HSN, Inc. - FORM 10-Q

HSN, Inc. - FORM 10-Q - May 3, 2017

Attached files

Attached files

HSN, Inc. Reports

file	filename
EX-32.2 - EXHIBIT 32.2 CFO CERTIFICATION SECTION 906 - HSN, Inc.	exhibit322certificationofc.htm
EX-32.1 - EXHIBIT 32.1 CEO CERTIFICATION SECTION 906 - HSN, Inc.	exhibit321certificationofc.htm
EX-31.2 - EXHIBIT 31.2 CFO CERTIFICATION SECTION 302 - HSN, Inc.	exhibit312chieffinancialof.htm
EX-31.1 - EXHIBIT 31.1 CEO CERTIFICATION SECTION 302 - HSN, Inc.	exhibit311chiefexecutiveof.htm
EX-10.1 - EXHIBIT 10.1 EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED 8/20/12 - HSN, Inc.	exhibit101hsnincemployeest.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________________________________________________________________________

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2017
Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-34061

________________________________________________________________________________________________

HSN, INC.

(Exact name of registrant as specified in its charter)

________________________________________________________________________________________________



Delaware		26-2590893
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 HSN Drive, St. Petersburg, Florida		33729
(Address of principal executive offices)		(Zip Code)

(727) 872-1000

(Registrant’s telephone number, including area code)

________________________________________________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o	Non‑accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
Emerging growth company o	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 1, 2017, the registrant had 52,375,050 shares of common stock, $0.01 par value per share, outstanding.



	TABLE OF CONTENTS
		Page
	PART I-FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	1
	Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016	1
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016	2
	Consolidated Balance Sheets as of March 31, 2017, December 31, 2016 and March 31, 2016	3
	Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2017 and Year Ended December 31, 2016	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

	PART II-OTHER INFORMATION

Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

PART I—FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended March 31,
	2017			2016
Net sales	$	785,435		$	816,765
Cost of sales	512,298			527,287
Gross profit	273,137			289,478
Operating expenses:
Selling and marketing	167,299			179,161
General and administrative	56,373			49,963
Depreciation and amortization	10,886			10,525
Total operating expenses	234,558			239,649
Operating income	38,579			49,829
Other income (expense):
Interest income	213			25
Interest expense	(4,077		)	(4,172		)
Total other expense, net	(3,864		)	(4,147		)
Income before income taxes	34,715			45,682
Income tax provision	(13,467		)	(17,097		)
Net income	$	21,248		$	28,585

Net income per share:
Basic	$	0.41		$	0.55
Diluted	$	0.40		$	0.54
Shares used in computing earnings per share:
Basic	52,432			52,378
Diluted	52,821			52,919
Dividends declared per share	$	0.35		$	0.35

The accompanying notes are an integral part of these consolidated financial statements.

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended March 31,
	2017		2016
Net income	$	21,248	$	28,585
Other comprehensive income (loss):
Change in fair value of derivative instrument, net of tax	327		(249		)
Other comprehensive income (loss), net of tax	327		(249		)
Comprehensive income	$	21,575	$	28,336

The accompanying notes are an integral part of these consolidated financial statements.

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



	March 31,			December 31,			March 31,
	2017			2016			2016
ASSETS
Current assets:
Cash and cash equivalents	$	48,246		$	42,734		$	46,785
Accounts receivable, net of allowance of $18,926, $19,086 and $19,706, respectively	236,828			335,005			217,878
Inventories	409,663			391,106			441,977
Prepaid expenses and other current assets	49,128			44,173			55,481
Total current assets	743,865			813,018			762,121
Property and equipment, net	210,382			211,106			206,344
Intangible assets, net	253,634			253,623			255,266
Goodwill	9,858			9,858			9,858
Other non-current assets	18,275			16,928			12,718
TOTAL ASSETS	$	1,236,014		$	1,304,533		$	1,246,307
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable, trade	$	217,129		$	293,816		$	209,933
Current maturities of long-term debt	28,125			25,000			25,000
Accrued expenses and other current liabilities	208,144			225,265			204,897
Total current liabilities	453,398			544,081			439,830
Long-term debt, less current maturities and net of unamortized deferred financing costs	495,932			484,878			592,302
Deferred income taxes	60,665			59,760			42,929
Other long-term liabilities	24,638			20,328			20,006
Total liabilities	1,034,633			1,109,047			1,095,067
Commitments and contingencies (Note 12)
Shareholders' Equity:
Preferred stock $0.01 par value; 25,000,000 authorized shares; no issued shares	—			—			—
Common stock $0.01 par value; 300,000,000 authorized shares; 52,374,108, 52,239,795 and 52,283,382 issued shares March 31, 2017, December 31, 2016 and March 31, 2016, respectively	523			522			523
Additional paid-in capital	998,007			1,013,688			1,062,128
Accumulated deficit	(799,696		)	(820,944		)	(911,067		)
Accumulated other comprehensive income (loss)	2,547			2,220			(344		)
Total shareholders’ equity	201,381			195,486			151,240
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,236,014		$	1,304,533		$	1,246,307

The accompanying notes are an integral part of these consolidated financial statements.

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Preferred Stock			Common Stock					Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total
	Shares	Amount		Shares		Amount			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive (Loss) Income			Total
Balance as of December 31, 2015	—	$	—	52,378		$	524		$	1,085,785		$	(939,652	)	$	(95	)	$	146,562
Net income	—	—		—		—			—			118,708			—			118,708
Other comprehensive income	—	—		—		—			—			—			2,315			2,315
Stock-based compensation expense for equity awards	—	—		—		—			19,233			—			—			19,233
Cash dividends declared on common stock	—	—		—		—			(73,151		)	—			—			(73,151		)
Issuance of common stock from stock-based compensation awards, including tax effect of $658	—	—		219		2			(1,616		)	—			—			(1,614		)
Repurchases of common stock	—	—		(357	)	(4		)	(16,563		)	—			—			(16,567		)
Balance as of December 31, 2016	—	—		52,240		522			1,013,688			(820,944		)	2,220			195,486
Net income	—	—		—		—			—			21,248			—			21,248
Other comprehensive income	—	—		—		—			—			—			327			327
Stock-based compensation expense for equity awards	—	—		—		—			4,704			—			—			4,704
Cash dividends declared on common stock	—	—		—		—			(18,331		)	—			—			(18,331		)
Issuance of common stock from stock-based compensation awards	—	—		134		1			(2,054		)	—			—			(2,053		)
Balance as of March 31, 2017	—	$	—	52,374		$	523		$	998,007		$	(799,696	)	$	2,547		$	201,381

The accompanying notes are an integral part of these consolidated financial statements.

HSN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	21,248		$	28,585
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,886			10,525
Stock-based compensation expense	4,704			5,376
Amortization of debt issuance costs	429			444
Deferred income taxes	(1,500		)	(1,415		)
Bad debt expense	6,083			4,588
Other	(249		)	178
Changes in current assets and liabilities:
Accounts receivable	92,094			84,109
Inventories	(18,557		)	(13,953		)
Prepaid expenses and other assets	(4,808		)	(9,248		)
Accounts payable, accrued expenses and other current liabilities	(87,991		)	(76,725		)
Net cash provided by operating activities	22,339			32,464
Cash flows from investing activities:
Capital expenditures	(9,859		)	(5,145		)
Other	(794		)	—
Net cash used in investing activities	(10,653		)	(5,145		)
Cash flows from financing activities:
Repayments of term loan	(6,250		)	(6,250		)
Borrowings under revolving credit facility	110,000			45,000
Repayments of revolving credit facility	(90,000		)	(55,000		)
Repurchase of common stock	—			(8,671		)
Cash dividends paid	(18,331		)	(18,300		)
Proceeds from issuance of common stock	423			586
Payments of tax withholdings related to stock-based awards	(2,016		)	(1,825		)
Net cash used in financing activities	(6,174		)	(44,460		)
Net increase (decrease) in cash and cash equivalents	5,512			(17,141		)
Cash and cash equivalents at beginning of period	42,734			63,926
Cash and cash equivalents at end of period	$	48,246		$	46,785

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1—ORGANIZATION

Company Overview

HSN, Inc. (“HSNi”) is an interactive multi-channel retailer that markets and sells a wide range of third party and proprietary merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks; (ii) catalogs, consisting primarily of the Cornerstone portfolio of leading print catalogs which includes Ballard Designs, Frontgate, Garnet Hill, Grandin Road and Improvements; (iii) websites, which consist primarily of HSN.com, joymangano.com and the five branded websites operated by Cornerstone; (iv) mobile applications; (v) retail and outlet stores; and (vi) wholesale distribution of certain proprietary products to other retailers. HSNi’s television home shopping business, related digital sales, outlet stores and wholesale distribution are referred to herein as “HSN” and all catalog operations, including related digital sales and stores, are collectively referred to herein as “Cornerstone.” Chasing Fireflies and TravelSmith, two of the apparel brands in the Cornerstone portfolio, were sold in September 2016. See Note 14 for further discussion.

