Q1 2020 Earnings Call
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I would like to have become friends over to you a speaker today Stacie Shirley CFO . Please go ahead ma'am. Thank.
Thank you operator, and good morning, everyone. Thank you for joining US joining me on the call today's Chief Executive Officer, Steven Becker.
Not received a copy of today's earnings release, you may obtain one by visiting the Investor Relations section of the Tuesday morning website at Tuesday morning Dot Com.
Before we begin today's discussion I would like to make you all aware some of the information presented today may contain forward looking statements and involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward looking statement.
We're making regarding the company's risk factors was included in our press release and is also included in our filings with the FCC.
Any forward looking statements made during this call speak only as of the date of this call.
Today's presentation loss includes certain non-GAAP financial measures, including eat EBITDA and adjusted EBITDA.
Reconciliation of the non-GAAP financial measures you said this presentation to the most directly comparable GAAP financial measures can be found any investor relations section of the Tuesday morning website at Tuesday morning Dot Com.
Steve will provide an overview of the results and strategy and I will follow with a review our financial results before we open the call to question I'll now turn the call over.
[laughter].
Good morning, and thank you everyone for joining us for first quarter call.
For the quarter, our comparable store sales were down 8.7% compared to a positive 3.8% last year, while we knew this would be our toughest compare the or we're also not helped by the weather with both the hurricane in the unseasonably warm temperatures in much of the country as we mentioned last quarter given the planned pullback in relocation activity the difference between our total comparable store sales growth and based.
Store comparable sales growth is increasingly immaterial this.
This is in sharp contrast to last year's comparable sales growth, which I 280 basis points of contribution from relocated stores.
Total comp performance notwithstanding we continued to be pleased with our transaction count haven't grown our comp transactions, 2.4% for the quarter. We believe the improvement in transactions is due to a combination of the right merchandise as was improved real estate and more effective marketing.
Offsetting this improvement transactions was a 3% decline in our basket. The decrease in basket was primarily related to the decline year on year and a handful of families. The carry a higher average unit retail as well as the mix impact of the growth, we're seeing and some lower than average you our families.
As it relates to the higher your families. We've made changes to the management.
Of these and taken other steps to improve their sales productivity, including addressing the values and price points being delivered.
We are seeing early signs of improvement in these specific businesses.
Ensuring that our values are competitive across our merchandise assortment is a key priority. This endeavor is a process, but we're making progress.
Our merchant team is coming together nicely.
We're pleased that we were able to attract talented merchants to enhance the strength in depth of our Tuesday morning team during the quarter. We added a veteran divisional merchandise manager, our third Gms and two more veteran buyers all from well known off price peers.
Since the spring we've replaced our entire merchant leadership team and in total recruited eat merchandise professionals with significant off price pedigree. We've also continued to provide the team additional resources and support to allow them to have a more frequent and effective presence in the market.
We feel good about the momentum that is building the progress this team is making and especially the exciting product. We're fighting in the market by the spring season, a significant portion of our assortment will be indicative of a more consistent focus discipline on delivering value to our customer.
We continue to see opportunity to drive both sales and profitability through our focus on delivering great value optimizing our marketing spend and driving efficiencies within our supply chain work, we've done shifting marketing dollars into digital has not only optimized our spend but has also begun to attract younger customer as we discussed on our last call.
As it relates to supply chain, we're proceeding with the retrofit of our Dallas distribution Center in the meantime, we continue to make headway improving our cost per piece across our facilities reduce costs in both Phoenix and Dallas This quarter and we're finding savings from the ongoing work from our transportation team. We expect it to retrofit will result in significant savings and we will continue to me.
Headway, reducing our costs along the way I.
Additionally, we were in the process of exploring the monetization of our non core real estate distribution assets. The interest in these assets has been robust and we look forward to updating you on the progress of this process.
