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Qurate Retail Inc (NASDAQ:QRTEA)
Q4 2019 Earnings Call
Feb 26, 2020, 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 Q4 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded February 26. 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 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 Form 10-K 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 note and schedules 1 through 3 can be found in our earnings press release issued today, which is available on our website. Today, speaking on the call we have President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note we published slides to accompany the earnings release and slides are available on our website.

Now, I'll hand the call over to Jeff Davis.

Jeffrey A. Davis -- Chief Financial Officer

Thank you and good morning everyone.

Beginning with QxH. Full-year 2019 net revenue declined 3% on 3% lower unit volume and ASP essentially flat. Adjusted OIBDA margin declined 50 basis points. As detailed on Slide 7 of our presentation on our website, the margin pressure was primarily due to headwinds from cost of sales, which includes inventory management costs associated with the accelerated exit of our Ingenious Designs and elevated freight and warehouse costs related to our network optimization initiatives and general freight rate increases. These cost of sales pressures were partially offset by improved product mix. Adjusted OIBDA also benefited from reduced TV commissions, partially offset by increased marketing. Fourth quarter performance was largely a continuation of 2019 trends. Net revenue declined 3% on 3% lower volume and flat ASP. Adjusted OIBDA margin declined 100 basis points, primarily due to the same cost of sales headwinds as in the full year. Adjusted OIBDA benefited from lower incentive compensation and reduced TV commissions, partially offset by increased marketing spend. In the fourth quarter, we incurred a $147 million non-cash impairment charge related to the fair value of HSN's trade name.

We continue to make progress on our network optimization project and we have begun shipping product from our new Northeast fulfillment center. We realized $160 million of cumulative growth synergies and $120 million of cumulative synergies net of one-time costs through December 31, 2019. The shortfall for our 2019 guidance will be captured in future periods. We reinvested a portion of these synergies into customer acquisitions and improved customer experience.

Looking forward to years 2020 through 2022, we remain on track to achieve our long-term synergy targets. In 2020, we expect QxH to face several margin headwinds through majority of the year due to the following factors: one, we have fully lapped the benefit of HSN's renegotiated carriage agreements; two, we have continued to experience reduced pack factor and duplicate facility and labor costs through Q2 as we complete remaining Phase 1 milestones of our network optimization; three, as we prepare to decommission the previously announced fulfillment centers, we will take additional inventory clearance actions to reduce associated transfer costs to other facilities; fourth, we will continue to take a disciplined approach to invest in marketing; and five, incentive compensation was favorable in 2019 and we expect it to be a headwind in 2020. To partially counterbalance these pressures, we are taking a number of cost actions, while continuing to realize the integration synergies and expect to increase product margins through strategic sourcing initiatives.

Turning now to QVC International. In constant currency, full year and Q4 net revenue grew 1% on 5% higher ASP, partially offset by 3% lower volumes and reduced shipping and handling revenue. For the fourth quarter and full year, adjusted OIBDA margin improved 40 basis points and 80 basis points respectively. For both periods, these gains were primarily from the close of operations in France, partially offset by lower product margins and higher fixed costs, which included expenses associated with the new international structure that Mike will describe shortly.

At Zulily, revenue declined 18% in Q4 and 14% for the full year, due to the factors that Mike will discuss shortly also. Full-year operating loss eroded substantially, primarily due to the $1 billion non-cash impairment charge Zulily incurred in Q3. For the fourth quarter and full year, adjusted OIBDA margin declined 270 basis points and 280 basis points respectively. The margin erosion primarily reflects the deleverage of supply chain and fixed costs from a double-digit revenue decline, partially offset by lower marketing spend as the management team remained diligent to a total rate returns.

At Cornerstone, excluding the Improvements business that closed in Q4 of 2018, revenue grew 1% in Q4 and was relatively flat in the fourth quarter -- sorry, for the full year, it was flat for the full year and adjusted OIBDA grew $6 million in Q4 and $3 million in the year. The business gained momentum in the second half of the year, led by gross margin initiatives in its home brands, lower marketing expenses and execution of operating model enhancements to reduce certain fixed operating expenses.

Looking at the business more broadly, we have not experienced a material impact from tariffs to date. We are pleased that a Phase 1 agreement was reached between the US and China and we'll continue to monitor developments.

Moving now to capital expenditures, cash flow and capital structure. Capital expenditures were $76 million in Q4 and $325 million for the full year on a cash basis, which is 2.4% of net revenues. The increase from 2018 was primarily due to the US fulfillment network optimization and continued investment in IT and commerce platforms. Total capital expenditure for the full year were below our guidance, primarily due to the classification of certain leasehold improvements as other assets. For 2020, we anticipate growth capex to range from $300 million to $320 million on a cash basis. Over time, we expect capex to return to a more normalized rate of 2 times to 2.2 times -- to normalized rates of 2% to 2.2% of net revenues.

