Q2 2020 Earnings Call
Greetings and welcome to the Ascena retail group incorporated second quarter 2020 earnings call.
At this time, all participants Arnie listen only mode. A question answer session will follow the formal presentation.
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Ill now turn the conference over to your host Jean Fontana I see our please proceed.
Thank you good afternoon, and welcome to is seen as second quarter fiscal 2020 earnings call before we begin I'd like to remind you that certain statements and information made available on today's call may be deemed to constitute forward looking statements. These forward looking statements reflect the company's current expectation as of March 920, 20 and are subject to a number.
Known and unknown risks and uncertainties that could cause actual results to differ materially for factors that could cause actual results to differ from the forward looking statements discussed on today's call. Please see the risks and uncertainties identified under the heading risk factors and have seen as annual and quarterly reports filed with the FCC. The company undertakes no obligation to revise or update any forward looking.
These statements. Additionally, today's call them webcast may refer to non-GAAP financial measures reconciliation of GAAP to 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 form 8-K earlier today. Please refer to the for investors section that Ascena retail dot com for every player.
Today's conference call note that the company has posted a supplemental slide package to augment information provided on today's call on its IR website.
Catchment with AK released earlier today participating in today's call or Carrie Teffner interim executive Chair, Gary Muto, Chief Executive Officer, and Dan limit Dread Chief Financial Officer, Thank you and I'll now hand, the call over to carry.
Thanks, Eugene and thank you all for joining US. This afternoon, we're pleased to it the Liberty second quarter results that exceeded our earnings guidance, well, making progress on our commitment to simplify the business and focus on fewer and more meaningful initiative.
With respect to our portfolio review, we have made great progress. In addition to the sale of our majority interest in marine.
We successfully completed the wind down up the pro sports business in February in addition to closing all Dressbarn retail locations. The company resolve the associated liabilities and told the brand intellectual property assets costs incurred as part of the wind down not fully offset by favorable business performance since the announcement and proceeds from.
The idea that sale.
As it pertains to our brand review, we currently have no active conversations as such we're proceeding with a clear focus on our premium plus and kids segments by driving brand strategies, which ensure long term relevant and differentiation, while streamlining our bakken to improve efficiency and profitability our board and management.
Remain committed to taking proactive steps to position us. The you know for long term success, and we will continue to evaluate opportunities that create shareholder value.
As we indicated on the last earnings call. We continue to work on optimizing our balance sheet. As a reminder, in Q2, we repurchased $80 million a term loan for $49 million in cash subsequent to the second quarter, we opportunistically repurchased an additional $42 million a term loan for $29 million in cash.
I want to know how incredibly proud we our of our entire team as we navigate through what continues to be a challenging period for retail we have been laser focused on delivering on our strategic objective and serving our customers. We're moving forward on a clear path focused on fewer and more well defined priorities.
Before I conclude I want to express our sympathies for those who are affected by the Corona virus, our hearts go out to though.
Gary Dan will speak on the details as it relates to the impact to our business specifically.
We'll now turn it over to Gary who will discuss the business performance and go into more detail on our progress Gary.
Thanks, Kerry we're very pleased that our second quarter results have exceeded our operating income guidance for the third straight quarter.
As we get to make progress on our strategic objectives are operating income for the past her guidance due to both better than expected gross margin performance and continued cost reduction efforts across the business sales in comps were in line with our expectations. Despite a shortened and highly promotional holiday season.
We also remain disciplined in maintaining leaner inventory levels and ended the quarter down 5%. We are pleased with the first as a inventory at all brands.
Across our business or three priorities remain the same driving sustainable growth, improving operating margins and optimizing our capital structure.
We continue to work towards delivering sustainable growth by leveraging our customer analytics and insights.
Placing the customer at the center of everything we do.
Product, our customer experiences and our communication strategies continue to be led by these insights improving our ability to address our evolving lifestyle needs and engage with her in more meaningful ways.
Operating margin improvements remain our second key priority.
We believe there analytic and insight work will lead to an increase in full price selling enabling greater promotional discipline and result in an improved merchandise margin.
On the operating expense side, we continue to work towards delivering greater efficiency in our operating structure by Rightsizing teams and executing simplified standardized processes across the enterprise to improve profitability.
Our third key priority is to optimize the capital structure to best support a business objectives by prioritizing cash flow and maintaining financial flexibility.
I will address this further in his remarks.
