Q3 2019 Earnings Call
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I'd now like to turn the conference over to Donnie case Investor Relations for Duluth Holdings. Please go ahead.
Thank you Hey, and welcome to today's call to this fast food chains third quarter fiscal year 2019 financial results.
Earnings release, which we issued this morning is available on our Investor Relations website, and I are due trading back under press release I.
I'm here today with the select Chief Executive Officer, and Dave We've added Chief Financial Officer on today's call management will provide prepared remarks, and then we will open the call to your questions before we begin I always like to remind you. The comments on today's call will include forward looking statements, which can be identified by the use of the words.
Such an estimate anticipate expect and similar phrases forward looking statements by their nature involved estimates projections, both forecasts and assumptions that are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward looking statements such risks and uncertainties and.
Uhhuh, but are not limited to those that are described in our most recent annual report on Form 10-K , and other SEC filings as applicable. These forward looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events and with that I would like to turn the call over to Steve.
Go ahead, Steve.
Good morning, and thank you for joining us today.
Since I assumed the role of interim CEO last quarter I've spent a good deal of time meeting with all levels of management throughout our organization.
Well I never stepped back from my role in shaping strategy I had to reenter the operational side or the business.
Over the last couple of years, we have been undergoing significant transformation for both our I T systems and distribution infrastructure.
Which was necessary to support our growth and compete in today's retail environment.
As I recently reported to our board of directors, while we have our share of growing things.
I have high confidence in our people processes and systems and collectively I believe we'll have a clear roadmap to growing our company and as profitability.
That said the potential of our investments, both and time and money have not been fully realized at this time, yet they are gaining traction and bearing fruit.
In fact, I believe we entered the fourth quarter better prepared to serve our customers than anytime in the last two years.
And here's a quick update on what we have accomplished.
We completed the opening of the 15 stores that were planned for fiscal 2019 in time for the holidays.
In the third quarter, we opened a new markets new markets in Birmingham, Alabama, Austin, Texas, and Salt Lake City.
Subsequent to the quarter, we launched our new concept store that exclusive exclusively features men's underwear in them All America.
We also opened the new markers of Nashville, and Knoxville, Tennessee, which completed our store build out for 2019, bringing us the total account of stores to 61.
While we announced last quarter that we were moderating our retail expansion stores play an important role in building brand awareness and driving meaningful growth.
In the third quarter stores contributed nearly 50% of our topline and they are critical to our omnichannel strategy to deliver the experience of today's customers demand shopping when where and how they want.
Now that we have BOPUS and ship from stores capabilities. We are just beginning to see their potential.
In quarter, three which we just completed 13% of direct sales were fulfilled from store inventory, which supports improved customer service and enhance inventory flow.
Keep in mind that we did not have these powerful systems up and running last fourth quarter and we're very pleased to see how fast are customers are adopting the convenience of ordering online and picking up in stores.
An even better a third of those customers purchased additional merchandise in the third quarter, while in the store.
Optimizing our retail stores in infrastructures is how will improve the ROI on the investments we've made over the last couple of years.
We're also intensely focused on areas that need improvement.
Driving traffic to our stores as a top priority.
Even though we put our stores, where our customers are we still need to create greater market aware greater market awareness through local advertising and in store events.
We also need to draw greater attention to the product newness that were delivery to customers. Our marketing team has been testing new ads and target areas using local TV and radio support direct mail prospects in a social media.
Results have been positive yet we have more more work ahead of us as we rollout these programs across our footprint.
Expanding on our newness initiative I'm pleased to report that we have seen progress on the new product front.
Our men's pant fit realize relaunch has been successful, especially in this limits to entered that categories, which affords us the opportunity to attractive base of new and younger customers.
Our men's dang soft underwear is off to a strong start and Buck naked prints are posting.
Results above expectations.
Our women's business continues to show healthy growth with expansion of the plus sizes and induction of core line extensions.
We're making good traction here in a very focused on doing the pipe in the pipeline with new and innovative products.
Regarding our third quarter results they were within.
Our current expectations, but still not showing our brands to put through potential.
The topline grew 12% and we earned one cents per diluted share, which reflects our focus on controlling expenses and achieving some SGN a leverage as expected.
Moving into the all important fourth quarter.
I am confident that our plans for Pete preparedness have turned in action.
We have exciting new products that are already showing traction and a great gifts selection for holiday shoppers.
We have a vastly improve line of sight across our inventory, which is in good shape, especially regarding our top selling products.
Our store shelves restocked, our people are ready we've checked all the boxes for what what's in our control.
That said everyone in the retail business hopes consumer spending will be strong during this year's compressed holiday selling season.
There continues to be mix sentiment on the outlook, but regardless, we are ready to do earns level best.
With that I will turn the call over to Dave to discuss quarterly results and operations in detail.
Thanks, Steve and good morning, everyone.
For the third quarter, we reported net sales of 119.8 million up 12% compared to $106.7 million last year.
Our direct segment sales grew 2.9% compared to last year and our retail segment sales grew 24%.
For the quarter shipping revenues were 1.5 million compared to $1.6 million last year.
The growth in retail was primarily driven by new stores opened in 2018 and 2019.
During the third quarter, we added three new stores and roughly 47000 gross square feet.
We ended the quarter with a total of 58 stores compared to 43 stores in the prior year.
During the quarter, we continue to experience and challenging demand trends.
Correct product sales were up 2.9% as reported however, this this period benefited the most from the 50 Threerd week calendar shift.
Excluding this direct Slayer sales were down slightly for the quarter.
We saw some momentum in August and September largely driven by increased clearance activity and the big Damn birthday sale event. However, a tough October followed which erase the gains of the prior two months.
We are pleased to see that markets, where the store opened at least two years continue to outpace non store markets and the direct sales growth.
In an effort to drive more sales and web traffic, we took deeper markdowns during sale events and drove a great greater amount of clearance activity.
As a result gross margin was down 250 basis points from last year for gross profit amount of 65.4 million.
As a reminder, our exposure to the China tariffs will continue well will impact our fourth quarter gross profit by 1 million to 1.5 million.
Our plans to ship the remaining production to other countries are underway and we expect minimal margin impact next year.
