Q2 2019 Earnings Call
Greetings and welcome to our Tw retail one second quarter 2019 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation English require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Francesco Cilantro. Please go ahead.
Thank you good afternoon, everyone before we begin I would like to remind you that some of the comments made on today's call either as part of our prepared remarks or in response to your questions may contain forward looking statements are made pursuant to the safe Harbor provisions in the private Securities Litigation Reform Act of 1995 actual results may differ from those projected in such forward looking statements.
Such forward looking statements are subject to risks and uncertainties are described in the company's documents filed with the FTC, including the Companys fiscal year Form 10-K . The company undertakes no obligation to publicly update or revise any forward looking statements to reflect subsequent events or circumstances.
As a supplement to today's presentation, we have made flies available, which you can view under the Investor Relations section and wine company Dot Com and now I would like to turn the call over to Greg Scott CEO . Thank you Francesca good afternoon, and thank you for joining US with me today to discuss our second quarter 29 result, 2019 results for Tracy Inglis, our president Chief marketing and customer officer, and Sheamus Toal, our executive Vice President COO and CFO .
As noted in our press release, we continue to execute against our strategic initiatives, most notably building the foundation of our multi brand platform to address copper opportunity that said, we were disappointed with our second quarter results in our core New York and company Brown, while our traffic and ecommerce business improved sequentially from the prior quarter and we delivered a positive increases in new customer acquisition, we continue to experience decreases in brick and mortar traffic as well as declines in basket size and an ongoing weakness from our Soho jeans sub brand. This is reflected in our Q2 comp sales decline of negative 4.8%.
While we were disappointed in our sales performance the team with agile and reacted appropriately managing expenses and inventory, which contributed to our Q near peak product margin rate level, while also investing in our new businesses to drive future growth.
Unfortunately, the combination of sales declines coupled with increased expenses, including shipping and store expenses reduced vendor rebates increased legal fees and increased recruiting fees combined with our investments in new businesses resulted in an operating loss of 7.6 million missing our guidance.
We believe the majority of these impacts are temporary and fixable, we are addressing the challenges today with a sense of urgency while also investing in the business to drive future growth.
During the second quarter, we continued to make progress toward our strategic strategy, creating a multi brand digital platform and I'd like to share a few highlights regarding the progress made in our transformation.
Regarding our celebrity brands the new businesses.
Fashion a figure are on trend last night brand delivered positive comp results with double digit growth online.
Happy by nature are ready to wear brand in partnership with Kate Hudson continued to build momentum driven by the strength of Kate 10 million active and engaged social following.
Our celebrity brands, which are exclusive to New York in company delivered double digit increases driven by significant comp increase in the Gabrielle Union sub brand.
Regarding our goal to increase new customer acquisition, 4% comp increase in new and reactivated customers to our brand as new digital marketing initiatives that our new CMO implemented in the last few weeks of the quarter performed very well.
Regarding our goal to drive digital growth ecommerce sales improved sequentially from Q1 with total sales increasing to approximately 30% of our total business.
In addition, we made key additions to the art Tw executive team representing industry leaders, who will bring the expertise necessary to drive our near and long term growth objectives, and we maintained our strong balance sheet with 83 million in cash on hand, or a $1.28 per share and no debt, which is a competitive advantage in today's volatile environment.
That said based on our current performance and the necessary decision to focus our resources on improving in New York and company business. We are prioritizing our efforts around fashion to figure and happy night by nature as such we've decided to exit the uncommon sense laundry lifestyle concept.
Sheamus will walk you through the additional details in his prepared remarks.
Looking ahead, we continue to see opportunity in our core brand and are working to address the customer and assortment challenges, which impacted our second quarter performance to further accelerate our tw transformation. We are launching our customer first initiative. This fall, which Tracy will outline during her prepared remarks and will drive positive results across our multi brand portfolio.
We also know we have the team and the action plans in place to bring about a positive change in the business and we are acting with a sense of urgency.
