Ladies and gentlemen, good morning, and welcome to the HSN Inc. First Quarter 2015 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's discussion, the HSNi team will be taking your questions. With that, I'd like to turn the call over to Felise Glantz Kissell, Vice President of Investor Relations. Ms. Kissell, please go ahead.

Good morning everyone and thank you for joining us. On this morning's call, we have Mindy Grossman, Chief Executive Officer of HSNi; and Judy Schmeling, Chief Operating Officer and Chief Financial Officer. Judy will first review our financial performance. Mindy will then strategically discuss the business. As always, some of the statements made on this call may be forward looking and as such are subject to many factors that could cause actual results to differ materially from expectations reflected in the forward-looking statements. Additional information regarding these factors, as well as various risks and uncertainties, can be found in HSNi's earnings release filed with the U.S. Securities and Exchange Commission and available on the company's website. HSNi does not undertake to publicly update or revise any forward-looking statements. Also on today's call, there'll be references to certain non-GAAP financial measures. These are described in more detail in the company's earnings release and SEC filings available on the HSNi website. You are encouraged to refer to the press release and SEC filings and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP results. I would now turn the call over to Judy Schmeling, HSNi’s COO and CFO. Judy?

Thanks, Felise. Good morning and thank you for joining us. As we embarked in 2015, we remain highly committed from differentiating HSNi of the content trends and immersive commerce destination. The strategic focus combine with our efforts to financial discipline resulted in strong results for the first quarter that include sales growth of 8%, with digital sales up 12%, gross profit dollars higher by 9%, adjusted EBITDA increased 22% and adjusted earnings per share growth of 26%. At HSN, we had excellent performance in the first quarter. Sales grew 10% to $600 million with digital sales growth of 18% and digital penetration increasing 280 basis points to 41%. All categories aside from jewelry reported growth in the quarter led by apparel and accessories, home and electronics and health. Our direct-response television marketing campaign featuring Keith Urban also contributed to our sales results. Excluding the Keith Urban direct-response business, sales increased 8%. HSN’s units shipped increased 8% and average price point grew 2%. Leveraging data analytics and customer insights contributed to customers spending more with us and purchasing additional items. Return rates improved 60 basis points primarily driven by product mix. Gross profit increased 9% to $208 million. Gross profit margin decreased 40 basis points to 34.6% largely due to an increase in inventory reserves as well as the impact of clearance activity primarily in jewelry. We do expect that jewelry will be pressured in the near term as we continue to take actions to reposition this business. Our immediate strategies in jewelry include evaluating and refining our product assortment as well as leveraging our new destination programming concepts that Mindy will speak to shortly. Operating expense leverage, excluding non-cash charges, improved 60 basis points to 23.5% as a result of higher sales leverage over fixed operating expenses and included cost…

Thank you, Judy, and good morning everyone. Our performance in the first quarter reflects the continued execution of our customer strategy and our ability to leverage data analytics to both great personal connection and drive commerce. It also reinforces the experiential power of our content, our capacity to effectively create engagement across our platforms and the appeal of our unique product assortment. During the first quarter, HSNi had sales growth of 8% and EBITDA growth of 22%. Once again, accelerated performance in digital was a key factor in our growth momentum, with digital up 12%, representing half of our total business. Mobile grew 31% for the quarter, with penetration at 18% of total sales and 36% digital sales. Our performance was propelled by the result of HSN, which included sales growth of 10% and EBITDA growth of 12%. The Cornerstone portfolio demonstrated tremendous improvement in the quarter. Sales grew 4% with EBITDA growing exponentially, driven by solid results across the majority of the portfolio, led by strong performance at Garnet Hill, Frontgate and Ballard Designs. At HSN, we had our second consecutive quarter of double-digit sales growth, with strong performance across nearly all categories. Digital sales continued to be exceptional, growing 18% over the prior year. Our strategic customer initiatives enable us to start the year in a much stronger position than in the same period last year. Our active customer file was up 6% to over 5.3 million, a growth rate we haven’t seen since I joined the company nine years ago. All customer buying segments demonstrated very strong growth, with the highest increase from new or reactivated customers and best customers. This illustrates how effectively we are bringing more new customers into the HSN experience and moving them along a path of increased loyalty and engagement. And HSN…

[Operator Instructions] Our first question comes from Eric Sheridan with UBS.

A question about customer growth, you’ve now seen an increase in customer growth over the last two quarters, highest level you’ve seen, Mindy, in a long time, wondering what you’re seeing from those new customers as they come on to the platform? And then you talked a little bit about social media. How much is social media and even the potential for paid search that are available for you to drive maybe new member growth from a non-TV landscape into the platform as well going forward?

