When Rod Stewart wanted to promote his first-ever album of Christmas music, he chose a seemingly unusual outlet -- a live concert on home shopping channel HSN.
The event paid off, with Stewart selling nearly 30,000 copies of his CD titled "Merry Christmas, Baby" before its official release four days later on Oct. 30.
"Being at the intersection of entertainment and retailing makes a lot of sense," said Wunderlich Securities analyst Matthew Harrigan. BothHSN ( HSNI ) and larger rival QVC, owned byLiberty Interactive Group ( LINTA ), "have done a really good job with event programming."
For instance, QVC has created programming around New York's Fashion Week as a way to promote its proprietary clothing lines.
As traditional brick-and-mortar retailers have faltered, consumer goods companies have turned to HSN and Liberty Interactive's QVC to push their products -- from apparel, shoes and accessories to consumer electronics and toys.
The two shopping networks are able to spend time explaining and demonstrating products to shoppers through their broadcasts and online videos. On-air hosts promote items with excitement to their core market, affluent women over 30.
Home shopping channels have come a long way from the days of selling knickknacks on cheesy cable broadcasts. Now the services boast top-brand merchandise and exclusive wares from celebrity designers.
HSN and QVC often use star power to attract customers to their cable and online sales channels. Celebrities frequently appear on the air to pitch their fashion and beauty products and other wares.
For example, HSN has musician Randy Jackson selling watches and guitars, actress Kate Walsh promoting perfume and actress Susan Lucci pushing health and beauty items. The network also has celebrity chefs Cat Cora, Emeril Lagasse and Wolfgang Puck pitching cooking supplies.
QVC boasts fashions by celebrities Kim Kardashian, Elisabeth Hasselbeck, Jennifer Hudson and Joan Rivers.
"If you go back five years, there are a lot of designers who wouldn't have been caught dead associated (with home shopping channels)," Harrigan said. "That's certainly changed and this is a more acceptable form (of retailing)."
Social Media & Shopping Culture
Investors have driven up shares of HSN more than 50% so far this year, although the stock is still thinly traded. Liberty Interactive shares are up 36%, despite a five-month correction through the second and third quarters. Those gains helped power the retail-mail order and direct sales industry group to a top 20 ranking among IBD's 197 industry groups on Friday, up from a No. 109 ranking at mid-year.
Others in the eight-stock group include home shopping serviceValueVision Media ( VVTV ), which sells products under the ShopNBC label. Online florist1-800-Flowers.com ( FLWS ), apparel sellerDelia's ( DLIA ) and school supplies dealerSchool Specialty (SCHS) are also in the group (all trading below 5 a share).
HSN and QVC are competitors as well as cousins, with Liberty Interactive owning 36% of HSN. The direct-sales networks compete against a broad range of retailers, including online leaders such asAmazon.com (AMZN).
HSN and QVC sell a broad range of items, including jewelry, apparel, shoes, handbags, beauty products, kitchen items, electronics, home appliances, decor and crafts. More than 70% of the products they sell are exclusive, which reduces the risk of consumers price-comparison shopping online, says Topeka Capital Markets analyst Victor Anthony.
Both shopping channels have made a smooth transition to selling products online, he says. They now get roughly one-third of their sales via the Internet.
HSN and QVC also have embraced new consumer technologies like social networking and mobile apps to engage customers. They're active onFacebook (FB), Twitter and Pinterest and have apps forApple 's (AAPL) iPhone and iPad andGoogle (GOOG) Android devices. They're also streaming video through their websites and mobile apps.
"They embody everything that's interesting on the Internet right now," said Lazard Capital Markets analyst Barton Crockett.
HSN and QVC have created online communities for its customers to "like" items on Facebook and share their thoughts on products.
"There is a big social media aspect to shopping," Harrigan said. "People really get into it ... . Shopping for women sometimes can be like sports are for men."
About 85% of customers on the home shopping channels are women, he says. The average customer is a 55-year-old woman with an annual income of $69,000, Piper Jaffray analyst Neely Tamminga said in a Nov. 14 research note.
"Where the real game is for someone like HSN is what they call the regular "her" categories (of) beauty and fashion with high repeat activity, proprietary products and very good margins," Harrigan said.
The Art of Online Sales
HSN and Liberty Interactive have attracted investors not only through growth potential, but also because they are "solid businesses that trade at inexpensive multiples," Crockett said. Both companies have done a good job returning cash to shareholders through stock buybacks and, in HSN's case, dividends.
HSN shares have consistently pressed to new highs throughout the year. Liberty Interactive has been consolidating below a five-year high notched on Nov. 6.
Combined, HSN and Liberty Interactive hold less than 2% of U.S. retail sales in their categories, Harrigan says. HSN has generated $3.24 billion in sales over the last four quarters and Liberty Interactive has brought in $9.89 billion.
HSN and QVC's use of video to hawk products -- the infomercial approach -- translates well from cable and satellite TV to online, Crockett says.
"They can use video in a way that Amazon andMacy's (M) can't," Crockett said. "You have a television host telling you about the product, why it's interesting, showing the product on video. They do that with a level of quality and depth that nobody else can match ... They're bringing the art of selling to the Internet."
On the competitive front, Amazon has the potential to give HSN and QVC fits with its free shipping offers. Historically the home shopping channels have made profits from shipping and handling charges, Anthony says.
In addition to Amazon, HSN and QVC compete againsteBay (EBAY) and "daily deals" websites, such asGroupon (GRPN) and Living Social.
While HSN is staying focused on the U.S., Liberty Interactive is expanding internationally. Liberty's QVC has operations in Germany, Italy, Japan and the U.K. It has a new joint venture in China and has plans to spread into Brazil, France and Spain over the next few years.
In addition to their home shopping channels, HSN and Liberty have other businesses. HSN has a catalog business called Cornerstone that sells home and apparel lifestyle brands led by Ballard Designs, Frontgate and Garnet Hill. Liberty Interactive owns other e-commerce businesses, such as Backcountry.com, Bodybuilding.com and Celebrate Interactive, which includes Gifts.com.
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