HSN, Inc.: weathering the retail storm.
Assouad, Alexander ; Jackson, William T. ; Fellows, James A. 等
CASE DESCRIPTION
This case was developed through the use of secondary research
material. The case has a difficulty level of five and is appropriate to
be analyzed and discussed by advanced undergraduate and graduate
students in a strategic management or accounting class.
The case allows the instructor the flexibility of concentrating on
one strategic issue, or examining the entire strategic management
process as well as complicated financial accounting reporting. The major
focus within the strategic analysis as well as excellent stand alone
modules is in the area of legal/political influence, economic,
accounting, or the ability to survive in an unattractive industry. The
instructor should allow approximately one class period for each element
addressed. Using a cooperative learning method, student groups should
require about two hours of outside research on each element researched.
The case also provides an impetus to explore a once very successful
company that existed as a member of a major conglomerate to an
stand-alone operation facing significant start-up issues under the new
arrangement.
CASE SYNOPSIS
This case is a library, popular press and internet case which
examines HSNi- a broad-based retailer that owns and operates an
interactive lifestyle network (HSN), a television network, print
catalogs, as well as an internet site to support its
business-to-consumer business model. The review of annual reports, trade
journals, government documents and proposed and enacted regulations must
be accomplished carefully. While most students have a general
understanding of the home shopping industry, few have the current
knowledge to compare this industry against more traditional operations.
A review of these resources should lead students in determining the
future of the company and the current CEO, Mindy Grossman.
INTRODUCTION
Mindy sat in her office suite overlooking the HSNi campus in
beautiful Saint Petersburg while she previewed the soon to be released
video detailing the company's Annual Report. She was quite pleased
with the positive feel that the video had considering the year the
company had just experienced. While she knew that those that understood
the industry would agree with the upbeat nature of the presentation, she
could not help but worry about the investor reaction--not that she had
not already lived that reaction constantly over the last twelve months.
Many thoughts kept rolling through her mind--would the economy
finally rebound from the lows experienced over the past 18 months; had
the company secured the cable rights necessary to move the company
forward; would there be any disruptions due to technological glitches no
one could predict; was the government going to constantly interfere with
an industry that hardly understood; was there any way to withstand the
competition that had finally recognized the potential of the industry;
would her studio stars still be icons to the viewing public this time
next year; and a thousand other issues she cared not to recall. But
mainly her mind kept returning to stockholders--how were they going to
understand that on one day the company had an over two billion dollar
asset on the next day they did not. Maybe it was time to put on a big
smile and face those challenges head-on.
COMPANY HISTORY
HSNi was incorporated in May 2008 as a result of the
"spin-off" by IAC/InterActiveCorp ("IAC"). The
predecessor company of HSNi initiated operations in St. Petersburg,
Florida in 1981. By 1985 the company had established 24 hours a day,
seven days a week broadcasting on a national network through a
combination of cable satellite and broadcast systems.
Until 2008, the company was reaching approximately 91.9 million
homes in the United States. In addition, IAC owned the Cornerstone
Brands portfolio. This portfolio included numerous print catalogs and
related websites. Both of these operations were a major part of the IAC
Retail Group (IAC/InterActiveCorp). However, in May 2008 all of the
rules of the game changed for HSNi.
HSNi openly admits in documents filed with the Security and
Exchange Commission that the company is subject to numerous threats.
These threats that exist in the external environment could also be
accentuated due to the potential of various weaknesses within the firm.
As will be discussed in more detail later, a few of these concerns
include: the eroding economic environment; the reliance on pay
television operators in reaching its customers; tenuous vendor
relationships; cost conscious consumers; increased distribution costs;
pressure from government agencies; potential changes in the sales tax
laws; the need to protect sensitive customer information and the
reliance on technology to accomplish that required task; protection of
its own intellectual properties; heightened competition; and, the impact
of the recent spin-off not the least of which includes a two billion
dollar plus write-off of goodwill.
COMPANY VISION AND MISSION
Joseph Shumpeter may have been envisioning the likes of HSNi when
he referred to creative destruction in regard to entrepreneurial firms.
