by Kellie Ell
Qurate Retail Group's [NASDAQ: QRTEA] capital structure has gained over the last couple of months as the company's turnaround strategy, dubbed Project Athens, provides a boost to full-year earnings estimates, said a sellsider, a buysider and two financial advisors. The retail brand owner and operator's debt issued at its QVC subsidiary climbed even more during the week of 22 May following the sale of its Zulily e-commerce business to investment firm Regent.
Qurate — which will continue to include a collection of retail, online and TV home shopping brands like QVC, HSN and Frontgate — was already expected to swing back to generating cash this year thanks to initiatives laid out in Project Athens, the sources noted.
The holding company launched the plan in June 2022 and since has been working to change its portfolio and cut costs after reporting declines in revenue and customer counts in 2022 that ultimately led to a company-reported cash drain of USD 9m for the year.
For 2023, estimates called for Qurate to bring in USD 190m in annual free cash flow, based on projections of USD 640m in cash from operations less USD 260m in capex, minus USD 140m in payments for TV distributions rights, less USD 50m in dividends paid to non-controlling interest, said the sellsider. Now with the sale of the underperforming Zulily unit, the free cash flow forecast for the year is expected to top those initial forecasts, the same source and financial advisor continued.
What's more, the Zulily sale has boosted investor sentiment that Qurate will be able to address its near-term maturing debt, the sellsider added. Its USD 600m 4.85% senior secured notes due 2024 are up nearly 20 points from a recent low of 76 on 28 March, last trading at 95.75 with a 10.284% yield 30 May, according to MarketAxess. Its USD 600m 4.45% senior secured notes due 2025, meanwhile, advanced almost four points last week to last change hands at 86 with a 13.927% yield on 25 May.
The cash flow projections mark a reversal from 2022, but also from 1Q23, when the company reported a cash burn of USD 70m amid softening consumer demand, the sources said.
Like many retailers, Qurate has been under pressure from increased competition, inflationary pressures, supply chain headwinds and consumers pulling back on discretionary purchases after a surge of spending during the COVID-19 pandemic.
Sales across Qurate's brands fell year-over-year in 1Q23 with total company revenue clocking in 8% lower at USD 2.64bn, versus USD 2.88bn in 1Q22. Included in the overall decline, Zulily's performance softened 17%, marking the most significant revenue drop among its brands, according to company filings.
The earnings weakness followed a 14% drop in overall revenue for all of 2022 to USD 12.1bn from USD 14bn the year prior. Qurate generated USD 1.06bn in adjusted OIBDA for 2022, marking a 49% decline from USD 2.08bn booked the year before. Zulily's adjusted OIBDA for 1Q23 tumbled 72% YoY, to negative USD 31m, while Zulily's full-year adjusted OIBDA amounted to negative USD 97m.
Contributing to the poor earnings, Qurate's customer count declined to 8.8m last year compared to 10.39m in 2021 and 11.6m in 2020.
To shore up the balance sheet and combat market pressures, the borrower laid off roughly 400 employees in February 2023 at QVC US and HSN, a move which is expected to generate USD 60m in all-in run-rate savings, with a USD 50m benefit flowing into 2023 figures, according to the company. The divestiture of the Zulily brand to Regent will allow Qurate to pay down borrowings on QVC’s bank credit facility by USD 80m at closing.
The company also said in May that it has been renegotiating import freight contracts over the last six months, trying to take advantage of lower market rates.
"Overall, the demand has been crushed over the last two years, given their supply chain issues," said one of the financial advisors. "A lot of their issues were that they couldn't get the inventory. They didn't have the freshness and couldn't bring their consumers the new and the best and the brightest out there...That's when they lost a lot of the customers when they couldn't fulfill the orders."
The company's "biggest issue has basically been just the general competitive pressures in retail. They're losing market share," added the sellsider. "There's just a lot more options of places to shop. Now they're trying to get into some other areas where people watch TV, such as YouTube TV and Hulu. But they're just not competitive with the rest of retail."
A recession, counterintuitively, may help Qurate by allowing the firm to reset its supply chain that has been under pressure in the wake of the pandemic, noted the buysider. "At the end of the day, they're a logistics firm and if we go into a recession that will be good for Qurate because prices along the supply chain will go down," the source said.
In the company's favor, it has an ample liquidity cushion with USD 1.28bn in cash and USD 1.88bn of incremental availability under its USD 3.25bn revolving credit facility, net letters of credit, as of the end of March, according to SEC filings. And the company has levers to pull if it needs to raise additional liquidity, including executing additional sale-leaseback deals on its owned properties, the sellsider noted.
In November, the company entered into agreements for sale-leaseback transactions on two properties — one in the United Kingdom and the other in Germany — collecting cash proceeds of USD 182m, which were used to partially pay down the QVC revolver due in 2026. QVC also sold five owned-and-operated US-based properties in July 2022, netting cash proceeds of USD 443m, according to the company's 2022 annual report.
Adding to its liquidity coffers, Qurate received USD 55m of insurance proceeds in 1Q23 related to a fire in its North Carolina Rocky Mount fulfillment center, an event which destroyed much of the center and killed one contractor. To date, the firm said it has received USD 435m in business interruption proceeds and expects additional proceeds from the disaster in the future.
In April 2023, Qurate sold the North Carolina fulfillment center for nearly USD 21m.
Qurate’s stock currently trades at USD 0.88 a share with a USD 381.5m market cap, compared to USD 3.61 a year ago.
Qurate did not respond to requests for comment.
