Q3 2019 Earnings Call

Good morning, My name is Carol and I will be your conference operator today.

At this time I would like to welcome everyone to the Jay Gelb third quarter 2019 conference call.

On today's call, our Jim Scully interim CEO of Churchill, Inc.

Web executive Vice President and CFO .

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

If he would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If he would like to withdraw your question. Please press the pound key.

Before we begin I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.

Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties.

Our described in the press release, and Jay Gelb FCC filings.

The forward looking statements made today are that if the date if this call and we do not undertake any obligation to update any forward looking statements.

Finally, we may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today.

If you do not have a copy of today's press release, you may obtain one by visiting me Investor Relations page of our website at GE gel Dot com.

I'll now turn the call over to Jim.

Thank you and good morning, everyone.

I am sure you saw in today's press release, I am stepping into the role as the Companys interim CEO .

On behalf of the board I want to think lender for her dedication and commitment to Jay Jill over the past two and a half years, including the past year and a half as CEO .

I joined the board two years ago, nor the brand well have great respect for our teams and I'm looking forward to leaving the company to a smooth transition.

Turning to our performance.

Our third quarter result, so short of expectations.

Total comparable sales declined 7% as the assortment did not resonate strongly with our customers as originally planned, particularly in our store channel.

These results were offset by an improvement in our direct channel, which grew to 43% total sales versus 39.8% last year.

Although our store channel is one to be admired and retail where the economics. We produce this performance has slowed.

We need to better align or two channels to fully capitalize on and build our omni channel customer segment.

Before I turn the call over to Mark to review the financial results in more detail.

I would like to spend a moment to discuss what I will be focused on initially with our teams.

Clearly the first priority is to stabilize the business.

We as a team to focus on our customer marketing product operating fundamentals in financial discipline.

In addition, the team has been working on go forward strategies to simplify our processes drive inventory discipline.

Improved quality and improve lead times, well, making sure we spend every dollar as effectively as possible.

As Mark will discuss we have made progress with inventory management and are working to improve our disciplines around going in season inventory in the future buys.

We need to go more flexibility into our inventory management and have better reaction to flex areas of our assortment up and down depending on how they are resonating with their customers.

With better Guard Rosen plays around inventory Clinton, we believe we will be much better position to capitalize on the benefits we have at the foundation of our business.

As you've heard us say before Jay Jill is remarkable brand with an extremely loyal and yet underserved customer.

I am the team believe any opportunities that we had for Jay Gelb.

Starting today I will be focused on working with the teams to instill and improve discipline around her operations to once again buda position to unlock these opportunities and capitalize on the great potential we have in this marketplace.

Well there is much work to be done I wouldnt fortune working with their teams to help position ghl for successful growth ahead.

Our brands as a will fall in our stores are a great asset in earn mired in the industry in our direct business is sizable.

All of which gives us confidence that we can once again begin creating value for shareholders.

With that I would turn call over to Mark will discuss our third quarter results in guidance in more detail.

Thank you Jim and good morning, everyone as Jim mentioned, the third quarter was challenging and we're committed to and focused on stabilizing the business. Our top priority is improving assortments to consistently deliver customers the quality and style. They expect from Jay Gelb.

We disappointed her in Q3 and know she is still engaged with the brand both online and in store she is spending less per transaction.

We see pockets of strength around key collections and items in the assortment, but have opportunity to be more consistent in our execution of quality and fabrication, primarily in the pure jail and wherever sub brands.

We know this from sales patterns as well as direct customer feedback we are actively listening and the teams are focused on correcting these issues in the coming for sex.

We also must continue to transform our operating practices around the management of inventory.

We have made progress and still in greater discipline in season inventory management and the sizing of future buys, but we have more work to do.

As product collections transition into those designed and purchased by the current creative teams.

We will position unit inventory conservatively and work to remain as flexible as possible and ready to react and chase as warranted.

We remain focused on bringing down costs to further improve the flexibility of the piano amidst challenging topline performance, we have begun to see some benefit in Q3 from cost savings actions taken in Q2 and continue to have opportunity to optimize our cost structure.

Now for an overview of third quarter performance.

Total net sales were $166 million down 4.6% versus last years $174 million.