As is stated in the company's vision statement, the company strives
"To be an original brand experience that becomes a disruptive force
on the retail and cultural landscapes." As was the case with other
companies that challenged the traditional distribution systems, HSNi has
indeed brought about many changes to the retail environment. In
addition, the firm's mission statement reinforces the maverick
attitude of the company:
"Deliver the joy and excitement of new discoveries every day:
Discover new products-You will find things that you can't find
anywhere else Discover new ideas-I get so many ideas...how to make
things work for me, how to solve problems Have fun-Its light, it's
fun, it's my time, just for me"
INTERNAL OPERATIONS
MARKETING:
Retail industry success relies heavily on the success of the
marketing efforts within a firm. Most important in that marketing mix
will be the efforts in advertising. Due to the unique nature of the
multi-channel marketing strategy being followed by HSNi, the company has
been successful in promoting each element (and channel) or sales. The
television format not only promotes the products it sells but
compliments the online options as well as catalog format.
SECURITY CONCERNS:
In an industry that is founded on the concept of
"long-distant" commerce, certain internal measures are
required to ensure completion of transactions. This activity generally
involves collecting sensitive information from customers such as credit
card information. While successful companies have specializing in this
market have dedicated considerable assets to protect customer
information, those seeking to usurp the system have been equally
aggressive. Many companies have experienced the impact on goodwill when
such breaches of security have occurred.
THE ECONOMY
The retail industry has been especially hard hit by the recent lows
in the economy. This has been most apparent in most of the upscale to
moderate scale department store chains. A true indicator of this
downturn is generally reflected in same store sales as can be seen
below.
Much of this downturn in upper-end department store spending is a
reflection of the conservative approach to shopping being taken in many
households. Consumers have not been convinced that the recession is
nearly over and in light of this fact there has been a significant trend
to reduce spending and debt. Standard and Poor's researchers
suggest that this has produced a positive impact on specialty stores and
discounters who "accounted for 31.5% and 20.9% of US apparel sales
in 2008, up from 30.6% and 20.9% respectively. The influence on retail
purchasing is both a reality of lower disposable income levels as well
as a lack of confidence in the economy.
In addition, consumers have turned rapidly to convenience in
shopping brought about partially due to rising fuel prices-an issue that
has also increased distribution costs for the retailers. This has been a
positive for those firms that sell through the internet or television
media. It has also been beneficial to firms that can convince shoppers
of a best value for their money option.
INFLUENCE OF REGULATIONS
HSN has faced more than its fair share of legal challenges since
its inception. The most significant action taken against the company
occurred when the FTC placed a consent order on the firm in 1996. If at
any time prior to April 15, 2019 HSN is found making claims for products
that suggest they "can cure, treat or prevent any disease or have
an effect on the structure of the human body" without substantiated
scientific evidence, they will be subject to significant fines and
penalties. In addition, HSN must always be cognizant of their liability
associated with any product sold through their network. This liability
can related to actions taken over misrepresentation of the facts as well
as the result of harm caused by the product.
[GRAPHIC OMITTED]
HSN operates in an extremely fluid industry in regard to the laws
governing transactions with consumers. The company must remain aware of
laws relating to retail operations not just in Florida where the
headquarters are based, but also in any state or territory where the
consumer receives purchased goods. These laws pertain to consumer
protection, privacy, general retail activity, and that of goods
purchased through the internet. This environment is constantly on the
move. A good example and one that is viewed as highly volatile in the
weak economy relates to the collection of sales tax collection for goods
sold on the internet. While the limited collection requirements has
afforded internet sales companies a potential advantage over traditional
retailers, court activity in this area is increasing.
Other specific regulations impacting the company include: FDA
regulations focused on food products; the EPA's concern and control
over environmental claims such as "antibacterial"; and the FTC
as well FCC regulating telemarketing activities. Indeed, there is much
required to stay ahead of the regulation game.