HSN offerings primarily consist of jewelry, fashion (apparel & accessories), beauty & health (including beauty, wellness and fitness), and home & other (including home, electronics, culinary and other). Merchandise offered by Cornerstone primarily consists of home furnishings (including indoor/outdoor furniture, home décor, tabletop, textiles and other home related goods) and apparel & accessories.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). They do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of HSNi's management, all normal recurring adjustments considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with HSNi's audited consolidated financial statements and notes thereto for the year ended December 31, 2016. The consolidated balance sheet as of December 31, 2016 and the consolidated statement of shareholders' equity for the year ended December 31, 2016 were derived from the audited consolidated financial statements at that date but may not include all disclosures required by GAAP. Intercompany transactions and accounts have been eliminated in consolidation.

Recent Accounting Developments

Recently Adopted Accounting Standard Updates

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330) ("ASU 2015-11"). The amendments, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. HSNi adopted ASU 2015-11 on January 1, 2017. The adoption of ASU 2015-11 did not have a material impact to HSNi's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718) ("ASU 2016-09"). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits and deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The effective date for the standard is for interim and annual reporting periods beginning after December 15, 2016. HSNi adopted ASU 2016-09 on January 1, 2017. Amendments related to accounting for excess tax benefits and deficiencies have been adopted prospectively resulting in the recognition of $0.4 million of tax expense within HSNi's consolidated statements of earnings rather than as a reduction to additional paid in capital for the three months ended March 31, 2017. Also, excess tax benefits related to share-based payments are now included in operating cash flows rather than financing cash flows in the statement of cash flows. This change has been applied retrospectively in accordance with ASU 2016-09 and prior period amounts which are considered immaterial have been reclassified. We have previously classified cash paid for tax withholding purposes as a financing activity in the statement of cash flows; therefore there is no change related to this requirement. The amendments

allow for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by previous guidance. HSNi has elected to continue estimating forfeitures under the previous guidance.

Accounting Standard Updates Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that revenue is recognized when a customer obtains control of a good or service. A customer obtains control when it has the ability to direct the use of and obtain the benefits from the good or service. Additionally, ASU 2014-09 will disallow the capitalization of direct-response advertising costs which will impact the timing of recognition of Cornerstone's catalog production and distribution costs. This standard will become effective for HSNi in the first quarter of 2018.

In 2015, HSNi established an implementation team (“team”) to assess the overall impact the adoption of ASU 2014-09 will have on its consolidated financial statements, processes, systems and controls. The team is in the process of developing its conclusions and assessing the impact of several aspects of the standard including principal versus agent considerations, identification of performance obligations and the determination of when control of goods transfers to the company’s customers. HSNi will adopt ASU 2014-09 on January 1, 2018. HSNi is still evaluating the accounting, transition method and disclosure requirements.

In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires lessees to reflect most leases on their balance sheet as assets and obligations. The effective date for the standard is for interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The standard is to be applied on a modified retrospective method. HSNi is currently assessing the timing of adoption of ASU 2016-02 and the impact it will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU 2017-04"). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. ASU No. 2017-04 is effective for HSNi in the first quarter of 2020, with early adoption permitted and is to be applied on a prospective basis. The adoption of the provisions of ASU No. 2017-04 is not expected to have a material impact on HSNi's consolidated financial position or results of operations.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

HSNi prepares its financial statements in conformity with GAAP. These principles require management to make certain estimates and assumptions during the preparation of its consolidated financial statements. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. In the opinion of HSNi's management, the assumptions underlying these interim unaudited financial statements are reasonable.

Significant estimates underlying the accompanying consolidated financial statements include: the determination of the lower of cost or net realizable value adjustment for inventory; sales returns and other revenue allowances; the allowance for doubtful accounts; the recoverability of long-lived assets; the impairment of intangible assets; the annual expected effective tax rate; the determination of deferred income taxes, including related valuation allowances; the accrual for actual, pending or threatened litigation, claims and assessments; and assumptions related to the determination of incentive compensation.

NOTE 3—PROPERTY AND EQUIPMENT

The balance of property and equipment, net, is as follows (in thousands):



	March 31,			December 31,			March 31,
	2017			2016			2016
Capitalized software	$	256,717		$	252,741		$	237,202
Computer and broadcast equipment	89,708			91,119			93,557
Buildings and leasehold improvements	118,016			113,731			110,887
Furniture and other equipment	125,940			124,518			97,434
Projects in progress	27,366			27,666			51,860
Land and land improvements	10,584			10,584			10,635
	628,331			620,359			601,575
Less: accumulated depreciation and amortization	(417,949		)	(409,253		)	(395,231		)
Total property and equipment, net	$	210,382		$	211,106		$	206,344

NOTE 4—SEGMENT INFORMATION

HSNi presents its operating segments and related financial information in a manner consistent with how the chief operating decision maker and executive management view the businesses, how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered and/or the target market. HSNi has two reportable segments, HSN and Cornerstone. The accounting policies of the segments are the same as those described in Note 2 – Summary of Significant Accounting Policies included in HSNi's Annual Report on Form 10-K for the year ended December 31, 2016. Intercompany accounts and transactions have been eliminated in consolidation.

HSNi’s primary performance metric is Adjusted EBITDA, which is defined as operating income excluding, if applicable: (1) non-cash charges including: (a) stock-based compensation expense, (b) amortization of intangibles, (c) depreciation and gains and losses on asset dispositions, and (d) goodwill, long-lived asset and intangible asset impairments; (2) pro forma adjustments for significant acquisitions; and (3) other significant items. Significant items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, thereby affecting the comparability of results. Adjusted EBITDA is not a measure determined in accordance with GAAP, and should not be considered in isolation or as a substitute for operating income, net income or any other measure determined in accordance with GAAP. Adjusted EBITDA is used as a measurement of operating efficiency and overall financial performance and HSNi believes it to be a helpful measure for those evaluating companies in the retail and media industries. Adjusted EBITDA has certain limitations in that it does not take into account the impact to HSNi’s consolidated statements of operations of certain expenses, gains and losses; including stock-based compensation, amortization of intangibles, depreciation, gains and losses on asset dispositions, asset impairment charges, acquisition-related accounting expenses and other significant items.

The following tables reconcile HSNi’s consolidated net income to operating income for HSNi's operating segments and Adjusted EBITDA (in thousands):



	Three Months Ended March 31, 2017								Three Months Ended March 31, 2016
	HSN			Cornerstone		Total			HSN		Cornerstone			Total
Net income						$	21,248							$	28,585
Income tax provision						13,467								17,097
Income before income taxes						34,715								45,682
Total other expense, net						3,864								4,147
Operating income	$	37,512		$	1,067	38,579			$	49,645	$	184		49,829
Non-cash charges:
Stock-based compensation expense	3,392			1,312		4,704			4,039		1,337			5,376
Depreciation and amortization	7,707			3,179		10,886			7,003		3,522			10,525
Gain (loss) on disposition of fixed assets	(49		)	—		(49		)	3		(1		)	2
Adjusted EBITDA	$	48,562		$	5,558	$	54,120		$	60,690	$	5,042		$	65,732

The net sales for each of HSNi's reportable segments are as follows (in thousands):



	Three Months Ended March 31,
	2017		2016
Net sales:
HSN	$	560,529	$	578,383
Cornerstone	224,906		238,382
Total	$	785,435	$	816,765

NOTE 5—EARNINGS PER SHARE

HSNi computes basic earnings per share using the weighted average number of common shares outstanding for the period. HSNi computes diluted earnings per share using the treasury stock method, which includes the weighted average number of common shares outstanding for the period plus the potential dilution that could occur if various equity awards to issue common stock were exercised or restricted equity awards were vested resulting in the issuance of common stock that could share in HSNi’s earnings.

