Qurate Retail, Inc.
- Company Name
- Qurate Retail, Inc.
- Stock Symbol
- Class Period
- August 5, 2015 to September 7, 2016
- Motion Deadline
- November 5, 2018
- District of Colorado
The complaint charges Qurate and certain of its officers with violations of the Securities Exchange Act of 1934. Qurate markets and sells various consumer products primarily through live merchandise-focused televised shopping programs, websites, and mobile applications. Qurate comprises eight leading retail brands – QVC, Inc., HSN, zulily, Ballard Designs, Frontgate, Garnet Hill, Grandin Road and Improvements – all dedicated to providing a “third way to shop” that goes beyond transactional eCommerce and traditional stores. The Company is number one in video commerce, with a worldwide reach of nearly 360 million homes via 16 television channels and multiple media outlets. QVC, Inc. (“QVC”) is Qurate’s largest segment, accounting for roughly 85% of the Company’s total revenue in 2016.
As a promotional tool used to spur sales, QVC offers a payment plan called Easy-Pay to its customers in the United States, the United Kingdom, Germany and Italy. Easy-Pay allows QVC customers to pay for certain merchandise in two or more monthly installments. When Easy-Pay is elected by the QVC customer, the first installment is billed to the customer’s credit card upon shipment and an Easy-Pay receivable is established to account for the collection of subsequent installments. Qurate is exposed to the credit risk on the Easy-Pay receivables. Specifically, if the QVC customer does not remit payment for the subsequent Easy-Pay installments, Qurate is required to record a loss and write off the Easy-Pay receivable. Under Generally Accepted Accounting Principles, the Company is required to establish adequate reserves for its Easy-Pay receivables.
The complaint alleges that throughout the Class Period, Qurate repeatedly attributed its growth to broad-based marketing and higher personalized customer experience, which the Company claimed would spur continued revenue growth. However, defendants’ Class Period statements pertaining to the Company’s revenue growth were materially false and misleading because defendants failed to disclose that: (1) the Company was aggressively loosening the credit standards of its Easy-Pay program to attract new customers; (2) the Company's strong sales growth was due to this loosened credit policy; and (3) accounts receivable associated with these new customers posed a high risk of having to be written off.
The slowdown in QVC sales began to emerge on August 5, 2016, when the Company issued a press release announcing its financial results for the second quarter of 2016, ended June 30, 2016, in which the Company disclosed “significant headwinds” and sales declines compared to prior periods. Later that day, during the Company’s second quarter 2016 earnings call with analysts and investors, the Company disclosed “higher than expected write-offs on Easy Pay purchases from October and November of last year” and announced increased reserves for prior-period purchases. The Company also disclosed that “[g]iven heightened write-off risks, we choose to moderate our Easy Pay usage beginning in June, which puts some additional pressure on our sales.” On news of Qurate’s sales slowdown, the Company’s stock price fell $5.69 per share, or more than 21%, to close at $20.61 per share on August 5, 2016.
Then on September 8, 2016, the Company disclosed the true impact of its Easy-Pay issues, revealing to investors that it expected to see “higher default rates” associated with these sales. Moreover, the Company warned that this negative trend, while improved, would still continue to impact its business. On this news, the price of Qurate stock fell $1.87 per share, or nearly 9%, to close at $19.59 per share on September 8, 2016.