Q1 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the first quarter 2020, Ascena retail group earnings Conference call. As a reminder, this conference call is being recorded I would now like to introduce your host for today's conference Jean Fontana of I see our you may begin.
Thank you good afternoon, everyone and welcome to looking at first quarter fiscal 2020 earnings call people. We begin I would like to remind you that certain statements and information made available on today's call maybe deemed to constitute forward looking statement.
Forward looking statements reflect the company's current expectations as of December nine 2019 are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially factors that could cause actual results to differ from the forward looking statement. That's on todays call. Please see the risks and uncertainties identify.
Under the heading risk factors and seen an annual and quarterly reports filed with the FTC. The company undertakes no obligation to revise or update any forward looking statements.
Additionally, today's call him up half married for to non-GAAP financial measure a reconciliation of GAAP and non-GAAP measures discussed today is included in our earnings release, a copy of which was filed with the U.S. Securities and Exchange Commission and the current report on form 8-K earlier today. Please refer to the boy that's a section I've seen a retail dot com for a replay of today's.
The conference call not that the company has posted a supplemental package to augment information provided on today's call IR website, and as an attachments with AK released earlier today.
Dissipating today's call I carried Tecnor interim executive Chair, Gary Muto, Chief Executive Officer, and Dan Limited Chief Financial Officer. Thank you and I will now hand, the call over to carry <unk>.
Thank you gene and thank you all for joining us this afternoon.
Hi, My sense on last quarter's call I'm optimistic about the opportunities for Sina, we have a portfolio looks strong brands three of which individually generate revenue of approximately $1 billion are more or.
Our focus on driving all of our brands combined with a streamlined bargain will enable us to optimize the growth and profitability potential casino.
We remain committed to simplify and this business and focusing on fewer and more meaningful initiative that will enhance our experience with our brand.
During fiscal Q1, we continued to make advances across our strategic initiatives.
Turning us for improved performance this progress enabled us to exceed our fiscal Q1 expectations with an operating income up last year.
Last month, Gary announced the appointment of two key executives to his team Burris, the Baldwin as SVP and Chief Human Resources Officer, and Justin Macfarlane as SVP and Chief customer officer. Both of these appointments will support the continued execution of our strategy and largely complete Gary's leadership team I look forward to that.
Contributions that Marissa Justin will bring.
Our portfolio review continues as we evaluate options to enhance shareholder value.
Process has been underway for spring and while I wouldn't like to provide a timeline. It is more important that we run a thorough and complete process before speaking publicly.
As we indicated on the last earnings call, we're considering options to optimize our balance sheet and liquidity from a position of strength.
The Quinsa the ended the first quarter opportunistically repurchased $80 million, a term loan bad for $50 million in cash.
Regarding the Dressbarn wind down progress continued during the quarter as we've noted before we have received tremendous support from our landlords every remain on track to close all stores by calendar year end.
Thank you and I will now turn the call over to Gary.
Thanks, Kerry so the first quarter operating income exceeded guidance, resulting from our cost reduction efforts across the business.
Oh sales and gross margin results were in line with died.
Importantly, we continue to carefully managed inventory, which was down 5% compared to the ended the first quarter last year.
Inventory contact was fresher and more relevant heading into holiday.
Well, we are seeing wins in our business, there's still much work to be done as we execute our strategic initiatives to drive improved performance across our business.
Our three key priorities remain driving sustainable growth.
Improving operating margins and optimizing our capital structure.
First with respect to delivering sustainable growth, we are putting the customer at the center everything that we did by creating a more nimble organization that enables us to quit the react to our customers rapidly changing needs with better product more effective communication.
On an exceptional customer service across channels.
Starting with product, we're making progress and leveraging customer insights gained from our advanced data analytics to deliver the right product at the right time, as we addressed for lifestyle needs and continuously providing compelling assortment.
Across our brands, we have tightened our test and react approach to more quickly respond to our provinces and shopping behaviors.
We saw the biggest benefit of these insights in the performance of our bus business this quarter.
Our communication strategies are designed to grow a customer file by retaining existing customers and drawing new customers to our brands.
To accomplish this we are enhancing customer engagement by leveraging our analytics capabilities segment, the customer file and deliver more relevant messages across all media fat dark current and targeted customers.
We're also officially utilizing digital channels prospect that new customers.