Our women's business continues to outpace mens with an overall growth rate of 19% for the quarter and mid teens growth rate online.
The growth in the women's business was driven by newness and into the expansion of the women's plus line, which was up significantly to last year and as well as strength in the quarter line extensions.
The men's business grew 10% over last year supported by the successful launch of new products, such as the pants refit assortment and the launch of Dang soft underwear, both exceeded expectations.
Headwinds on our men's core categories and soft outerwear sales due to the unseasonably warmer weather led to sales falling short of our plans. However.
Turning to expenses, we have been very focused on expense management, including a continued effort to focus on the most productive advertising spend.
Additionally, the steps, we've taken to leverage fixed cost and gains variable expense efficiencies resulted in improved operating margin and earnings growth on a year over year basis.
Selling general and administrative expenses increased 0.8% to 64 million compared to 63.5 million last year.
This included increases of 900000 in selling expenses and 2.2 million in general and administrative expenses.
Offset by a decrease of 2.6 million in advertising and marketing expense.
As a percentage of net sales SGN, a expense decreased 600 basis points to 53.5% compared to 59.9, 59.5% last year.
As a percentage in net sales advertising and marketing costs decreased 440 basis points to 16% compared to 20.4% in the comparable period.
Primarily due to advertising leverage gain from a shift within the spend by increasing television and decreasing print.
We've also pushed some advertising dollars into the fourth quarter, where it is the most productive.
Selling expenses as a percentage of net sales decreased 110 basis points to 15.4% compared to 16.5% last year.
The decrease is attributed to improved shipping and fulfillment cost and a higher mix of retail sales compared with last year and the efficiencies gained in our distribution network.
General and administrative expenses as a percentage of net sales decreased 50 basis points to 22.1% compared to 22.6% last year, primarily due to the leverage gain on fixed cost.
For the third quarter, we reported net income of 182000.
Or one cents per diluted share compared to a net loss of 3.2 million or 10 cents per diluted share last year.
Our adjusted EBITDA was 7.3 million compared to 1 million last year.
Turning to the balance sheet and liquidity, we ended the third quarter with a cash balance of 2 million.
Net working capital of $109 million.
And 90 million outstanding on our $130 million line of credit.
Inventories increased 39% to 180 83 million compared to 131 million last year.
The increase in inventory was due primarily to early delivery of receives to support our peak selling season.
As well as for the additional stores.
This reflected our goal of receiving good several weeks earlier to mitigate issues, we had last year with dislocated inventory in our Dcs and store channels.
Capital expenditures for the third quarter were $8 million compared to 19 million last year and were primarily for the new stores.
We are maintaining our full year guidance at this time, but remain cautious due to the shorten shopping period between Thanksgiving and Christmas.
We've also observed other retailers extending discounts earlier and deeper than prior years.
Overall, we expect our promotional cadence in the fourth quarter to be similar to last year, but not a steep in the level of discounts.
We expect to deliver sales growth of roughly 10% on a 52 week basis or net sales between 610 and 620 million in 2019.
We expect gross margins to be down 100 to 150 basis points.
Which is down an additional 50 basis points from our last guidance.
Selling general and administrative expenses as a percentage of net sales to be in the range of 48% to 49%.
We expect 2019 earnings per diluted share to be between 60, and 66 cents, which compares to 68 cents last year on 52 week basis.
Additionally, we do expect to realize a tax benefit related to R&D credits, which will post in the fourth quarter and bring the full year tax rate down to approximately 22.5%.
We expect adjusted EBITDA to be between 51, and 55 million and capital expenditures of approximately 38 million.
As Steve noted, we entered the fourth quarter prepare for success, while we still have close to three weeks of critical shopping activity ahead.
Current indications are the customers continue to shop closer to Christmas.
The four days of Black Friday through cyber Monday were healthy for both our channels compared to the same events last year.
However, due to Thanksgiving being one week later this year the three weeks, leading up to the holiday came in below last year.
That being said we are positioned to make up for the lag sales during the compress shopping period, and we'll continue to execute our fourth quarter game plan.
With that we will open the line for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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The first question comes from John D. Morris of D.A. Davidson. Please go ahead.
Hi, Thanks, good morning, everybody.
Question for question. Thanks, a question for you on inventory.
Can you give us a feel of what the inventory would have been if you were adjusting for the fact that you've got the pull forward to correct.
For last year. It just I'm just wondering it looks.
Even with that potentially a little bit high up 39% relative to sales growth and I Wonder if you can give us any comfort there and where you might be expecting that at the that inventory to be let's say at the end the fourth quarter. So those two questions.
Yes sure.
We we we moved our inventory forward by quite a bit three to four weeks, which in this period of time.
Sounds too.
A fairly large amounts in excess of $20 million of inventory that we pulled in early.
Relative to last year, we know that we were.
We were late in getting those those inventories into our warehouse and outdoor stores. So.
I'd say under normal circumstances under which we come back and repeat next year, we would expect our inventories to be closer in line to what our sales growth are.
At the ended the year I think we'll also see a greater increase on the inventory levels, because we're going to repeat that activity in preparation for spring and summer. So we're expecting inventory to be.
Between 20, and 30% higher on a year over year basis at the end of the year, reflecting that that continued pull forward.
And then as we proceed through 2020 odd get the inventories back in line with with sales growth.
All right. That's yeah. That's good to know ahead of time, so we not to expect that.
And then and then I guess, some slight or maybe partially connected to that just trying to understand a little bit better about the expectation for implied sales growth.
For the fourth quarter, maybe I missed it because you were kind of going through the full year numbers pretty quickly but.
It is my math correct that.
Given the window with a full year guide that sales growth in Q4.
Would be up I guess, a low to mid single digits and I'm wondering well it was that correct and if so.
I guess, given the way you're managing inventory levels, why why would that be the case in terms of a diesel compared to the third quarter growth rate.
Yeah, the fourth quarter will have from a sales growth standpoint.
The impact of going against our our 50 Threerd week last year, so over fiscal period standpoint.
Low mid single digits is correct.
From a from a.
52 week to 52 week basis, it's going to be a little bit above that in the highs mid single digits.
And really that's what we're we're managing our inventory flow to is the is the sales on a week same week over week basis.
