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Qurate Retail, inc (QRTEA) Q3 2021 Earnings Call Transcript

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QRTEA earnings call for the period ending October 31, 2021.

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Qurate Retail, inc (QRTEA 13.66%)
Q3 2021 Earnings Call
Nov 4, 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. 2021 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, November 4. I would now like to turn the call over to Courtnee Chun, Chief Portfolio Officer of Investor Relations. Please go ahead.

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Courtnee Alice Chun -- Chief Portfolio Officer

Thank you. Before we begin, we'd like to remind everybody that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results, including our ability to reach our repurchase target, could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent Forms 10-K and 10-Q filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. On today's call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations, including preliminary note and schedules one through 3, can be found in the earnings press release issued today on our earnings -- or our earnings presentation, which are available on our website. Today speaking on the earnings call, we have Qurate Retail's CEO, David Rawlinson; Qurate Retail Group CFO, Jeff Davis; and Qurate Retail Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. Now I'll hand the call over to David Rawlinson.

David L. Rawlinson -- President & CEO

Thank you, Courtnee, and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. I want to start by thanking Mike George for 16 years of service and dedication to Qurate. Mike made numerous contributions to this business, and I am especially thankful for the countless marathon sessions we had over the last two months. These conversations included countless hours of dialogue and exchange as we bonded over the business and transitioned leadership responsibilities. One of the ways that I connected with Mike was through his understanding of the consumer. My time on the Board and in management at Nielsen since 2017 helped me understand the massive shifts in consumer behavior we have been experiencing. Since joining the company on August two and transitioning to CEO, October 1, I have been working to understand the company and these outside factors. I've met with vendors, on-air hosts, retail thought leaders, entrepreneurs and innovators in live commerce. I have conducted about 150 one-on-ones across the business and conducted town halls and small group sessions with thousands of employees. I have also been spending time with customers and importantly, prospective customers, those who don't shop with us, but we hope to engage on our platform. These conversations have reaffirmed the reasons why I joined Qurate. Our business is built on the foundation of long-standing relationships with highly engaged customers, expert hosts, compelling entrepreneurs and established vendor network and a talented employee base. The quality and longevity of our relationships differentiate us from more transactional retailers. We create nearly 90 hours of live programming per day on our 14 TV networks that reach more than 200 million homes. At QVC U.S., our best customers purchase almost 70 items on average and spend more than $3,000 per year. They visit our website more than 30 times per month and tune into our programming 18 days per month. The business is also not sitting still. It is engaging in the future. The pandemic accelerated the widespread shift to a digital lifestyle, a space we should be able to compete in an even more effective way over time. Over many years, we have created a robust and extensive digital ecosystem with our presence on pay and over-the-air TV, digital live streaming TV, interactive streaming services, social streaming sites, websites and mobile apps. This ecosystem enables us to extend our relevance and provide our customers with unique ways to engage with our global brands and transact wherever and however they choose. We still have work to do to drive more profitable revenue through these digitally native channels, and I recognize the need to evolve and expand beyond linear TV over time. With that said, the growth in digital channels is substantial, and we are focused on this work. We have every right and opportunity to win in this space. The substantial assets of the business mean that we have a strong foundation, but we also know the world is changing quickly around us.

When I was running the global online businesses for Grainger and building a fast-growing business that rapidly acquired new digital customers, I came to understand that a digital transformation is not just about technology. It is about building the products your customers will want in three years today. It is about being brutally honest in seeing changing market realities, aligning a team, getting them focused on hard choices and injecting urgency and accountability into the culture. When these things are present, change can happen fast. I learned this again as CEO of Nielsen IQ, where we were able to arrest shrinking margins and drive record EBITDA growth in less than a year. The media landscape and the retail landscape are both changing. And I firmly believe that there is a place for a more human, trusted, experiential set of brands that grow alongside the impersonal and algorithmically optimized scale players. That will be Qurate, and I look forward to discussing this more with you in the coming months. One thing we will continue is to have an attractive financial profile. As the team has demonstrated for years, we have a robust cash flow model and track record of returning meaningful cash to shareholders. In short, I am extremely excited by the strength of this business and the opportunity to create growth through innovation, urgency and accountability. The unique capabilities of Qurate position us for a promising future, as we navigate the world during pandemic recovery and beyond. Let me now move on to the third quarter and start with sharing a sense of our customers' mindset over the past few months. Early in the quarter, many of our customers told us that they were encouraged by declining COVID cases and by vaccine availability. They were excited to resume normal summer activities. In the middle of the quarter, there was a significant shift in mindset, as the delta variant caused feelings of growing anxiety and many companies extended return-to-office dates until 2022. The uncertainty forced some customers to shift or postpone plans. This was apparent from research across retail and our own category shifts and measures of customer sentiment. Toward the end of the quarter, while some feelings of uncertainty remained, most customers were excited for the changing of the seasons and preparing for the holidays. They are looking forward to family traditions and gift giving. The macro story continues to be about supply chain constraints and cost inflation that are impacting efficiency, cost and delivery times for the entire industry. These headwinds include unscheduled factory shutdowns. They also include the limited availability of containers, trucks and drivers. Like others, we are also seeing cost inflation for freight, fulfillment labor and marketing costs. These factors led to a larger-than-normal deviation between demand sales and net revenue in the quarter. For the total company, demand sales declined 4%, while net revenue was down 7%. And at QxH, demand sales declined 3%, while net revenue was down 8%. Please refer to Slide 13 in our presentation for an illustration of the components of net revenue. Recall that we do not recognize revenue until an item is shipped and delays in inbound freight led to delays in shipments. Further, we also saw an increase in advanced orders in the quarter, which compounded the deviation between demand and net revenue. In this environment, we focused on what we could control during the quarter.