The following table presents HSNi’s basic and diluted earnings per share (in thousands, except per share data):



	Three Months Ended March 31,
	2017		2016
Net income	$21,248		$28,585

Weighted average number of shares outstanding:
Basic	52,432		52,378
Dilutive effect of stock-based compensation awards	389		541
Diluted	52,821		52,919

Net income per share:
Basic	$	0.41	$	0.55
Diluted	$	0.40	$	0.54

Unexercised employee stock options and stock appreciation rights and unvested restricted stock units excluded from the diluted EPS calculation because their effect would have been antidilutive	3,814		1,919

NOTE 6—LONG-TERM DEBT

The balance of long-term debt, including current maturities, is as follows (in thousands):



	March 31,			December 31,			March 31,
	2017			2016			2016
Secured credit agreement expiring January 27, 2020:
Term loan	$	468,750		$	475,000		$	493,750
Revolving credit facility	60,000			40,000			130,000
Long-term debt	528,750			515,000			623,750
Unamortized deferred financing costs	(4,693		)	(5,122		)	(6,448		)
Long-term debt, net of unamortized deferred financing costs	524,057			509,878			617,302
Less: current maturities	(28,125		)	(25,000		)	(25,000		)
Long-term debt, less current maturities and net of unamortized deferred financing costs	$	495,932		$	484,878		$	592,302

On January 27, 2015, HSNi entered into a $1.25 billion five-year syndicated credit agreement ("Credit Agreement") which is secured by 100% of the voting equity securities of HSNi's U.S. subsidiaries and 65% of HSNi's first-tier foreign subsidiaries. Certain HSNi subsidiaries have unconditionally guaranteed HSNi's obligations under the Credit Agreement. The Credit Agreement, which includes a $750 million revolving credit facility and a $500 million term loan, may be increased up to $1.75 billion subject to certain conditions and expires January 27, 2020.

Loans under the Credit Agreement bear interest at a per annum rate equal to LIBOR plus a predetermined margin that ranges from 1.25% to 2.25% or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges from 0.25% to 1.25%. HSNi can elect to borrow at either LIBOR or the Base Rate plus a predetermined margin which is determined by HSNi's leverage ratio. The interest rate on the $528.8 million outstanding long-term debt balance as of March 31, 2017 was 2.45%. HSNi pays a commitment fee ranging from 0.20% to 0.40% (based on the leverage ratio) on the unused portion of the revolving credit facility.

The amount available to HSNi under the revolving credit facility portion of the Credit Agreement is reduced by the amount of outstanding letters of credit issued under the revolving credit facility, which totaled $7.2 million as of March 31, 2017. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants. As of March 31, 2017, the amount that could be borrowed under the revolving credit facility, after consideration of the financial covenants and the outstanding letters of credit, was approximately $472.6 million.

NOTE 7—DERIVATIVE INSTRUMENTS

HSNi uses derivatives in the management of its interest rate risk with respect to its variable rate debt. HSNi's strategy is to eliminate the cash flow risk on a portion of its variable rate debt caused by changes in the benchmark interest rate (LIBOR). Derivative instruments are not entered into for speculative purposes.

HSNi uses interest rate swap contracts to eliminate the cash flow risk on a portion of its variable rate debt. HSNi pays at a fixed rate and receives payments at a variable rate based on one-month LIBOR. The swaps effectively fix the floating LIBOR-based interest of our outstanding LIBOR-based debt. The interest rate swaps were designated and qualified as cash flow hedges; therefore, the effective portions of the changes in fair value are recorded in accumulated other comprehensive income (loss). Any ineffective portions of the changes in fair value of the interest rate swaps will be immediately recognized in earnings in the consolidated statements of operations.

The interest rate swaps effectively convert $187.5 million of our variable rate term loan to a fixed rate of 0.8525% through April 2017, and then increases to $250.0 million in April 2017 with a maturity date in January 2020 with a fixed rate of 1.05% (in both cases the swapped fixed rate is exclusive of the credit spread under the Credit Agreement). Based on HSNi's leverage ratio as of March 31, 2017, the all-in fixed rate was 2.3525%. The changes in fair value of the interest rate swaps (inclusive of reclassifications to net income and net of tax) for the three months ended March 31, 2017 and 2016 were income of approximately $0.3 million and a loss of approximately $0.2 million, respectively, and were included in other comprehensive income (loss).

The fair values of the interest rate swaps at March 31, 2017 and December 31, 2016 were assets of $4.1 million and $3.6 million, respectively, and were recorded in "Other non-current assets." The fair value of the interest rate swaps at March 31, 2016 was a liability of $0.6 million and was recorded in "Other long-term liabilities" in the consolidated balance sheets. HSNi estimates that approximately $0.5 million of unrealized income included in accumulated other comprehensive income related to these swaps will be realized and reported in earnings within the next twelve months. See Note 8 for discussion of the fair value measurements concerning these interest rate swaps.

NOTE 8—FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value assumptions are made at a specific point in time and changes in underlying assumptions could significantly affect these estimates. HSNi applies the following framework for measuring fair value which is based on a three-level hierarchy:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these items.

The following table summarizes the fair value of HSNi's financial assets and liabilities which are measured at fair value on a recurring basis in the consolidated balance sheets (in thousands):



	March 31, 2017
		Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
		Total Fair Value and Carrying Value on Balance Sheet		Level 1		Level 2		Level 3
Assets:
Interest rate swaps		$	4,077	$	—	$	4,077	$	—



	December 31, 2016
		Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
		Total Fair Value and Carrying Value on Balance Sheet		Level 1		Level 2		Level 3
Assets:
Interest rate swaps		$	3,577	$	—	$	3,577	$	—



	March 31, 2016
		Total Fair Value and Carrying Value on Balance Sheet		Fair Value Measurement Category
		Total Fair Value and Carrying Value on Balance Sheet		Level 1		Level 2		Level 3
Liabilities:
Interest rate swap		$	552	$	—	$	552	$	—

HSNi's interest rate swaps are carried on the balance sheet at fair value. The swaps are entered into for the purpose of hedging the variability of interest expense and interest payments on HSNi's long-term variable rate debt. The fair value is based on a valuation model which utilizes interest rate yield curves and credit spreads as the significant inputs to the model. These inputs are observable in active markets (level 2 criteria). HSNi considers credit risk associated with its own standing as well as the credit standing of any counterparties involved in the valuation of its financial instruments.

The carrying amount of the term loan and revolving credit facility outstanding under the Credit Agreement approximates fair value as these instruments have variable interest rates which approximate current market rates (level 2 criteria).

NOTE 9—INCOME TAXES

HSNi calculates its interim income tax provision in accordance with the accounting guidance for income taxes in interim periods. At the end of each interim period, HSNi makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date income or loss. The tax expense or benefit related to significant or unusual items

that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.

In addition, excess tax benefits and deficiencies related to share-based awards and the effect of changes in enacted tax laws or rates, tax status, or judgment on the realizability of beginning-of-the-year deferred taxes in future years are recognized in the interim period in which the change occurs.

The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year and permanent and temporary differences. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.

For the three months ended March 31, 2017, HSNi recorded a tax provision of $13.5 million which represents an effective tax rate of 38.8%. For the three months ended March 31, 2016, HSNi recorded a tax provision of $17.1 million which represents an effective tax rates of 37.4%.

The Internal Revenue Service ("IRS") has concluded its examination of HSNi's consolidated federal income tax return for the year ended December 31, 2010 and its limited scope examination of HSNi's consolidated federal income tax return for the year ended December 31, 2011. No material adjustments resulted from these IRS examinations. Currently, HSNi’s 2013 through 2015 tax returns are under audit by the state of Florida. HSNi does not anticipate any material adjustments to our tax liabilities as a result of the examination.

