Q1 2020 Francesca's Holdings Corp Earnings Call

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Thanks, and good morning, everyone. We appreciate your participation. This morning in Francesco <unk> first quarter 2020 conference call earlier today, we issued a press release discussing our Cobiz 19 update in select preliminary financial results for the quarter ended may 2nd 2020.

Please note. The following discussion includes forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

All statements other than statements of historical fact included in today's discussions that address activities event or development that the company expects believes the target or anticipate wheel or may occur in the future are forward looking statement.

The Companys actual results may differ materially from those projected in the forward looking statements as a result of certain risks or other factors, including those risk factors set forth in the company's form 10-K in quarterly reports on form 10-Q filed with the Securities and Exchange Commission.

All such statements speak only as of the date made in except as required by law. The company undertakes no obligation to update or revise any forward looking statements whether as a result of new information future events or otherwise as usual a replay of today's conference call will be posted on our corporate website, we will begin.

In today's call with comments from our CEO, Andrew Clark I'll now turn the call over to Andrew.

Thank you Sandy.

Good morning, everyone and thank you for joining us for our first quarter earnings call I Hope you're on your loved ones remain say from well.

These are certainly challenging times.

That's the events of the cost few weeks of unfolded.

Any of us saddened by what is occurring in our society today.

It is clear we should all be doing better to address the discrimination in our communities.

We acknowledge that we do not have already ounces, but we're proud to recognize that 5000 team members are vibrant diverse group of individuals and by listening to them, we hope to craft a broader set of initiatives to build an even more supportive accepting and diverse set of company values.

To enhance and expand our company's emphasis on diversity and inclusion we're creating a friend divest council that will be made up of team members from across the organization.

The council work shape, social and cultural strategy for our company site showcases diversity and inclusion that's one of that coupon.

This program reflects our collective design to continue to evolve our practices as an employer and brand as a retailer to promote racial quality.

Now I'd like to turn to outperformance in the first quarter in recent weeks.

Since we spoke in the beginning of my we have continued to see bright spot cannot business driven by new strategies, but we have been testing and scaling.

We remain pleased with the performance in <unk> E Commerce business and are encouraged by the results in boutiques that we have reopened.

We've also taken measures to improve liquidity by driving sales monetizing existing inventory.

Personally reducing costs and managing cash flows, which together with differing rent and vendor payment enabled us to increase our cash position to approximately $21 million as of June 12 2020.

These accomplishments have not only increased my confidence that we will surface from this challenging period, but reinforced my optimism about the long term potential francescas.

I want to thank our associates across the organization has that continued commitment and hard work.

And both grateful I'm proud of the team.

While acknowledging we still have a lot of work today.

Oh five priorities remain one safeguarding our people.

To driving sales a monetizing existing inventory through our E Commerce channel Riocan boutiques.

Great safely reopening the remainder of RBC.

Well.

Providing a customer centric broad end use assortment with consistent newness.

Hi, controlling expenses and preserving cash.

Bust safeguarding our people.

As part of the decisions, we made since the onset of because it 19 pandemic, we took steps to protect the health and safety about people.

We swiftly shifted to work from home in March with no change to the productivity and collaboration demonstrate to planting and we have navigated through this crisis in the most efficient way possible.

We've also taken measures to maintain tissue distancing and sanitize that distribution centers and more recently I boutiques.

Second.

Driving sales on monetizing existing inventory through our ecommerce channel Andrea can boutiques.

As we said last quarter, our E Commerce sales grew 85% on a year over year basis from the beginning of the store closure period through April 30.

Conversion rates trended higher well she visited us more frequently and she was spending more with each visit.

We've also seen great new customers and customers coming to shop with online who have previously shop to only in store.

During shelter in place a buying trends were focused on top beauty.

<unk> accessories and entertainment.

Evidently she has been purchasing items geared toward a virtual way of life, well Uh huh.

We began to increase segmentation strategies in our marketing communication and emphasized these categories. During this period, which we believe contributed to our strong equal mask right.

Well, we sold momentum in our E commerce business well not boutiques were closed its performance.

Decelerated as we reopened the majority of boutiques.

This is largely expected and we remain pleased with the solid performance. We're currently seeing in this channel.

As consumer behavior shifted online I'm proud of the team's ability to keep pace with the unprecedented fully generated through our ecommerce site.

Surgeons sales during the store closure period demonstrated the untapped potential of this channel.

As we continue to cross the future Francescas there is a focus on enhancing our omni channel capabilities.

Secondly through re platforming, our E commerce site to support greater scale.

Similarly, we are launching a mobile app in July enabling us to increase accessibility to our brand and continue to accelerate demand among the 18 to 24 year old demographic.

We plan to high a dedicated head of equal math to lead our digital efforts.

The enhancement of our omni channel capabilities is key as we work to supplement our boutiques with a powerful digital strategy and we look forward to updating you on our progress.

Good.

Safely reopening out boutiques.

Subsequent to the end of the first quarter, we began to reopen boutiques that had been temporarily closed since the middle of March.

Currently approximately 85% of I boutiques have reopened.