We took multiple pricing increases to counter cost inflation and average selling price increased at all of our businesses. We also offer customers the opportunity to purchase through advanced orders, substituted lower sales velocity products into high-volume time slots and presented vouchers to customers in appreciation for their patience as we work through backlogs. We continue to generate growth in apparel at QxH, QVC International and Garnet Hill. At QxH, our customers remained engaged and behavior among our customer cohorts played out largely as expected. We saw an increase in the number of TV minutes viewed, which grew 1.5%. The average spend and items purchased by QxH total customers rose 6% and 4%, respectively. New and occasional customers declined in count and spend partially because new and occasional customers over-index in categories like electronics and home innovations, which were most impacted by supply chain constraints this quarter. While the numbers of new and reactivated customers are down from 2020, we continue to see them convert to best customers at similar rates as previous classes. Let me provide a bit more color on the impact of the macro industry headwinds on our video commerce business. At QxH, 32% of our Today's Special Values and Today's Specials needed to be shifted due to product availability. And in the U.K. and in Germany, that percentage was 45%. Historically, we have had minimal shifts of TSVs due to lack of product availability. This low product availability is of particular significance for QxH with a daily item focused business. In this business, we tend to sell one story and one item at a time. On a typical day, one single item will make up between 20% and 25% of sales with a halo effect on engagement outside of that TSV. That day's other product offerings are often planned many months in advance in concert with the TSV brand. So when the item is unavailable because it is in transit or stuck in a harbor, we necessarily shift to less optimized and less planned offers. At Zulily, there was limited inventory from top-tier national brands to support its key events. And Cornerstone also was not immune to supply chain challenges. The business is mostly proprietary, which provides more direct control over product availability but it is still subject to transportation delays. Again, across the business, the increases in costs were substantial. We have seen the average cost of a shipping container rise more than 2.5 times from 2020 for QxH and for Cornerstone. Further, the average labor rate in our fulfillment centers increased 20% to 25% year-over-year at QxH and Zulily. As we look ahead, we've taken a series of actions to deliver improved performance in the fourth quarter. First, we proactively communicated further up the supply chain to understand production and delivery delays, allowing more time to adapt. We pre-bought inventory and have taken early delivery for a portion of our Q4 supply. Consumer electronics is normally a materially larger portion of the mix in Q4. And as you may recall, lack of electronics inventory was a significant revenue pressure in Q4 of 2020. This year, we are planning ahead to mitigate that pressure and are taking a balanced approach to electronics by weighing sales productivity and new customer acquisition strength with its lower-than-average margin profile.

