Q4 2019 Earnings Call
Good morning, My name is Jack and I'll be your conference operator today at this time and welcome everyone to the GI Joe's fourth quarter 2019 conference call on today's call or Jim Scoli interim CEO drilling and Mark Webber Executive Vice President and CEO.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time as simply press star followed by the number one key on your telephone keypad.
I can withdraw your question press the pound key.
Before we begin I need to remind you that certain comments made during this call may constitute forward looking statements that are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended such forward looking statements are subject to both known.
An unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the press releases and GI Joe's FCC filings before we're looking statements made today are as of the date of this call.
We do not undertake any obligation to update any forward looking statements.
Finally, we may refer to certain adjusted or non-GAAP financial measures on this call.
Reconciliation schedule, showing the GAAP versus non-GAAP financial measures is available in our press release issued today.
If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our web site at Churchill Dot Com I will now turn the call over to Jim.
Thank you and good morning, everyone.
As you saw in our press release. This morning, we deliver fourth quarter performance above our revised expectations and made progress against our initiatives, including ending the year with the lower inventory balance and more importantly, with enhanced disciplines in place to continue to actively manage our in season and pre season inventory.
<unk>.
Well our January same store sales were solid it's much too early to call. This in new trend in the business.
Mark will review our results in more detail in a moment.
Before he does that I will take you through my thoughts on the quarter in what we're doing to position Jay Gelb for future success.
First with regards to performance 2019 was a challenging gear for JJ and we're disappointed with our results.
With that said, it's clear that there are opportunities to continue to lie ahead for the brand once the business has stabilized.
The key tenants that have made Gi Joe's success are in place and in most cases remains strong.
We service, a remarkable growing and yet underserved demographic.
Heavy rightsized store fleet, great penetration of online.
In the oil customer who face both channels as ways to interact with the brand.
It is also clear to me since taking the interim CEO role that the foundational support that what's needed to bring the brand forward to its next stage of growth was not fully implemented.
That is the work that Mark and the team began many joint.
Well in greater discipline around inventory management.
I'm also working with the teams to improve cross functional decision, making within the organization to position the brand to truly reap the benefits of our great assets. Most importantly, our customer.
Included in this work is the refining and strengthening of the guard rails, we're putting in place around inventory disappointments, not just focused on the absolute levels, but getting the breadth and depth of the assortment a lot through communications between our design merchandising and planning and allocation teams.
As we install more this institutionalized discipline within the brand. We're also building a culture with a greater degree of accountability and appreciation for what needs to be done in order to regain the success. This brand has enjoyed into realize its full potential.
We are certainly excited to have or new design teams product in place and we look forward to receiving feedback from our customers.
And from what I've seen a weight has adopted a heightened focused on who work customer is and what she is telling us she wants from Jay Joe.
Looking ahead, we've entered fiscal 2020 on stronger footing and our focus for this year will be to manage our expectations from a topline perspective and ensure that we're driving improved gross profit performance.
We want to position the business with healthier foundation and the ability to scale from this point.
With that said as Mark will discuss our outlook for the year remains cautious as we're continuing to stabilize the business as well as contend with ongoing macro uncertainties.
Having been in retail for many years I noticed the fundamental situation. We're in is one that we can improve significantly and most importantly, once the foundation has been fully established a new leader can easily leverage this work in order to return this brand to attractive profitable growth.
Before I wrap up I want to thank all of our teams for their hard work and dedication to Jay Joe.
We are an important inflection point for the brand and we remain committed to delivering on our goals and realizing the full potential this brent.
Thank you Jim and good morning, everyone.
As Jim mentioned, the fourth quarter overall was challenging but we continue to make progress stabilizing the business.
We have improved operating practices around the planning and management of inventory is still in greater discipline into pre season by decisions and adjusting the metrics and meetings around in the season inventory management discussions.
Earlier this year, we took action on overhead costs, including payroll general operating expenses and occupancy, which continued to generate savings in the fourth quarter.
We believe there is still more operational efficiencies to be lives in this business overtime.
As it relates to fourth quarter performance December performed better than November while our late January performance exceeded expectations.
In terms of unit inventory buys the January and February four sets, which arrived later in the quarter, where the first pre season by quantities, we were able to better align with demand, but November December and earlier floor sets were bought two dean while overall inventories are in a better position as we enter 2000.
20, we will continue to work down these older season, Mark Downs in Q1, as we mix to more appropriately sized new full price floor sets going forward.
Getting inventory buys right is a first and critical step to stabilizing the business and we are making good progress.
Let me now turn to our results my discussion today will include adjusted non GDP metrics, which exclude costs associated with the CEO transition and additional noncash goodwill and intangible asset impairment charges of $36 million taken in the fourth quarter. Please see today's press.
At least for more details on our Q4 and full year financial performance, including reconciliations of our non G.A.P.G.A.P. metrics.
For the fourth quarter.
