Oliver Wintermantel
Okay, thanks. Then the other question I had was, David, you mentioned three impacts in QxH, temporaries and execution, but then I think the third one you mentioned, increased competition. Could you maybe expand on that a little bit, what you’re seeing there in the competitive space?
David Rawlinson
Yes, absolutely. Part of what we saw through the fourth quarter among competitors, of course we saw them taking some price in regard to inflation, but we also saw store traffic go back up. We saw a lot of brick and mortar either reopen or advertising campaigns driving people back to stores. You also saw an increase in digital marketing which drove some digital marketing inflation throughout the market, and then finally click-and-collect, order online and pick-up at store also grew substantially, so you saw the market sort of rebalancing from online back to a more natural mix, probably, of offline, and I think you also saw people getting out of the house and getting offline a touch in terms of how they balance their shopping. We definitely saw those trends and I think it just makes for, once again, a richer competitive environment than what we faced as the pandemic concentrated some of the trends.
Oliver Wintermantel
Got it. Thanks very much, and good luck.
David Rawlinson
Thank you.
Operator
Our next question will come from Jason Haas with Bank of America. Please go ahead.
Jason Haas
Thanks, good morning, and thanks for taking my questions.
David, I’m curious, now that you’ve been here for some time and had the chance to assess the business, I’m curious as you start to think about the go-forward strategy, what areas of the business you’re looking at, what changes are you thinking to making to improve performance.
David Rawlinson
Yes, I appreciate the question. I would say a number of things. I think first, we just have to continue getting better every day in terms of execution. Some of that is about a culture of accountability, some of that is about structure and making sure that we have the people who can make decisions in real time at all levels in the organization, so we’re thinking carefully about organizational design to make sure we can act with accountability but also urgency and speed, and that only becomes more important as the world gets more dynamic.
Part of the reason those things, by the way, are important is because we do still have very strong core assets to take advantage of, so if you look at the past year, actually minutes viewed was up every quarter this year. We had over $65 billion minutes viewed in 2021 in QxH, and that was a number that was up well over 4%, almost 5% for the year, and so at the core, our core assets are still very strong. We have to be able to convert those core assets into sales, and so an awful lot of that is about execution.
I think part of the execution challenge also is making sure we have the right products at the right time. Some of that is supply chain, but also some of that is product vision, and so we’re really taking a look at our merchandising operations and what needs to be true for how we operate there, to make sure we’re getting in front of consumer demand and consumer trends.
From there, I would say we know that outside of linear TV, the opportunity in live stream shopping, social shopping is very substantial, and we are under-indexed to those areas relative to their relative areas of growth, so we have to pivot the business so that we are taking advantage of those spaces. We have every right to win in those spaces. I think our competitors are looking for us to win in those spaces, but we have to be there competing to truly take advantage of them, and so we are organizing a little bit differently to make sure that we have dedicated resources, dedicated vision in those spaces.
I’ll also say we’re adding some talent, and I’ll have more to say on that later, but we’ve already made a couple of hires in the digital space that are going to help us take a different view about how to get there with some amount of speed. We’ll have more to say on all of these things. We’re doing a top to bottom assessment. We’re also looking at things like compensation, we’re remixing how we look at some short term incentives to drive good behaviors for both responsibility for top line growth and bottom line performance, and so we think there is a lot of opportunity because there are substantial places of growth that we aren’t fully participating, and then we have core assets like minutes viewed that are actually growing, that if we can drive increased efficiency in the use of those core assets, also provides a real opportunity for the company. Some of those things are structural, some of those things are cultural. We’re concentrating on all of them while also understanding that the shift doesn’t turn overnight.
It’s going to take some time, it will take--I think I said in the script that it’s going to be measured in months and quarters, not days and weeks. We’re going to do this with an eye towards long term value creation for our shareholders, and we’re going to do it in a responsible way that respects the stability of the assets we have and the really special culture of caring and commitment to each other and our customers within the company.
Jason Haas
Thanks, that’s helpful. You mentioned TV minutes viewed being up, and I know we’ve talked a lot about on previous calls about the fact you picked up a lot of customers through the pandemic, so I’m curious what you’re seeing now in terms of retention rates. Do you still feel good about your ability to keep those customers, or now that maybe post-omicron things are starting to open up a little bit more, are you starting to see any sort of higher churn in that customer base?
David Rawlinson
Yes, thank you for that. There are a number of pieces to that answer, so let me walk through a few different components.
The first is I think we believe that newly acquired digital customers, some of those bumper crops of customers that we got during the pandemic were less invested in our core video content, and the increased competition from brick and mortar reopening and the buy online pick-up at stores did change the retention dynamic slightly among that customer group. I would also say that historically once we have a customer, retaining them is highly dependent on getting a second and third purchase, after which they basically become customers for life. Usually a new customer purchases in the same category for their second and third purchase that they did for their first purchase. Often the first purchase is a home purchase or an electronics purchase because those are the categories that are best for attracting new customers, and of course both home innovations and electronics were down sharply, so what that often means is you bring in somebody early on in the home or electronics category and then you de-emphasize those categories so you don’t get a second purchase, and that increases the churn dynamics, and we certainly saw some of that in those increased customer profile basis.
