Q2 2019 Earnings Call
At this time I would like everyone to the GI Joe's second quarter 2019 conference call.
On today's call Arlinda, Heasley, President and CEO of Churchill, Inc.
And Mark Webb Executive Vice President and CFO .
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press the pound key.
Before we begin I need to remind you that certain comments made during this call may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in the press release and Jay Gelb SEC filings.
The forward looking statements made today are as of the date of this call and we do not undertake any obligation to update forward looking statements.
Finally, we may refer to certain adjusted or non-GAAP financial measures on this call.
A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in the press release issued today.
If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page J. Jill Dot com.
I will now turn the call over to Linda.
Thank you and good morning.
The challenging start to this year impacted our results materially in the second quarter.
We took significant action to align inventories better with demand.
I dress assortment issues, where we could.
Enhanced visual presentation and the store experience.
Right size, the cost structure and focus on China.
As we implemented what we set forth in our last earnings call.
We performed in line with our expectations.
We have made progress fixing that which needs to be.
There is more work to be done.
We are continuing to take action and doing so in a way that does not impact the customer experience.
To that point, we saw good traffic across all channels in 11 out of 13 weeks this quarter.
June and July both had positive traffic throughout the period.
As we head into deliveries for those months.
We led with product that celebrated high summer.
With key items that were seasonal essential in a color palette that resonated well with her.
Driving good full price sell through.
Well, we continue to work on shortening our lead times.
Our ability to infuse newness on a monthly basis is already offsetting fashion risk.
That will improve further.
Our performance demonstrates the incense yeah Lydia.
And our commitment you.
Ensuring that we have a balanced assortment that the lighter.
Interspersed with standout unique pieces that become must have items.
An inventory position to address demand across all channels.
And currently we have invested more appropriately in marketing re mixing the working media spend.
A customer continues to be loyal.
During the quarter, our customer file has grown across new and existing and reactivated customers.
As we pursue new to brand customers and reactivate lapsed customers to grow our customer file.
We are constantly aware of the essential need to stay relevant and top of mind to our existing customer.
We are seeing opportunity to use our data more effectively to identify what triggers a customer's loyalty and spend with the brand.
We've always use the data to know who our customer wants and what she expected.
But now.
We are digging deeper.
Gaining insights into why our customer shops the way she does.
And what we can do to better serve her.
As I have said before we have some wonderful unique characteristics.
Our audience is often overlooked in retail.
She is looking for someone to speak to her.
We regularly check and tune our business model.
For example, we're continuing to test how the catalog should evolve as part of our marketing strategy and as a component of how we communicate with our customer.
In any given day, the first touch point many of our customers have with the brand is on mobile or digital devices, either through email or social and digital media.
The store location is also a critical component of our interaction with the brand owing largely to our engage store associate base.
But the catalog to isn't important secondary touch point to these platforms.
Indeed, she tells us that she takes the catalog to bed butter and falls asleep be inspired by the images.
And as we digitized more content.
Soon that will shift to a smart device.
Regardless of how she chooses to interface. She often starts and ends her day with J., Joe top of mind.
I now conclude that we moved too fast at the beginning of this year testing reduced circulation and pages within the catalog as well as postcard mailers.
This quarter, we returned to a more normalized circulation and contact cadence and our team is working on a go forward strategy that better balances print and digital spend ensuring frequency of contact over specific time intervals.
I'm thrilled to announce that we have brought aboard and be honest steel as SVP CIO and CTO.
We are committed to making the necessary smart investments to improve overall efficiencies and improve our customer experience across all interaction points.
The Ana is reviewing our technology and digital capabilities as well as the blueprinting, we developed related to our I T project.
Well she does that the previously announced project is on hold.
We will discuss our next steps in more detail in the future.
Our marketing team under Brian's leadership.
Along with the already mentioned analysis of catalog spending.
Well continue our efforts to remix and optimize our working media spend as we improve our brand voice reach and imagery.
I said last time operational issues corrected it aside.
It's all about product.
I repeat that.
It's all about product.
Looking to the remainder of the year, we will continue to work on improving the product we have accelerated the use of customer insights to assist in reviewing floor sets for the coming months.
Through these exercises we are able to look through our customers lens and bring more of those views into the process closer to the market.
