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Qurate Retail Inc (NASDAQ:QRTEA)
Q4 2020 Earnings Call
Feb 26, 2021, 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. 2020 Year End Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer. Please go ahead.

Courtnee Chun -- Chief Portfolio Officer of Liberty Media Corporation

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 statements contained herein to reflect any change in Qurate Retail's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based.

On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow 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 the earnings press release issued today on our earnings presentation, which are available on our website.

Today, speaking on the earnings call, we got Qurate Retail President and CEO, Mike George; Qurate Retail Group's CFO, Jeff Davis; and Qurate Retail's Executive Chairman, Greg Maffei. Please note we published slides to accompany the earnings release. These slides are available on our website.

Now, I'll turn the call over to Mike.

Michael A. George -- President and Chief Executive Officer

Thank you, Courtnee. And good morning, everyone. Thank you for joining us today. We had a very strong finish to the year. We sustained topline growth across all business segments as our team responded with agility to meet our customers' rapidly shifting needs in the stay-at-home environment and to adapt offerings and events in the phase of substantial product shortages and shipment challenges, all while significant pulling back in our commercial activity.

We grew robust new customer growth and made good gains in our long-term strategic priorities in all businesses. We maintained tight financial management and grew strong overall net revenue, OIBDA and free cash flow growth and returned capital to shareholders, even as we invested to keep team members safe and provide them with enhanced pay and benefits.

Additionally, we continue to support our community's well-being with innovative programs such as our Small Business Spotlight, in partnership with the National Retail Federation Foundation to help small businesses challenged by COVID-19, including a second phase locked in August supporting backlog businesses. We publicly announced new corporate responsibility commitments with time down measurable targets focused on protecting our environment, curating products responsibly and championing inclusion and empowerment. I'm particularly proud to report that we received a 100% rating on the Human Rights Campaign's 2021 Corporate Equality Index, the nation's foremost benchmarking survey measuring corporate policies and practices related to LGBTQ workplace equality. This recognition is a credit to our entire team, and it is their commitment to fostering a culture where all team members can do their full service and do their best work.

We are grateful for the commitment and the resilience every team member demonstrated this past year, while grappling with all the personal challenges this pandemic has brought. In appreciation, at year-end, we awarded a special one-time bonus to all regular and temporary team members who are not eligible for other bonus or success share programs.

Now turning to the numbers, in Q4, we grew revenue 6% and OIBDA 13% in constant currency and for the year, we grew revenue 5% and OIBDA 8%. We generated free cash flow of nearly $2 billion for the year, up more than 200% supporting our ability to return cash to shareholders through special dividends and share buybacks.

We continue to experience rapid new customer growth across all business units and all markets with more than 2.8 million new customers added in Q4, that's up 33% last year gaining the total new customers for the year to 7.6 million, a 25% increase.

COVID-19 has pushed millions of consumers to interact with retailers and brands online, and many will continue to do so long after the pandemic is over. We believe this is a fundamental long-term shift in consumer behavior. And given the vast array of online shopping choices, consumers now have a record acquisition and stable retention of new customers speaks powerfully to the relevance and the stickiness of our platforms and our experiences.

Now taking a closer look at Qurate Retail's performance in the fourth quarter, as in the prior two quarters, we delivered outstanding growth across all home categories, partially offset by continued softness in our fashion businesses, otherwise, note that we did gain share in apparel, accessories and beauty in a down market and a steep decline in consumer electronics.

Excluding consumer electronics, net revenue of Qurate increased 6% in the fourth quarter. The moderation in revenue growth from the prior two quarters reflected two main drivers that are unique to Q4. Firstly, a late season snow storm impacted our Northeastern fulfilment centers, which forced us to move up cutoff dates for guaranteed Christmas delivery, costing us a final weekend of quality selling. Second, we had significant product shortages in late November and December. These shortages were driven by vendor challenges keeping up with rising demand, compounded by chip shortages, factory delays, scarcity of shipping containers in Asia, and significant backlogs at the West Coast ports.

As the business that focuses on key items featured for the day, rather than broad, always-on assortments, last-minute shortages in these key items can be highly disruptive. While these shortages were up across many categories, these had the greatest pressure in electronics, which normally represents over 20% of our sales in Q4, about double the normal mix. As a result, we are unable to meet demand for smart home items, tablets, and audio products.

Additionally, in terms of sub-categories, such as gaming devices that were particularly strong in the market, we intentionally don't have a meaningful presence given an unattractive margin profile and customer base that is typically lower lifetime value than our target demographic. While the electronics challenges significantly impacted our revenue growth, it was not a meaningful impact on our OIBDA growth, due to the lower margins on our products.