In addition, I will keep carbon plays a key role and advancing our personalization efforts as we've taken steps to deepen our understanding of our customer the more actively engaged with her.
Our goal is to deliver the right message to the right person at the right time to drive greater brand out to see an engagement.
We've made the most progress in our baby segment, where we have seen segmentation drive incremental revenue and profitability.
No. We are working quickly to expand this capability it implies.
In terms of a multi tender loyalty program. This was extended to our premium plus segment. This past spring and enrollments are off to a great dark.
Our ecommerce business drove strong growth across brands driven by traffic and conversion in the first quarter. We attribute this to increase traffic driving marketing initiatives and enhanced digital capabilities.
The total company ecommerce penetration has expanded to 34% as result of these efforts.
We're particularly pleased with the increase in mobile penetration conversion in the first quarter. As this is increasingly becoming our preferred shopping method.
In addition, we see continued opportunity to expand penetration in our growing online business through our segmentation strategies.
Operating margin improvement is our second key priority.
As we move towards better aligning our assortment with customer preferences, we expect to drive higher full price selling.
In addition, our marketing initiatives are shifting to lead with compelling brand stories and product rather than for most of them messaging as we improve engagement and full price selling that said, we will continue to be responsive to the broader promotional environment to protect our market share.
Our promotional markdown optimization initiatives, which as a first quarter had been fully rolled out across our portfolio combined with disciplined inventory management should also supports higher merchandise margin.
With respect to operating expense, we continue to work towards driving greater efficiency in our operating structure by Rightsizing teen and delivering simplified standardized processes to drive profitability.
Our results over the past two quarters are clear evidence that we making progress on this front.
Our 30 priority is to optimize our capital structure, the best support our business and growth objectives by prioritizing cash flow and maintaining financial flexibility.
Dan will address this further in his remarks.
Turning to our segment.
Beginning with premium.
Our premium business comp decline, 1.5% against a strong 8% comp increase in the prior year.
This was the result of a 1% comp decline that Taylor and a 1.8% decline at law.
Starting with Intel or which is our premium brand that caters to the modern working women. She demand versatility for on the go lifestyle and we've continued to evolve our balance of fashion in key items.
Then the on her 95 day.
Our customer what they facto professional uncomfortable wardrobe, we've made great progress in meeting that desire and continue to aggressively up our assortment to exceed our expectations.
We're pleased with the overall performance despite the different repairs as we delivered increased product versatility across season occasion and outfitting choices.
In the first quarter, we increased our mix of fashion and are building on the positive momentum to deliver a distinctive assortment that align with the ongoing shift towards more casual workwear.
As part of this we continue to pop our pant business, a key driver of customer loyalty with new silhouettes.
Accessories is another area, we've seen progress as we continue to enhance the assortment to drive outfitting and versatility.
For holiday for Workwear assortment expands its more day evening choices for holiday events, showcasing that Brad versatility and styling of our product.
Turning to law.
Our customer is optimistic playful inclusive and community oriented.
She enjoys versatility in fashion newness that takes it through a multifaceted life with vibrancy.
Early on in the first quarter these talking with too serious lucky newness in fashion tops and to me repeat styles.
Taking steps to adjust our offering with more compelling fashion tops outfitting options.
We also increasing testing new trends online and we'll launch online only limited capital to deliver relevant fashion and newness.
While adjusted to the assortment will not be fully complete until spring, we did impact the portion of our assortment, particularly in our dress into category starting in October .
For holiday, our assortment will reflect the playful festive spirit our customer.
In both our premium brands from marketing strategy is focused on retention of existing customers reengagement of lapsed customers and the acquisition of new customers.
As I previously noted segmentation as the foundation of our enhanced communication initiative with our customer and it is already driving improvements in an email engagement, resulting in incremental sales and margin though.
We are further expanding our segmentation strategies, which represents approximately half of our customer communication that Taylor and more than one third of loss in the first where.
We plan to increase this penetration and build personalization into our strategies to grow our customer file by improving retention and getting new customers.
For both brands, we are elevating the brand messages to drive greater engagement.
And then Taylor, we are talking about brand story to build affinity and relevance with our customer with campaigns like our recent ball social hashtag, we are better together.
We are focused on a fashion with love campaign, that's being thrown that out loud optimists. We also driving that no one way to celebrate campaign, which enables more versatility and consistent messaging through the season.