First and foremost, we're taking added health and safety precautions inline with CDC guidelines to protect our employees and customers.

These include requiring store associates to wear masks sanitizing boutiques, providing hand, sanitizer to customers and enforcing social distancing <unk> guidelines.

Encouragingly the initial results in the reopened boutiques have been better than expected, albeit at high promotional levels.

Well the ramp up has varied across regions on average retail sales are running at similar levels to the same prior year period.

A significant increase in conversion and average units per transaction, indicating acceptance promotional an engagement strategies and offsetting.

Negative traffic trends.

Well, we are currently operating it's an elevated promotional cadence, which we expect to pressure merchandise margin in the second quarter, we all tightening up inventory levels and enhancing liquidity to support our emergence from this crisis.

As we monetize our existing inventory, we also delivering newness into our stores.

These deliveries will be merchandise with current inventory to create an out 15 point of view from customers.

As I mentioned on our last call I boutiques provide abroad and juice assortment that is curated a much in dive to enable outfitting while at the same time offering a treasure hunt experience to our customers.

Layering this with a strong find value proposition. We believe we have a compelling business model and then opportunity to grow our share of wallet.

Paul as we capitalize on our market positioning we continue to evolve business into a customer centric organization.

We are leveraging customer insights gained from digital channels to shape out assortment and marketing strategies.

When it's a great just differentiators of our business model is our ability to read and react customers purchasing behavior and fashion trends.

As short lead times enable us to react quickly to customer demand and we are unencumbered by food supply, leaving open to buy available.

The customer feedback we recently received from digital channels helped us gain a better understanding of what items. She was looking for a shelter in place orders were being lifted.

Our results validate it that she is coming to us the fashion she emerges from her virtual world back into society.

She is looking forward to going out with friends dating I'm returning to her workplace and once you outfits to celebrate.

In response to this we launched a new assortment of dresses <unk> very well received with my style selling out within a few days.

This was particularly encouraging as this tells US she will purchase product she likes and he's not solely driven by promotions.

To support I read and react approach, we recently made some changes to our buying and merchandising organization.

We reduced the lies in the teams to enable more collaborative approach that will speed up decision, making I didn't show that our multiple categories worked together to create a cohesive outfitting proposition.

We appointed a new SVP of merchandising experienced in women's fast fashion models to lead this effort and ensure the right balance of presenting our customer where the point of view.

We will continue to reduce the mix of commodity basics in our school and leading towards more fashion pieces, while reducing skew count overall.

This does not mean fewer choices in fact, we believe we have an opportunity to broaden our customer payable by providing a customer with more variety.

A great example of this is illustrated in our dress assortment, where we previously off off the two silhouette in a variety of colors and patterns.

We've increased our options to five distinct styles with varying silhouette from which customers countries.

We also relining more closely with fewer vendors to advance the strategy and we're pleased with the cost efficiencies, we are able to achieve with fewer partners.

We are currently flowing you receipts online and to reopened boutiques to ensure we meet customer customer demand with fresh inventory.

In addition, we see opportunity to optimize our vendor relationships to capitalize on excess inventory in the supply chain for the second and third quarter.

As we work back towards delivering a constant flow of new product, we will shift on messaging to fashion, new arrivals and most wanted items.

And reduced promotional messaging.

Number five.

Given the volatility and icon environment, I priorities remain disciplined cost controls and cash generation.

We're in discussions with our vendor partners on payment.

We're also working with our landlords regarding the deferral I'm reduction of rent payments.

Lastly, we will continue efforts to maximize working capital by adopting a more disciplined approach to managing inventory and we are strengthening our leadership team in this critical function of expertise.

Overall, we're optimistic about our future as we execute a differentiated business model.

We will play to our strength in providing a read and react approach to delivering great fashion and the strong value proposition, while being able to adopt <unk> unpredictable traffic trends.

We will continue to capitalize on I boutique presence, which offers a differentiated local store, but with the treasure Hunt experience.

And we'll still in the early innings of leveraging the opportunity and I E Commerce channel.

With that I'll turn the call over to Cindy to review, our first quarter results.

Thanks, Andrew our discussion today will primarily focus on a review of our select preliminary first quarter 2020 financial and operating with all.

These preliminary results are subject to change upon completion of our financial closing procedures and do not include the impact of noncash long lived asset impairment charges, including the related income tax effect, which are expected to have a material impact on the company's reported result, I encourage you all to refer to our press release issued.

This morning for a reconciliation of our GAAP results to the adjusted result.

Net sales for the first quarter decreased 50% to 43.8 million compared to 87.1 million in the first quarter last year due to mandated BT closures beginning on March 25th as a result at the Cobot 19 pandemic.

We began reopening boutique on April Thirtyth, 2020, incompliance with local guidelines in with reduced operating hours in capacity.

This decrease was partially offset by strong performance in our ecommerce business. Following a total shifts in our effort.

The quite to March 25th 2020 toward driving ecommerce sales, while our boutique were temporarily closed.

The growth in ecommerce sales was driven by significantly higher conversion and average unit per transaction, indicating positive acceptance of our promotional and engagement strategies offset by reduced traffic.