Okay, Great. That's great clarification, good luck for holiday the stores look great, especially with that Alaska hard here. Thanks, guys.
Great. Thanks, John Thank you John .
The next question is from Jonathan Komp Fair to please go ahead.
Yes, hi, Thank you I'm, maybe Steve sincere now back kind of.
Deep into the business for for a while here Im curious as to start off kind of bigger picture has it gotten back engaged.
Just kind of any any broader thoughts on the state of the business or the brand or anything that surprised you as youve gotten back involved.
Well, there's been no surprises to speak of John .
We've got a lot of talented people here as I said earlier, we we've gone through gone to some growing pains with the rapid store expansion, we did with bringing a new systems and.
New logistic inventory systems that we're using a moment it systems. So that created sort of a drag this last 24 months and we're coming out of that.
Hi, I'm fairly well I feel the brand a solid I think our systems are in a in a better places there have been the last couple of years, we've got a couple of to complete yet, but the overall health of the businesses is good.
LNG environment out there, but that's that's something a little bit our control.
We're learning a lot about how to work this omnichannel program between the stores in the markets that the stores are in and are in our direct business.
So I probably your next question is.
On the CEO search I'll, just go head and say that Thats something we have planned to initiate probably in the first if not the second quarter of next year.
But we're doing that.
We're going to do that carefully and one of the things I've been trying to do is make sure that we really I'm well informed about what the qualities are these background experiences that we bring we'll be looking for generics.
See you all year.
Okay, Great and then Tom.
Maybe Dave a question on the margin performance year on year over year basis, It's about 15 and quite a while I'm.
And Im just curious how you're thinking about more of the outlook for for margin.
Yeah, if you've kind of reached a.
A bottom so to speak and see opportunity that more sustainably expand the margin from here and maybe embedded within that is just your confidence that you have a good handle going forward on the gross margin since that's been one area. That's.
Net loss was positive or more negative frankly has a year is going on here.
Sure John .
The operating margin.
Improvement.
We do expect that to continue this this particular quarter was.
I will say.
Improved significantly.
I don't think we'll get to see that degree of improvement every quarter going forward, but but the goal would be with the sales plans, we have the cost structure in place to to see improved profitability.
As you do know gross margin is a big part of that and that's going to come.
From the improvement in.
And our sell throughs, an ability to sell at full price. This this period. We're in right now is the most competitive and it just continues to be to be so where we see.
Products really doing well and many cases, it's because we've we've had to meet some pricing.
That that the market is.
It has from a deep discount standpoint.
And a good part of our gross margin impact in the in the third quarter did come from our women's side of the business, which I think is going to have a little bit more volatility to it but.
But that's that's the nature of continuing to rollout newness and the assortment.
Some things are going ahead, and some things might miss but but as long as we've got the pipeline of new products.
That was going to give us the best chance to.
To see growth and continued continue productivity so.
Hi, hopefully that gives you some color on on that question John .
It doesn't and maybe that leads to just my last one.
Forward in terms of some of us sales driving initiatives, whether it's the.
Yeah, the marketing messaging and mix or the product pipeline or even getting the customer file in place.
Any kind of broader thoughts if you look for yeah, what the major opportunities to drive but topline.
Sitting here today, you're here looking forward to.
Yes, certainly looking forward.
As you mentioned one of our biggest initiatives that we're working on now and will go into effect next year as a re platform of our customer data warehouse system, and that's going to give us the ability to to very much.
On a nimble way.
Personalize, our marketing approach to customers based on preferences based on there.
Based on their shopping habits, or even just browsing habits on online.
And it also give us the ability to to tailor some of the pricing that's that's relevant to the customers so were not as blanketly.
Putting out global promotions, but we can be more or targeted.
That that's going to improve the full price selling.
But we also think capture some of that that business of sales growth, because it's going to be more relevant and tied to the customers' preferences.
That's an initiative that's going to.
Be in place.
Our goal is by this time next year, so in place for our fourth quarter.
And we'll get some early learnings on it.
In the third quarter likely but.
That's that's a critical component I'd say the other thing is really around marrying that with omnichannel capabilities on our stores.
Which will come with an upgrade to the POS system next year as well and supplement what we've done already with BOPUS and ship from store, but but make the experience even better in the stores. So we know that a conversion of store traffic.
As is key to to seeing some store productivity improve and that's that's one of our major initiatives is seeing the traction in store store level traffic as well.
Okay I appreciate the color. Thank you.
Thank you. My next question is from Jim Duffy of Stifel. Please go ahead.
Thank you good morning.
Good morning questions for me.
Just wanted to start Big picture, Steve you mentioned potential from new system was not fully realized maybe there was a little bit overlap with jonathan's question here, but can you guys talk about some of the opportunities still on the common and the expected financial benefits as you.
Begin to.
You know realize the power of these new systems.
I'm going to let Dave handle that.
Yes, Jim Jim.
You know.
As we've talked about the.
The infrastructure that needed to be in place with order management, a new website.
Logistics infrastructure was was really a catch up from from prior years that and also to support the future growth.
The the financial benefits.
We're already starting to see that in the in the logistics side.
Compared to last year savings from having the inventory flow better in the right place. So were so we minimize the amount of back orders and and split shipments with that adds to cost.
And and plus handling time on our call center is improved which would streamlined the efficiency of our call Center operations. So those financial benefits are were we benefited from that in the third quarter and we continue to benefit from it right now.
The the systems that I just talked about for next year are going to be very much sort of topline driving initiatives and and get too.
Selling productivity in margin gross margin.
Improvement.
So those are the two two systems that we think are going to have the biggest financial impact.
Okay, Great and then more near term line of questioning Dave can you talk about growth expectations for the direct business in the fourth quarter.
You have a very concentrated selling window here Im curious are there any throughput limitations and is there incremental expense associated with associated with the servicing demand in that concentrated window.
No we do not anticipate any any throughput issues you know, we got well in front of it. This year inventory is already been fully received and our replenishment to stores. After a very vibrant black Friday weekend is is.
It is smooth and in progress so.
From a system standpoint, we we have been very stable knock on wood and and got through cyber Monday, which was.
Again, one of our biggest days ever from a online order standpoint, so no no concerns.
