Q3 2019 Earnings Call
Greetings and welcome to the retail When's Inc. third quarter 2019 earnings conference call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.
I wanted to require operator systems during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I'll now turn the conference over to your host Francesco prolong drove I see our you may begin.
Thank you good afternoon, everyone before we begin I would like to remind you that some of the common Bath <unk> call either as part of our prepared remarks. Our response to your question may contain forward looking statements that are made pursuant to the safe Harbor provisions and the private Securities Litigation Reform Act like 95.
Actual results may differ from those projected in such forward looking statements such forward looking statements are subject to risks and uncertainties.
Describing the Companys documents filed with the I think actually seeing.
Including the company's fiscal year 18 Form 10-K , the company undertakes no obligation to publicly update or revise any forward looking statements to reflect subsequent events or circumstances.
As a supplement to todays presentation, we have made slides available, which you can view under the Investor Relations section at <unk> Company Dotcom and now I would like to turn the call over to Greg Scott CEO .
Thank you Francesca good afternoon. Thank you for joining us with me today to discuss our third quarter 2019 results are takes Inglis, our president chief marketing and customer officer, and Sheamus Toal, our executive Vice President COO and CFO .
As noted in our press release, we were disappointed with our third quarter results at softness in our store channel contributed to our sales decrease in operating losses below our expectations that said, we continue to make progress against our strategic initiatives, which include growing our multi Brett brand platform driving digital growth across all brands.
And implementing our customer our first initiative.
I'm encouraged to report that in the third quarter, our passion to figure brand delivered a 55% call. Our total digital businesses across all brands delivered positive comp results and represented 36% total volume.
We're able to accelerate further our new customer growth.
Unfortunately, tropic in our store channel combined with challenges that our denim base Soho jeans stopped Brad drove the quarters operating losses.
The team navigated these headwinds your disciplined inventory and expense controls and we ended the quarter with 66 nine in cash on hand and no debt.
We acknowledge these challenges and are addressing with a sense of urgency.
I'm proud of our team's ability to navigate challenges by appropriately managing our controllable, including expenses and inventory, which contributed to near peak product margin rate levels. While also investing in new business. It's just support our multi brand portfolio the customer acquisition to drive future growth.
Overall, the combined impact of the negative 4% consolidate comps sales decline coupled with increased shipping expenses reduced vendor rebate increased marketing spends to drive customer acquisition and investments in new business as resulted in non-GAAP operating loss of 7.5 million.
Excluding the impact of a one time charges related to the closure of our launch right business on common sense.
These results were way below our expectation is driven by continued weakness in store traffic, we do benefit from lease flexibility with more than 70% of our stores on to your last terms and we continue to evaluate our real estate portfolio.
Let me now turn to an update on our strategic initiatives, which where we continue to advance our strategic agenda.
I'd like to share a few highlights regarding the progress made in our transformation.
Regarding our celebrity brands, the new businesses fashion to figure are on Trent Lott by brand delivered a positive 55% call driven by the E Commerce channel and supported by the brands ongoing execution of a strategic plan.
Happy by nature already where Brad in partnership with Kate Hudson continued to build momentum driven by the threat strength, the KC 10 million active and engage social following.
Our celebrity brands, which are explicit in New York and company delivered positive comp increases and continued to be an important driver of new customer acquisition and assortment differentiation.
Regarding our Boulder increased new customer acquisition, we achieved positive growth in our 12 month customer file and we achieved positive 5% comp increase and new in reactivated customers to our Brad I'd be continue in that and new customer acquisition channels to support future growth.
Regarding our goal to drive digital growth total digital sales across all brands deliver delivered positive comp growth supported by double digit Tropic increases with digital businesses now representing 36% of our total sales volume.
Regarding our ongoing challenges related to our casual Soho jeans sub brand, what we introduced new man, a new manufacturing base in data to support our newest assortment in spring 2022, we achieved positive customer response to chase deliveries from our new vendor producing our that's performing styles in the quarter, which will greatly.
Influenced our investments in spring 2020 in the category and three we cheap we advanced critical new hires to lead the sub brands reposition in fall 2020.
