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Qurate Retail Inc (QRTEA -1.04%)
Q3Â 2019 Earnings Call
Nov 11, 2019, 8:30 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 Inc. 2019 Q3 Earnings Call. [Operator Instructions] As a reminder this conference is being recorded November 11.
I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.
Courtnee Alice Chun -- Chief Portfolio Officer and 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. Actual events or results could differ materially due to a number of risks and uncertainties including those mentioned in the most recent Forms 10-K and 10-Q filed by our company and QVC with the SEC. 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 statement 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 and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations including preliminary notes and 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; Qurate Retail Group CFO Jeff Davis; Executive Chairman Greg Maffei. Please note we have published slides to accompany the earnings release.
These slides are available on our website. Now I'll turn the call over to Mike George.
Michael A. George -- President, Chief Executive Officer & Director
Thank you, Courtnee and good morning everyone. The third quarter was challenging with continued sales and OIBDA pressure at QXH and Zulily. However we were pleased to see Cornerstone turned to growth after adjusting for the closure of improvements and a further acceleration of growth at QVC International. And despite the sales pressures we achieved strong growth in free cash flow. As we look ahead we are intensely focused on improving our operating results accelerating synergy capture and better positioning our companies for a changing marketplace while sustaining strong cash flow. Turning to QXH. Let me start by welcoming Leslie Ferraro to our company. Leslie joined us in September and has jumped right into her new role as President of QXH. Since Q3 marks our third quarter of declining sales of QXH I want to take some time on this call to walk through the categories and the customer segments that are contributing to the decline; summarize what we believe are the major drivers behind these declines; and most importantly share what actions we're taking to improve the trend and return to strong performance.
So I'll start with the category view. Our home business is down $45 million in the quarter versus last year and down $88 million for the year driven largely by 3 pressure points. First at the end of last year we closed HSN's Joy Mangano Ingenious Design subsidiary. While this brand's sales productivity was strong its cost structure was unattractive necessitating the closure. The exit has created short-term sales pressures along with margin challenges as we cleared the inventory. We anniversary the exit at the end of the year. Second the kitchen electrics business has entered a more challenging product innovation cycle and we're beginning to see this impact our sales especially in Q3. And third the premium mattress category a significant business for us is undergoing a dramatic shift as consumers migrate to bed in a box options. Our team has done a terrific job jumping on this trend with our successful partnership with Casper the innovation leader in this space along with our proprietary offerings from Northern Nights and our Scott Living products. However this new category comes at a significantly lower price point than traditional premium mattresses which is pressuring overall sales.
Our fashion businesses of apparel accessories and footwear are down $17 million in the quarter and $32 million for the year. This is a significant change in trend as these businesses had been strong drivers of growth over the last several years. These categories are down substantially across the industry and while we're gaining market share we have not been able to sustain growth. Our beauty business is up $9 million for the quarter and down $4 million for the year. Similar to fashion this year's performance is a significant change in trend as beauty had been a strong contributor to growth for many years. And it reflects a substantial slowing of the prestige beauty market as you've heard from other beauty retailers and manufacturers. We were encouraged to get back to growth in Q3 in the face of these category headwinds. Our consumer electronics business is flat for the quarter and up $18 million for the year.
It's a modest factor in the worsening trend in Q3 and reflects challenges we're experiencing in securing compelling offers at attractive margins in some of our biggest brands and items especially for our off-air assortments. And finally our jewelry business is down $20 million for the quarter and $60 million for the year as we continue to reduce jewelry airtime in favor of more productive categories. Since jewelry has been declining for multiple years it is not contributing to the worsening sales trend this year. Now turning to the customer view. The overall sales decline is reflected in a modest pullback across the customer base but we're encouraged that we don't see significant pressure in any one customer segment. Fundamentally our customers are still with us and we just need to do a better job every day giving her a reason to buy. In particular for existing customers who represent about 87% of our sales in the trailing 12 months count declined 3% in the quarter and 1% in the last 12 months while the average spend per customer was largely stable. Importantly the declining count has not translated into any meaningful change in retention rates which we measure on a rolling 12-month basis.
Rather it indicates that some of our more infrequent customers pulled back from making a purchase in the quarter. For our new customers who represent about 7% of sales in the last 12 months we were encouraged to see continued growth in count up 1% in the quarter and a strong 5% over the last 12 months. Q3 marks our ninth consecutive quarter of positive or flat new customer growth at QVC and the second consecutive quarter of growth at HSN. While most new customers come to us organically our added investments in performance marketing are helping now bringing in 30% of new customers. Finally for reactivated customers who represent about 6% of sales in the last 12 months. Count was down mid-single digits for the quarter and the 12-month period reflected in part the challenges in our apparel and kitchen electrics businesses which outperformed with reactivants as well as the overall softness in on-air sales. So after giving you this category and customer view let's step back to talk about root causes. In our business it's never just 1 or 2 things that drive big changes in trend up or down but rather a confluence of factors. And these factors we believe can be summarized into 3 broad buckets. First we're facing a choppy retail environment.