We also bought seasonal inventory in home decor. And in apparel, we anticipate receiving 20% to 35% more inventory in Q4 than the same period last year. Second, we took advanced orders, which we expect to ship in Q4. Third, we are conducting a limited national advertising campaign for holiday at QxH to build wider awareness of the QVC and HSN brands and what they offer to support top-of-the-funnel customer engagement. The campaign will run on national TV, connected TVs like Hulu and Sling, online video, on-network radio, streaming audio and online display. We are also evaluating the mix of marketing channels to improve growth across our customer cohorts. Where appropriate, we are diversifying channels and expanding on the more digital platforms such as TikTok and digitally retargeting non-QVC and HSN customers who have engaged with us through our Roku app. Fourth, as mentioned, we enacted targeted pricing increases to counter a portion of the inflation pressure. Looking to our holiday plans for QxH, we are leaning into apparel more than we typically would in the fourth quarter. We want to sustain the demand momentum we generated in recent quarters and meet the customers' excitement for the change of the seasons. We've seen good interest notably in denim, sweaters, loungewear and outerwear. There has been widespread media commentary that supply chain shortages will likely lead to limited availability of holiday items, and this is shaping the consumer mindset. We anticipate fewer consumers will leave holiday shopping until the last minute. As a result, we've adapted our holiday plans with an earlier focus on events and gifting in areas where we have a stronger inventory position. When we have secured sufficient product, our customer demand has been encouraging. We've already conducted successful holiday-inspired events and fashion culinary, beauty and our gift kickoff to support holiday purchases. Beauty demand rebounded in September and we are leveraging that momentum and investing in airtime for products in Q4 to sustain that demand. We had a very successful event in October, anchored by a kitchen aid stand mixer TSV. Our team secured hard-to-find inventory and the customer responded positively. Similarly, in consumer electronics, the customer was engaged when we've had available quality product, such as for the Windows 11 and the iPad Gen eight launches. We are in a better inventory position in electronics this year than in Q4 last year due to the team's planning. In this coming weekend, we will host Shop With Us Live, a livestream cross-platform holiday shopping event. It will run on QVC and HSN streaming service and will feature 200-plus unique hours of live video shopping with amazing deals. It will also stream on our linear channels, social pages on Facebook, Instagram, TikTok and YouTube, our websites and our mobile apps. The macro industry factors remain, creating a challenging environment. However, because of the actions our team has taken, we believe Q4 performance will be a bit better than Q3, and the deviation between demand sales and net revenue will improve. With that said, while it remains difficult to predict the future impact, we do anticipate the challenges from product availability due to manufacturing, logistics and transportation delays as well as cost pressure from freight and labor will be ongoing into 2022 in our U.S. and European businesses. Turning to other topics. I want to announce that Jeff Yurcisin, the President of Zulily, will be leaving the company in early 2022. After many conversations, Jeff and I mutually concluded that it was time for new leadership. Jeff had many, many accomplishments as the leader of that business, and we want to thank him for his service to the company. We have a search for the new leader underway, and we also recently hired a new CFO for Zulily.

The current market environment is a perfect storm for that business model, but we believe that with a normalized market and new leadership, that business can be returned over time to profitable growth. Today, we are also announcing a special cash dividend of $1.25 per share payable to stockholders of Qurate's common stock for an aggregate dividend of approximately $490 million. In addition to year-to-date share repurchases through October 31 of $267 million, this announcement shows our commitment to returning a substantial majority of cash flow to our shareholders by year-end and our long-term belief in the business model. In closing, Qurate is a business with a sound profitable foundation and substantial untapped potential for future growth. With additional urgency, accountability and aspiration, I am confident that we can build a path to growth and continue to return a substantial portion of cash flow to shareholders. I am very excited to be here and lead Qurate through its next journey. I look forward to providing more observations at Investor Day on November 19 and a more fulsome view of our new growth plan in the spring. Now I'll turn the call over to Jeff to review our financial results in more detail.

Jeffrey A. Davis -- CFO

Thank you, David, and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the three months ended September 30, 2021 to the same period in 2020. Starting with QxH. Revenue declined 8%, primarily on lower unit volume, partially offset by an increase in average selling price, which reflected product mix and targeted pricing actions to offset cost inflation. Unit volume declined primarily from various supply chain constraints that David mentioned. Based on internal estimates, we believe the impact of supply chain disruptions to third quarter performance was approximately half of the 8% decline at QxH. Adjusting for this impact, we estimate QxH net revenue would have been up low single digits on a 2-year comparative basis to Q3 2019. As anticipated, overall customer counts moderated from the 2020 pandemic highs, yet we grew average spend and units purchased per customer and sustained growth in apparel and home decor, which is the largest subcategory within home. E-commerce revenue of $1.1 billion declined 7% with a 120 basis point increase in penetration. As illustrated on Slide 7, we experienced a shift in category mix, primarily from home and electronics to apparel. Apparel revenue increased 8%, which more than offset the decline in 2020. The apparel expansion was led by top brands and best customers with continued strength in contemporary, classic and activewear. We are pleased to have apparel return to its normalized product mix level in line with 2019. Accessories declined 4% but was up 6% compared to 2019. We experienced lower demand for casual footwear, leather handbags and fashion accessories, which was partially offset by growth in nonleather handbags, loungewear, fashion footwear and luggage. While beauty declined 6%, we experienced 6% demand growth in the month of September. And as David said, we expect to increase airtime for beauty in Q4. As anticipated, home declined from an exceptionally strong 2020 that was up 1% versus 2019. The year-over-year performance reflected lower demand for pandemic-related fitness and wellness, cleaning and floor care as well as cookware products and kitchen electronics. Within home, we continue to experience solid demand growth in home decor, particularly for seasonal items, bed and bath. Consumer electronics declined 13%, reflecting supply chain constraints and a reduction in new and occasional customers who normally over-index in this category. Our customers were engaged when products were available. And going into this holiday season, we believe our inventory is better positioned compared to Q4 of 2020. Adjusted OIBDA declined 14% and adjusted OIBDA margin declined 130 basis points. Looking at the key drivers of the margin compression. Gross margin was unfavorable 60 basis points, primarily due to higher fulfillment expenses and lower product margins, partially offset by lower inventory obsolescence.