With this work and under Elliot and Shelley's direction, we will continue to influence the assortment as we can through the balance of this fiscal year.
As we saw with June and July .
We can and will change things like color extensions styling and visual presentation queues.
I'm very pleased that our improved product and merchandising approach has shown predictable results and look forward to more improvement as all that we have initiated comes to fruition next year.
Finally, with Mark now on board, we have done a thorough review of our cost structure and I've made some decisions related to overhead and current investment spend.
He will discuss that in more detail.
In summary, the changes we have made over the past year with respect to talent brand direction, an affirmation of our customer were done to ensure long term profitable growth.
The actions, we took this past quarter in inventory levels, and implementing management and disciplines around her by processes and practices and addressing our cost structure were intended to move us forward faster.
I strongly believe in the strength and power of this brand and the opportunity that lies ahead.
We are confident that the decisions we are making will continue to stabilize our performance and we look forward to continuing to update you with our progress I will now turn the call over to Mark Mark.
Thank you Linda and good morning, everyone.
As Linda mentioned, we made good progress with efforts to stabilize the business during the second quarter, we reviewed capital and operating expenses, taking action on both which will not only help us focus on better execution going forward, but add flexibility to the piano.
And though total inventory levels are still elevated we have assessed start in season management processes, and we'll bring inventory more in line with demand starting the second half of 2019.
I will provide more color on these actions and the impact to the piano in a moment.
For the second quarter total net sales were $180.7 million sub 0.6% versus last years $179.7 million.
Total company comparable sales decreased 1.2% total direct sales increased 4.9% year over year, increasing 170 basis points as a percent of total sales for the quarter.
Gross profit was 105.3 million versus 116.7 million last year.
And gross margin was 58.3% compared to last year's 64.9%.
The reduction in rate was slightly better than guidance as better full price selling in the quarter helped partially offset the drag from clearing excess product.
S. Sheena expenses were 200.1 million inclusive of onetime events, which I will discuss in more detail.
Excluding these onetime costs as Fianna expenses were 103.4 million or 57.2% of sales versus 97.4 million or 54.2% of sales last year with the increase driven by selling expenses marketing investments and expense associated with the technology project prior to pause and which we discussed last quarter.
During the second quarter, we undertook a comprehensive review of SGN, a with the intent to reduce excess overhead cost while preserving strategic investments in customer driving areas.
While still more work to do this review resulted in reductions in overhead, including a reduction in head count and other expenses and the closing of one floor of excess headquarter office space, we expect to generate approximately $5 million to $6 million in annualized has seen a savings as a result of these actions.
Our actions did not include reductions in store selling payroll or marketing spends that we continue to review these investments for efficiency opportunities.
We view, both selling payroll and marketing as an important strategic differentiators for J, Jill so were proceeding with our views with that in mind.
Including these actions there are three onetime events included in second quarter 2019, as she and I.
First from the overhead expense review just discussed we incurred one time charges related to severance outplacement and impairment on the office lease right abuse asset.
Second we had a favorable settlement related to an insurance claim for inventory destroyed in a cargo ship fire earlier in the year.
The net impact of these first two items was a charge of $1.3 million.
And lastly, the drop in market capitalization. Following the Q1 earnings call prompted a review of the carrying value of intangible assets on the balance sheet. This review resulted in a non cash impairment charge taken in the second quarter of $95.4 million, bringing total onetime charges to $96.8 million.
G.A.P. operating income was a loss of $94.8 million versus income of $19.3 million or 10.7% of sales last year.
Adjusted EBITDA for the quarter was $12.6 million compared to $29.3 million last year.
As a percentage of sales adjusted EBITDA was 7% versus 16.3% last year.
The decrease in both dollars and rate was primarily driven by the impact of clearing excess inventory in the quarter. A reconciliation of EBITDA to net income is included in our press release.
Interest expense for the quarter was $5 million versus $4.9 million last year.
Tax benefit for the quarter was $3.1 million versus a 4 million dollar tax expense last year and the effective tax rate was 3.1% compared to 27.4% in the second quarter of 2018, driven by the tax impact of the nonrecurring items previously mentioned.
G.A.P. net income for the period was a loss of $96.7 million or $2 or 21 cents per diluted share compared to income of $10.5 million or 23 cents per diluted share last year, excluding onetime items adjusted diluted earnings per share was a loss of five cents. This year versus income of 24 cents per share in Q2 2018.