Obviously, overall customer growth simulation, retention and migration for greater spend has all been in unison to the collective impact. A substantial portion of that new customer growth is through our digital platforms, increasingly mobile. And that mobile customer is our youngest most affluent and most diverse. So very valuable as we bring the customer in. However, what has really impacted the momentum has been the assimilation of those new customers which has really been a result of our capability in terms of our system transformation around analytics and customer relationship with management and the tools and talent that we’ve really brought in. Social, definitely is a significant part of that strategy across every one of our social platforms, but we don’t peanut butter it, we have very specific strategies with Pinterest, Twitter, I talked a lot about Instagram and we do feel that platforms with strong visual content have the future opportunity we believe to drive the greatest potential that convert to commerce. So again, they all play strategically together.

Our next question comes from Tom Forte with Brean Capital.

Mindy, I really wanted to take this opportunity to ask you about something I’m getting a lot of questions from investors, it’s the [indiscernible] from cord cutting, so there is a lot of concern that as more consumers cut their cable cords and elect for over-the-top options, it’s going to have a material negative impact on your business.

Actually I think both Judy and I can certainly talk to that, one on the distribution side and then I’ll talk to my perspective on what it all means.

And I think to tie it together, we don’t view it as just people cutting the cord, it really is about the content itself. And HSN does not charge license fee and we actually own all of our content, the inclusion of HSN on almost all the over-the-top platform is very straight forward unlike some other content providers. And we strive to have HSN carried on in a multiple platform, but primarily those ones that do have a good viewer customer experience and as you know we already carried on several connected TV platforms like Samsung, Sharp and Panasonic, so on standalone devices like [TEGO and ROCU]. And so we’re continuing to look at options for us to be able to have that great content that we create day in and day out and attract new and different customers. The over-the-top platforms are continuing to evolve and we believe that we’re positioned well for this change and the landscape and also are looking for opportunities to be able to use our patented shop by remote technology to make that experience much different and unique to HSN. So we think that there actually is some additional opportunities for us in this area. And I do think that’s why there is also a lot of chatter about over-the-top platforms. I think that continuing to soften the cable providers, actually the bundle package is actually a very good option and I think I wouldn’t underestimate the competitive nature of that business from what they do as well.

And do Judy’s point, our belief is it's not a [indiscernible] content, right. And I think that we continue to look at not just how do we get the customers to come to HSN, but how do we get HSN out in the landscape of distributed commerce. And the amount of original content net of the live show that we are creating has increased dramatically. And the more platforms we can get that content on is more opportunities for the customers to interface with HSN, so whether that's univeseon, AOL, YouTube and Judy also mentioned shop by remote. So our new version which was developed for the HTML-type platform, it really is kind of the best of TV, timely video, and broad product on demand. And I think as we continue to leverage the unique capabilities that we have, and again as Judy mentioned, I think we are positioned differently than maybe some other players that you would think of.

Our next question comes from Q - Neely Tamminga with Piper Jaffray.

Question for you, Mindy, on products, on outdoor specifically, could you help us rewind to last year's outdoor situation and how we are approaching that more specifically this year and what that can be for Q2 for you guys, I think that's a pretty decent sized opportunity for Q2? And then Judy, as it relates to the West Coast port situation, are we totally done with the bottleneck that's occurred from debentures point of your business, if you could give us an update there would be great.

So, if you recall last year, we had a slow start to the outdoor segment and had a tough time really catching up throughout the balance of the season. So clearly, we are encouraged by what we are seeing this year. But another thing to take into consideration, particularly with Frontgate and as I highlighted for Ballard, Grandin, we stepped up our product offering and our assortment in indoor home. So, we are not as dependent. We are still dependent, I mean, it's a big part of our business, but we are continually working to be more diversified and that definitely was a factor in Frontgate's performance in the first quarter versus last year.

Mindy, can I ask a quick follow-up to that, is that just under the banner of – you guys are better positioned for just overall entertaining too, I mean, this year versus last year as people gather, is that another way to kind of think about how you're approaching outdoor?

Yes, I think we have more options to your point, so if you look at, it's everything from furniture, to accessories, to day core, to dining and if you look at the new flash catalog which is more of the fun outdoor, pool et cetera and it features the entire Margaritaville assortment. It's just really create this whole level of fun and entertaining and I think it really inspired the team, not just in the Margaritaville product, but in general to say we want to own fun for the entire summer.