Finally, with our store fleet in a much improved position following the significant store relocation opening store relocation opening and closing activity of the last five years, our primary real estate focus this year has shifted to rent renegotiation of the approximately 170 leases up for renewal this fiscal year, we've already renegotiated about two thirds.
With a significant number of these on more favorable terms.
Given our lease expiration schedule and with a renegotiation process progress. We are seeing is entirely reasonable to expect our rent costs to begin to decline quarter over quarter at some point in the near future.
For this year, we expect to opened approximately three new stores complete five relocations and close to 25 to 35 stores, we will be opportunistic about opening new stores and finding relocation sites and have recently improved a number of projects for next fiscal year.
In summary, we're very pleased with the work on many fronts, particularly with our merchandise team and the enhanced focus on consistently executing our core off price model and delivering great value.
We've also continued our focus on managing costs throughout the organization highlighted by improvements in rent and transportation spend we look forward to delivering continued improvement in updating you on our progress Stacey. Thank you see net sales were $224.4 million down 1.3% from Q1 last year.
Sales decreased 27% on top of last years positive 3.8% comp performance.
We expected the first quarter to be our most challenging compare given our strong comp performance last year, which included a 280 basis point contribution from relocated stores and as Steve mentioned weather was also a headwind.
Transactions increased 2.4% an average ticket decreased 3%.
Gross profit profit was almost flat at 81.1 million versus 82.4 million last year.
Gross margin decreased slightly to 36.1% compared to last year's gross margin of 36.3%.
The gross margin rate decline was primarily driven by increased markdowns compared to last year.
Q1 of last year, we completed the transition to new markdown management process, which resulted in a timing shift caused favorable markdown rate last year.
As expected we anniversary this timing shifts in Q1 of this year, which drove the overall decrease in gross margin rate.
As we look to the balance of the year.
Our quarterly markdown rate should be more comparable.
With the prior year quarters continued improvement in initial merchandise markets as well as lower supply chain and transportation costs for gross margin tailwinds in the quarter.
As seen a expenses were 89.8 million for the first quarter compared to last year's expenses of 90.0 million.
The decrease in SNA dollars was driven primarily by reduced spending on our real estate projects.
As a percentage of net sales SNA, delevering 40 basis points to 40% compared to 39.6% last year.
It is also worth noting that total rent expense was relatively flat compared to last year.
Steve discussed we've continued to have success in our written renegotiations and are starting to see the benefits of those efforts.
Our operating loss for the quarter was 8.7 million compared to a loss of 7.6 million in the first quarter last year.
We reported a net loss of 9.6 million or 21 cents per share compared to the first quarter last year. When we reported a net loss of $8.1 million or 18 cents per share.
Lastly, EBITDA was negative 2.2 million compared to negative point 9 million last year, and adjusted EBITDA was negative $1.5 million compared to negative point 1 million in the first quarter of last year.
Turning now to the balance sheet.
Cash and cash equivalents were 5.3 million at the ended the quarter compared to $12.6 million at the end of the first quarter of last year.
Total liquidity was 70 million, including approximately $65 million available on our revolver.
As of quarter end, we had 57.9 million in borrowings outstanding under our line of credit compared to 55.6 million last year.
We ended the quarter with our inventory in a good position at 285.9 million, which is a decrease of 2% from a year ago.
Our overall inventory turn to flat to last year and 2.6 turn.
Accounts payable balance declined 113 million compared to 132 million a year ago.
Year over year change was primarily driven by the inventory decline and timing factors, we expect accounts payable to be more in line with historical levels by the end of Q2.
For the first quarter, we invested 4.5 million of Capex on a net basis.
Turning now to our outlook as you saw from our press release, we are reiterating the financial outlook for fiscal 2020 that we provided on our last call.
We continue to expect comp store sales for fiscal 2022 increase in a low single digits.
As a reminder, Q2 will be a challenging comparison as we anniversary is strong comp from last year, which included a 170 basis point contribution from relocated stores.
