Q2 2020 Earnings Call
Requested pier one imports today's conference call is being recorded.
All lines will be in listen only mode on so the question and answer period at which time instructions will follow.
I'd now like to introduce Christine greedy Blueshirt group.
Thank you and good afternoon, everyone today after market close we issued our earnings press release, which included the financial results for the second quarter of fiscal 2020.
Before we begin I need to remind you that any statements made today regarding our business maybe deemed to include forward looking statements that are based on current estimates.
Or expectations of future events or future results and are made pursuant to an within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act.
Of 1995.
Forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Any forward looking statements made today are as of the date of this call and the company does not assume any obligation to update or revise any such forward looking statements.
The company will also discuss non-GAAP financial measures on this conference call pursuant to the requirements of regulation G. An item 10 E of regulation SK. The company has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures.
Our earnings press release that was issued this afternoon and is available on our Investor Relations website at Investor stopped Pier one dotcom.
Now I'd like to turn the call over to Sheryl Batchelder interim Chief Executive Officer Cheryl.
Thank you Christine and good afternoon, everyone. Joining me on the call today's Bob Riesbeck, our new Executive Vice President and Chief Financial Officer.
As you may have seen subsequent to our last earnings call Bob was appointed CFO and at the same time dug deep boss was named President.
Doug and Bob brings valuable experience across retail operations, and finance that will contribute substantially to the turnaround a pure ones performance.
They've been on the ground in Fort worth since late July and quickly moved into action.
We are very pleased with how our leadership has come together and feel confident we have the senior talent and capabilities in house to get the business back on track.
Our teams have remained focused on our fiscal 2020 action plan and during the second quarter, we continued to make progress against the five key areas at the plan.
As we expected sales and margins remained under pressure as we prepared for merchandise and marketing reset this fall.
When we spoke to you in June we told you. Our mission critical objective was to exit non go forward merchandise through aggressive clearance actions in Q2, we did that the clearance activity was the primary driver of our net loss this quarter, but it paved the way for fresh on trend Assortments and our.
Stores.
In the second half our customer will see ever revitalized pure one and we believe will be positioned to compete more effectively.
As our merchandising and marketing initiatives began to gain traction we expect to deliver improvement in our comp sales and gross margin trend beginning in the fourth quarter.
Our expectation also reflects the late Thanksgiving this year, which will cause a portion of our holiday pay off to shift from our fiscal third quarter into our fiscal fourth quarter.
At the same time the cost cutting actions, we outlined under our fiscal 2020 action plan are expected to take hold throughout the second half.
For full year 2020, we remain on track to achieve previously outlined benefits of 100 $210 million, including a reduction in SGN a expense of approximately $90 million.
Now I'll update you on the progress, we're making against each element of our fiscal 2020 action plan.
Revenue in margin marketing or promo effectiveness sourcing and supply chain cost cutting and store optimization.
First revenue and margin.
The success of our clearance plan allowed us to reset our stores with new fall goods to help drive traffic and sales.
The level of clearance inventory in our stores has been significantly reduced and margins are recovering accordingly.
This fall and holiday, we're returning to the familiar best selling categories, our customers want from tier one.
For example, we're highlighting important and profitable categories, such as indoor furniture, and housewares, which we believe will help us begin restoring key metrics, including eight you are and gross margin.
New good started flowing into stores during August and September and we're seeing some encouraging early signs in key product categories like harvest and others that we featured at our mail worse. We also had a successful labor day event marked by a positive comp over the five day period.
By the end of October we expect our merchandising and marketing reset to be fully reflected across our stores and pier one dotcom.
Turning now to marketing and promotion.
Among our top priorities is to optimize media creative and promotions to drive traffic.
We were successful in quickly developing a fresh and innovative campaign, featuring pure ones new style stories for fall.
In August we showcased style your mood with calming Eucalyptus in September it was energetic ochre and next month well be featuring elegant indigo.
The early August launch encompassed all of our key channels, including digital social and TV and our customers have responded positively.
Looking ahead to the holiday and next fiscal year.
We have hired G.S. D N a top tier AD agency renowned for brand transformations to assist us with strategy and creative direction.
