Qurate Retail(QRTEA) - 2023 Q4 - Annual Report

Part I Business Qurate Retail operates in video and online commerce through QVC and Cornerstone Brands, emphasizing customer engagement, cost reduction, and human capital development Description of Business - QVC QVC, a global video and e-commerce leader, generated $5.5 billion in 2023 e-commerce revenue and is implementing 'Project Athens' for performance improvement - QVC reaches approximately 216 million households worldwide through broadcast, websites, streaming, and mobile apps[26] - In 2023, QVC's global e-commerce operations generated $5.5 billion, representing 58.6% of its consolidated net revenue[29] - Project Athens, a five-point turnaround plan, was initiated in 2022 to stabilize QVC-U.S. and HSN brands, involving inventory reduction and a workforce reduction completed in February 2023[33] QVC Global Sales Mix by Product Category (2021-2023) | Product category | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Home | 41% | 40% | 40% | | Apparel | 18% | 18% | 16% | | Beauty | 18% | 17% | 18% | | Accessories | 11% | 11% | 11% | | Electronics | 7% | 9% | 10% | | Jewelry | 5% | 5% | 5% | | Total | 100% | 100% | 100% | Description of Business - CBI CBI operates a portfolio of home and apparel brands primarily through e-commerce and catalogs, supplemented by 30 retail stores, focusing on proprietary products - CBI's portfolio includes home brands (Ballard Designs, Frontgate, Grandin Road) and an apparel brand (Garnet Hill)[65] - In 2023, CBI circulated approximately 111 million catalogs to customers[67] - CBI operates 30 retail and outlet stores throughout the U.S. as a marketing tool to increase demand[65][71] Regulatory Matters The company faces extensive U.S. and international regulations covering broadcast, e-commerce, data privacy, product claims, and trade policies, as evidenced by recent settlements - QVC is subject to FCC program access and carriage rules due to attributable ownership interests in cable operators[73][75] - E-commerce operations must comply with data privacy laws such as the E.U.'s GDPR and California's CCPA/CPRA, which govern the collection and use of personal data[82][83] - In October 2023, HSN settled with the CPSC for $16 million regarding the alleged failure to timely report issues with a clothing steamer product[124] Human Capital Qurate Retail employed approximately 20,300 people as of December 31, 2023, with human capital strategies focused on DE&I, employee engagement, and health and safety - As of December 31, 2023, consolidated subsidiaries had approximately 20,300 full and part-time employees[93] - The company is committed to Diversity, Equity, & Inclusion (DE&I) with focuses on leadership representation, education, culture, and community impact[94] - Based on employee feedback, a flexible distributed workforce model was introduced in 2022, allowing some team members to work from home[95] Risk Factors The company faces diverse material risks including 'Project Athens' execution, distribution agreements, intense competition, cybersecurity, supply chain, economic fluctuations, and significant indebtedness - The 'Project Athens' turnaround plan may not realize expected cost savings or business improvements in the anticipated timeframe[113] - QVC's business depends on maintaining affiliation agreements with television distributors, with the majority expiring between 2024 and 2029[114] - The company faces intense competition from large retailers like Amazon and Walmart, which have greater resources and brand recognition[127][129] - QVC has significant indebtedness ($4.364 billion in secured debt as of Dec 31, 2023), which could limit its operational and financial flexibility[219] - The business is subject to cybersecurity risks, including threats to personal data, which could lead to liabilities and reputational damage[184] Cybersecurity Qurate Retail manages cybersecurity via LMC and QVC's dedicated functions, utilizing the NIST Framework with Board oversight, and has not identified material threats - Corporate IT and cybersecurity functions are provided by LMC via a services agreement, while QVC operates its own cybersecurity function with corporate oversight[234] - The cybersecurity risk management program is designed based on the NIST Cybersecurity Framework[236] - The Board's Audit Committee has primary oversight of cybersecurity risks and receives quarterly updates from management[245] - As of the report date, no cybersecurity threats have been identified that are reasonably likely to materially affect the company's business, strategy, or financial condition[243] Properties Qurate Retail's properties include leased corporate headquarters, QxH and QVC International facilities, and CBI's offices, fulfillment centers, and 30 retail stores - QxH leases its corporate headquarters in West Chester, PA and owns a multi-functional building in St. Petersburg, FL[254] - CBI owns an office in New Hampshire and leases fulfillment centers in Ohio and Arizona, in addition