HSNi and several companies previously owned by IAC/InterActiveCorp, or IAC, were spun-off from IAC on August 20, 2008. In connection with the spin-off, HSNi entered into a Tax Sharing Agreement with IAC. Pursuant to this agreement, each of the companies included in the spin-off (the "Spincos") was indemnified by IAC for additional tax liabilities related to consolidated or combined federal and state tax returns prepared and filed by IAC prior to the spin-off. However, each Spinco agreed to, among other things, assume any additional tax liabilities related to their separately filed state income tax returns. All examinations have concluded or statutes of limitations have expired related to IAC's consolidated or combined federal and state tax returns for years including HSNi operations prior to the spin-off.

The Tax Sharing Agreement also provides, among other things, that each Spinco indemnifies IAC and the other Spincos for any taxes resulting from the spin-off of such Spinco (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related shareholder litigation or controversies) to the extent such amounts result from any post spin-off (i) act or failure to act by such Spinco described in the covenants in the Tax Sharing Agreement, (ii) acquisition of equity, securities, or assets of such Spinco or a member of its group, and (iii) breach by such Spinco or any member of its group of any representation or covenant contained in the separation documents or in the documents relating to the IRS private letter ruling and/or tax opinions. This indemnification remains effective until IAC's tax returns for the two year period after the spin-off are no longer subject to examination.

NOTE 10—STOCK-BASED AWARDS

Stock-based compensation expense is included in the following line items in the accompanying consolidated statements of operations (in thousands):



	Three Months Ended March 31,
	2017			2016
Selling and marketing	$	1,588		$	1,808
General and administrative	3,116			3,568
Stock-based compensation expense before income taxes	4,704			5,376
Income tax benefit	(1,240		)	(1,876		)
Stock-based compensation expense after income taxes	$	3,464		$	3,500

As of March 31, 2017, there was approximately $38.5 million of unrecognized compensation cost, net of estimated forfeitures, related to all equity-based awards which is currently expected to be recognized on a straight-line basis over a weighted average period of approximately 2.3 years.

The Second Amended and Restated 2008 Stock and Annual Incentive Plan, as amended (the “Plan”), authorizes the issuance of 8.0 million shares (8.8 million shares after giving effect to the anti-dilution provisions of the Plan related to the special cash dividend paid in February 2015) of HSNi common stock for new awards granted by HSNi. The purpose of the Plan is to assist HSNi in attracting, retaining and motivating officers, employees, directors and consultants, and to provide HSNi

with the ability to provide incentives more directly linked to the profitability of HSNi’s business and increases in shareholder value. As of March 31, 2017, there were approximately 0.5 million shares of common stock available for grants under the Plan.

During the first quarter of 2017, HSNi granted 96,439 performance share units ("PSUs") to certain executive employees. PSUs cliff vest after a three year performance period. PSUs have rights to receive dividend equivalents that vest concurrently with the underlying PSUs once the requisite service has been rendered. Vesting percentages range between 0% and 200% of the target award based on HSNi's Total Shareholder Return relative to a peer group at the end of the performance period. The compensation expense for these PSUs is based on the fair value of the awards measured at the grant date and is expensed ratably over the vesting term.

A summary of the stock-based awards granted during the three months ended March 31, 2017 is as follows:



	Three Months Ended March 31, 2017
	Number of Awards Granted	Weighted Average per Share Fair Value
Maximum value stock appreciation rights (a)	1,144,049	$6.36
Restricted stock units	291,420	$38.14
Performance share units (b)	192,878	$57.36
Employee stock purchase plan options	31,729	$8.63
Dividend equivalents due to quarterly dividend	8,940	-
(a) Maximum value SARs are similar to traditional SARs, except these instruments contain a predetermined cap of 200% on the maximum earnings potential a recipient can expect to receive upon exercise.
(b) PSUs are reflected at the maximum 200% potential value.

The fair values of the options granted under the HSN, Inc. 2010 Employee Stock Purchase Plan are estimated on the grant date using the Black-Scholes option pricing model. The fair values of the maximum value stock appreciation rights and PSUs are estimated on the grant date using a Monte-Carlo simulation pricing model which estimates the potential outcome of reaching the market condition based on simulated future stock prices. The weighted average assumptions used in the valuation of each for the three months ended March 31, 2017 are as follows:



	Three Months Ended March 31, 2017
	Maximum Value Stock Appreciation Rights		Employee Stock Purchase Plan Options		Performance Share Units
Volatility factor	27.4	%	38.7	%	30.0	%
Risk-free interest rate	1.79	%	0.65	%	1.40	%
Expected term	4.7		0.5		2.9
Dividend yield	3.6	%	4.1	%	0.0	%

NOTE 11—SHAREHOLDERS’ EQUITY

Share Repurchase Program

Effective January 27, 2015, HSNi’s Board of Directors approved a share repurchase program which allows HSNi to purchase up to 4 million shares of its common stock from time to time through privately negotiated and/or open market transactions. The timing of repurchases and actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under HSNi’s debt obligations and other market and economic conditions. During the three months ended March 31, 2017, there were no share repurchases. During the three months ended March 31, 2016, HSNi acquired approximately 181,000 shares of its outstanding common stock for $8.7 million at an average price of $48.04. All shares were retired immediately following purchase. As of March 31, 2017, approximately 2.7 million shares remain authorized for repurchase under the program.

Dividend Policy

In the first quarter of 2017, HSNi's Board of Directors approved a quarterly cash dividend of $0.35 per common share resulting in a payment of $18.3 million on March 22, 2017 to HSNi's shareholders of record as of March 8, 2017.

In the second quarter of 2017, HSNi's Board of Directors approved a quarterly cash dividend of $0.35 per common share. The dividend will be paid on June 21, 2017 to HSNi's shareholders of record as of June 7, 2017.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes the cumulative gains and losses of derivative instruments that qualify as cash flow hedges. The following table provides a rollforward of accumulated other comprehensive income (loss) (in thousands):



	Three Months Ended March 31,
	2017			2016
Accumulated other comprehensive income (loss) as of January 1,	$	2,220		$	(95	)
Other comprehensive loss before reclassifications	(242		)	(603		)
Amounts reclassified from accumulated other comprehensive income to interest expense in the consolidated statements of operations	742			200
Income tax (expense) benefit	(173		)	154
Other comprehensive income (loss), net of tax	327			(249		)
Accumulated other comprehensive income (loss) as of March 31,	$	2,547		$	(344	)

NOTE 12—COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, HSNi is a party to various audits, claims and lawsuits. These audits or litigation may relate to claims involving property, personal injury, contract, intellectual property (including patent infringement), sales tax, product recalls, regulatory compliance, employment matters and other claims. HSNi has established reserves for specific legal, tax or other compliance matters for which it has determined the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain legal, tax or other matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against HSNi, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on its liquidity, results of operations, financial condition or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future and an unfavorable resolution of such a proceeding could have a material impact. Moreover, any claims or regulatory actions against HSNi, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

NOTE 13—COSTS ASSOCIATED WITH AN EXIT ACTIVITY

As part of its supply chain optimization initiative, HSNi announced in June 2015 its plan to close the HSN distribution center in Roanoke, Virginia and expand the capabilities of its distribution center in Piney Flats, Tennessee. HSNi expects the closure to be completed in 2018.

HSNi expects to incur approximately $4 million to $5 million in total charges related to the closure. These charges include approximately $3 million to $4 million in employee-related expenses, including severance payments and retention incentives, $3.2 million of which were recognized in fiscal 2015.

A summary of HSNi’s liability associated with exit activities, which is recorded in “Other long-term liabilities" as of March 31, 2017 and "Accrued expenses and other current liabilities" as of March 31, 2016 in the accompanying consolidated balance sheets, are presented in the following table (in thousands):



	Employee Related Costs
	2017			2016
Balance at January 1	$	3,100		$	3,221
Provisions	—			—
Payments	(63		)	—
Adjustments	—			—
Balance at March 31	$	3,037		$	3,221

NOTE 14—DIVESTITURES

On September 8, 2016, HSNi completed the sale of substantially all of the assets and certain liabilities of Chasing Fireflies and TravelSmith, two of the apparel brands included within the Cornerstone segment for a sale price of $1 million. The sales agreement included contingent consideration of $2 million that was based on the achievement of certain performance metrics in 2016 which were not achieved. No value was assigned to the contingent consideration as it was not considered probable of being earned.