Turning to our business segment in our plus business. The events. We have made in executing our key priorities are clearly reflected in our results as we have delivered sustained momentum across both top and bottom line.
Just as we were disappointed in our results and we are working aggressively to refinery bounce the assortment in order to improve our performance.
In our premium segment, we drove improved profitability and we could see to make progress in evolving the assortment.
Now I will provide more details let each segment.
Starting first with our plus segment.
We have made meaningful progress in executing on our strategy for the second quarter, we delivered a 7% positive comp while generating 90 basis points of gross margin expansion.
These results are linked to our strategy of leveraging our analytics and insights to ensure we delivered a right product right message at the right experience that makes a customer appeal her best.
And our process assortment, we reengineered certainty category and rebalanced, our offering for a modest fashion fit and problem solving based or no learning and she is responding favorably or technical innovation enables us to deliver the best fit for a customer which is critical to driving brandloyalty.
Performance during the quarter with led by strength in our category focused areas, including tops denim and dresses as both exhibit these categories have been re engineered and enhanced to rebalance the assortment for fashion fit and problem solving for spring, we continue to build on our successes with the right mix that core seasonal in fashion trends.
In terms of our promotional strategy, we continue to refine our price value relationship, which combined with our more compelling merchandise offering drove our gross margin expansion during the quarter.
We're also seeing success in our segmentation strategy, both digital marketing and email marketing campaigns. While we are in the early stages customer reactivation has been encouraging and we plan to continue to expand our segmentation initiatives.
In digital we have continued to test and learn alcohol timing and frequency of digital ads, you also improving or social media presence through expanded followers and brand building activities that are driving engagement.
Finally, we are leveraging the launch our multi tender loyalty program to target customer engagement and drive improvements in retention as well as encouraging customers to shop across multiple categories.
Enrollment and reward redemption in our loyalty program, while early continues to see expectation.
Moving to our kids segment at Justice, we wouldn't use fashion spawn and community disconnect between girls. We are the only specialty store that delivers this experience for the six to 12 Euro girl, which provides us with a unique market position.
As we have shared on our last earnings call Justice continues to experience significant traffic headwinds coupled with challenging product acceptance in our specialty offerings.
Which led to a disappointing negative 15 comp in the second quarter over the past few quarters, we stepped away from more authoritative merchandising point of view and scaled back categories that were historically customer acquisition drivers.
As a result, our assortment did not effectively aligned with our customers' preferences. We are in the process a building on the power of the justice Brad to rebuild and refiner assortment in messaging to best serve between girl. We also took aggressive action during the quarter to clear our holiday inventory to ensure we will better position heading into spring.
Overall, our goal is to improve our offering to attracting new when younger customer to the Brad while keeping her longer as she reaches that high end up our target age group, we understand that there are specific preferences across these different age groups as weve leveraged learnings from our data we will be better informed to execute our plenty of merchandising strategies.
In apparel based her insights we are focused on driving at attractive value proposition for our younger customer for older Girl, we're expanding our aspirational offering with collection ex while we still in the early stages involving our offering we are seeing positive early read.
And specialty where we've made some strategic decisions that hold back on low margin categories. We're selectively expanding in areas, where we can drive more consistency in our business, including room beauty in jewelry.
Marketing initiatives during the quarter leaned heavily into promotional messaging to move through our underperforming product.
Going forward, we are shifting our focus more on storytelling supported with brand appropriate promotions and we will continue to reinforce our club Justice loyalty program.
It will take time to return justice to growth.
As we continue to rebalance our Assortments, we believe we will drive more consistency and greater profitability in our business overtime.
Turning to our premium segment, which is our largest business, we delivered roughly flat comps against a 10% comp increase in the prior year period. This was the result of at 3% comp increase it and Taylor and a 1% comp decline at bought.
Importantly, we drove meaningful improvement in our profitability.
Moving first at Taylor, we were pleased with our performance as we continue to see positive response from our customer in key categories. We continue to shift our assortment towards work apparel that has versatility to fit our multi faceted lifestyle for the quarter. She responded to our diverse offering a fashion key items that took her from day to evening in sweaters.
We saw continued improvement as we better address or casual fashion needs.
Great. We will continue to balance our wear to work with casual offerings and hike our focus on fashion across our wobensmith and dress offerings.
Also building on the momentum by continued to enhance our important pet business with new silhouettes, which we know our key drivers of customer loyalty.