Andrew discussed during his remarks, we are benefiting from several strategies in this channel, which we will continue to evolve and build upon due the next several quarters.

Gross loss as a percentage of sales for the period was 6.6% versus a gross profit margin of 34.8% in the prior year. This unfavorable variance was due to de leverage in occupancy costs. As a result of lower sales as we expensed full occupancy costs despite that.

The t. closures.

Additionally, merchandise margin decrease due to aggressive mark downs in promotions as well as increased inventory reserve, resulting from the impact of the cobot 19 pandemic.

During the first quarter, we continue to move our excess inventory on our ecommerce site in successfully reduced our inventory levels in the channel by 53%.

Given the mandated BT closure related to the Kobe 19 endemic declaring a seasonal inventory in our BT will extend through the second quarter and we expect to see significant margin pressure as a result.

<unk> expenses decreased 15 million or 38% to 25 million from 40 million in the prior year quarter adjusted EPS in a in the first quarter fiscal 2019 was 38 million in excludes 1.2 million of consulting expenses, especially.

It is with the company's review of strategic and financial alternatives in the turnaround plan 1.1 million in severance benefits and other payroll costs also associated with the turnaround plan and point Threemillion of stock based compensation reversal associated with the departure of certain employees.

The $13 million decrease in S. DNA versus adjusted EPS DNA in the comparable prior year period was primarily due to a 10.7 million dollar reduction in B T. In corporate payroll costs as a result at the temporary furlough of substantially all of the company's employees a point $9 million.

Decrease in B T in corporate bonus expense and point $6 million decrease in professional fees.

Turning to the balance sheet. We ended the first quarter of 2020 with 14.3 million in cash and cash equivalent compared to 17.5 million at the ended the first quarter last year as of May 2nd 2020, our outstanding debt with 15 million in combined borrowing availability with 3.1 million.

Under our credit facilities.

Inventory on hand at the end of the first quarter was 34.8 million an increase of 8% as compared to the end of the first quarter last year.

Average inventory per boutique was up 11%.

This increase was primarily due to temporary beauty closures, which was exacerbated by the fact that we began the year with excess inventory.

As Andrew mentioned, we were able to significantly reduce our E commerce inventory levels dream to store closure period as the team every open we were able to reduce inventory levels down 9.5% from the end of April to the end of May.

Our primary focus will be to continue to reduce inventory levels as well as leverage our flexible supply chain by working with our vendors to appropriately aligned inventory with demand as the emerged from this crisis.

Our capital expenditures at the ended the quarter totaled 2.5 million comprised of point 2 million for new boutiques in point Threemillion for beauty relocation started prior to the kind of at 19 outbreak.

During the first quarter, we closed eight boutiques, bringing the total BT count to 703 at the end of the quarter, consisting of 341 malls and 362 non mall locations of which 91 our outlet BT.

Now for our 'cause it Nike update as we mentioned on our fourth quarter earnings call. We began reopening BT on April Thirtyth, where local shut down orders have been lifted as of June 12, 2028 total of 593 BT have reopened although the majority of them are operating at reduced capacity.

And operating hours in accordance with local regulation.

As our B T. Three open we are seeing consumer shopping shift back to our beauty.

So far we are seeing increases in conversion rate, an average unit per transaction largely offset declines in traffic.

We will continue to monitor and react to changes in traffic trends in shopping behavior in conjunction with sex boutique reopening more than half of all furlough corporate and boutique employees had been recall.

We plan to continue to reopen in recall furloughed employees as local mandates are lifted.

All boutiques will strictly adhere to CDC recommendation in local regulation to protect the health and safety of its sales associates and customers.

Additionally, as of June 12, 2020, our E Commerce and distribution facility continue to operate at reduced capacity.

As a result, as the cobot 19 pandemic. The Companys revenue results of operation in cash flows continue to be materially adversely impacted and as previously disclosed. This continues to raise substantial doubt about its ability to continue as a going concern.

Our main priority now is building liquidity in preserving cash to manage through this crisis.

To that and we continue to take aggressive and prudent actions to reduce expenses and defer vendor payments in rent where possible as Andrew mentioned, we are currently in discussions with our landlords to abate or defer rent payments during the temporary BT closure period.

I think gene 12, 2020, our cash and cash equivalents totaled approximately 21 million and we have no borrowing base availability under our ABL credit facility.

We expect to receive an income tax refund of 10.7 million related to the provisions under the cares Act during the second quarter fiscal year 2020. This refund is required to be used to repay the $5 million outstanding borrowings along with any other then outstanding borrowings under our ABL credit facility.

In accordance with the letter agreement between Us and our lenders.

As a result, as they continued uncertainty related to the cobot 19 situation, we are not providing guidance at this time.

This concludes the financial review and I'll now turn the call back over to Andrey for his closing remarks.

Thank you Cindy.

In closing I want to thank our employees for their hard work during this crisis as well as the customers who continue to show pop rhymed, we look forward to sharing updates when I go full plant in the future. Thank you feel time today.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.