Home Shopping Network 2008 Annual Report Download - page 24

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Sources of Revenue
HSN revenue includes merchandise sales originating from the live television broadcast of its programming
24 hours per day, seven days a week and the HSN.com website. HSN also sells merchandise through its "Autoship"
program under which customers receive scheduled merchandise shipments according to a pre-determined calendar.
Cornerstone sells private label and third party merchandise. The primary brands within the Cornerstone
business portfolio include Frontgate, Ballard Designs, Garnet Hill, Smith+Noble, The Territory Ahead, TravelSmith
and Improvements.
Products and Customers
HSNi sells a wide array of merchandise across its various channels of distribution. HSN merchandise
categories primarily consist of jewelry, apparel & accessories, health & beauty and home & other (including
housewares, home fashions, electronics, fitness and other). Cornerstone merchandise categories generally consist of
home furnishings (including indoor/outdoor furniture, window treatments and other home-related goods) and
apparel & accessories.
HSNi management believes that merchandise diversification, combined with a multi-channel distribution
strategy, appeals to a broader segment of potential customers and is an important part of its overall business strategy.
HSNi is continually developing new merchandise offerings from existing, potential and future suppliers, to
supplement its existing product lines.
Shut-Down of America’s Store
In April 2007, largely as a result of increasing cable and satellite distribution costs, HSN ceased operating
America's Store, a home shopping network that reached an average of 14.3 million households during 2006.
America's Store sales were $15.9 million and $88.6 million in 2007 and 2006, respectively.
Discontinued Operations
On June 19, 2007, HSNi sold Home Shopping Europe GMbH & Co. KG, and its affiliated station HSE24
("HSE"). Accordingly, HSE is presented as a discontinued operation in the statement of operations. HSNi sold HSE
for approximately $216.5 million, which resulted in a pre-tax gain of $45.7 million and an after-tax gain of
$30.6 million. The pre-tax gain included $22.8 million of foreign currency translation gains that were recognized
into earnings at the time of the sale.
Economic and Other Trends
Overall adverse economic conditions have affected HSNi's businesses, as total net sales and gross margin
percentages declined 3% and 252 basis points, respectively, as compared to 2007. Revenues and gross margins
derived from HSNi’s Cornerstone segment were particularly challenged. Cornerstone’s business is impacted by its
dependency on demand generation from the more challenging home, apparel and luxury segment categories.
Cornerstone’s revenues decreased 15% to $866.7 million, and its gross margins declined 340 basis points during
2008. Throughout the year, HSNi has taken steps to reduce the negative impact this economic environment had on
Cornerstone’s results through both organizational and cost reduction initiatives. During the third quarter of 2008,
we made leadership changes to improve Cornerstone’s operating performance, to refocus the organization and to
benefit from operating leverage across both business segments. While we are satisfied that these leadership changes
have refocused the organization as a whole, we expect that realizing the benefits of these changes will take time to
materialize and will be dependent upon the duration and severity of the current adverse economic conditions.
The HSN segment’s annual net sales increased 3% in 2008 over the prior year to $2.0 billion, which
included a 16% sales growth at HSN.com. We attribute this growth to the successful execution of our strategies
and to the flexibility of HSN’s business model, in which we are better able to adapt our merchandise offerings to
customer demand. During 2008 HSN’s active customer base grew by 2.6%. However, HSN experienced
significant pressures on its gross profit margins, particularly in the fourth quarter. During the year, HSN’s gross