Turning to the balance sheet, we ended the quarter with $29.1 million in cash.
Inventory at the end of the quarter was $70 million compared to $61.6 million at the end of second quarter 2018.
2019 inventory includes units removed from sales and held for disposal as well as an increase in the timing of Q3 units shipped and in transit as of the end of fiscal second quarter.
Excluding these items on hand inventory as of the end of second quarter 2019 was up 2% versus last year.
During the quarter, we opened four and closed one store, bringing store count to 286 at quarter end finally capital expenditures were $3.8 million.
Turning now to our outlook for third quarter and the rest of the year.
We took aggressive action in the second quarter to right size cost and address elevated inventories.
We have also been working to improve our in season management of inventory as well as our buying processes to better balance the units we offer for sale to the demand for those units going forward.
We believe these efforts will pay off in the long term, while also providing near term benefits to gross profit and SGN Ed.
That said, we still have more work to do.
Inventory levels are still elevated and uncertainty in the macro environment persists and though our sourcing teams have made great progress the past year, reducing reliance on China manufacturing to below 20% of total cost of goods source. Some lists for tariffs are set to begin in September and will nominally impact cost of goods sold in the back half of 2019.
All of these issues are taken into account in our outlook for the rest of the year.
With this in mind, we expects the following for the third quarter.
Total comparable sales to decrease between one and 3%.
Total net sales will be between negative 1% to plus 1%.
Gross margin will decrease about 200 basis points year over year.
Interest expense for the quarter will be approximately $5 million.
Net diluted earnings per share is expected to be 10 to 12 cents compared to 15 cents in the third quarter of fiscal 2018.
And lastly, we expect to open five stores ending the quarter with 291 stores.
Turning now to our outlook for the full year, we still expect total comparable sales to decrease 2% to 4% and total net sales to be flat to down 2%.
We expect gross margin to decrease about 300 basis points year over year.
Interest expense is still expected to increase approximately $1 million relative to fiscal 2018.
The tax rate for the year is expected to be about negative 3%, excluding the impairment the projected tax rate is approximately 27%.
Diluted earnings per share, which includes the Q2 impairment is expected to be in the range of a loss of $1.86 to $1.90 per share adjusted diluted earnings per share is now expected to be 20 to 24 cents compared to prior diluted earnings per share guidance of 17 to 21 cents.
This guidance includes nine cents of drag from the technology investment in the first half of the year.
During the second quarter, we reviewed and took action on planned capital expenditures for the year and are now expecting to spend between 22 and $25 million for full year 2019.
The primary driver of the reduction in capital guidance is the pausing of our technology initiative already discussed.
Lastly, we continue to expect to end the year with approximately 288 stores.
In summary, we have made progress stabilizing the business, taking decisive actions in a swift manner, and improving inventory management oversight and discipline.
There is still more work to do and we are cautiously optimistic as we head into the back half of the year.
That concludes my prepared remarks, I will now turn the call back to the operator for questions.
Thank you.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the culinary roster.
Your first question comes from the line of Janine Stichter from Jefferies.
Please go ahead.
Hi, good morning, everyone.
Question for Mark just wanted to ask about the inventory if you could help us parse out the in transit units versus even if you're holding for disposal I'm wondering if you have to bring in any shipment early did it there.
Hi, Jamie so.
The Lions share of the reported increase was more related to in transit and then some was related to the inventory that weve removed and are holding for jobber I think it's more fortuitous that we have earlier shipments coming in in advance of the terrorists that should present some level of benefit for us, but I can't claim that that was a strategic plan for us it's been so fluid with respect to the tariff situation.
That really wasn't wasn't a strategy for us.
To be helpful. I think that number that we reported on the on hand units, which really is the inventory that we have available in DC are in store for sale and we reported it that's up 2% as of the end of the second quarter. The equivalent number at the end of the first quarter was up a little over 4% so represent some sequential improvement.
In the carrying level have on hand inventories.
Okay. That's helpful. And this is on the Terrace I think you said a modest impact the back half of the year from the tariff that go into place in September does that contemplate taking any price increases there. How are you thinking about that you might have there.
Oh, it's all included in our guidance.
