But HSN saw 17 percent drop in operating income, to $30.7 million, and a decline in its gross profit margin.
For the first nine months, HSN’s net sales are up 6 percent, to $1.48 billion.
“At HSN, our strategy of utilizing content to create communities and drive commerce delivered a net sales increase of 6 percent and best customer growth of 9 percent, due primarily to strength in apparel, accessories and electronics as well as the addition of new brand partners and marketing initiatives,” HSN CEO Mindy Grossman said in a prepared statement. “We undertook key strategic initiatives this quarter that were focused on customer engagement by creating content-immersive experiences and leveraging our unique multichannel platform.”
HSN’s net sales increased 6 percent to $493.7 million. The sales growth was driven by strong performances in apparel, accessories and electronics. HSN.com sales increased 10 percent over the prior year and represented 30.9 percent of HSN’s net sales, up from 29.8 percent in the prior year. Units shipped and average price point increased 3 percent and 2 percent, respectively.
Gross profit increased 1 percent to $169.9 million. Gross profit margin declined 170 basis points to 34.4 percent primarily driven by increased product costs, retail price reductions and inventory reserve provisions. During the third quarter of 2009, HSN benefited from a reduction in inventories and the related reserves.
Operating expenses, excluding non-cash charges, increased 4 percent. The increase was primarily attributable to the costs associated with launching HSN2, HSN’s second television shopping channel that debuted in August, costs for brand and event marketing and accrued costs for a legal settlement.
Adjusted EBITDA decreased 8 percent to $43.1 million from $47.1 million. Operating income decreased 17 percent to $30.7 million compared to $37.1 million in the prior year due to the increase in operating expenses, including non-cash charges.
Adjusted EBITDA and operating income for HSNi, which includes the home shopping network and the company’s Cornerstone unit, included a $2.5 million sales provision for an upcoming voluntary product recall at one of the Cornerstone brands and costs related to a $2.5 million legal settlement.
During a conference call with analysts, Grossman said the legal settlement involved a patent case for an e-commerce sales system. She said HSN decided it was in the company’s best interest to just settle the case quickly and put it behind it.
On the call, Grossman mentioned several of HSN’s third-quarter launches, including the exclusive debut of Mary J. Blige’s fragrance. She added that singer Rod Stewart’s live concert had generated sales of almost 30,000 CDs.
Jean queen Diane Gilman sold 200,000 pairs of jeans during the quarter, according to Grossman.
Consolidated HSNi results reflected a net sales grow of 10 percent to $708.4 million over the prior year. Cornerstone’s net sales increased 23 percent to $214.7 million with Internet sales representing 56.9 percent of its net sales.
HSNi’s Adjusted EBITDA was $49 million compared to $48.8 million in the prior year. These results were driven by a 10 percent increase in net sales, partially offset by a 170 basis point decrease in gross profit margin and a 7 percent increase in operating expenses, excluding non-cash charges.
Operating income decreased 9 percent to $32.8 million compared to $36.1 million in the prior year. Included in Adjusted EBITDA and operating income is a $2.5 million sales provision for an upcoming voluntary product recall at one of the Cornerstone brands and costs related to a $2.5 million legal settlement.
Adjusted earnings per share was 31 cents compared to 32 cents in the prior year. GAAP diluted EPS was 25 cents compared to 29 cents in the prior year. The combined impact of the product recall and legal settlement on Adjusted earnings per share and GAAP diluted EPS was $3 million, net of taxes, or five cents per diluted share.
“HSNi’s net sales growth of 10 percent reinforces the strength of the HSN and Cornerstone brands,” Grossman said in a satatement. “Our efforts to reach customers across multiple channels continue to be successful and contributed to an e-commerce net sales gain of 15 percent in the quarter.”