The turnaround story for shopping channels has been must-see TV for investors. ValueVision Media, Inc. (NASDAQ:VVTV) - operator of ShopNBC - is up an astonishing 3,363% since February 2009 and HSN, Inc. (NASDAQ:HSNI) has soared 1,600% following its nadir in December of 2008. That performance reflects both how much the financial crisis impacted shopping networks and how well they have rebounded. Investors should reposition their portfolios as the industry braces for big changes.

TUTORIAL: Introduction To Fundamental Analysis

Will Shoppers Keep Tuning In?
Shopping channels like HSN, ShopNBC, and Liberty Media Corp's (NASDAQ:LINTA) QVC sell items ranging from jewelry and beauty products to electronics and home decor. The industry is highly leveraged to cyclical trends and consumer spending habits. The staggering returns of television retailers will be difficult to sustain if shoppers get squeezed.

Retail sales - up 1% last month - have been robust for several months. An increasing percentage of discretionary income being apportioned to gas and food prices, as well as the weakening housing market, could curb retail spending. February's existing home-sales report was sobering, as were new home sales which collapsed 16.9% for the same month. Future consumer-confidence data reports could be another reality check for what consumer spending is going to look like with rising inflation and slowing home sales.

HSN's High Ratings
Despite these factors, shoppers are tuning into shopping channels, like HSN, in droves. The home and catalog retailer recorded positive sales and earnings growth during the fourth quarter of 2010 as their turnaround story continues. A concern for HSN is that inflationary pressures may be leading to a period of deteriorating margins. Gross profit margins shrunk from 35.9% last year in the fourth quarter to 34.5% in the same period. Since inflation has heated up on the turmoil in North Africa and the Mideast, shares of HSN have trended sideways.

Few shorts have been willing to line up against HSN. The primary reason being Liberty Media's John Malone who will eventually almost certainly swallow up the remaining HSN shares that are not already owned. HSN was spun off from IAC/InterActiveCorp (NASDAQ:IACI) in August of 2008. If not for Malone's invisible hand, geopolitical unrest may have done more damage than the relatively tame 4% March decline.

Who to Shop with Now
Shares of HSN should be supported until the QVC-HSN merger happens, but distant third-place shopping network ShopNBC may be where the value is. ValueVision has been on fire since renewing the ShopNBC licensing agreement with NBC Universal back in November.

The Bottom Line
A dramatically improving operating performance suggests ValueVision is airing their own turnaround story; net sales jumped 15.2% last quarter and gross margins climbed an additional 0.9%. While positive earnings may be a few years away, ShopNBC should be able to leverage a new relationship to reduce large distribution fees. Comcast Corporation's (NASDAQ:CMCSA) majority stake in NBC Universal and potential backing of ShopNBC could be reason enough to switch shopping channels. (To learn more, see The Bottom Line On Margins.)

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