From a pick ups from the infrastructure to kind of satisfy the demand.
Direct.
Is.
With the week with the shifts in and weekly cadence between Thanksgiving and cyber Monday Monday being a week earlier last year it does compressed.
And we're going to expect that that the web business is going to.
The positive on a full quarter basis.
Similar to.
Similar to the third quarter now we are missing a week and that does detract from it.
But but on a on a true kind of week over week basis.
We're expecting it to be positive.
Positive growth and in fact as I mentioned.
The.
The period between Black Friday in cyber Monday was was up.
Year over year compared to those same events last year, so to us thats a good indication that that things are working.
Great then last one for me more housekeeping question I suppose, but you mentioned in the third quarter benefited the most from the 50 Threerd week can you.
Just explain that lots please.
Yeah sure.
With last year, having the 50 Threerd week in the fiscal year. It pushed the beginning of our fiscal year this year.
From 2019 and pushed it forward one week so.
When you think about the beginning in the end of a quarter, we began the the third quarter.
Got it the beginning of August which sales volumes are going to be lower than they would be at the ended the quarter, which is at the end of October so by pushing it.
Forward, our fiscal period picks up that that at that higher volume week.
What we had last year.
Now when we go back and we say lets aligned the weeks on a similar week over week basis. That's that's a better tru measure of the performance of the business.
And that's that's what I called out in terms of that the difference in growth rates as you think about it now we had the benefit and a fiscal.
Quarter this year or in the third quarter, we'll give a little of that back at the end of the fourth quarter, because we come down the slope of high sales down to lower sales period.
But.
But really the bigger impact is missing a 50 threerd week there.
Understood. Thanks, so much and good luck in these next few weeks.
Thank you.
Next question is from Guillen Carton of William Blair. Please go ahead.
Great. Thank you very much Dave sorry, just continue on that sort of less thought so I get that sort of on an apples to apples basis, you're looking at Oh gain here a growth similar to it sounds like the third quarter and your direct business, but as reported is that sort of come down closer to flat or.
Let's throw away thinking about whats going actually give me printed.
For the fourth quarter.
You know flat to slightly up low single digits is what we expect.
We'll be reported.
Yes, that's that's what would tie to the to the full year guidance.
And then is there any sort of had.
The thought there about ER, you mentioned that stores or markets, where stores and open over two years or seen outsized growth in the direct business is there any color you can add to that as per.
When that really kicks in how big of a difference that is is there sort of high volatility amongst markets how its aging in some of your older markets any additional detail you grew but.
I would be helpful.
Yeah. We you know we continue to see that that once a store has been in a market.
After its first full year.
The direct business is growing.
Faster pace and.
In cases, where we've got the most established markets.
Largely around the Midwest here in Minnesota and Wisconsin.
We saw direct in the third quarter a in the high single digits in terms of growth in those in those markets year over year.
So you know that thats, what translates into supporting the market growth.
Despite the store contraction in that second year that that that we know we see because of the shift in some of the customer activity. So you know in the in the third quarter in markets that we have been operating in four.
At least two years, where the store.
We would we were largely positive in terms of the sales growth in those in those markets. When you combine the store.
Business with a direct business.
And that's that's continues to play out that way.
I guess, where does that imply that the bigger pockets of weakness are then in the direct business in markets, where you don't have a store and is that sort of largely in units of inventory issue. So.
Well it is in markets, where we don't have a store, but it's also in markets, where we just opened up a store. So those that we opened up this year in 2019 or at the end of 2018 that are still kind of feeling the the cannibalization of of that new stores. So those.
You know those markets have direct growth rates, which are lower or or negative in some cases in markets, where we where we don't have a store.
Yeah that has been softer for us and.
Thats, where were only reliant on our on our marketing.
From a national brand standpoint, or or catalog prospecting and we have dial back some of that prospecting.
Because we see that at the end of the day, it's not the most highest.
Value of advertising.
But we do think that that product newness.
Will help within those markets, but it's been the softer part of our of our business.
For the last six to nine months for sure.
Great and then it sounds are you expecting to be able to sort of I.
I guess, where where should we expect that can add leverage on to come in and related to that it sounds like what you're saying for fourth quarters. They are expecting promotional activity to be inline.
Last year already seen that already this year or is that sort of largely expected as you enter sort of some of the more core selling periods now had a Christmas.
And then what is I guess, the shipping impact that you've seen and we'll continue to see.
Well the advertising, we do we do expect to get a little bit of leverage in the fourth quarter there.
Although we've added some.
Some dollars to to the period, we're in now to be more nimble in strategic and some of the digital spend that we've got flexibility on in the short term and it's also very high.
Return.
So we'll.
We expected to be a minor amount of leverage from advertising the fourth quarter.
Certainly not as similar to to the third quarter.
In terms of.
Sorry, Dillon what was the other part of your questioner Yeah I thought.
Comment was that the expectation for Fourq, who is going to be call it stable promotional cadence or depth or maybe putting pullback on debt.
Just what what the expectation is for how promotional you're going to be versus what you've already seen thus far in Nicholas.
Yeah from up from early.
Discount of the product in setting our our our promotions.
Where where we're going to be a little bit different is last year, we were.
Doing a lot of flash sales on individual items at a different on different days, a week and while we found that we kind of spike the business.
It was at a pretty steep discount that that didnt really play out and productive way for us. So we're not going to we're not going to be doing the daily flashes.
Well is nearly as much as last year and some of our.
Sale events are going to be.
You know tailored to.
Some items at a 20% discount some at a 30% and the combination of some temp promos with a global promos gets us to net roughly the same amount of discounting last year.
But absent those those flash sales. So we expect that we're going to be able to hold gross margin.
In this quarter and and we're already we already are seeing that in November our gross margin year over year is up.
Quite a bit to last year and.
And so we're hoping that that's going to didnt going to be a in place for the balance of the fourth quarter.
But this is the most competitive and critical time for us and and we also.
To be nimble, so, we'll we'll react to kind of capture the business, but but we're not going to be.
As Steve as you see other retailers I think that Thats My point.
Great all very helpful. Thank you so much that's the level.
Thank you.
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Yes.
Good morning, and welcome to the Duluth Holdings third quarter fiscal year 2019 earnings Conference call.
