Cornerstone Still a Drag on HSN
August 11, 2008-- Home Textiles Today,
Direct-to-consumer retailer Cornerstone Brands was the worst-performing segment of IAC/InterActive Corp. in the second quarter, and home was the hardest-hit area at Cornerstone.
"Cornerstone revenue decline reflects an 8% decrease in units shipped and a 3% decline in average price point as the business continues to be affected by the difficult retail environment, particularly in the home category," IAC said.
Cornerstone sister unit HSN (Home Shopping Network) served to keep results from sagging even more within the retailing segment of IAC, the company said during its earnings call. HSN, which represents about two-thirds of the retail division, continues on a growth pattern that started two quarters ago. By comparison, Cornerstone remains on a downward trend.
In the quarter, HSN posted an 11% revenue gain to $460.9 million, and an operating profit of $26.7 million – but Cornerstone posted an operating loss of $298.6 million as sales sagged 12% to $235.0 million.
If reporting as a stand-alone company (the spinoff by IAC is in progress) the combined results would have been an operating loss of $271.8 million, compared to operating profit of $34.8 million in the year-ago period. Sales for the unit were up 2% to $695.8 million.
The already announced goodwill writedown of $300 million for the Cornerstone Brands division was a big part of the overall IAC quarterly net loss of $421.6 million, compared to last year's net profit of $94.6 million.
The other major impairment charges were $165.9 on goodwill at Tree.com and $92.7 million from an investment in German retailer Arcandor.
Cornerstone – which comprises seven catalogs including Frontgate, Garnet Hill and Ballard Designs – suffered what the company called "exposure to home and apparel products," positioning it "square in the weakest part of the retailing sector and this is evident in the results."
Propping up HSN during this difficult period is a rebound in total customers, and "our buying strategies, improvement in quality, improvement in customer service and really offering great-priced value and the assortment that we've built over the past year," explained Mindy Grossman, ceo, IAC Retailing.
As a strength, Grossman pointed to the "tremendous flexibility" HSN has on adapting its product categories and assortment based on demand. She said the HSN home goods assortment is "incredibly diverse and we can focus on high-volume, lower-ticket type businesses, which has been working in this environment."
But because Cornerstone's line weighs heavily on home – 65% of its offerings, with apparel making up the balance – the cataloger "has been hit more relative to the environment than the HSN business, which can manage through that."
IAC expects a tough third quarter for Cornerstone, but a brighter holiday. "Once we get to Q4, when all of the [retail] businesses play much more evenly and we're comping against where we saw the challenges begin, we see the business getting back to comps and improving," Grossman said.
By that point, IAC will not necessarily be doing the reporting. "We'll all be five separate entities in November, when we'll all be talking to you again," said Barry Diller, IAC chairman and ceo. "This is the first and last time that in one single conference call there are five, pro forma separate companies talking to you, so we should enjoy the great history of this moment. We are almost there on the spin … this is last consolidated quarter. This is too much complexity and information and lack of single focus – that is why we are doing this."
The company said its bank and bond financing initiatives were moving along and it's "working through the last stages of the process with the SEC and on the tax side."
"I am really excited about the new IAC Company," Diller said. "It's perfectly focused -- all internet brands, about 32 of them, vary from established brands like Citysearch to ones in mid-stage like Evite and Gifts and Pronto to about 15 emerging businesses in various stages."
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