Looking ahead, we do not believe that the impact of product shortages to 2021 will be really as significant as they were in Q4. We expect the global supply chain will begin to stabilize and in the interim, we're taking stronger actions to increase our oversight of the inbound product sales from our vendors.

Additionally, there are much smaller mix of electronics and plus of course, three quarters of the year significantly reduces our exposure. We drove strong growth in new customers at QxH at 18% in the quarter, especially impressive in light of the consumer electronics decline as that category brings in the largest share of new customers most holiday seasons. Excluding electronics, new customer build is 36% and over 60% of new customers in the quarter came in organically. Even going directly to our websites or customer service agents or finding organic search or organic social with the remainder required discipline investment and performance marketing these results highlight the combined power of our TV reach, our brand reputation, our social presence and word of mouth coupled with highly effective digital marketing programs. And we remain highly encouraged by both the quantity and the quality of new customers who are attracting.

Looking back at the customers acquired in the second and third quarters, 26% have made at least a second purchase within 90 days of joining that's slightly above last year's rate. And the percentage of these new customers who hit the 20 items purchase threshold is considered a best customer in just their first 90 days, it's similar to prior years. So in addition to a record number of new customers in 2020, we added more new customers who have already become best customers than any year in our company's history. We advanced our strategic priorities focused on driving sustainable, long-term growth in our global video commerce business.

As a reminder, our strategic efforts for both QxH and QVC International are focused around five themes, curating special products at compelling value, extending video reach and relevance, reimagining daily digital discovery, expanding and engaging our passionate community, and delivering joyful customer service. I'll briefly comment on a few of these priorities.

As part of our focus on expanding and engaging our passionate community, we continue to invest in enhanced customer acquisition, development and personalization initiatives to both increase our overall addressable customer base, and retain and enhance the stand of the key customer. Our efforts, included successfully testing new advertising programs, such as YouTube and TikTok to reach new audiences, building out our success with personalized content and email communications to increase customer engagement and spend, and expanding personalization on the website to create calls to action based on shopper browsing behavior.

We continue to expand video reach and relevance with the addition of new screening platforms including LG TV's Shop Time app, and Pluto TV, the leading free TV streaming service, and last month, QVC debuted on YouTube TV, which has more than three million subscribers. QVC the only livestream shopping channel on YouTube TV, which is available across smart TVs, streaming media players, smartphone apps, tablets, computers, gaming consoles and smart displays.

We continue to see strong growth of our own streaming app that integrates extensive live on-demand and original content from QVC and HSN. Downloaded through the app on Roku were up 63% in 2020, with average monthly viewers up 47% and downloads on Amazon Fire TV were up over 240% with monthly viewers up to 75% since the start of 2020.

Even as we see growing interest in our livestream shopping options, we also continue to benefit from high engagement with our traditional linear TV offerings, with the number of homes tuning in to QxH network per day up 14% year-over-year in Q4. The reach and relevance of our networks, and platforms and sophisticated development sources, marketing fulfilment and customer service support, makes it a highly attractive partner in stored and new brands alike as we make strides on our strategic priorities to curate special products at compelling values.

Our Big Find program, which in 2021 virtual helps us find new brands from upcoming entrepreneurs with compelling stories that we know our customers will love. From 2400 entries from 60 different countries 92 exciting new brands across apparel, accessories jewelry, beauty, home, culinary and electronics were selected for launch. And two thirds of the brand's owners identified as women or minority owned.

During the fourth quarter and full year, we also added many premium brand partners. For example, QVC U.S. expanded its close relationship with Estee Lauder to now include MAC, Clinique and in addition to the namesake brand. Based on this success, we also began offering Estee Lauder in the UK in the fourth. We also launched new, exclusive and timely collaborations with leading designers and entrepreneurs, such as Jason Wu size inclusive fashion line. And we created engaging new types of content, such as our original series, Curtis Stone's Travel, Cook, Repeat, which contributed to a 22% sales growth for the Curtis Stone Cookware brand this quarter.

Looking forward, we're leveraging our new merchandising organization, with the audit resources and structure we put in product discovery and business development to go after high growth, emerging products and categories that we believe will be highly relevant to the consumer this year.

In home these include new proprietary and exclusive cookware and home decor brands as we build out our global design, development and sourcing services and increased differentiation in the top trending categories. For the enthusiast increased focus on sporting goods, crafts, pools and spas and games. To cook specialty kitchen electronics from bread makers and ice cream makers to vacuum sealers, pasta makers, and wine sellers along with plant-based food and wine products. To stay healthy, connected, fitness equipment and wellness and hygiene products from macro search, to virus blockers, to EV sanitizing products, cleaning and disinfecting, air purification and face coverings. In the fashion side we're focused on expanding assortments in comfort at-home wear, athleisure and outdoor apparel and wear and wash and go footwear; and we're tapping into multiple growing beauty segments, including multicultural beauty and masking and salon beauty.