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I'd now like to turn the conference over to Doughty case Investor Relations for Duluth Holdings. Please go ahead.
Thank you Kate and welcome to today's call to this.
Strange third quarter fiscal year 29.
Financial results our earnings release, which we issued this morning is available on our Investor Relations website at <unk> trading Dotcom under press release.
I'm here today with East <unk>, Chief Executive Officer, and they live added Chief Financial Officer on today's call management will provide has the market and then we will open the call to your question before we begin I would like to remind you. The comments on today's call will include forward looking statements, which can be identified by they used to them.
Estimate anticipate expect similar phrases forward looking statements by their nature estimates projections, both forecasts and assumptions that are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed on the forward looking statements such risks and uncertainties include.
But are not limited to those that are described in our most recent annual report on Form 10-K , another FCC filings as applicable. These forward looking statements speak only as of the date of this conference call and should not be like on as predictions of future Lisa.
With that I would like to turn the call over to Steve go ahead.
Good morning, Thank you for joining us today.
Since I assumed the role of interim CEO last quarter.
On a good deal of time dealing with all levels that management throughout our organization.
Well I never stepped back from my role in shaping strategy I had to reenter the operational side or the business.
Over the last couple of years, we have been undergoing significant transformation for both our I T systems and distribution infrastructure.
Which was necessary to support our growth and compete in today's retail environment.
As I recently reported to our board of directors, well, we have our share of growing things.
I have high confidence in our people processes and systems and collectively I believe we have a clear roadmap to growing our company had its profitability.
That said the potential of our investments both time and money have not been fully realized at this time, yet they are gaining traction and bearing fruit.
In fact, I believe we entered the fourth quarter better prepared to serve our customers than any time in the last two years.
And here's a quick update on what we have accomplished.
We completed the opening of the 15 stores that were planned for fiscal 2019 in time for the holidays.
In the third quarter, we opened a new markets new markets in Birmingham, Alabama.
US in Texas, and Salt Lake City.
Subsequent to the quarter, we launched our new concept store that exclusive exclusively features men's underwear in them All America.
We also opened the new markers of Nashville, and Knoxville, Tennessee, which completed our store build out for 2019, bringing us the total account of stores to 61.
Well, we announced last quarter that we were moderating our retail expansion stores play an important role in building brand awareness and driving meaningful growth.
In the third quarter stores contributed nearly 50% of our topline and they are critical to our omnichannel strategy to deliver the experience of today's customers demand shopping when where and how they want.
Now that we have both us and shipped from stores capabilities. We are just beginning to see their potential.
In quarter, three which we just completed 13% of direct sales.
We are fulfilled from store inventory, which supports improved customer service and hatch inventory flow.
Keep in mind that we did not have these powerful systems up and running last fourth quarter and we're very pleased to see how fast are customers are adopting the convenience of ordering online is picking up in stores and even better a third of those customers purchased additional merchandise in the third quarter, while in the store.
Optimizing our retail stores and infrastructures is how will improve the ROI on the investments we have made over the last couple of years.
We're also intensely focused on areas that need improvement.
Driving traffic to our stores as a top priority.
Even though we put our stories, where our customers are we still need to create greater market aware greater market awareness local advertising and in store events.
We also need to draw greater attention to the product newness that we're delivering new customers. Our marketing team has been testing new ads and target areas using local TV and radio support direct mail prospects initial show media.
Results have been positive yeah, we have more more work ahead of us as we roll out these programs across our footprint.
Expanding on our newness initiative I'm pleased to report that we have seen progress on the new product front.
Men's pants that real a relaunch as men successful, especially in the slams to entered that categories, which affords us the opportunity to attractive base of new and younger customers.
Our men's dang soft underwear is off to a strong start and Buck naked French are posting.
Results above expectation.
Our women's business continues to show healthy growth with expansion of the plus sizes and induction of core line extensions.
We're making good traction here in a very focused on going the pipe and the pipeline with new and innovative products.
Regarding our third quarter results they were within.
Our current expectations, but still not showing our brands to true potential.
The topline grew 12% and we are in one cents per diluted share, which reflects our focus on controlling expenses.
Giving some SGN a leverage as expected.
Moving into the all important fourth quarter.
I'm confident that our plans for Pete preparedness have turned in action.
We have an exciting new products that are already showing traction and a great gifts selection for holiday shoppers.
Have a vastly improved line of sight across your inventory, which is in good shape, especially regarding our top selling products.
Our store shelves restock or people are ready we've checked all the boxes for what what's in our control.
That said everyone in the retail business focused consumer spending will be strong during this year's compressed holiday selling season.
There continues to be mix sentiment on the outlook, but regardless, we are ready to do earns level best.
With that I will turn the call over today to discuss quarterly results and operations in detail.
Thanks, Steve and good morning, everyone.
For the third quarter, we reported net sales of 119.8 million up 12% compared to $106.7 million last year.
Our direct segment sales grew 2.9% compared to last year and our retail segment sales grew 24%.
For the quarter shipping revenues were 1.5 million compared to 1.6 million last year.
The growth in retail was primarily driven by new stores opened in 2018 and 2019.
During the third quarter, we added three new stores and roughly 47000 gross square feet.
We ended the quarter with a total of 58 stores compared to 43 stores in the prior year.
During the quarter, we continue to experience some challenging demand trends.
Direct product sales were up 2.9% as reported however, this this period benefited the most from the 50 Threerd week calendar shift.
Excluding this direct slow sales were down slightly for the quarter.
We saw some momentum in August and September largely driven by increased clearance activity and the big Damn birthday sale of it. However, a tough October follow what's you raised the games of the prior two months.
We are pleased to see that markets, where the store opened at least two years continue to outpace non store markets and the direct sales growth.
In an effort to drive more sales in web traffic, we took deeper markdowns during sale events and drove a great greater amount of clearance activity.
As a result gross margin was down 250 basis points from last year for gross profit amount of 65.4 million.
As a reminder, our exposure to the China tariffs will continue well will impact our fourth quarter gross profit by 1 million to 1.5 million.
Our plans to shift the remaining production to other countries are underway and we expect minimal margin impact next year.