We grew free cash flow on an operating basis at Qurate Retail in 2019 with an increased focus on working capital management, lower transaction-related costs and cash taxes and we're able to offset reduced adjusted OIBDA and higher capital expenditures. In 2020, we expect to further improve free cash flow conversion to reduce overall capital expenditures and additional working capital actions such as more closely aligning our vendor payment terms with our new Easy Pay-FlexPay every day program announced in January. We were an early adopter in this space years ago and have a long track record in managing our program with a customer default rate below 1.5% of net revenue.

Qurate Retail estimates that its average annual effective tax rate over the next three years will be in the range of 15% to 18% including federal, state and foreign taxes, net of tax credits generated by Qurate Retail's green energy investments. Our effective tax rate in 2020 and 2021 will be lower than this range and will increase significantly thereafter due to the expiration of certain green energy tax credits at the end of 2021. We are actively exploring new green energy investments that will generate tax post -- tax credits post 2021, but have not yet closed on these investments at this time. In addition, Qurate Retail's book tax rate in 2019 was impacted by various one-time items outlined in our earnings press release. In Q4, we issued a total of $500 million of senior secured notes in the retail bond market at a coupon of 6.25% for a duration of 49 years. At December 31, 2019, QVC's consolidated leverage, as defined in our revolving credit agreement was 2.4 times as compared to a permissible 3.5 times. More recently in February 2020, we issued another $575 million of senior secured notes in the institutional bond market at a coupon of 4.75% for a duration of seven years. Upon closing the February 2020 issuance, we reduced the total capacity of our senior secured revolving credit facility by $700 million, which now provides for a $2.95 billion of total capacity.

When our 10-K is filed later today, you will notice a material weakness in our internal controls. We've made significant progress on this front, fully remediating one material weakness in the UK and improving our overall IT access controls globally with the exception of certain access controls in Germany. We are committed to fully remediating these issues in the very near term.

Now, I will turn the call over to Greg.

Gregory B. Maffei -- Chairman

Is Mike yet -- Mike's on? Mike you ready?

Michael A. George -- President and Chief Executive Officer

This is Mike. Yeah, I'll take it. Thanks, Greg. Thank you, Jeff. Thanks, Jeff and good morning everyone. 2019 was obviously a challenging year for us for QxH and Zulily as those disappointing results continued into Q4. However, despite the revenue and OIBDA decline and the accelerated capital investment, we grew free cash flow at Qurate Retail Group for the year and importantly, we advanced a number of the strategic priorities we outlined at our November Investor Day. While we still have much work in front of us, we're confident that actions we're taking will enable us to capitalize on changing industry dynamics to lead at the intersection of retail, media and social offering a third way to shop that is highly differentiated from both brick and mortar and transactional e-commerce.

Before reviewing our business segments, let me briefly comment on the coronavirus outbreak. Our first priority has been to take appropriate measures to ensure the health and safety of our team members and partners in the region. Our sourcing and quality assurance teams are now gradually returning to work and factories are beginning to restart production. While the situation remains fluid, we do anticipate ongoing supply chain disruptions and are actively developing contingency plans to mitigate the impact of any shortfalls in product supply. Across the Company, Zulily has been the most affected to date since it carries minimal inventory and has a large China direct ship business. As a result, we've had to remove a number of daily events and product lines from our Zulily offerings, causing a meaningful sales impact. It's too early to assess potential sales challenges at our other businesses, but we will continue to take actions as developments unfold.

Turning now to our QxH business, our performance challenges in Q4 were largely consistent with the issues we described on our last call. Looking at our category performance, home revenue declined $40 million in Q4 and $128 million in the full year. The largest pressure in home, came from the closure of HSN's Ingenious Design subsidiary, which we've now fully lapped. We also saw continued pressure in the premium mattress segment as that business shifts to lower price alternatives. This erosion was partially offset by gains in gourmet food, in floor care including leading brands iRobot, Dyson, and Shark, and in personal care with Philips Sonicare and Waterpik.

In fashion, which includes apparel, accessories and footwear, revenue declined $17 million in Q4 and $49 million in the full year. This performance primarily reflects a tough industry cycle with all three categories down for the year according to market data from NPD. We're generally holding our share, but not offsetting industry softness. Earlier in the year, recognizing the weaker industry trends, we reduced our inventory purchases for the second half of the year and cut back Q4 apparel airtime. Beauty revenue declined $23 million in Q4 and $27 million in the full year. We're seeing weakness in a few of our largest brands as we face a highly competitive marketplace with expanding distribution and slowing industry growth. We continue to focus on diversifying assortments with good growth in emerging brands like Beekman 1802, Lancer and Belle Beauty.

Consumer electronics revenue declined $6 million in Q4, but increased $12 million in the full year. While we saw strength in wearables including FitBit and audio with brands such as Bose, we continue to see erosion in laptops, tablets and TVs, which also puts pressure on ASPs. In jewelry, revenue declined $11 million in Q4 and $71 million in the full year, driven primarily by reduced airtime, which was partially offset by improved productivity. Our focus on increasing sales per minute by concentrating our airtime on a handful of highly engaging jewelry events that drive tune-in, enabled us to substantially reduce the rate of decline in the category.