Coming out to QVC International, the team delivered exceptional performance in the quarter with double digit revenue and OIBDA growth, including revenue and OIBDA growth in every market and across most categories, and strong new customers acquisition of nearly 30%. The broad trends in our International business nears those in the U.S. with particular strength in the home categories and among the customers. However, product shortages were not nearly as significant, as most markets can face the same inbound supply constraints that we saw the West Coast ports.

Additionally, our International markets were making much smaller purchase orders and therefore have more flexibility to meet their needs. I would also note that electronics represents only 5% of the International mix in the fourth quarter.

We continue to see the benefit of having strong local teams in each market are highly tuned to country and regional needs, coupled with the test and learn mentality of our team's building into our global video commerce strategic priorities, with a particular focus on enhancing daily digital discovery, including developing a new live streaming app built around user generated content, which is now in beta phase, deploying dropship capabilities to expand digital only assortments and expanding digital marketing.

Our International team is also taking the lead on building and deploying new machine learning capabilities to optimize pricing and maximize airtime, productivity, among many other applications, capabilities we expect to rollout globally as they are developed.

Zulily is gaining momentum on it's great fresh buying strategy introducing Premier Brands, London Fog, Honest Company, Mango, Ann Taylor, Hunter Boots, HUGO BOSS, Vans and Macy's, along with over 1400 new longtail vendors launched in 2020, largely through China direct program. The team is also making good gains, diversifying its marketing program, with a new influencer-based affiliate network and strengthening its outbound marketing. Given this progress, we chose to ramp up our marketing spend in the quarter with an outstanding 74% new customer growth of Zulily and provided a strong foundation to continue growing into 2021.

Cornerstone had another outstanding quarter record revenue and adjusted OIBDA benefiting from the surge in home spending and we are excited about the long-term prospects for this business. Cornerstone had strong growth in home office, storage, outdoor living and home decor, coupled with a focus on building highly differentiated or proprietary assortments. We saw continued strong margin expansion as the team pulled back significantly and promotional activity along with improved marketing efficiency.

I'd like to close with a few thoughts on 2021. We're confident that all our hard work positions us well successfully navigate this fluid environment. Given the pace of vaccine availability, we will not reopen our offices before September at the earliest. Our highest priority remains the safety of our team members, both those working on-site, those working remotely.

I am excited for the year ahead of us, despite the uncertain background. The macro trends we're seeing possibly aligned with our capabilities and our strategic priorities. The increasing focus on live stream shopping from Amazon live to TikTok demonstrates that our business has never been more relevant than it is today. However, the key to success is not the latest technology of the flashiest influencers. It's building lasting relationships customer by customer. The fundamentals of great shopping have not changed. It's still about the power of human connection and the joy of discovery, wandering into your favorite shop.

On today's world, your favorite virtual shop, having interesting conversations, learning the story behind the products and getting inspired. The pioneers in both live stream shopping and leveraging influencers, we have the experience, expertise and global infrastructure to be the partner of choice for established the new alike seeking to reach customers at scale in an engaging way. And we have the financial strength to support our continued investment in innovation, both in how we reach customers with personalized messages and how we engage with them on new platforms and new technologies. I am confident we will emerge from the pandemic stronger, well positioned for sustainable long-term growth.

And with that, I'll turn the call over to Jeff.

Jeffrey A. Davis -- Chief Financial Officer

Thank you, Mike, and good morning to everyone. As Mike mentioned, we delivered strong revenue and OIBDA growth at Qurate Retail in both Q4 and the full year. So let's get started with QxH. Revenue grew through continued momentum and home category, expansion of our customer base and reduce customer returns. E-commerce revenue grew 6% and penetration improved 270 basis points in the quarter. For the quarter, total customers grew 6% with new growing 18%. We activated up 13 and existing up 2%. While we only have access to comparable HSN customer data going back five years, we believe this is the largest new customer class in the history of both QVC U.S. and HSN.

As illustrated on Slide 8 of our earnings presentation, we continue to have a sizable shift in category mix into home and away from primarily electronics and apparel. Revenue in home increased 17% as consumers maintain their focus on family and wellbeing with strong demand for fitness and wellness products, food and kitchen, electrics, home decor and furnishings and household, home environment and cleaning products.