The assets and liabilities of the two brands were classified as held for sale as of June 30, 2016 which resulted in a non-cash asset impairment charge of $20.4 million recorded in the second quarter of 2016 within the Cornerstone segment. During the year ended December 31, 2016, Cornerstone recorded an additional pre-tax loss on sale of $10.8 million. The transaction included cash charges of approximately $3.5 million related to transactions costs and employee and lease liabilities.

HSNi entered into a transition services agreement with the buyer to provide fulfillment and various back office support services through February 2017. Fees earned by HSNi under this transition services agreement of approximately $0.9 million for the three months ended ended March 31, 2017 are recorded in net sales in the consolidated statements of operations.

HSNi determined the sale of these businesses would not represent a strategic shift in its business nor would it have a major effect on its consolidated results of operations, financial position or cash flows. Accordingly, the disposal group is not presented in the consolidated financial statements as a discontinued operation.

NOTE 15—SUBSEQUENT EVENT

On April 26, 2017, HSNi announced Mindy Grossman, the Company's Chief Executive Officer, had resigned effective May 24, 2017 and she will not stand for reelection to the Board of Directors at the Annual Meeting of Shareholders on May 24, 2017. The Board has retained a national search firm to assist with the search for a successor that will include both internal and external candidates. In addition, until a successor is named, the Board has established the Office of the Chief Executive consisting of Rod R. Little, Chief Financial Officer, William C. Brand, Chief Marketing Officer of HSNi and President of HSN; and Judy A. Schmeling, Chief Operating Officer of HSNi and President of Cornerstone Brands, Inc. Mr. Little will be acting as the Company's interim principal executive officer.



ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report. Historical results and trends which might appear should not be taken as indicative of future operations. Our results of operations and financial condition, as reflected in the accompanying statements and related notes, are subject to management’s evaluation and interpretations of business conditions, changing market conditions and other factors.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), which are based on management’s exercise of business judgment, as well as assumptions made by and information currently available to management. When used in this document, the words “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,” “intend” and words of similar import, are intended to identify any forward-looking statements. These forward-looking statements include, among other things, statements relating to the following: future financial performance, business prospects and strategy, anticipated trends and prospects in the various markets in which HSNi’s businesses operate and other similar matters. These forward-looking statements relate to expectations concerning matters that are not historical fact and are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Although we believe our expectations are based on reasonable estimates and assumptions, they are not guarantees of performance.

Should one or more of these uncertainties, risks or changes in circumstances materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include but are not limited to those described under “Risk Factors,” included in HSNi's Annual Report on Form 10-K for the year ended December 31, 2016 and the following:


•	our ability to attract new and retain existing customers in a cost-effective manner;


•	our exposure to intense competition and our ability to effectively compete for customers;


•	changes in our relationships with pay television operators, vendors, manufacturers and other third parties;


•	the influence of the macroeconomic environment and its impact on consumer confidence and spending levels;


•	failure to attract and retain television viewers and/or changes in consumer viewing habits of our programming;


•	consolidation and/or divestiture in the cable industry, increases in on-air distribution costs and failure to secure a suitable programming tier of carriage and channel placement for the HSN television network programming;


•	changes to international and national trade laws, regulations and policies (particularly those related to or restricting global trade) could significantly impair HSNi's profitability;


•	interruption, lack of redundancy or difficulties implementing new or upgraded technology in our systems or infrastructure could affect our ability to broadcast, operate websites, process and fulfill transactions, respond to customer inquiries and/or maintain cost efficient operations;


•	any technological or regulatory developments that could negatively impact the way we do business, including developments requiring us to collect and remit state and local sales and use taxes in states where we do not currently do so;


•	risks associated with possible systems failures and/or security breaches, including, any security breach that results in the theft, transfer or unauthorized disclosure of customer, employee or company information, or the failure to comply with various laws applicable to HSNi in the event of such a breach;


•	changes in product shipping and handling costs particularly if we are unable to offset them;


•	changes in consumer expectations for reduced shipping charges and faster delivery times particularly if we are unable to meet them;


•	HSNi’s business prospects and strategy, including whether HSNi’s initiatives will be effective;


•	our ability to offer new or innovative products and services through various platforms in a cost effective manner and consumer acceptance of these products and services;


•	risks associated with litigation, audits, claims and assessments;


•	risks associated with acquisitions including the ability to successfully integrate new businesses and achieve expected benefits and results; and


•	our chief executive officer transition, and our ability to appoint a new chief executive officer with the required level of experience and expertise in a timely manner; or the loss of any additional key member of our senior management team.

Other unknown or unpredictable factors that could also adversely affect HSNi’s business, financial condition and results of operations may arise from time to time.

You should not place undue reliance on these forward-looking statements. All written or oral forward-looking statements that are made or are attributable to us are expressly qualified in their entirety by this cautionary notice. Such forward-looking statements speak only to the date such statements are made and we do not undertake to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize. Historical results should not be considered an indication of future performance.

Results of Operations

Overview of Results

HSNi’s net sales in the first quarter of 2017 decreased 4% to $785.4 million. Net sales at HSN decreased 3% to $560.5 million and Cornerstone’s net sales decreased 6% to $224.9 million. The prior year period included the benefit of an additional day for leap year within the HSN segment and the net sales from two Cornerstone brands that were divested in September 2016. Excluding these effects, HSNi's net sales decreased 1%; HSN's net sales decreased 2%; and Cornerstone's net sales increased 1%. Both segments were impacted by a challenging and highly competitive retail environment. We also continued to experience increased pressure on shipping and handling revenues in both the HSN and Cornerstone segments, a trend we expect to continue through 2017.

Digital commerce remains an essential part of our strategy to optimize the content of all our brands across multiple distributed commerce platforms. HSNi digital sales penetration represents 54% of our business. Sales from mobile devices, including smart phones and tablets, grew 11% and represent 24% of our total business. We will continue to invest in digital technologies to enable us to offer a highly personalized and engaging experience based on customer profile, preferences and usage.

In September 2016, HSNi completed the divestiture of two of the under-performing apparel brands within the Cornerstone portfolio, TravelSmith and Chasing Fireflies, allowing us to exclusively focus on improving the performance of our strategic brands. The results of TravelSmith and Chasing Fireflies are included in the results of HSNi and Cornerstone through the date of the divestiture.

As part of our distributed commerce strategies, we continued to invest in Cornerstone's experiential retail stores in key markets to expand consumer touch points with our brands. We have seen increased demand and higher lifetime-value customers in the regions where our retail stores are located. During the first quarter of 2017, we opened one new Ballard Designs retail store and have plans to open one Frontgate and two additional Ballard Designs retail stores in 2017.

HSNi continued implementation of its supply chain optimization initiative which includes the automation and consolidation of certain HSNi distribution centers. HSN began phasing in its expanded automation capabilities in its Piney Flats, Tennessee distribution center in the third quarter of 2016. HSN incurred additional costs of approximately $4 million in the first quarter of 2017 related to the implementation in the form of increased labor, operational inefficiencies and increased consulting costs. These costs negatively impacted gross profit by $2.4 million and operating expenses by $1.6 million. We expect that approximately $6 million of additional related charges will be incurred in 2017, with approximately half impacting gross profit. Upon the project's completion, we expect to realize financial and operational benefits of the supply chain optimization initiative in the form of increased labor efficiencies, more efficient space utilization, lower transportation costs and faster customer deliveries.

As part of the supply chain optimization, HSN will be closing its Roanoke, Virginia distribution center which is expected to occur in 2018. HSNi expects to incur approximately $4 million to $5 million in total charges related to the closure of the Virginia facility. These charges include approximately $3 million to $4 million in employee-related expenses, including severance payments and retention incentives, which were recognized in fiscal 2015. See Note 13 of Notes to Consolidated Financial Statements for further discussion of the planned closure of the Roanoke, Virginia distribution center.

HSNi's net income in the first quarter of 2017, decreased 26% to $21.2 million. The decrease in net income was primarily due to gross profit compression as a result of the lower sales, heightened promotional activity in shipping and handling and the additional costs incurred related to the supply chain optimization implementation. The decrease was partially offset by lower operating expenses as a result of the divested businesses.

