UPDATE 3-HSNi Q4 beats Street, sees Cornerstone turnaround

Wed Mar 3, 2010 1:12pm EST

* Q4 adj EPS $0.74 vs est $0.46

* Q4 revenue $838.7 mln vs est $760.2 mln

* Says to invest back in the business in 2010

* Says Cornerstone turnaround to continue

* Shares rise as much as 20 pct (Recasts; adds CFO comments, updates stock activity)

By Shobhana Chadha

BANGALORE, March 3 (Reuters) - HSN Inc's (HSNI.O) fourth-quarter profit beat market expectations, helped by an improved performance at its Cornerstone brand and cost cuts, but the teleshopping and e-commerce operator said it plans to invest back in the business in 2010.

Shares of the St Petersburg, Florida-based company rose as much as 20 percent to their all-time high but pared some gains to trade up $2.55 at $25.25 on Wednesday afternoon on Nasdaq. They had earlier touched a high of $27.34.

"Margin growth is going to be more relevant (in the next fiscal), we don't expect to continue to cut costs overall... we do anticipate that we are going to invest back in the business," CFO Judy Schmeling told Reuters in an interview.

In 2010, Schmeling also expects the Cornerstone business -- which mostly caters to the home segment -- to continue its turnaround.

HSNi's Cornerstone brand has been suffering due to continued softness in consumer demand for luxury home furnishings and apparel, as well as a strategic reduction in catalog circulation.

However, this quarter, the segment posted a 2 percent fall in revenue -- much better than the 13 percent drop last quarter -- even though catalogue circulation fell 19 percent.

"Our biggest cost reduction has been at the Cornerstone segment which is reducing the cost of the catalog... trying to drive the business more towards the internet," the CFO said.

MARGINS GET LUXURY BOOST

HSNi, which saw people come back to make discretionary purchases like fashion clothing, jewelry and beauty products last quarter, said it expects the trend to continue in the first half of fiscal 2010.

The company said it witnessed internet sales penetration of nearly 40 percent.

"HSNi really has lot of video content which really differentiates the website," analyst Christopher Marangi of Gabelli & Company said.

HSNi's namesake brand, HSN, saw a 12 percent rise in revenue, primarily driven by electronics, fitness and fashion product divisions.

"They should continue to be able to grow the top line in both businesses, and that should result in continued operating leverage," Marangi said.

Gross profit margin for Cornerstone brand, which largely includes home goods, improved 260 basis points to 42.2 percent.

"Cornerstone turned the quarter. They have been very diligent about managing costs for the brand," analyst Marangi said.

The company said net income for the fourth quarter was $39.4 million or 68 cents a share, compared with net loss of $2.15 billion, or $38.29 a share, a year ago.

Excluding items, the company earned 74 cents a share.

Revenue for HSNi, which competes with other multichannel retailers like QVC Inc and ValueVision Media Inc VVTV.O, rose 8 percent to $838.7 million.

Analysts on average were expecting earnings of 46 cents per share on revenue of $760.2 million, according to Thomson Reuters I/B/E/S.

For the fourth quarter, total operating expenses fell 93 percent to $226.2 million, the company said in a statement.

Gross margins for HSNi rose 180 basis points. (Reporting by Shobhana Chadha; Editing by Jarshad Kakkrakandy and Unnikrishnan Nair)