Q4 2019 Earnings Call
Greetings and welcome to the Delta apparel workshop fourth quarter fiscal year 2019 earnings conference call.
This time, all participants are not listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator systems. During the conference. Please press star Zero and your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Allison Malkin Alessi I think you may begin.
Good morning, Thank you for joining us with me today are sharing price John CEO and Voin keyboard gets CFO for today's call Sharon will begin with the discussion of our fourth quarter fiscal year 2019, performing and review the progress made on our strategy. After Dwayne will review the financials in more detail.
We will then open the call to take your question. We ask that you limit your questions to one question and one follow up its way we can get to everyone's questions. During this one hour call.
Ill free to re queue. If you have further question members of the media, who maybe on our call today should contact US. After this conference call with your question. Please.
Please note a college being recorded and broadcast live via the Internet. The earnings Leap is available on the Investor Relations portion of our corporate website, a replay of both our call and webcast will be available later today on the IR site before I turn the call everybody can management I won't read.
Like everyone that forward looking statements are inherently subject to risks and uncertainties actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in their best factory section in the Companys annual report on form 10-K, we undertake no obligation to revised.
Any forward looking statements and now I would like to turn the call over to Sharon.
Thank you Allison and good morning, everyone.
I'm pleased to have the opportunity to discuss our fiscal 2019 fourth quarter and full year results with you.
Although the here did not unfold on a by quarter basis as expected. We remained focused on our strategic growth initiatives and ultimately delivered results that met or exceeded our most recent guidance.
Overall 2019 was a solid year, a forward progress and which we not only returned to profitability, but we also grew total revenues.
We gained momentum across many areas of our businesses, we progressed, our diversified initiatives, including expanding into digital economy, continuing to evolve and diversify our retail model better leveraging our robust loyalty club membership and monetizing the awareness trust and affinity that a broad range of consumers have for our beloved brand.
Yeah.
Our results for the quarter in the fiscal year include an increase in both net retail sales and commercial revenue delivering a 3% lift in total revenue for the quarter. These results were positively impact, but impacted by our ninth consecutive quarter of double digit ecommerce growth a consistent track record since we upgraded.
Our platform in 2017, which contributed to the expansion in total revenue for the year.
The top line growth contributed to pretax income of $7.6 million in the quarter and improvement of over $14 million compared to the prior years period on a GAAP basis, which was also buoyed by strategic use of promotional activity and disciplined expense management.
Importantly, the positive quarter drove a return to profitability in fiscal 2019 and objectives that we shared at the beginning of the fiscal year and subsequently achieved.
And we finished the year with a solid balance sheet. The showed a healthy cash position again within our recent guidance range with no borrowings on our credit facility.
As we noted in our previous call. We saw some pressure early in the fourth quarter. However, as the holiday season progressed and momentum built it ultimately led to positive sales for the period that carried through the end of the fiscal year.
We attribute the improvement to several factors, including a shift in retail traffic pattern skewing later in the holiday season.
In total we saw increased consumer traffic in stores and online with store traffic swinging positive in mid December which carried throughout January the final month up our fiscal year.
Overall based on our available data build a bear out paced national traffic trends.
Our aggressive shift to increase digital marketing that not only drove ecommerce, but also benefited our retail store base and ultimately contributed to delivering an improved to return on ad spend.
An increase in bonus called activation with targeted communications using updated segmentation models and improving efficiency and message relet relevant.
Focus on gift card sales touting the gift of experience in our store online and in other non build a bear retail channels, which ultimately contributed to increased redemption levels post holiday.
Driving additional demand for personalized gifting, which delivered growth both online and in stores, including investment of our adult two adult offering.
And finally sales of products associated with our best in class movie partners the gained momentum as the quarter progressed.
We believe that several of these factors will continue to benefit our business as we further progress our key strategic niche initiatives in 2020, which I will discuss momentarily.
As we have reiterated many times, we believe build a bear has continued to strategically evolved in an evolving retail consumer and geopolitical environment.