As I mentioned many of our largest and most strategic categories are under significant pressure. According to market research firm NPD in the U.S. women's apparel accessories and footwear sales are all in negative growth territory industrywide for the third quarter and year-to-date through September and prestige beauty and kitchen appliance sales have slowed dramatically from the prior year. Second we continue to experience execution pressures associated with the acquisition of HSN. The reorganization of our buying teams has created short-term distractions although we believe we're getting to the other side of this. Our fulfillment network optimization is still in early stages and when completed will provide significant benefits to the customer and the P&L but it is both costly in the short term and creating more service disruptions to customers than we anticipated. And our efforts to stabilize and restructure the HSN business have involved taking a number of difficult and costly steps such as the exiting of Ingenious Designs' business. Despite these short-term pressures we remain fully confident in the acquisition rationale and the power of this combined platform to drive substantial value for customers and shareholders and we are thrilled to have the HSN team in our family. And third we're operating in a changing industry context facing the headwinds of declining linear TV viewership and growing brand proliferation more volatile product life cycles and intense price competition. These headwinds are not new but they add to the other pressures we're seeing.
Offsetting these headwinds are a few powerful tailwinds as well including the rapid growth of digital media and the increasing value of retail platforms that can help brands tell their stories directly to consumers in a compelling authentic immersive and video-rich way. Looking more deeply at TV viewership. We are encouraged that our total minutes viewed continues to grow despite declines in overall reach driven by cord-cutting reflecting continued strength among our more engaged viewers. However the decline in linear viewing does place additional pressure on our ability to reach new and occasional viewers. We're driving a number of initiatives to offset the linear TV erosion with higher viewership across our digital and OTT platforms. The trend toward shorter and more volatile product life cycles is translating into heightened pressure in some of our larger brands. While we do not have high sales concentration in any one brand 10 of our larger brands representing just 9% of sales accounted for nearly 90% of the year-to-date sales declines. We actually see this as an encouraging sign and a reminder that the difference between growth and decline is concentrated in a small number of brands. So now that I've shared what's happening and why let me get to what matters: The actions we're taking. While we can't control some of the macro pressures like the challenging fashion cycle or product and price volatility we can respond more effectively to get to better outcomes. So first we're intently focused on disciplined day-to-day execution.
We're controlling our inventories driving improved product margins reducing fixed costs stabilizing the organization and working to deliver more consistent service levels to our customers. Most importantly we're working hard to delight our customers every day by increasing product differentiation expanding variety and getting new ideas to market faster. For example in Q3 in fashion we're driving growth in the active and athleisure segment with the launch of Zuda on QVC that's our new proprietary athleisure lifestyle brand; as well as a new exclusive collaboration we launched New Balance x Isaac Mizrahi which brings performance footwear together with unique fashion. In beauty we launched Carmindy Beauty an exclusive beauty brand. She has a significant social following and we supported the launch with extensive programming across our social platforms including Facebook Live and Instagram TV. And we're reinvigorating some downtrending beauty brands with stronger offers to our customers such as vendor-supported free shipping and handling. Second we remain committed to achieving and most likely exceeding our synergy targets.
Third we're tightly managing every element of our cash flow with a commitment to maintaining the high levels of cash flow conversion we've delivered over time even while making important investments in areas like our fulfillment networks and replatforming our website. We have a number of ways we can improve cash conversion even if our adjusted OIBDA results are pressured as we did this quarter. Finally we're working aggressively to better position our companies for a changing marketplace minimizing the impact of the industry headwinds I mentioned while taking full advantage of the tailwinds. We remain confident in our long-term direction but we need to sharpen our focus and intensify our execution of 5 key strategic initiatives to reestablish growth: To be the industry leader in curating special products at compelling values; to extend our video reach and relevance over all the digital platforms our customers engage with; to reimagine daily digital discovery making our digital experiences as engaging and sticky as our TV experiences; to expand and deepen the engagement of our passionate community of customers; and finally to deliver joyful customer service. And I'll provide a deeper dive on these 5 strategies at Liberty's Investor Day next week. Finally I'll wrap up my comments on QxH with a word about the holiday season. With Thanksgiving falling later than previous years we'll have a shorter window to engage customers for the Christmas shopping period. All retailers face this pressure but with the December 21 being our last ship date without the customer paying for expedited shipping it's more difficult for us to capture last-minute sales.
We've launched a thoughtful merchandising programming and event strategy to pull demand forward as much as possible. To complement this strategy we're integrating new shows like Sean Saves Christmas Down Home with David Very Merry Deals and Get Gifty as well as digital platforms such as Holiday HQ to inspire early gift-giving ideas. Turning ,now to QVC International. Growth accelerated in the quarter led by strong gains in Japan. We continue to pursue a series of strategic initiatives across international that are largely in line with our efforts at QXH. Notably we're in the early stages of building our European capabilities in performance marketing advanced analytics digital discovery and strategic merchandising. We're also continuing our product margin improvement initiatives including disciplined promotional and inventory management optimizing product mix in airtime and implementing selective price increases which yielded positive results in Q3. In Japan we actively prepared for the consumption tax increase from 8% to 10% that went into effect on October 1 applying learning from the last increase in 2014. As a result Q3 benefited by pulling forward demand in advance of the tax increase especially in higher-priced products and categories such as jewelry.