Consumer electronics declined 17% primarily from the supply chain pressures that Mike has mentioned. Yet, we were able to satisfy customer demands in several higher price subcategories such as home office and computers and delivered increased overall product margins. With respect to our fashion categories, accessories grew 6% on the strength of lounge wear and non leather handbags. Beauty declined 10% reflecting lower demand for cosmetics and the pandemic. And apparel and jewelry remained challenged in line with general market conditions. But we did see pockets of strength in active wear and hollowware. Adjusted OIBDA grew 10% and adjusted OIBDA margin expanded 130 basis points.

Gross margin improved 200 basis points, which was led by 360 days point expansion and product margin. Approximately 50% of this expansion was split between -- equally between strategic sourcing initiatives and promotional pullback. Another 20% from reduced customer returns and 15% from pricing to partially offset freight surcharges and rate increases.

Given the impact of strategic sourcing work, I wanted to provide some additional background. Recall we initiated this work in 2019 as part of our overall synergy commitments. Our bringing QVC and HSN merchandise groups together, we were able to work with our vendors across both brands on the broad program to reduce end-to-end supply chain costs, optimize assortments around vendors offering the greatest sales and margin productivity and create new arrangements such as marketing funds to grow the brands.

We started to work in just two categories and expand it across all categories through 2020. We'll begin to anniversary the benefits of this work toward the middle of 2021. Finally, fulfillment cost increased 150 basis points primarily due to ongoing productivity challenges in our fulfillment centers from adhering to COVID protocols, freight surcharges and rate increases, which were partially offset by improved pack factor.

Operating expense with 10 basis points unfavorable, primarily due to higher customer service from longer average call times associated with executing our upsell initiatives and addressing shipping status questions partially offset from favorable conditions.

SG&A was 60 basis points unfavorable comprised primarily of 180 basis points, which was split equally across marketing and administrative costs. Marketing reflects our continued investment to acquire, retain and engage customers. Our total marketing spend while rising was still only 2% for QxH net revenue in 2020. We expect to increase the spend on average 50 basis points annually, if we see attractive opportunities to further grow at attractive returns.

Administrative costs are primarily due to our higher incentive compensation accruals. The marketing and -- this marketing and administrative pressures, the partially offset by 125 basis points of favorable bad debt expense which was primarily reflects lower customer default rates and fewer offered installment payments associated with the pullback in promotional activities.

In closing, QxH we remain on track to deliver 370 million to 400 million cumulative HSN synergy through 2022. And we are over 70% complete as of year-end.

Moving to QVC International, which continues to generate very strong across all categories with strong new customer gains and increased e-commerce revenue and penetration. My comments will focus on constant currency results.

Revenue grew 10% with strong growth across all markets led by Japan, Germany, and UK. Total customers grew 10% in the quarter with new up 28%, reactivated up three and existing up eight. 40-year QVC International attracted 1.2 million new customers, a record member for any year in the last 10. E-commerce grew 23% and e-commerce penetration increased 500 basis points. The business generated broad-based games in nearly every category led by home and beauty and adjusted OIBDA increased 16% and adjusted OIBDA margin expanding 90 basis points.

One more detail. So from a gross margin basis, it improves 120 basis points primarily due to higher product margins, which reflect reduced customer returns, strategic sourcing initiatives. We also benefited from favorable fulfillment expenses driven by sales leverage and a higher average selling price. These gains were partially offset by higher inventory obsolescence, primarily due to outlet store closures and proactive inventory management.

Operating expenses were favorable by approximately 50 basis points, primarily due to lower commissions, reflecting higher e-commerce penetration, sales leverage on fixed rate contracts and renegotiated carriage contracts.

SG&A was unfavorable primarily due to incentive compensation and marketing investment to acquire, retain, and once again engaged customers partially offset by lower administrative expenses and sales leverage.

Moving to Zulily. Revenue grew 11% driven by outstanding gains in home and hardlines as well as strong customer growth. Total customers grew 11% and new customers grew 74%. Adjusted OIBDA declined $7 million and adjusted OIBDA margin declined 170 basis points primarily due to higher freight costs from international product mix, seasonal wages at our fulfillment centers, as well as incentive compensation accruals and marketing expenses. These pressures were partially offset by improved product margins and leverage of administrative expenses.

Moving to Cornerstone, once again delivering outstanding results and record revenue and adjusted OIBDA. Revenue grew 30% driven by sustained momentum in the home brand on the strength of core home decor, outdoor categories. Garnet Hill returned to growth on the strength of home textiles and its cashmere products.

Adjusted OIBDA increased $28 million primarily due to product margin gains and home brands and reduce promotions, as well as leverage of administrative and marketing expenses. These games were partially offset or higher freight rates and surcharges.