In terms of the West Coast port situation, we did have impact on that. I think we have mentioned it on the other call and it continued into the second quarter. We are not completely off away through it, we are still having some backup issues on the Cornerstone side, but hopefully over the next couple of weeks we will be done and be able to ship all of our products finally. We did actually have some impact on the HSN side of the business with some of our partners not being able to get their product, but we were able to move different shows and have different items in that timeframe. So a little bit different than the Cornerstone side of the business. But the one thing that I think is unknown is how, how is that impacting other businesses and is there going to be any more competitive issue, not that I can imagine, there would be in apparel side of the business, it's so competitive already, but would there be any more competitive issues with that? But overall, we should be done with having any backup at the port.

Our next question comes from Jason Bazinet with Citi.

I just have two quick questions. I think all of us have been trying to figure out whether lower gas prices were going to show up or not show up, do you think anything in the solid results that you reported is a function of lower gas prices or would you describe it more to just execution? That's my first question. And then secondly, on the Cornerstone part of the business, if I go back to the prerecession era, you were running gross profit per catalog at a little over $1 and it went up after the recession and is slowly being coming back down. Do you ultimately see that getting back to that $1-ish level as opposed to the $1.50-ish level where it peaked? Or is that the wrong way to think about it?

Let me answer the first question. Our perspective is absolutely anything that more disposable income into the consumers' hand and into the economy is going to have a positive impact on the business. And any kind of betterment to how the consumer is feeling about what their comfortable spending is going to have a positive impact on the business. So yes from that perspective. But clearly, as we walk through the results for the quarter, we also believe it is the combined execution of the strategies that we employed.

Jason, sorry, we weren't quite following your $1 and $1.50 question. Can you repeat that?

Sure, yes. I mean, just one of the simple calculations we do is just your gross profit on the Cornerstone side of the business per catalog that's in circulation and when we went into the recession, I think you dialed back the magnitude of circulation of Cornerstone and so your gross profit per catalog was rising. Since we came out of the recession, it seems like it's falling, but it still has a long way to go before we get back to the 2007, 2008 levels?

First of all, you're looking at an aggregate portfolio, so that is very different business today than it was prerecession. Prerecession, our apparel businesses had a much higher percentage of the portfolio than they do now. So our gross profit dollar rate on the home side of the business is lower than on the apparel side of the business. And then I think that the market dynamics have changed a lot and we are a lot more competitive on pricing as well as shipping and handling costs which affect that gross profit dollars. So we are doing everything we can to continue to improve our gross profit dollars and gross profit margin rate, I think, as you can see in this quarter, we made a dramatic improvement. But I don't believe that that metric is one that is going to be easily obtained in the short or near-term.

Our next question comes from Alex Fuhrman with Craig-Hallum Capital Group.

I wanted to talk a little bit about channel placement, I'm wondering it looks like there's been a lot of markets where you are in a greater number of channels than you were six or 12 months ago, I'm wondering if maybe that's because of maybe some of the ease of getting into some of those base packages that you alluded to earlier in the Q&A. And if that's contributing to the lift in customers, I was surprised to hear, it sounds like reactivated customers are actually contributing as much as the new customers are to the revenue growth. And I'm wondering if that is perhaps due to increased channel placement or new products or really what's driving the increase in the reactivated customers.

Sure. So I will take that channel placement. Our average channel placement hasn't changed dramatically over the past year. We do have some more HD channels which has continued to increase in penetration. Some markets might have dual channel, an analog and an HD, other ones were actually combining those and then we also have our HSN2 which rolled out on Comcast, that definitely has contributed somewhat to our performance, although it's not huge. So I think it probably depends on what you're looking at in your market, but overall, we haven't dramatically improve or added additional channels, other than on HSN2 on Comcast.

And actually what's interesting is where we are seeing improvement, you've seen certainly the digital accelerated growth, a lot of that growth is coming from engagement and sales of products that have nothing to do with the live television broadcast. So it really has come from our digital marketing, our digital content effort and our customer out link effort that contributed to both the new customer acquisition and the reactivation and we can track that. And so that's what we're seeing.

And then thinking ahead to the Margaritaville partnership that you have staggered across a number of your different brands, I'm not sure if you mentioned it during the call, but is it fair to assume that Mr. Butler will be joining us for a live concert on HSN?

Not at launch, but let's never say never. But we are excited about that partnership on a number of levels, we do think it really aligns really well from both a brand and a consumer perspective. They are great partners to work with, have incredible reach as I mentioned, will be integrating with – they are the number two radio station on Sirius, it's Margaritaville TV. And this is not just a one-time event launch, this is going to be a sustainable business, ongoing, and will be continuing to develop products and coming up with events and concepts throughout the year that we're pretty excited about.