Also as Steve noted, but we've identified and are working on driving improvement in the higher IMU. Our families that are pressuring our basket. These changes take time and finally, we expected to be a competitive holiday season with promotional pressure in the market, resulting from retail retailer store closure activity as well as a holiday calendar the has 60 or days between.
And Christmas.
We are encouraged by the transaction progress we have seen and as we move into the second half of fiscal 2020 with easing same store sales comparisons and a greater portion of our assortment impacted by the new merchant team, we look forward to driving improvement in our comp trends.
As it relates to gross margin, we continue to expect to achieve improvement in gross margin for the full year driven by improved initial merchandise markup and lower supply chain expenses.
Given prior year comparisons we would expect the gross margin improvement to be delivered in the second half, which is our spring season.
While we expect our markdown rate to normalize going forward as I just discussed we do expect Q2 gross margin to be down versus last year as we anniversary the material 280 basis point expansion, which included significant IMU improvement.
In addition, we incurred increased freight cost late last fiscal year, which were capitalized into inventory at that time. These higher costs will be recognized as we sell through the associated inventory in Q2 of this year, putting additional pressure on gross margin.
Consistent with our prior guidance at Genie expenses for the year expected to be relatively flat on a rate basis, and we continue to expect meaningful EBITDA improvement.
Total capex. This year is still expected to be approximately 25 to 27 million with a year over year increase related to the retrofit of our Dallas DC as well as an increase in investments in information technology, partially offset by lower spend on stores.
We plan to fund these investments through a combination of cash from operations.
Potential sale of certain non core real estate distribution assets as Steve mentioned and if necessary borrowings on our credit facility on now going to turn the call back over to Steve before we open up for questions.
In closing, we're pleased with the progress, we're making and we're well positioned to execute against our goals for the remainder of the year with important holiday season in front of US. We look forward to continue to deliver great product that amazing value to our customers I want to thank all of our teams for their hard work. We look forward to updating you on the progress on our next call.
[laughter].
Operator, we're ready for questions.
Ladies and gentlemen answer I wanted to ask a question you want me to quest to start into one key on your touched on telephone to withdraw your question. Please press the pound key.
Please standby, while we compile the county roster.
[laughter].
And our first question coming from the line of Jeff Van Sinderen.
Riley Your line is open.
Hi, good morning, everyone.
Can you speak more about the storm impact in the quarter. Just wondering if this has bounced back in the storm impacted areas and also are you seeing anything different in store traffic. So far in Q2, and then maybe if you could touch on your thinking around the fewer days between Thanksgiving and Christmas I know you mentioned that.
And any color you can provide on your toy business.
And the changing competitive landscape for tourists.
Yes, so a few different things are Jeff Firstly regarding the storm impact there was impact we're not going to quantify it.
Those areas have bounced back since that.
So I think you know you called out the compression of the at the time between Thanksgiving and Christmas certainly it's going to impact US just like it is everyone else's that's trying to.
Figure out the challenge that that's going to put into Q2, it's a very competitive.
Market right now from a promotional standpoint, and I think some of that compression has led some retailers to go ahead and start promoting already.
Yes, Jeff, Okay and Yep.
As regards your question on toys.
Obviously, we have some competitors who left the market other folks have stepped up to improve their toy offerings. We think twice has always been a big business for us and is a big opportunity and we think we're well positioned to hit at this Christmas.
Okay. Good.
And then I know you gave a little bit color on your outlook talk about the year over year comparison that obviously does factor in Q1.
As the fiscal year progresses, I'm, just kind of considering that fewer relocations.
In the margin games that you asked last year.
Maybe you can just touch more on the potential to improve margins and the current fiscal year from trade I think you mentioned and maybe any other elements there.
Maybe just touch on order of magnitude around those how we should think about the.
Maybe just anything we can consider around individual quarters beyond.
You too.