So let's quickly review the balance sheet and cash flow. CapEx was $92 million in Q4 and $257 million for the full year, which is a reduction from our initial 2020 indications. For 2021, we anticipate CapEx to range from $265 million to $300 million. TV distribution payments were $56 million in 2020, reflecting an off year of a two-year cycle for multi-year contract renewals. While we do not provide forward guidance, fiscal 2021 will be higher than 2020. On average, our amortization of TV distribution payments average $130 million annually.

As Mike said, we generated nearly $2 billion of free cash flow in 2020. This outsize growth was driven primarily by improve cash flow from operations, working capital benefited from the extension vendor payment terms, pullback of customer installment payments, reduced inventories, and increased accruals for management incentive bonus and returns.

Separately, you recall, we also received $267 million, a pre-tax proceeds from the sale of a green energy investment in 2020. We expect to return to a more normalized level of free cash flow conversion in the range of 45% to 55%. Recall, we generated substantial working capital improvements in the first half of 2020 from pulling back on offered installment payments, which reduce accounts receivable and strategic sourcing, which increased accounts payable. These items are now in our base and will not serve as a source of working capital this year.

Finally, the accruals for incentive and other bonus compensation will be paid in the first half of the year. And these items will create more difficult compares for free cash flow in the first half of 2021. Looking at our debt profile. At the end of the year, we had nothing drawn under our revolver and $2.9 billion of capacity. We had $806 million of cash and cash equivalent. And our leverage ratio is defined by our QVC revolving credit facility with two times.

In closing, we have multiple paths to sustain net revenue and OIBDA growth. As we look forward to 2021, we believe the same digitally driven macro consumer trends will continue with elevated home demand, supporting new and occasional customer growth and upside with best customers as behaviors shift back to fashion. OIBDA margins are reinforced by rebalancing our category mix, continued realization of our strategic vendor management incentives -- initiatives and reduce commissions from increased e-commerce penetration and contract negotiations.

These positive drivers will partially offset -- will be partially offset by prevailing increases in freight and competitive labor rates has experienced across the industry and increase marketing to support customer acquisition, retention, and expanded audience development.

And now I'll turn the call over to Greg.

Gregory B. Maffei -- Chairman

Thanks, Mike and Jeff. Well, in addition to a strong operating performance in 2020, Qurate had superior capital returns in the year as well. We paid out nearly $1.3 billion in two special cash dividends. We also had a $1.3 billion dividends of an 8% preferred stock, which is trading at par now pretty, very nicely. We resumed our buyback in late November. The stock did move meaningfully higher as we reinstated our buyback and the material movement to stock ran through our great an impact our repurchase volume, you sometimes call that a high-class problem when your stock moves that quickly.

And finally, we also repurchased nearly 50 million of our MSI bonds for liability and tax management. In 2021, we anticipate using the above tools, all of them potentially to deploy a substantial portion of the free cash flow that Qurate will generate to our shareholders.

And with that, we appreciate your continued interest in Qurate Retail and hope you all safe and healthy.

And with that operator, I'd also like to open the floor to questions. Thank you.

Questions and Answers:

Operator

Well, thank you. [Operator Instructions] And our first question will come from Ed Yruma with KeyBanc Capital Markets.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys. Thanks for taking the question. I guess first obviously would be, looking back at 2020 would be significant, but new customers you're able to bring into the fall. How are they behaving kind of out of the gate? I would guess that they're probably buying different categories and maybe your cohorts from previous years and kind of how can you continue to encourage them to come back and become habituated users? And as a follow-up, I know you had a lot of favorability in 2020 from a returns rate perspective, you're able to reduce the amount of easy pay. I know you don't guide in 2021, but should we assume that we're going to see some normalization of those trends? Thank you.

Michael A. George -- President and Chief Executive Officer

Thank you, Ed. This is Mike. I'll take the first part of the question and maybe Jeff you can comment on the question around payables. We continue to just to be very encouraged by the new customer performance as I mentioned on the script, both in the quantity and quality that they're coming in, first thing is that they're coming in on every single category. And they're kind of giving very similar behavior to prior classes. So what they're buying is aligned with what everyone is buying. So certainly a more of a shift toward home, but we've been especially encouraged by the fact that we're actually seeing strong new name growth even in the down trending categories of apparel and beauty. So they're coming in on every category. As I mentioned about a quarter of them are getting to a second purchase within 90 days.

And I mentioned that metric as it's sort of the one metric that has really stood the test of time is that, if they repeat purchase within 90 days, they're probably going to stick with you and so we watched that metric carefully. That metric is at or above prior year performance over the life how they reengaging with us. And we're even seeing a smaller part of these new customers get to this 20 purchase threshold, which is that threshold we talk about, when you hit that threshold, you are absolutely an amazing customer for life.