Total net sales were $168 million down 1.7% versus last year's $171 million total company comparable sales decreased 2.8%.
Total direct sales increased 2.9% year over year 200 basis points to 47.3% of total sales for the quarter.
Gross profit was $100 million versus $108 million last year and gross margin was 59.5 per cent compared to 63.1% last year.
Year over year reduction in rate was due to an increase in the promotional rate during the quarter as we work to clearly elevated inventories we entered the quarter with.
SGN expenses adjusted for onetime costs previously mentioned were $98.4 million for 58.5% of sales versus $99.8 million were 58.4% of sales last year with the decrease driven by savings in corporate overhead, resulting from actions taken earlier this year.
As well as a reduction in marketing expenses compared to Q4 last year, we reported an adjusted operating income of $1.7 million for 1% of sales versus adjusted operating income.
$8 million for 4.7% of sales last year.
Adjusted EBITDA for the quarter was $11.8 million compared to 18.5 million last year.
What percentage of sales adjusted EBITDA was 7% versus 10.8% last year.
Interest expense for the quarter was $4.7 million versus 4.7 million last year.
On January 31st we made a voluntary prepayment of $5 million, reducing the total amount of the term loan outstanding to 237 million.
Tax benefit for the quarter was $3.2 million versus a tax expense of 1.2 million last year and the effective tax rate was 7.6% compared to 37.1% in the fourth quarter of 2018.
Adjusted net loss was $2.2 million or five cents per share.
Turning to the balance sheet, we ended the quarter with $21.5 million in cash.
Inventory at the ended the quarter was down 6.1% to $72.6 million, we're comfortable with this level of inventory as we enter 2020 and the content and mix will continue to improve as we move forward.
Regarding real estate, we opened one and closed four stores during fourth quarter, bringing total store count to 287.
Finally, net capital expenditures in the quarter were $2.1 million.
To summarize 2019, while it difficult year, we made progress addressing costs and strengthening the disciplines around inventory planning and management, we extended the term of our abbey out and took advantage of the stronger finish to the fourth quarter by making a voluntary 5 million dollar pre payment on the term loan before quarter.
And.
We are looking forward to transitioning into product Assortments designed by the current design team during the first quarter of 2020, and we'll maintain tight discipline around inventory as we do.
Turning now to our outlook for first quarter and full year 2020.
2020, as a year of stabilization and gross profit recovery for Jay Gelb Rightsizing inventory purchases is one critical component and this recovery as deep promotions and jobber activity required to move excess goods in 2019 should not need to be anniversary to the same extent.
This will be most pronounced in the second quarter.
Year of recovery the top priority as gross profit and generating cash flow, we will invest capital to maintain and improve the operations of the business and we'll continue to address the capital structure with excess cash generated.
While we believe in a long term revenue growth potential of the Ghl brand, we must recover profitability first and strengthen core operational foundations to profitably obtain that growth in future periods.
Before I review, our expectations in more detail there are three housekeeping items to address first in 2019, the full extent of our inventory issues was identified and actioned after the first quarter.
As such the first quarter of 2020, well in effect the up against a more difficult first quarter gross margin comparison.
Our first half 2020 results should normalize out the quarterly volatility, but our first quarter guidance will reflect this more challenging comparison.
Second as you will see in our press release, beginning in fiscal 2020, our comparable sales growth calculation will exclude shipping and handling revenue.
We believe this change will provide investors better visibility to the underlying product performance in our comparable year over year sales. Please refer to our press release, where a comprehensive restatement of total comparable sales for fiscal 2019 for your reference.
And third to Echo Jim's earlier comments our guidance does include a certain level of caution given our focus on continuing to stabilize the business as well as the uncertainty of the current macro environment, including the Corona virus. Our teams have done a great job minimizing the sourcing of finished goods from China. However.
For the global situation remains very fluid and we are taking a cautious stance.
Now for the first quarter, we expect total comparable sales to decrease between three and 5%.
Total net sales will decrease between two and 4% gross margin will be about flat year over year.
Interest expense for the quarter will be approximately $4.5 million.
Adjusted diluted EPS is expected to be between six and eight cents compared to earnings of 10 cents in the first quarter of fiscal 2019, and lastly, we expect to close one store ending the quarter with 286 stores.
And for the full year 2020, we expect total comparable sales to decrease 3% to 5% total net sales decreased 2% to 4%.
Gross margin to increase about 200 basis points year over year and interest expense to be about $18 million for the year.
The effective tax rate for the year is expected to be 28% to 29%.
Full year earnings per share is expected to be in the range of 10 cents to 14 cents per share this guidance compared to fiscal year 2019 adjusted earnings per share of six cents.
We expect net capital expenditures of approximately $20 million for full year 2020.
It's about half of this amount going to stores and the other half focused on technology and operations investments and finally, we expect to open six and close six stores this fiscal year ending with 287 stores.