Fulfillment margins declined due to elevated labor costs, higher freight rates and surcharges and closing costs associated with decommissioning our Lancaster, PA and Roanoke, Virginia fulfillment centers as part of our network optimization plan. Product margins declined primarily due to lower shipping and handling revenue on reduced unit volume and expanded shipping and handling promotional activity, partially offset by increased private label credit card income and favorable returns. Inventory obsolescence reflected a favorable adjustment to provisions from reduced aged inventory. Operating expenses were unfavorable, approximately 55 basis points, primarily from prior year favorable settlement of credit card fees and higher current year labor rates for customer service. SG&A was unfavorable, approximately 10 basis points, primarily from higher marketing and bad debt expenses and the deleverage of fixed costs. This was partially offset by lower incentive compensation accruals. Marketing expense increased to engage our customers and expand audiences on digital platforms and reflects accelerated cost inflation. Bad debt reflects a prior year favorable true-up and an increase in the number of installment payments this year, partially offset by lower default rates and improved credit screening. We anticipate Q4 performance at QxH to improve relative to Q3. We are through the toughest quarterly comparisons to 2020 and expect Q3 advanced orders, less cancellations to ship in Q4. In addition, we are in a better inventory position than Q4 2020 and have launched an advertising campaign to drive top-of-funnel awareness of QVC and HSN. Recall last quarter, we reiterated our Q1 expectations for QxH OIBDA margin to be relatively flat for the nine months ended December 31. This was predicated on prevailing estimates of supply chain disruptions, broad-based cost inflation and the anniversary of certain favorable 2020 provision adjustments. Based on actual year-to-date results and our view of elevated cost inflation and persistent supply chain disruption, we now expect our full year 2021 OIBDA margins will be relatively flat to down modestly. Moving to QVC International. My comments will focus on constant currency results. Revenue declined 4% on lower unit volume, partially offset by an increase in average selling price. Our operations in Europe faced similar supply chain constraints at QxH. These challenges were partially offset by sustained growth in Japan, which delivered its 10th consecutive quarter of revenue growth. As anticipated, total customer count declined 4% in the quarter, reflecting the outsized gains primarily from new and reactivated customers in 2020. Compared to 2019, total customer counts increased across all cohorts and are relatively exhibiting the same behavior as prior year cohorts. E-commerce revenue was flat for the -- from last year and penetration increased more than 200 basis points. QVC International experienced growth in apparel, but a decline in other categories. Home revenue declined 5% from last year's strong growth of 21%. Compared to 2019, the business generated gains in home, apparel, electronics and beauty with slight declines in jewelry and accessories. Adjusted OIBDA declined 14% and adjusted OIBDA margin compressed 180 basis points.

Looking at the key drivers of the margin compression, gross margin decreased 90 basis points, primarily due to lower product margins and higher fulfillment costs. Product margin pressure was partially due to lower shipping and handling revenue on lower unit volume. Fulfillment expenses were unfavorable due to higher freight and labor costs. Operating expenses were approximately 35 basis points unfavorable, primarily due to higher TV commissions from increased carriage cost in Japan and the anniversary of nonrecurring contractual rebates in Germany from 2020. SG&A was unfavorable approximately 75 basis points, primarily due to higher fixed costs and marketing expenses, partially offset by lower incentive compensation. Moving to Zulily. Revenue declined 17%, reflecting inventory scarcity across national and emerging brands and marketing inefficiencies. Approximately 1/3 of Zulily's revenue is from national brands, which was down approximately 30%. We continue to see challenges across paid marketing channels, mostly due to the iOS 14.5 consumer privacy launch. These pressures were particularly offset -- were partially offset by sustained growth in our factory direct business. Adjusted OIBDA declined $44 million due to sales decline combined with higher fixed fulfillment costs, including freight and surcharges for the factory direct business, higher marketing expenses, fixed cost deleverage and lower product margins. Moving to Cornerstone. The business generated 7% revenue growth, recognizing record third quarter revenue at Ballard Designs and Grandin Road. Cornerstone's revenue gains were driven by sustained momentum from home decor, interior furnishings, bath and textiles and at Garnet Hill in apparel and home textiles. E-commerce grew revenue -- e-commerce revenue grew 7%. Adjusted OIBDA decreased $11 million, primarily due to higher inbound freight costs and marketing expenses, partially offset by lower administrative expenses. Just a quick note on inventory sourcing. Qurate Retail directly sources approximately 10% to 20% of its inventory from outside the United States and is designated as the importer of record. China represents over half of our foreign exposure.

