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With all the attention ValueVision (VVTV) has been receiving lately, it’s been a while since I opined about VVTV.

Let’s discuss some points on VVTV regarding some interesting discussions I have had, recent news and what to expect.

Insider Buying

I’m sure you are aware of the insider stock purchases by the management team at VVTV, especially the CEO. Keith Stewart has been buying heavily in the open market for the past few months ranging from $0.28 all the way up to $1.83.

The CEO’s activity alone totals 1.22 million shares equating to $1.05 million of his own money.

These are not restricted stock options, these are the same shares that we as the public purchase so he is not receiving a better deal under the table.

The May DEF14A document which details executive compensation does state that the CEO has opted to receive stock options and grants for the first year instead of a salary but remember that it is all tied to performance. None of which they have been able to meet so far.

However, the important question is what does Keith Stewart see in VVTV for him to spend over $1million in cold hard cash from his own pocket on the stock of his company?

With 15 years of prior experience at QVC, I would prefer to bet that the CEO knows something about the value of the business.

This now brings me to a short discussion on the fair value of VVTV.

VVTV “Value” Discussion

I was involved in a few discussions about the intrinsic value of VVTV lately. The most interesting was with a person that previously worked at QVC.

The arguments he brought forth were:

• VVTV is expensive and should be trading in the 80c range at best.
• The company is not trading on fundamentals. Lots of hype and expectation.
• VVTV still has a high cash burn rate and no reliable historical performance.
• The company strategy is bound to fail if it just a copy of QVC and HSN.
• VVTV was not profitable last quarter and will not be profitable the next.

Considering all 5 points, there is truth to it and I do see why people would think that VVTV is a speculation, but to me, all of the above points constitutes a rather short term 3 month type of Wall Street thinking and completely forgetting the fact that price is what you pay and value is what you get.

Price and value go together. If VVTV was at its current state and selling for $5, there would be no way that I would even touch it with a 10ft pole but at less than $1 or even $2, that is a different story altogether. Price plays the role in risk reward. Without taking this into consideration would be fiddling with the numbers on only one side of the equation.

When I first looked at VVTV, I was hoping for a short term play with a buyout in the $2 range. However, things have changed and when I now look at the business, I see a company that has restructured their debt giving them 3 years to improve the business, new carriage contracts to lower costs and improve margins, new management that is experienced and understand the business, previous Chairman (Buck) no longer in position, a business that is being sold for 1/2 book value, 0.12% of its sales, plenty of cash, exposure to 80+ million households and growing and good insider ownership. All being sold for less than $1 when I started loading up.

So my firm conviction is that VVTV is still cheap compared to its value. So far, people have directly emailed me that my views are far too optimistic. I’ve had some really good opinions and discussions but in the end it doesn’t matter. I have conviction with the cards I am playing with.

Business Strategy

In the last conference call, we were finally able to get a better understanding of how ValueVision expects to implement their new strategy. To sum it quickly, it is a copy of the QVC playbook.

My view is that copying QVC isn’t a bad choice. If VVTV has to copy its competitors to get back on track, let them. The first priority is to get profits. Top line and bottom line.

Once management has a handle on the margins and profits, then it may be time to differentiate and try new things but getting back to basics has never been a bad thing.

VVTV’s reliance on high end electronics and jewelry cost them dearly as the market turned and their new strategy of changing up the product mix to bring in more recurring sales is a wise one. Their online presence is increasing as well.

One of the golden rules of retail is that it is far easier to sell to a previous customer than to attract a new one. The direction they are going is a good one. Much better than trying to commodities in the upper end.

Recent Monetizing of Assets

On July 10, a press release stated that VVTV had “monetized its portfolio of auction rate securities for $19.4 million in cash”. I find the final sentence to be misleading, “The company stated it is pleased to have monetized these securities and strengthened its balance sheet.”

When I first read the headline, I was pleased that they would add to their cash balance but upon some brain scratching, it seemed like the company needed cash, but for what? I came to the conclusion that cash was needed to purchase inventory. From their last conference call, CEO announced they would be purchasing plenty of inventory now that they have abandoned drop shipping.

FYI I previously wrote: “They[VVTV] 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.”

What to Expect with the Business

The worst of the market seems to be behind us, HSN will be announcing their quarterly results on Aug 5th  which will provide an indication of how VVTV may have performed.

I’m not expecting a surprise earnings or a sudden turnaround just yet. VVTV cash burn should remain on the high side and the new cable renegotiation effect won’t be visible until the next two quarters or so.

Profit and margins should slowly inch up, there should be an increase in customers, although at a lower price point.

The important point is to look at the business at least 1 yr ahead and decipher what you see rather than get stuck on the recent price movements.

Disclosure

I hold VVTV at the time of writing.

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

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.

Todd Sullivan of Value Plays recently posted some retail numbers and discussed Sears internet presence. However, I noticed it included numbers for ValueVision’s (VVTV) competitors QVC and HSN so I went to the source of data to try and find some more information.

From the list we can see that QVC.com is 7th and HSN.com is 13th. To my disappointment, VVTV i.e. ShopNBC.com is not on the list. Considering all three businesses have similar product mixes, cable channels close to each other and websites looking and feeling similar, I am curious as to why shopnbc.com didn’t break the top 20 list.

