Shop-at-Home Firm Looks to Diversification : Industry Pioneer Offers Strategy to Boost Profit
Fifteen months ago, Home Shopping Network stock peaked at $47 per share, up from an adjusted price of $3 per share at its initial offering just eight months previous, capping one of the most successful stock market debuts in history.
On Monday, the stock closed at $5.25.
The once sky-high stock price indicated that Home Shopping Network, the St. Petersburg, Fla.-based pioneer of the home shopping industry, was the dominant and most visible player in a brand new segment of retailing.
Tickled by entertaining hosts and tempted by the impulse to buy heavily discounted items, the television shoppers seemingly couldn’t get enough of an array of products from cubic zirconia diamonds and computers to fur coats and tools.
Clones Fold
The carnival-like format, broadcast around the clock beginning in 1985 over cable stations and later on Home Shopping Network’s own broadcast network, also contained a high-pressure element: Viewers were told they had 10 minutes to buy their “opportunity of a lifetime.”
From the start, the stock was a favorite of some industry analysts. At the same time, other retailers and broadcasters moved quickly to offer a variety of shop-at-home services and programming.
Industry analysts took a look at the increases in household memberships and, among other trends, the frequency and amounts of purchases by Home Shopping Club members and went gaga. “If the penetration kept taking place at the rate it was, by now we should have (a company) producing revenues equal to Sears, Roebuck,” said Tim Rice of Johnson & Rice, a New Orleans investment firm. Home Shopping Network’s revenue rose to $160 million in fiscal 1986 from $10 million in 1984.
Today, nobody would compare Home Shopping Network to Sears. The stock has tumbled, earnings have dropped, and sales, while growing, are far less than the company--and some analysts--had projected.
If the bloom isn’t off the home shopping rose, it has certainly wilted a bit. Industrywide home shopping sales of $1.2 billion in 1987 were below the $2 billion or more that some observers had forecast. At least a half dozen of the 30 home shopping outfits have folded over the past year, said Larry Gerbrandt of Paul Kagan Associates, a media research firm in Carmel, Calif.
Fashion Channel, a highly publicized video shopping service selling top of the line clothing that was introduced six months ago, said last week that it would need an immediate cash infusion to stay afloat.
At Home Shopping Network, officials are optimistic that sales and earnings will grow, and the company has begun to diversify.
For its fiscal year ended Aug. 31, 1987, the firm posted sales of $582 million, up 324% from 1986. And during the same period, the number of households reached by the company grew to 2.6 million, up 2.1 million.
In the second quarter of 1988, the firm said its sales were up 17% over the same quarter last year to $192.8 million. But its profit of $5.2 million was off 40%.
In part, the company blames many of its problems on external factors. In an interview here last week, HSN Chairman Roy Speer said HSN’s stock decline is due mainly stock speculators who want the stock price to fall as much as possible before a company bond issue becomes convertible to stock on April 22. The lower the stock price is at that time, the more shares bondholders would receive.
Broaden Line
Speer said the main reason for HSN’s disappointing financial results is the company’s faulty phone system at its telecommunications center in St. Petersburg. In a $1.5-billion lawsuit filed in September against GTE Corp., HSN alleged the phone system resulted in the loss of “hundreds of thousands” of calls from prospective buyers, costing the company $500 million in revenue in 1987.
GTE, in a statement following the filing of the lawsuit, said the accusations are “erroneous” and “without merit.”
Speer said Home Shopping Network’s strategy is to broaden its product line. The company has been offering beauty products successfully for three months and plans to soon begin marketing mail-order drugs and financial services, including insurance and stock trades. HSN owns two seats on the New York Stock Exchange, Speer said, and has filed for permission from the Securities and Exchange Commission to sell mutual funds.
Speer was in San Diego last week to visit Mistix Corp., a computerized ticketing company that sells seats for the San Diego Padres and reservations for the state park systems, including Hearst Castle at San Simeon, Calif. Home Shopping Network has agreed to buy Mistix for $4.5 million. Within 30 days, HSN would use it to begin offering tickets for nationwide entertainment and sporting events, air fares, reservations and theme parks.
Despite Home Shopping Network’s efforts to regain favor on Wall Street, several analysts remain skeptical that the company can effectively manage its growth. The frequency and dollar value of viewer purchases are down from their peaks, they say, a sign that the novelty of home shopping may be wearing thin.
Mark Riely, a media analyst with Eberstadt Fleming in New York, said the stock is more than adequately priced given HSN’s “fairly weak earnings outlook.” And while granting that HSN has made a “persuasive case” that it was hurt by the phone system, he and others said that if the phone system were the root of all HSN’s problems, the company would have had a bigger sales rebound than it did during the recently ended second quarter.
HSN’s growth prospects have also been undercut by the upsurge of two competing cable networks, Cable Value Network of Minneapolis and QVC of West Chester, Pa., which combined with HSN control 90% of home shopping dollars spent, Gerbrandt said.
CVN and QVC, both of which are part-owned by Tele-Communications Inc. of Denver, the nation’s largest cable operator, have been able to undercut HSN by offering more lucrative payment schedules to the cable operators who carry their programming. Home Shopping initially induced cable operators to carry its programming by promising them 5% of net sales revenue and HSN stock options.
New technology in home shopping is also on the way and could have an impact on HSN. Telaction, a $60-million interactive cable shopping service wholly owned by J. C. Penney, began test marketing in a Chicago suburb in February. The system allows viewers to control the products seen on the TV screen with their telephone keys.
IBM and Sears say they are close to introducing a similar interactive home shopping service called called Trintex.
The growth of the two competing networks and a desire to tap into big city markets that are still not completely “wired” by cable networks led Speer late in 1986 to acquire 12 television stations for $243 million. The stations, which now form the basis of the HSN-2 network, Speer said, are capable of reaching 37 million homes.
Speer is enthusiastic about the company’s prospects. To illustrate, he said last Thursday that the day before the company sold 20,000 Michael Jackson stuffed dolls, 24,000 feather dusters and flea collars by the bushel basket.
“The beauty of the operation is that results are instantaneous,” Speer said. “If you put it out and it doesn’t sell, you bury it.”