Net Sales

Net sales primarily relate to the sale of merchandise, including shipping and handling fees, and are reduced by incentive discounts and actual and estimated sales returns. Sales taxes collected are not included in net sales. Digital sales include sales placed through our websites and our mobile applications using tablets and smart phones.

Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is generally on the date of shipment. HSNi’s sales policy allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions.



	Three Months Ended March 31,
	2017		Change	2016
	(Dollars in thousands)
HSN	$	560,529	(3)%	$	578,383
Cornerstone	224,906		(6)%	238,382
Total HSNi net sales	$	785,435	(4)%	$	816,765

HSNi net sales in the first quarter of 2017 decreased 4%, or $31.3 million, due to a 3% decline at HSN and a 6% decline at Cornerstone. Excluding the results of the divestitures and the benefit of the additional day for leap year at HSN from the prior year, HSNi net sales in the first quarter of 2017 decreased 1%, or $11.4 million, compared to the prior year period. Digital sales were flat to prior year while penetration increased 200 basis points to 53.8%. Mobile sales grew 11% and as a percentage of digital sales were 44.7%, up from 40.5% in the prior year. Gross units shipped in the first quarter of 2017 decreased 8% to 13.8 million while the average price point increased 5% to $62.99.

HSN

HSN net sales in the first quarter of 2017 decreased 3%, or $17.9 million. Excluding the benefit of having an additional day for leap year in the first quarter of 2016, HSN's net sales decreased 2%. Digital sales grew 3% and penetration increased 290 basis points to 46.7%. Mobile sales grew 12% and as a percentage of digital sales were 54.0%, up from 49.9% in the prior year. Sales grew in apparel & accessories, kitchen and home, offset by decreases in other categories. Shipping and handling revenues decreased primarily due to an August 2016 reduction in HSN's standard shipping rates and an increase in shipping and handling promotions. The return rate improved 160 basis points from 16.8% to 15.2% primarily due to a shift in sales mix to categories with lower return rates as well as continuing to experience lower than historical return rates in many product categories. Average price point increased 4% to $56.49 driven by changes in product mix. Units shipped decreased 8% to 11.2 million.

Divisional retail product sales mix at HSN is provided in the table below:



	Three Months Ended March 31,
	2017		2016
Jewelry	8.0	%	8.6	%
Fashion (apparel & accessories)	16.7	%	15.6	%
Beauty & Health (including beauty, wellness and fitness)	25.5	%	26.6	%
Home & Other (including home, electronics, kitchen and other)	49.8	%	49.2	%
Total	100.0	%	100.0	%

Cornerstone

Cornerstone net sales in the first quarter of 2017 decreased 6%, or $13.5 million. Digital sales decreased 5% while penetration increased 60 basis points to 71.5%. Mobile sales grew 7% and as a percentage of digital sales were 29.6%, up from 26.4% in the prior year. Catalog circulation was 66.1 million, a decrease of 21% compared to prior year. The return rate was 14.0% compared to 13.2% in the prior year. Units shipped decreased 11% and average price point increased 8%. Cornerstone added one retail store during the first quarter of 2017 with a total of 17 stores open as of March 31, 2017 compared to 14 stores as of March 31, 2016. Cornerstone expects to open an additional three retail stores in 2017.

The divestiture of TravelSmith and Chasing Fireflies which occurred in September 2016 impacted the comparability between periods of net sales and of certain sales-related operating metrics. Excluding the divestitures, net sales increased 1%; units shipped increased 2% and average price point increased 2%. Excluding the divestitures, digital sales grew 2% with penetration increasing 120 basis points; mobile sales grew 15% and as a percentage of digital sales increased 330 basis points. Excluding the divestitures, catalog circulation decreased 14% which was largely due to timing and the strategic decision to allocate additional spend towards digital advertising.

The brand mix at Cornerstone is provided in the table below (as a percentage of net sales):



	Three Months Ended March 31,
	2017		2016 (b)
Home brands (Ballard Designs, Frontgate, Grandin Road and Improvements) (a)	81.5	%	76.7	%
Apparel brands (Chasing Fireflies, Garnet Hill and TravelSmith) (a)	18.5	%	23.3	%
Total	100.0	%	100.0	%
(a) Classification is based on the brands' primary product category which it sells; however, each brand sells products from other categories to a lesser extent.
(b) The first quarter of 2016 includes the results of Chasing Fireflies and TravelSmith.

Cost of Sales and Gross Profit

Cost of sales consists primarily of the cost of products sold, shipping and handling costs and compensation and other employee-related costs for personnel engaged in supply chain functions. Cost of products sold includes merchandise cost, inbound freight and duties and certain allocable general and administrative costs, including certain warehouse costs.



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
Gross profit:
HSN	$	191,132		(4)%	$	199,285
As a percentage of HSN net sales	34.1		%	(40 bps)	34.5		%
Cornerstone	$	82,005		(9)%	$	90,193
As a percentage of Cornerstone net sales	36.5		%	(130 bps)	37.8		%
HSNi	$	273,137		(6)%	$	289,478
As a percentage of HSNi net sales	34.8		%	(60 bps)	35.4		%

bp = basis points

HSN

Gross profit for HSN in the first quarter of March 31, 2017 decreased 4%, or $8.2 million. Gross profit as a percentage of net sales decreased 40 basis points to 34.1% primarily due to a decrease in shipping revenues and higher fulfillment costs, partially offset by an increase in product margins. The increase in fulfillment costs of approximately 40 basis points was primarily associated with the ongoing implementation of HSNi's supply chain optimization initiative which resulted in higher labor costs and operational inefficiencies during the quarter. Product margins were favorably impacted in the first quarter of 2017 by less clearance activity; however, HSN is carrying excess inventories in certain product categories that could create future margin pressure in the form of markdowns.

Cornerstone

Gross profit for Cornerstone in the first quarter of 2017 decreased 9%, or $8.2 million. Gross profit as a percentage of net sales decreased 130 basis points to 36.5%. Excluding the divestitures, gross profit as a percentage of net sales decreased 3% primarily due to a decrease in shipping margins as a result of increased promotional activity in the home brands, partially offset by higher product margins primarily driven by strategic pricing initiatives.

Selling and Marketing Expense

Selling and marketing expense consists primarily of advertising and promotional expenditures; compensation and other employee-related costs (including stock-based compensation) for personnel engaged in customer service, sales and merchandising, production and programming functions; on-air distribution costs, including costs to purchase media for direct-response television marketing; and marketing partnership programs. Advertising and promotional expenditures primarily include catalog production and distribution costs and online marketing, including fees paid to search engine companies and third-party distribution partners, as well as other advertising and promotional campaigns.



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
HSN	$	102,432		(3)%	$	105,570
As a percentage of HSN net sales	18.3		%	-	18.3		%
Cornerstone	$	64,867		(12)%	$	73,591
As a percentage of Cornerstone net sales	28.8		%	(210 bps)	30.9		%
HSNi	$	167,299		(7)%	$	179,161
As a percentage of HSNi net sales	21.3		%	(60 bps)	21.9		%

HSNi's selling and marketing expense in the first quarter of March 31, 2017 was $167.3 million, a decrease of $11.9 million from prior year, and was 21.3% of net sales compared to 21.9% in the prior year.

HSN

HSN's selling and marketing expense in the first quarter of 2017 decreased $3.1 million compared to the prior year and was 18.3% of net sales, consistent with the prior year. The decrease in expense is primarily due to higher advertising and media costs in the prior year related to the expansion of HSN's wholesale business and direct-response television marketing; lower employee-related costs primarily in our sales and customer service center; and a decrease in on-air distribution costs; partially offset by an increase in digital marketing expense.

Cornerstone

Cornerstone's selling and marketing expense in the first quarter of 2017 decreased $8.7 million and was 28.8% of net sales compared to 30.9% in the prior year. Excluding the divestitures, selling and marketing expense was consistent with the prior year; however, in connection with Cornerstone's strategy to focus more on digital marketing, there was a decrease in catalog costs that were offset by increases in expenses related to digital marketing and the additional retail stores.

General and Administrative Expense

General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, human resources, information technology and executive management functions; bad debts; facilities costs; and fees for professional services.