Turning to our second quarter results I'd like to spend a few moments discussing our progress against our 2019 keys to success.
First we continue to leverage our celebrity collaborations in Subbrands as market Differentiators that our customer can only find it New York and company together, our celebrity collaboration has delivered double digit comp growth in the second quarter, representing nearly 10% of our business.
Our Gabrielle Union collection was particularly strong with customers responding to key pieces war by Gabrielle on America's got talent.
In addition, we're pleased by the customer response to our recently launched happy by Nature brand. We look forward to continue expand this brand beginning with our international debut in partnership with UK based Department store, Selfridges, which launched this week.
We are seeing our customers we saw into areas of business that satisfy our need to satisfy your need for fashion style quality and value or dress assortment, which represents our largest category business in the second quarter at 16% of our mix delivered strong results in the quarter and provides an important fashion and lifestyle halo across Europe and company.
In addition, our seventh Avenue sub brand supported by strength in our marketing market, leading franchise Pant program continues to be an area of competitive strength and a strong driver of customer loyalty.
In fact, we rank 12, and the overall apparel category in the past category, reflecting our strength in the business.
Finally, so history, our street were influenced and lounge lifestyle sat brand delivered significantly improved results, which we look forward to building on in the third quarter.
Unfortunately, the cost decreases we experienced and our Soho jeans sub brand significantly impacted our overall comp performance specifically in denim, we continue to see weakness in our delivery and our overall reserve results were far below our expectations.
In the near term, we are managing our inventory investments in this area, while leaning into our core competencies and we will be reinventing our casual offering in 2020.
Regarding our second strategic priority to increase brand awareness and customer engagement. Our overall traffic improved sequentially from the first quarter driven by e-commerce , while our brick and mortar traffic continues to perform generally in line with widely reported industry results.
We are pleased to see new and reactivated customer accounts increased in the quarter by 4% comp, which represents an improved improvement from trend.
With Tracy his leadership, we are actively rebalancing, our marketing mix to invest more in working media and digital acquisition channels to ensure we are bringing new customers to our portfolio of brands.
In addition, we are launching our customer first initiative this fall, which will reinvent all aspects, our marketing organization for data and data analytics creative storytelling, personalization and segmentation and content creation with an intense focus on the customer.
Tracy will share additional details of this initiative during her prepared remarks.
We are also expanding our relationship and connection with customers through enhanced level of personalization and segmentation. We are tailoring, our marketing voice to where she is in the customer journey and experienced improved results in our targeted E mail marketing performance during the second quarter, leveraging audience segmentation insights and category affinities.
Our third strategic priority focuses on driving digital and omni our New York in company ecommerce performance improved in the second quarter supported by increases in traffic from the incoming trend.
Our fashion to figure ecommerce business also delivered significant comp growth, where we recognized an opportunity to accelerate performance in the channel even further.
In addition sales through our omni program, which includes in store pickup order online ship from store.
From store or online and order in store ship from store or online increased at double digit rate for the quarter.
From a product perspective, our ecommerce exclusive merchandise delivered double digit comp performance in the quarter and allows us to expand our fashion projection through new styles and categories. These assortments are also size inclusive as we offer side the double zero to 20 in nearly all styles, including our celebrity collaborations.
Across all brands were able to increase our digital sales penetration to nearly 30% of volume as compared to 26% last year driven by the positive comp performance across our digital channels and brands.
With our new executive leadership in place, we will continue to implement the changes necessary to re accelerate our digital growth.
Our fourth strategic priority focuses on our real estate portfolio, we have opportunistically taken advantage of much of the consolidation that has happened in the industry over the past several years.
We see stores is an important driver of customer acquisition engagement metrics that inform a holistic approach to real estate during the quarter. We opened three New York and company locations and we'll continue to evaluate opportunities in high price low profile in premium filters importantly, we benefit from a highly flexible real estate portfolio with roughly 70% of our existing store base on two years or less terms Sheamus will elaborate further on the steps, you're taking to rationalize and optimize our store fleet.
