Q2 2020 Francesca's Holdings Corp Earnings Call

In quarter 20, <unk> earnings conference call.

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Please note this conference is being recorded.

I'll now turn the conference over to Cindy, Tennessee to begin thinking sales.

And good morning, everyone. We appreciate your participation this morning, and Francesca second quarter 2020 conference call earlier today, we issued a press release announcing our second quarter financial results and exploration of strategic initiatives. Please.

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 events or developments that the company expects believes targets or anticipate will or.

May occur in the future are forward looking statements that comes.

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, and quarterly report on form 10-Q filed with the Securities and Exchange Commission.

All such statements speak only as of the date made and 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.

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

Thanks Cindy.

Good morning, and thank you for joining us for our second quarter earnings call.

The challenges created by Cabot, 19%, we continued to control what is within our control in order to navigate through this difficult period.

As such we are managing our business to whether its a short term headwind. That's one is advancing the strategies, we have put in place to drive long term growth.

Our near term priorities have been focused on.

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Safety of our employees and customers.

We continue to it it's a health and safety standards.

The measures we began to employ in March in our corporate office distribution centers, and our boutiques Oh still in place today.

Our corporate teams all slowly coming back to the office under strict guidelines to protect their wellbeing, including temperature checks social distancing.

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Second we continue to drive sales and monetize inventory through our E commerce business as well as reopened boutiques.

E Commerce sales grew 27% over last year in the second quarter.

Inventory at the end of the quarter was down 26% over last year.

We held a clearance sales the last week of July that helped us to end the quarter with substantially reduced clearance inventory.

Quinlan to 45% less versus the same period last year.

This leaves us in a healthy inventory position to start the new season.

With the continuation of work from home as well as schools from home. This fall we are leveraging our rapid supply chain to lean into categories that align with our customers' current lifestyle.

Well I will speak to shortly.

Hi, good the sustainability of our business as we continue to navigate through the pandemic.

We remain maniacal focus on controlling costs.

Managing inventory and protecting our cash.

We are reducing non critical spending while continuing to work with vendors and landlords on payment terms.

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The safe reopening of topically.

We ended the quarter with 671 boutique three items, reflecting the replay merger of 29 boutiques in California due to the rising kind of big cases that.

The performance of our Riocan boutiques, largely aligned with the severity of the continent, and therefore, we are seeing a wide range of traffic trends across markets.

While traffic remains challenging generally we are encouraged by the improving conversion rates and are you all driven by a positive response to the new assortment, which is selling through less discounted right then I spring summer offerings.

Turning now to our strategy.

Our customer centric approach remains the foundation of everything we do in terms of both near term and long term strategies.

Beginning with product.

The agility of our business model is enabling us to quickly react to our customers preferences with the right products and exceptional value.

Leveraging a demand driven sourcing model, we are pivoting, our assortment to styles and categories that align with our customers' current mindset and activities.

We know the buy now wear now is more important than ever.

With loungewear, new tops graphic Tees, comfy buttons, such as leggings and joke is driving more recent apparel sales.

With a shift in mindset towards casualization, we ramped up our casual pants business, which has proven to be the right strategy as we complement that with an enhanced casual fashion tops assortment that is resonating with customers and driving higher U.P. teas for ease of outfitting.

Opportunities.

Outside of apparel footwear, including Slippers. In addition to beauty products and a new category of conversion related products, such as masks blue light classes and hand sanitizer all the categories. She is most favorably responding to.

These categories are great. Examples of how we can quickly adjust I'm not sure <unk> offering to meet the needs of our customers and drive strong conversion.

Before we will continue to lean into these high demands categories. As she continues to prefer a more casual styles.

We have successfully tested a lounge wear assortment as we know this is becoming a more important component that's her wardrobe and we want to grow our share but her closet.

The team is chasing into this category based on strong initial results.

In addition to driving greater demand among our existing customers, we see opportunity to expand our reach due to the disruption in the marketplace.

We have proven our ability to attract a younger customer to francescas evidenced by the double digit growth in new customers during the quarter driven primarily by this demographic.

This fall, we will be testing, a small assortment tween products online and through our soon to launch.

As well as extending assigned suffering online.

While we are excited to see evidence of our ability to expand our reach we remain devoted to try coal customers.

We know the style she loves and we will continue to update these looks to refresh across it on a per head to toe merchandise auction.

We have seen positive response to our merchandising strategies and we'll continue to use data to inform our merchandising decisions going forward.