Now, turning to the customer view. Overall, the decline in customers in the last 12 months is consistent with the revenue decline. For existing customers, count declined 3% in Q4 and 2% for the full year. For new customers, count declined 2% in Q4 and was down slightly in the full year. The Q4 decline is a reversal from recent growth trends, primarily due to a difficult comparison in Q4 of '18 when we grew new customers 10% at QVC. For reactivated customers, count declined 2% in Q4 and 4% in 2019, driven largely by the softness in apparel, which is a key category for this cohort.

As we outlined at Investor Day, our overall performance in 2019 was impacted we believe by three key factors. First, and most importantly, we're operating in a rapidly changing industry context with long-term headwinds from declining linear TV viewership and growing brand proliferation, which leads to shorter and more volatile product lifecycles. In fact, 10 of our larger brands, which represented just 12% of 2019 demand sales accounted for more than a 100% of our 2019 sales decline. While it's a natural part of our business that most brands hit a peak level and then begin to decline, we're finding that it is taking more to get new brands to scale fast enough to fully offset these large brand declines and momentarily, I'll share more on our product curation strategies to respond to this challenge. And while these industry pressures are real, this changing landscape also creates new opportunities for us as consumers access more and more types of media in more ways than ever before and the growth of transactional e-commerce has led to a desire for alternatives that are more authentic, engaging and experiential, which we believe taps into our core DNA.

Second, exacerbating these long-term trends, we saw a cyclical slowdown in fashion and to a lesser extent in beauty, which together have been our top growth drivers for several years. And finally, we experienced some short-term pressures, a combination of organizational disruption associated with all the changes we made along with purposeful choices to close down the Ingenious Design subsidiary due to its high cost structure and invest in restructuring our fulfillment network to improve service levels and lower cost over the mid-term. But a despite a disappointing year, we believe our platform is as relevant today as ever with its enormous global scale, the unparalleled consumer reach with low marketing spend, the focus on highly curated product discoveries offered at compelling values with flexible payment options, immersive video reach experiences and intense social engagement, all leading to astounding customer engagement and loyalty. The recent explosion of direct-to-consumer brands, coupled with the inevitable pressures those brands are now facing at the cost of sustaining customer reach is proving so high, both highlights customers' desire for something more in the shopping experience and also underscores the efficiency and attractiveness of our brand-building platform.

As we shared at Investor Day, we're intently focused on accelerating five strategies that will enable us to take advantage of what this platform has to offer. First, curate special products at compelling values. Second, extend video reach and relevance. Third, reimagine daily digital discovery making our websites and apps every bit as engaging and sticky as our traditional live TV experience. Fourth, expand and engage our passionate community, reaching new customers and increasing engagement of our existing users through loyalty, personalization and expanded performance marketing. And finally, deliver joyful customer service by meeting our customers' rising delivery expectations and injecting moments of joy throughout the service journey that deepens our emotional connection to the brand.

This morning, I'd like to provide an update on the first two, curating great products and distributing our content everywhere the consumer accesses video. Our business starts with special products at amazing values and so our product curation strategy is at the center of everything we do. To win in today's environment, we need to increase product differentiation, drive a greater pace of product innovation, both ourselves and with our vendor partners, increase our pace of expansion into adjacent and underserved categories, expand our capacity for product discovery and devote more resources to nurturing brands through their life cycles. We're ramping our proprietary and exclusive offerings, creating differentiation and driving innovation by expanding our design, development, and discovery capabilities across categories. 2019 successes included the launch of Northern Nights and South Street Loft Bed in a Box programs in home, Potion 54 by Jill Martin in beauty, and G by Giuliana in apparel among many others. In 2020, we will bring the launch of at least 10 major new brands developed through our in-house design and development capability, including the relaunch of IMAN at HSN next week.

We're tackling underpenetrated categories like athleisure and outerwear and where we feel we've underleveraged our strengths like size inclusivity. In 2019, we introduced key national athleisure brands as well as proprietary offerings including New Balance by Isaac Mizrahi, Merrell, Lug, and our proprietary zuda brand with three more proprietary launches coming in 2020. In outerwear, we saw great success with Nuage, Arctic Expedition and [Indecipherable] and further expanding our offerings in 2020.

And QVC and HSN have been leaders in size inclusivity for decades, offering virtually all fashion products in the full size range at one uniform price. Now, we're further expanding the range adding sizes 4X and 5X in many brands and in underserved categories like outerwear and activewear. In 2020 for the first time, we'll be launching brands that are designed and developed from the outset with a larger size perspective in partnership with two highly regarded body positive influencers. We're also taking steps to enhance our organizational focus on discovery and innovation. Recall in 2018 that we combined the QVC and HSN merchandise organizations to take a more holistic category view. In 2020, we're investing in more specialized capabilities to enable our buyers to spend more time in the market curating special finds and less time on administrative functions. Last summer, we conducted the Big Find, a nationwide search for the next big brands in beauty, fashion and jewelry with two successful launches from the search in Q4 and an additional 38 in Q1 alone with more to follow.