Team has been working on some mitigation strategies, we factored in the list for tariffs I think the latest the latest announcement, which was the 15% starting September .
Along with some of the mitigation strategies that we've had but all of that is captured in the guidance that we provided.
Great. Thank you.
Your next question comes from Kimberly Greenberger from Morgan Stanley .
Please go ahead.
Great. Thank you so much good morning, Linda when you feel confident that the product will fully reflect all of the changes that you need to make such that we'll see more normalized revenue growth in merchandise margins.
And then I just had a clarification question for you Mark.
On the gross margin the 660 basis points of decline is that all merchandise margin pressure or is there anything else in there.
And on the.
Sourcing out of China did you say, you expect a China product to account for 20% or less severe sourcing by yearend this year or what was the timeframe on that thank you so much.
I'll I'll start well.
Compiled from notes its a good morning.
We are we're making changes to the product as much as we can.
Each successive job, that's coming up and so you'll see in September through the back half of this year building on the things we know she loves and making course corrections in color, where we know that we had some missteps earlier in the year.
I feel very excited as we build into next year relative to the direction of the new product team I would tell you and see you on board they have really driven on.
A lot of Harkening back to what Jay just stands for and what we know our customer lives as well as a push forward to where we believe the brand can really take off so again I I see steady improvement through the back part of the year, we're very cautious about it because again those were course corrections, where we could and then I see a nice.
Push forward in the <unk> and Q1 of next year going into that.
The rest of the year.
So stay tuned I again, I'm getting very excited and my partner over here Mark keeps me temper down, but again I think you're going to.
You're going to appreciate what you see coming up.
Art, Kimberly I'll tackle sort of China first we as of now the teams have been working over the course of the last I think over a year to bring down the reliance on China as a sourcing a country and so we are below 20% of Cogs.
Now and that's kind of an annualized statement, but I think weve made that progress now and and so that's sort of the.
The current state of China manufacturing for us the year over year decline in gross margin was 660 basis points was primarily remember at the end of the first quarter, we had too much inventory and we had talked about the fact that we were going to be moving that inventory through the system either through selling them through stores, but we wanted to be conscious of the impact that would have on the selling experience and also looking at alternative methods, So which basically means third party jobbing et cetera.
The reality is that we ended up jobbing more than we had anticipated.
And we think that was a financially sound decision because we did see some benefit through to the full price selling and sort of clear that the environment to allow the full price selling to happen for the quarter. So the the primary driver was the year over year impact of the incremental jobbing that we did this year.
Thanks, so much mark.
Definitely.
Our next question comes from comes from Paul Trussell from Deutsche Bank. Please go ahead.
Good morning.
When it comes to the top line could you help us understand how was in store traffic versus your expectations and the same in terms of the direct performance where were you were you satisfied there also help us think about.
What happened with ticket in terms of you or you PT.
Paul I'll take it then Linda may want to jump in on on the direct performance.
The.
So through the quarter.
From where we guided we came in at the better end of the range of our guidance. So I think you could interpret that we were slightly better than the guidance that we provided in our expectations.
The in store traffic traffic has not been a problem for us in the store and I think it's a signal of the strength of the brand and the customer connection that through at all the customer traffic has been strong and that's fairly unique I think in specialty apparel retail, but so traffic hasn't been the issue the opportunity for US is around the you are and conversion in the store and we did see some sequential improvement in those metrics as we sort of I'd mentioned it on the last question to Kimberly as we made some course correcting actions in the quarter and decided to move more of our liable excess inventory into a job or bucket versus.
I'm trying to move it through the stores and so we're encouraged by that result through.
Throughout the quarter as for the direct performance, we reported direct sales up 5%.
Pleased with that result, and I don't know if there's anything you'd want to I think to Mark's point about conversions conversion has been something we're very mindful of across all the touch points all the channels our fastest growing channel is mobile and we know that's where were most challenged with conversion. So we're making appropriate investments, particularly in the digital platform to help that conversion better. So we're we believe that we can move there and then again I think with some of the merchandising visual presentation merchandising changes and product, where we could change the product in the back part of the year. That's also going to help with conversion and the store channel in particular, so we think there is some upside here relative to thinking about it smartly and leveraging the good news for US is we have to try that.