When I first wrote about VVTV, I mentioned that retail is a tough business and I didn’t really feel their shopping website was as valuable as it seemed. I wasn’t taken in with the whole concept of “shop as you watch a video presentation” experience since it is distracting, time consuming and difficult with a slow internet connection. So when I checked back in to the ShopNBC shopping website today after a few months, I was glad to see the site redesigned. No more bandwidth hogging, time consuming and dominating videos. It now looks very similar to the other websites.

For VVTV, it is just a matter of gaining some online retail presence to support its home shopping business. If VVTV can market its way into the top 20, that’s when I’ll start getting excited about future aspects. We’ll also have to wait and see whether the negotiation in carriage contracts with the cable companies will improve margins in the home shopping side.

An obvious point at this time is that there is no way anyone can dethrone Amazon from its dominating number 1 position for now. I’m not hoping VVTV becomes number 1. I’m just hoping it can somehow break the top 20 online retailers.

Disclosure

I own shares of VVTV at time of writing

ValueVision (VVTV) has been gaining some big momentum as it has shot up from its low stock price of $0.18 to $0.74 and up again after hours to $0.83.

I first began looking at VVTV because it was:

1. Trading at a huge discount to what I believed was its liquidation value based on Graham’s Net Net formula,
   • (No longer a net net due to its increase in off sheet obligations)
2. An easy to understand business,
3. Cash flow from operating activities was positive,
4. Short term uncertainty surrounding the company

It also confirmed David Dreman’s Rule 12 from Contrarian Investment Strategies

Rule 12: (A) Surprises, as a group, improve the performance of out-of-favor stocks, while impairing the performance of favorites.
(B) Positive surprises result in major appreciation for out-of-favor stocks, while having minimal impact on favorites.

ValueVision’s catalyst was based on the company pursuing strategic alternatives that included the sale of the company. However, on Jan 27, 2009, it was announced that there were no final bidders for the business and subsequently, the stock price fell 50% as institutions gave up and sold out.

The other short term uncertainty surrounding the company, its upcoming $44mil preferred stock redemption to GE Equity, was restructured and delayed until 2013 which provides plenty of breathing room for the company to turn its performance around. At the same time, the new restructuring agreement with GE included 6 million warrants to purchase VVTV at $0.75 and a stock buyback plan of $1.5 million over the next 12 months.

I wasn’t impressed with the conditions (still not) but the recent massive insider buying does finally prove that insiders believe the stock price to be incredibly cheap. Previously, analysts and portfolio managers were grilling the management for not purchasing back its shares but the recent buying activity has created some much needed surprises and optimism.

It VVTV remains at around 75c, GE is then entitled to use its 6 million warrants which will cause the stock price to fall as the shares are diluted.

However, ValueVision is a cheap stock, not as cheap as it used to be, compared to its ongoing operations. Insiders and institution buys as well as a featured video from The Street naming VVTV as “The Best Stock Under $1” doesn’t hurt in gaining more public interest.

As an ongoing business, VVTV seems to be worth around $1.50 at a minimum.

Disclosure

I hold VVTV at the time of writing

As previously mentioned, the big cause of concern related to VVTV was its upcoming redemption of GE Capital’s preferred stock which would have wiped out most, if not all, of VVTV’s cash and put it close to bankruptcy. Instead they have been able to restructure the preferred stock to the following conditions:

• An upfront cash payment of $3.4 million
• 4.9 million shares of a new series of non-convertible redeemable preferred stock with a redemption amount of $40.9 million and a 12% dividend rate, payable in 2013 and 2014
• Repayment of the preferred stock is scheduled for 30% in 2013 and the remainder in 2014 with accelerated payments possible only if ShopNBC generates excess cash above agreed upon thresholds
• Warrants to purchase 6 million shares of the company’s common stock at $0.75 per share.

In addition,

The company also announced its board of directors authorized a common stock buyback of up to $1.5 million over the next 12 months. The timing and amount of any repurchases will be determined by management based on an evaluation of market conditions and other factors. The buyback will be funded through existing cash balances.

What Does This Mean?

The restructure allows VVTV to extend its obligations by 5 years which gives it breathing room and squashes fears of bankruptcy as it continues to work on a turnaround. However, the new deal obviously benefits GE Capital. How? The original aggregate redemption cost to GE for all the preferred stock is $44,264,000. This number has not changed.

$3.4 mil + (0.3 x 40.9 mil)  + (0.7 x 40.9mil) = $44.3 mil

VVTV now has to pay a 12% dividend and dilute shareholders by offering an additional 6 million warrants.

The other news was the stock buyback plan. If $1.5 million is used to buy back stock at an average price of $0.25, the company would end up buying back 6 million shares (1.5 mil/0.25=6mil). Do you see the “coincidence”? Buyback 6 million shares and then dilute with 6 million warrants.

The stock buyback therefore seems like an effort to create an illusion of enhancing shareholder value, but is in fact, a strategy of slyly countering the dilution. It is a shame that the preferred isn’t bought back.

Management

If my theory is correct, it confirms what I think about management – not much. I understand that John Buck is trying to direct the company but with such a high and sudden turnover in executives and board members of late, it really questions what he is trying to do.

Letting the company fall to such valuations without a single buyback until now is also questionable. I never got the impression that the board had their interests aligned with shareholders.

I could be completely wrong with this theory or it may not matter as people simply gloss over the details and focus on the stock price and how it is related to the warrant price of $0.75.

Disclosure

I own VVTV at the time of writing