Okay sure. So a couple of things for margin I would say that we did reiterate that we are still expecting the year to improve year over year I'm not to the same degree that we experienced in fiscal 19 and really the opportunity is more so in this spring.
If you look at Q2.
We had significant expansion last year and our gross margin, which is really driven by I knew the 280.
Points improvement and so as we're anniversarying that thats going to be a real challenge for us which is why we.
Guided to our margins being down in Q2, the as you know we do still think that theres opportunity from I am you standpoint, but certainly not to the degree that we'd experienced over the past few years, we've consistently increased our I knew some of that has been through better negotiations and through mix than to the changes that we've made to our.
Our traditional advertising and so as we move forward still some opportunity, but just not to the same degree and especially as we continue to focus on really getting our value proposition right.
On the supply chain standpoint, definitely believe there's additional opportunity there from those the operations of our DC and becoming more efficient and getting our cost for piece down as well as from a transportation and perspective, we've done a lot of things from transportation.
And those processes through VC, bypassing consolidation as well as the work that our new head of transportation is done from a renegotiating our rates with our carriers transportation can can bounce around a bit which as you know we called that out as far as that being headwind for Q2 this year.
Because of how the accounting works and how those costs will come through but as we move into the spring again, we think that there's more opportunity there as we have.
Work that has been done has takes more full effect, especially from a rate perspective on until we think that that's a real opportunity.
And somewhat from the same point from sales when we gave our guidance at the end of the year at low single digit we knew that most of that opportunity was going to be in the spring because you know again Q1, which was the most difficult compare to two is still a difficult compare.
And the couple of things that I called out that make the quarter challenging from again, what we just called out within the compression on the the promotions that are out there and for us having less.
Real estate activity.
So we don't have that strong contribution that we had in the past.
And then what Steve talked about from the standpoint of really hitting these areas and having the full effect of the new merchant team that will take more effect in the spring, yes, Jeff I would add to that I think there's a lot of optimism about the spring we.
We have change out the entire leadership of our merchandising organization.
In total we as a new individuals working on that team and the whole team has really come together.
We changed some of the responsibilities and I think in in the whole, we've really embraced the off price and I think youre going to see that in the spring. So in the spring you're going to see a lot of inventory that we pack and held especially with spring seasonal you're going to see additional brands I think our price points are getting increasingly more compelling.
And that that should really start to come together I mean, if you think about it.
We have a number.
Number of new senior members of the team that I've only been here a few months and so their ability to impact the assortment. Thus far has been relatively limited, but as you get into the spring that changes considerably. So I think especially where we were last spring, where we think we're going to be this spring theres a lot of opportunity.
Okay. That's all helpful.
Oh, let somebody else jump and thanks for taking my questions.
Thank you.
And our next question coming from the line of cracks children with Paragon Associates. Your line is open.
Hi, Good morning, guys good morning.
Just curious if you guys have an update on the timeline for the monetization of the Dallas distribution assets and then do you have an estimate for how much and duplicative costs you may be carrying today.
So let me answer the second piece first we're not carrying duplicative costs, we are ultimately going to consolidate.
A couple of buildings that we can accommodate within our existing GC infrastructure and then ultimately monetize those.
We are in the process of monetizing those that is currently happening we feel very good about it it's been very robust and we've gotten.
Very good feedback from the market. Thus far we don't have an update on the timing, though it is in process and I think it should be fairly normal process and we look forward to updating you on the results of that as soon as we have them.
Great. Thank you guys. Thank you.
Our next question coming from the line of Chris Krueger with Lake Street Capital markets. Your line is open.
Hi, good morning.
Good morning.
Can you just touched on it the Dallas.
Initiative can you remind us.
The overall timing of.
Getting that retrofit.
Completed.
Expected to happen.
So we expect to be done this summer of 2021.
That's about a two year process.
Okay. So right around the end of fiscal 21 roughly.
Yes exactly.
Okay.
Then you guys touched on the toy category.
A couple of callers ago can you talk about.