Next project excellence, while our Q2 operating loss was impacted by several factors, including reduced vendor rebates and increased legal and recruiting fees. We remain committed to looking at every cost to improve efficiencies and deliver our more profitable operating model.
We continue to identify opportunities to enhance our organizations effectiveness add as we have discussed previously we have streamlined our organization that said, we recognize the challenges in today's environment with respect to shipping expenses store payroll expenses and the impact of potential tariffs on imports from China.
Regarding potential terrorists, we have been proactively working with our partners to mitigate risk and we have taken early receipts of merchandize in vans in advance of potential tariffs as seen in our Q2 in transit inventory, while our current guidance does not incorporate the potential risk of tariffs, we maintain an active and open dialogue with our vendor partners recognize the dynamic nature of the macro environment.
Our final strategic priority focused on growth initiatives, while we are maintaining our focus within our core New York and company business. We are also looking at additional white space opportunities with significant without significant capital investments through leverage of our TWC operating platform our fashion to figure brand continues to execute against the strategic plan, we implemented beginning in the fall of 2018.
We are pleased with the overall customer response to our assortment and marketing messages as we position this brand for growth in the plus size market. Looking ahead, we will be accelerating growth in our e-commerce business to build on the channel double digit growth rate and efficient customer acquisition costs.
Regarding our happy by nature business, we are pleased with the customer response and believe in the potential of this lifestyle brand.
We are seeing the strength of Kate Hudson Social channel in fact, social channels contributed to nearly 20% of happy by nature, Dotcom volume, reflecting the importance of social and acquiring customers and driving sales.
We will continue to provide future updates regarding our growth plans for happy by nature throughout 2019.
Our subscription box service and wind see closet continues to grow and benefit from a strong and positive customer response building on the strength of this program, we introduced FCF closet for our fashion to figure brand to ensure we are engaging our customers wherever whenever and however, they shop across our brands.
Looking ahead to the third quarter. We believe there is opportunity our 40 orphan company brand despite challenging trends as reflected in our guidance.
We have repositioned our product investments for fall by lean into categories and franchises of strength, including celebrity and our dominant wear to work pant category, while mitigating risks and our Soho jeans sub brand.
In addition, our customer first initiative led by tracing list President Chief marketing customer officer will transform the customer journey across our portfolio of brands and position us for long term growth.
I would like to introduce tracing less our president Chief marketing customer officer, who joined the our Tw leadership team in June .
Tracy expertise and translating customer data analytics and insights into innovative customer Onest strategy will help lead our evolution to a multi brand portfolio and I look forward to working with her on building for the future of our tw and transforming our customer journey across our portfolio of brands.
I now will turn the call over to Tracy.
Thank you Greg I'm very excited to be here at our tw into the working with a talented teams as we execute our brand growth strategies.
I believe we have the right ingredients for success, including strong product with unique market positioning highly engaged customers and an organization that is receptive to making the necessary changes to introduce digital marketing and customer first best practices I'd like to spend a few moments sharing my initial observations as we embark upon a journey to become a customer led organization.
We have a great foundation in product across the our tw portfolio from celebrity collaborations and a market leadership position in wear to work pants and dresses for New York and company Q on trend classified fashion at Ftn and happy by natures distinct lifestyle fashion with an evolving environmentally conscious platform to drive growth, we need to amplify our marketing reach with a focus on gaining new customers and continuing our strong focus on driving lifetime value. Our shoppers are very loyal and spend per customer is strong we simply need more of them with this in mind, we are transforming our marketing effort to be customer first.
Data, driven and creative optimized, which when combined will elevate our overall brand experience, while reaching new customers for whom we may not be front of mind today.
I will share updates regarding our progress on this initiative in future quarters, but we'd like to provide the three key areas. We are focusing on as part of our customer first transformation.
First experience, we are addressing how to customer engages with our brands and how we can translate awareness into advocacy across an integrated approach with specific focus on new customer acquisition.