to 30 retail and outlet stores[257] - In December 2023, QVC agreed to sell its call center in Kassel, Germany, which is classified as held for sale[256] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Qurate Retail's common stock trades on Nasdaq, with no cash dividends paid in 2023 or 2022, and no stock repurchases in Q4 2023 - The company's Series A (QRTEA) and Series B (QRTEB) common stock are traded on the Nasdaq Global Select Market[263] - No cash dividends were paid on common stock during 2023 and 2022. A special cash dividend of $1.25 per share was paid in November 2021[266][267] - There were no repurchases of Series A or Series B common stock during the three months ended December 31, 2023[270] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Qurate Retail's revenue declined to $10.9 billion, but operating income significantly improved due to lower impairment charges, while 'Project Athens' and liquidity management remain key focuses Overview Qurate Retail's overview highlights the Zulily divestiture, post-COVID retail challenges, the Rocky Mount fire insurance settlement, and strategic sale-leaseback transactions - Zulily, LLC was divested on May 24, 2023, resulting in a $64 million loss. Its results are included through that date and are not presented as discontinued operations[274] - In June 2023, QVC received a final insurance settlement for the Rocky Mount fire, with cumulative proceeds reaching $660 million, resulting in a net gain of $208 million after accounting for costs[282] - The company completed sale-leaseback transactions for properties in the U.S. (2022), Germany, and the U.K. (2023), generating significant cash proceeds and gains[285][287] Strategies and Challenges The company's strategy centers on 'Project Athens' to improve QVC and HSN through customer experience, cost reduction, and streaming, while navigating economic and market challenges - Project Athens focuses on five key areas: (i) customer experience, (ii) core process execution, (iii) cost reduction, (iv) brand portfolio optimization, and (v) building high-growth businesses like streaming[288] - A key challenge is navigating economic uncertainty, as discretionary spending, which drives a substantial portion of revenue, typically falls during periods of instability[296] - CBI's strategy involves acquiring new customers through direct-to-consumer marketing, expanding its retail footprint, and developing more proprietary products[298] Results of Operations—Consolidated Consolidated revenue decreased to $10.9 billion in 2023, primarily due to the Zulily divestiture, but operating income significantly improved to $590 million due to lower impairment charges Consolidated Operating Results (2023 vs 2022) | (amounts in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | | | | QxH | $6,995 | $7,359 | | QVC International | $2,454 | $2,528 | | CBI | $1,165 | $1,313 | | Corporate and other | $301 | $906 | | Consolidated Qurate Retail | $10,915 | $12,106 | | Operating Income (Loss) | | | | QxH | $275 | $(1,820) | | QVC International | $370 | $306 | | CBI | $35 | $48 | | Corporate and other | $(90) | $(575) | | Consolidated Qurate Retail | $590 | $(2,041) | | Adjusted OIBDA | | | | QxH | $746 | $750 | | QVC International | $325 | $358 | | CBI | $67 | $78 | | Corporate and other | $(64) | $(122) | | Consolidated Qurate Retail | $1,074 | $1,064 | Reconciliation of Operating Income (Loss) to Adjusted OIBDA (2023 vs 2022) | (amounts in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Operating income (loss) | $590 | $(2,041) | | Depreciation and amortization | 407 | 481 | | Stock-based compensation | 53 | 60 | | Restructuring, penalties and fire related costs, net of (recoveries) | (189) | 3 | | Gains on sale of assets and sale leaseback transactions | (113) | (520) | | Impairment of intangible assets | 326 | 3,081 | | Adjusted OIBDA | $1,074 | $1,064 | Liquidity and Capital Resources As of December 31, 2023, Qurate Retail had $1.12 billion in cash and $2.28 billion available under its credit facility, though QVC's debt covenants restrict certain dividend payments Cash and Cash Equivalents by Segment (Dec 31, 2023) | (amounts in millions) | Cash and cash equivalents | | :--- | :--- | | QVC | $307 | | CBI | $86 | | Corporate and other | $728 | | Total Qurate Retail | $1,121 | - As of Dec 31, 2023, QVC's leverage ratio was above 3.5 to 1.0, restricting its ability to pay certain dividends to Qurate Retail, though payments to service parent debt are still permitted[324] - Projected uses of cash in the next year include ~$330 million for interest payments, $235-$250 million in capital expenditures, and payments for television distribution rights and preferred stock dividends[330] - On February 27, 2024, QVC issued a notice to redeem all its outstanding 4.85% senior secured notes due 2024[332] Results of Operations—Businesses QVC's consolidated net revenue decreased to $9.45 billion in 2023, but operating income significantly improved due to lower impairment charges, while