Qurate Retail Closes Above $1.00 – Time To Re-Evaluate (NASDAQ:QRTEA)

Qurate Retail (NASDAQ:QRTEA) closed above $1 on Thursday, a huge milestone for the stock. Could this be a turning point for the beaten-down stock? We think so.

A Sad History

Qurate has been plagued in recent years by a number of headwinds.

Some were the result of poor management:

• Qurate purchased Zulily in 2015 and eventually sold the company in 2023 for next to nothing. Zulily was nothing more than a cash-burning fire pit.
• Qurate issued special dividends in 2020-2021 off the back of the post-COVID recovery boom when they should have been paying down their debt. Even if they had expected the recovery period to last forever, it’s hard to imagine paying dividends should take priority over high coupon (against a near zero rate environment) debt at the time.

Some were the results of unlucky exogenous shocks:

• A fire in 2022 wiped out their largest fulfillment facility. The fire caused numerous issues to their operations and ultimately resulted in heavy losses in customers due to shipping delays and unfulfilled orders.

Some are just a product of secular business decline:

• The classic argument against Qurate has always been “their customer base is aging and dying”.

But, the million-dollar question…

for Qurate for the last several years has been if or how they can address the massive debt burden against a backdrop of shrinking revenue and profitability. You might be asking how a company that does $7-800 million EBITDA only has a market cap of ~$400 million. And this is because the language in the debt at QVC prevents money from moving upstream to the parent entity where the equity is issued unless it satisfies a leverage ratio test. Thus, in order for shareholders to see value, you cannot simply take an EBITDA multiple, you have to first analyze the binary outcome of whether or not they can clear this leverage ratio test.

Given recent guidance, we can start to form some projections. We forecast pro-forma leverage into 2025, right after they pay the 2025 maturity. The left column is based on company guidance and assumes revenue stabilization and taking everything else they say at face value (with respect to cost savings etc). The right column assumes continued secular decline.

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Now this really tells us a lot. If we take them at their word, by the end of 1Q25 we should be at 3.0 leverage for QVC and 5.0 true leverage for the entire entity (inclusive of debt at the parent level). If this happens, then we will have the following results:

• Being under the RP leverage ratio, they would be able to upstream more cash from the QVC entity to the parent entity
• At 5x true gross leverage, they would be able to refinance remaining debt at reasonable rates.

Under this scenario, we estimate the QRTEA shares would be somewhere in the range of $3-8 representing a forward EV/EBITDA ratio of around 6-7x.

Under this scenario, we estimate the QRTEP to trade $85-90, at 5x gross leverage, we figure ~ 12-14% yield would still be super attractive.

Now let’s consider the alternative path. If the decline moderates, Qurate still probably has considerable runway. They could also attempt a restructuring to deal with their debt. Without any immediate filing on the horizon, we think the stock just lingers around $1, we would also assign a price target of $40 on the preferred on the basis that there is still $25 cash per share at the parent and assign some continued probability of a recovery as well as some probability of a restructuring.

The third path would be a severe decline and imminent filing. In this case, the common shares are worth zero and the preferred are probably worth around $20 on remaining cash discounted to PV basis.

Given our current trajectory, the probability of the last path has steadily diminished. While this may have been the base case assumption in May of last year, currently it is probably <5%. The middle path we would say is around a 30% chance and the company performing close to management guidance we assign a probability of 65%. Based on these probabilities, we come up with a blended expectation of ~$3.50 for the common and ~$70 for the preferred and assign these as our price targets.

Risks

Make no mistake, Qurate is a high-risk investment.

• Continued secular decline, in other words, the “aging and dying customer” thesis materializes could result in continued revenue decline. The result would be an indefinite catch-up to get under the leverage ratio and eventual default.
• Creditors and debt capital markets play hardball – they will need plenty of help to refinance, or otherwise extend debt maturities.
• Increased competition, not just from Amazon and other existing e-commerce but also from social media platforms entering the space.
• Another exogenous shock, they’re in a precarious situation already, and one more accident could sink the ship.

Some Final Notes

The bottom line of investing is not to find the best company. That is easy. Apple is an amazing company, and Walmart is an amazing company. But investing isn’t about finding amazing companies, it’s about buying companies that are trading for less than what they’re actually worth. Sure, Apple is amazing, but everyone knows it and so it is priced accordingly, there is no advantage.

Qurate is objectively a poorly managed company. They’ve made plenty of blunders, from disaster Zulily to ill-timed special dividends. But it’s really a low bar. And as long as they avoid another landmine, QVC is a billion dollar EBITDA gift that just keeps giving.

Lastly, if you are concerned about inflation, just remember, that inflation probably helps Qurate because their super high leverage gets inflated away in real terms. Economics 101: Your debt doesn’t inflate, but your earnings certainly do.