Next data and technology, we are leveraging customer data in decision, making with a focus on acquiring new customers and maintaining our healthy lifetime value, we will optimize our investments by building a test to invest mindset across promotion channel and creative to minimize risk of untested concepts and scale proven investment.
As we do this the measurement and management and optimization of these investments is increasingly important we're building capabilities and tools to support these efforts and we are focusing on driving stronger engagement with our customers by leveraging data to drive personalization and better targeting offers and experiences.
Finally, creative we have an opportunity to better align our fashion product and celebrity messages with integrated marketing campaign aligned with where our customer is engaging with our brands where their storage site or social content generation is critical and with data as our confidence we will optimize our creative execution across all channels and engagement.
In summary, I'm truly excited by the opportunity to partner with Greg and the RC GW organization to lead the transformation to be truly customer centric with that I will now turn the call over to machine.
Thank you Tracy good afternoon, everyone.
Net sales were $201.9 million as compared to $216.4 million in the prior period.
Reflecting.
4.8% decrease in comparable store sales and a reduction of 13 stores, partially offset by the increase of sales from new businesses.
Gross profit as a percentage of net sales decreased 260 basis points to 29.5% versus the 2018 second quarter gross profit percentage of 32.1%.
While product margins remain near peak levels on a rate basis decreased slightly due to increased promotional activity. We also experienced an increase in shipping costs due to the growth in our digital businesses and a reduction of vendor rebates due to lower inventory receipts. These amounts were partially offset by an improvement in leverage of buying and occupancy costs as we continued to reduce occupancy expenses.
Selling general and administrative expenses were $67.2 million or 33.3% of net sales as compared to $66.3 million or 30.7% of net sales in the second quarter of 2018.
In selling general and administrative expenses is $2 million of incremental marketing spend principally in connection with the incubation of our three new businesses and increase recruiting expenses, which were partially offset by a reduction in variable compensation expense.
Operating loss for the second quarter was $7.6 million inclusive of $2.3 million of losses from the company's new businesses.
This compares to operating income of $3.1 million for the second quarter of fiscal year 2018.
Net loss for the second quarter of fiscal year, 2019 was $7.5 million or a loss of 12 cents per diluted share as compared to net income of $3.1 million or five cents per diluted share in the second quarter of fiscal year 2018.
Total quarter end inventory increased 8.8% as compared to the end of the prior period, primarily reflecting an increase in merchandise in transit due to shifts in the timing of receipts in an effort to receive goods in advance of tariff increases and an increase in inventory to support new businesses.
On a hand inventory per store is down slightly.
Capital expenditures were $1.8 million as compared to $1.4 million in the prior year period, reflecting continued spending to support new stores and the remodel refresh of existing stores and investments in the infrastructure.
During the second quarter. The company opened three New York in company stores and two fashion to figure stores closed one New York and company store and one outlet stores and converted to New York in company stores to outlets stores.
Ending the quarter with 413 stores, including 120 outlet stores.
On the real estate front, our short term renewal strategy continues to provide a highly flexible real estate portfolio with approximately 70% of our store leases expiring in two years or less.
We're also pleased to end the quarter with a strong balance sheet with $83.3 million of cash on hand, representing $1.28 per diluted share and we have no outstanding borrowings under our credit facility and no long term debt.
Now turning to our outlook for the third quarter fiscal year 2019, we continue to focus on investing in the future to drive improvements in long term operating results and increases in both top line sales and annual operating income.
For the third quarter, we expect the following.
Net sales are expected to be down by a low single digit to mid single digit percentage range, reflecting the combination of reduced store count and the reduction in comparable store sales, which are expected to be down in the low to mid single digit percentage range.
Gross margin is expected to be down slightly on a rate basis, primarily reflecting increased shipping costs due to the growth in our digital businesses and decreased vendor rebates due to lower inventory receipt levels, partially offset by improvements in product margin.