Now to win with special products, we also have to ensure that every item, inclusive of shipping and handling charges is offered at a compelling value relative to the market. In January, we took another big step forward in our value story by offering Easy Pay at QVC US and Flexpay at HSN on substantially every item we sell. This has been a popular -- this has become a popular payment option, especially among younger consumers as other retailers now provide similar programs, but typically at a much higher operating cost. We believe these product initiatives will prove instrumental in our return to growth, but we also acknowledge it will take some time for these programs to scale sufficiently to offset the erosion in some of our larger brands.

Of course, none of our product curation investments matter if we can't get these discoveries in front of the consumer, which leads me to our second priority, extending our video reach and relevance across platforms. While we face short-term pressures as cord cutting accelerates, we firmly believe we are entering a new era supported by multiple investments and innovations that will fundamentally reshape and enhance our unique video shopping platform and expand our potential customer base. The future of video shopping is increasingly about ubiquitous distribution, new methods of discoverability, more tailored and relevant lifestyle content and interactivity that puts the viewer in control of the experience. And so, let's go through each of these four components.

First, ubiquitous distribution. Simply stated, we need to be wherever the consumer accesses video content. While our MVPD homes have declined from a peak of 99 million in 2015 to 80 million today, the vast majority of consumers in our target demographic still have a pay TV service. And so our multi-year investments in five networks with attractive channel locations still provides a unique advantage over every other retailer. And as early as 2012 we began introducing over-the-air distribution, which has grown rapidly as an alternative to pay TV and today we're in approximately 11 million OTA homes. The growth of virtual MVPD alternatives also known as digital skinny bundles, provides another distribution opportunity and in Q4, we launched on AT&T TV NOW and we anticipate adding additional major distributors this year.

We're leading innovation in over-the-top offerings with multiple partners. We've teamed up with the major streaming service device providers including Roku, Amazon Fire TV and Apple TV. Last year we launched a greatly enhanced streaming app on Roku and Amazon that combined the best QVC and HSN content. With Roku, we saw a 58% growth in our net app installs over the prior year to 2.9 million by year-end and we rank among their Top 25 free TV and movie apps out of an overall universe of 16,000 channels. We're partnering with TV manufacturers to offer our linear streams directly, including recently launching QVC and HSN networks on Samsung TV Plus, ZooMoo and LG Channel Plus. We're working with our cable distributors to access homes that only subscribe to their broadband offering such as to Comcast Flex streaming service, an alternative to their Xfinity platform for homes without a video subscription.

We continue to focus on digital video aggregators like YouTube, Instagram and Facebook and of course, we're also focused on our own digital platforms and have seen significant growth in viewing minutes of our linear feeds on both our web and app platforms and we're in the early stages of exploring relationships with other programmers and audience aggregators to leverage their access. For example, in September, we launched our most popular program In the Kitchen with David on CBS's new lifestyle OTA and streaming network DABL. We expect to be announcing new relationships later this year that will introduce us to other new audiences. The second component of the video shopping platform of the future is discoverability. Direct search interfaces, voice-activated remotes and connected smart devices are all changing the way viewers find content, compounded by the growing fragmentation of devices, and services. So to address this shifting landscape, we're leaning into new ways to develop audiences working with our partners to achieve prominent positioning through initial channel selection, featured carousels, addressable advertising, banners, screen savers, tune-in messages, and electronic program guide placements. Leveraging these types of techniques has led to some of our early wins with Roku.

The third component is ensuring we're offering relevant tailored content that fits the platform and the audience. We've significantly increased our investment in a variety of new shoppable and lifestyle content as I've shared on recent calls.

Finally, we aim to be a leader and an innovator as television platforms become increasingly interactive, creating whole new possibilities for the video shopping experience. We're already seeing the power of putting the user in control of the content as she is when watching our current streaming app on Roku or Amazon. Later this year, we anticipate taking the next step, bringing the market a holistic shopping and lifestyle streaming service with a pay-TV partner that will create an even more immersive and convenient retail experience. We remain intently focused on our strategic plan to return to profitable growth at QxH and compete in this dynamic retail and media marketplace. We're working on a number of initiatives, which makes the timing of a return to top line growth, hard to predict, but we've also recognized several macro factors that we'll need to navigate in 2020 including the coronavirus impact, the Olympics, and the US presidential election.

However, even with these expected sales pressures, we do anticipate that with the progress we're making on margins, costs, and synergies in the later part of the year, we will start to see as Jeff noted a moderation in the OIBDA yield pressures that we began to experience in the second half of '19. Coupled with our additional focus on working capital efficiency and prudent capital management, we anticipate seeing improvement in our free cash flow conversion this year as well.