Pets category, and then babies categories and what what do you think there.
Yeah, I mean, you know baby not dissimilar from toy saw a major player exit the market, which I think has created opportunity for everyone else we have been.
Growing our baby business, adding a lot of vendors and brands.
And we think it's a big opportunity.
Obviously, the baby customer allows us to attract younger customer and we've talked about.
We've seen consistently the average age from our customer decline. It has even declined again recently, so we think the baby offering is a great offering for us the customers responding to it and we're very happy that and similarly, our pet business has been a very good business as well I mean, I think the pet parent trend is very strong and our customer response.
Adds to our pet offering.
Also would comment that when you think about overall our basket. Those are two businesses that generally speaking have a lower a you are than our average and so we've seen tremendous growth from a number of businesses that similarly, you have a low at you are so for us to get our basket up we obviously have to improve the mix.
And drive strength in a handful of families that historically have had a higher you are and we've done a lot of work on that over the course of the last couple of quarters, we changed out some buying responsibilities and some management of buyers and we feel good about the progress that we're making and ultimately getting the right mix between some businesses like a pet which might have lower.
You are in some higher you our business is getting that mix correct and driving our average unit retail up we'll solve the basket issue.
Alright, Thats only got thank you.
Thank you.
And our next question coming from the line of David Faiman with Berman Capital. Your line is now open.
Hi, guys.
Just wanted to ask your question.
Looking at your payables.
Europe , you have 70 days of payables, which is almost two months actually tunable lasers are.
Are you so the people who down 14% year over year.
Are you how easy is for you to get new product and credit from the vendors because.
Obviously getting new product as Q2 two success.
But just your payables one already so I'm wondering from appreciate if you're going to lose the vendors and if you're able to get new production that that's an issue we haven't had an issue whatsoever I.
I mean, the difference in payables this quarter was related to lowering of inventory in some timing differential, but we haven't seen that at all.
Okay.
So getting frisch inventories on issue annual goal it would treat.
I guess, you don't want to increase it too much what does your gold inventory I mean, basically flat year over year sales were flat year over year.
But you have a 180 days of inventory so how good is that inventory.
The 180 days that we would you.
And what sort of could look for fresh products.
So the where inventory is fresh and we've talked about this over the last.
Number of quarters, we've consistently driven that down we feel very good about our freshness, obviously want to continue to improve turn we've talked about we've engaged in off price consultant and we worked very hard to continue to drive turn and in some of our families. We worked hard to lower the weeks to supply to pick up the turn so that is it's.
Recently, we haven't stated a public goal, but it's a significant initiative of the organization to improve the turn and to get our rate of sale up and it's something that we talk to regularly and in certain places, we're making a lot of progress there.
Well what does the what does the issue with improving because in the last year you have 180 days a year ago and you've got 180 days no. It's almost exactly the same so there hasn't been an improvement at least at the last year.
Well what is being that the problem with as well as we've stated we change out our entire merger organization and we've hired a consultant to help us to improve that so obviously, we too we're not pleased with a turn and we've made a lot of changes to the organization.
Focus on improving that I mean, it's basically we should expect to see the turns improve good future quarters, but we havent, yet so what you're saying that I think thats fair.
So we should expect to see inventories going down.
Yes year over year.
And you don't feel that Thats. Good what do you obviously would you consultant stuff you don't feel that's going to hurt sales.
Look we're not guiding to our inventories going but we think theres a lot of opportunity for us to be more efficient with our inventory you said, obviously lower working capital usage.
We certainly would unlock cash if you could reduce inventories.
Which should be good.
Yes.
Thank you very much appreciate it thank you Paula.
And I'm not showing any further questions at this time I would like to turn the call back over to Mississippi, Steven Becker for closing remarks.
Thank you for joining us today, we look forward to our next quarterly call. Thank you.
Ladies and gentlemen, discontinuities conference call. Thank you for participating you may all disconnect good day.