And since 2019 and the application of certain import tariffs, we have taken actions to diversify into other Southeast Asia countries. Turning to our balance sheet and cash flow. Capital expenditures were $169 million in the first nine months of 2021. In addition, we spent $184 million on renewals of our TV distribution contracts, which essentially wraps up our planned expenditures for 2021. Free cash flow was $218 million in the first nine months of 2021. The year-over-year decline is primarily attributable to prior year expanded sources of working capital, driven by strategic sourcing actions, a reduction in customer installment payments, which is now included in our base and is no longer incremental. In 2021, we are incurring higher renewals for multiyear TV distribution agreements and early receipts of our 2021 holiday inventory with elevated capitalized inbound freight. Looking at our debt profile. On September 30, $120 million was drawn under the QVC revolver and $2.8 billion was available capacity. Our leverage ratio as defined by our QVC revolving credit facility was 2.1 times. On October 27, we amended and restated our QVC revolver, extending the maturity to 2026, reducing the interest rate and increasing total capacity to $3.25 billion. The borrowing group was expanded to include Cornerstone. These primary revisions to our leverage calculation, including the addition of Cornerstone to the borrowing group and the recognition of all unrestricted cash, reduced our leverage pro forma to 1.9 times as of 9/30. After quarter end, we issued a notice to redeem 100% of the 3.5% MSI exchangeable debentures by year-end. The carrying value of the MSI exchangeable debentures was $549 million as of quarter end and the redemption will be funded through our revolving credit facility. With that, I'll turn it over to Greg.

Gregory B. Maffei -- Executive Chairman

Thanks, Jeff. First, I'd like to start by welcoming David on his first earnings call as CEO and again, thanking Mike George for his 16 years of tremendous service to Qurate. As David mentioned, we are pleased to announce a special cash dividend of $1.25 per share, ahead of a likely tax increase. The total net cash dividend is approximately $495 million. I'd note that we have purchased year-to-date about 23 million shares for $267 million. That includes $23 million from settling a financial instrument we entered into in the second quarter. We expect to repurchase an additional $46 million worth of stock under remaining and outstanding financial instruments that we'll also sell in the fourth quarter. We will continue our buyback strategy and are targeting repurchasing 10% of our share count by year-end 2021 based on shares outstanding at the start of the year. We have told you in the past, we are committed to returning a substantial majority of our free cash flow to shareholders. And this year, we anticipate returning virtually all of it, including some onetime tax, green energy and other like items. This announcement about the dividend reflects our ongoing endorsement of Qurate's business and our commitment to balance shareholder returns and equally our statement about our intent to return the majority or more of all of our cash flow. We look forward to the ongoing evolution of Qurate Retail, as we welcome David as our new CEO. We also look forward to seeing you virtually for our Investor Day November 19. Now operator, with that, we'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] We'll take our first question from Jason Haas with Bank of America.

Jason Daniel Haas -- BofA Securities -- Research Division-Analyst

Hi. Good morning and thanks for taking my question. So first, I wanted to ask about the supply chain delays. I know on the last call, we had talked about orders, you were hoping that they would arrive by September. So I'm curious if that's what the issue was, if those were delayed and maybe pushed some revenue that you were expecting in September into October.

David L. Rawlinson -- President & CEO

Yes, I can start on that, and then I'll let Jeff come in as well. First of all, it's great to be here, and I appreciate the question. So we did see a number of supply chain delays in the quarter, and that did drive advanced ordering throughout the quarter. So I don't think we're giving an advanced order exact number, but I can tell you that advanced orders were about double what we would have expected in prior quarters. And so that definitely was the piece of it. In our QxH business, I think we -- about 60% of our deliveries came late, about 80% of those deliveries were more than two weeks late. And so that caused us to do a number of things, including allowing customers to do more advanced ordering when there was going to be longer lead time on the product. I would say another thing that, that also drove some advanced ordering, as you know, we have a relatively large Christmas and July event that was very successful this year. And that causes some people to order for Christmas in advance. And so that also led to probably higher-than-normal deviation in terms of some advanced ordering. So there definitely was a big supply chain element, but also some other elements throughout the business.

Jeffrey A. Davis -- CFO

The only thing I would add to that, David, is the customer demand for apparel really exceeded our expectations. And while we had what we thought was going to be a adequate supply of inventory, the demand has really outstripped supply there. So we felt as if we left a little opportunity on the table. That's one of the reasons why we have worked very diligently to, as David had mentioned earlier, to bring in some additional inventories for the fourth quarter, upwards of 30% to 35%.

Jason Daniel Haas -- BofA Securities -- Research Division-Analyst

Got it.Thank you. That's really helpful. And then I have a couple of questions on the balance sheet and capital allocation, either for Jeff or for Greg. The first is just if you could provide some more color on the decision behind this new credit facility? I guess my two biggest questions would be why include Cornerstone now? I believe that was previously unencumbered. And then also why go ahead and take a leverage capacity there?