Now, let's shift to QVC International. We continue to be encouraged by our solid international performance, led by QVC Japan, where the team drove strong broad-based execution across products and programing, effectively mitigating the challenges of the consumption tax increase that went into effect October 1. As we look forward, QVC International will continue to focus on margin enhancement initiatives including rebalancing the promotional activity and optimizing airtime, product mix, inventory efficiency and TSV margins. To support our strategies to drive long-term growth in international, we recently announced a new international structure with strategic investments in new cross-market teams to drive digital growth, enhanced performance marketing and brand development, deep and advanced analytic resources and drive regionwide merchandising strategies and vendor partnerships.

Turning to Zulily. Their performance remained highly challenged due to continued headwinds in customer acquisition costs along with lower purchase frequency from new and existing customers. And while Zulily faced these challenges on several dimensions, compounded in the short term by the coronavirus outbreak, we continue to see longer-term opportunity. We believe Zulily serves a large addressable market of consumers who are willing to trade speed of delivery for meaningful product savings. To address the current challenges, we continue to add top talent in the organization, including in just the last several months hiring a new Chief Merchant, a Chief Marketing Officer, a leader for performance marketing, a leader for new business development, and a leader for machine learning and data, all of them bring strong backgrounds in innovating across retail, technology and customer experience.

We have remained disciplined on marketing returns and reduced marketing spend 11% year-over-year in Q4. We'll continue to experiment with new marketing channels to find more efficient acquisition vehicles. On product, the new Chief Merchant and business development leader are highly focused on acquiring new brands and products, both leading national brands and unique finds. These product and market initiatives are combined with actions to improve the customer experience. In October, Zulily launched its best price promise as a foundation to increase transparency and earn customers' trust. We're also redeploying savings from our reduced marketing spend into new pilot shipping and return programs and we've improved site functionality in areas like product search, shop by category and homepage videos. Finally, we'll also benefit from cost actions taken last summer and will maintain a disciplined focus on cost management going forward.

At Cornerstone, we've built momentum in the second half of the year, led by strength in the home brands. Ballard Designs generated record Q4 revenue highlighting the success of its retail stores. Grandin Road delivered record Q4 OIBDA, driven by seasonal business. As we look forward, Cornerstone will be focused on sustaining momentum in home brands, particularly with Ballard's retail expansion, Frontgate's outdoor assortment, and Grandin Road's home furniture and accessories.

In summary, while our 2019 and Q4 results were disappointing at QxH and Zulily, we remain resolutely focused on our strategic plan. We are confident in our business model and our core strengths of curated discoveries of immersive video-rich experiences and the ability to aggregate live audiences of highly engaged customers across multiple commerce platforms.

And with that, I will turn it over to Greg.

Gregory B. Maffei -- Chairman

Thanks, Mike and our slightly flipped script. Let's review our capital allocation for 2019 across the areas we had previously mentioned.

First, we are investing in the business for the future. We deployed $325 million in capex in 2019. It was a little bit elevated due to some IT and fulfillment center initiatives which will start to pay back at the end of this year and further ramp in 2021, part of those obviously will owe to our HSN integration. We expect capex to be lower in 2020.

Second, managing our tax exposure. We repurchased $98 million of MSI exchangeable bonds and hedged our remaining exposure through total return swaps.

Lastly return of capital to shareholders. We repurchased $392 million of QRTEA A shares. Given the volatility of the stock and the results, we remain cautious on the buyback. While the business is experiencing some headwinds now, we still know it generates strong free cash flow and we will prudently and opportunistically allocate it.

Please mark your calendars for our Annual Investor Meeting in New York on Thursday, November 19. We appreciate your continued interest in Qurate Retail.

And operator, now I'd like to open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll go first to Eric Sheridan at UBS.

Eric Sheridan -- UBS -- Analyst

Thanks so much for questions, a lot in there. So maybe two, if I can. On the virus disruption to the inventory and sort of your food chain, is there a way to quantify what you're seeing of how that might translate into headwinds to revenue either in Q1 or Q2. Obviously, it's a moving situation, so nobody has an edge probably much beyond those types of time periods. But is there a way to quantify as what you're seeing in real time, so we can translate into what kind of headwinds you're seeing as potential for the business going forward?

And then to Jeff's part of the commentary, there was a lot to unpack in there. Just want to know if we can better -- get some better granularity on sort of the headwinds and tailwinds without guidance per se, but as you look out to 2020 and your lapping against some things there were headwinds and tailwinds in the margin structure in the business,how to better sort of throw some guardrails around that? Thanks so much guys.

Michael A. George -- President and Chief Executive Officer

Yeah, thanks, Eric. I'll take the first one and then Jeff will take the second. On the virus disruption, it is very hard to assess the impact. So today, I would say everyone's best guess is that we're looking at a three week to four week in production given the time the factories have been closed, maybe another four weeks to six weeks transportation risk given the various bottlenecks that are anticipated. So, clearly a slowdown in getting products to all of our markets.