Lastly, we are building on our omni channel capabilities as we continue to enhance our mobile site. We recently redesigned our mobile home page to prove navigation increase engagement and we are continuing to improve the digital experience to deliver the same level of satisfaction. She finds in our stores.
Turning truck bus segment, we aren't ambition to enable our customers to feel her best by creating value through the unique combination of inspired fashion flattering fit and ingenious solution. We are undertaking greater product testing create the best fit at flattering solutions for our customer.
As we are focused on being our number one resource for our lifestyle needs.
Our first quarter plus delivered nearly a 1% comp increase.
We're especially pleased with the inflection we saw in lane Bryant, which signals that our initiatives are gaining traction.
This represents the first positive comp in five quarters illustrating that we are moving the product assortment and customer communication in the right direction.
Performance was led by a re engineered and enhance top offering.
Where we rebalanced the assortment redevelop the product around three top priority fashion fit and problems that.
We also redefined our pricing pyramid to offer a good better best structure and launched our in store styling service.
We have established a product that static with the appropriate balance of fashion across the brand that is resonating with our customer, but theres still more work to be done.
We are implementing our customer centric panel testing strategy in all major categories as we evolve our assortment starting with pans.
This will be if their process, but we have the right formula in place.
Looking ahead, we will maintain that makes up or seasonal in fashion trends, which is garnering a favorable response from our customer.
For holiday, we're focused on all aspects of her life from party cozy from work to weaken.
Again, our marketing initiatives are centered around customer retention acquisition.
We've just begun to implement our segmentation strategies in the bus segment, where we are in the early stages are encouraging customers to shop across multiple categories.
From a media perspective, we are focused on to me sat direct mail and digital marketing.
Indirect now we've elevated our message drive customer engagement as the fashion brand rooted in modern current trend and time it looks for her.
In digital marketing, we're testing to understand the tiny frequency of digital AD to ensure we captured the next purchase whether that be through e-commerce were stores.
We also utilizing digital marketing to focus on new and lapsed customers with targeted AD highlighting categories that have a high propensity customer acquisition.
Social media, it's starting to play a larger ROE as we increase our follow shipping engagement in brand building activities.
Lastly, our kids segment. The Justice mission is to effectively connect between girls proved fashion funding community. We are uniquely position as the only specialty store that caters to that six to 12 year old age group.
Our store it also creates a special pub adored experience as they tend to shop together.
For the first quarter comparable sales declined 6% I guess to 12% increase in the first quarter last year, we saw a positive reaction to our apparel assortment.
Robert traffic trends were disappointing as we fell short of our specialty offerings. We have identified areas, we can leverage within specialty, including jewelry beauty and toys, which are great categories for new customer acquisition and our quickly adjusting the assortment for better representation.
In apparel, we've expanded the historic to capture several acetic and product offerings to address girls across the age range we serve.
Everyday favorite lean more into the younger customer and represent our new value proposition.
Our test have shown that this program is resonating in driving both sales and profitability.
We're also seeing new customers drawn to the Brad through this offering.
We continue to build out collection act or more aspiration, offering which captures the high end of the price spectrum, particularly with the at least a static.
Our marketing initiatives are emphasizing campaigns that leverage product storytelling and in store events to drive traffic.
Similar to our premium and plus segments, we had amplifying investments in digital marketing for justice using advanced analytics to develop segmented messaging across the piece social and email.
We also leveraging our loyalty program as we built on personalization strategy in future periods.
In terms of our omni channel capabilities, we recently completed a roll it up buy online pick up in store.
We know moms values convenience and we are enhancing our online presence and capabilities to better meet for needs.
In summary, we continue to employ strategic initiatives across segments.
While each year in various stages of evolution, we encouraged by the progress we are making.
We remain confident that the steps we're taking now that's it's up to successfully achieved double digit EBITDA margin and enhance shareholder value long term.
Now, let me turn the call over to debt discuss our financial results.
Thanks, Gary before getting started let me note that my comments will reference non-GAAP results, which exclude items such as restructuring charges recorded in the quarter.
As Jay noted we have posted a supplemental earnings package on our IR website and attached it tour 8-K to provide reconciliations and additional information on these items.
Turning to our first quarter results. We were pleased to have exceeded our operating income guidance as we continue to execute our cost savings initiatives.
As a reminder, our guidance excluding dressbarn results.