Turning to our marketing strategy, we are taking a more localized approach than we have in the past.

One of the differentiating attributes of Francescas is a small store format.

The project a local boutiques acetic, despite having a national presence.

As such we want to create more segmented messaging as opposed to a one size fits all noise.

We have a database of 2.6 million customers and we will advance our data analytics capabilities to create messaging that speaks to different customers. According to geography demographic and channel preference to drive higher engagement.

We have been trialing localized marketing and promotional strategies during the quarter to align with demand by market.

We are also amplifying our brand messaging and social media brand.

Brian Inclusivity will be a brand feature wasn't throughout our Assortments and marketing communication and is a core value a corporate culture.

We recently enhanced our efforts on the slots appoint establishing an associate diversity and inclusion council, which is actively engaged in helping us shape, our future brand and company strategies.

And the last month of the second quarter and into the third quarter, we had decidedly pulled back on promotions as we have played a large portion of our aged inventory.

Well this has impacted our top line given the aggressive promotional environment.

Gross profit dollars and margin rate improved for this period.

While we recognize that we have to be responsive to the promotional environment. We are challenging ourselves to maintain a less aggressive stance as new product Assortments are now flowing to the boutiques and online on a weekly basis.

Turning to our boutiques.

Given that social distancing in a 1400 square foot store is a challenge without a doubt it is even more important that we optimize the boutique experience for I guess.

We will continue to focus on delivering a broad end use assortment with head to toe options that delight and excited.

With the traffic trends still significantly below last year. It is even more important that we drive conversion.

We remain laser focused on enhancing her omni channel experience.

We were very pleased with the performance of our E Commerce business during the store closure period, and we continue to pursue ways to enhance our online experience with us both from a presentation and functionality perspective.

With the completion of the re platforming of our E. Commerce site, we will be able to further advance our omni channel capabilities.

We currently expect to launch our mobile apps by the end of October to elevate a smartphone experience well.

Well. This is slightly later than we initially planned we won't have to enjoy a consistent and seamless experience. However, she chooses to shop with us we have.

We've had to play a bit of catch up in this area, but we feel really good about the path we are on and the trajectory of this business.

In the second quarter.

74% of online customers were new to Francescas.

As a team to brand for the first time through E Commerce.

In addition, 67% of our E commerce purchases are being made by existing customers from our boutique channel who had not previously shopped us online.

This remains encouraging as I've previously said as customers, who shop multiple channels typically spend more than customers, who shop a single China.

In conclusion, we recognize the retail environment remains extremely challenged by the 'cause it pandemic, creating traffic pressures and highly aggressive promotions.

While we have taken important steps to advance our strategic initiatives. We are operating within what continues to be an unprecedented and extremely challenging environment.

As such we believe it is in the best interest of our shareholders to explore a variety of potential strategic alternatives.

With the support of third party consultants, we will be evaluating a number of alternatives and we'll provide an update once it is deemed appropriate to do so.

While we cannot control many factors in this situation I am proud of our team's efforts and leveraging the agility of our business model broadening our customer reach enhancing our omni channel experience and developing creative ways to capture opportunities through the market disruption.

Cash preservation remains Paramount in the near term.

Given the continued advancements we are making on the aforementioned strategies, we have in place our unique business model and the market share opportunities, we see stemming from the disruption within the <unk> power retail space. We are optimistic about the long term growth opportunities the francescas.

I would like to turn it over to Cindy for financial review.

Thanks Sanjay.

Net sales for the second quarter decreased 29% to 75.7 million compared to 106 million in the second quarter last year due to the temporary closure of RBC and soft traffic trends in reopened boutiques as a result at the 'cause it 19 pandemic.

As of September 4th 2020, only nine boutiques are still temporarily close yes.

But partially offset by an increase in ecommerce sales, which were driven by strong conversion rate, partially offset by a decrease in average unit retail as a result of aggressive markdowns and promotions.

Comparable sales declines moderated to a decrease of 5% versus the comparable prior period in determining comparable sales change sales for the period during which a boutique was temporary closed for four or more days ever we were excluded.

In terms of performance by merchandise category Yep was our strongest category with comparable sales increasing although total sales decrease primarily driven by entertainment and candles ups.

Apparel sales declined due to weakness in spring fashion tops and skirt, but was partially offset by continued strength in dresses Joe.