How quickly those factors were able to ramp back up, whether there are future outbreaks, and then most importantly, our ability to shift out of the products we were anticipating coming and leaning into other products, all impact the results. So fortunately with the QVC and HSN models, where we're making decisions everyday as to what items to script on the show, if an item's not available, we can go to something else.

So in the short-term, we see relatively limited sales impact if some of our big, today's special value or other really significant programs were to get materially delayed, we would unlikely be able to adjust enough to fully offset that pressure, but at this point, it's a little too early to see that. So, we expect some impact, very hard to dimensionalize if it will be significant or not, with the exception of Zulily, which as I mentioned has seen an immediate sales hit on top of the base sales pressures they've been experiencing because they have a more immediate relationship to those supply pressures.

And then Jeff, I'll let you take the second question.

Courtnee Chun -- Chief Portfolio Officer and Senior Vice President, Investor Relations

Mike, I think he is having some technical difficulties if you want to take that one.

Michael A. George -- President and Chief Executive Officer

So, I think your question, Eric, was just around kind of headwinds and tailwinds in 2020. So, I'll try to summarize it at a high level and if Jeff can get back on, he can add to it. The biggest pressure point is network optimization, which is causing a negative impact on both the freight and fulfillment lines. That pressure does get better later in the year, but we do expect two quarters to three quarters of pressure with some improvement as we get late in the year. That ultimately flips to a positive impact on the P&L, but we'll have pressures through a large part of this year and then that gets better. The other pressures on the P&L are just the fact that we didn't pay incentive compensation last year, so we'll have some incentive costs built in our fixed costs.

As you know, we continue to invest in performance marketing, that's a little bit more of an evergreen investment. We've generally been able to more than offset that through the synergies. So, I would say the big variable in the year, we feel pretty good about product margins and the work we're doing to improve product margins. And so, the big variable in the year is both sustaining the investment in performance marketing and getting through this bubble of costs with network optimization, which will be negative in the front half, start to gradually turn more positive as we get later in the year.

Eric Sheridan -- UBS -- Analyst

Thanks.

Operator

We'll go next to Edward Yruma at KeyBanc Capital Markets.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hey, guys. Good morning. Thanks for taking the questions. I guess first more of a housekeeping question. Just as we do some math on 2019, how much of a lift was the closure of France to gross margin and just kind of trying to think about in context as you will lap it in March? And then second, I know you have some comments on expanding Easy Pay. I guess, what percent of sales is Easy Pay today, where do you want it to get to, and just help assure us since you went through some of the difficulty issues I think with some sloppy pay behavior about two years ago? Thank you.

Michael A. George -- President and Chief Executive Officer

Let me start with the Easy Pay question. So, we do use Easy Pay. We've offered it on a substantial number of our products over the years, and I'm just speaking to the US market, now. It's a little different internationally. We did make the decision at the start of the year to offer it on substantially all items. Customers then have a choice as to whether they take that offer or just pay full price and some do both. So we don't -- when we think about impact on the P&L of expanding Easy Pay offerings, we don't necessarily see a substantial -- we don't anticipate a substantial impact from that program because it's largely trying to codify where we've been going previously, which is again make it broadly available as a consumer benefit of shopping with Q and H.

So, so to me that's the new normal. We feel good about that program. We think it just enhances the value offering to the consumer, gives us one more reason to shop and to make the experience easy, because you don't have to worry about which item is going to get Easy Pay. So, effectively kind of universal Easy Pay as a go-forward approach at Q and FlexPay at H. I don't know if Jeff is back?

Gregory B. Maffei -- Chairman

And Mike, Jeff is back on the line.

Jeffrey A. Davis -- Chief Financial Officer

Yes. [Speech Overlap] France.

Michael A. George -- President and Chief Executive Officer

We can. You can take the France question?

Jeffrey A. Davis -- Chief Financial Officer

Okay. I did not hear the France question. I was getting redialed back in. Could they ask the question one more time please?

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Yeah. I was just trying to understand, I know you cited in the gross margin commentary and the press release that France did -- the closure of France, that was a lift to gross margins. Trying to understand kind of what was the aggregate impact in 2019, and then I know you're going to begin to lap the closure I think in March of this year, so trying to understand the dynamics there? Thank you.

Jeffrey A. Davis -- Chief Financial Officer

Yes, thank you. About 50% of the margin improvement overall was related to France and the closure that occurred earlier this year.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

We'll move next to Oliver Wintermantel at Evercore ISI.

Oliver Wintermantel -- Evercore ISI -- Analyst

Yeah, thanks. Thanks very much. I had a question that you mentioned that free cash flow, you expect that to improve in 2020, and I was just wondering to see what the use of that free cash flow would be in 2020?

Gregory B. Maffei -- Chairman

Well, why don't you -- this is Greg. Mike, why don't you just -- if you want to add anything about the operating free cash flow and how you feel about it and then I'll talk about uses.