The vision and flexibility of our approach balance with the recognition of the greater potential of the brand to stretch beyond this its historical limits of traditional mall based retail was a key tenants to our ability to deliver our guidance in 2019.
That in mind, we're pleased by our year end result.
Which have provided additional confidence that we are on the right track.
To achieve our longer term objectives, which include sustained profitable growth for the company.
As a reminder, the nexus of our strategy is to diversify and expand our retail model, while simultaneously building on our brand strength to add incremental profitable revenue stream, but the goal of leveraging the synergy between retail and intellectual property initiatives to grow the entire business.
Now, let me turn into a discussion of four of our key goals for the school 2020.
These include accelerating our digital initiatives and further expanding ecommerce.
Leveraging our corporately managed retail portfolio, while maintaining high levels of lease optionality.
Driving our commercial revenues, including third party retail outbound licensing and entertainment.
And focusing on expense management and margin optimization.
First addressing our goal to continue to accelerate our digital initiatives.
As you may recall, having recognize the shift in consumer trends when I first joined the company we've been executing a multiyear plan to more fully participate in the digital economy.
This has included updating and aged infrastructure and adding capabilities in a systematic and sequential process.
For example, most recently we completed an upgrade to our warehouse management system that is intended to improve efficiency and add new competencies.
Dovetailing in to these infrastructure investments is our announcement. This morning, recognizing an expanded relationship with Salesforce is our digital and E commerce platform partner.
Salesforce is integrated consumer relationship management platform unites marketing sales Commerce service anymore to give companies a single shared view of their customers.
Well, we've been pleased with the progress that we've made in the digital space. We believed that this strategic partnership and cloud based technology solution had the potential to be transformative providing us a data driven platform that can accelerate our growth rates overtime by elevating and personalizing, the consumer journey and experiences of our guests across channels.
In order to improve conversion and sales both online and in stores.
We have sent an aggressive timeline to implement the platform and expect to have an expanded portfolio of capabilities by the time, we go into the holiday season for 2020.
Well the team has already at work with Salesforce implementation, we expect to continue to deliver growth in E. Commerce by offering innovative gifting solutions, leveraging our consumer data to increase guest retention and lifetime value and expanding our aggressive shift to digital marketing channels to drive traffic both online and in stores.
Our next initiative is to leverage our corporately manage retail portfolio, while maintaining our real estate flexibility with high levels of lease Optionality.
Bill there's iconic interactive retail experience remains at the heart of our business model and brand building programs and while we expect traditional mall traffic to remain challenging our goal is to continue to profitably operate our portfolio of stores.
By maintaining the high level of strategic lease Optionality that we've put in place and focusing on optimizing profitability, we're able to continually and aggressively negotiate reik read terms for a corporately managed retail portfolio.
With over 70% of leases, having natural lease events over the next three years, we maintain significant flexibility to evolve our portfolio as needed.
As we move forward, we expect to continue to get precedence to locations that expand consumer accessibility to our brand with priority given two locations, where today's families choose to go for shopping and entertainment.
This diversification plan is inclusive of adding locations with Insulet Walmart stores as well as opportunistic tourist locations such as the store. We recently opened at Knott's Berry farm.
Long term and seasonal basis.
We have also been improving our retail productivity by operating in smaller spaces, leveraging the variety of snore store format that we've created which allows us to effectively deliver our interactive retail experience in a wide range of settings square footage requirements and time spent.
In fiscal 2020, we expect to have less total square footage, but higher sales per square foot and our Corporately managed portfolio.
We had in 2019 I.
I think it is also worth noting that we expect to have about half of all of our stores and our updated discovery format by the end of this year.
Next driving commercial revenues include third party, including third party retail outbound licensing and entertainment.
Commercial revenues grew an impressive 80% in fiscal 2019 at a margin accretive rate.
Specifically looking at the progress and third party retail we've been developing this model in which we sell our products on a wholesale basis to other companies then in turn execute our retail experience.
This model has several advantages for build a bear.
These include little to no startup capital expenditures to open a retail location.