Finally, we maintained our strong balance sheet with 66 nine cash on hand, or dollar <unk> dollar to per share and no debt, which is a competitive advantage in today's volatile environment.
Looking ahead, we continue to see opportunity in our core brand and are working to address the customer assortment challenges, which impacted our results. While also continuing to evaluate our real estate portfolio.
In addition, Tracy will <unk> will provide an update on our customer first initiative, which we've recently launched a dry positive results across our brands. We believe we have the team focus and plan in place treat turn our company sales growth and positive operating profit and are asking with a sense of urgency.
Turning to our third quarter results I'd like to spend a few moments discussing our progress first we continue to leverage our celebrity collaboration subset Brown.
Market differentiated that our customer I can only find that New York and company combined our celebrity collaborations delivered positive comp growth in the third quarter and continue to be a significant source of new customer acquisition.
In addition, we are pleased by the customer response to our reach they lost happy by nature, Brad We saw performance improved throughout the quarter. Looking ahead, we recognize more opportunities to complement our celebrity influencers with nano and micro Influencer and will be initiated a test in the fourth quarter to leverage brands down to drive further.
Awareness.
We're seeing our cost respond to areas of the business that SATA satisfy our need for fashion style quality and value our dress assortment, which represented over 10% of total company volume delivered strong results in the quarter and provided important fashion and lifestyle Halo across New York and company.
Our seventh Street sub brand, which provides a street wear influence complement that enhances our lifestyle perfect projection also delivered positive comp increases supported by innovation that our bottoms category.
And finally, our seventh Avenue sub brands supported by strengthen our marketing leading franchise pass program continues to be an area of competitive strength and a strong driver of customer loyalty.
With that being said the comp decreases we experienced in Soho jeans significantly impacted our overall comp performance and represented near near the entirety of our volume decrease in our core New York and company Brad.
Number two regarding a second strategic part priority to create brand awareness and customer engagement. We continue to experience increased bifurcation performance between our store and digital channels.
I'm pleased to share that we deliver positive double digit tropic increases across our digital brands that said, while our store traffic continues to perform generally in line with widely reported industry results, we experienced traffic decline below industry benchmark and our outlet conversion stores further impacting our overall.
Store traffic performance, we're absolutely actively engaged in improving these results and testing into new initiatives to drive traffic.
In terms of our customer file we're pleased that the comp increases in both our 12 month customer file as well as positive, 5% increase and new at reactivated customers, which represented an improvement from trends.
We have an active cascade agenda focus on acquisition and retention and under Tracy's leadership, we are actively rebalancing our marketing mix to that the digital acquisition channels to ensure we are bringing new customers to our portfolio brands. In addition, we launched our customer first initiative during the third quarter with the objective to reinvent all.
Aspects of our marketing organization for data analytics, creative storytelling, personalization and segmentation and content creation with intense focus on the customer.
Tracy will share additional details at this initiative during their prepared remarks.
Our third strategic priority focuses on driving digital and omni, our New York and company E. Commerce performance delivered positive comp results in the third quarter supported by double digit increases in traffic.
Our fashion, a bigger ecommerce business essentially doubled over the prior year and we recognize an opportunity to accelerate performance in this channel even further.
Our rental program available and wind company closet Dot com continues to grow driven by increases in our subscriber base.
Finally sales through our omni programs, which includes in store pickup order online ship from store or online and order in store ship from store or online increase that double digit rate for the quarter.
From a product for perspective, our e-commerce exclusive merchandise delivered double digit comp performance in the quarter and allows us to expand our fashion projection through new styles and categories. These assortments are also size inclusive as we offer sizes doubled zero through 20 in nearly all styles, including our celebrity collection.
Across all brands, we are able to increase our digital sales penetration to nearly 336% of volume as compared to 32% last year driven by the positive comp performance across digital channels brand and services.
Looking ahead, we will continue to implement the changes necessary to accelerate further our digital growth.
Our fourth strategic priority focus on our real estate portfolio.