Michael A. George -- President and Chief Executive Officer

Yeah, I would say, we feel really good about our ability to continue to expand free cash flow conversion in 2020, number of programs, in addition to all of the efforts we're doing to strengthen OIBDA performance as we move toward the latter part of the year, a number of programs to improve working capital efficiency, some new trade payable terms among other actions coupled with just the lower level of capital spend as we move through some of the bubble of our network optimization work, as well as somewhat lower payments to our distribution partners. So, we think this can be a good year for expanded free cash flow conversion. And then I'll let Jeff talk -- I'll let Greg talk about use of cash.

Gregory B. Maffei -- Chairman

So, I think we outlined the places where we're focused, first, investing in the business, and second, managing our tax exposure. So, let's talk about that one for a second. We have, as you know, gone out and repurchased a bunch of exchangeable bonds. We've hedged a bunch. And I think we'll continue to look at ways to manage that down and potentially including investing in other kinds of tax advantaged investments for the so-called green investments that we've made to-date that we think have generated very attractive IRRs and returns on capital. As far as returning capital to shareholders, we remain cautious. There is volatility both in the business and in the marketplace, and we'll wait for the year, as the year goes through -- on rather, what we do with capital in that regard.

Oliver Wintermantel -- Evercore ISI -- Analyst

Great. Thanks very much.

Operator

We'll take our next question from Heather Balsky of Bank of America.

Heather Balsky -- Bank of America -- Analyst

Hi, thank you for taking my question. I was hoping you could talk a little bit more about your shipping and handling strategy. You spoke a little bit at the November Investor Day, and also it looks like shipping and handling at QxH was down a bit in the fourth quarter just based on my math. So, just curious what's going on there? Thanks.

Michael A. George -- President and Chief Executive Officer

Thanks, Heather. I would say we just continue to evaluate both at an item level and an event level how we want to deploy shipping and handling. We have gradually reduced shipping and handling revenue a little more substantially in Q4, as we have focused on making sure that we are competitive. It kind of takes a couple of forms. It takes in some -- one form is that we include shipping and handling with the price of the item, where we think that that's sort of a market standard to do so, and then we also run events, all day events, flash events, where we'll offer free shipping as a benefit. We expect that to be higher in Q4, we definitely see that. The promotional intensity goes up every Q4. It was high a year ago. It was high this year compounded by the short selling season.

And so a little bit more intensity on those key weekends to make sure you're as competitive as you could be. I would note that even with a pullback in shipping and handling revenue as we got more aggressive on promotions, you'll note that our impact of product mix or product margin was about flat. That's very slightly down, and that shipping and handling cost shows up in product margin.

So, we were able to offset the shipping and handling investment as improvement in product margin rate. So, we felt good about our ability to be pretty competitive in the marketplace, but also offset some of that shipping and handling investment in product margin rate. And so, as we move forward for us, it's all about continuing to work with our vendors to make sure we have the most optimized costing we can get and then to make the right surgical choices as to how to bring that item forward and what mix of price promotion estimates we use to deliver value to the consumer, but also get to the margins that we need.

Gregory B. Maffei -- Chairman

If I could add to that also, Mike, you bring up the point working with our suppliers and supporting a number of these events. One of the elements that supports us from a product margin also is when the vendor will provide us support for shipping and handling on certain items vendor events, which also helps us to maintain that overall margin rate.

Heather Balsky -- Bank of America -- Analyst

Thank you. And as another question, you talk about 10 brands representing 12% of your sales and all of your decline. Can you talk about the other 88% of your business and what you're seeing in different categories across that? How do we -- is the rest of the business growing then?

Michael A. George -- President and Chief Executive Officer

So, I mean the math is the rest of the business is growing in aggregate, right, those 10 are more than 100% of the decline. And again, I want to be a little cautious with that fact because you always have big brands that are in decline. It's just the nature of this business. It's all about moving brands up a lifecycle and then managing them down a lifecycle, but I would say, right now we're feeling sort of the double pressure of a little bit greater pressure from that sort of top brand phenomenon decline, a little bit compounded this year by the fact that a couple of those brands are associated with this Ingenious Designs business that we closed, so they were kind of unanticipated exits and those are obviously much harder to manage. So, a little more pressure from the top brand decline.

And while the other brands are, in aggregate, growing, they're just not growing at quite the rate to get us to positive total growth. And that's where kind of all the actions I described on product curation are all about feeding the top of the funnel with a broader range of brands, getting more creative about how we nurture those brands through the lifecycle, knowing that it's a crowded marketplace for brands today and just making sure we're using the platform in the best way to tell the best stories to find even more unique offerings like through our Big Find program, more exclusive offerings to our earlier development programs, we just are finding that we need to -- none of those things are brand new to our arsenal, but we need to use those things at an even higher level of intensity to get to the most moderate declines among the top brands and more importantly get all the other brands to be growing at an even faster rate.

Heather Balsky -- Bank of America -- Analyst

Great, thank you.

Operator

We'll go next to Alex Fuhrman at Craig-Hallum Capital Group.