DIRECT COMPETITORS
HSN is not alone in its approach to home shopping retailing. Two
major competitors are squeezing margins in their pursuit of this retail
segment--QVC and Shop NBC. As was the case with HSN, each is a member of
a powerful conglomerate.
QVC is by far the strongest competitor in this market. With sales
in excess of $7 billion and a comprehensive array of mechanisms to
pursue this multimedia retail segment, an eye must always be focused on
their operations.
The company is a wholly owned subsidiary of Liberty Media
Corporation. Founded in 1986 as a home shopping alternative, the company
has branched out to the internet with QVC.com, receiving the unique
distinction as the number two web site for customer satisfaction in
ForeSee Results' "Top 100 Online Retail Satisfaction
Index."
The focus of all segments of QVC is "to draw an upscale,
discerning, and loyal customer base." This desire has translated
into the ability to represent some of the leading product lines in the
world (i.e. Dell and Bare Escentials).
QVC employs over 17,000 employees worldwide, reaches over 96
percent of all US cable homes plus a sizable percentage of the satellite
home market (over 166 million households). In April of 2008, the company
launched QVCHD capitalizing on this technology to provide a crisper,
more colorful and detailed programming format. And, as the company
itself states:
"The phones are ringing off the hook at television home
shopping company QVC. QVC (its name stands for "quality, value, and
convenience") offers about 1,600 items each week to TV-tied
shopping addicts. Merchandise includes apparel, cosmetics, electronics,
housewares, jewelry, and toys. It broadcasts 24 hours a day; viewers
call in their orders to one of its six call centers. If you can't
find what you're shopping for on the tube, it also sells online and
through five outlet stores plus a full-line store at the Mall of America
in Bloomington, Minnesota. The company also has shopping channels in
Germany, Japan, and the UK."
Shop NBC, although smaller also has placed significant pressure on
HSN. Shop NBC focuses on premium lifestyle brands in each of its product
lines. As was the case with many retailers, the last year has created
many challenges. Sales plummeted from $781.6 million in the year ended
January 31, 2008 to $567.5 million in the year ending January 31, 2009.
Most experts suggest this decline was caused by the reliance on high-end
products by the company--an issue that is already being addressed by
Shop NBC. A breakdown of the company's product mix is shown below.
Shop NBC Product Mix
Home Products 8%
Jewelry 36%
Electronics 22%
Watches & Coins 22%
Apparel 12%
Note: Table made from pie chart.
OTHER COMPETITION
As will be discussed later, the traditional retail industry
suffered significant setbacks during the previous year due to the
economic downturn. Many of these traditional department stores
recognized the shift to "best value" and convenience desires
of consumers and began to make changes. Nordstrom and Saks are two
examples of companies that elected to follow a more advanced
multi-channel retail strategy. This shift, in the case of these two
companies, even included movement into their off-price stores--Nordstrom
Rack and Saks Fifth Avenue Off 5th.
Discounters too have withstood the economic downturn much better
than the traditional department store and added to the erosion of sales
coveted by the home shopping networks. Much of this improvement with the
discounters, however, has been attributed to a more diverse product
offering-not just reliance on apparel.
Another area being focused on by HSN yet one many others see as
having high potential is private labels. Retailers in general have
recognized that this approach is beneficial in establishing brand
identity and customer loyalty. In addition, (and especially important in
the down economy) this approach eliminates the middleman associated with
national brands and allows for higher profit margins and a perception by
the consumer of a greater price-value relationship.
QUESTIONS FOR DISCUSSION
Based upon the analysis of the general environment, which forces
present the greatest challenges to HSNi?
After a thorough analysis of the industry environment using the
Michael Porter Five Force Analysis, describe the attractiveness of the
industry.
Complete a SWOT analysis of HSNi. What are the critical issues
facing the company?
What key financial ratios should be focused on for HSNi? How does
the company stand in regard to some of its competitors in regard to
these ratios?
Analyze the cause of the 2 billion dollar plus write-off of
goodwill. Does this write-off doom the company to failure and marginal
performance in the future?