However we do expect the consumption tax increase to have an adverse impact on our Q4 sales. In October as we expected our sales in Japan declined. Turning now to Zulily. Our Q3 performance was highly challenged.
We continue to see significant headwinds in marketing spend efficiency as the cost to acquire new customers continues to rise. We remain disciplined on our marketing return requirements and reduced our overall marketing spend by 14% in the quarter. As a result of lower and less effective marketing spend we saw further erosion in the activation of new and reactivated customers as well as lower purchase frequency among existing customers. Overall product freshness also continues to be a headwind and we have not made sufficient progress in improvements to our overall customer experience. As we aggressively focus on stabilizing the business we are working to diversify to more efficient marketing channels reinvest in the customer experience and increase our product freshness. On product we're working aggressively at premier national brands and we've seen some early success partnering with well-known brands Tommy Hilfiger Calvin Klein Ashley Furniture and a pilot with Nike.
And we'll do this while maintaining growth and commitment to our unique and boutique brands as well. These actions are combined with a concerted effort to reinvest in the customer experience. We're leaning into our differentiated fun and addictive mobile store with an increased focus on initiatives to earn her trust through operational excellence and exceptional customer programs anchored by price transparency. In October we launched Best Price Promise which was the first initiative demonstrating our commitment to increase transparency for our customers owning our position as the lowest price leader. While the vast majority of our merchandise is unique and boutique we have thousands of items that launch daily where we can directly compare our pricing to Amazon and Walmart. Since the launch of our Best Price Promise where a Zulily item is identical to an item sold by Amazon or Walmart as often as 97% of the time Zulily offered the lower price.
With our Best Price Promise we're now featuring Amazon and Walmart's prices on identical items on our product detail pages to highlight our significant price advantage and build customer trust. In addition to our efforts on product and price. We're investing in improving shipping times and piloting options to lower shipping and returns cost. As we see headwinds in marketing spend efficiency we'll plan to reallocate some of our marketing spend to these efforts and deepen our investment in our customer experience. At Cornerstone excluding improvements we had a strong quarter delivering both top line and OIBDA growth driven by continued strength at Ballard Designs including a strong performance at our retail stores a positive turnaround at Grandin Road and improved trends at Frontgate.
As we move forward we'll be focused on sustaining the momentum in our home segment as well as continuing the progress we're making with our gross margin initiatives and our discipline around operating expenses. Finally we plan to build upon the Q3 launch of Ryllace our premium plus-sized proprietary fashion brand that fills a real marketplace need. We were pleased with the reaction at its launch event and our teams are now beginning to promote the brand more broadly. Before I turn the call over to Jeff I want to thank our 27000 team members who show up every day striving to make a difference for our customers and our business. We recently celebrated the launch of a year-long effort involving several hundred team members to shape our Qurate purpose and define the principles for how we'll work together to serve our customers. I am especially grateful in times like these for our team's dedication and passion. And on this Veterans Day we extend our special appreciation and thanks to all of our QRG team members who have served in the armed forces or whose families have served. A reminder of the upcoming Liberty Investor Day I look forward at having the opportunity to speak with you in greater detail about the strategic initiatives and our areas of focus.
And with that I will turn the call over to Jeff.
Jeffrey A. Davis -- Chief Financial Officer
Thank you Mike and good morning everyone. Beginning with QXH net revenue declined 4% on 4% reduction in unit volume slightly offset by a 1% increase in ASP due primarily to mix shift within home innovations and the home category. Adjusted OIBDA declined 7% and margin rate declined 50 basis points primarily due to sales deleverage and headwinds from network fulfillment upgrades general freight rate increases inventory management and continued marketing investments. These factors are partially offset by reduced TV commissions synergies and product mix impact. Our network optimization plan will reduce our U.S. fulfillment center footprint to 7 facilities by the end of 2020 down from 9. We had a soft opening of our new Northeast fulfillment center in Q3 handling a modest amount of large-sized non-conveyable products.
We're also continuing to stabilize our Lancaster facility to support apparel fulfillment. We anticipate additional expense headwinds in Q4 primarily from new Northeast site lease and project implementation costs. However we anticipate improved productivity and reduced transportation and fixed costs to start to have a favorable impact on adjusted OIBDA in 2020 along with capital avoidance on facilities we are closing. We will provide an update on our U.S. fulfillment center optimization and current year impact at Investor Day. Finally on QXH we realized cumulative cost synergies of $110 million through September 30. We anticipate total 2019 synergies net of onetime costs to be consistent with our prior indications and we'll provide more detail at Liberty's Investor Day. Moving to our international business.
In constant currency international delivered a strong quarter with revenue up 3% on an 8% ASP increase which was partially counterbalanced by a 3% decline in unit volume and lower shipping and handling revenue. Japan had the best performance across the markets with strong revenue growth. This performance was driven by better product flow and category level initiatives. Strong demand from its TSV replay and expansion of programming and carriage as well as initiatives to proactively pull forward demand in advance of the Japan consumption tax increase. Adjusted OIBDA grew 15% and margin expanded 180 basis points from gross margin improvement and the closure of our former France operations in March of this year. At Zulily revenue declined 17% due to the factors that Mike mentioned. Zulily also recognized a $1 billion noncash impairment charge which is not included in adjusted OIBDA and is the primary driver of its operating loss. Approximately 60% of the charge was related to its trade name with the remainder attributed to goodwill. Adjusted OIBDA declined 56% and OIBDA margin declined 200 basis points primarily due to sales deleverage of supply chain and fixed costs partially offset by reduced marketing spend. Our initiatives and actions to diversify and test new marketing channels and strategically reinvest and enhance the customer experience will take time to yield meaningful results.