No direct operational overhead expenses, including both rent and labor.
And the potential to leverage retail opportunities that tend to be family centric tourist oriented locations.
The model is also beneficial for our partners, who can take advantage of space and labor that they typically have readily available as well as being able to offer the power of the build a bear brand to their direct to consumers.
As noted sales from third party retail that are reported in our commercial revenues reflect wholesale pricing to select roster partners.
These include Carnival cruise line, great with large landry's and beaches resorts.
We're also working with several other companies that are on the early stages of testing, including military bases, Chuck E. cheese and Marriott resorts.
We finished 2019 was 63rd party locations, an increase of 50 per cent compared to the prior year end.
Now, let me turn to our efforts to monetize the inherent value of our brand and owned intellectual properties.
With the high levels of awareness and trust that consumers have for build a bear we've recognized the opportunity to offer products and other consumer categories.
2019, or licensing programs centered on toy Softlines and gifting with agreements covering over 20 categories.
Notably our branded license products were offered in over 7000 retail doors throughout the year <unk>.
As you may recall, our successful toy offering the build a bear stuffing station was named to Wal Marts top rated by kids toy lists for 2019 and as a product line that we expect to expand and the future along with adding products and other toy categories. We also plan to have new offerings in softlines and betting fashion and accessories.
Okay and in sync with our gifting focus we recently introduced a subscription box program. In addition to a range of baby apparel and party supplies that are currently offered.
Separately, we currently have a number of entertainment offerings and the pipeline for 2020 and beyond.
These efforts include expansion of our programming on build a bear radio, which recently shifted to the I heart platform movies with Sony pitcher worldwide acquisitions and music with Warner Music groups Arts Division.
Among other exciting opportunities.
We expect to begin to deliver content into the marketplace. Later this year, we believe the memorable engagement that consumers have had with our iconic retail experience and the specific brands that will be featured in the entertainment such as our Honey girls well drive interest in the content, which will then effectively act as Mark a marketing tool to drive.
Further retail purchases and drive our over all business model.
And finally in addition to these revenue generating initiatives, we've returned to profitability in 2019.
Our goal in 2020 is to focus on expense management and margin optimization.
As we look forward, we are encouraged by the momentum thus far in 2020 with positive year to date result, fueled by successful that signs day program, the targeted adult gift or as well as our traditional family demographic.
Along with our seasonal products for the upcoming Easter period, and owned intellectual properties, we plan to merchant to tap merchandise tied into upcoming movies, including trove World Tour and minions the rise of group.
In addition, as you may have already heard we also have plans to launch the child from the groundbreaking Disney plus series the man Lorien.
While we had planned to share annual guidance for fiscal 2020 on today's call that outlined ranges of expected growth in both total read revenues and pre tax profit given the uncertainty and rapidly changing corona virus situation. We believe it is prudent to reap free refrain from providing.
Detailed guidance at this time.
We want to express our concern for the well being of our associates suppliers partners and guests in this volatile environment.
Separately, we are evaluating a number of shorter term scenarios for the business, while remaining focused on our strategy to achieve our longer term objectives.
In closing 2019 show progress as we built upon the strategic insights foundation and infrastructure. The beat we have been working on for several years.
We believe we have the right plan in place to continue to transform build a bear into more of an intellectual property company that is designed to leverage the experience will impact of our retail workshops to drive consumer interest and products in activities beyond retail.
Finally, before I turn the call to Voin I want to thank the entire team at build a bear from our talented designers to our dedicated bear builders, who make ari chronic experience come to life in our stores for tens of millions of people each year round the world.
This organization remained focused on achieving our goal of returning to profitability.
And delivering top line growth in 2019.
Supporting our stated belief that the 2018 results weren't anomaly following what had been a consistent run a for prior years of sustained profitability.
The team is looking forward to the opportunity in potential as we work to unlock the value and monetize the power of our brand.
I'll now turn the call over deploying to review additional financial details.