Gregory B. Maffei -- Executive Chairman

Jeff, do you want to let Ben take a shot at that?

Jeffrey A. Davis -- CFO

Sure.

Ben Oren -- Senior VP & Treasurer

Just to note, Cornerstone is being added as a co-borrower. They are -- to the extent that they want to borrow under that facility, that would put leverage on them. To the extent that they don't, we continue to have the ability to remove Cornerstone at any time. And so we wanted that flexibility, so that it was more simpler exercise than creating a facility directly at Cornerstone. It's optionality rather than true incumberance at the moment though.

Gregory B. Maffei -- Executive Chairman

You had another question?

Jason Daniel Haas -- BofA Securities -- Research Division-Analyst

Yes. My second question -- well, I guess another any reason to take up the leverage ratio there? And then the second one is just, Greg, could you just maybe walk through the derivative transactions that you're doing? I think it would be helpful just to kind of get an understanding of the rationale for doing those.

Gregory B. Maffei -- Executive Chairman

Sure. Ben, do you want to talk about expanding first, then I'll talk about the financial instruments.

Ben Oren -- Senior VP & Treasurer

Yes, sure. Expanding it is really just coming back. If you'll recall, we were at a higher level back in 2019. During the 2019 refinancing of the revolver, it dropped to $2.95 billion. So given that the company is in a much more attractive space from a leverage perspective, banks were more than willing to give us a slightly higher amount at even more attractive levels, and we took it.

Gregory B. Maffei -- Executive Chairman

So on the financial instruments, we have been issuing put warrants against our own stock, knowing that we have a buyback in place. We think that's an attractive way of reducing our overall cost of net share repurchase or potentially pocketing some extra change depending on how they settle. But overall, we think against our buyback, it's an attractive facility.

Operator

We'll take our next question from Edward Yruma with KeyBanc Capital Markets.

Edward James Yruma -- KeyBanc Capital Markets Inc. -- Research Division-MD & Senior Research Analyst

Hey good morning guys thanks in taking the question. In your prepared remarks, you really talked about the importance of digital. And obviously, given your background, the focus makes a lot of sense. I guess as you assess the asset base you have, do you think improving performance in digital is one of execution? Do you think you need to do M&A? And I guess as you think about kind of going forward, do you think that this will require significant capital outlay? And then just as a quick follow-up. On the commentary about the shipping being a little bit tighter in the fourth quarter, is this symptomatic because you have kind of greater visibility on inventory on hand? I guess it's just interesting because most people are saying that the supply chain issues will intensify versus maybe get a little bit better? Thanks.

David L. Rawlinson -- President & CEO

Yes, that's great. Thank you for the question. So we are dedicated to winning digitally, of course. What I think is true is that the retail landscape and the media landscape are changing at the same time, both going through digital revolutions. We sit right at the center of that. And so to be a winner long term, we have to win there. So we're doubling down. One of the things I think that's very attractive about the business today is that especially on the streaming side, we're about every place you would want to be. We're on the interactive streaming shopping services, Roku, Comcast, X1, XFINITY Flex, digital live streaming TV, Sling TV, free streaming services, smart TV streaming services, social streaming, our own mobile apps and websites, free over-the-air TV, pay TV. And we are continuing to expand, but we're largely on the right platforms today. And then the same thing is true in social, where we are on all of the major platforms today. I think in the future, we have to not only be on those platforms, we have to continue to be more productive and more innovative on the platforms, and we have to continue to ride the wave of, I think, more shopping moves to those platforms. I'm going to talk probably a little bit more about that during Investor Day and a lot more about that when we come back to you with some time on our growth plans in the -- early next year. I don't think it's going to require -- we're looking at everything. I'm meeting with people across the industry. I'm meeting with entrepreneurs, I'm meeting with the large platforms to stay close to everything that's happening. Because of the substantial role we play in the space, we tend to get a call when somebody is doing something new. So it helps us keep up. So we're going to be a player consistently. I don't think it requires any substantial change to our capital allocation strategy. We're able to do this based on internally focused investments. If there's something interesting, of course, we would look at it, but no changes to that. So I feel good about our starting position. I do think we're at a time where urgency is going to be necessary, and we're determined to play and win in the space digitally. On shipping, what I would say is we are -- in fulfillment centers, we're starting to see some early signs of some lessening of that pressure. It's still incredibly elevated, the costs are still incredibly elevated. I was in one of our largest fulfillment centers yesterday, and we're starting to see -- we're starting to clear a little bit of backlog. We're starting to see some lightening of the labor market and some success in hiring back. I think container costs are still an incredibly elevated level, but have started to stabilize just a touch. So we are feeling a bit better about the supply chain and fulfillment center. And then we also, as we discussed before, have taken some steps going into the fourth quarter, prebuying some inventory where necessary, making sure that we have a better position in electronics than we had last year, a better position in apparel than we had last year because those are both very important categories for the fourth quarter. And then also being very targeted, we're taking some price, so that we can cover some of the increased costs. So we feel like in the things we can control, we've tried to be as forceful as possible, given what's just a tough market environment for everybody in the industry when it comes to supply chain issues.

