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Joe's Jeans Inc. (NASDAQ:JOEZ)

Q3 2008 Earnings Call

October 15, 2008 4:30 pm ET

Executives

Marc Crossman – CEO, President, Director and Head of Operations - Innovo Inc

Hamish S. Sandhu – Chief Financial Officer

[Laurie Nimbico] – Counsel

Analysts

Eric Beder – Brean Murray, Carret & Co.

Nadine Francis -- Roth Capital Partners

[Stephen Cane] -- [Rudgear Capital]

Ronald Bookbinder – Global Hunter

[Richard Sosa] - Private Investor

Operator

Welcome to Joe's Jeans fiscal 2008 third quarter call. (Operator Instructions). I would now like to turn the presentation over to your host of today’s conference, [Laurie Nimbico], Counsel for the company. Please proceed, ma’am.

[Laurie Nimbico]

Present on the call today to discuss our results are Marc Crossman our President and CEO and Hamish Sandhu our CFO. Before we start let me review the company’s Safe Harbor language. Today’s call may contain forward looking statements which are statements of the company’s or managements intentions, hopes, beliefs, expectations or predictions of the future.

These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You’re cautioned not to place undue reliance on forward-looking statements which speak only as of the dates that they are made.

I also refer you to our reports that are filed with the SEC, which includes our 2007 annual 10-K report filed on February 28th, 2008, our first quarter 10-Q filed on April 14th, 2008, our second quarter 10-Q filed on July 15th, 2008, and our third quarter 10-Q filed today.

These include information that could also cause our results to be materially different from those contained in any projections which may be made during this conference call. By making any forward looking statements the company undertakes no obligation to update them for revisions or changes after today. Finally, a copy of our earnings release and a recording of this call will be available on our website www.joesjeans.com and telephone replay will be available also for one week from today.

Now I will turn the call over to Marc.

Marc Crossman

We’re extremely pleased to be reporting $18.2 million in net sales and $2.2 million of net income for the quarter. I want to highlight a few things about the quarter before I turn the call over to Hamish for a detailed overview of our financials.

We experienced a 16% growth in net sales during this period over the prior year period. This sales growth is primarily attributable to improve sales across all of our segments women’s, men’s, international and kids.

As we had projected on previous calls our growth margin continues to trend upward as planned due to the greater shift of our production coming from outside of the U.S. During the quarter we saw margins at 49% of solid sequential and year-over-year improvement.

We’re pleased to report record quarterly profitability with net income of $2.2 million during the period. In addition year to date we’ve generated approximately $3.5 million of cash flow from operations. Finally, just last week we opened our first full price retail location in the Bucktown neighborhood of Chicago.

We’re happy with the amount of traffic in the initial sales in our first full week of operation and look forward to the opening of three additional stores in time for the holiday selling season. I’ll now turn the call over to Hamish to discuss the quarter in more detail and then I’ll close with an outlook for the remainder of the year.

Hamish S. Sandhu

During the quarter net sales grew to $18.2 million from $15.7 million over the prior year period. A 16% increase as Marc noted. Overall sales growth was primarily attributable to strong performance across all of our segments as follows. First, our women’s domestic department store business had a 24% gross sales increase over Q307.

Notable accounts that grew included Saks by 81%, Macy's West by 32%, Macy's Central by 422% and One Male by 38%. We experienced this increase due to new door growth. However, this strong growth in women’s department store business was partly offset by a 14% decline in our gross sales in our women’s specialty store business over Q307. Due to the promotional department store environment many of our specialty stores made more conservative purchases over the summer months.

However, we saw solid increases with such notable accounts as Anthropology, Barney’s, Henry Bendel, American Rag, National Jeans Co., and some other regional specialty store chains.

Thirdly, our men’s domestic business had a 67% increase in gross sales for the quarter. Men’s department store sales saw a 79% increase compared to a year ago. Notable accounts showing solid growth over last year were Macy’s West by 132%, Bloomingdale’s by 104% and Nordstrom’s by 34%.

Regarding men’s specialty sales we are pleased to report that this segment was up 42% over the prior year period, with growth coming from new stores as well as expanding our business with retailers such as Scoop, Ron Herman, American Rag, Blue Bee and Lisa Klein.