In terms of the quarter and how it played out, we think about 60% of the shipped sales decline in QxH in Q4 was attributable to the relative weakness in new and reactivated customers.
The last piece that I would point out in that regard is that we saw real inefficiencies in digital marketing. Digital marketing costs in Q4 were up 30% to 40%. On some days like Black Friday and key weekends in December, we actually saw digital marketing costs up something like 50%. Part of how we get a customer to repeat is by reaching them through our digital marketing channels, and in a world where that’s more expensive, we’re making different return on investment tradeoffs, and we weren’t able to hit them with quite as much activity to encourage long term behavior as we might typically do.
I think looking back at those customer cohorts, I think there are a number of reasons why we have seen a little bit of an elevated churn dynamic among that customer base. I guess I would be encouraged by two things. The first is we have continued to see those customer--new customer demographics, for those that stay, they are maturing into our best customers at something close to historical rates, and once they become best customers, they’re continuing to be as loyal and as prolific in terms of their shopping behaviors as our historical best customers always have been, and so we are still filling the funnel of best customers with some of those bumper crops of pandemic-fueled new customers.
Jason Haas
Thanks, that’s good to hear. Appreciate the color.
Operator
The next question will come from Edward Yruma with Keybanc Capital Markets. Please go ahead.
Edward Yruma
Hey, thanks very much for taking the question. I guess two from me.
First, you outlined a lot of initiatives you’re working on. Some seem to be maybe more easy to rectify in the short term - merchandising issues missteps, and then maybe some more structural issues where you have to maybe augment the talent pool. I guess as you dimensionalize the timing around the turn, and I know you’re not guiding, but how should we think about the sequencing of things you can affect quickly, that we should see the responses for, versus what’s going to take longer?
Then as a follow-up, you guys have done a good job of returning capital to shareholders. With the stock down here, I guess how do we think about your openness to stock buybacks? Thank you.
David Rawlinson
Yes, I’ll take the first part and then let Greg also comment on the second part of the question.
I think there’s basically three time horizons, so there’s some things that are purely temporary that we would expect to see get better in the near to medium term. I think supply chain challenges, we expect to abate in the second half of the year. Obviously we’re dealing with some things like the fire at Rocky Mount, where we’re having to restructure the supply chain a bit, and that’s had an impact. I think some of the near term execution challenges, like you said, some of the structural changes we’re making should lead to some incremental improvement over time, and so I think those things we can hit relatively quickly.
There are longer term things, like the rebalancing of our sales composition to new and growing media, and augmenting away from our linear TV dependence, which is still a very good, profitable business for us, but making sure that we have the right mix of revenue between linear and new media, over the top, other types of streaming. That will take more time, and we’ll have to build that over time.
I think there’s some things we can do in the short term. I also think we’ll get some help in the short term as the world returns to a bit of a more normal pace, but I think changing the overall architecture of the composition for how we drive revenue and how we generate demand in the business and ultimately produce profits, that will take a little bit more time, although I will say we don’t believe we have forever. We’re in a dynamic market, we have competitors who are trying to figure this space out, and so while we recognize it’s going to take some time, we’re moving every day like it has to be done tomorrow.
Greg, do you want to say anything about capital allocation?
Greg Maffei
Sure, thank you David, and thank you for the question.
Look, I made my statement, I think you heard some words from David and Jeff which reinforce that. This business has a strong cash flow, this business has been a strong performer for a long time. We were extremely disappointed with what occurred in 2021 and the fourth quarter in particular, so we will be cautious and watch some of that. I do expect we have an opportunity to return to growth and pursue some--particularly growth in some of the new lines around digital that David mentioned. We were certainly surprised with the volatility of our working capital, that also had an impact on our free cash flow obviously, and we’re watching our debt levels, so we’re going to put that mix together, all of those factors and look forward to potentially returning to return of capital via share repurchase as we have done historically, but we’re going to weigh those factors and make that decision at the right time.
Edward Yruma
Thanks so much.
Operator
Our next question will come from William Reuter with Bank of America. Please go ahead.
William Reuter
Hi, so just a follow-up on that last question. It sounds like you will not be repurchasing shares in the near term. Is that the short answer to that?
Greg Maffei
I think you heard my answer, and you can interpret it as you wish. I didn’t say that. I said we’re going to watch the business and as it improves or moves, or we get comfort and certainty, we’ll probably lean in harder.
William Reuter
Okay, sorry. There was a little bit of a discussion there about as things improve and as those things improve, then you’d weigh those factors, so I kind of thought that that was referring to the fact that it wasn’t near term in nature. Okay.
The second question is on a lot of these challenges, you guys gave pretty helpful comments on a first half outlook, even if it wasn’t guidance. A lot of those things aren’t changing in the first half of the year. There are some things, such as the customer mix in terms of new customers and their over-indexing to the home category, as well as electronics - those will obviously change in the first half. Is it fair to say that the first half in a lot of ways will look like the fourth quarter, though?