We believe they will contribute significant value as we look to elevate holiday with a strong creative platform and position pure wanting to begin taking back market share.
Based on the productive media impact, we're seeing thus far in the fall season, we're leveraging data driven insights and optimizing our spend to really get behind the product, we believe in and help us reach more customers.
Most recently, we started testing some incremental spending in select markets to measure the impact on traffic.
And our third area of opportunity sourcing and supply chain, we made important progress as well.
On the sourcing front, our initiatives to strengthen our partnerships lower our cost and differentiate our merchandise are bearing fruit.
Most recently, we completed the optimization of our agent network, which is expected to result in an enhanced level of service to pier, one while lowering costs.
We are in close collaboration with our vendors to bring new and unique merchandising stories to our customer.
We're in Fort worth many of US are working on our merchandise planning for fiscal 2021 and members of our senior leadership team will be traveling overseas next month to spend time with our vendor partners.
Given the fluidity of the tariffs situation, we're fortunate to have a highly skilled global sourcing team to help us navigate the uncertain landscape.
During the past year, we've taken tangible actions to reduce our exposure to China through cost reductions with many of our vendors and by moving some of our sourcing to other countries.
We've also taken price increases to mitigate a portion of the tariff increases, but some margin impact it's a certainty.
Moving to supply chain, our cost reduction initiatives are taking hold and are expected to begin driving savings in the second half of the year. Our teams remain focused on capturing efficiencies increasing speed to market and better serving our customers.
We're continuing to make headway around D.C. labor costs third party logistics and freight.
Looking now at the fourth area of our plan cost cutting for fiscal 2020, we remain on track to capture approximately $90 million the best DNA savings.
As outlined previously this includes reductions in marketing Gionee and stores.
For business critical spending we've renegotiated contracts to lower our cost base and most recently secured a $10 million reduction with a major vendor.
Additionally, our transformation costs are quickly winding down as planned and we've largely exited our consulting relationships.
The fifth area of opportunity under our plan is store optimization.
Our work with AG Realty to address rent expense and determine the ideal footprint going forward remains ongoing.
We have been holding active discussions with our landlords and are continuing to make progress in realizing occupancy cost reductions.
We are encouraging those landlords, who have not yet participated in discussions to work with us to achieve our goal.
Thus far we've decided to close approximately 70 stores in fiscal 2020, and expect that number to increase as we continued the dialogue with landlords.
If we are unable to achieve our performance coal sales targets and reductions in occupancy and other costs, we could close up to 15% of our portfolio.
In the second half of fiscal 2020, our customer, we'll see a revitalized pier one with on trend merchandise and compelling marketing.
We're closely monitoring early response to our fall reset and anticipate well see our topline and margin trends began to improve as we move closer to holiday.
We all know that turnarounds take time, but I want to assure you that our teams are working with a sense of urgency.
The pier one organization is passionate about the business, we recognize the value of this brand and remain committed to returning to strong performance overtime.
We are especially grateful to our associates for continuing to go the extra mile to make pier one a success.
Now, it's my pleasure to introduce Bob Riesbeck to discuss the financials Bob.
Thanks, Sheryl and good afternoon, everyone I've been at Pier, one nine weeks now and have worked diligently to get up to speed.
We had a strong finance team and I'm working with all of our functions to establish our fiscal 2021 planning process.
And looking at the second quarter, our financial performance was essentially in line with the expectations that management discussed last quarter.
Net sales declined 14.3% to 305 million and company comparable sales declined 12.6%.
Store traffic and are you I remain soft during the quarter offsetting higher U.P.T. versus a year ago.
Second quarter gross profit totaled $51 million versus $94 million a year ago gross profit rate came in at 16.7% versus 26.3% last year.
Pressure on our gross margin rate is primarily due to discounting to cleared through non go forward merchandise as well as a 240 basis point deleverage of occupancy costs due to the lower Selby.
Second quarter, SGN $8 decreased $11 million to 132 million, which includes approximately 7 million of transformation cost and 4.3 million of store impairment.
SGN a rate de leveraged by 300 basis points.
