Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the fourth quarter 2019, Ascena retail group earnings Conference call.
As a reminder, this conference call is being recorded.
I'd now like to introduce your host for today's conference Jean Fontana I see our.
You may begin.
Thank you good afternoon, everyone and welcome to is seen as fourth quarter fiscal 2019 earnings call before we begin I'd like to remind you that certain statements and information made available on today's call maybe deemed to constitute forward looking statements. These forward looking statements reflect the company's current expectations.
Tober third 2019 and are subject to a number of known and unknown risks and uncertainties that could cause actual results to differ materially for factors that could cause actual results to differ from the forward looking statements discussed on today's call. Please see the risks and uncertainties identified under the heading risk factors and has seen its annual and quarterly reports.
Filed with the FCC the company undertakes no obligation to revise or update any forward looking statements. Additionally, today's call may refer to non-GAAP financial measure a reconciliation of GAAP to non-GAAP measures discussed today is included in our earnings release, a copy of which was filed with the U.S. Securities Exchange Commission in the current report.
<unk> form 8-K earlier today, please refer to the Investor section at the Athena retail Dot com for a replay of today's conference call note that the company has posted a supplemental slide package to augment information provided on today's call on its IR website and as an attachment to an 8-K released earlier today the supplemental package includes.
Health about certain non-GAAP items, including noncash impairment charges participating in today's call or Carrie Teffner interim executive Chair, Gary Nieto, Chief Executive Officer, and Dan Lamadrid, Chief Financial Officer, Thank you and I'll now hand, the call over to carry.
Thank you Jane and thank you all for joining US. This afternoon, we make pivotal changes in the back half of fiscal 2019 to position us to deliver sustainable profitable growth.
We took steps to exit verbally business, what's the best trip Maurices and we're extremely pleased with the progress we have made on the wind down of Dressbarn.
We are on track to complete these store closures by calendar yearend.
Our values segment will enable greater focus on our remaining brand, where we see the biggest potential to drive profitability. While the changes we made in the back half of fiscal 2019 have been difficult. They were the right decisions for the long term health of the business.
Beyond these accomplishments we were also very pleased to have exceeded our guidance and with the continued progress we made on our transformation plan in the fourth quarter gearing, Dan will provide additional details and their remarks.
Our board and our executive management team continued to assess the portfolio as we remain committed to enhancing shareholder value by returning to sustainable growth.
Proving our operating margin and optimizing our capital structure.
To that and the board of directors appointed two new independent directors, Gary Bachman impulse take limit. We now have 75% of the board represented by independent members. These new appointments demonstrate the board's ongoing commitment to ensuring a sina drives performance across our objective in order to deliver value for our.
Shareholders, Gary involve both bring strong financial and operational expertise there will be valuable to the company. The company continues to consider options to optimize its balance sheet and liquidity from a position of strength, we have large iconic brands and a business with significant liquidity.
The options being considered to be clear and for the avoidance about bankruptcy of Athena is not one of the options being evaluated.
I've now been in my role and partnering with Gary for five but as we approach the business at the brand level I remain optimistic about the opportunity for Sina, we have a portfolio of strong brands three of which individually generate revenue of approximately $1 billion or more.
Our focus on driving all of our brands combined with a streamlined the Bakken will enable us to optimize the growth and profitability potential other sina.
As we simplify this business, we can better concentrate our efforts on you were more meaningful initiative that enhanced her experience with our brands. We are clear about what's important we know what we need to do to drive value and we are making steady progress.
Before turning it over to Gary I would like to take a moment to share. How pleased we are to have Dan and the CFO role. He is a seasoned finance executive who joined US Sina two years ago, SVP and Chief Accounting Officer, following finance leadership positions in other retailers, including Ralph Lauren and vitamin Shoppe, Dan has played a critical role.
In our transformation work and strategic portfolio review, Gary and I look forward to partnering with Dan as we move forward and our transformation with that let me turn it over to Gary to provide more detail on the quarter.