We anticipate the current rate of sales erosion to accelerate in the near term given the reduced number of new and reactivated customers compared with prior periods. Our Cornerstone business returned to growth with revenue up 5% and adjusted OIBDA increasing $3 million excluding the improvements business that was closed in Q4 of last year. The business gained traction with product margin initiatives and remain disciplined with operating costs shifting marketing spend from catalog to digital. Looking at the business broadly we had not seen a material impact from tariffs levied to date. As a reminder the next tranche will not go into effect until mid-December. In total the announced tariffs cover approximately 35% to 40% of total Qurate Retail cost of retail sales. Approximately 80% of the tariff imposed cost of sales is from vendor-sourced products meaning we have -- we are better-abled to mitigate the tariff impact with our vendor partners with the remainder of the product is direct imports. Of our overall exposure approximately 1/3 are in electronics with the rest spread evenly across apparel accessories and the remainder of our home categories.
Our teams continue to work closely with vendors to share the cost burden across the supply chain and increase prices where necessary as well as look to shift product sourcing from China to mitigate any impacts to our results. While it's too early to predict the impact on future sales demand we will continue to monitor the situation and hope for a swift resolution to the trade dispute. Let me wrap up my comments with a discussion on capital expenditures and cash flow. Capital expenditures were approximately $83 million in the quarter and $249 million year-to-date on a cash basis. For the full year we now anticipate cash capex to be approximately $370 million to $390 million on a cash basis which is in line with our prior estimate but higher than prior years. The increase is attributable to our U.S. fulfillment network optimization initiative and continued information technology and commerce platform investments. Shifting to the balance sheet and cash flow. We improved free cash flow in Q3 primarily due to the timing of the renewal of TV distribution rights and the absence of transaction-related costs incurred in the prior year and disciplined working capital management. Finally QVC's consolidated leverage ratio as defined in our credit agreement was 2.3x at September 30 as compared to a maximum ratio of 3.5x.
With that I'll now turn it over to Greg.
Gregory B. Maffei -- Chairman
Thank you Jeff. Let me comment a little bit on our capital allocation philosophy at Qurate. We look at the following buckets which are not necessarily mutually exclusive. First investment in the business for the future. capex as you heard from Jeff is elevated in 2019 as we invest in IT and other fulfillment initiatives but we expect this to revert to more normal levels in 2020 in part as we complete the integration of HSN. Secondly managing our tax exposure. While the tax liability from our exchangeable bonds was reduced substantially due to tax reform we've decided to be proactive in some of the elements including attacking the MSI bonds. And toward that end we repurchased $88 million of bonds in October and hedged a portion of our uncovered MSI exposure.
We also continue to deploy capital into what we believe are very attractive tax-advantaged investments and you've heard about some of those in the past. Third return of capital to shareholders. This year through 10/31 we bought $392 million of stock. We will continue to be opportunistic going forward but are aware that the stock has experienced much more volatility this year. Qurate continues to generate very strong free cash flow and we will prudently invest that across all of the buckets I mentioned above. As Mike and Jeff mentioned we look forward to seeing many of you next week at our Annual Investor Meeting on Thursday November 21 in New York. The link to register is on the homepage of our website. We appreciate your continued interest in Qurate Retail.
And with that operator I'd like to open up the line for questions.
Questions and Answers:
Operator
[Operator Instructions] We'll go first to Heather Balsky at Bank of America.
Heather Nicole Balsky -- Bank of America -- Analyst
Hi, thank you for taking my question. First on QXH. Can you just talk about some of the near-term levers you have to improve performance? Are there any thoughts about investing more in free shipping or marketing? And what can you do on the product side? Thanks.
Michael A. George -- President, Chief Executive Officer & Director
Thanks Heather. It is a bit of all of the above. I mean most importantly it's just continuing to read and react to what the customer is responding to on the product side. And as you know we benefit from being able to adjust what we're offering fairly quickly. So trying to just continue to shift to where she's going in areas that we know are areas of strength like fashion and beauty working intensely to get those back to sustainable growth launching a number of new product lines. I mentioned a couple of them in Q3 but we've been building our capabilities within our proprietary product development team and you'll see a handful of new brands rollout over the next several months. We're partnering with influencers to try to bring niche influencer brands to market.
We're -- we just completed our effort we talked about on the last call to scour the country for up-and-coming entrepreneurs and we'll be -- met with about 850 or so entrepreneurs if I recall the numbers correctly and we'll be launching 80 to 90 of their brands over the next few months. So for us it just starts with product and just being resolutely focused on everything we can do to bring her fresh exciting products and try to engage your interest. We are -- on the other dimensions you mentioned we're continuing to invest in expanding our marketing. We're mindful of returns on that marketing spend. So we don't want to invest beyond what the returns would tell us. But did take up marketing spend in Q3 and expect to continue to invest in that.
