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Coverage Initiation: HSN Inc.
Value Line recently initiated coverage of HSN Inc. (HSN) in its flagship product, The Value Line Investment Survey. The company describes itself as an “interactive multi-channel retailer offering retail experiences through various platforms.” While this may be a somewhat open-ended description, most will know the retailer’s ubiquitous Home Shopping Network television channel (thus the HSN acronym). However, HSN also sells products online, through mobile devices, via catalogs, and in retail and outlet stores. It has two operating segments, HSN and Cornerstone.
The company considers the HSN division both a retailer and an “interactive lifestyle network,” providing products primarily through television home shopping programming on the HSN television networks and its affiliated website, HSN.com. Its shows attempt to connect with consumers by incorporating experts, entertainment, inspiration, solutions, tips and ideas in connection with the sale of its products. Although a far cry from the early days of television when shows were sponsored by makers of consumer products (Soap Operas), the integration of entertainment and sales is, essentially, the key to the success of this division. Cornerstone, meanwhile, offers home and apparel lifestyle brands, including Frontgate, Ballard Designs, Garnet Hill, Grandin Road, Smith+Noble, The Territory Ahead, TravelSmith, and Improvements. Cornerstone sells products via catalogs, eight internet sites affiliated with its different brands, and 19 retail and outlet stores. This division, which represented 32% of sales in 2011, is materially smaller than the HSN group, which accounted for the remainder of the company’s sales.
HSN’s predecessor company began broadcasting television home shopping programming in 1981. Just four years later, it was broadcasting through a national network of cable and local television stations, with programing aired all day, every day. It continued to expand its distribution over the years and, as of the end of 2011, reached over 95 million homes (more than 80% of the penetrable market) in the United States. Its online presence dates back to 1994, though HSN.com wasn’t officially launched until 1999. The company acquired the Improvements catalog business in 2001, and rolled that business into its 2005 purchase of Cornerstone Brands. HSN was ultimately spun off from IAC/InterActiveCorp in 2008.
Taken as a whole, HSN is a retailer selling both private label and third party merchandise, only it does so in a somewhat non-traditional way. Like any other retailer, it must ensure that its products satisfy often fickle customer demand. Selecting the wrong products could have a negative impact on performance, though the broad array of product categories in which it operates mitigates the impact that might be felt in any one area. Indeed, its products span from clothing to jewelry to home goods, making this retailer somewhat similar to a department store—only without the physical stores. Like any retailer, the broader economy has a material impact on HSN’s sales.
The media based sales approach has historically been a great benefit to the company, as it allows it to connect with consumers in a very personal way. It also means that HSN’s salespeople gain access to people’s homes in a way that no department store can. Such access and emotional connection is a privilege, however, that the company needs to be careful not to abuse, as it could quickly and easily turn once-loyal customers off. This makes high product quality and honest salesmanship a priority.
Since the company’s physical retail presence is small, customer service and product delivery increase in importance. Indeed, customers will judge the company on factors from ordering systems, to the helpfulness of company representatives, to the cost effective and reliable delivery of their purchases. While some of these factors are within HSN’s control, others are not. For example, an increase in the cost of shipping products could impact the bottom line if the company is unable to pass those added costs along. Mail costs are also an issue for the catalog based Cornerstone business, where cost of mailing a catalog is a material component of the sales equation.
HSN must pay cable and other television service providers to carry its channel. Normally, the agreements call for a per subscriber fee, though some contracts also require commissions based on merchandise sales to the provider’s subscriber base. Contracts are usually multi-year in nature and renewal negotiations can be lengthy and tense. The loss of a material distribution contract would obviously be a negative development that would impact both the top and bottom lines.
HSN has grown materially since its humble beginnings in St. Petersburg Florida. While once the butt of many jokes because of poor production quality or suspect products, HSN has grown into a material presence in the retail industry. Moreover, it has a large and loyal following, the size of which would make many television production companies envious. Subscribers interested in taking a position in a non-traditional, though important participant in the retail space, should consult the regular quarterly reports for HSN, while keeping an eye out for supplemental reports which will update subscribers on impactful late-breaking news.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.