Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our business
strategies; COVID-19 (as defined below); the impact of the fire at Rocky Mount
fulfillment center; revenue growth at QVC, Inc. ("QVC"); our projected sources
and uses of cash; the recoverability of our goodwill and other intangible
assets; and fluctuations in interest rates and foreign currency exchange rates.
Where, in any forward-looking statement, we express an expectation or belief as
to future results or events, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the expectation or belief will result or be achieved or accomplished. The
following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
the impact of the novel coronavirus ("COVID-19") pandemic and local, state and
? federal governmental responses to the pandemic on the economy, our customers,
our vendors and our businesses generally;
customer demand for our products and services and our ability to attract new
? customers and retain existing customers by anticipating customer demand and
adapting to changes in demand;
? competitor responses to our products and services;
? increased digital TV penetration and the impact on channel positioning of our
programs;
? the levels of online traffic to our businesses' websites and our ability to
convert visitors into customers or contributors;
? uncertainties inherent in the development and integration of new business lines
and business strategies;
? our future financial performance, including availability, terms, deployment of
capital and our level of indebtedness;
? our ability to effectively manage our installment sales plans and revolving
credit card programs;
the cost and ability of shipping companies, manufacturers, suppliers, digital
? marketing channels, and vendors to deliver products, equipment, software and
services;
? the outcome of any pending or threatened litigation;
? availability of qualified personnel;
? the impact of the seasonality of our businesses;
changes in, or failure or inability to comply with, government regulations,
? including, without limitation, regulations of the Federal Communications
Commission, and adverse outcomes from regulatory proceedings;
? changes in the nature of key strategic relationships with partners,
distributors, suppliers and vendors;
domestic and international economic and business conditions and industry
? trends, including the impact of inflation and the United Kingdom's exit from
the European Union;
? changes in the trade policy and trade relations with China;
? consumer spending levels, including the availability and amount of individual
consumer debt and customer credit losses;
? system interruption and the lack of integration and redundancy in the systems
and infrastructures of our businesses;
? advertising spending levels;
changes in distribution and viewing of television programming, including the
? expanded deployment of video on demand technologies and Internet protocol
television and their impact on home shopping programming;
? rapid technological changes;
failure to protect the security of personal information, subjecting us to
? potentially costly government enforcement actions and/or private litigation and
reputational damage;
? the regulatory and competitive environment of the industries in which we
operate;
? natural disasters, public health crises (including COVID-19), political crises,
and other catastrophic events or other events outside of our control;
? threatened terrorist attacks, political and economic unrest in international
markets and ongoing military action around the world; and
? fluctuations in foreign currency exchange rates.
For additional risk factors, please see Part I, Item 1A. Risk Factors of our
Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021
10-K"). These forward-looking statements and such risks, uncertainties and other
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factors speak only as of the date of this Quarterly Report on Form 10-Q, and we
expressly disclaim any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto and the 2021 10-K.
The information herein relates to Qurate Retail, Inc. and its controlled
subsidiaries (collectively "Qurate Retail," the "Company," "Consolidated Qurate
Retail," "us," "we" or "our" unless the context otherwise requires).
Overview
We own controlling interests in video and online commerce companies. Our largest
businesses and reportable segments are our operating segment comprised of QVC
U.S. and HSN ("QxH") and QVC International. QVC markets and sells a wide variety
of consumer products in the United States ("U.S.") and several foreign
countries, primarily by means of its televised shopping programs and the
Internet through its domestic and international websites and mobile
applications. Zulily, LLC ("Zulily"), an online retailer offering customers a
fun and entertaining shopping experience with a fresh selection of new product
styles launched every day, is a reportable segment.
Our "Corporate and other" category includes our consolidated subsidiary
Cornerstone Brands, Inc. ("Cornerstone"), along with various cost and equity
method investments.
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China and has
subsequently spread across the globe causing a global pandemic, impacting all
countries where Qurate Retail operates. As a result of the spread of the virus,
certain local governmental agencies have imposed travel restrictions, local
quarantines or stay at home restrictions to contain the spread, which has caused
a significant disruption to most sectors of the economy.
QVC transitioned most administrative employees to a hybrid work model and
certain employees have moved to permanent work from home arrangements which has
resulted in the reduction of office space. Due to ongoing staffing issues and
labor shortages, QVC has increased wages and offered incentives, resulting in
additional costs to the company. As a result of these resource constraints QVC
has experienced some delays in shipping at certain fulfillment centers. The
inability to control the spread of COVID-19, or the expansion or extension of
containment measures, such as stay at home restrictions, could negatively impact
QVC's results in the future.
The stay at home restrictions imposed in response to COVID-19 required many
traditional brick and mortar retailers to temporarily close their stores, but
allowed distance retailers, including QVC, to continue operating. As a result,
from the end of the first quarter of 2020 and continuing through the first
quarter of 2021, QVC observed an increase in new customers and an increase in
demand for certain categories, such as home. Beginning in the second quarter of
2021 through the second quarter of 2022, QVC observed a decline in new customers
and a decline in demand for its home product category, while also seeing an
increase in demand for its apparel product category.