Total company comparable sales decreased 7% total direct sales increased 3% year over year up 320 basis points to 43.0% of total sales for the quarter.

Gross profit was $107 million versus $116 million last year, and gross margin was 64.4% compared to 66.3% last year.

The year over year reduction in rate was due to softer than expected product margins, which were partially offset by approximately 120 basis points a benefit from better than expected recoveries on liquidated inventory during the quarter.

SGN expenses were $98 million versus $102 million last year the year over year decrease was driven by savings in corporate overhead, resulting from actions taken earlier this year as well as a reduction in marketing expenses compared to Q3 last year as a percent of sales SGN a de leveraged.

70 basis points versus last year.

Hey, P. operating income was $9 million were 5.4% of sales versus $13.9 million for 8% of sales last year.

Adjusted EBITDA for the quarter was $19.6 million compared to $24.2 million last year.

As a percentage of sales adjusted EBITDA was 11.8% versus 13.9% last year.

A reconciliation of adjusted EBITDA to net income is included in our press release.

Interest expense for the quarter was $4.8 million versus $4.7 million last year.

Tax expense for the quarter was 1.8 million versus 2.5 million last year and the effective tax rate was 42.5% compared to 27.1% in the third quarter of 2018, the elevated tax rate in the quarter is due to the impact of permanent tax to book differences, which a rise in the normal course.

Business.

GAAP net income for the period was $2.4 million or five cents per diluted share compared to $6.7 million or 15 cents per diluted share last year.

Turning to the balance sheet, we ended the quarter with $17 million in cash inventory at the end of the quarter was up 3.3% to $81.4 million versus $78.8 million last year.

This level of inventory is still too high but does represent a sequential improvement compared to end of second quarter looking forward through efforts taken earlier. This year, we were able to impacts the pre season buys related to receipts landing late in the fourth quarter. This is a critical step toward rightsizing inventory levels as we enter.

2020 regarding real estate, we opened four stores are in the third quarter, bringing total store count to 290.

Finally capital expenditures were $5.6 million.

Now to our outlook for fourth quarter and rest of year.

We have made progress this year streamlining costs and addressing elevated inventories, which we believe will pay off in the long term, but given the performance of product assortments during a challenging third quarter and a belief that fourth quarter will continue to be highly promotional we must be realistic in our outlook for the remainder of the year. We are therefore revising guide.

Once all of which excludes the impact of CEO transition costs as follows.

Fourth quarter, we expect total comparable sales to decrease between eight and 10% total net sales will decrease between five and 7% gross margin will decrease about 400 basis points year over year interest expense for the quarter will be approximately $4.5 million net EPS.

This is expected to be a loss of between 14 and 16 cents compared to earnings of five cents in the fourth quarter fiscal 2018.

And lastly, we expect to open one and close four stores ending the quarter with 287 stores.

And for the full year, we now expect total comparable sales decreased 5% to 6% total net sales to decrease 3% to 4% gross margin to decrease about 350 basis points year over year and interest expense to be about flat to fiscal 2018 levels.

The effective tax rate for the year is expected to be about 2% due to the permanent tax to book difference related to the impairment of goodwill recorded in second quarter, partially offset by the items impacting the third quarter tax rate mentioned earlier.

Full year earnings per share, which includes the impairment taken in second quarter is expected to be in the range of a loss of $2, an 18 cents to $2.20 per share.

Adjusted diluted earnings per share is now expected to be a loss of two cents to four cents compared to prior adjusted diluted earnings per share guidance of 20 cents to 24 cents, we continue to refine and prioritize capital investments and now expect capital expenditures of between 15 and $18 million.

As for full year 2019.

In summary, while we're disappointed and current performance, we're optimistic about the future and potential of this business. We remain focused on stabilizing operations and strengthening core operating principles that will enable ghl to meet and exceed the needs of an incredible growing target customer base.

That concludes my prepared remarks, I'll now turn the call back to the operator for questions.

Thank you.

This time I would like to.

I remind everyone in or to ask a question. Please press Star then the number one on your telephone keypad.

Well pause for just a moment to compile the queuing roster.

Our first question today comes from Paul Trussell from Deutsche Bank. Please go ahead.

Hi, Good morning. This is actually Kristina could tie on for Paul Welcome Jim. So I wanted to get your initial impressions and areas that need specific improvement.