REFERENCES
Anonymous (2008). IACInteractiveCorp.; IAC completes spin-offs of
HSN, INC., Interval Leisure Group, INC., Ticketmaster and Tree.com, INC.
Investment Business Weekly, Sept 7, p. 115.
Anonymous (2008). HSN, INC. adopts stockholder rights plan. PR
Newswire, Dec 29.
Anonymous (2009). Steve Lococo's eco-care hair products to
launch on ShopNBC; New color-safe eco-care system debuts on august 9th.
PR NewsWire, August 6.
Dodes, R. (2009). Style-In fashion: Isaac Mizrahi meets QVC-the
network creates a part-pitch, part-reality show to capture the designers
outsize persona. Wall Street Journal, July 25, p. W4.
HSN, INC. Form 10-k Report, 2008.
Porter, M. E. (1980) Competitive Strategy: Techniques for Analyzing
Industries and Competitors. New Your: Free Press.
Porter, M. E. (1985) Competitive Advantage. New York: Free Press.
Savitz, E. J. (2008). The writing is on the wall for HSN and John
Malone. Technology Trader, June 19.
Sullivan, S. (2000). Shopping channels: Less of a hard sell.
Broadcasting & Cable, Nov 27, 130 (49), 86-88.
Thompson, A. A., Strickland, A. J. & Gamble, J. E. (2007).
Crafting & Executing Strategy (15th Ed.). Boston, McGraw-Hill Irwin.
www.dmwmedia.com/news/2008/06/09.
www.finance.yahoo.com
www.hsni.com
www.hsni.com/index.cfm
www.qvc.com/about
www.netadvantage.standardpoor.com/docs/indsur
Alexander Assouad, University of South Florida St. Petersburg
William T. Jackson, University of South Florida St. Petersburg
James A. Fellows, University of South Florida St. Petersburg
SAME-STORE SALES OF SELECTED DEPARTMENT STORES AND DISCOUNTERS
(Percent change from previous quarter)
2008 *
FISCAL
YEAR END 1Q 2Q 3Q 4Q
BETTER DEPARTMENT STORES
Nordstrom January (6.5) (6.0) (11.1) (12.5)
Saks January 8.4 (4.0) (11.5) (15.3)
UPPER-MODERATE DEPARTMENT STORES
Dillard's January (6.0) (3.0) (9.0) (8.0)
Macy's January (2.6) (2.1) (6.0) (7.0)
MODERATE DEPARTMENT STORES
J.C. Penney January (7.4) (4.3) (10.1) (10.8)
Kohl's January (6.7) (4.6) (6.7) (9.1)
Sears, Roebuck January (9.8) (6.7) (10.6) (11.0)
DISCOUNT STORES
99 Cents Only
Stores ([dagger]) March 1.5 (0.5) 4.7 4.2
Big Lots January 3.4 2.8 (0.2) (3.2)
Dollar Tree Stones January 2.1 6.5 6.2 2.2
Family Dollar
Stores ([dagger]) August 0.0 0.1 5.6 2.1
Kmart January (7.1) (5.6) (7.0) (5.0)
Target January (0.7) (0.5) (3.3) (5.9)
2009 *
E1Q E2Q E3Q E4Q
BETTER DEPARTMENT STORES
Nordstrom (13.6) {13.7) (11.3) (7.7)
Saks (26.5) (15.0) (10.0) (6.7)
UPPER-MODERATE DEPARTMENT STORES
Dillard's (15.0) (12.7) (7.3) (7.7)
Macy's (8.0) (S.0) (6.5) (5.5)
MODERATE DEPARTMENT STORES
J.C. Penney (8.4) (7.7) (3.3) (2.7)
Kohl's (4.5) (7.2) (6.8) (3.7)
Sears, Roebuck (11.0) (12.0) (8.0) (6.0)
DISCOUNT STORES
99 Cents Only
Stores ([dagger]) 6.2 6.5 3.0 3.5
Big Lots (1.0) (1.0) 0.0 1.5
Dollar Tree Stones 4.0 2.0 3.0 4.5
Family Dollar
Stores ([dagger]) 6.4 5.9 1.5 3.0
Kmart (5.0) (6.0) (5.0) (5.0)
Target (3.5) (3.7) (2.5) (0.5)
E-Estimated. * Based on a January fiscal year end. ([dagger])
Since fiscal year differs from the rest, data for closest
comparable quarter is included.