Total revenue from continuing operations for the first quarter was $1.297 billion, a 3.1% decrease as compared to the prior year period.
The company comp sales for the quarter were essentially flat to last year.
Excluding dressbarn comp sales were down 2% inline with our guidance.
Our comp performance reflects positive trends in our plus segment as our initiatives gain traction. This was offset by a comp decline in our kids segment and a modest decline in our premium segment.
Both the kids and premium segments were up against a strong comp sales performance in a prior year quarter.
Our gross margin was 59.6% down 30 basis points compared to the same period last year.
The gross margin rate was pressured by increased promotions and markdowns at both our premium and kits businesses.
Partially offset by higher gross margin rates at Dressbarn, and our plus segment.
Operating expenses improved 9% in a quarter versus last year, excluding restructuring costs, which was better than guidance. The decrease in operating expenses was largely attributable to our cost reduction initiatives, including lower occupancy and store related expenses reduced head count and non merchandise procurement savings.
As a result, adjusted operating income for the first quarter fiscal 2020 was $45 million compared to $9 million in a year ago period.
And primarily reflects the expense reductions partially offset by the decline in gross profit.
Excluding dressbarn adjusted operating income for the quarter was $37 million.
Consistent with our ongoing store optimization strategy, we close to 85 stores during the quarter. This included 72 closures at Dressbarn.
There are 544, dressbarn locations remaining and a total store count for Sina at quarter end with 3363.
Turning to Dressbarn.
We're very pleased with the progress, we're making the winding down of Dressbarn and are firmly on track with our plan.
Liquidation began on November Onest and is proceeding as expected.
We continue to make progress reaching agreements with the majority of our landlords. We remain on track to close all dressbarn stores by December 31st.
Dressbarn delivered comparable sales growth of 10% in the first quarter.
The acceleration that began at the time, we announced the wind down at the business has continued with the accelerated sales and margin helping to offset cost associated with the wind down.
Turning to our balance sheet, we ended the quarter with $262 million in cash and equivalents, reflecting our continued strong cash position.
And we're maintaining our disciplined approach domain, managing or inventory levels, which were down 5% this quarter compared to the prior year.
Extra liquidity, we remain at a healthy position with no borrowings under our revolving credit facility.
Together with our cash balance we ended the quarter with over $675 million in available liquidity.
Capital expenditures for the first quarter were $29 million.
As of quarter end long term debt stood at $1.370 billion, reflecting the balance of our terminal.
As Carey mentioned previously subsequent to quarter end, we repurchased $80 million of debt in the open market.
Our term loan matures in August 2022, and our next amortization payment of 22 and a half million dollars is not due until November 2020.
Further we continue to be in full compliance with all of our covenants and intend to remain so.
Before turning to guidance with regards to tariffs.
As we stated last quarter, we're negotiating with our vendors to share the higher costs and we're selectively increasing prices, where we believe we have flexibility.
Guidance accounts for the expected impact from tariffs.
Turning to guidance note that with the planned wind down of Dressbarn. During the second quarter Dressbarn results are expected to be reported as discontinued operations and are excluded from our guidance.
For the second quarter, we expect.
Net sales of 1.200 billion to 1.225 billion as compared to 1.271 billion in fiscal Q2 2019.
Reflecting a reduction in store count and a low single digit decline in comparable sales.
Gross margin rate should be between 51.2% to 51.7%.
As compared to 51.9% in the second quarter fiscal 2019.
Depreciation and amortization of approximately 64 million.
And then adjusted operating loss of $40 million to $60 million.
For the full year, we continue to expect capex between $80 million to $100 million down significantly compared to prior years.
And as we stated last quarter cash remains our number one priority.
We continue to make progress and Rightsizing, our cost structure to better align with the scale of our go forward business.
We are well underway to achieving $150 million of savings that we previously communicated the bulk of which we are realizing this fiscal year.
Through a combination of achieving these savings goals rationalizing, our capex and maintaining disciplined working capital, we're making progress on enhancing our balance sheet.
That concludes our prepared remarks, and with that I will turn it back to the operator.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad.
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For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star Keith.
One moment, please while we poll for questions.
We have reached the end of the question and answer session I will now turn the call back over to Gary modem for any closing remarks.
Thank you everyone for calling in wishing already we're happy holiday season, and I would especially like to thank our associates for all that support we look forward to updating you at our next conference call.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.