Now if we can make the shopping experience even easier for her we can drive conversion.
Thank you and you spoke to evaluating the infrastructure and doing some rightsizing anymore detail are examples there.
Yeah, Paul we took a look at the overall cost structure and in the quarter, we took actions on our corporate overhead, including some headcount reductions and the related expenses along with that in reviewing our space utilization in Quincy office here, we were under utilizing our space and we were able to we occupy four floors in a building and we were able to take out one floor, which is a little almost 25% of our total space. So a good opportunity for us to take this to take that floor out.
I would just add that the from with respect to the financial impact of that there was an impairment on that occur in the new lease accounting you take an impairment on your right of use asset and then the impact of the PNM Theres actually a slight increase in occupancy expense until you effectively sublease year. Your space and then you get the benefit of that in the out periods. When you sublease. It. In addition to costs I would also add it's time and decision making.
We're working very hard with the product teams that we have in place right now to get decisions made earlier and in sync instead of having to do work and rework and that's another significant cost. So it's looking at where we can we do sampling where we can.
Improve our the quality of the product to get better full price selling up when we bring it to market. So there is a bought the whole body of work that addresses our product development calendar, which we know is long and we brought this up before so there is a lot of work at Pike, Yeah, and Paul Lastly, in addition to that there were.
Looking at the usual suspects the discretionary spends around travel supplies et cetera. Every one of the organization has stepped up in a huge way and made good contributions to those to those expense savings for US ongoing we would take a look at a more related to the indirect spend in the business. How we can become more efficient in some of our.
Third party expenses et cetera, and that work is continuing.
Thank you and my last question is just regarding the outlook. Obviously, you did a little bit better as you mentioned this particular quarter other than the original guidance provided as we look towards the second half.
What has perhaps changed or been edited from your prior forecast with the exceptions of tariffs.
So.
I'll start we have included obviously the impact of tariffs as you mentioned, we have our expense that impacted the expense activities that we took we've reflected the reality is going into the back half we still remain cautiously optimistic about the overall environment. There is a lot of uncertainty in the macro world or in the news trade.
Disputes that are going on create real market movements and that impacts consumer psyche, and et cetera, et cetera, right. So in terms of us in the guidance. We're looking for continued sequential improvement, but we are still taking a stance of uncertainty around some of that more macro impacting stuff.
Thank you best of luck.
Thanks, Paul.
As a reminder, if you'd like to ask a question. Please press Star then the number one on your telephone keypad.
Your next question comes from Ike.
From Wells Fargo. Please go ahead.
Good morning, everyone. This is Lauren frasch on for Ike.
As we look at the back half for the year. How are you thinking about the cadence of clearing through the inventory you have as you work to right size I hear levels and its impact on margins given the amount of inventory you're holding today should the bulk of that margin has been taken in Q3, and then put you into a clean position by the end of the year and next step I know Paul's question touched on this a bit but DTC sales accelerated quite a bit as a percentage of total sales could you talk maybe a little bit what the primary driver of that was thank you.
Sure Lauren.
Let me start on the margin and so really the excess inventory that we're still holding is has been reserved down to the level that we expect to achieve in a third party.
Sale right. So in terms of the margin hit the 660 basis points in Q2.
He is really the the hit from clearing the excess inventory and were more on a normal cadence as we in our guidance that we provided for the back half of the year for Q3 implied in Q4, and the Q that full year guidance that we provided.
With respect to that direct to consumer deceleration so.
Leaving on doing a number of things relative to the direct to consumer acceleration on we've the new to brand customer and in the past I think we've been doing as most likely to come in to the to the digital platform first and we had great success with that we've also been working on it.
Messaging and communication and email the site on messaging on the site layout the tight imagery. The significant investments. We made this past year are really paying off and you're seeing that annex out the celebration and whether that's been a big win for us I, having a very pointed a point of view relative to a product offering that's new and limited in its quantity that we purchased have been she responds very well to that so it's a combination of factors that are working to our advantage relative to the direct to consumer channel.
Good.
Thank you very much.
Thank you thanks Lauren.
There are no further questions at this time.
The call back over to Linda for some closing remarks.
Thank you everyone. We look forward to talking to you at our next quarter earnings call.
Thank you.
This concludes today's conference call you may now disconnect.
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