Our women's business continues to outpace mens with an overall growth rate of 19% for the quarter and mid teens growth rate online.
The growth in the women's business was driven by newness and as the expansion of the women's plus line, which was up significantly into last year and as well as strength in the quarter line extensions.
The men's business grew 10% over last year supported by the successful launch of new products, such as the pads refit assortment and the launch of things soft underwear both exceeded expectations.
Headwinds in our men's core categories and soft outerwear sales due to the unseasonably warmer weather led to sales falling short of our plans. However.
Turning to expenses, we have been very focused on expense management, including a continued effort to focus on the most productive advertising spend.
Additionally, the steps, we've taken to leverage fixed cost and gain variable expense efficiencies resulted in improved operating margin and earnings growth on a year over year basis.
Selling general and administrative expenses increased 0.8% to 64 million compared to 63.5 million last year.
This included increases of 900000 in selling expenses and 2.2 million in general and administrative expenses.
Offset by a decrease of 2.6 million in advertising and marketing expense.
As a percentage of net sales SGN, a expense decreased 600 basis points to 53.5% compared to 59.9, 59.5% last year.
As a percentage and that sales advertising and marketing costs decreased 440 basis points to 16% compared to 20.4% in the comparable period.
Primarily due to advertising leverage gain from a shift within the spend by increasing television and decreasing print.
We've also push some advertising dollars into the fourth quarter, where it is the most productive.
Selling expenses as a percentage a net sales decreased 110 basis points to 15.4% compared to 16.5% last year.
The decrease is attributed to improve shipping and fulfillment cost.
At a higher mix of retail sales compared with last year and the efficiencies gained at our distribution network.
General and administrative expenses as a percentage of net sales decreased 50 basis points to 22.1% compared to 22.6% last year, primarily due to the leverage gain on fixed cost.
For the third quarter, we reported net income of 182000.
Or one cents per diluted share compared to a net loss of 3.2 million or 10 cents per diluted share last year.
Our adjusted EBITDA was $7.3 million compared to 1 million last year.
Turning to the balance sheet and liquidity, we ended the third quarter with the cash balance of 2 million.
Net working capital of 109 million.
And 90 million outstanding on our 130 million line of credit.
Inventories increased 39% to 180 83 million compared to 131 million last year.
The increase in inventory was due primarily to early delivery of receives to support our peak selling season.
As well as for the additional stores.
This reflected our goal of receiving good several weeks earlier to mitigate issues, we had last year with dislocated inventory in our Dcs and store channels.
Capital expenditures for the third quarter were $8 million compared to $19 million last year and were primarily for the new stores.
We are maintaining our full year guidance at this time, but remain cautious due to the shorten shopping period between Thanksgiving and Christmas.
We've also observed other retailers extending discounts earlier and deeper than prior years.
Overall, we expect our promotional cadence in the fourth quarter to be similar to last year, but not as steep as a level of discounts.
We expect to deliver sales growth of roughly 10% on a 52 week basis or net sales between 610 and 620 million in 2019.
We expect gross margins to be down 100 to 150 basis points.
Which is down an additional 50 basis points from our last guidance.
Selling general and administrative expenses as a percentage of net sales to be in the range of 48% to 49%.
We expect 2019 earnings per diluted share to be between 60, and 66 cents, which compares to 68 cents last year on a 52 week basis.
Additionally, we do expect to realize a tax benefit related to R&D credits, which will post in the fourth quarter and bring the full year tax rate down to approximately 22.5%.
We expect adjusted EBITDA to be between 51, and 55 million and capital expenditures of approximately 38 million.
As Steve noted, we entered the fourth quarter prepare for success, while we still have close to three weeks of critical shopping activity ahead.
Current indications are that customers continue to shop closer to Christmas.
The four days of Black Friday through cyber Monday were healthy for both our channels compared to the same events last year.
However, due to Thanksgiving being one week later this year the three weeks, leading up to the holiday came in below last year.
That being said we are positioned to make up for the lag sales during the compress shopping period, and we'll continue to execute our our fourth quarter game plan.
With that we'll open the line for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using his speakerphone, please pick up your handset before passing the keys to withdraw from the question Q. Please press Star then too.
The first question comes from John D. Morris of D.A. Davidson. Please go ahead.
Hi, Thanks, good morning, everybody.
Question for you guys. Thanks, a question for you on inventory.
Can you give us a feel of what the inventory would have been if you were adjusting for the fact that you've got the pull forward correct for last year. It just I'm just wondering it looks.
Even with that potentially a little bit high up 39% relative to sales growth and I Wonder if you can give us any comfort there and where you might be expecting that it that inventory to be let's say at the end the fourth quarter. So those two questions.
Yes sure.
We we we moved our inventory forward by quite a bit three to four weeks, which in this period of time.
The amounts to.
A fairly large amount in excess of $20 million of inventory that we pulled in early.
Relative to last year, we know that we were.
We were late in getting those those inventories into our warehouse and outdoor stores. So.
I'd say under normal circumstances, and obviously come back and repeat next year, we would expect our inventories to be closer in line to what our sales growth are.
At the ended the year I think we'll also see a greater increase from the inventory levels, because we're going to repeat that activity in preparation for spring and summer. So we're expecting inventory to be.
Between 20, and 30% higher on a year over year basis at the end of the year, reflecting that continued pull forward.
And then as we proceed through 2020.
Get the inventories back in line with sales growth.
Alright, Thats, yes, that's good to know ahead of time, so we now to expect that.
And then and then I guess, some slight or maybe partially connected to that just trying to understand a little bit better about the expectation for implied sales growth for the fourth quarter, maybe I missed it because you are kind of going through the full year numbers pretty quickly but.
This is my math correct that.
Given the window with a full year guidance sales growth in Q4.
Would be up I guess low to mid single digits and I'm wondering well.
Correct and if so.
Hi, guys, given the way you're managing inventory levels, why why would that be the case in terms of a DSL compared to the third quarter growth rate.
Yeah, the fourth quarter will have from a sales growth standpoint.
The impact of going against our our 50 Threerd week last year, so over fiscal period standpoint.
Low mid single digits is correct from a from a.
52 week to 52 week basis, it's going to be a little bit above that in the highs mid single digits.
