ValueVision (VVTV) Still the Best Stock Under $1


ValueVision Media Inc (VVTV) released their Q1 results on the 19th after hours and the conference call was held today on Wed May 20th. There was a lot going on with VVTV this quarter and my previous overly pessimistic attitude about its retail business has now changed. As VVTV starts or continues to turnaround, this cheap company really is one of the best stocks under $1.

VVTV Spider Graph Quick Overview

VVTV Business Valuation Overview

First Quarter Highlights

All the highlights and operation results can be read from the original press release.

GE Preferred Stock

The big obvious ones worth mentioning was that VVTV managed to negotiate its preferred stock with GE.

Negotiated with GE to restructure and extend the majority of its payment obligation of $44.3 million Series A preferred stock by five years. This extension provides the company with the time, flexibility and financial resources to execute the turnaround of its business. The impact of this transaction on the financial statements for the quarter include a $3.4 million cash payment of principal, interest expense of $743,000, and the newly issued Series B preferred stock with a valuation of $10 million on the balance sheet.

This was not that good of a deal for VVTV but they needed the extra time which is what they got. When I reflect a few months back regarding the restructuring of preferred stock, I realize the short term may not be so good, but the long term is much better with the deal rather than no deal and having to pay out a large cash redemption.

Cable and Satellite Distribution

The company stated that it expects to preserve 100% of its footprint [72 million homes], and with regard to negotiations completed to date, it expects to realize a 33% rate reduction. This is expected to result in a cost savings in the range of $22 million to $25 million in fiscal 2009.

A 33% rate reduction is a huge drop from its current levels. It isn’t enough to suddenly make VVTV profitable or ultra competitive, but it does allow VVTV to test new products.

Although VVTV will not be FCF positive anytime soon, the decrease in $22-25 million will make a big difference once it starts to take effect.

Insider Buying and Share Buy Backs

VVTV bought back 1.6 million shares for $900,000 at an average price of $0.58 per share which is around the price I first started buying. Although $900,000 isn’t a large sum, it’s finally good to see them increasing shareholder value.

The CEO insider buying has also been very positive with buyback prices ranging from the $0.20’s to $0.70’s.

Conference Call Notes and Thoughts

On a side note, a hunch I have about this CEO is that he is determined to see the company turn around. Although he was reading off a prepared statement, I felt that he knew what had to be done and how it was going to be done in a cool and collected manner.

Here are my thoughts on specific topics I was keen on.

Margins Increase Strategy

  • Current gross margins creeped over 30% this quarter but management is not satisfied. They are working towards a consistent gross margin of mid to high 30’s [35%-38% ish?]
  • Shifting product mix around. When I first started following VVTV it was all about the asset play. I was skeptical about its strategy to change up its product portfolio but they have shown, with numbers, that the strategy is beginning to work.
  • Margins will slowly move up as Q3 and Q4 approaches as predictable sales increase.

Re-order Business, Predictability of Sales and Product Mix

  • VVTV is trying to increase repeat sales. A strategy of getting the consumer to re-order items rather than selling one time high price products such as consumer electronics where the margins are only in the mid 20% range.
  • Additionally, an improved re-order business will provide some predictability in revenue with fewer markdowns since they do not have to test which products sell well or not. This should also reduce operating costs driving up the margins higher.
  • Electronics are low margin one time purchases so VVTV is trying to diversify into more predictable products.
  • The problem with the current model is having to introduce new products constantly to generate sales. This introduces risk since the products have to be either returned or marked down and sold if it doesn’t sell well. These non selling products also take up airtime which could be better used for popular products.

Inventory

  • I was surprised that VVTV used drop shipping method to store inventory. Drop shipping is where the retailer does not keep stock but transfers the order details to the wholesaler or manufacturer. The good thing with this supply chain management technique is that it will keep inventory low but to truly maintain a healthy and reputable retailing business, I believe drop shipping isn’t the answer.
  • VVTV will now keep inventory in their warehouse rather than drop shipping now. (Good!) This move should turn out to be efficient and cut some additional costs.
  • They also mentioned that their current inventory levels are at their 6 year low so in the next quarter, they will be doubling the amount of inventory to keep up with sales and to transfer to the inventoried supply chain management technique. With their inventory turnover slightly above 7, VVTV is doing an excellent job of churning inventory.
  • VVTV has also informed their suppliers that they will  be extending payment due dates by 15 days.

In the beginning of my investment with VVTV, I placed no hope on the retailer, but with new leadership and direction, it seems like the strategy VVTV is implementing is working. Strong insider buying, stock buy backs at cheap prices and numbers showing that their new strategy and focus is working keeps VVTV as the best stock under $1 in my books.

Disclosure

I hold VVTV at the time of writing.