Our next question comes from Trisha Dill with Wells Fargo Securities.

My first question is on the leverage your generated in Q1 with EBITDA growth well above revenue, obviously the comparisons get a bit more challenging in the back half of the year, but maybe you can talk to how you are thinking about full year EBITDA growth relative to revenue and whether or not there are any additional investments that might be planned for the back half that could impact this leverage?

So, yes, it was terrific leverage in the first quarter. I think if you break that down by business units, part of that is because of dramatic improvement at the Cornerstone brands. And so obviously it's our lowest quarter performance and we didn't have that same degradation in the back half, so our comps are higher. So I would say you're not going to continue to see 800%, it is the best increase at Cornerstone side of the business. So we try not to look at it by quarter though, we look at how we perform over a year because in any certain quarter you are going to have ebbs and flows. For instance, in the second quarter at HSN, that is actually our lowest sales quarter, so we don't have the same leverage over our fixed operating expenses whereas on Cornerstone it's a much more – the largest quarter that they had. So it will balance itself out over the course of the year. And again, I think we are constantly looking at how do we perform over the year and I think if you look at last year, the year performance on the HSN side, that's really indicative of how we are thinking and looking at 2015. And then of course continued improvement on the Cornerstone side, albeit not as dramatic as the Q1 performance.

And then just a quick question on the personalization efforts that you spoke to on the call, maybe you can give us a little more detail on what you're doing there and how that will evolve throughout the year with may be any color on how much higher conversion is when the customer receives a personalized email or any other metrics that you share on the effectiveness of this strategy?

There's a number of strategies inherent throughout that digital journey. So how do we continue our digital optimizing efforts to drive conversion, right? And then on the personalization side within the customer journey, how do we use our new capabilities to continue to drive that. And we are constantly testing and iterating, so I mentioned in our customer confirmation emails, we are now able to personalize part of that content, some will be extending that out. So it really is from end to end, continuing to test both in our customer outreach strategies as well as through the online journey itself, how can we be more personalized and customized. And we do believe that this is something that is going to be a continued the area of focus for us. We are obviously seeing the results and how much further can we take that.

Our next question comes from Barton Crockett with FBR Capital Markets.

A little bit more about the item, the number you called out in the release about two percentage point contribution to sales from the direct-response television marketing campaign that started during the fourth quarter and continued into the first quarter. I was curious how you did the math there, is that the revenues generated from this event like an assumption of what you would have been selling had you just been doing your normal operations in those timeslots?

Let me explain that, Barton. It's actually it's not on HSN, so these are separate media buyers that we are buying and are shown on other channels. So when you see any type of direct response [indiscernible] on other channels, if you see Keith Urban say on DirecTV, on whatever, that would be our response. So it's all the sales that we recorded directly through that program.

Okay. So on a completely different channel?

Yes, it's very simple, because it's a completely different channel, not Keith Urban's HSN business. It is pre-recorded programming that is generating those sales. And the reason for that, Barton, is obviously given Keith's schedule, we're able to have Keith's live performance three times a year, very focused, but we realized that this was a business that we thought we had the opportunity to maximize much more broadly than that and this was a way for us to do it as long as we continue to see that profitable balance of investment versus return, we will continue. And I should say with the media spend that we are planning in Q4 and Q1 is higher than what is planned in Q2, because that's generally a softer period for that type of programming. So I do want to call that out, it would be that same 2% more than likely in Q2 and we will determine for Q3 and Q4 as we go forward.

So is this something that’s just very particular to Keith Urban or is it something you would like to do more of in other products, other personalities?

I would not call this a strategy for the broad business. Certainly if we see another opportunistic product scenario that we really think can lend itself, we now have the findings and the knowledge, but then again we are being very purposeful and this is something we thought made a lot of sense because as I mentioned, the structure of when we can have Keith within the live show, the product itself, its ability to be very demonstrable and scenario. So again, it was very purposeful. We're not saying we wouldn't do it again if we find the same combination of assets, but it's not like we are proactively looking to do more.

Our next question comes from Anthony Lebiedzinski with Sidoti & Company.

I have a couple of questions. So first as a follow up on the gasoline prices, so gas prices are actually up around 10% versus a month ago, but still substantially down from a year ago, so just wanted to get a better sense as to what part of your customer base would be the most sensitive to gas prices? The second question is also the outlook for jewelry, just wondering how you are thinking about the holiday quarter for that segment. And lastly is more or less a housekeeping question about the tax rate assumption, how should we think about that for the year?