We have opportunistically, taking advantage of much of the consolidation that has happened in the industry of that past several years, we see stores an important driver customer acquisition engagement metrics that inform our holistic approach to real estate. In addition, we have amplified our retention efforts on closing stores for the goal.
The increase in our Omnichannel customer base and overall retention rates during the fiscal year, we anticipate closing up to 30 location has more than 70% of our existing store base on a two year or less terms, we continue to actively evaluate our store portfolio.
Next sourcing regarding the impact that regarding the impact of potential tariffs on imports from China, We had been proactively working with our partners can mitigate risks and we've taken early receipt of merchandise advanced the potential tariffs are current guidance incorporates risk associated with potential terrorists and we maintain an active and open die.
Along with our vendor partners, recognizing the dynamic nature of the macro environment.
In addition, we've made significant changes to our manufacturing base and country of origin strategy and a reduced our dependence on China's that Chinese manufacturing significantly decreasing to 40% in spring 2020 from 60% in the prior year with a long term goal below 25%.
Our final strategic priority focus on growth initiatives, while we're maintaining our focus within our core New York and company business. We're also looking at additional white space opportunity without significant capital investments by leveraging our tw operating platform.
Our fashion to figure brand continues to execute against the strategic strategic plan, we implemented beginning in the fall of 2018, resulting in a positive 55% comp for the third quarter. We're pleased with the overall customer response to our assortment and marketing messages as we position this brand for growth plus size market.
In addition, we delivered several influencer collaborations during the quarter, which drove awareness increased sales and provided a source for new customer acquisition.
We see these types of collaborations as an important component driving the brands future growth and will be increasing the frequency of these drops throughout 2020.
I'm also pleased the share the Gabrielle Union will be partnering with fashion, if the year with our first collaborate collection available now. In addition, we'll be accelerating growth in our e-commerce business to build on the channel double digit growth rate and efficient customer acquisition costs. Looking ahead. We are pleased to report the trend.
We experienced in the third quarter have carried into the fourth and anticipate similarly strong results from the fashion to take your business.
Regarding our happy by nature business, we're pleased with the customer response and believe in the potential the lifestyle Brad.
We're seeing the strength of Kate Hudson social channels in fact, social channels contributed to nearly 20% of happy by nature Dot call volume rig volume, reflecting the importance of social and acquiring customers and driving sales were pleased to see the brands momentum increase throughout the quarter and has continued in the fourth quarter, we will continue.
To provide further updates regarding our growth plans for happy by nature.
Looking ahead to the fourth quarter, while our reads in October in early November were above our expectations are Black Friday performance was disappointed you to traffic in our store channel.
We were very pleased that our cyber Monday results delivered record breaking traffic and sales, which reflects the continued bifurcation of our positive digital growth and our traffic headwinds in stores.
While we anticipate improve margins rate over the prior year, reflecting our mark merchandise strategy. We're also continuing best in the future, including marketing to drive customer acquisition, which is increasing our marketing expense over the prior year.
All said for the fourth quarter, we expect to drive positive growth across our digital businesses and the fashion if take your brand.
We will continue to invest in the future, including marketing and we believe continued price pressure on brick and mortar traffic is all reflected in our fourth quarter guidance.
With that I would like to turn the call over to Tracy, Our President Chief marketing customer officer, who will provide an update regarding our customer first transformation.
Thank you Greg I approached me six month with that retail wins team I continue to believe that we have the right ingredients for success, including strong product with unique market positioning highly engaged customers an organization that is receptive to making the necessary changes to introduce digital marketing and customer first best practice.
With that in mind I'd like to provide an update on our journey to becoming a customer led organization through our customer first initiative.
As I previously shared we're transforming our marketing efforts to be customer first data driven and creative optimized which when combined will elevate our overall brand experience, while reaching new customers for whom we may not have been front of mind today.
Last quarter I shared with you that our shoppers are very loyal and spend per customer is strong, but that we simply need more than we laid out strategies to drive new customer acquisition based in digital best practices and leveraging the strength of the New York and company brand I am pleased to share the strategies, which I shared last quarter are working well.