[noise], Thanks, Anne and good morning, everyone. During fiscal 2019 be delivered on our objective of returning to profitability following a challenging fiscal 2018.
Our GAAP pre tax results improved over $20 million compared to the prior year or about $8.7 million on an adjusted basis.
We also saw a slight increase in total revenues, including an over and over 80% expansion in our commercial revenues segment compared to 2018.
Well, it's having a double digit increase in E commerce during each quarter of the fiscal year.
By geography toll revenues increased 1.3% in North America and declined 5.3% in Europe, which is primarily driven by the United Kingdom operations.
Specifically relating to the UK, while we continued to be mindful that the economic conditions. They remain uncertain. Following Brexit. These so some improvement in the overall trends with growth in the online channel.
As you May recall following the implementation of GDP regulations in 2018.
Last year, we launched a new registration process for enrollment into our loyalty program, which has led to a significantly larger email database, allowing us to actively market the more consumers.
In addition to improving top line trends be focused on increasing efficiencies and reducing expenses, including our real estate costs with a goal to stabilize the business.
Now turning to our fourth quarter results.
Total revenues were $104.6 million.
An increase of 3% compared to the fourth quarter fiscal 2018.
Retail gross margin expanded approximately 450 basis points to 50.4% compared to the prior year.
This expansion was driven by over 300 basis points of improvement related to leverage of our fixed occupancy expenses.
This was a result of Red productions through aggressive real estate portfolio management, given the high level of lease Optionality that we have maintained.
In addition, the also delivered expansion and merchandise margin.
As you and then it was $45.1 billion, a 400 basis points improvement as a percent of total revenue.
This was driven by disciplined expense management, including lower marketing spend as we move to more efficient digital marketing programs.
Partially offset by an increase in incentive compensation.
Combined this drove a 14.2 million dollar improvement in pretax result, compared to the fiscal 2018 fourth quarter or a 6.1 billion dollar increase from the prior year on an adjusted basis.
Turning to the fiscal year.
Total revenues were $338.5 million, an increase of $2 million compared to fiscal 2018.
Retail gross margin expanded 270 basis points to 45.4% compared to the prior year.
Including approximately 60 basis points related to the leverage of fixed occupancy cost with the remainder driven by expansion in merchandise margin.
[noise] as DNA expenses were $152 million, a decrease of $5.1 million, primarily due to lower non cash charges compared to fiscal 2018.
As I noted combine this drove an improvement of over $20 million in GAAP pretax income in fiscal 2019 compared to the prior year.
Turning to the balance sheet.
We ended the year with cash and cash equivalence of $26.7 million.
49% increase compared to the prior year end and no borrowings on our revolving credit line.
We ended the fiscal year with approximately $53 million of consolidated inventories, representing a 5 million dollar decrease compared to the prior year.
This is consistent with the expectation is the most recently shared.
This reduction was primarily due to a change in the timing of in transit inventory relative to the year end of fiscal 2018.
Capital expenditures totaled $12.4 million for the full fiscal year compared to $11.3 million in prior fiscal year.
The increase in spend compared to prior year is mainly related to the opening of 16, new Wal Mart applications.
As it relates to our store base the opening of the Walmart quotations, partially offset the closing of 17 underperforming stores, primarily in traditional mall locations.
We ended the year with 372 Corporately men's locations it declined to one store from fiscal 2018.
We expect to continue to manage our flexible real estate portfolio.
With aggressive negotiations going forward.
Finally, as it relates to fiscal 2020 guidance as Ken noted.
We plan to share expectations on today's call that reflected both top and bottom line growth, but given the rapidly changing environment. We are currently I'm unable to accurately estimated the potential impact on the call on the buyers.
We recognize that there are multiple unknown that could affect companies on a number of front, including sales store traffic and supply chain and we are actively evaluating scenarios in order to manage our business during this uncertainty.
With that in mine, our evolution to a more diversified business model, our broad lease optionality. The continued enhancements of our ecommerce capabilities.
Recently evolved sourcing base.
And our strong balance sheet, which includes no borrowings under our credit facility should provide an increased level of flexibility.