  • I would make an argument for China 3C Group (CHCG) but its not below $1.
    The stock dropped 25% and is down from a recent high of $1.60 to a shade over $1.03. Still 7 cents x 4 would be 28 cents a share in a year… which for a $1.03 stock with about 55 cents a share in cash money. Also, cash flow positive

    -Alex

    AlexG’s last blog post..CVI: Top 50 Buy and Hold Bolgs

  • @ AlexG
    Thanks for the heads up. A small growing company able to be FCF neutral is definitely worth a look but with what I am experiencing regarding Chinese companies and management, I’m not too keen on placing anymore bets on these Chinese companies. Shareholders truly mean nothing to them. I’ll definitely take a look though.

  • I’m not too big on em either. Just so happens, CHCG was on the magic formula list for so long that I HAD to look 😉

    Anyway, a bit more on Chinese stocks. I have looked through a number of them but always find them overvalued or “hyped” in some way. Take for example Baidu. Its by far the most well known company , gets ton of media attention, its CEO is on CNBC,etc… despite some aggressive valuations, still overvalued. I did fiind that there are some better known companies that own interest in Chinese companies. Potash (POT) for example owns a stake in the number one Chinese fertilizer company.

    My .02. i apologize for any mispellings orrun-offs, but its early and I need some sleep

    AlexG’s last blog post..BYD: Will America Buy It?

  • The General

    From the conf call it was said that VV does have the scale to move toward the operating metrics enjoyed by one of the ‘players’ in the homeshop biz. There are only 2 publicly traded players: QVC and HSN. Since the majority of the VV management team came from QVC, it is likely they are most familiar with the metrics used to guage the performance of QVC. Those metrics are:
    Fixed Costs 7.5%
    Variable Costs 10.50%
    Product Cost 49%
    Shipping 10%
    EBITDA 23%
    VV is not going to achieve those metrics for some time but if it moves toward those metrics and continues to move toward those metrics in a meaningful way it will move from being an undervalued ‘value play’ to a ‘growth story’.

    That ‘growth story’ includes:
    1) Meaningful movement toward the above metrics Q by Q and YoY
    2) Growing its foot print from 72M homes to 96M homes over time with carriage fees that make economic/business sense
    3) Capitalize on internet video to accelerate .com sales
    4) Capitalize on mobile e-commerce

  • Thanks for the input The General. As you mentioned, VVTV does have the scale. With 72 million FTE’s they are getting closer to their competitors.

    Also, there is a rumor that QVC is trying to buy out HSNI and they have been accumulating HSNI shares in the mid $4.

  • The General

    Jae,

    Q now owns @34% of HSN. They are precluded from taking majority until 2010 I believe. Q & H are fully distributed but expected to grow high single/low double digits when economy improves. ShopNBC could grow 2-3x’s their rate because they have 24M homes in which to add and the current 72M in which they can reintroduce themselves with lower price points and different merchandise than the past.

    Q was valued at $14B in 2003 on sales of $4.2B….what would ShopNBC pps be with sales of $1.2B in a few years…and they would also be operating [email protected]% EBITDA margin at that sales volume.? That could be reality in 4-5 yrs. Discount back and you can see that current pps is no where near where it should be.

  • The General

    Check out the VV Investor Presentation. Sets out objectives to hit $1.1B Sales and 10%+ EBITDA margins in 3-5 years. 15x on $110M EBITDA in 5 yrs = $50/pps. Discount back 5 years then cut that in half and you have a $14 stock…about where it priced the last time it published similar plans/objectives…..and that is a pessimistic discount.

    This time could be different. Mgt has much industry experience which was lacking before…and the economy appears to be improving vs an imminent/precipitous decline before. Have also much better carriage arrangements.

  • Yes I did look at that and the strategy looks good.

    With most of the management coming from QVC, this is a play from the QVC book.

  • The General

    Jae,

    If one believes that much of the success that can accrue to a company is a result of the people who work there; the management/consultant team assembled at VV have the experience and the credentials that will allow ShopNBC to be successful…even very successful.

    When a CEO says he wants to double sales in 3-5 years and then double again in 3-5 years…it is just words…but when those words are backed up by the experience of a management/consultant team that did just that at QVC…seems it should be taken more seriously than $1.70/share….we shall see

  • The General

    Jae,

    Great Oaks Capital filed 13G today. Upped earlier position (44K shares) to 6.4% (2M+ shares).

    Perhaps they know what they are doing..?

    We shall see…

  • The General,

    Yes I did see that. Upped to 2+ million shares from 44k is a huge jump. Seems like they are backing up the truck on VVTV. Also safe to assume that it was Great Oaks that has been the cause of the recent runup.

  • The General

    Jae,

    I would not assume anything with the market and VV in particular. Recent mgmt change is good. It signals the turn-around is in the next phase. It is now about execution. The team they have put together is very capable of executing and delivering results that will drive the share price to new Hi’s. (and I mean higher than the 52 wk sort of Hi)

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