So on -- all of those dimensions they're sticking with us, that's what we don't want to take it for granted. And so we are leaning into a lot of marketing programs. I would say a couple of big categories. We're looking at how to retarget new customers. I mentioned the new YouTube app, for example. So we'll where we target that new customer when she's on YouTube and present a really compelling video experience to her, that's very much good with the brand and kind of reminds her of why she made that first purchase at QVC or HSN proven very successful. We'll continue to innovate those kinds of programs.

And then just a lot of personalized outbound marketing both email and physical mail, because we're finding as others are, physical mail, that's a little disruptive right now, and people enjoy seeing a great culinary catalog as an example. And so we'll get those back in through a really cool culinary experience through this catalog. So really pleased with what we're seeing. And Jeff you want to take the second part?

Jeffrey A. Davis -- Chief Financial Officer

Sure. Ed, part of your question was around the promotional activities. We have a unique opportunity as is out of the pandemic, maybe a once in a lifetime opportunity to kind of reset some of the promotions that we were doing with respect to installment counts just being one element of it. It's really important to note that that's really just one portion of our overall strategic actions that you have taken from a promotional elements.

As we move forward, as we see customers continue to possibly rotate back into other categories, we'll continue to evaluate how we pulse those installment payments in order to continue driving demand overall. As you may recall that we really started this promotional pullback if you will in the second quarter of 2020. So as we kind of go through first quarter and going into second, we'll start to anniversary some of those items. But the one thing I'd want to leave you with is that a lot of these activities that we were taking was our opportunity to try and protect as much margin as we could given the shift from fashion and beauty into home.

As we start to see, hopefully that rotation back into some of our fashion and beauty categories. We'll have an opportunity to take a look at our overall margin mix and how we will continue to maintain and grow that the promotional activities may get a little more aggressively or may be less that our real decision is around trying to be very disciplined in our actions going forward.

And then the last piece just to go on just one moment is around returns, while returns have been favorable for us, it's really reflective of the categories and what you currently buying which has a lower return rate. But also if you think about this, they usually have a little lower margin rate associated with it. So kind of getting back to my early portion where I think about the rotation back into some of our fashion and beauty categories, which may have a higher return rate. We'll also get higher margins associated with that business offset that return costs.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Oliver Wintermantel with Evercore ISI.

Oliver Wintermantel -- Evercore ISI -- Analyst

Hi, good morning, guys. My question is more regarding QxH and on that with a strong decline. I think you said, CE was down about 17%. That must have been a very big help for the mix shift perspective for margins and then the shift to home probably in addition to that. So maybe -- if you could maybe give us some quantitative or qualitative information about what that mix shift due to margins, how much did that help?

Jeffrey A. Davis -- Chief Financial Officer

Mike, do you want me to take that?

Michael A. George -- President and Chief Executive Officer

Jeff, yes. Jeff, do you want to take that?

Jeffrey A. Davis -- Chief Financial Officer

Sure. So interesting enough as a result of the decline in electronics in the fourth quarter for us and given its overall penetration, customer mix was actually probably one of the last favorable items, but in our kind of waterfalls, we think about what was supporting product margins. Customer mix as result would have been making the last item. So, in our presentation, we outlined that strategic sourcing, promotional pullback, returns and pricing where some of the major drivers of product margin increase, category mix would have been a far distance to that, but it was modestly favorable for us.

Michael A. George -- President and Chief Executive Officer

I'd just add. I was going to say part of the reason that you don't see a bigger benefit because it was offset by that softness in fashion and beauty. So category mix turns out to be a relatively minor driver of the margin expansion.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Got it. Thank you. And I just two quick follow-ups on the balance sheet and cash flow. So, you mentioned CapEx, I think came in at about 1.8% of sales. I think that was below what you guys were talking about at your last Analyst Day. But then you said, it's going to go up, looks like it's two, 2.1% of sales next year. What is this for? Like, what are you spending on there? Is it fulfillment centers? Is it distribution capacity? Would like some more color there. And then I saw inventories were down eight, with sales up six or seven. With that, what is the inventory level going into the spring selling season? Thank you.

Michael A. George -- President and Chief Executive Officer

So, Oliver, I can't necessarily opine or give you from a standpoint of the percentage of net revenue. We don't give you any guidance for 2021. But as it relates to the absolute dollar of spend, that we're anticipating we continue to invest in our technology platforms. We still have a little more work to be done while so much less than in prior years in our network optimization. But it's really around continuing to expand capabilities in order to drive our strategies. But it's primarily in technology where the vast majority of the spend is then followed up by, sort of supply chain and fulfillment centers.