Thanks Kerry.
Fourth quarter, we exceeded our adjusted operating income guidance with a better than expected comp and lower expenses importantly, we were successful in getting inventories back in line I have the important fall and holiday season.
Back to this resulted in pressure on our gross margin during the quarter, but put us in a much better inventory position in terms of the quality and composition.
Now I will share some highlights on our fourth quarter results and our initiatives at each year, our segment and then able to talk about our future direction.
In premium for the fourth quarter comp sales grew 1% led by law on top of the 5% increase last year.
Well promotional activity impacted profitability for the quarter, we successfully clearing excess inventory and are well positioned for the fall season.
We know that we have strong brand recognition at both loft Ann Taylor, We also know that our customer wants versatility across seasons occasions, and outfitting choices. So that she can get the most out of her wardrobe.
And Taylor, specifically, we are shifting the perception of our brand away from wear to work towards more wearing occasions relevant to her lifestyle.
We're pleased to see the work we're doing to provide personality and our assortment is being well received we believe this shift in our merchandising strategy combined with our flexibility to keep pace with her changing desires.
Positions us to deepen our customer loyalty with existing customers reengage lapsed customers and attract new customers to the brand.
In kids comparable sales decreased 5% for the quarter following an increase of 50% in Q4 last year.
Similar to premium promotional activity was higher as we manage through excess inventory.
And we ended the quarter with a clean and fresh assortment.
I just as we're looking to possibly in power and help our customer go competence that a young age.
We need to appeal to both our girls and her mom.
Our mission is to inspire every girl every day.
Well, we can attract retention with non apparel theme product. We note that our apparel leads to resonate with her for us to succeed long term.
Just caters to ages six to 12, and there were several acetic and product offerings that needs to be represented within this age range.
Everyday favorites leads to a younger customer represents a new value proposition for her.
We also offer assortments that happen more aspirational static and capture the higher end of the price spectrum.
In the middle the pyramid, we maintain a balanced for all ages.
From a product perspective based on customer insight, we are beginning to move away from spark.
In general the overall trend is now more toned down a responding to that ship.
Sparkle will continue to play a role within the assortment. It will just be done in a more subtle way.
The shift in product assortment began with a fall deliveries and we're seeing a positive initial response.
Overall justice has a strong market position with between age segment.
We will continue to leverage our insights to more fully capitalize on our market position and we look to in fact, we engage her and keep are excited and coming back.
In closing costs for the segment were down 4% compared to a 2% increase in the fourth quarter last year.
We were encouraged to see performance improved through the last six weeks of the quarter.
As we think about how we address our plus vice customer, we know that she values fit quality and service.
You also wants to be on trend in a way that makes them feel her beth.
The inclusiveness of the customer experience at each of our plus brand is an important differentiator.
In response, we are enhancing our merchandise assortments to meet her needs with flattering fit and good quality, while continuing to provide exceptional service.
This focus will help us therefor, better and deliver and more sustainable and profitable business.
As we look ahead to fiscal 2020, we're committed to enhancing the profitability of our business.
In the past we place too much emphasis on building. It platform. We are fundamentally changed your approach to the heightened focus on maximizing the potential of each of our brands.
As Carey stated we have a strong a diversified portfolio a powerful brand and they all have meaningful and differentiated presence in the marketplace.
As we shift or attached to each and streamlined the backend will be in a better positioned to optimize their growth and profitability.
The work, we're doing is rooted in the execution of three key priorities.
Driving sustainable growth.
Improving operating margin.
And optimizing our capital structure.
First with respect to driving sustainable growth. We believe we can drive performance across our brands as a more nimble flexible organization weekends with we respond to our customers rapidly changing needs by delivering relevant product communicating more effectively across all our touch points and delivering an exception.
Customer experience across channels.