Successfully reversed the trend on our customer acquisition effort from several quarters of negative growth to our first quarter of modest gains and new customer acquisition. We have also seen strong year over year increases in traffic driven by digital marketing.
Further we kicked off this team's separate projects, both internally driven and consultant driven in support of our customer first initiative in Q3 I'm pleased to report that we are on budget and on schedule across all initiatives and have already begun began to see progress toward becoming a customer led organization. We're focused on three.
Key areas first experience, we are addressing how the customer engages with our brands and how we can translate awareness into advocacy across an integrated approach with specific focus on new customer acquisition.
Customer first transformation begins with the customer decision journey. We've just completed this work and are now identifying our activation plan to enable critical component of this roadmap. This was a critical guide to inform our strategic agenda and is a comprehensive and thorough assessment of all the different ways customer experience as our brands.
Across all channels and touch points and we're gaps in this experience compromise, our ACA acquisition and retention efforts.
Net data and technology, we are leveraging customer data in decision, making with a focus on acquiring new customers, maintaining our healthy lifetime values and optimizing our investments by building attached to invest mindset to minimize risk of untested concepts and scale proven investments as we do.
Thats the measurement management and optimization of these investments is increasingly important and we are building capabilities and tools to support that.
Q3, we added an AB testing tool new payment options of Apple pay and after pay improved site, you acts and filtering and more we have a very full roadmap of tools and technology to further optimize our digital growth throughout the next several quarters.
Finally, creative as part of our aspiration to build a content creation culture. We are taking the steps necessary to support increased content creation aligned with where our customer is engaging with our brands whether stores site or social.
Being customer led is not just the marketing initiatives going forward I see our customer first initiative, becoming an embedded part of the retail wins culture that can be enabled across all brands and team and the success will be realized an ever increasing sales and customer lifetime value.
Our initial results are encouraging for our long term growth and I'm excited to be a part of this migration.
With that ill now turn the call over tissue.
Thank you Tracy good afternoon, everyone.
Net sales were $200.1 million as compared to $210.8 million in the prior year, reflecting a 4% decrease and comparable store sales and a reduction of 14 stores, partially offset by increases in sales from the new businesses.
And the comparable store sales base average dollar sale per transaction decreased 1.1%, while the number of transactions per average store decreased 3%.
Gross profit as a percentage of net sales decreased 460 basis points to 27.8% versus 32.4% in the prior year third quarter.
The decrease includes $3.3 million and and write offs of inventory and zero point $4 million of severance related to the exit of the uncommon sense brand, which combined contributed 180 basis points of the 460 basis point decrease in March.
Run rate.
Margin was also impacted by increases in shipping costs, and the de leveraging of buying and occupancy costs on lower sales.
Selling general and administrative expenses were favorable to our prior guidance at $67.7 million or 33.8% of net sales as compared to $66.8 million or 31.7% of net sales in the third quarter 2018.
Included in selling general and administrative expenses is $1.5 million of incremental spending from the prior year incurred in connection with the incubation of new businesses.
Zero point $6 million of expenses associated with the exit of on common sense and zero point $4 million of non operating charges related to severance due to a reorganization and the New York and company Brad.
Partially offset by.
200000 dollar legal accrual reversal.
Excluding these items selling general and administrative expenses were $65.4 million.
Operating loss for the third quarter was $12.1 million inclusive of $5.8 million of losses from the company's new businesses.
These new business losses included a charge of $4.2 million to exit the uncommon sense business, which is consistent with our prior guidance.
This compares to operating income of $1.6 million for the third quarter of fiscal year 2018.
On a non-GAAP basis, the operating loss was $7.5 million after excluding the impact of $4.2 million in charges to exit the on common sense business.
Zero point $6 million and reorganization charges in New York and company and partially offset by zero point $2 million in legal accrual reversals.
This compares to non-GAAP operating income of $2.4 million for the third quarter fiscal year 2018.
Net loss for the third quarter fiscal year, 2019 was $11.6 million or 18 cents per diluted share as compared to net income of $1.7 million or three cents per diluted share in the third quarter of fiscal year 2018.