Jewelry sales declined with the decrease in all subcategories, which we attribute to stay at home order in most parts of the country.

Accessory sales decreased due to a decline in hair and sunglasses, partially offset by an increase in handbags.

Gross profit as a percentage of sales for the period was 17.5% compared to 38.2% in the prior year. This unfavorable variance was primarily due to lower merchandise margin related to aggressive markdowns and promotions in order to move through aged inventory entity during the temporary closure.

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If new merchandise flows into our boutiques, we have been less promotional and therefore expect merchandise margins to sequentially improve in the second half of the year.

Additionally, occupancy costs de Levered as a result of lower sales that was partially offset by a decrease in lease and depreciation expenses, primarily due to prior year asset impairment charges, our lease expense for the quarter included $1.2 million reduction related to early lease termination.

Triggered by kick out provisions as well as posted 19 related lease abatements received from certain landlords.

<unk> expenses decreased 12.9 million or 33% to 26 million from 38.9 million in the prior year quarter.

The decrease of X gene. They was primarily due to 9.6 million decrease in BT and corporate payroll costs as we operated BT with minimum coverage and temporarily further substantially all of our employees during a portion of the quarter as well as $1.7 million decrease in BT in corporate bonus expenses.

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During the second quarter. The income tax expense was 4 million, while the effective tax rate was 30.2% we.

We expect that any net operating losses generated from tax purposes for fiscal year 2020, well be carried back to prior years as allowed under the cares Act and we will be entitled to an income tax refund when we file our fiscal year 2020 income tax return in it.

An income tax benefit is currently reflected in our estimated annual effective tax rate for fiscal year 2020.

The income tax benefit in the prior year quarter was immaterial due to the full valuation allowance provided on our net deferred tax assets during fiscal year 2019.

Our net loss for the quarter was 17.2 million or $5.80 loss per diluted share. This compares to a net income of 1.8 million or 61 cents earnings per share in the prior year quarter.

Turning to the balance sheet. We ended the second quarter of 2020 with 20.2 million in cash and cash equivalents compared to 22 million at the end of the second quarter last year as a.

As of August 1st 2020, our outstanding debt was 12.1 million net point ninemillion debt issuance costs and our combined borrowing availability was 1 million under our credit facility.

Subsequent to quarter end and as of September 4th 2020, our cash balance was 18.2 million as of the same day, we had combined outstanding borrowings of 12.2 million net of point 8 million of debt issuance costs and $3 million of combined borrowing availability under our credit facility.

Okay.

Inventory on hand at the end of the second quarter was 22.9 million a decrease of 26% as compared to the end of the second quarter last year.

Average inventory per boutique was down 24% from the prior year quarter due to more clearance merchandise sold and merchandise received as a result of vendor supply disruptions caused by the cobot 19 pandemic.

Our primary focus will be to continue to manage inventory levels conservatively as well as to leverage our flexible supply chain by working with our vendors to appropriately align inventory with demand as we emerge from this crisis.

Our year to date capital expenditures totaled 1.3 million comprised of <unk> point Sixmillion for need 50.4 million for the peak relocations and point Threemillion for technology initiatives.

Mostly associated with obtaining perpetual licenses.

Note that the spending for new and relocated boutiques were committed prior to the cobot 19 candidates.

During the second quarter, we opened one nipisi and permanently closed for BT, bringing the total boutique count to 700 at the end of the quarter, consisting of 339 malls and 361 non mall locations of which 92 our outlet BT.

Our main priority continues to be building liquidity and preserving cash to manage through this crisis to that end, we continue to take aggressive and prudent action to optimize sales monetize inventory reduced expenses and manage liquidity as Andrew mentioned, we are exploring a broad range of strategic alternatives.

Putting further lease concessions and apparel further.

The reduction of operating and capital expenditure raising additional capital, including seeking a refinancing of our debt in restructuring our debt and liabilities through a private restructuring or restructuring under the protection of a pickup all bankruptcy law our city.

Our strategic plans are not yet finalized and are subject to numerous uncertainties, including negotiations with creditors and investors and conditions in the credit and capital markets.

We do not intend to disclose for the development unless and until the board of Directors Special Committee has approved expect specific transaction or otherwise determines that disclosure is appropriate.

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

Thanks, Andy.

Thank you for joining and we look forward to updating you on our next call in the meantime, we hope you remain healthy insight.

Thank you. This does conclude the conference you may disconnect. Your lines at this time and have a wonderful day.