Edward James Yruma -- KeyBanc Capital Markets Inc. -- Research Division-MD & Senior Research Analyst

Thank you.

Operator

Thank you. Our next question comes from Jason Bazinet with Citi.

Jason Boisvert Bazinet -- Citigroup Inc., -- Research Division-MD, Global Head of EMT & Analyst

Thanks. I had two quick questions. You mentioned that demand sales were greater than GAAP revenue in the quarter. Would you -- is it reasonable for us to assume that all of that will reverse and become a tailwind to GAAP revenue as the supply chain normalizes? Or is there risk in the street making that assumption because of elevated cancellations or incentives that are booked as contra revenues or something to make the customer happy given the delays? That's my first question. And then second, you mentioned something on the free cash flow in the quarter. You said customer installments are now included in the base and is no longer incremental. I just didn't understand what that meant. If you could just expand on that comment, that would be great. Thanks.

David L. Rawlinson -- President & CEO

Maybe I'll start talking about advanced orders a little bit, and I'll turn it over to Jeff for more commentary on advanced orders and free cash flow. So there definitely was -- were elevated advanced orders in the third quarter. We do expect some of that carryover to ship into the fourth quarter. And so we do expect this deviation between demand and net revenue to stabilize and maybe even reverse up a bit in the fourth quarter. So we do see that normalizing and stabilizing and we're seeing that in the business. Jeff, anything you would add or anything you want to touch on for the free cash flow?

Jeffrey A. Davis -- CFO

Sure. So on the free cash flow, you'll recall last year was sort of a once-in-a-lifetime opportunity for us to reset sort of customer expectations with respect to the number of installments that we were providing. While we were providing installments on all products that we were offering, we were reducing some of the upper installment opportunities. And in doing so, it kind of reset and is now part of our base going forward. So last year, where it would have been a positive opportunity for us in reducing the number of installments, it's now part of our base. Going this year, it's now any sort of marginal adjustment to that, which would have any impact on our free cash flow going forward.

Jason Boisvert Bazinet -- Citigroup Inc., -- Research Division-MD, Global Head of EMT & Analyst

That's interesting. Thank you.

Operator

Thank you.We'll take our next question from William Reuter with Bank of America.

William Michael Reuter -- BofA Securities -- Research Division-MD

Good morning. Some retailers with regard to their ocean freight, the vendors pay those. Other ones, they are responsible for some of that. And when you talk about elevated freight, is that mostly domestic? Or are you paying for the -- a lot of the ocean freight that's coming from manufacturing facilities?

David L. Rawlinson -- President & CEO

Yes, do you want to talk to that, Jeff?

Jeffrey A. Davis -- CFO

Yes, absolutely. So a lot of the product that we bring in, especially if it's direct sourcing and I've given a little bit of details to 10% to 20% of our product we're actually the importer of record, we are paying for that ocean freight coming in as well as on a domestic basis. And depending on the particular brand, taking QVC, for example, we have a higher percentage of our product where it is "collect", where we actually are paying for the product at the suppliers back door, and then we're responsible for getting it to our facilities versus an HSN brand where it is more prepaid, where that is already included, the freight is included in the product cost to get it all the way to our door. So it kind of runs across different brands differently. But also having a high concentration of direct sourcing, we are responsible for getting that product from overseas.

William Michael Reuter -- BofA Securities -- Research Division-MD

Okay. And then you mentioned that you have pushed through, I think you guys said, a portion of the cost increases that you've been seeing. Is there any way to put that into context, what portion of cost -- elevated cost you have pushed through at this point?

David L. Rawlinson -- President & CEO

Yes. I don't -- this is David. I don't think we're prepared to quantify that. What I would say is we've taken a couple of cost increases. We're continuing to see cost increase in the market at competitors as well. We think that will continue. We haven't seen any substantial diminishment of demand and price. We took -- in our QxH business, we took one in July and one in September. Despite the increase in July, we still had a very strong Christmas in July. We're going to continue to look at price given some of the challenges for cost in the business. We're going to be surgical. We have a keen eye on what's happening in the market and making sure that our value proposition for our customers stay intact. But we think there's a level of inflation in pricing across the market. We're going to join in that given the continuing cost pressures.

William Michael Reuter -- BofA Securities -- Research Division-MD

And then just lastly...