Our brand messaging, we'll continue to focus on addressing the bottom working women with personal product and not just wear to work as we continue to expand the brand to more end uses reflecting the shift towards cannibalization.
Moving onto loft, we're making progress on evolving our assortment, although we still have worked to do.
Our freedom Bob covers multiple end uses and putting outfitting and versatility at the center of the way we developed market merchandise products. This strategic shift is how we will grow this business for spring, we were placed greater emphasis on new trends across silhouettes fabrication and pattern as well is leveraging limited edition capsules.
Well, we started carting steps during the quarter, that's still fine tuning the assortment to meet her needs across more end uses.
Our marketing strategies for both and Taylor and walk for me focused on retaining our existing customers reengaging lapsed customers and acquiring new customers.
We saw a meaningful turn around how to add Taylor and continued improvement have bought during the quarter.
That would change the remains the foundation of our personalization efforts, we are accelerating our segmentation work across digital channels to drive traffic to our sites indoors.
During the quarter, we began to see the early successes of segmentation of our email campaigns.
This accounted for 40% and 50% of and tell them off email, respectively, and we will continue to enhance our personalization efforts as we move through the balance of the year.
Lastly, our multi tender loyalty program continues to see strong enrollment and redemption rates. While still early we are encouraged by the response to our program to date in summary, we continue to build on our data and insights strategies across all segments in order to create a more predictable and profitable business model overtime.
So in the various stages of our transformation, we remain confident that the work we're doing tupperware brands forward will position us to ultimately deliver double digit EBITDA margin and enhanced shareholder value.
Before I turn the call over to Dan I'd like to spend a moment discussing the krona virus.
First and foremost our thoughts and prayers are with those have been impacted by the virus. Our main priorities the safety of our associates, our customers and our suppliers.
For a business standpoint, we are actively monitoring the situation certain facilities with manufactured products to the company have experience interruptions and are closures of operation as a result at the current a virus as of today. All factors are have reopened at varying levels of productivity and we are aggressively working with the manufacturing partners to mitigate the impact of any delays.
To the extent possible. However, a portion of a receipts for the fourth quarter are expected to be impact and we will continue to closely monitor this rapidly evolving situation.
Let me now turn the call over to Dan to 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 non cash impairment charges of goodwill and other intangible assets reported in the quarter.
Dressbarn results have been moved to discontinued operations will be excluded from my review of our financial results.
It's Carey mentioned, we're very pleased has completed the wind down of Dressbarn.
Our liquidation began in November 1st and proceeded as we expected cumulative cost incurred as part of the wind down of approximately $60 million were offset by favorable performance since the announcement.
As well as the sale of Dressbarn intellectual property assets.
As always we have posted a supplemental earnings package on our Investor Relations website and attached to our 8-K to provide reconciliations and additional information on these items.
Turning to our second quarter results.
We exceeded our operating income guidance as a result, a better than anticipated gross margin performance and continued execution of our cost savings initiatives.
A reminder, or guidance exclude addressable.
Total revenue from continuing operations for the second quarter was $1.217 billion, a 4.3% decrease as compared to prior year and total comp sales for the quarter were down 2% to last year, which is consistent with our guidance.
The comp decline was the result of at 15% decline in our kids business, where we are aggressively working to improve performance.
This decline was largely offset by 7% increase in comparable sales in our plus segment as or initiatives continue to gain traction.
And our premium business the comp was flat and as a reminder, or premium segment was up against strong comp sales performance in the prior year quarter.
Our gross margin was 52.2% up 30 basis points compared to the same period last year and ahead of our guidance. The gross margin rate improvement was driven by reduced promotional activity in both our plus and premium segments.
Partially offset by increased promotions and markdowns at Justice.
Operating expenses improved 5.9% in the quarter versus last year, excluding restructuring costs.
The decrease in operating expenses was largely attributable to our cost reduction initiatives, including lower occupancy in store related expenses reduced head count and non merchandise procurement savings as well as reductions related to the shared service agreement with Maurices.
As a result, our adjusted operating loss for the second quarter fiscal 2020 was $30.5 million compared to an operating loss of 50.4 million in a year ago period.
Consistent with our ongoing store optimization strategy, we close 55 stores during the quarter total store count for Sina at quarter end was 2764.
Turning to our balance sheet.