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

Great, thanks very much for taking my question. Wanted to ask about your different product categories. It seems like consumer electronics was up for you guys in 2019 at QxH, whereas the other categories were negative. I know it's early, but just looking into 2020, do you feel that there is sufficient innovation out there in the consumer electronics landscape for that product segment to continue to grow for you or do you think other categories might be taking over as leadership for you this year?

Michael A. George -- President and Chief Executive Officer

I think -- thanks for the question, Alex. I think it is early to tell. I wouldn't say that it feels that the innovation is so compelling that we're confident in that business. We tend to -- our market has always been that we'll have up years and down years with consumer electronics based on the cycle. And so, let's get everything else growing in a consistent way as we can and then we can either benefit from electronics or try to mitigate any negative impacts. I mean, certainly in some spaces, audio continues to be -- audio trends continue to be hot and new items there in wearables as well, but we have seen a slowdown in smart home, as that business just took off very rapidly, and now we're anniversarying those big increases in smart home.

And so that is, I would say, for now moderating, and of course, the places where we are seeing growth do tend to be lower ASP than the classic computer, tablets, TV market. So I would say it's a category we approach cautiously in 2020, not necessarily looking to huge growth, but also not sure we face huge pressure either.

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

Okay, that's very helpful. Thank you.

Operator

And we'll go next to Thomas Forte at D.A. Davidson.

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

Great. Thanks. Thanks Mike to your thoughts and comments as always. On the coronavirus, I wanted to ask about how should we think about broadly it's impacting the business from a disruption standpoints, disrupting the consumer, and then how should we think about it in geographies that are affected such as Italy?

Michael A. George -- President and Chief Executive Officer

Yes. Thanks, Tom. Yeah. It's -- it's a good question. It is hard for us to read. I would take a moment to recognize and appreciate all of our team members in Italy, We are headquartered in Milan, so they're going through a tough time right now and I'm grateful for that leadership team and all their efforts to make sure our team members and partners in Milan are safe. So far we've been able to operate the Milan business without disruption, but certainly taking it day-by-day and certainly our Japanese team members and China team members have felt the brunt of this as well.

I would say that to-date, we're not sensing any meaningful impact on consumer demand through our markets. So, we're not seeing the kinds of pressures folks would say brick-and-mortar businesses in Asia or folks who are heavily dependent on tourist trade, how they're seeing it. The wildcard for us is the one you hit on is. It just creates a substantially negative halo on consumer sentiment and obviously connected to that, we know our consumers are sensitive to the stock market. And so that intersection of stock market pressures and consumer sentiment pressures certainly could impact demand. We haven't seen it to-date, but depending on how this plays out, we can't rule out that risk.

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

Great. Thanks, Mike.

Operator

And we'll go next to Jason Bazinet at Citi.

Jason Bazinet -- Citi -- Analyst

I hate to belabor at this point. Can I just go back to the margin, international margins. In the release it implies that the France closure was sort of so large and it was offset by a bunch of items, but the aggregate margin expansion we saw was smaller than the impact that the France closure would have had if you didn't have all those other offsets, yet in the Q&A you said the France closure was 50%, if I heard you right of the overall margin expansion in international? I just got confused. Can we just go back to that and clarify?

Jeffrey A. Davis -- Chief Financial Officer

Yeah. So essentially, the France business which in 2018 would have had some losses associated with that business. As you are going through 2019, you would not have been incurring those losses as a result of the exit of that market in mid-March. So, that was actually a year-over-year sort of tailwind for us as we were going through the course of the year.

Jason Bazinet -- Citi -- Analyst

Yeah.

Jeffrey A. Davis -- Chief Financial Officer

The other offsets to that though were really for the international markets, somewhat in fixed costs as they were continuing to take actions with respect to their operating model. And as Mike had mentioned, some of the actions they were taking with respect to centralizing and regionalizing a number of their efforts.

Jason Bazinet -- Citi -- Analyst

So -- but at the end, just the losses that we were incurring in France must have been quite large. Is that the right takeaway that we just didn't see the full benefit because of those offsets? I just don't understand how you got 50% of the overall margin expansion was France related, it's more than 100%, is it not?

Jeffrey A. Davis -- Chief Financial Officer

No. No, it's not.

Jason Bazinet -- Citi -- Analyst

Okay, I'll take it offline. All right. Thank you.

Jeffrey A. Davis -- Chief Financial Officer

Yes.

Michael A. George -- President and Chief Executive Officer

Great. Thank you to all for your interest in Qurate. Thank you for your questions. As always we look forward to speaking with you on next quarter's call, if not before. Thanks very much to the team in Seattle, the team in Pennsylvania and here in Colorado. With that operator, I think we're done.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Courtnee Chun -- Chief Portfolio Officer and Senior Vice President, Investor Relations

Jeffrey A. Davis -- Chief Financial Officer

Gregory B. Maffei -- Chairman

Michael A. George -- President and Chief Executive Officer

Eric Sheridan -- UBS -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Heather Balsky -- Bank of America -- Analyst

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

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

Jason Bazinet -- Citi -- Analyst

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