David Rawlinson
It’s David. I’m not sure exactly how to answer that question without giving guidance. I think we’ve said what we can say.
William Reuter
Okay, thanks for taking the questions.
Operator
Next we’ll hear from Michael Coppola with JP Morgan. Please go ahead.
Michael Coppola
Great, thanks for taking our questions. You guys redeemed some of those exchangeable notes this quarter, I think the net cost, you guys said it was $315 million. Was curious, do you guys expect to repurchase a similar amount, kind of every quarter or so going forward as part of your ongoing liability management?
Then kind of in conjunction with that, can you remind us what the tax liability associated with that is as well, and where that stood as of year-end?
David Rawlinson
I’ll let Ben Oren, our Treasurer handle that.
Ben Oren
Sure. I would say the MSI exchangeable was a refinancing, there was a unique opportunity going into year end and potential changes to the tax regs in 2022. On a go-forward basis and similar to what we did with the T-Mobile or Sprint exchangeables, we look to try to proactively manage those depending on our cash balance, depending on other needs for cash, and depending on the amount of capacity we have for deductions and for interest expense, and so we will continue to do that if liquidity allows on a regular basis. To the extent that we do more than that, it would just be taking a look at it opportunistically.
Michael Coppola
Okay great, thank you. Then another question we had was on the fewer customer count. Can you guys elaborate a little bit on the breakdown of that between online versus TV, and if there’s any particular differentiation among the key age cohorts there as well?
David Rawlinson
Yes, sure. We don’t break out new customers by online versus television. I think I’d make two observations, though. The first is online new customer growth is disproportionately impacted by our performance marketing, and when performance marketing experiences the type of inflation that we saw in the back half of 2021, our ability to effectively bring new customers into online is hampered.
I would also say that product portfolio does make a difference online as well as people do branded and product-specific searches, and if you don’t have those, you don’t have the opportunity to drive sales and traffic to your website. A lot of the ways that we normally drive new customers online, I think were especially difficult.
I would say on the linear TV broadcast side, the story is a little bit more stable. People find us over time and the value proposition attractive, and so we do see spikes depending on the product portfolio that we’re showing on Today’s Special Value or Today’s Special on the linear TV side for sure, but I would say the number and type of acquisitions that we did from that side of the house tends to be a little bit more stable and predictable over time to what we’ve seen digitally.
Jeff Davis
Yes, the only thing I would add to that, while it’s not a direct correlation, we did see a higher penetration of ecommerce sales in our overall net revenue this particular quarter, which is an indication of how that customer is really engaging with us through digital media. There is some indication that as you think about online versus potentially direct linear customers, that there is a higher penetration on the online side.
Michael Coppola
Great, thank you. That’s all from us. Happy to pass it off.
Operator
Our last question will come from Jason Bazinet with Citi. Please go ahead.
Jason Bazinet
I just had a question for Mr. Maffei. You mentioned that the working capital was a little bit of a surprise to you, and I didn’t know if that was a commentary on the quarter or the year, and if you had any suggestions for us in terms of what surprised you - was it receivables or payables or inventory?
Greg Maffei
Yes, I’ll comment, and certainly David and Jeff can.
If you look, working capital was a large source of free cash flow in 2020 and it was a large use in 2021, and particularly in the fourth quarter. Jeff commented on some of that, in that inbound freight in particular was so high during 2021 due to the well described and well known problems around shipping from places like China, and we had a large amount of inbound freight costs which got caught up in working capital and in inventory. That’s one example of the volatility we had there. I think that was larger than as many years past, and as I said, a source in ’20 and a use in ’21 which had an impact on free cash flow.
David or Jeff, what might you add?
Jeff Davis
Yes, what I would add to that comment, and Greg, I think you hit the nail on the head, the only other component was that we had a higher percentage of our--a higher level of inventory in transit as a result of these delays coming into the country as well as getting it ultimately to the fulfillment centers. The inventory of course wasn’t available for us for the particular airing time - we’ve now carried that into 2022. We feel very comfortable with the quality of that inventory and the customer reactions to these particular products.
Then offsetting on the imbalance is that these inventories came in, we had to of course pay for them, and many times we didn’t have the opportunity to get them in their appropriate time slots for sales, so you have this imbalance of payables being lower and carrying a little higher inventory levels as a result of some of these delays.
Jason Bazinet
If I can just have one quick follow-up, does that mean--you said the supply chain issues you expect to persist through the first half of this year, is the corollary that this will likely continue to be a use of cash until things normalize and then become a source?
Jeff Davis
You know, without giving any guidance on this, our expectation is that we will continue to adjust our purchasing behaviors to account for some of the delays that we’re seeing, and as we work through our inventory levels and adjusting some of the relationship payable terms with our customers, this is something that we could see persist through the first half of the year.
Jason Bazinet
Okay, thank you.
Greg Maffei
Thank you for the question, Jason, and thank you to all the other listeners and questioners. Thank you again for your continued interest in Qurate Retail. We look forward to speaking with you next quarter, if not sooner.
Blogs & Forums
Forums
Blogs