CBI's revenue also declined QVC Operating Results (2023 vs 2022) | (amounts in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net revenue | $9,449 | $9,887 | | Adjusted OIBDA | $1,071 | $1,108 | | Operating income (loss) | $645 | $(1,514) | - QxH 2023 revenue decreased 5.0% due to a 6.3% drop in units shipped, partially offset by a 3.1% increase in average selling price[354] - QVC International 2023 revenue decreased 1.3% in constant currency, as a 3.1% decrease in units shipped was partially offset by a 2.3% increase in average selling price[354] CBI Operating Results (2023 vs 2022) | (amounts in millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net revenue | $1,165 | $1,313 | | Adjusted OIBDA | $67 | $78 | | Operating income | $35 | $48 | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate changes, with a mix of fixed and variable rate debt, and foreign currency fluctuations impacting international operations - The company manages interest rate risk through a mix of fixed and variable rate debt. As of Dec 31, 2023, QxH and QVC International had $857 million in variable rate debt at a weighted average rate of 7.0%[373] - Qurate is exposed to foreign exchange risk from QVC's international subsidiaries. A 1% change in FX rates relative to the USD would have impacted 2023 Adjusted OIBDA by approximately $3 million[375] Financial Statements and Supplementary Data This section presents Qurate Retail's audited consolidated financial statements for 2021-2023, including balance sheets, income statements, cash flows, equity, and detailed accounting notes Consolidated Balance Sheets As of December 31, 2023, Qurate Retail's total assets decreased to $11.37 billion, while total liabilities also decreased to $10.88 billion, resulting in a slight equity reduction Key Balance Sheet Items (Consolidated) | (amounts in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $3,682 | $4,275 | | Goodwill | $3,164 | $3,501 | | Total assets | $11,368 | $12,571 | | Total current liabilities | $2,617 | $3,099 | | Long-term debt | $4,698 | $5,525 | | Total liabilities | $10,879 | $12,046 | | Total equity | $489 | $525 | Consolidated Statements of Operations In 2023, Qurate Retail's total revenue decreased to $10.92 billion, but operating income significantly improved to $590 million, leading to a reduced net loss of $145 million Key Income Statement Items (Consolidated) | (amounts in millions, except per share) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Total revenue, net | $10,915 | $12,106 | $14,044 | | Impairment of intangible assets | $326 | $3,081 | $363 | | Operating income (loss) | $590 | $(2,041) | $1,087 | | Net earnings (loss) attributable to shareholders | $(145) | $(2,594) | $340 | | Diluted EPS | $(0.37) | $(6.83) | $0.82 | Notes to Consolidated Financial Statements The notes detail accounting policies, the Zulily divestiture, impairment charges, debt structure and covenants, lease obligations, and related party transactions - A goodwill impairment of $326 million was recorded for the QxH reporting unit in the fourth quarter of 2023. This followed a $2.54 billion goodwill impairment for QxH in 2022[501][504] - As of Dec 31, 2023, total consolidated debt was $5.94 billion in principal, with carrying value of $5.34 billion. This includes various senior secured notes at QVC and exchangeable debentures at the corporate level[506] - The company has $1.36 billion in total future operating lease payments, with a weighted-average remaining lease term of 12.6 years[548][554] - The company's 8.0% Series A Cumulative Redeemable Preferred Stock is classified as a liability ($1.27 billion) and is subject to mandatory redemption in March 2031[576][584][588] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023, following remediation of a prior IT general controls material weakness - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[379] - A material weakness related to IT general controls (ITGC) reported in the 2022 Form 10-K was remediated as of December 31, 2023[384][385] - Remediation actions included enhancing ITGC risk assessment, improving access controls, delivering training, and implementing additional compensating controls[388] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023. The independent auditor, KPMG LLP, issued an unqualified opinion on the effectiveness of internal control[390][392] Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive compensation, security ownership, and related transactions, is incorporated by reference from the 2024 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive proxy statement for the 2024 Annual Meeting of Stockholders[661] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including corporate documents, debt indentures, and material contracts - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K[664] - Exhibits include key corporate documents, indentures for debt, material contracts such as executive employment agreements and incentive plans, and required certifications[666][668][669]