Polishing Up The Cubic Zirconia

Home Shopping Network Inc. has something a lot tougher to sell than fake diamonds: It needs to convince shareholders that it can bring sparkle back to its shop-by-television business. Results for the second quarter were dismal, with a loss ef $9.7 million and a sales decline of 10%. Gains in some new areas masked even worse results in the company's core TV shopping business, where sales fell by 14% in the second quarter, after an 18% drop in the first quarter.

Led by Chief Executive Gerald F. Hogan and his recruit from Lands' End, chief operating officer David F. Dyer, HSN is in the midst of a painful two-year transformation to shed its cubic-zirconia image. By offering a higher-quality service, they hope to boost sales from the company's already-large customer base. Conceived in the 1980s as novelty programming that thrived on crude hucksterism, the Clearwater (Fla.)-based company is attempting to remake itself as a sophisticated merchandiser. On Aug. 5, HSN will unveil a new on-air look with friendly kitchen and living room sets, a spiffier logo, and programs for new products such as housewares and apparel.

Already, new softer-sell programs are replacing the old auction-style jewelry-on-a-revolving-pedestal standby. But so far, the new formats seem to have alienated people drawn to HSN's old bargain-basement style without bringing in new viewers to replace them. Analysts and investors, who have pounded the stock to almost half what it was shortly after Hogan joined the company in early 1993, are watching closely for a promised turnaround by the end of the year. "A lot of the moves they've made are positioning the company effectively, but we're still waiting," says John Tinker, an analyst with Furman Selz Inc.

When it debuted nationally in 1986, HSN concentrated on closeouts and overruns. But better inventory management by manufacturers shrank sources of quality merchandise. Moreover, HSN concentrated on price at the expense of quality and customer loyalty, acquiring an image of cheap, inferior merchandise and lousy customer service. HSN reaches 67 million households, but its sales have stagnated for the last five years at roughly $1 billion. Rival QVC Inc., which reaches fewer homes, boasts sales of $1.4 billion, almost double 1990's $776 million. "It was not sustainable," says Hogan of HSN's mode of doing business. "It was broken, and we had to fix it."

He and Dyer don't have forever. John Malone, president of HSN's controlling shareholder, TeleCommunications Inc., is said to be growing impatient. It's not hard for Malone to compare HSN's performance to the competition. TCI, which controls 80% of the voting rights at HSN, also owns 43% of QVC, which throws off more cash flow, and as a cable-only operation, can operate more cheaply than HSN. If Hogan and Dyer fail to deliver results by year-end, some analysts speculate that TCI might try to merge the two home-shopping companies. TCI wouldn't comment, but Hogan doesn't dispute the pressure.

SHADY DEALS. Brought in when cable giant TCI bought control of HSN in early 1993, Hogan boasted solid experience in cable television. At HSN, he took over a company in crisis. Morale was at rock-bottom. The U.S. Attorney's Office in Tampa was investigating allegations of fraud and favoritism in HSN's buying practices. Charges were never brought, but Hogan was forced to deal with a slew of shareholder lawsuits. Then came merger talks with QVC, scuttled months later when then-QVC Chief Executive Barry Diller pursued Paramount Communications Inc. and lost. After cleaning house, Hogan looked outside the TV industry and last fall brought in Dyer to revamp HSN.

Part of Dyer's mission is to transform HSN from a company that sells to a company that markets. He has put together a merchandising, design, and quality control team hired from such retailers as Banana Republic, Spiegel, and Lands' End. A stickler for details, Dyer personally oversaw the design of new packaging. "You have to sell customers twice," he says. "Once when they buy it over the air, and once when they open it at home--did they get more than they thought?" Now HSN jewelry is likely to arrive in reusable keepsake boxes. Hosiery is packed in color coded containers good for organizing sock drawers.

Dyer has worked hard to overcome HSN's image problems and bring in brand-name merchandise from manufacturers that had long shunned HSN. Viewers can now order Etienne Aigner handbags and shoes. London Fog Industries Inc.'s and Evan Picone coats are scheduled for fall showings along with housewares sporting Corning Inc., Cuisinart Inc., and other well-known labels. HSN will also add private label apparel and housewares.

HSN is also experimenting in cyberspace. In addition to ventures with CompuServe, Prodigy, and now America Online, HSN last year bought the Internet Shopping Network, a popular commercial site on the Internet. And when Microsoft Corp.'s Windows 95 debuts, HSN will be included in the new online service that will be part of the launch. Though the online ventures have yet to break even, they give HSN a toe-hold for the future.

In the meantime, HSN has to get its TV shopping back on track. The poor showing in the most recent quarter is partly due to inventory clearance to make room for new products. But there have been missteps, too. New programs aimed at kids and men were flops. Other innovations have yet to pay off. Recently, HSN added item numbers, allowing customers to take their time and order a product even after it's off the screen, as QVC does. But, Hogan concedes, that new approach has cost the company some impulse sales. HSN will retain some of the old auction format on its second channel, HSN Spree.

WHO'S BUYING? Hogan argues the changes being put in place now will help build better long-term relationships with customers. HSN's viewers tend to be 40- to-50-year-old women with household incomes of $45,000--roughly the same universe QVC reaches. Hogan hopes the new programs and formats will pull in some younger viewers, but the emphasis is on getting more business from existing customers. A staggering 17 million people have ordered one time only from HSN, hence the new emphasis on customer satisfaction. "We're not trying to change the demographics," says Dyer. "But we have undermerchandised."

To help win higher-spending customers, HSN is embarking on a $20 million advertising campaign, using spots on other cable stations as well as spreads in women's magazines. There are signs that some new viewers have noticed the changes already in place.

Rena Sager, an avid QVC shopper from Rockaway Township, N.J., disliked the old, brash HSN sales pitch, but lately has found herself tuning into HSN more often, drawn to the new formats. Recently, she bought a pair of gold earrings, packaged this time in a velvet box instead of the usual plastic bag. "It has gotten somewhat better," she says. "It's a little better quality." It will take many more shoppers like Rena Sager to see if HSN has found its way.