David L. Rawlinson -- President & CEO

Maybe the other thing I would just say, and I'll pass it over to Jeff is because of these price increases, we have seen average sale prices increase at all of our businesses. I think I talked about a 4% increase in my script. And so that has been a bit of a tailwind, and we haven't seen downside to it so far. So we're going to continue to be smart, but where it makes sense, we'll continue to move there. Jeff, anything you want to add?

Jeffrey A. Davis -- CFO

No, I think you've covered it. Thank you.

William Michael Reuter -- BofA Securities -- Research Division-MD

Okay. And then just lastly for me. You guys were at net leverage of 1.9 times. The onetime dividend is going to push that up a little bit. Is 2.5 times still your net leverage target?

Gregory B. Maffei -- Executive Chairman

Yes, 2.5 times or better, we should clarify, given that we are substantially below 2.5. But we should also point out that we anticipate that free cash flow will cover the dividend. And so we don't anticipate going higher in leverage as a result. There may be some short-term timing issues, but on an ongoing basis, it will not move.

William Michael Reuter -- BofA Securities -- Research Division-MD

Understood. Thank you.

Operator

Thank you. Our last question comes from William Brewster with Sullimar Capital Group.

William Brewster

Hey guys. David nice to hear you on the call.Greg congrats on the bridge. I'm going to try to keep this one short. So it seems to me that the rebuttable presumption is that this business is in decline. I think that the customer count is a nice green shoot to look at. With respect to the amount of attention that has to be given to digital going forward, I'm curious, and maybe this is a better Investor Day question, but how you think about Zulily and what the strategic alternatives might be for that asset? Because it seems to me that it takes up a fair amount of resources from a time perspective and has been a fairly consistent drain on performance.

David L. Rawlinson -- President & CEO

Yes, I appreciate the question. I will have a lot more to say on Investor Day. I will say in the core business, we feel good. We think if you normalize for some of the exceptional onetime aspects of supply chain disruption, we would have seen -- we would have been up on the 2-year stack versus 2019. So I think the underlying business continues to be healthy, and we're coming off a quarter where we were not able to meet all of the pent-up demand that was there for our products and our value. And so I do think the long-term -- underlying long-term trends in the business have some real strength. And we also talked about things like even in the pandemic customer cohort, we're continuing to see those customers turn into best customers at about the same rate. So there's real stability and strength in the core business. For Zulily, that business really has been hit by a perfect storm. So it's a business very dependent on digital marketing when we've seen big changes in the digital marketing environment, the iOS change, Apple, Facebook, all of those things have caused inflation and life of efficiency in digital marketing. It's a business that's very much dependent on excess -- high quality, but excess inventory from our retail partners. We're in an environment right now where there's too little inventory for those partners, not too much. And then it's also a business that has a lower average selling price than the other Qurate businesses. And so with those added increases in costs, you can get upside down on the U.S. unit economics in that business relatively quickly. We think most of those trends stabilize over time, and that gives that business a real opportunity to return to profitable growth in the medium term. So I think there's still real reasons to believe in Zulily. The addressable market for that business is large and the opportunity still available for that business is large. In terms of where it fits strategically in the portfolio, I don't think we have anything to announce there today. I think we're determined to make sure that it's a profitable growing business going forward, even given the current difficulties in the environment. The one thing I would say is we're dedicated at Qurate at building brands that have a really special experiential component to them, and Zulily has that. I think they've historically been very dedicated to trying to create a joyful experience for their customers, a more motive experience than you can find in a lot of online retail. And so in that sense, it does fit thematically with what we do, but I think we'll have more conversations about sort of portfolio construction at large as we continue to have conversations with you.

William Brewster

Thanks for the answer. People speak very highly of you. I can see why. And sorry that this is such a tough quarter to take over in, but we all appreciate your hard work.

David L. Rawlinson -- President & CEO

Thank you for that.

Gregory B. Maffei -- Executive Chairman

To all of our listeners, thank you for your interest in Qurate. And as we said, we look forward to seeing you at the virtual Investor Day on November 19. And with that, operator, I think we are done.

Operator

[Operator closing remarks]

Duration: 60 minutes

Call participants:

Courtnee Alice Chun -- Chief Portfolio Officer

David L. Rawlinson -- President & CEO

Jeffrey A. Davis -- CFO

Gregory B. Maffei -- Executive Chairman

Ben Oren -- Senior VP & Treasurer

Jason Daniel Haas -- BofA Securities -- Research Division-Analyst

Edward James Yruma -- KeyBanc Capital Markets Inc. -- Research Division-MD & Senior Research Analyst

Jason Boisvert Bazinet -- Citigroup Inc., -- Research Division-MD, Global Head of EMT & Analyst

William Michael Reuter -- BofA Securities -- Research Division-MD

William Brewster

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