In closing fiscal 2019 was a year, where we returned to profitability and grew our total revenues, while advancing many of our overall strategic initiatives.
Well, we noted that our 2020 years today total revenue is up the current circumstances require unnecessary shifting focus.
Our goal is to remain agile way, our options and make the best possible decisions for our wide range of stakeholders with the perspective for both the short and longer term.
Now I will put on the call back over to the operator for questions operator.
Thank you I'll now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad, a confirmation telling one indicate your line is in the question to you May press star to if you'd like to move your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset for pressing the star keys, one moment. Please.
People for your questions.
Our first question comes from the line of Eric better what I see research. Please proceed with your question.
[noise], Hey, good morning, [laughter], but.
[laughter] questions here, one is could you give us a little bit update on what you were seeing the Walmart stores for the holiday season, you did a significant ramp of those stores and where is that going.
He is in terms of.
Ah so workouts and other pieces, how should we be thinking about that going forward you've done a good job.
Reducing the square footage.
Are we going to see kind of little more aggressive in the store counts. Thank you.
Hi, Eric a champion yeah on the Walmart a relationship where we highly value our relationship with the company and we have been and building out what we believed to be a the right model for both of US moving forward I think as we shared on our last.
This call we were working with Walmart to assess our current stores and evaluate the right metrics to make predictive have predictive analytics on what metrics actually allow us to choose the right locations have the many 3000 plus locations that they have we feel.
Very confident that we've isolated some of those on those and specific metrics that allow us to make a the best choices because as we shared when we started the process with Walmart what we wanted to do with test a number of different types of locations. So that we would have on good compares and contrasts to make sure that when we did decide.
To roll when and if we decided to roll that we would roll with great confidence So where we believe we're at the point right now where we have a good assessment of what on specific attributes tend to be more predictive of success and so we're feeling more confident about the potential as we evolve that relationship yes.
As in many of our stores, we of course ramp up in the holiday season. We saw you know good results from that with Walmart is wells across the organization with our Merry mission campaign as well as we saw as I noted in the prepared remarks on some of our movie properties did see start to show some better moment.
On the after we completed the third quarter call. So ours. So you know, we're really quite positive about where we're headed with Walmart as a total relationship because as the also noted they are inclusive of being a retail partner of ours. They are also our largest licensed partner so a lot of intersection.
With with the company.
And then the second question that you asked about the store count we haven't provided the specific guidance as we continue to be very aggressive as we continue to negotiate our leases. We do have as we mentioned over 70% of our leases coming up for a natural lease event over the next three years to be continue to work on.
Mitigating and reducing our of rent expense in those particular locations.
Our goal is as we have stated before to exit unprofitable stores during those times, but at the same time as we think about the store count and a number of occasions, we got to expand.
Our Horizon, then think about the number location has built a bread brand. This present, we also share that in our third party retail locations to be grew that number by 50%. So from 40 to 60 locations. So we do want to have our brand present in a variety of different.
Places and you know we are looking for more of these assets like models. If we can achieve them by the same time.
We don't want to make sure that we continued to run and operate a profitable portfolio stores.
Yeah, it's like the and.
Oh, I'm, sorry, Erik I, just wanted to say to add onto points comment.
We are in the business of expanding the consumer accessibility to have this and yes. It memorable experience that said as I noted in the remarks that is a tenet of our overarching strategy as we expand the brand into other categories into broader consumer basis. So.
We also as we are evolving and you may have noticed we dropped a salesforce a press release. This morning, a announcing the partnership that I also mentioned in her remarks on as we start to expand and drive into the digital economy, we're seeing a strong intersection between consumers that.
Matt shop, a in our stores and online and feel like that having that much more robust a view to our consumers and being able to create those journeys will will has the potential to build both our in store and online business and we started to see some of that type of momentum in the fourth quarter.
Interesting, okay, guys congrats on the quarter and good luck in 2001 thing.
Thank you thanks, so much.
Our next question comes from the line to Stephanie Wissink with Jefferies. Please proceed with your question.