Finally our international business recorded gross sales of approximately $1.9 million, a 75% increase over a year ago. Driving this growth were primarily strong sales increases in Japan of 165% ,adding a new distributor in Australia and 172% increase in our European business over a year ago.

Our gross margins came in at 49% during the quarter due to a greater quantity of our production being sought from outside of the United States. During the quarter our non-U.S. production accounted for 86% of all approved shipped compared to 79% shipped in the second quarter.

Third quarter SG&A was $6.1 million a 15% increase from $5.3 million a year ago. The increase over last year is mostly attributable to additional headcounts to support our retail initiative, higher facility and distribution costs, which were driven by high sales volumes and commencement of rent obligations to our retail stores, high professional fees and additional stock-based compensation expense due to the timing our stock grants.

In summary these results led to a record quarter of profitability and net income of $2.2 million compared to net income of %913,000 during the prior year period, a 145% increase. Earnings per share for the quarter were $0.04 compared to $0.02 in the prior year period.

Now, I’ll turn the call back to Marc.

Marc Crossman

As we approach the end of our 2008 fiscal year I want to make a few comments about our fourth quarter outlook. We’ve stated on previous calls that we expect to open two outlet stores and two full price stores during 2008. We are on track with this goal.

We just opened our first full price retail store in Chicago and have three stores slated to open in time for the holiday selling season, two outlet stores in Orlando, in Woodbury and one additional full price store in San Francisco.

Because our stores are opening later in the fourth quarter it’s a contribution of retail sales as our top line next quarter will be small. We believe the look and feel of the store showcase the full potential of Joe's product, captures the shopper’s interest and transitions us into a full life style brand.

This is evidenced by the fact that 36% of our sales in our Chicago store came from collection pieces and further emphasizes the breadth of our product offering beyond Denim. We recently signed two additional leases, one for a full price store and one for an outlet. Both located in southern California that are slated to open in the fall of 2009.

We look forward to reporting back to you after our fourth quarter once we have more operating history about the performance of our retail store. Looking at our women’s domestic business we anticipate single digit growth for the fourth quarter.

Overall on a macro level we see two factors driving business in this environment. First the customer wants newness and second fashion items outsell basic. To create newness we are launching a new core program for women. In our T6 we are expanding the shade ranges and offering a variety of new denim fabrications and weight. In addition we’re increasing the percentage of fashion items as a percent of our overall business.

As a result of revamping our core product offerings we anticipate flat sales for the fourth quarter of 2008 compared to 2007 for our women’s department store business. We have core styles that have been in our department stores assortments in excess of four years and plan on letting our core product inventory levels sell down during the holiday season. During this time period we will also increase the percentage of fashion that makes up our overall business.

As for our women’s specialty store business we are optimistic about conservative growth for our fourth quarter. As we mentioned in previous calls we made special offerings designed exclusively for the specialty store segments for the fourth quarter in order to differentiate from the products sold in department stores. We believe that offering exclusive products for specialty stores has a positive impact on our fourth quarter sales.

In addition we continue to see an increase in average dollars per account compared to the fourth quarter of 2007 and on a sequential basis. Our mid-America strategy of targeting areas where we have previously not had strong distribution has helped to offset the number of specialty store closes we have seen recently.

We remain extremely optimistic about the sustained growth of our men’s business for the remainder of 2008 and into 2009. We anticipate double-digit growth over the last year for the fourth quarter of 2008. Our men’s department store business remains very strong with consistent door growth and increased average dollars per door compared to fourth quarter of last year and on a sequential basis as well. We see our men’s business as an exciting growth opportunity as we roll into 2009.

In terms of our international business we’ve been pleased with our expansion in the market place and there is still room for growth. Looking into the fourth quarter we’re encouraged to see our backlog up over 60%. We recently signed up a new distributor in Australia which has translated into solid sales for us in the third quarter and going into the fourth quarter.

Our presence in Europe continues to grow and our shoppers are going to shop at Galleria Lafayette, exceeded our expectation with gross monthly sales of approximately $42,000 in September and we are trending to hit $60,000 in October. We are also actively looking into expansion in other markets with potential new distributors. Finally we expect our fourth quarter net sales to come in between $19 and $20 million with earnings of approximately $0.03 per share.