That concludes my prepared remarks, I'll now turn the call backs the operator for questions.
Certainly as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad to draw. Your question press the pound key we'll pause for a moment to compile the Q and a roster again that is start one does a question by phone.
Paul Trussell with Deutsche Bank. Your line is open.
Hi, Good morning, God is actually Kristina can tie on for Paul So congrats on the better results you have delivered in the fourth quarter I'm guiding first quarter down in the same store sales for 3% to 5% when the year ago comparison is admittedly easier than it was in the fourth quarter and you said the January.
Trends for solid so I guess my question is how should we think about the comp progression over the year and what do you think it takes to see the topline stabilize and returned to positive trends.
I have seen as Mark I'll I'll jump in on that.
First I think its most important to call attention to that total year strategy, which really is for 2020, a focus on gross profit recovery first versus sales stabilization and growth and I think that's an important distinction given coming.
From a year, where we know we had.
You know challenges a lot of which driven by quantities of inventory that we had receded were committed in 2020 to to bringing inventories more in line and you saw at the end of Q4, some evidence of progress on that so really the the plan.
As to first stabilized gross profit that's the plan.
For 2020, and I think.
As with respect to cadence through the year and we mentioned that in the remarks. The second quarter of last year is where we really began to action and react to the inventory issues, we had coming or we had coming into that quarter and through the rest of the year. So.
Well in terms of Q1 of last year from a gross margin perspective.
If you look at Q1 into Q2, the Q2 performance.
Sort of speaks to the actions we took and so that's why we mentioned that the first half and sort of normalize some of that volatility out.
Got it. Thank you that's that's really helpful and again.
Good question would be on gross margin you're doing a lot of good things there to rightsize inventories improved turns and just overall speed things up and I think the 200 basis points expansion is really encouraging I guess I wanted to ask what are some of the pressures that you were still seeing whether it's.
Overall macro or more promotions that could really continue to offset these initiatives.
Yes. So we have as you mentioned, we guided to the 200 basis point improvement our overall guidance and we did mentioned it in the remarks has some level of caution baked into it relative to the initiatives that we have underway to stabilize the business, which entails Mike.
Rating from a promotional environment to a less promotional environment also migrating to new designs of our new design team.
To the current design team right, but those designs are now coming into the stores as well as to the macro uncertainty that's out there relative to.
The Corona virus et cetera, and what we've really tried to do is.
Take a cautious stance, primarily in our guidance related to potential supply chain disruptions that may exist.
Versus trying to quantify any.
Consumer demand side risks that would be in that guidance.
Got it and if I may follow up you guys still have a big sourcing operation out of China.
How do you gauge the current situation in terms of supply chain disruptions and how quickly can you move some of those products to maybe other countries, where you could sourced from.
Yeah. They are so the interesting thing that teams here have made great progress minimizing the sourcing of finished goods out of China.
To the extent where it's.
Not really that much of an issue for us anymore. In terms of finished goods. The reality is that components of the supply chain are still heavily dependent upon China originated loans things like fabric et cetera. So I think that's where we're monitoring and watching to see how the overall supply.
Chain, even goods that are finished in other countries how how the manufacturers are working with all the components of the production line.
To make sure that we managed to on time deliveries that is a fluid situation one that our teams are all over and.
And managing as best they can and dynamic environment, but overall in terms of the specific China exposure. It's written I mean, its were below 5% now in the spring in the first half of the year in terms of goods sourced from China.
Hi, Thank you and not best of luck going forward.
Thank you.
Daniel Lupo with Jefferies. Your line is open.
Hey, guys. Thanks for taking the call.
How much is drawn the revolver today and do you expect that draw on that and all doing there.
Hi, Thanks for the question.
We have zero drawn on the revolver weve actually never drawn on the revolver, we have no plans to draw on the revolver as we mentioned in the remarks, we at the end of year.
In a voluntary prepayments on that term loan for $5 million.
Which again, where we're pleased to be able to make that on utilizing the stronger finished the quarter and it's worth noting that.
While we're still finalizing our term loan certifications at this point, we have no reason to believe that we have any issue with the covenant related to the term loan so nothing drawn on the hour and progress with respect to that to the term loan.
That's good to hear and then.
Given that you just purchased back from term have you thought about buying it back in the open market kind of given the trading levels and how have you thought about addressing the 22 maturity.
Answer your second question clearly, we're aware of the maturity coming up and as a responsible board management team are thinking about.
Nothing about that at this point no specific comments on on plans.
Around the capital structure other than what we said in her remarks, which is with excess cash will continue to addressing.
Okay. Thank you for your time congrats on the quarter. Thank you. Thanks.
There are no further questions at this time I would like to turn the call back over to management for final remarks.
Well, thanks, everyone for joining today and we look forward to update you on our progress on our Q1 call and thank you.
This concludes today's conference call. We thank you for your participation you may now disconnect.