Total quarter end inventory decreased 5.2% as compared to the end of the prior year period, primarily reflecting planned decreases in merchandise and transit and inventory on hand.
Capital expenditures were $2 million as compared to $2.1 million in the prior year period, primarily reflecting investments in the Companys information technology and Omnichannel infrastructure.
During the quarter. The company opened two stores closed one store and remodeled one store ending the third quarter with 414 stores, including 120 outlet stores.
On the real estate from our short term renewal strategy continues to provide for a highly flexible lease portfolio with more than 70% of our leases expiring in two years or less.
We were pleased to end the quarter with a strong balance sheet with $65.6 million of cash on hand, representing one dollar and two cents per diluted share and we have no outstanding borrowings under our revolving credit facility and no long term debt.
As previously announced we're also pleased to complete a new five your credit facility during the quarter, which is available to provide the company with significant additional liquidity if needed at reduced rates and lower costs.
Now turning to outlook for the fourth quarter fiscal year 2019, we continue to focus on investing in the future to drive improvements in long term operating results and increases in both topline sales an annual operating income.
While we make these investments we continue to expect the headwind of negative mall traffic trends to impact our brick and mortar stores, which highlights further the importance of our customer first and digital strategies.
For the fourth quarter, we expect the following.
Net sales are expected to be down in the mid to upper single digit percentage range, reflecting the combination of reduced store count.
And comparable store sales, which are expected to be down in the mid single digit percentage range.
Gross margin is expected to be down by up to 150 basis points, reflecting increased shipping costs with product margins are expected to be flat to up slightly.
Selling general and administrative expenses are expected to be up slightly as we continue to invest in the future.
With marketing to attract new customers and through the incubation of new businesses.
In addition to these marketing investments and new business costs. We also expect to see increases in variable ecommerce selling expenses driven by growth and the ecommerce business and increases in variable compensation due the elimination of accrual reversals, which occurred last year.
All of which was partially offset by reductions and payroll.
Operating results for the fourth quarter are expected to reflect a loss of $4 million to $8 million.
On hand inventory at the end of the fourth quarter fiscal year 2019 is expected to be down in the mid single digit percentage range.
Capital expenditures for the fourth quarter fiscal year 2019 are expected to be approximately $5.5 million to $6.5 million to support ongoing investments in the infrastructure and new and remodeled store activity.
Full year capital expenditures are expected to be between $11 million and $12 million.
Depreciation and amortization expense for the fourth quarter is estimated to be approximately $5 million.
During the fourth quarter fiscal year 2019, the company expects to open one New York and company store and close a total of 27 stores, including 19, New York and company stores for fashion to figure stores and for outlet stores.
For the full fiscal year 2019, the company expects to have opened a total of seven New York and company stores and to fashion to figure stores and closed a total of 31 stores, including 22, New York and company stores for fashion to figure stores and five outlet stores.
With that I would like to turn the call over to the operator to begin the question and answer portion of the call.
Thank you at this time, we will be conducting a question and answer session.
To ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q.
Participants using speaker equipment and may be necessary to pick up your handset before pressing the star Q1 moment, please while we pull for questions.
Our first question comes from the line of David Kanen of Ken and wealth management. Please proceed with your question.
Hi, good afternoon, thanks for taking my.
Question.
So.
I know that.
Calm was about 36% of total revenue what was the year over year accruals and total of E com.
Hi, Dave This is Seamus, we don't typically disclose comps by channel.
So we have disclosed the percentage in terms of total penetration but for.
Accounting purposes, and FCC reporting purposes, weve not gotten into disclosing individual comps by channel.
Okay.
And E com being at a total of 36% that incorporates all of the.
Celebrity.
Brands et cetera, correct.
As well as fashion to sit here.
Yes. It does it does include all of the celebrity brands all of our digital sales in terms of both celebrities as well as the fashion to figure right.
And the happy by nature brand as well so all all digital facing brands as well as the New York Company Brent.
Okay, and then I.
I think you alluded to during the quarter started to see some momentum and happy by nature.
Can you just to elaborate on that how it's doing general sense and.