The areas that need in your view immediate attention and how do you plan on attacking these and then lastly, just wanted to get you view like with all the changes that you have made over the last two years using that there's a base that you might have alienated your one so quick question there and how do you think you can successfully reengage with them.

Great well good morning, I think I think first I want to start by saying that.

That we have great business, a great brand I think we have a loyal customer and an attractive segment.

And I think we just need to focus.

If you better.

Thank you can think about some of the specific areas.

It is obviously an improving inventory.

We need to drive gross margin improvement.

Well at the same time positioning the company for future growth.

Clearly disappointed in the results and how the year shaping up but the focus in the intermediate term will be on.

Execution in operating disciplines.

And I'll, just I'll add and on the customer as Jim said the customer is very loyal.

Customer accounts are actually still positive year to date.

The reality is she is spending less and I think thats back to some of the points that Jim was making in terms of rightsizing the inventory by.

The resulting impact that has on the promotional level within the brand are all things that will continue to help us actually satisfy the customer. So we don't think we've alienated her but I would put yet on that the product the assortment needs to improve and that's where the focuses.

Thank you that's helpful and on obviously like yourselves performance missed the guidance that you have provided so as we look to the final quarter.

It doesn't mean things that have changed versus your prior expectations that really resulted in that 8% to 10% decline in same store sales and you mentioned that you will be course correcting with upcoming floor sets. So just in your view like when should we start seeing improvements in the topline and stabilization in your gross margin.

Sure. So the when we entered the third quarter. We had said at that time that we were cautiously optimistic and that we were basing our projections on a continuation of the trends we saw in the second quarter.

The reality is in the third quarter those trends fell off and really in the month of September with the September floor set which sets late August and into September .

We had some challenges so forecasts for the guidance now that we're providing.

We would call it realistic and it's based on a continuation of the Q3 trends as we exited the third quarter.

With really the discussion around the inventory and Rightsizing of those buys I would say that receipts that start to come in late in the quarter are much more in line with where we want them to be now I wouldn't say that that is a driver of topline growth initially what we're.

Looking to do is stabilized on the profit line. The gross profit initially and really start to.

Sort of stabilize around those key.

Profit metrics now that said as you right size your inventories and.

And the assortment comes together, which.

Assortments and I'm talking about that happened right sized inventory are not yet the assortments that are designed by the current creative team. That's later in the first quarter of 2020, but but as you stabilize the inventory in the Assortments improve then you're a war, which has been a choice.

Alex this year in Q3 in particular.

Can contribute in time to sales growth, but the initial initial view is stabilizing the business rightsizing the inventories stabilizing on the gross profit line.

Great. Thank you. Thank you so much and good luck with the holidays.

Thank you.

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley . Please go ahead.

Hey, this is going to capitalize on for Kimberly Greenberger.

Was wondering if if you could speak about the specific challenges that you saw if there were specific products that you saw issues or more of a broad based general issues across different products for specific color specific lines that there were challenges this quarter. Thanks.

Sure I'll I'll do my best to give you some color. The reality is within the Assortments, we had pockets of strength that we saw but we also had overriding.

Challenges that strengths that we saw in the assortment were in areas, where we'd sort of pushed the assortment into some of the more fashion areas of leopard print in FFO suedes by their very Virtu those are smaller buys.

We had some great items like cable sweater in the quarter end quilted jackets, it did very well, but I think overall the opportunities. We had were in the pure Jill and wherever collections within the store, we have an opportunity and are focused on further differentiating those sub brands within the store to their end use.

Yes.

We had some quality and color challenges within the assortment.

Generally in a little bit in late August and ended September the weather didn't help us the September drop when more towards layering and and a bit more heavier sweaters.

We don't like to site, whether honestly unseasonably warm is is that becoming seasonably warm in the summer not sure, but we need to really work through the assortments and work on the pure agilent wherever part of the assortment primarily.

Thank you so much.

Sure.

Our next question comes from the line of change ticker from Jefferies. Please go ahead.

Hi, Good morning question for Mark So I think you talked a bit about as she now being reduced and still seeing some opportunity to further discussion I think you'd have to have talked about where that's coming from and potentially where you see more expense reductions and then also how you balance making sure that you don't cut customer facing a revenue generating expense I think.