And then as it relates to inventory, coming out of 2020, our inventories were down part of that is resolved some of the supply chain challenges that we had. We continue to really be disciplined around how we're growing our inventories and really focused on our supplier base and how we support our sales growth. You would expect to see our inventories start to replenish as you go through the first half of the year as we get away from hopefully some of the supply chain challenges.

Oliver Wintermantel -- Evercore ISI -- Analyst

Got it. Thank you very much and good luck.

Operator

Thank you. Our next question comes from Eric Sheridan with UBS.

Eric Sheridan -- UBS -- Analyst

Thanks so much for taking the question. I'll just ask one, international that came in stronger than we had forecasted. You have this interesting array of countries that are in sort of various states of recovery or it's still in the midst of the pandemic. Any sense of consumer behavior across your array of international assets, what do you think that might tell you about how the business might operate as we go through 2021 and 2022? Appreciate the color. Thanks guys.

Michael A. George -- President and Chief Executive Officer

Yes, thanks. Yes, we've been just delighted with the broad-based strength of international. Every market is performing well, and most categories are strong. Hopefully, home is the strongest as it is in U.S. Especially in Germany and Japan, we haven't seen the same level of pressure on the fashion and beauty in the jewelry categories, they've held up better. UK, I would say, little more mirrors what you see in the U.S. in terms of consumer behavior and the category she is selecting. So it's a little hard to draw a lot of conclusions about what that means for the future. But we're surely focused on making sure we're staying close, closely to the markets to try to see early indicators of change.

Clearly the lockdowns in Europe were stronger more recently than in the U.S., so that may have provided some additional benefits to the businesses in Europe that the brick-and-mortar environment is a little more constrained. But I think as a main, we're just seeing sort of a more resilient consumer engagement across a broad array of categories. We've got exactly about the future a little hard to say, the breadth and strength of the business International Business competence, that they can sustain pretty healthy trends over the long term.

Eric Sheridan -- UBS -- Analyst

Thanks so much.

Michael A. George -- President and Chief Executive Officer

Thank you.

Operator

And moving on to our next question will be Jason Bazinet with Citi.

Jason Bazinet -- Citigroup -- Analyst

Thanks, two questions. On the gross dichotomy between international and domestic on a constant currency basis, is there any other driver other than the electronic system that you called out that probably hurt us more than international? And then my second question is, I think, there was a benefit to you guys, when the corporate tax rate dropped on the exchangeable debentures. If you can just sort of remind us how that works. I think it was a good guide is the Congress also true that if the tax rates go up, it becomes a slight negative in terms of what you have to pay back when those mature relative to the lower value of the shield? This lower federal tax rate you had over the past few years?

Gregory B. Maffei -- Chairman

Mike, I'll let you talk about the impact on the U.S. and then I'm happy to take on the details.

Michael A. George -- President and Chief Executive Officer

Thanks, Jason. As a growth driver, differential U.S. and International, so you are right consumer electronics was the biggest single component by far of the delta. The other difference is the fact that in Germany and Japan, they haven't seen this similar pressure in the fashion, beauty and jewelry business. So those businesses aren't growing as strongly as home, but growing.

So home pretty consistent globally; fashion, beauty and jewelry challenge in the U.S. and UK, and to some extent Italy and holding up better in Germany and Japan. So those would be the two big differences. And as a result of that the overall customer bases, you're seeing sort of good performance across all elements of the customer base. And Greg I'll ask you to take the second.

Gregory B. Maffei -- Chairman

So, Jason, as you noted, the way these -- we issued those series of exchangeable debentures, which have the feature that we deduct interest at imputed rate other than just the cash rate. And those deductions were taken at higher corporate income tax rates, that we were building the deferred tax liability knowing we would have to pay it back when the corporate tax rate was reduced, our deferred tax liability was decreased. And with the corporate tax rate increases, we will have to revalue the deferred tax liability and it will likely go up.

I will make two points about that. First is I have not seen any projections that it will go up to the rate at which we deducted we will still be net ahead, having deducted at higher rates than the corporate tax rate is likely to get to. And two, you may have noticed over the last several years, we have been managing some of that DTL liability down by repurchasing some of the bonds that generated the DTL liability. And in effect that might be MSI bonds and then in effect have been reducing that liability already.

Jason Bazinet -- Citigroup -- Analyst

Makes perfect sense. Thank you.

Operator

And our next question comes from Carla Casella with JPMorgan.

