ValueVision Media (VVTV) – $5.58
Although I planned on writing up my entire thesis for VVTV, things got a little busy and I never ended up finishing it. Thankfully, someone over at Value Investors Club has done my job for me. Click here to see david101’s writeup on ValueVision (available via a 45-day delay).
I would also reiterate that under $6 per share this is a very “heads I win, tails I don’t lose much” type of investment. There is uncertainty surrounding a few different aspects of the investment (like cable distribution costs, the transition to digital, new internet ventures) but little to no downside based on hard assets and cash. If a few things go right ValueVision could be worth 2-3x its current price. In addition to the information provided in the above writeup, I’ll add a few of my thoughts below:
Distribution costs. The thorn in ValueVision’s side is the cost of carrying ShopNBC in 70 million homes across the US. In 2006, payments to cable and satellite providers totaled $107 million. This comes out to an average of $1.64 per year, per household (or FTE – Full Time Equivalent).
The current situation. With about 850 thousand active customers, ShopNBC’s penetration rate is about 1.3%, which has been unchanged for the past 4 years. Factoring in this rate with the cost per FTE, it comes out to an average cost of $126 per year, per customer. Gross profit per customer in 2006 was $296. Take away SG&A($175) and CapEx($14), and VVTV had a loss of $19 per customer in 2006. Sales growth in the past few years has been mostly a factor of more FTEs and higher selling prices. As seen in the math above, the problem is that acquiring a customer through FTE purchases only increases sales, not profit. So everything else equal, they’ll have to make money by other means.
How they’ll become profitable. Unless they’re taken over by HSN or another buyer, VVTV will have to grow sales and profits on their own. As stated above, they can grow sales by buying more FTEs, but they’ll continue to lose money unless the following three things happen:
- Higher penetration rate. Acquiring more customers from households who already have the ShopNBC network. 1.3% of households are customers, versus 4.4% for QVC and 3.5% for HSN. This could be achieved through many different methods: more online customers, lower churn rate in current customers (see below), more efficient marketing, and better customer service.
- Lower return rate. The home shopping companies have a much higher return rate than retailers in general. VVTV in particular has an extremely high return rate of 32%. Basically this means that for every three products sold, one is being returned. To me, this shouldn’t be very difficult to solve. A little extra spending on better customer service and higher quality products would go a long way with customers. Before any product returns, VVTV has over $1 billion in sales. So spending a few million dollars on service (or lowering gross margin a bit) would be money well spent, potentially adding a few hundred million a year in sales. VVTV is currently working with a consulting firm (this could be good or bad) on this and other operational issues.
- Lower distribution costs.This is more of a wild-card then the others, but if it worked out would be a huge catalyst for profits (and hence stock price). In the next year, most cable carriage contracts will be renegotiated. VVTV currently pays much more per FTE than the other home shopping channels. Since current rates were negotiated some time ago (when the company was much smaller), VVTV has more leverage and will probably be able to get lower rates. Also, the upcoming switch from analog to digital cable will help VVTV as digital rates are cheaper.
Disclosure: I own shares in VVTV. This is not a solicitation to buy or sell any security.
UPDATE (June 2009)
Another investment disaster. I’m starting to think that any company I write up on this blog turns into a failure. Solution: don’t write up any more specific investments (or turn the blog into a “what not to do” journal).
ValueVision turned out to be the most costly investment I have ever made (in terms of total portfolio losses). Where to begin? Despite the fact that VVTV had no debt and a huge pile of cash, the losses just kept getting bigger. As I said in the above post, it has a large amount of fixed pay-no-matter-what distribution costs. With declining sales from both poor execution and a bad economy, net losses skyrocketed. However, even in this bleak scenario, ValueVision’s assets still had/have value to a potential acquirer. The business model isn’t the best (unless it is scaled to a huge size), but the biggest problem here, in my opinion, was/is management.
Even with a good management team, lots of capital, and a normal economy, I think it would be a challenge for VVTV to succeed. As I stated in my original post, I definately thought it was possible. But in a bad economy (most of ShopNBC’s products are highly sensative to consumer spending) and with bad management, there is no way VVTV will pull through.
So, get some good managers and give it all you’ve got with economic tailwinds, or sell ShopNBC and liquidate the rest. Currently, VVTV is in limbo — hire new overpaid executives, lay off workers, and somehow stop bleeding cash. To me, it’s painfully obvious such a strategy won’t work, especially with the current state of the economy. And I don’t believe a buyer can’t be found at any price from some of VVTV’s assets. The lesson? When taking a passive stake in a business based on its assets, make sure you can trust the people who manage them.