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
HSN	$	43,481		17%	$	37,068
As a percentage of HSN net sales	7.8		%	140 bps	6.4		%
Cornerstone	$	12,892		—%	$	12,895
As a percentage of Cornerstone net sales	5.7		%	30 bps	5.4		%
HSNi	$	56,373		13%	$	49,963
As a percentage of HSNi net sales	7.2		%	110 bps	6.1		%

HSNi’s general and administrative expense in the first quarter of 2017 increased 13%, or $6.4 million, and was 7.2% of net sales compared to 6.1% in the prior year.

HSN

HSN's general and administrative expense in the first quarter of 2017 increased 17%, or $6.4 million, and was 7.8% of net sales compared to 6.4% in the prior year. The increase is primarily due to an increase in employee-related costs, additional

consulting costs of $1.6 million incurred from the supply chain optimization implementation and a $1.4 million increase in bad debt expense.

Cornerstone

Cornerstone's general and administrative expense in the first quarter of 2017 was consistent with prior year and was 5.7% of net sales, compared to 5.4% in the prior year. Within general and administrative expense, there was a decrease in expense as a result of the divestitures, offset by an increase in incentive-based employee compensation.

Depreciation and Amortization



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
HSN	$	7,707		10%	$	7,003
Cornerstone	3,179			(10)%	3,522
HSNi	$	10,886		3%	$	10,525
As a percentage of HSNi net sales	1.4		%	10 bps	1.3		%

Depreciation and amortization in the first quarter of 2017 increased 3%, or $0.4 million. The increase in HSN's depreciation expense is primarily related to the assets associated with the supply chain optimization.

Operating Income



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
HSN	$	37,512		(24)%	$	49,645
As a percentage of HSN net sales	6.7		%	(190 bps)	8.6		%
Cornerstone	$	1,067		479%	$	184
As a percentage of Cornerstone net sales	0.5		%	40 bps	0.1		%
HSNi	$	38,579		(23)%	$	49,829
As a percentage of HSNi net sales	4.9		%	(120 bps)	6.1		%

HSNi's operating income in the first quarter of 2017 decreased 23%, or $11.2 million, and was 4.9% of net sales compared to 6.1% in the prior year. The decrease was due to a 4% decrease in net sales and 60 basis point decline in gross profit as a percentage of net sales, partially offset by a $5.1 million decrease in operating expenses.

HSN

HSN's operating income in the first quarter of 2017 decreased 24%, or $12.1 million, and was 6.7% of net sales, compared to 8.6% the prior year. The decrease was due to a 3% decrease in net sales, 40 basis point decline in gross profit as a percentage of net sales and $4 million increase in operating expenses. The supply chain optimization implementation resulted in an additional $4 million in costs which negatively impacted gross profit by $2.4 million and operating expenses by $1.6 million.

Cornerstone

Cornerstone's operating income in the first quarter of 2017 increased $0.9 million to $1.1 million and was 0.5% of net sales compared to 0.1% in the prior year. Excluding TravelSmith and Chasing Fireflies, operating income decreased $3.9 million due to lower performance in the home brands and the absorption of approximately $1 million in fixed costs previously allocated to the divested businesses.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure. Please refer to Note 4 of the Notes to Consolidated Financial Statements for a discussion of the usefulness of this metric and for the reconciliation of operating income to Adjusted EBITDA for HSNi's operating segments and to HSNi's consolidated net income.



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
HSN	$	48,562		(20)%	$	60,690
As a percentage of HSN net sales	8.7		%	(180 bps)	10.5		%
Cornerstone	$	5,558		10%	$	5,042
As a percentage of Cornerstone net sales	2.5		%	40 bps	2.1		%
HSNi	$	54,120		(18)%	$	65,732
As a percentage of HSNi net sales	6.9		%	(110 bps)	8.0		%

HSNi's Adjusted EBITDA in the first quarter of 2017 decreased 18%, or $11.6 million, and was 6.9% of net sales compared to 8.0% in the prior year. The decrease in Adjusted EBITDA was due a 4% decrease in net sales and 60 basis point decrease in gross profit as a percentage of net sales, partially offset by a $4.7 million decrease in operating expenses (excluding non-cash charges identified in Note 4 to Notes to Consolidated Financial Statements). Operating expenses as a percentage of net sales excluding certain non-cash charges (identified in Note 4 to Notes to Consolidated Financial Statements) were 27.9% compared to 27.4% in the prior year.

HSN

HSN's Adjusted EBITDA in the first quarter of 2017 decreased 20%, or $12.1 million, and was 8.7% of net sales compared to 10.5% in the prior year. Adjusted EBITDA includes approximately $4 million of additional costs related to the supply chain optimization implementation. Operating expenses as a percentage of net sales (excluding non-cash charges identified in Note 4 to Notes to Consolidated Financial Statements) were 25.4% compared to 24.0% in the prior year.

Cornerstone

Cornerstone's Adjusted EBITDA in the first quarter of 2017 increased 10%, or $0.5 million, and was 2.5% of net sales compared to 2.1% in the prior year. Excluding non-cash charges (identified in Note 4 to Notes to Consolidated Financial Statements), operating expenses as a percentage of net sales were 34.0% compared to 35.7% in the prior year.

Excluding TravelSmith and Chasing Fireflies, Adjusted EBITDA decreased $4.1 million and was 2.5% of net sales compared to 4.3% in the prior year. The decrease was due to lower performance in the home brands and the absorption of approximately $1 million in fixed costs that were previously allocated to the divested businesses. Excluding the divestitures and non-cash charges (identified in Note 4 to Notes to Consolidated Financial Statements), operating expenses as a percentage of net sales were 34.0% compared to 33.6% in the prior year.

Other Income (Expense)



	Three Months Ended March 31,
	2017			Change	2016
	(Dollars in thousands)
Interest income	$	213		736%	$	25
Interest expense	(4,077		)	(2)%	(4,172		)
Total other expense, net	$	(3,864	)	(7)%	$	(4,147	)
As a percentage of HSNi net sales	0.5		%	-	0.5		%

Interest expense for the first quarter ended March 31, 2017 was $4.1 million, relatively unchanged from the prior year, due to lower average outstanding debt balances being offset by a higher average interest rate. The interest rate swaps as of March 31, 2017 and 2016 effectively converted $187.5 million of our variable rate term loan to a fixed rate. Beginning in April 2017, the interest rate swaps will effectively convert $250.0 million of our variable rate term loan to a fixed rate. See further discussion in Liquidity and Capital Resources.

Income Tax Provision

For the three months ended March 31, 2017 and March 31, 2016, HSNi recorded a tax provision of $13.5 million and $17.1 million, which represents effective tax rates of 38.8% and 37.4%, respectively. The change in the effective tax rate was primarily due to the adoption of ASU 2016-09 on January 1, 2017 which impacted how the tax effects of share-based awards are recognized. The adoption of ASU 2016-09 introduces a degree of volatility to HSNi's interim and annual effective tax rate. The excess or deficiencies in the tax benefits of share-based compensation are impacted by the value of the Company's shares at the time when awards are vested or exercised.

As a result of the resignation of Mindy Grossman, Chief Executive Officer, effective May 24, 2017, the Company is expecting it could incur additional income tax expense in the third quarter of 2017 related to certain vested equity awards that are out-of-the-money as of May 2, 2017. If these awards expire unexercised, it could result in an effective tax rate for the third quarter of 2017 of up to 46%, resulting in an annual effective tax rate of approximately 39%.

Liquidity and Capital Resources

As of March 31, 2017, HSNi had $48.2 million of cash and cash equivalents compared to $42.7 million as of December 31, 2016 and $46.8 million as of March 31, 2016.

Net cash provided by operating activities for the three months ended March 31, 2017 was $22.3 million compared to $32.5 million in the prior year, a decrease of $10.2 million, which was primarily due to a decrease in operating performance and changes in working capital. Working capital was negatively impacted in 2017 by the timing of accounts payable. Inventories were a higher use of cash due to the inventory growth at Cornerstone as a result of the additional retail stores as well as the timing of inventory receipts. Cash provided by accounts receivables in 2017 increased compared to the prior year due to a higher outstanding accounts receivable balance at the end of 2016 compared to 2015, partially offset by higher utilization and expanded offers of HSN's Flexpay offering in the three months ended March 31, 2017. HSN expects to continue to use its offering of Flexpay, when appropriate, as a tool to drive profitable revenue growth.