Carla Casella -- JPMorgan Securities -- Analyst

Hi, I noticed you've been keeping your leverage nice and low QVC at about two times. Is that within your target range and how high would you be comfortable taking that either for the right transaction or for further dividends to the parent?

Michael A. George -- President and Chief Executive Officer

Jeff or Greg, do you want to take that?

Gregory B. Maffei -- Chairman

Jeff, you want to do that I'll be happy to.

Jeffrey A. Davis -- Chief Financial Officer

Go ahead, Greg.

Gregory B. Maffei -- Chairman

Okay, our stated corporate leverage target at the Q level is 2.5 times. We are obviously below that probably around the two times. And so that does create some opportunity. We had a high-quality problem, enormous cash generation in 2020 that helps even with our one time, cash dividends, and our share repurchases helps drive leverage down. So we do have some flexibility. And we'll monitor what we can do with that flexibility in the coming quarters and years.

Carla Casella -- JPMorgan Securities -- Analyst

Okay, and if I can just ask one follow-up on the answered some questions about payables, have you extended terms, so with some of the payable increased permanent versus temporary, would you call it all temporary and all going to reverse in the first half of 2021?

Jeffrey A. Davis -- Chief Financial Officer

So all of the extensions of payables is one component, once again, how we were strategically working with our vendors, that was all permanent. And those negotiations and how we put that into place happened over the course of 2020. So you'll start to see a reverse of that really starting in the second quarter through the end of the year.

Gregory B. Maffei -- Chairman

To put a finer point on it, both that and the reduction in our instalment payments, which has benefited accounts receivable, is meant to be long-term program. So, it's not that they reverse, it's just that you don't keep copying them to get to the end of the base. And then you have sort of a normal sort of working capital trends off of that newly established base.

Jeffrey A. Davis -- Chief Financial Officer

Thank you.

Carla Casella -- JPMorgan Securities -- Analyst

Perfect. Thank you.

Courtnee Chun -- Chief Portfolio Officer of Liberty Media Corporation

Operator, we are ready for the next question.

Operator

Thank you. Our final question will come from Sean Henderson with D.A. Davidson.

Sean Henderson -- D.A. Davidson Companies -- Analyst

Hi, guys. Thank you very much for taking my question. Just wanted to know if you guys could provide a little bit more color on just the new customer cohort that you guys are seeing? Just in terms of any new demographic call outs? And then also, are they being acquired at a kind of a lower customer acquisition costs and historically normal? Thank you.

Michael A. George -- President and Chief Executive Officer

Yes, thanks for the question. I'll focus my comments, on QxH customers just because it's the most valuable customers, and there's so many different stories across all of the different businesses we have. So, I want to just focus on that. Broad stroke demographics of the new customers look, literally identical to prior years, and our new customers tend to be six to seven years, on average younger than existing customers on average kind of you would expect, that isn't changing. So I always emphasize the fact that our businesses tend to be very stable around each cohorts and kind of life stage, both for existing customers and new that's remain true in the pandemic and it's remain true, as we've seen lots of new customers come in through streaming services or other forms of digital platforms.

The overall profile of those customers, even though they're coming in at different platforms, is very like in prior year classes. And it's one of the reasons that this gives us confidence, all of the other, more quantitative metrics, that these customers will behave in similar vein that pass your classes because on both demographic elements and on behavioral elements, they are remarkably similar. They are just more OEM.

The way I would think about cost of acquisition is, when you think about the 60% of new customers that come in organically, there's effectively zero marginal cost to bring in that 60%. And so the fact that we're bringing in a lot of them as zero marginal cost is actually a positive story. That 40% where we use paid marketing to bring them in, now take paid marketing is about stable, were less efficient in Q4 just because we grew that at a pretty rapid rate, and we're still ROI positive but obviously, when you grow faster, you tend to get a little bit less efficient.

But if you wait all that out, combined, you're organically and the pay, I think, it's safe to say that customer acquisition costs have come down, just based on the volume of new customers that we're bringing in. And, I think, that was our last question. So, again thanks to all of you for your time and continued interest and support. And hope all of you stay safe and well as we go through what we hope is the final stage of this pandemic. Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Courtnee Chun -- Chief Portfolio Officer of Liberty Media Corporation

Michael A. George -- President and Chief Executive Officer

Jeffrey A. Davis -- Chief Financial Officer

Gregory B. Maffei -- Chairman

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Oliver Wintermantel -- Evercore ISI -- Analyst

Eric Sheridan -- UBS -- Analyst

Jason Bazinet -- Citigroup -- Analyst

Carla Casella -- JPMorgan Securities -- Analyst

Sean Henderson -- D.A. Davidson Companies -- Analyst

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