You mentioned pulling back on marketing and how you balance.

What do you think nationality, so making sure that you're focused on driving Avenue.

Sure gene so the expense opportunities, we continue to see our at this point more around refinements and efficiency.

Looking through all the spend areas within the PNM filed and a bit more of that traditional.

Currency reviews, we mentioned on the Q3 call that both stores payroll and marketing we view as strategic Differentiators for the brand and that is true.

In the third quarter the reductions in marketing that we put through were primarily related to catalog circulation reductions and within catalog circulation there are different categories of customer that you're targeting the.

Might have cost a little bit of top line in the quarter, maybe earlier in the quarter. The team has been refining the mix across the marketing media, including catalog to try to focus on the highest returning investments and have seen some successes there and then within the catalog itself circulation they've been tweaking.

To make sure that we're targeting the most responsive customers the existing customer primarily with the catalog and made some adjustments through the quarter to address that that that will continue but we view, even the strategic differentiators as opportunities to just continue to refine and become more.

Efficient in those spends and thats kind of the work that just continues within the business.

Okay. Great. That's helpful. And then you talk a lot about improving inventory management, but it feels like a lot of the challenges you're having just kind of go back to the fact that I think your lead times are somewhat on a longer side, though how difficult is it for you to improve inventory management and and what needs to change structurally within the organization for you to become more flexible.

Yes, we've made progress on the inventory management, despite long lead times I mean, there's both in the season aspects of inventory management and then there's the pre season.

Aspect of it pre season, obviously relates to the pie and making sure that we have the right.

For them and discussions set up to review the both the sales plans that profitability plans and the inventory that we're putting against it. So that's something that I mentioned weve been able to get in front of for the end of this quarter's receipts.

The in season management. The teams here have made good progress in terms of really diving deeper into some of the key metrics that we need to look at on a regular weekly if not more frequent basis around managing the yield of our products from the point that it hits the store through the point that sold through.

And that we've made great progress with initiating some some new language into the business with putting some structure and meetings around.

Those discussions on a regular basis I'm, not saying those meetings weren't happening before the it's more of a refinement and making sure. We were looking at the right metrics at the right time to make those discussions all the way through were to make those decisions all the way through.

Okay, great. Thanks, Thanks, very much good luck of holidays. Thank.

Thank you here.

Our final question comes from Marni Shapiro from retail tracker. Please go ahead.

Hey, guys.

Jim Nice to hear your voice again after a little while.

I guess I've a couple of quick questions. First one are you seeing a big difference between the customer whose online shopping.

And the way she's shopping in store.

And then I guess the other one is are you still getting new customers into the store or whether its physical or digital.

And would you I don't want to say slowdown that effort until the product is right is well, what's your thinking around sort of the marketing cadence to get new customers and until the product is right.

That's good good question Marty.

So look digital we've had a very strong digital business within Ghl for sometime this quarter. We mentioned that has ticked up to 43% of total sales I think some of the learnings we've been having or that some of the capsule items that we've had the collaborations.

That we've had our definitely as helping to drive traffic and and some new to brand traffic to the website, which is great.

The the stores in the third quarter were more challenged and.

I think for us as a business, it's really continuing to look at how to manage the entire ecosystem. The omni capabilities of the business across both digital and stores and so our marketing efforts focus there as well a lot of our mix has been moving into social and digital channels.

That helps the natural sort of industrywide trend within digital traffic is that it's migrating more towards mobile versus desktop and so lots of opportunities to focus on how to improve what has always been the lowest converting which is mobile and things are getting a lot.

Peter and there's there's new technologies there are always looking at there to help drive that.

But yeah as a focus in the business. That's a big strength of ours is that penetration of digital and how we continue to maximize where we think is a big competitive advantage, which is the store base.

To support the whole ecosystem as we go forward.

<unk>.

It makes sense.

Good luck with the I'll take the rest of questions offline best of luck for the holiday season. Thanks, guys. Thanks Marni.

Alright, Jim's I want to say.

So Jim I want to say, thank you for for joining US today I also want to thank all of our teams for their continued hard work and dedication and I hope everyone has a nice holiday season, and we look forward updating you on our progress under this call.

Yes.

This concludes today's conference call you may now disconnect.