Ended the quarter with $374 million in cash and equivalents, reflecting our continued strong cash position and ongoing disciplined approach to managing our inventory levels, which were down 5.3% this quarter compared to the prior year.
Our priority remains to drive profitability in our business, we're carefully managing inventory levels to protect gross margin as well as brand equity.
At the same time, you're focused on reducing costs across the business.
That's for liquidity, we remain in a healthy position together with our cash balance we ended the quarter with over $620 million and available liquidity.
Capital expenditures for the quarter was $17 million down from 30 million in the per year.
Another quarter end long term debt stood at $1.292 billion, reflecting the balance of our terminal.
As Carey mentioned previously during the quarter, we repurchased $80 million of debt in the open market for 49 million in cash.
Subsequent to quarter end, we also repurchased an additional 42 million of dead in the open market for 29 million a cash.
The term loan matures in August 2022, and our next amortization payment of 22 and a half million 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 I wanted to update you on a couple of items.
Tariffs as we stated last quarter, we are negotiating whatever vendors to share the higher costs, we're selectively increasing prices, where we believe we had the flexibility.
Guidance accounts for the expected impact for tears.
Regarding the Corona virus I echo carrying Gary's comments that our thoughts go out so all those that have been impacted.
We are monitoring the situation closely.
Customer behavior may be impacted as the situation develops. This in addition to the potential supply chain disruptions that Gary mentioned May result in an adverse effect on our financial performance that we are unable to estimate at this time and therefore is not reflected in our guidance.
Turning to guidance our outlook for the third quarter reflects current trends as well as our outlook for the remainder of the quarter.
With that backdrop for third quarter, we expect net sales of 1.050 billion to 1.080 billion as compared to 1.088 billion in a third quarter fiscal 19, reflecting a reduction in store count and a low single digit decline in comparable sales.
Gross margin rate to be between 57.8% to 58.3% as compared to 57.6% in the third quarter fiscal 2019.
Depreciation and amortization of approximately 60 million.
And adjusted operating loss of 10 million to $30 million as compared to an adjusted operating loss of 66 million and the same period last year.
For the full year, we continue to expect Capex between 80 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 on rightsizing, our cost structure to better align with the scale of our go forward business, we're gaining traction in achieving our targeted $150 million of cost savings that we previously communicated the bulk of which we are realizing this fiscal year.
Through a combination of achieving these savings goals rationalizing 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 conduct a question answer session.
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One moment, while we pull first question.
Our first question comes from Dana Telsey with Telsey Advisory. Please proceed with your question.
Good afternoon, everyone.
Yeah, I would love to get some more color on the segmentation strategy in.
At Ann Taylor with that would wear to work merchandise and what you're seeing there in terms of the progress and what we should look for going forward.
Then Kerry we talk a little bit about Dan the share buyback in the progress on that and any update on the portfolio review that's underway. Thank you.
Okay Dana regarding the segmentation.
As we said in our prepared remarks, or I said in our prepared remarks about 40% of or E mail, our segmented and you know we're looking at everything from occasion use to age segmentation to propensity to.
Dubai certain categories, and we're actually seeing some very very encouraging results.
Intel has been AFE is for a while up to continue to.
Really evolved the assortment to really be more about her everyday life.
And we're starting to see some nice progress I would say, especially in our bottoms business.
We have very very strong equity in that business and we continue to leverage the segmentation to continue to grow that business.
And Dan as stand regarding your question on share buybacks, it's going imagine we're constantly reviewing all of our options. However, as we've said in the past given the leverage on our balance sheet. Our priority is optimizing the balance sheet and also our capital structure.
And then I'll take the last question Dana with respect to the portfolio review as we've talked about since last spring around the time that we exited our value segment with the sale of our majority interest at Maurices as well as the announced wind down of Dressbarn, we continue to evaluate our brands as others as well as other portfolio asset specific to the.
Brand review.
Where we are right now as we have no active discussions underway and were proceeding with a clear focus on all three of our segments premium plus and Kid and we're really focused on just.
Gary laid out on the call focusing on the brand strategies, making sure were relevant differentiated and the comment to that Dan is made with respect to cost savings as consistent as really streamlining our back end to improve efficiency and profitability that said I want to also be very clear that our board and our management team our remained.
Committed to taking proactive steps to position Sina for the long term and drive shareholder value and so we continue evaluate opportunities that will do that.
Thank you.
Thanks Dana.
Our next question comes from Marni Shapiro with retail tracker. Please proceed with the question.