In terms of the gas prices and all that, one of the things if you look across our portfolio, our customers' average income ranges from about $70,000 on the HSN side, in excess of $100,000 across most of the portfolio brands, and in excess of $300,000 at Frontgate. So we don't play in the really heavy pressured value segment, okay. So it's not the penny. But again, it's a combination of gas prices and consumer sentiment. But again, we are not in that are really pressured traditional low end bank. So I just want to clarify from that point of view. As far as jewelry is concerned, we are being very strategic around the repositioning. And as you can imagine, just like what we did in culinary, some of that is getting out of businesses, adding businesses, growing businesses. And to your point, we're really trying to do that work. So we can maximize the fourth quarter which we know is a great quarter for that business.

And in terms of your question on the effective tax rate, we think it will be between 37% and 38% for the year.

Our next question comes from Matthew Harrigan with Wunderlich Securities.

[indiscernible] for your concert as you keep putting up your sales numbers, how does the cable show, there is a lot of interest in 4K, I think really at an inflection point and that was evidence to you guys as well, most of the delivery be on the streaming basis rather than a linear channel basis. I mean, you talked about the richness visual content, certainly your entertainment programming certainly, what you do is marketing, making the products look as good as possible. And I know everyone is very sensitive as to production cost on 4K right now, I think probably the assumption a while ago would have been that wasn't particularly applicable to you, but do you think that that could [indiscernible] because I mean, a lot of advertisers I wouldn't think will even be able to offer 4K programming in a lot of linear channels. And then I actually had a number of questions, but I will hold with that one. And then the second question would be some talk about Martha Stewart, that still seems kind of extensive for you, it'd be a pretty big commitment, I don't know, I guess you probably ordinarily don't comment on quick side of the speculation, but in an event that you were inclined to do so, I'd love to that. And then I had a couple of follow-ups.

Sure, I will take the Martha Stewart question. Yes, we don’t comment on – in terms of 4K, yes, we are looking at that and seeing what makes sense for us and we do have great entertainment and programming, we’re all about – but we don’t do this for entertainment, taken as combining that with the shopping experience. So we're constantly looking at ways to maximize our performance.

And just looking at kind of random, but when you look at your entertainment profile now and the electronics growing as fast as it is and social media, are you getting more of a male component leaching into your new customer numbers from what you had to look for?

No, it's still very much a female driven business. It's not that we don't have male customers particularly in electronics and our cooking businesses. But still, the vast majority of the decisions and purchases are being influenced by the women.

And it's kind of less the demographics for us and it's more the psychographics of why she likes shopping in this environment. And it's part that she just like shopping, but she is very social, so she really likes this idea of getting the idea, the information it is very empowering to her. And finally we've had a lot of success as well with our K. So there's a reason for her to come to our platform for everything she likes to do.

And then finally on social media, some consultancies have concluded that you just kind of hear that the face change in terms of all retailers recognizing the obsolete pivotal to their business right now. When you look at Cornerstone and clearly Margaritaville rounds across Cornerstone as well as HSN, how would you characterize the social media intensity for that business? Obviously there are some metrics you can measure in terms of the activity, I guess the demographics probably benefited, but it feels like it's less of a kind of cohesive community type ambience to the business than you have with HSN.

I'm going to step back and talk about it specifically about social and more about the broad-based community. We absolutely are going to be looking to partner with Margaritaville to tap into their very engaged audience. That really has an affinity of that brand. So some of that certainly is going to be social channels, some of it is going to be their media channel, their digital channel and our outreach. And we're going to use that all in tandem. And certainly we want to engage as much of that audience as possible. So it's a big part of that strategy.

Our next question comes from Ben Mogil with Stifel.

In terms of the M&A environment, it's been a while since you have done any deals on the Cornerstone side. Are you seeing the digital valuation just be hard for you to rationalize and build versus buy makes more sense for you in contrast with what you're seeing on the M&A environment in general?

I think that we are always in the marketplace to evaluate and look at businesses that fit our criteria. To your point, there has been definite issues with valuations in many cases. But the other part of it is we believe that there are still a lot of opportunity to invest in our own businesses and create new platforms such as Porta Forma which is just launching and other areas that we think are the best investments for us within our own categories. So we will continue to look at what can be added and really have an impact materially on our business, but we are also going to continue to invest.

And there are no other questions at this time. I'd like to turn the call back over to Ms. Grossman for closing remarks.

Thank you everyone. We look forward to following up and speaking with you soon.