Net cash used in investing activities for the three months ended March 31, 2017 was $10.7 million and was related to capital expenditures primarily for investments in Cornerstone's retail store expansion, information technology, and infrastructure.

Net cash used in financing activities for the three months ended March 31, 2017 was $6.2 million. Borrowings of HSNi's long-term debt net of repayments during the current quarter, including for the term loan and revolving credit facility, were $13.8 million. HSNi paid quarterly cash dividends of $0.35 per share, representing an aggregate payment of $18.3 million.

On January 27, 2015, HSNi entered into a $1.25 billion five-year syndicated Credit Agreement. The Credit Agreement, which includes a $750 million revolving credit facility and a $500 million term loan, may be increased up to $1.75 billion subject to certain conditions and expires January 27, 2020. As of March 31, 2017, total debt of $528.8 million was outstanding.

The Credit Agreement includes various covenants, limitations and events of default customary for similar facilities including a maximum leverage ratio of 3.50x and a minimum interest coverage ratio of 3.00x. HSNi was in compliance with all such covenants as of March 31, 2017 with a leverage ratio of 1.9x and an interest coverage ratio of 20.0x. The Credit Agreement also contains covenants that limit our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness, pay dividends or make other distributions to third parties, repurchase or redeem our stock, make investments, sell assets, incur liens, enter into agreements restricting our subsidiaries' ability to pay dividends, enter into transactions with affiliates and consolidate, merge or sell all or substantially all of our assets. The Credit Agreement also contains provisions that limit the ability of HSNi to make Restricted Payments, defined as cash dividends, distribution of other property, repurchase of the Company’s common stock, prepayment or redemption of debt, etc., however, so long as the Company’s leverage ratio is below 3.00x after giving pro forma effect to any proposed Restricted Payments, the amount of such Restricted Payments are not limited. In the event the Company’s leverage ratio is equal to or greater than 3.00x or after giving pro forma effect to any proposed Restricted Payments, then such Restricted Payments are limited to $150 million in any such fiscal year. The current quarter cash dividend of $0.35 per share, or approximately $1.40 on an annualized basis, represents a Restricted Payment of approximately $18.3 million. Dividends, loans or advances to HSNi by its subsidiaries are not restricted by the Credit Agreement.

Loans under the Credit Agreement bear interest at a per annum rate equal to a LIBOR rate plus a predetermined margin that ranges from 1.25% to 2.25% or the Base Rate (as defined in the Credit Agreement) plus a predetermined margin that ranges from 0.25% to 1.25%. HSNi can elect to borrow at either a LIBOR rate or the Base Rate and the predetermined margin is determined by HSNi's leverage ratio. HSNi pays a commitment fee ranging from 0.20% to 0.40% (based on the leverage ratio) on the unused portion of the revolving credit facility.

The amount available under the Credit Agreement is reduced by the amount of commercial and standby letters of credit issued under the revolving credit facility, which totaled $7.2 million million as of March 31, 2017. The ability to draw funds under the revolving credit facility is dependent upon meeting the aforementioned financial covenants, which may limit HSNi’s ability to draw the full amount of the facility. As of March 31, 2017, the additional amount that could be borrowed under the revolving credit facility, in consideration of the financial covenants and outstanding letters of credit, was approximately $472.6 million.

To reduce our future exposure to rising interest rates under our credit facility, we entered into interest rate swaps that effectively converted $187.5 million of our variable rate term loan to a fixed-rate of 0.8525% through April 2017, and then increased to $250.0 million through January 2020 with a fixed rate of 1.05% (in both cases the swapped fixed rate is exclusive of the credit spread under the Credit Agreement). Based on HSNi's leverage ratio as of March 31, 2017, the all-in fixed rate was 2.3525%. For additional information related to our interest rate swap, refer to Note 7 of Notes to Consolidated Financial Statements.

Effective January 27, 2015, HSNi's Board of Directors authorized a 4 million share repurchase program which allows HSNi to purchase shares of its common stock from time to time through privately negotiated and/or open market transactions. The timing of any repurchases and actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under HSNi’s debt obligations and other market and economic conditions. During the three months ended March 31, 2017, there were no shares repurchased. As of March 31, 2017, approximately 2.7 million shares remain authorized for repurchase under the program.

HSNi anticipates it will need to make capital and other expenditures in connection with the development and expansion of its operations. Our capital expenditures for fiscal 2017 are expected to be approximately $55 million to $60 million and primarily relate to investments in information technology, approximately $12 million for Cornerstone's retail expansion; our distribution centers, including our warehouse automation project; and digital commerce. HSNi’s ability to fund its cash and capital needs will be affected by its ongoing ability to generate cash from operations, the overall capacity and terms of its financing arrangements as discussed above, and access to the capital markets. HSNi believes that its cash on hand, its anticipated operating cash flows, its available unused portion of the revolving credit facility and its access to capital markets will be sufficient to fund its operating needs, capital, investing and other commitments and contingencies for the foreseeable future.

In the second quarter of 2017, HSNi's Board of Directors approved a cash dividend of $0.35 per common share. The dividend will be paid on June 21, 2017 to HSNi's record holders as of June 7, 2017.

Seasonality

HSNi is affected by seasonality, although historically our business has exhibited less seasonality than many other retail businesses. Our sales levels are generally higher in the fourth quarter.



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of HSNi's market risks, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in HSNi's Annual Report on Form 10-K for the year ended December 31, 2016. No material changes have occurred in HSNi's market risks since December 31, 2016.



ITEM 4.	CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2017. Based on that evaluation, management has concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II



ITEM 1.	LEGAL PROCEEDINGS

In the ordinary course of business, we are involved in various legal matters arising out of our operations. These matters may relate to claims involving property, personal injury, contract, intellectual property (including patent infringement), sales tax, product recalls, regulatory compliance, employment matters and other claims. As of the date of this filing, we are not a party to any legal proceedings that are reasonably expected to have a material adverse effect on our business, results of operations, financial condition or cash flows; however, litigation matters are subject to inherent uncertainties and the results of these matters cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, results of operations, financial condition or cash flows. Moreover, any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources.

See Note 12 - Commitments and Contingencies in Part I, Item 1 for additional information regarding legal matters in which we are involved.



ITEM 1A.	RISK FACTORS

See Part I. Item 1A., “Risk Factors,” of HSNi's Annual Report on Form 10-K for the year ended December 31, 2016, for a detailed discussion of the risk factors affecting HSNi. There have been no material changes from the risk factors described in the annual report other than as set forth below.

We are undergoing a chief executive officer transition, which could cause disruption to our business, and our failure to appoint a new chief executive officer with the required level of experience and expertise in a timely manner could have an adverse impact on our operations and business strategy.



ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On January 27, 2015, our Board of Directors authorized us to repurchase up to 4 million shares of our common stock, principally to offset dilution related to HSNi's equity compensation programs. Under the terms of the share repurchase program, HSNi will repurchase its common stock from time to time through privately negotiated or open market transactions, including pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The timing of repurchases and the actual number of shares repurchased depends on a variety of factors, including the stock price, corporate and regulatory requirements, restrictions under the company’s debt obligations and other market and economic conditions. The repurchase program may be suspended or discontinued by HSNi at any time.

As of March 31, 2017, there were 2,695,579 shares available for repurchase. During the first quarter of 2017, there were no repurchases.

Refer to Note 6 of the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis- Liquidity and Capital Resources for a discussion of restrictions on the payment of dividends.



ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None



ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable



ITEM 5.	OTHER INFORMATION

None



ITEM 6.	EXHIBITS



Exhibit No.	Description of Document	Method of Filing


10.1	HSN, Inc. Employee Stock Purchase Plan, as Amended August 20, 2012	Filed herewith

31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.	Filed herewith

31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act	Filed herewith

32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith

32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act	Filed herewith

101	The following financial information from HSNi’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith: (i) Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016, (ii) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016, (iii) Consolidated Balance Sheets as of March 31, 2017, December 31, 2016 and March 31, 2016, (iv) Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2017 and Year Ended December 31, 2016, (v) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016, and (vi) Notes to the Consolidated Financial Statements.	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 3, 2017

/S/ Rod Little

Rod Little
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)