And really that's what we're we're managing our inventory flow to is the is the sales on a week same week over week basis.
Okay, Great. That's great clarification, good luck for holiday the stores look great, especially with that Alaska hard here. Thanks, guys.
Thanks, John Thank you John .
The next question is from Jonathan Komp Affairs. Please go ahead.
Yes, hi, Thank you I'm, maybe Steve sincere now back kind of.
Deep into the business for for a while here Im curious just to start off kind of bigger picture has it gotten back engage.
Just kind of any any broader thoughts on the state of the business or the brand or anything that surprised you as we've gotten back involved.
Well theres been no surprises to speak of John .
We've got a lot of talented people here as I said earlier, we've we've gone through gone through some growing pains with the rapid store expansion we did.
Bringing a new systems and.
New logistic inventory systems that we're using.
Systems. So you know that created sort of a drag this last 24 months and we're coming out of that.
So I'm fairly well I feel the brand to salad I think our systems are in a in a better place in there have been the last couple of years, we've got a couple of to complete yet, but the overall health of the businesses is good.
Challenging environment out there, but that's that's something a little bit our control.
We're learning a lot about how to work this omnichannel program between the stores in the markets that the stores are in our in our direct business.
So I probably your next question is.
On the CEO search I'll just go ahead, and say that Thats something we have planned to initiate probably in the first if not the second quarter of next year.
But we're doing that.
We're going to do that carefully and one other things I've been trying to do is make sure that we really I'm well informed about what the qualities are the background experiences that we bring we'll be looking for an index.
See you all year.
Okay, Great and then.
Maybe Dave a question on the margin performance.
Year over year basis, it's about 15 and quite a while and.
And I'm, just curious how you're thinking about more of the outlook for margin.
Yeah, if you've kind of reached.
A bottom so to speak and see opportunity that more sustainably expand the margin from here and maybe embedded within that is just your confidence that you have a good handle going forward on the gross margin since that's been one area. That's.
Ben was less positive or more negative frankly as the year has gone on here.
Sure John .
The operating margin.
Improvement.
We do expect that to continue this this particular quarter was.
I'll say.
Improved significantly.
I don't think we're going to see that degree of improvement every quarter going forward, but but the goal would be what the sales plans, we have the cost structure in place to see improved profitability.
As you do know gross margin is a big part of that and that's going to come.
From the improvement in.
And our sell throughs, an ability to sell at full price. This this period. We're in right now is the most competitive and it just continues to be to be so where we see.
Products really doing well and many cases, it's because we've we've had to meet.
Pricing.
That the market is.
It has from a deep discount standpoint.
And a good part of our gross margin impact in the in the third quarter did come from our women's side of the business, which I think is going to have a little bit more volatility to it but.
But that's that's the nature of continuing to rollout newness.
The assortment.
Some things are going ahead, and some things might miss but but as long as we've got the pipeline of new products.
That was going to give us the best chance to.
To see growth and continued continued productivity so.
Hi, hopefully that gives you some color on on that question John .
It does and maybe that leads to just my last one.
Look forward in terms of some of us sales driving initiatives, whether it's the.
Yeah, the marketing messaging and mix or the product pipeline or even getting the customer file in place.
Any kind of broader thoughts if you look for.
The major opportunities to drive topline.
Sitting here today are here looking forward to.
Yes, certainly looking forward.
As you mentioned one of our biggest initiatives that we're working on now and will go into effect next year as a re platform of our customer data warehouse system, and that's going to give us the ability to two very much.
Kind of nimble way.
Personalize, our marketing approach to customers based on preferences based on there.
Based on their shopping habits, or even just browsing habits on online.
And it also gives us the ability to to tailor some of the pricing.
Yes, that's relevant to the customers so were not as blanketly.
Putting out global promotions, but we can be more or targeted.
That's going to improve the full price selling.
But we also think capture some of that that business of sales growth, because it's going to be more relevant and tied to the customers' preferences.
That's an initiative that's going to.
Be in place.
Our goal is by this time next year, so in place for our fourth quarter.
And we'll get some early learnings on it.
In the third quarter likely.
Yeah.
That's that's a critical component I'd say the other thing is really around marrying that with omnichannel capabilities in our stores.
Which will come with an upgrade to the POS system next year as well and supplement what we've done already with both us and ship from store, but but make the experience even better in the stores. So we know that a conversion of store traffic.
As is key to.
Seeing some store productivity improve and that's that's one of our major initiatives is seeing the traction in store store level traffic as well.
Okay I appreciate the color. Thank you.
The next question is from Jim Duffy of Stifel. Please go ahead.
Thank you good morning.
Good morning questions for me.
Just wanted to start Big picture, Steve you mentioned potential from new system was not fully realized maybe there was a little bit overlap with jonathan's question here, but can you guys talk about some of the opportunities still on the common and the expected financial benefits as you.
Begin to.
Realize the power of these new systems.
I'm going to let Dave had on that.
Yes, Jim Jim.
You know.
As we've talked about the.
The infrastructure that needed to be in place with order management, a new website.
Logistics infrastructure was was really a catch up from from prior years and also to support the future growth.
The the financial benefits.
We're already starting to see that in the and the logistics side.
Compared to last year savings from having the inventory flow better in the right place. So were so we minimize the amount of back orders and and split shipments with that adds to cost.
And plus handling time on our call center is improved which would streamlined the efficiency of our call Center operations. So those financial benefits are were we benefited from that in the third quarter and we continue to benefit from it right now.
The the systems that I just talked about for next year are going to be very much sort of topline driving initiatives and and get too.
Selling productivity in margin gross margin.
Improvement.
So those are the two two systems that we think are going to have the biggest financial impact.
Okay, Great and then more near term line of questioning Dave can you talk about growth expectations for the direct business in the fourth quarter.
You have a very concentrated selling window here Im curious are there any throughput limitations and is there incremental expense associated with associated with the servicing demand in that concentrated window.
No we do not anticipate any any throughput issues you know, we got well in front of it this year.
Inventory is already been fully received and our replenishment to stores after a very vibrant black Friday weekend.
His smoother than in progress so.
From a system standpoint, we we have been very stable knock on wood and and got through cyber Monday, which was.