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Beginning with product our customer insights and advanced analytics capabilities are yielding valuable insights into each of our brands. We are leveraging this data to inform our product decisions as well as our segmentation strategy.
These insights enable us to provide her with more relevant and compelling product assortments that meet her personal lifestyle needs.
Our communication efforts will also be led by analytics capabilities as we begin to second our customer file and deepen our relationship with existing customers and targeting new customers through more relevant messaging across all media channels.
We really early stages, our personalization efforts and we see significant opportunity to engage with her in a more meaningful way as we implement these strategies.
Exceptional customer experience is an important ways in which we can continue to drive greater wealthy across brands.
We're capitalizing on omni channel capabilities to engage her with our brand, how where and when she walks we want to serve heard through multiple quite to contact and create a seamless shopping experience across China.
We see an opportunity to expand our reach an increase of penetration are growing online business by offering convenience and accessibility as well as showcasing our product offering in the best way.
Similar to the way we communicate with her we also want to personalize our shopping experience across channels.
Well loyalty programs play an important role in our personalization strategy, we extended our multi tender customer loyalty program to our premium plus segment. This spring.
In addition to gaining valuable customer data these problems in the Eagle increased customer and brand engagement.
Based on deepening understanding of who she is in her preferences. We believe that we can drive high retention and increased share of wallet across our segments as well as more effectively attract new customers to our brand.
Operating margin improvement is our second key priority, we expect to deliver improved merchandise margin through higher full price selling as well as improved commercial and markdown strategies across brands.
We also continue to evaluate our operating structure to ensure that we have to rightsize teams and simplify standardized processes to drive improved profitability.
Third and finally, we continue to focus on optimizing our capital structure to support our business in growth objectives by prioritizing cash flow and maintaining appropriate financial flexibility.
Dan will address this further in his remarks in summary, we were energized by the progress we've made and the opportunities we see in front of US that said there is still a lot of work to be done.
We are moving our brands and the right direction as we capitalize upon their distinct market leadership positions. We believe the steps. We're taking now it's up to successfully achieved double digit EBITDA margin and enhance shareholder value long term.
Let me now turn the call over to Dan.
Thanks, Gary.
I share carrying gary's enthusiasm for the opportunities ahead for Sina and look forward to working together to position the business for long term profitable growth.
Before getting started let me note that my comments will reference non-GAAP results, which include Dressbarn, but exclude items, such as restructuring and noncash impairment charges recorded in the quarter as well as the impact of the 50 Threerd week in the prior year.
As Jay noted we have posted a supplemental earnings package on our IR website and attached to our 8-K to provide reconciliations and additional information on these items.
We would also note demo reese's results have been classified as discontinued operations for the quarter.
Turning to our fourth quarter results.
Total revenue from continuing operations for the quarter was $1.454 billion up slightly from Q4 fiscal 2018.
Total company comp sales for the quarter were flat to last year, driven by Dressbarn as well as their premium segment.
Excluding dressbarn comp sales were down 2%.
The comp reflects heightened promotional activity to move through excess inventory, which positioned us well heading into the first quarter.
The results gross margin rate from continuing operations came in at 54.3%.
Operating expenses improved 5% in a quarter versus last year, which was better than expectations.
Adjusted operating income for the quarter came in at $16 million. This reflects the better than anticipated comp performance and lower operating costs as a rightsizing initiatives have begun to take hold.
Excluding dressbarn adjusted operating income was $13 million.
Consistent with our ongoing store optimization strategy, we closed 75 stores during the quarter. This includes 45 closures that dressbarn.
There are 616, Dressbarn locations remaining and total store count for Sina at year end was 3445.
Turning to Dressbarn.
As noted earlier the wind down is proceeding according to plan.
We're pleased that agreements have been reached with the majority of landlords and negotiations with the remaining away at Lord's are ongoing.
We expect all Dressbarn stores will be close by December 31st.
Since the wind down was announced business has accelerated with just weren't delivering comparable sales growth of 12% in the fourth quarter.