Hey, guys really nice progress on that and Taylor and Lane Bryant, both source of looked really focus very easy to shop.
Can you talk a little bit about krona virus I'm specifically.
Can you talk about the impact on your supply chain and then can you also talk as it's spreading across the U.S. and I was in them all last week and <unk> well I'm starting to feel it in them. All already can you talk about what you factored in to from your perspective into sales for the upcoming lets say quarter next quarter as well.
Okay. My I'll take that it's Gary you know as you said.
During the earnings call.
Regarding the supply chain.
Our factories as of last week or up and running.
Varying degrees of productivity and our sourcing teams are monitoring it every day.
We.
Project that we will have some impact really in our Q4, so really that may.
The floor set dates relatively small in comparison, we've continue to migrate out of China of course, the last year year and a half, but there's certain categories that were highly depended on primarily more the accessory categories.
As far as the U.S. I think we all recognize that.
How this will impact the consumer is is I think we're it's uncertain. There's uncertainty right now that said we are monitoring very closely the areas that have been in step.
I have been impacted.
The greatest.
And you know and we do believe that we feel that our guidance back yeah, we feel good about where our guidance. It that said, we're about almost halfway through the quarter.
Yeah. When you look at our portfolio, we have a very diversified portfolio about 34%. Our four portfolio sits in mall. So were not as highly dependent on laws. As I think everyone believes we are I think the other thing too is we have strong omni channel capabilities that we will continue to leverage and we feel.
Coupled with our positioning as as as it stands today.
That makes us feel so just diving a little bit on justice.
Because some of the product has looked very good, particularly this spring there's been a few things that have hit the floor. It looked outstanding you said you wanted to there were some categories that you walked away from that you were looking to revisit or rebuild and then can you talk about some of the categories that to me have always been no kind of like the bones and.
The most of the bread and butter for Justice like you guys are known for your Swimwear every mom know she can go there for swimwear and for the first from panties and for Sleepwear and for great shorts that she can wear to camp. So can you talk about.
Are those some of those categories can you just talk about what were your thoughts out category wise, yes. Good morning, I'd be happy too as you know Justice really has yeah. We divide the business. It's like two groups does the apparel business and then there was a specialty business I.
I would say the apparel business, we recognize it out for a while that we had some opportunities and the team has been working very aggressively to continue to fine tune. The assortment, we introduce kind of a good better best strategy with good meeting our opening price point really geared more towards playwear, a slightly younger customer we also introduced color.
Actually an x. last fall I'm in a more meaningful way.
A higher price point of the older aesthetic.
So those.
Both of those categories have performed well our opportunity to parent really sit to that middle which is really what justice was known for and we're starting to see some sequential improvement as we move through our Q2.
And Q3 of this this past quarter. So I feel apparel is headed on a better path and we also actually had a very very strong bottoms business.
On that fees however.
Well the opportunity really fits into specialty part of the business and the specialty part makes up a myriad of product. So it makes up those categories. You just mentioned, albeit submits when sleepwear as well as some parts of categories toys room beauty I would say we're opportunity set to go to.
The toy and the room business we.
Strategically.
Scaled back on on room for a whole host of reasons last year.
We did not like with margin profile.
There was enough do we believe it was an opportunity to kind of rightsize that business interestingly enough. When used we really started today again that is a great acquisition of customer.
But.
Justice needs.
Always replenish their client file offline another brand he basically at the customer for yes, you're lucky.
For this year, so yes, there's opportunity for us to react to that business I think little girls still.
Decorate their room through whether its stuffed animals or pillows on the toy business I think everyone kind of recognize that it really wasn't a huge toy season, but thats a great acquisition driving she was also drives traffic.
Looking at these other categories like.
When you know we're just going into this is when season I'm. So excited too early to tell and we believe we have an opportunity to really grow the intimate business and we'd be that definition so between girl.
That's fantastic and its beauty falls into this category as well you said duty falls into that category also we relaunched duty last August.
We have seen nice results, we have more opportunity there and the teams are aggressively working on bringing that to fruition.
Fantastic Thanks, guys.
Yes. Thank you at this time I would like to turn the call back over to get little for closing comments.
All right I'd like to thank everyone for joining us today, and we look forward to update you guys getting next quarter on our results. Thanks.
Thank you. This does concludes today's teleconference. You may disconnect your lines at this time it. Thank you for your participation.