When do you think will potentially be no meaningful contributor 2020 $5 million to $60 million here, how long will it take this ever get to that point.
So hi, Dave its Greg So I think happy by nature continues to perform well on our New York from company Digital site.
We saw US good performance in the New York Company stores and at the same time really the momentum shift really happened on its own site, where we really saw incremental increase traffic over the quarter really driven I think specifically by Kate Hudson social.
Presence and what she's done socially which really drove good traffic and we're really seeing upticks in conversion. So I will say as we're now about six seven months into happy by nature, If I look at the trajectory of maybe the ever Mendez brand.
And the Gabrielle Union brand I would say that.
We're tracking certainly similarly to those brands little less than maybe the ever did her first year.
And I would say that as we look at it today I would say that'd be a two to three year horizon to hit those numbers and it really I think we have to look at it and determine I think what we're seeing is customers that are new to the happy by nature site, which really have no overlap to New York and company that.
We're discovering this brand we have to with the marketing team really continue to find cohorts that are like back customer that are not part of the New York and company brand to really have that kind of explosive growth because theyre really new customers are finding and liking this brand.
Okay, and then housekeeping question for Seamus, Steve do you expect to and the fiscal year.
With a higher cash balance just based on.
Working down inventory and working capital.
So, we'll certainly and with a higher cash balance than we have at the end of the third quarter. The third quarter is our traditionally our lowest balance as we invest in inventory in advance of the holiday season, So you're absolutely correct as we liquidate that inventory and converted to cash we would expect our cash balances to.
To build at yearend.
Okay, and then just I guess commentary for the management team and the board I understand your your strategy.
To transform the company.
Into more of an ecommerce play.
Which is great.
And.
You know it it's growing although we would like to see growth faster.
But that business by its very nature.
He is lower margin because it's a more expensive business and the message really to the board and management is I think you guys need to be more aggressive and boulder in terms of transforming your cost structure.
And just throw out an idea for too.
Having four floors for headquarters in Manhattan, Im sure you need some presence in Manhattan, but perhaps.
Some of that can be moved.
Across the river at a significantly lower costs.
So my message in general is.
You guys have to see every screen signed savings to adapt to.
A better model and E com, but one that has no significantly more costs in order.
To be profitable impact, but company thats more value for shareholders. So that's my message you're happy to comment on it I'd love to hear that you've got initiatives underway.
And that's pretty much all its out for you. Thank you.
Great. So I appreciate that feedback Dave.
I think just in terms of a couple of comments. Obviously you know we have a very strong history of being.
Aggressive and looking for every expense opportunity across the organization that has helped us overtime to not only.
Control our costs, but build our cash balances. So we have been and we'll continue to be very.
Very aggressive with that I think that as we look forward. We absolutely agree that we are transforming the company and we need to look at expenses from a different perspective that we did before and there may be some shift in expenses as we find opportunities elsewhere in some areas will use those opportunities to invest.
More in terms of our transformation in marketing and other initiatives that we want to roll forward I think the one that you you referenced is one that we're very active with right now in terms and you and I have discussed this.
Where we are looking at opportunities to sublease portions of our space. So that's on the market right now.
And out and in terms of the real estate market.
Where we can be more efficiently use of our office space, where we can be more efficient use of of.
Our resources, we are definitely doing that.
I, just I would like to add that I think we'll continue and I think it's a great comment I. Appreciate it I think we're going to continue to look at every way to transform the business that makes sense I think as we go to market from design to merchandising to planning.
Really looking at that total pipeline to understand the right strategy to go forward in the new era is important.
You have my word that I'm actively with team looking at that hope to talk about that in the new year.
But I think what you what you're saying, it's something that we think about everyday and it's well taken and I hope that we're able to make some strong moves as we move into 2020.
Thank you great time.
We have reached the end of the question and answer session I will now turn the call back over to Greg Scott for any closing remarks.
I appreciate everyone joining us today. Please no we are working diligently to improve the business I think all of our associates for everything they do.
And we look forward to speak with you when we report our fourth quarter and full year results.
In middle of March how the good holiday and we'll speak too soon thank you.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great evening.