The accelerated sales margin will help offset cost associated with the wind down.
We appreciate the continued loyalty and dedication of our associates as we go through this process.
Now turning to the sale Maurices.
We completed the transaction on May six and received a combination of cash proceeds and an equity interest in the go forward business.
Our share of operating results are being recorded based on the equity method of accounting and during the fourth quarter Maurices reported several purchase accounting related adjustments, which resulted in a net loss for the quarter.
Overall, the transition with smooth and service agreements are now in place.
Turning to the balance sheet, we ended the year with $328 million in cash and cash equivalents, reflecting proceeds from the mortgages transaction and positive cash flow in a quarter.
No. The proceeds from them race is still have been reinvested into business in accordance with the terms of our credit agreement.
As for liquidity, we are in a healthy position with no borrowings under our revolving credit facility.
Together with our cash balance we ended the fiscal year with almost three quarters of a billion dollars in available liquidity.
Capital expenditures for the fourth quarter were $32 million.
Resulting in a full year capex of $136 million, which was lower than our for your estimate of 150 $260 million.
Long term debt stood at $1.372 billion at quarter end, reflecting the balance on our terminal.
The term loan does not mature until August 2022.
Our next amortization payment is due November 2020.
Further we are in full compliance with all of our covenants and intend to remain so.
Before turning to guidance I'd like to briefly touch on our strategies to mitigate the impact of tariffs.
We are negotiating with our vendors to share the higher costs and we're selectively increasing prices, where we believe we we have flexibility.
In addition, we continue to move a portion of our production out of China, where we believe there will not be an impact on quality.
We expect these mitigation efforts to ramp up in the first half and become more meaningful starting in Q3.
Turning to guidance, which will continue to exclude dressbarn.
For the first quarter, we expect comparable sales to be down low single digits.
Net sales of 1.1 to 1.1 to 5 billion as compared to 1.147 billion in Q1 fiscal 19.
Gross margin rate down 50 to 100 basis points as compared to 60.3% in the first quarter fiscal 19.
This includes an estimated 50 basis points of impact relating to tariff increases.
Excluding the tariff in fact, we expect to gross margin rate to be flat to down 50 basis points.
As I stated earlier, we expect our mitigation efforts will begin to have a meaningful impact beginning in Q3 and continue thereafter.
Depreciation and amortization of approximately $61 million.
And operating income of 15 million to 35 million.
This compares to 32 million of income in Q1 fiscal 19.
For the full year, we expect capex between $80 million to $100 million down significantly compared to prior years.
And we expect to drive sequential improvement in operating margin as our strategic initiatives take hold throughout the year and we lap softer performance in a second half.
Cash remains our number one priority we are in a process of rightsizing, our cost structure to align with the scale of our go forward business, we are well underway to achieving the $150 million of annualized savings that we previously communicated the bulk of which we expect to realize in fiscal 2020.
Through a combination of achieving these annualized savings goals rationalizing, our capex and maintaining disciplined working capital management, we expect to strengthen our balance sheet over the course of fiscal 20.
That concludes our prepared remarks, and with that I will turn it back to the operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
Our first question comes from line of Dana Telsey with.
Telsey Advisory group. Please proceed with your question.
Good afternoon, everyone.
Two quick questions as you think about long term the gross margin opportunity. What do you see is the gross margin opportunity to the business or brand by brand along with the go forward strategy for each of the brands and lastly on real estate, how do you think of your portfolio outlet versus full line.
And what the base, where you should be over the long term. Thank you.
Great. Thanks, Dan This is Dan I'll take the at the first question regarding.
Gross margin rate opportunities and clearly as we we've shared the back half for fiscal 19.
Were elevated inventory positions that we had we knew there was any pressure on gross margin rate.