Selling general and administrative expenses are expected to increase by approximately $2 million versus the prior year third quarter. This increase reflects investments in marketing in our effort to drive new customers to our brands an increase in selling expenses driven by growth in our ecommerce variable costs and increases in cost to support new businesses.
Partially offset by reductions in variable compensation and reduced payroll expenses operating loss for the third quarter are expected to reflect a modest loss.
Excluding onetime non-GAAP charges to exit the uncommon sense business, which may include charges to write down inventory and to a much lesser extent charges to impair certain digital assets and site development costs and record severance as we plan on divesting this business.
On hand inventory at the end of the third quarter fiscal year 2019, and the core New York in company business is expected to be down slightly.
Offset by increased in transit levels due to the timing of receipts and inventory to support the new business with total inventory expected to be up in the low to mid single digit percentage range.
Capital expenditures for the third quarter of 2019 are expected to be approximately $4.5 million to $6 million to support ongoing investments in infrastructure and new and remodeled store activity.
Full year capital expenditures are expected to be between $12 million and $13 million as compared to $8.5 million in the prior year.
Depreciation and amortization expense for the third quarter is estimated to be approximately $5 million.
During the third quarter of fiscal year 2019, the company expects to open three New York in company stores remodel and refresh one New York and company store and closed one New York and company store and one outlet store.
With that I would like to turn the call over to the operator to begin the question and answer portion of the call through at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May proceed sir.
If you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yes.
Once again that is star one if you would like to ask a question.
Our first question comes from the line of Dave Cannon with Kanen wealth management. Please proceed with your question.
Hi, guys good afternoon.
First I'd like to welcome Tracey aboard.
Look forward to seeing.
Her prints on the company and the hopefully a positive effect going forward. So again, welcome Tracey and I wish him much success.
So.
You're welcome so a few questions.
Could you go into a F to ask <unk>, what was the same store sales growth for the quarter.
So hi, David Seamus on that so we don't disclose the actual on a same store sales growth on my channel within the business, but on the CF business continues to grow at a strong rate, particularly within the core ecommerce component or the digital component of that business. We continue to have double digit comps within that segment of the business and believe that that opportunity as Greg highlighted is significant for us in the future.
<unk> was it profitable for the quarter or do you expect it to be profitable in the near future.
So in terms of the profitability of the business. It was not profitable for the quarter. However, as we've commented in the past. This was always a year for us of investment in terms of each of our new businesses and while we did not have profitability in the quarter within.
Those businesses already within the fashion to figure business, we do believe in the long term.
Opportunity within fashion to figure and we do believe that in short order we will.
With growth and with the investments that we're planning on making in both digital and customer growth and with Tracy's influence.
We believe we will shift that business to profitability on the in the very near term.
Okay, and then what was the growth year over year and E com.
So again, we don't disclose the comps by channel our business.
But I think as we commented in several components of our.
Prepared remarks, we did see the penetration of our E Commerce business.
Grow to 30% of our sales, which is a significant obviously component of our total sales that was up from 26% of our sales last year and the digital businesses did.
Perform positively in comp positively within within our core business. So it was a strong quarter for our digital businesses.
Positively Comping and again, we believe as we make investments in terms of marketing as we make investments in terms of.
Customer.
Acquisition that we will see more dramatic growth in the future, but that was one of our positives for the quarter.
Mhm.
Okay and then.
Do you guys kind of snuck, a press release and it looks like yesterday on Kate Hudson.
Giving this collaboration with Selfridges could you speak to the opportunity size there.
How many doors.
Countries and what the you know what you guys think your total addressable market is in collaboration with them.
So hey, Hey, Dave It's Greg. So this was an opportunistic and partnerships in the sense that.
They really really liked the collection. It also has a sustainable.
Back part of the collection, which is really what selfish is all about Kate also is obviously very popular in all of Great Britain then.
So I think it was a great marriage.
So we started very small with them what it did give us international shipping. We currently don't have international shipping on our current site.