Sources: Company reports; Standard & Poor's estimates.
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data, for years ended December 31)
2008 2007 2006
Net Sales $ 2,823,593 $ 2, 908, 242 $ 2,877,954
Cost of Sales 1,838,163 1,820,048 1,765,203
Gross Profit 985,430 1,088,194 1,112,751
Operating Expenses
Selling and Marketing 567,305 595,911 584,997
General and Administrative 220,644 211,955 186,261
Production and Programming 60,217 59,051 56,800
Amortization of Non-Cash
Marketing 8,022 4,442 --
Amortization of intangible
Assets 7,465 12,681 34,224
Depreciation 37,438 34,363 37,273
Asset Impairments 3,186,650 -- --
Total Operating Expenses 4,087,741 918,403 899,555
Operating (Loss) Income (3,102,311) 169,791 213,196
Other Income (Expense)
Interest Income 480 252 586
Interest Expense (16,420) -- --
Other Expense (256) (1,040)
Total Other Expense, Net (15,940) (4) (454)
(Loss) Income from Continuing
Operations before Income
Taxes (3,118,251) 169,787 212,742
Income Tax Benefit
(Provision) 730,773 (64,554) (79,210)
(Loss) Income from Continuing
Operations (2,387,478) 105,233 133,532
Gain of Sale of Discontinued
Operations, Net of Taxes -- 30,572 --
(Loss) Income from
Discontinued Operations,
Net of Tax (3,410) 28,999 (10,715)
Net (Loss) Income $(2,390,888) $164,804 $122,817
(Loss) Income from Continuing
Operations Per Share
Basic $ (42.48) $ 1.87 $2.38
Diluted $ (42.48) $1.86 $2.36
Net (Loss) Income Per Share
Basic $ (42.54) $ 2.93 $2.19
Diluted $ (42.54) $ 2.91 $2.17
Shares Used in Computing
Earnings Per Share
Basic 56,208 56,206 56,206
Diluted 56,208 56,649 56,649
HSN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data, for years ended December 31)
2008 2007
ASSETS
Cash and Cash Equivalents $177,463 $ 6,220
Accounts Receivables Net of Allowances
of $10,026 and $8,112, respectively 165,114 192,609
Inventories 304,172 317,411
Deferred Income Taxes 21,777 24,606
Prepaid Expenses and Other Current Assets 42,080 55,182
Total Current Assets 710,606 596,028
Property and Equipment, Net 157,832 155,805
Goodwill -- 2,884,389
Intangible Assets, Net 261,747 571,662
Other Non-Current Assets 22,272 12,747
Total Assets $1,152,457 $4,220,631
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable, Trade $209,615 $260,531
Current Maturities of Long-Term Debt 15,000 --
Accrued Expenses and Other Current
Liabilities 179,637 188,312
Total Current Liabilities 404,252 448,843
Long-Term Debt, Less Current Liabilities 393,528 --
Deferred Income Taxes 83,276 819,969
Other Long-Term Liabilities 13,116 8,933
Total Liabilities 894,172 1,277,745
Shareholders' Equity:
Preferred Stock $0.01 Par Value; 25,000,000
Authorized Shares; No Issued Shares -- --
Common Stock $0.01 Par Value; 300,000,000
Authorized Shares; 56,222,631 Issued
Shares 562 --
Invested Capital -- 4,522,873
Receivables from IAC and Subsidiaries -- (1,581,157)
Additional Paid-In Capital 2,406,503 --
Retained Deficit (2,148,534) --
Accumulated Other Comprehensive (Loss) Income (246) 1,170
Total Shareholders' Equity 258,285 2,942,886
Total Liabilities and Shareholders' Equity $1,152,457 $4,220,631