That that pressure is now behind US. We think we've started fiscal 20 at a healthy inventory position. However, some headwinds that we have coming into the new year or the impact of new tariffs as well as this again as our E. Commerce business continues to grow at a healthy rate E. Com penetration is increasing also putting pressure on gross margin rate.
We do think as we get further into the year as we're comparing against.
49 teams inventory liquidation period, so that will have opportunity to show improvement gross margin rate, but when you combine that as well with our cost reduction efforts that were doing besides gross margin. We are focused on making sure that we can deliver operating margin improvements with later in the year.
Dan It's Gary anything with the Brad focus on.
Customer and offering relevant product, we believe the continued to improve our margins go forward.
Regarding my second question on real estate.
We have continued to optimize our real estate portfolio will continue to do so it's an ongoing process.
We continue to rightsize, both the full price fleet as well as the outlets suite.
Is there a number of stores the each that that you would target outlets or a line.
Dan I think it really depends on on the brand.
Yes, and we look at it on ongoing basis.
The premium segment, it probably has the the larger penetration and outlet stores.
To full price and we continue we are we could you look to optimize.
Yes.
Both and it really we take a holistic view looking at the demand at the market level and then that determines the number of stores that we believe were appropriate based on that demand. The other thing I would add to what Barry just said is the fact that just on evolve over time, obviously as the consumer shift continues to move online, making sure we're balancing that mix of where the customer.
Can shop, and making convenient for her is what's important inventories were driving the right for a level of profitability.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, fueled by task question. Please press star one on your telephone keypad one moment, please as we pull for questions.
Our next question comes from the line of Jenna Gianelli with Goldman Sachs. Please proceed with your question.
Hi, good afternoon, thanks for taking the questions.
And just to start off I wanted to ask on the cost savings. He said that you're expecting 150 million odd to be realized this year does the one Q guide factor in some of these savings and and how should we think about them rolling through would they be falling rolling through to the bottom line or should we think about some of those being offset by my other investments and.
Our inflationary pressures.
Sure again so.
As we look at even Q4 fiscal 19, we already started seeing the benefit of similar actions.
Well, we have plenty plenty more work to execute to get that 150, we have a clear roadmap. It will actually throughout the year of fiscal 20. It will build owned a portion of it that affects Q1 is reflected in the guide though.
And as far as how much of it will drop to the bottom line. It is being used to offset partially or other headwinds such as inflation and alike, but we are expecting it helped drive again or operating margin improvement as we get throughout the year.
Great. Thanks, and then just I wanted to ask on you know strategic alternatives. There how are you thinking about option for Cemig other brands and timing do you see these as you know more potential asset sales like you did with Murray says or something maybe more like a wind down similar dress barn.
And I guess on the back of that you know how are you thinking about your footprint by yearend.
Yes, we think of our portfolio, we have announced obviously, we're doing that getting our portfolio assessment.
You know you consider wind down an option to obviously I think the key there is really about looking at the profitability individual brands.
And as we've looked at its best Dressbarn clearly was not driving profitability at the brand level. So that's obviously key driver too that we have healthy brands that generate.
Recent profitability or opportunities really continue to drive those brands and right size the cost structure. So we can drive overall profitability for the business. So.
We'll continue our assessments and when we have more information, obviously, we would share it Uh huh.
Great. Thanks, and then just one final one if I can you know as we think about your liquidity are strong liquidity and the desire to manage Robertson given right alone is trading I know it something you've engaged within the past have you thought potentially about buying back some of the alone in the open market to take advantage of that this kind of where it's trading.
Yeah, we when I was saying on that is we're looking at all opportunities available to us to optimize our capital structure and being really thoughtful about that.
Thank you so much.
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Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Gary Muto for closing remarks.
Thank you I want to thank our stakeholders for their continued support our focus is now.
Kerry committed to our brands.
We are committed to driving sustainable growth, improving operating margins and optimizing our capital structure.
We look forward to updating you on our further progress at our first quarter earnings call. Thank you for joining us today.
This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.