Strict cost control remains a priority across the organization.
For fiscal 2020, we are on track to reduce SGN $8 by approximately 90 million, which represents annual run rate savings of $105 million to $115 million.
Net loss in the second quarter total $101 million or negative $24.29 per share and EBITDA was negative $81 million.
Turning to the balance sheet in cash flow at the close or the second quarter, we had $10 million of cash and investments.
Inventories totaled $329 million, that's down 58 million or 15% compared to last year and reflects the success of our clearance plan.
At quarter end level clearance inventory in our stores has been significantly reduced.
Since my arrival in late July we have relooked at the capital needs of the business and made the decision to reduce our Capex plan for this fiscal year from 30 million to 20, Mike.
As of August 31st 2019, there was 190 million outstanding under our term loan 50 million a borrowing under our five electronics and 55 million of working capital borrowings under our $350 million revolver.
We continue to carefully monitor our liquidity position and believe we have sufficient resources to implement our fiscal 2020 action plan.
Separately, the board's work to evaluate strategic alternatives remains ongoing and no formal conclusion has been drawn.
Before moving to Q in a share on I would like to take a moment to mentioned tropical storm in Nevada and Hurricane Dorian.
First and foremost we are grateful that all of our associates are safe.
We experienced store closures related to both storms, but our stores did not suffer damages beyond minor flooding that some locations.
The overall impact a third quarter sales is expected to be less than $1 million.
We appreciate your time this afternoon and I look forward to working with all of you going forward.
Now Sharon I wouldn't be happy to take your question.
As a reminder to ask a question you will need to press star one on your telephone.
Draw your question please.
Please press the pound Ji. Please standby, we compile the culinary roster.
First question comes from the line of Steven for.
<unk> Securities Your line is open.
Good evening.
Maybe a a follow up on the new assortment tried to there's been in there for I believe over a month now can you discuss whether you've seen really a broader change and customer engagement trends right. Thank both traffic and conversion.
You gave some color right around labor day, which appeared successful, but but how are these trends been since then and is there anything to talk about regionally as it relates to the customer behavior trends as well.
So a couple of things, we're really pleased with the engagement of the customer, particularly in the store, we've seen customers coming in with catalogs in hand, better Dogeared looking for specific items and it's been a file since we've seen that appear won so we're encouraged by their response to the fresh merchandise and.
Fresh marketing I think I encourage you to go to pure one dot com and kind of see the look and feel that we've put forth. This fall with fresh and Ah proving interesting to our customer, but it's way too soon to talk the specific Steve around traffic conversion transactions.
It's going to be a measured transition as we get fully deep into the inventory I mentioned in the remarks closer to October November I think we'll be in a better position too.
Give indicators of turn in the business I think it'd be premature to do that today.
And then just as a follow up right because I believe you mentioned an expectation for I guess directional improvement right in comp in margin trends.
But I also a it given the cost savings right I also but I thought the expectation was getting sort of back to the same level of EBITDA right absolute EBITDA performance last year.
But I mean, obviously your today trends are slightly below that so I don't know he can help us conceptualize what you see as a potential path of EBITDA in the back half what kinda sorta comp level, you're you're you're anticipating right given given new merchandising resets and if not on that just really how we shall we should think about.
The quarterly cash burn rate as we exit the year.
I'm not going to guide forward on either EBITDA or sales into the third and fourth quarter I think the point I'd emphasize in response to your questions. Steve is that the majority of the margin degradation in the quarter. The second quarter traced to clearance than we were very pleased with the exit of that non go for.
Forward merchandise, we think it put us in a very good position to see increasing performance in the second half a year now that those goods have moved out of the stores.
Yeah and Steve This is Bob So one of the things also the cero had mentioned as of the cost savings initiatives that we haven't place for the current year. We've recognized about a third of those savings in the first half of the year. So the majority of those savings during the back half.
Thank you.
Thank you.
Ladies and gentlemen that is our only analyst question today I'll now turn the call back to management for closing comments.
We would like to thank all of you for your time today and look forward to keeping you updated in future quarters.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating.
Correct.
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