And so it allow the collection to expand internationally as well have a premier retailer in Europe have the collection.
I would say we are going to go slow we're very happy with the initial results. It just launched on Sunday and the results are very promising.
I I think what this says is theres probably opportunity as we expand this outside of New York and company, especially as we're seeing the response to the collection.
Outside of the New York City brand.
Okay, and then Sheamus in terms of the guidance that you gave in the prepared remarks.
You said that you expect gross profit to be down slightly.
And to have.
I think you said something like a modest operating cost could you quantify that what is gross profit down slightly is that 50 basis points or does that 200 basis points and then.
A modest operating loss does that means sub $1 million or potentially more than that.
Yes, so in terms of.
First the gross margin question.
I think you know.
We commented that you are correct that gross margins are expected to be down slightly but we are seeing improvements in our product margin, so where we're seeing a slight deterioration and on it would be towards the lower end of the numbers that you threw out.
It would certainly not be in the 200 basis point range. So towards the lower end of what you commented.
In the.
In the ranges and it's primarily based upon.
As as we commented to increases in shipping costs as we grow the.
The digital businesses were seeing an increase in those variable expenses were obviously offsetting that to a certain degree with our real estate strategy and the aggressive approach that we're taking to.
Reduce occupancy costs, but given the increases that we're expecting in digital sales. We are we are anticipating shipping increases which is driving a slight decrease in.
Overall margin, but the product margin.
Is up.
Okay, and then the statement modest operating loss.
How do you decide modest is that a million or less or 2 million or less 5 million or less.
Yes, I mean.
Obviously were so didnt, we didnt define a range on it so it's.
A small loss I would say, we wouldn't say, it's a million or less that would.
That's a very narrow range.
But certainly.
Not a significant loss.
But as I said, we haven't defined an explicit range.
In that but.
Given some perspective that we are anticipating a modest loss.
Okay and then.
One more question and this is really for Tracy.
I understand the pivot or the transformation that the company is embarking upon.
You know to a.
Perhaps my terminology is not really corrected E com first social media social Influencer type of model.
And I would point to textile where you were previously at them revolved.
And I'm very excited about that.
I understand that that really is the future and when we look at valuations of public companies that model you know yes.
Has values like.
Possibly 30 times that of.
A traditional brick and mortar retail or so.
So that being said Tracy.
You know looking out longer term with the relationships that we have to celebrity collaborators.
You know our existing brands with what you're working with today, how do you feel in general about the opportunity and you know three years from now where do you see this pivot going to if you could quantify it I'm not going to hold you to specific numbers, but what do you use.
If you could kind of give me a range of how you would define success given some numbers I'd appreciate that.
Yes, I mean, it's interesting that you bring up the evaluation process for digitally native brands I think also.
What we should be talking about a customer acquisition practices for digitally native brands, and that's where I see a lot of opportunity of bringing that more modern customer acquisition process and expanding that digital footprint to a more traditional business like New York and company I think that's where we'll really have a lot of success and ground you mentioned the celebrity collaboration and were looking at influence or programs I'd like to think about Influencers. As you know from celebrity is at the top two civilians at the bottom and their influencers that we can tap into that or micro and nano influencers that you may have never heard of but are actually going to be very very cost efficient for driving customer acquisition at scale.
So for me I wouldn't be comfortable right now putting some specific numbers out there for you, but what I can say is that we're looking at a road map of bringing some of those best practices and customer acquisition and being digitally native and understanding how to grow the business in a more modern way and tell our brand story in places where the consumer is consuming the brand story, which is not always just in your stores and catalog those are important parts of the p., but they're not the entire entirety right, so and expanding that digitally that digital footprint for the brands will really help us to grow our customer base.
Okay, well I wish you the best of luck I'm excited to see your Mark on the company in the next year or two.
Thank you.
Me too.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Greg Scott for closing remarks.
Thank you again for joining that we look forward to speaking with you when we report our third quarter results in December Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.