we're more clear. I would think you would expect M&A largely to be within that space.

That having been said, QVC, HSN and zulily are a very large free cash flow generator. Liberty likes to think of itself as able to allocate capital wisely. We think in general the market has given us a permission slip to do that. I wouldn't say we would treat it lightly to change the mission, but if we found the right opportunity, we would think about it and we would try and signal why we were doing that crisply and clearly why we thought that was an attractive opportunity.

As far as what's across the M&A landscape and where this sits, I think I've tried to say we try to focus on this because we think it's a good space and it's one of which we have a management team which has demonstrated talent how to operate within that space and have success. There are other places in the Liberty portfolio which are concentrating on things like live events or online travel that I think are also attractive. But in general, those things are better left and focused in those areas.

As I started with my opening comments, most of our focus here is going to be on trying to hone our position, which we think is a good one, improve its strength in the video/e-commerce space. Mike, what would you add?

Mike George -- President and Chief Executive Officer

Not much else to add. We are continuing to look carefully at acquisition opportunities. A lot of things come our way and we reach out and explore other things that fit broadly within those parameters that Greg articulated. But we do have a very high bar on making sure that they really fit and are additive, and importantly are at a good value and valuation. So we've passed on lots of things and we're certainly open to the right opportunities that we think add to this video commerce, social commerce, e-commerce space. But again, we'll be very selective.

I would, Victor, quickly touch on your couple other questions. On China tariffs, a very fluid situation, obviously, in terms of what will end up happening with the tariff situation. We're watching it carefully, but our goal is to work with our vendor partners and to really manage the impact as best we can, trying to make sure we're able to shift suppliers as we need to, shift countries of origin, respond. I think we have a benefit relative to traditional retail in that we are much more able to shift mix pretty quickly, since we don't have our inventory out there in every store. We'll watch it carefully. We think it's manageable at this point, but obviously early to exactly assess the impact of tariffs.

Then on your other broader question about the media sectors. I would just emphasize that these megamedia trends certainly create some headwinds, but in our judgment, more tailwinds. The obvious headwind is cord cutting and declining traditional broadcast viewership. But again, I would just underscore that we have now a multi-quarter track record of actually increasing broadcast viewership, which not many people can say. We're not suggesting we would outrun that trend forever, but we've shown pretty good skill in that core TV viewer sticking with us.

Then we're driving rapid growth across all these other new media platforms -- OTT in various flavors; social media from Facebook Live to Instagram TV to YouTube. As the world shifts to mobile, the fact that we're the third largest mobile commerce retailer, that we've actually shown unlike most folks that we can drive really attractive conversion on mobile, and that mobile becomes this really powerful viewing platform, and when folks view QVC or HSN video on mobile, they increase their conversion.

I think we're in a really unique spot where we are a content provider, a programmer that has complete ownership of its content, can move that content wherever we want to move it. And in a sense have always been an OTT player because we've had video on the website since the earliest days of having a website. Just that flexibility to win across platforms, to win on mobile, take advantage of all these new media opportunities. We're in very early innings of where that's going, leaning into it heavily. That's something I'll talk more about at next week's investor conference.

Victor Anthony -- Aegis Capital -- Analyst

Okay, thank you.

Operator

And our last question for today will come from Thomas Forte with D.A. Davidson. Please go ahead.

Thomas Forte -- D.A. Davidson & Co. -- Analyst

Great, thanks. One quick one. First, congrats on an encouraging performance on many levels. For Mike, how should investors think about the relative distribution costs for QVC and HSN on legacy distribution such as MSOs, compared to your emerging efforts such as Roku and now Amazon Fire TV?

Mike George -- President and Chief Executive Officer

Thanks, Tom. I would say on balance, we expect distribution costs to continue to decline over time. And that's generally been true now for a few years. There are different kinds of arrangements on some of these new platforms, but what you would traditionally call distribution expenses we expect will continue to go down over time.

That said, on some of these platforms, we do need to invest in digital marketing to make people aware of these platforms and to drive an action like to download an app, or to engage in some form of digital media experience. I think you see over time an improvement in the distribution line. I think you see increased expense in digital marketing. Again, the exact mix of those two depends on the comments I made earlier on our success in reinvesting in digital marketing.

Thomas Forte -- D.A. Davidson & Co. -- Analyst

Thank you.

Mike George -- President and Chief Executive Officer

Thanks, Tom. I think that wraps up the call. Thank you, everyone, for your time and interest in Qurate. We look forward to seeing you at next week's Liberty investor day. Thanks.

Greg Maffei -- Chairman

Thank you all.

Operator

Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation. You may now disconnect.

Duration: 60 minutes

Call participants:

Mike George -- President and Chief Executive Officer

Jeffrey A. Davis -- Chief Financial Officer

Mark D. Carleton -- Chief Financial Officer

Greg Maffei -- Chairman

Courtnee Chun -- Senior Vice President, Investor Relations

Eric Sheridan -- UBS Securities -- Analyst

Barton Crockett -- B. Filey FBR -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Heather Balsky -- Bank of America Merrill Lynch -- Analyst

Jason Bazinet -- Citigroup Global Markets -- Analyst

Alex Fuhrman -- Craig-Hallum Capital Group -- Analyst

Victor Anthony -- Aegis Capital -- Analyst

Thomas Forte -- D.A. Davidson & Co. -- Analyst

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