That has a little more benefit on new customer acquisition than on overall sales so it's a little more of a long-term play. It doesn't help as much in the short term. And then finally we are continuing to look at having the right sorts of promotional offers which for us is about use of our Easy Pay and FlexPay tools along with shipping and handling promotions. We just had a big shipping and handling promotion this past weekend as an example. We're trying to get our vendor partners to support those where we can and do those in the right way. So we'll tackle all those initiatives still try to do it in a way where we feel like we're getting healthy volume and volume that's sustainable over time as opposed to overly promotional in nature.
Heather Nicole Balsky -- Bank of America -- Analyst
And then on the balance sheet can you just remind us what the current tax liability on the exchangeables is and what the impact is from the MSI transaction?
Gregory B. Maffei -- Chairman
So we'll take that here. Brian do you have that number?
Brian J. Wendling -- Qurate Retail Inc. -- Analyst
Yes it's $1.71 billion at quarter end.
Gregory B. Maffei -- Chairman
Now remember that number will grow as we receive -- as we take incremental deductions but we will also get the benefit of an effective interest-free loan for the period until they're retired. So they're -- it's a continuing increase in that liability offset in part by earnings we can make on that interest-free loan.
Heather Nicole Balsky -- Bank of America -- Analyst
Got it. Did the liability come down with the payment?
Brian J. Wendling -- Qurate Retail Inc. -- Analyst
It did yes.
Gregory B. Maffei -- Chairman
Yes yes. But that was subsequent to quarter end in part right?
Brian J. Wendling -- Qurate Retail Inc. -- Analyst
Thanks so much.
Operator
We'll go next to Eric Sheridan at UBS.
Eric James Sheridan -- UBD -- Analyst
Two maybe. Mike it's been about a year now since you talked about leaning in on performance marketing channels and trying to engage with new and existing customers in different ways. I wanted to know if we could look back and sort of get a better sense of what you've learned from those efforts. How much they've been a benefit to growth on the customer side over the last year? And what sort of it might do to inform your spending on marketing going forward? And then second question if I could. Did you guys call out the benefit to adjusted EBITDA from the carriage renegotiations with HSN? I think I missed it but I just want to make sure if you did call it out that we didn't miss that. And maybe I think the synergy longer-term from carriage agreement is probably a topic for next week but I just wanted to tee that up if you are willing to address that as a topic.
Michael A. George -- President, Chief Executive Officer & Director
Thanks Eric. I'll take the first and ask Jeff to weigh in on the second. So I would say in the year since we've been talking about it more actively you are seeing us increase our performance marketing about 30% on a year-over-year basis each quarter. It's typically been in that range. Keep in mind the absolute number is still fairly modest in the kind of 1% of revenues area but grow over prior year. We found that that level of step-up enables us to invest that money in ways that get to attractive returns and we measure the return as the number of new customers that we're bringing in and the value that those new customers bring us over the subsequent couple of years. So it's an investment that's negative in period but has a sort of within-the-year payback as we start to see that new customer repeat. So we feel good that we know how to increase it we know how to measure it with high integrity.
We -- it is bringing in more new customers. So I mentioned that about 30% of new customers came in through performance marketing. So we do think new customer growth would be negative if we didn't have that investment in performance marketing. We don't tend to ascribe a lot of benefit to performance marketing to our existing customers. We've maybe been conservative in that but view it primarily as an acquisition tool. I would say we're learning more and more about what channels are most effective. And as you'd expect those channels evolve over time. We know that paid social while a very high-cost channel for us is one where we're most likely to find those new customers who go on to become real superusers of QVC or HSN. So we're trying to kind of spread the dollars across higher-cost channels that bring in a very attractive type of customer along with the channels that just bring in more volume of still good customers. So we feel good about the program. We'd love to be growing it even faster. So we're going to I would say in this coming year accelerate our investment in marketing technology tools as well as resources so we get ourselves into position where if we're getting attractive returns we're in a better position to scale it faster with a higher level of technology to support to be confident in that investment. Jeff do you want to.
Jeffrey A. Davis -- Chief Financial Officer
Yes. Eric you're exactly right. For a point of brevity I didn't go through it in the individual points. There's a page in the presentation that we posted on the IR website. The commissions sort of support for the quarter was a total of 95 basis points. About 2/3 of that was really associated with the MSO change. So the delta if you will is really the portion that is attributed to the synergies associated with the carriage for both Q&H.
Eric James Sheridan -- UBD -- Analyst
Thanks guys.
Operator
We'll move next to Oliver Wintermantel at Evercore ISI.
Oliver Wintermantel -- Evercore ISI Institutional Equities -- Analyst
Thanks Mike for all the additional details on the QXH business. If -- I know you don't break it out anymore but maybe you could talk a little bit about the difference between QVC U.S. and HSN how the performance was in the third quarter.