Again, one of our biggest days ever from a online order standpoint, so no no concerns.
From.
Its ups from the infrastructure to kind of satisfy the demand.
Direct.
Is.
With that week with the shifts in and weekly cadence between Thanksgiving and cyber Monday Monday being a week earlier last year it does compressed.
And we're going to expect that that the web business is going to.
The positive on a full quarter basis.
Similar to.
Similar to the third quarter now we are missing a week and that doesn't detract from it.
But but on a true kind of week over week basis.
We're expecting it to be positive.
Positive growth and in fact as I mentioned.
The.
The period between Black Friday in cyber Monday was was up.
Year over year compared to those same events last year, so to us that's a good indication that that things are working.
Great then last one for me more housekeeping question I suppose, but you mentioned the third quarter benefited the most from the 50 Threerd week can you just.
I just explained that lots please.
Yeah sure.
With last year, having the 50 Threerd week in the fiscal year. It pushed the beginning of our fiscal year this year.
From 2019 and pushed it forward one week so.
When you think about the beginning in the end of a quarter, we began the third quarter.
Got it the beginning of August which sales volumes are going to be lower than they would be at the ended the quarter, which is at the end of October so by pushing it.
Forward, our fiscal period picks up that that that higher volume week than what we had last year.
Now when we go back and we say lets aligned the weeks on a similar week over week basis. That's that's a better tru measure of the performance of the business.
And that's that's what I called out in terms of that the difference in growth rates as you think about it now we had the benefit than a fiscal.
Quarter this year or in the third quarter, we'll give a little of that back at the end of the fourth quarter, because we come down the slope of high sales down to lower sales period.
But.
But really the bigger impact is missing a 50 threerd week there.
Understood. Thanks, so much and good luck in these next few weeks.
Thank you.
Next question is from Guillen Carton of William Blair. Please go ahead.
Great. Thank you very much Dave sorry, just continuing on that sort of last thought so I get that sort of on an apples to apples basis, you're looking at a.
Gain here a growth similar to it sounds like the third quarter and your direct business, but as reported is that sort of come down closer to flat or.
What's the right way to think about whats going actually going we printed.
For the fourth quarter.
You know flat to slightly up low single digits is what we expect will be reported.
Yes, that's that's what would tie to the to the full year guidance.
And then.
You can sort of had.
The thought there about ER, you mentioned that stores or markets, where stores that opened over two years are seeing outsized growth in the direct business is there any color you can add to that as per.
When that really kicks and how big of a different that is.
Is there sort of high volatility amongst markets, how its aging and some of your older markets any additional detailed bye bye.
Would be helpful.
Yeah, we.
We continue to see that that once a story has been in a market.
After its first full year.
The direct business.
Is growing.
At a faster pace and.
In cases, where we've got the most established markets.
Largely around the Midwest here in Minnesota and Wisconsin.
We saw direct in the third quarter.
The high single digits in terms of growth in those in those markets year over year.
So that's what.
Translates into supporting the market growth. Despite the store contraction in that second year that that that we know we see because of the shift in some of the customer activity.
So.
In the in the third quarter in markets that we have been operating in four.
At least two years, where the store.
We would we were largely positive in terms of the sales growth in those in those markets. When you combine the store.
Business with the direct business.
And that's that's continues to play out that way.
I guess, where does that imply that the bigger pockets of weakness are then in the direct business in markets, where you don't have a store and is that sort of largely in units of inventory issue itself.
Well it is in markets, where we don't have a store, but it's also in markets, where we just opened up a store. So those that we opened up this year in 2019 or at the end of 2018 that are still kind of feeling the the cannibalization of of that new stores. So those.
Those markets have direct growth rates, which are lower or or negative in some cases in markets, where we where we don't have a store.
That has been softer for us and.
That's where we're only reliant on our on our marketing.
From a national brand standpoint, or or catalog prospecting and we have dial back some of that prospecting.
Because we see that at the end of the day, it's not the most highest.
Value of advertising.
But we do think that that product newness.
Will help within those markets, but it's been the softer part of our of our business.
For the last six to nine months for sure.
Great and then it sounds are you expecting to be able to sort of.
I guess, where where should we expect that can add leverage.
To come in and related to that it sounds like what you're saying for fourth quarters that you're expecting promotional activity in line with.
With last year.
Are you seeing that already this year or is that sort of largely expected as you enter sort of some of the more core selling page now had a Christmas.
And then what is I guess, the shipping impact that you've seen and we'll continue to see.
Well the advertising, we do we do expect to get a little bit of leverage in the fourth quarter there.
Although we've added some.
Some dollars to to the period, we're in now to be more nimble in strategic and some of the digital spend that we've got flexibility on in the short term and it's also very high.
Return.
So we'll.
We expected to be a minor amount of leverage from advertising the fourth quarter.
Certainly not as similar to to the third quarter.
In terms of.
Sorry deal and what was the other part of your questioner Yeah, I thought that the comment was that the expectation for Fourq, who is going to be call it stable promotional cadence or depth or maybe pleading pullback on debt.
Just what what the expectation is for how promotional you're going to be versus what you've already seen thus far in the quarter.
Yeah from up from eight.
Discount of the product in setting our our promotions.
Where where we're going to be a little bit different is last year, we were.
Doing a lot of flash sales on individual items at a different on different days, a week and while we found that we kind of spike the business.
It was at a pretty steep discount that that didnt really play out and productive way for us. So we're not going to we're not going to be doing the daily flashes.
Apple is nearly as much as last year and some of our.
Sale events are going to be.
Tailored to.
Some items at a 20% discount some at a 30% and the combination of some temp promos with a global promos gets us to net roughly the same amount of discounting last year.
But absent those those flash sales. So we expect that we're going to be able to hold gross margin.
In this quarter and and we're already we already are seeing that in November our gross margin year over year is up.
Quite a bit to last year and.
And so we're hoping that that's going to getting going to be in.
In place for the balance of the fourth quarter.
But this is the most competitive and critical time for us and and we also are going to be nimble. So, we'll we'll react to kind of capture the business, but but we're not going to be.
As steep as you see other retailers I think Thats my point.
Great all very helpful. Thank you so much vessel level.
Thank you.
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