Earlier this month the Home Shopping Network's parent company, HSN Inc. (Nasdaq:HSNI), recently hit a new 52-week high of $38.15. Up about 18% year-to-date as of Dec. 19, 2011; it will deliver its third straight year of positive returns for shareholders of the IAC/InterActive (Nasdaq:IACI) spin-off, from 2008. Value investors will be tempted to pass on this specialty retailer, but don't; It's still a good deal and I'll explain why. (For related reading, see The Value Investor's Handbook.)
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IAC/Interactive acquired Cornerstone Brands in 2005 for $720 million. Paying one times sales, HSN's former parent got a cadre of e-commerce retailing experts in the deal and more importantly, state-of-the-art infrastructure. If HSN wanted to be a serious player in online retailing, the Cornerstone acquisition was vital to its success. In the nine months ended Sept. 30 of this year, Cornerstone's revenue was almost $701 million, about where they were for an entire year in 2005.
More importantly, HSN has been able to squeeze some profits out of the business. In the second quarter of 2008, HSN recorded impairment charges totaling around $300 million on its Cornerstone business, resulting in about a $300 million operating loss. This past quarter ending Sept. 30th, 2011, Cornerstone had an operating profit of over $5.8 million with a 2.5% margin. For the first nine months of the year, its operating profit was around $25.4 million with a 3.6% margin. Clearly, its Cornerstone business has stabilized and is starting to grow profitably. This can only help HSN's future bottom line. (To learn more, read A Look At Corporate Profit Margins.)
S&P MidCap 400
Standard & Poor's announced changes to the S&P MidCap 400 index Dec. 8, 2011. The most relevant being adding HSN to replace AGL Resources (NYSE:GAS) on the mid-cap index, as AGL was promoted to the S&P 500, replacing Nicor, which it acquired the very same day. By no coincidence, several analysts upgraded either its rating or target price on the news. Zack's moved HSN from a "neutral" to "outperform" rating and Wunderlich reiterated its "buy" rating and raised its target price to $42 a share.
Since the change, its volumes have picked up considerably, averaging slightly more than 700,000 per day, or around double its average daily volume. On Monday, Dec. 12, volume was eight times the average, as institutions bought and sold HSN's stock depending on the index they're tracking. I'm sure things will settle down as we move into the holidays, but come January, volumes will pick up again. Those who desire liquidity have to be happy with the change. (For more information, read Understanding Liquidity Risk.)
HSN's CEO comes from Nike (NYSE:NKE), where she was in charge of its global apparel business for six years and before that she worked with Ralph Lauren (NYSE:RL) and Warnaco (NYSE:WRC), in senior executive positions. In other words, she'd worked for some of the best. When Grossman was recruited in 2006, she had no idea what the business was all about, except that HSN had had seven CEOs in the span of 10 years and was an unmitigated disaster.
Transforming the business and the culture, slowly she was able to develop a company with a vision, however not before the floor fell out in the markets, shortly after going public. By Dec. 2008, its stock was lower than $2 and its receivables balance was higher than its market cap. Fast forward to today and it's part of the S&P Mid-Cap 400. No longer is it a shopping channel, but rather a lifestyle company that caters to people who love to shop. No longer is it second fiddle to QVC; Grossman had a lot to do with its transformation.
The Bottom Line
As I said previously, Cornerstone's operating margins are moving in the right direction. So too are HSN's, which increased around 190 basis points in the third quarter and is currently about 7.12%. Given the profit improvement in recent quarters, an enterprise value 8.6 times EBITDA hardly seems excessive.(For related reading, see A Clear Look At EBITDA.)
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.