In addition, there are several potential adverse impacts of COVID-19 that could
cause a material negative impact to the Company's financial results, including
its capital and liquidity. These include reduced demand for products we sell;
decreases in the disposable income of existing and potential new customers; the
impacts of any recession and other uncertainties with respect to government
responses to COVID-19; increased currency volatility resulting in adverse
currency rate fluctuations; higher unemployment; labor shortages; and an adverse
impact to our supply chain and shipping disruptions for both the products we
import and purchase domestically and the products we sell, including essential
products experiencing higher demand, due to factory closures, labor shortages
and other resource constraints. While the future impact is currently uncertain,
the inability to control the spread of COVID-19 could cause any one of these
adverse impacts, or combination of adverse impacts, to have a material impact on
our financial results.
Beginning in the second quarter of 2021, QVC saw increased product shortages as
a result of high market demand in some product categories such as home and
electronics. QVC also experienced escalating shipping disruptions due to
challenges in the global supply chain and labor market causing extended lead
time on inventory orders. As a result, the
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delayed receipt of inventory ordered in prior periods impacted QVC's ability to
have the right products at the right time and has contributed to higher
inventory levels as of June 30, 2022. These factors also impacted QVC's ability
to offer certain goods and ship orders timely to its customers. In addition, QVC
has seen increasing inflationary pressures during the period including higher
wages, freight, and merchandise costs. Russia's invasion of Ukraine, as well as
the related international response, is exacerbating inflationary pressures. If
these pressures persist, inflated costs may continue to outpace QVC's pricing
power in the near term.
Early decisions by the Biden Administration confirm continuity of a bipartisan
consensus in the U.S. government favoring increased confrontation of China in
trade practices and economic matters, national security and human rights. The
imposition of any new U.S. tariffs on Chinese imports or the taking of other
actions against China in the future, and any responses by China, could impair
the Company's ability to meet customer demand and could result in lost sales or
an increase in the Company's cost of merchandise, which would have a material
adverse impact on the Company's businesses and results of operations.
On December 18, 2021, QVC experienced a fire at its Rocky Mount, Inc.
fulfillment center in North Carolina. Rocky Mount was QVC's second-largest
fulfillment center, processing approximately 25% to 30% of volume for QVC U.S.,
and also served as QVC U.S.'s primary returns center for hard goods. The
building was significantly damaged as a result of the fire and related smoke and
will not reopen. QVC has made a decision not to rebuild the facility; however,
it is still in the process of determining future plans for the property. QVC has
taken steps to mitigate disruption to operations including diverting inbound
orders, leveraging its existing fulfillment centers and supplementing these
facilities with short-term leased space as needed. Based on the provisions of
QVC's insurance policies and discussions with insurance carriers, QVC determined
that recovery of certain fire related costs is probable, and recorded an
insurance receivable. For the year ended December 31, 2021, the Company
recorded $250 million of fire related costs and estimated insurance recoveries
of $229 million for which recovery was deemed probable. For the six months ended
June 30, 2022, the Company recorded $135 million of fire related costs,
including $95 million for the write-down of inventory, and estimated insurance
recoveries of $37 million for which recovery was deemed probable. The insurance
receivable balance was $66 million as of June 30, 2022, net of $200 million of
insurance proceeds received in advance, which was recorded in Trade and other
receivables, net of allowance for credit losses in the condensed consolidated
balance sheet.
During the six months ended June 30, 2022, inventory write-downs related to
Rocky Mount of $95 million were included in cost of goods sold. Due to the
circumstances surrounding the write-downs of the inventory, these write-downs
have been excluded from Adjusted OIBDA (as defined below). These write-downs are
expected to be submitted as part of QVC's business interruption insurance claim;
however, there can be no guarantee they will be recovered. QVC expects to
continue to record additional costs and recoveries until the property damage and
inventory recoverability assessment is completed and the insurance claim is
fully settled. While QVC has taken steps to minimize the overall impact to the
business, it experienced increased warehouse and logistics costs during the six
months ended June 30, 2022 and anticipates these increased warehouse and
logistics costs to continue during 2022.
In June 2022, QVC modified the finance lease for its distribution center in
Ontario, California which reduced the term of the lease and removed QVC's
ability to take ownership of the distribution center at the end of the lease
term. QVC will make annual payments over the modified lease term. Since the
lease was modified and removed QVC's ability to take ownership at the end of the
lease term, the Company concluded that a successful sale and leaseback
transaction had occurred. QVC recognized a $240 million gain on the sale of the
distribution center for the three and six months ended June 30, 2022 calculated
as the difference between the aggregate consideration received (including cash
and forgiveness of the remaining financing obligation of $84 million) and the
carrying value of the distribution center. The gain is included in (gain) loss
on sale of fixed assets, net in the condensed consolidated statement of
operations. The Company accounted for the modified lease as an operating lease
and recorded a $37 million right-of-use asset and a $31 million operating lease
liability, with the difference attributable to prepaid rent.
In July 2022, QVC sold five owned and operated properties located in the U.S. to
an independent third party and received net cash proceeds of $443 million.
Concurrent with the sale, the Company entered into agreements to lease each of
the properties back from the purchaser over an initial term of 20 years with the
option to extend the terms of the property leases for up to four consecutive
terms of five years. QVC will make initial base rent payments of $27 million per
year and increasing to $39 million per year. QVC expects to record a gain in the
third quarter related to the successful sale leaseback transaction.
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