Michael A. George -- President, Chief Executive Officer & Director
Thanks Oli. Yes we don't -- as you know we don't break it out anymore in large part because we're really trying not to manage the business in that way. And so our feeling is to try to parse out QVC versus HSN performance can maybe be a misleading signal because we want to be investing in our resources where they get the best return across the platforms. So I don't want to say much other than there were highlights in both brands and challenges in both brands. There were some issues that were a little more specific to HSN like the pressure we're having with the Ingenious Designs a business that we've exited. But on the flip side we've been encouraged for example that we've been able to -- part of how we're able to grow the beauty business in a tough cycle is because we felt that beauty was substantially under-penetrated at HSN. And so we've seen nice growth over the course of the year as we've leaned into the beauty business at HSN. So we're trying to be thoughtful about how to optimize each category across the 2 brands in ways that make sense relative to where those 2 brands are.
Oliver Wintermantel -- Evercore ISI Institutional Equities -- Analyst
Got it. And then maybe on the free cash flow side. As you mentioned it's still -- free cash flow is still very strong. But with declining sales that might be going forward some pressure on free cash flow. And you also mentioned that capex is going to be peaking in -- or relatively high in 2019 with the level down in 2020. So maybe if you could maybe capital allocation strategy going forward do you have a leverage ratio that you're aiming at? Or when we could see maybe free cash flow -- or sorry buybacks going to more of a normalized level.
Gregory B. Maffei -- Chairman
I think that -- go ahead Jeff and I'll comment on top.
Jeffrey A. Davis -- Chief Financial Officer
Very good. I was just going to comment on the first portion of the question with respect to -- with our leverage ratio our focus and commitment right now is to continue managing the business in the range of the 2.5x area at the operating company level. We continue to look for ways to be very diligent with respect to our capital allocation with respect to expenditures as it relates to our network optimization and other areas within our technology platforms. But I'll leave the rest -- with respect to share buyback Greg do you want to maybe address that?
Gregory B. Maffei -- Chairman
Yes. Thanks Jeff. So I think 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 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. And also do some things as we talked about to reduce other liabilities like the deferred tax liability to DTL through taking out the MSI bonds and hedging a portion of that. So we're going to continue to look at those alternatives for non -- for balance sheet and capital markets-related alternatives we're going to continue to look at those over the next several quarters and see what attract -- is the most attractive in our minds.
Oliver Wintermantel -- Evercore ISI Institutional Equities -- Analyst
Thank you very much good luck.
Operator
We'll go next to Ed Yruma at KeyBanc Capital Markets.
Edward James Yruma -- KeyBanc Capital Markets -- Analyst
Hey, good morning guys and Thanks for taking my question. I guess just first a broader question. The company has had kind of ongoing merchandising issues going back I think even before Doug-Howe left but maybe even -- and certainly accelerated since then. I guess as you step back and think about this if it's beauty if it's apparel. Do you think it's been tactical missteps? Or do you think that there's been kind of a structural way in maybe the consumer changes the way they shop and maybe you haven't been as responsive as you could have been? And then second as you think about kind of the QxH merchant organizations I know that there's been a lot of volatility there what changes have you implemented to kind of smooth that process out? And maybe where did you change H's merchandising philosophy that in hindsight maybe can be course-corrected?
Michael A. George -- President, Chief Executive Officer & Director
Thanks Ed. Great, question. Let we try to opine on it for a moment. I think we have an extraordinary merchant team. I don't say that in a defensive way. I just -- I think this is a team that does miraculous things every day. So I really don't characterize it as so much tactical missteps. And by that I mean we have this very unique mission that pretty much no other retailer in the world can do which is to identify a handful of items every day that can drive extraordinary volumes and attract mass audiences in a highly fragmented world. And I just continue to be in awe of the team and how they try to do that and try to add creativity and energy and new ideas to it on an ongoing basis in ways that both delight the new customer but also meet the needs of all of our existing and long-standing customers. I would say our challenge has been and our warning on reflection has been that probably as a leader team we haven't moved fast enough to evolve with the structure of our merchandising capability to respond to just how fast the product cycles are evolving in the world and that's definitely on us on our leadership team.
And so one of the things we're doing now having done the heavy lifting of bringing the QxH organizations -- merchant organizations together so that we could take more of a holistic category view of our opportunities and combine these really talented resources now the next phase of that now that we're largely stabilizing that organization is to really invest in more specialized capability to be out in market more often to take all the administrative activity off of the backs of our buyers to get them out in the market to build more product incubation and development capabilities within the merchant team. Said differently it's just all about trying to now take this world of fragmenting consumer taste and rapid brand proliferation and give our merchants more structural resources tools and capabilities to move that much faster. So again I think the misstep has been that we just have been a little behind in the pace of change we needed relative to an environment that's changed even faster than we anticipated it would. So as pressured as the business has been I'm encouraged by the work of the team to start to define that merchant organization of the future start to put it in place. And I think that's going to really be an enabler as we start to move through next year.
On your question about QxH integration and philosophy I would say we're feeling pretty good. We try to be thoughtful about kind of putting together the best capabilities and approaches of both the Q&H organizations and teams and philosophies always adjusting always course-correcting continuing to evaluate when it makes sense to share brands across Q&H when it makes sense to keep the brands unique. So I would characterize it more as just kind of continuous learning and fine tuning but not any kind of major change in direction relative to what we've put in place over the last several months.