Good morning, this is actually Hogan bumper stuff. Thanks for taking your question.
As a result, hi, the profit results were better than we had modeled can you talk about the biggest contributing factors to that improvement and then year to date comments around the business being up. We're a positive are you seeing the home entertainment window for frozen driving up chicken demand or is that related to some owned brand initiatives.
So I'll take the first question regarding the profit improvements so actually as you know from the.
Last year from the beginning of last fiscal year, we provided guidance that we expect to returning back to profitability invisible delivered on that the objective. It was the theme efforts throughout the year that help deliver.
Those results and it came in several different arena, so like as we talked about diversification of our revenue streams, which you've seen some really nice growth in our commercial revenue via you've seen us double digit growth in our E com business.
We continue to put a lot of focus on the rent reductions and the really leverage our occupancy cost.
That we were able to leverage with a small increase in total revenue for the year.
The did expand our merchandise margin that talks about to really.
Disciplines that theater and still in the business and managing Controllables that we talk about on a regular basis. So this is one of those things managing promotions managing costs. We continue to do that stuff across the organization and we are seeing things that are helping us deliver these results. In addition to these things that I mentioned.
Disciplined expense management was the key saw the whole year. The whole organization was focused on returning back to the profitability and I'm very pleased that we were able to achieved that goal.
Concerning your second question Ashley Yes, we are we have seen positive year to date results. It's actually a number of things that have contributed to that we had very strong valentines on top of a strong valentines prior year, whereas we've expanded not just for what we'd be we would call our constituents.
Additional types consumer our family consumer that focuses mainly on a younger child, we are expanding that valentines offering into adulthood, they'll gifting and has seen a lot success. There. We have seen early success for our Easter offer on so that's also contributing we also to your question about the.
Home Entertainment, we've seen some of these properties, particularly ones that we launched in later in the year. They have their very strong properties with long tail. So yes. The we have continued to see some some sales ah contribute to the overall increased associated with our movie properties and finally, I I have to mention that all.
No. It's not direct sales the is the impact of the child in the announcement of the child. The you know also known as baby Yoda associated with Star Wars manned Lorien theories on Disney plus.
Had increased interest in the brand 'em, we seen increased levels of retail traffic online traffic sign up for the child and generated.
Quite a few impression win during that launch.
Okay, great things sort of color and congrats on the quarter.
Thank you.
Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad are part of since you think speaker equipment, maybe necessary to pick up your handset before passing the start keys.
Our next question comes from the line of Hamid coarse sand with VW U.S. financial. Please proceed with your question.
Hi, Good morning, So first off I just wanted to follow up on your comments right now the increase that you've seen him Valentine Easter. So far is that mostly are predominantly coming from.
In line or is that in store.
It's both we're seeing increases in both but of course the majority of the sales are still in our stores.
And is there appears to when the child will be released.
Oh of course, you know, we we have not shared the specific date of the release of the child.
And my final question is are you seeing any impacting your supply chain as far as inventory goes and how are you able to meet all the good man with everything that's going on in the supply chain.
I like that going can add some color to this but I'll start I do want to note that you might have noticed in our remarks that we have seen a decrease in inventory I want to note that that was a plan to decrease in inventory and that is not related to anything with the supply chain as we're going forward.
Sure you're aware that we have diversified our factory base, but we still have a significant portion of our product that is made manufactured and ship from China. So the Chinese manufacturing facilities did not reopen until a few weeks after what would've been a natural.
I'll close your during the Chinese new year's period, and so there there are some delays, although we are right now as particularly as it relates to the child, we reconfigured a lot of our supply chain to move more into some of our Vietnam areas and we feel.
I like that we are starting to well actually know we started to see some flow whether it impacts us going forward. It really a is more related to how long this process.
Okay. Thank you.
Thank you there no further questions at this time I'd like to turn the call back over to Sharon for any closing remarks.
So thank you for joining us on todays call and we look forward to updating you on our first quarter results at the next earnings call.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.