Edward James Yruma -- KeyBanc Capital Markets -- Analyst
Great, thanks so much.
Michael A. George -- President, Chief Executive Officer & Director
Thanks.
Operator
Next we'll move to Alex Fuhrman at Craig-Hallum Capital Group.
Alex Joseph Fuhrman -- Craig-Hallum Capital Group -- Analyst
Great. I wanted to ask about the closure of Ingenious Designs. If I'm interpreting your comments correctly Mike it sounded like the products were selling well but the business behind it wasn't very efficient. Can you just give us a little bit more color on why you made the decision to close that subsidiary? And then just looking out at your other proprietary brands across both Q and H. Are there any other brands that stand out as perhaps having businesses that aren't great that are either an opportunity to do some restructuring behind the scenes or perhaps are at risk of also getting closed?
Michael A. George -- President, Chief Executive Officer & Director
Yes. Thanks Alex. I would say there's nothing else that's kind of parallel to Ingenious Design. So I don't think there's any learnings or risk from Ingenious Designs that apply more broadly across the business. It was a very unique situation where HSN had a wholly owned subsidiary that was operating as a separate business located in New York with a very high cost structure and quite frankly under-resourced for the products it was developing relative to our own existing proprietary development capabilities. And so we had a business structure that was uneconomic. And then also we had a wonderful partner in Joy who's been a very important part of the QVC story and the HSN story for many years. But discussions with her she was ready to move on and we were -- just sort of collectively felt a need to make a change. So fairly unique situation. A lot of the products will continue but being developed internally as opposed to through the subsidiary. So again unique situation. We anniversary it at the end of the year. I don't think it has a lot of application beyond Ingenious Designs.
Alex Joseph Fuhrman -- Craig-Hallum Capital Group -- Analyst
Okay. That's helpful. And then just thinking about the shorter shopping period this year between Thanksgiving and Christmas is that something that you can share with us just historically how much of a headwind it's been when we've made that full week leap in the calendar?
Michael A. George -- President, Chief Executive Officer & Director
We certainly look back at every seven years or so when this happens six or seven years. And I would say it's hard to -- the world changes so much that I think it's very hard to extrapolate what the impact will be. The last time it happened just the whole dynamics around Black Friday week were radically different than they are today. So we don't know what the impact will be. We just are prepared trying to get as much demand in as we can. And hopefully the impact will be modest. But I don't -- we haven't been able to find a good historic analog that would be I think a relevant reference point given how much has changed.
Alex Joseph Fuhrman -- Craig-Hallum Capital Group -- Analyst
Okay, very helpful. Thank you.
Operator
We'll move next to Jason Bazinet at Citi.
Jason B Bazinet -- Citigroup -- Analyst
I think I heard in your prepared remarks you reiterated your long-term synergy targets. But I was just wondering if you it was about $80 million of net synergy realization.
Gregory B. Maffei -- Chairman
Jason we blipped you there for a little bit. Maybe you could repeat your question.
Jason B Bazinet -- Citigroup -- Analyst
Sure. So I heard you maintain -- you said you're going to maintain or exceed your long-term synergy targets but I was just wondering if you could give us an update on where we are as of the third quarter. I think as of the second quarter it was about $80 million of net synergy realization and we're looking at -- for maybe $135 million for the full year.
Jeffrey A. Davis -- Chief Financial Officer
So through the third quarter we're now at $110 million. For the year our -- we were anticipating $165 million to $170 million gross. That would have been -- there were approximately $24 million to $25 million of onetime costs that would have been associated in order to get to that $165 million to $170 million. Based upon where we are today we feel as if we are able to accomplish our 2019 goal for this year.
Jason B Bazinet -- Citigroup -- Analyst
Okay, very helpful.
Operator
Thanks for taking my question. Great. So Mike I wanted to know if you could comment on the comparison in conversion rates for some of your digital engagement versus legacy to TV versus qvc.com versus Facebook Live versus Roku.
Michael A. George -- President, Chief Executive Officer & Director
Thanks Tom. Yes that's a tough question because it's obviously hard to truly measure conversion across these platforms. Keep in mind that we can't associate a TV viewer to a sale. We have TV viewership data but it's all anonymized. So I guess I would characterize the overall conversion funnel as we have an enormous volume of people watching QVC or HSN TV at any point in time the vast majority actually not customers. So we -- even in today's world that pool of non-customer shrinks a bit with cord-cutting but even with cord-cutting we still have this enormous opportunity to engage that non-customer as well as obviously engage the customer. We've talked a little bit about the fact that it feels like the sort of immediate translation of a TV viewing moment to a sale it feels like it's not quite as tightly correlated as it's historically been.
I think that's -- I don't want to overplay that point but I think there's some truth to that just because folks will take their time to go check it out on the website and do other forms of research. So there can be some other intervening steps that might not have been historically there. We have very high conversions when we get traffic to our website. So even though again most of our traffic to our website is also noncustomers the power of that TV signal is such that our conversion rates on the websites are absolutely industry-leading. We're typically north of 5% conversion rates which is 2 to 3x what the other folks would have just because of the power of the overall ecosystem. Still early days on platforms like Roku. So if you just thought about the number of homes that Roku is in I would say we convert a relatively small number of those homes to a sale. But if we can get them to -- if we can market to them get them to download the app get them to engage in the experience then we can start to see attractive return -- conversion rates. So we're in a learn mode on those platforms but like the power of those platforms to create a more interactive experience for the customer.
Operator
And we'll take our final question from Victor Anthony at Aegis Capital.
Victor B. Anthony -- Aegis Capital -- Analyst
So Mike you talked about I guess the foremost headwind for the business is really just a choppy retail environment. Is there any relief in sight for that? Or is this just a sustained norm? And second on Zulily you talked about the low marketing spend efficiency we talked about for quite some time now. I know some other companies in the space have kind of called out there are changes that Google has made either on the mobile side or on the desktop as well. Maybe you could just give us a little bit more detail in terms of what's driving that marketing spend efficiency. And at a higher level for Zulily is there any sort of structural I guess issue with the model that's probably contributing to the -- I guess the decelerating growth that we're seeing in the business?
Michael A. George -- President, Chief Executive Officer & Director
Thanks for the questions. So on the QXH side on the choppy retail environment. I do think -- don't think that's a new norm. I do think we're in an unusually tough cycle with apparel accessories and footwear in negative growth territory. They were not in negative territory last year. So we live in this funny year where we see a growing separation in performance of different retailers heavily driven by what segment of retailing in you're in. But clearly folks that are in the sort of call it mid-tier fashion and mid- to upper-tier fashion and beauty business we're in a tough cycle. Do I think that cycle continues forever? I don't. When does it evolve? When does it change? I don't know. It looked different last year I suspect it will look different in the future.
I separate that from just the -- I talked about both the choppy retail environment and the sort of changing industry context. The changing industry context is ongoing whether that's cord-cutting or price competition and we need to win in that changing context. But in terms of the sort of current chop it feels a bit exaggerated from what we normally see. It feels like an unusually adverse cycle. We by no means use it as an excuse for our performance. We need to do better even in adverse cycles but I do think that can come around over time. On the Zu side you hit on one of the issues. So I would -- if I were to oversimplify I would say there's kind of a couple of real marketing-related pressures at Zulily. One is just that our -- email has historically been a very powerful platform for Zulily to engage its 50, million 80, million 90, million prospect base. And that has become increasingly difficult especially with the kind of filters that exist on Gmail. It, just harder to consistently get to those customers.
We know that. We've been working for multiple years but in an accelerated way for the last year to find other ways to reach our customer beyond email. Certainly getting them to download our apps and engage with our apps on a daily basis engage with Facebook Messenger some of these other platforms are rising in importance. And we have one of the highest -- our percentage of sales done on apps is one of the highest in the industry at Zu also quite high at QxH. We think that's a real strength but it hasn't fully offset the pressure we see in e-marketing. And then the other big pressure we say -- see is more on the acquisition front where Facebook has just become a much more costly channel less effective for us. And we have been working diligently all year to try to mix to more favorable channels and just haven't quite found that formula. And so we do believe as we look forward given the depth of the pressures at Zu that we're not going to be able to market our way back to health.
We can do better in marketing than we're doing now but we think these pressures are such that we can't rely on marketing in the same way we've relied on it in the past. And that's where we've got to work harder on product freshness and we got to work harder on customer experience and by doing that do a better job of engaging our existing customers reduce the churn rate of our existing customers. And so I think to your question about is there a structural pressure? I think some of the formula that worked so well in the early years bringing in a lot of new customers on the basis of this very unique experience we've got to round out that experience as we move to appeal to broader groups of customers and grow our existing customer base. We have to have a better sort of everyday store which the team is working on in addition to our daily events. We have to do better with returns and shipping times and the team has a good plan for doing better with returns and shipping times. We have to again build up this message of transparency and trust which we're doing with our Best Price Promise. And we've got to round out the product assortments. And so having pilots like Nike on the platform is a real wow factor for our consumers. So it's not a short-term fix. There's a number of things we need to do. We do believe the intrinsic importance of the brand what it represents the amount of customers that engage with it that these to us are all addressable issues. And we can get back to growth having had a very pressured year but we need a number of things to work together well. So with that I think that was our final call so -- final question. So thanks to everyone for joining us today.
We appreciate your continued interest and support in Qurate and look forward to seeing you at our Investor Day next week. Thank you.
Operator
[Operator Closing Remarks]
Duration: 60 minutes
Call participants:
Courtnee Alice Chun -- Chief Portfolio Officer and Senior Vice President, Investor Relations
Michael A. George -- President, Chief Executive Officer & Director
Jeffrey A. Davis -- Chief Financial Officer
Gregory B. Maffei -- Chairman
Heather Nicole Balsky -- Bank of America -- Analyst
Brian J. Wendling -- Qurate Retail Inc. -- Analyst
Eric James Sheridan -- UBD -- Analyst
Oliver Wintermantel -- Evercore ISI Institutional Equities -- Analyst
Edward James Yruma -- KeyBanc Capital Markets -- Analyst
Alex Joseph Fuhrman -- Craig-Hallum Capital Group -- Analyst
Jason B Bazinet -- Citigroup -- Analyst
Victor B. Anthony -- Aegis Capital -- Analyst