Looking into 2009 we believe we are well positioned to capitalize on the trends in the market place. Our spring 2009 collection features new treatments in fashion details that vastly distinguish our products from previous seasons. The fabrications and washers have a more vintage deconstructed feel with hand stitching details and embellishments. In addition we’re offering a variety of fashion kickers, shorts and skirts.

We feel very encouraged with our product diversity. It gives us newness and an edge in the premium denim space as evidenced by the enthusiastic response from both the department and specialty store buyers.

With that said, operator we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Eric Beder – Brean Murray, Carret & Co.

Eric Beder – Brean Murray, Carret & Co.

I'm going to ask the obvious economic question. How has the economy affected you guys? What are you seeing out there in terms of the department store reorders or canceled orders? How are you seeing the department stores that other people will look in terms of the economy?

Marc Crossman

I guess the best way to answer that first of all we’re not seeing canceled orders. They’re clearly ordering closer to the vest and I think when you look at premium denim as a whole within the department stores, it’s obviously a bright spot. I think if you look at the entire premium category again a bright spot I'd catch that as being, depending upon the store, anywhere from down 5% to flat up 5%.

Eric Beder – Brean Murray, Carret & Co.

In terms of the new stores, you've got four by year end what’s the kind of thought process in that you’ve signed already two leases where do you want to end next year in terms of stores? I know it’s very early but you’re already up to six so where are you kind of thinking of that?

Marc Crossman

You know it obviously is going to depend upon how the economic environment shakes out as we move into next year since we haven’t signed any more than two and those were for fall. You’re probably not going to see anything opening up in the spring in the near term. So I think we’re going to kind of watch and see how the market develops I think. If it stays roughly where we are in terms of the pace of our business then we probably open another four next year.

Eric Beder – Brean Murray, Carret & Co.

Okay in terms of your balance sheet I saw that the cash numbers are, cash is nicely up, inventories are a little bit up year to year, what should we think about in terms of year ending cash and inventory and how that’s going to flow, especially now at the retail stores?

Marc Crossman

This is the inventory side of things I think what we’re going to see is we’re obviously having to build up for, or did build up as this reflects in our numbers for the fourth quarter selling season and then really going into the fourth quarter, you’re not going to see that really come down because we’re gearing up for the new core program.

So really where we’ll see is the inventory starts to come back down will be early next year in 2009. In terms of where our cash position is going to be I think it’ll be roughly where we are today at around $3.5 million to $4 million.

Eric Beder – Brean Murray, Carret & Co.

And assuming you can find, you have – that's enough to finance next years store rollouts too?

Marc Crossman

Oh, absolutely.

Operator

Our next question comes from Nadine Francis – Roth Capital Partners.

Nadine Frances -- Roth Capital Partners

Yes, congratulations. Marc can you give us the number for the overall backlog? I know you mentioned the international was up over 60% in terms of just overall what would that number be?

Marc Crossman

The overall back log number?

Nadine o -- Roth Capital Partners

Yes.

Marc Crossman

Or are you talking about the overall in terms of how far up it is?

Nadine Francis -- Roth Capital Partners

How far up it is. Yes.

Marc Crossman

Yes, we don’t release what the overall actual backlog number is.

Nadine Francis -- Roth Capital Partners

Okay.

Marc Crossman

But right now as it stands when we look at totality it’s up about 20%.

Nadine Francis -- Roth Capital Partners

Okay. And for the women’s new core program, when will we see that in the stores, the program that you talked about for the fourth quarter?

Marc Crossman

You’re going to see it in end of January beginning of February.

Nadine Francis -- Roth Capital Partners

Okay, and in terms of guidance is it for the fourth quarter revenues $19 to $20 million?

Marc Crossman

Correct.

Nadine Francis -- Roth Capital Partners

Okay, so basically you guys are going to come at kind of the lower end of the guidance range you provided?

Marc Crossman

Correct.

Nadine Francis -- Roth Capital Partners

Is that because just the overall environment in general and what you have seen lately?

Marc Crossman

Well, it’s really a combination of two factors. One is revamping this core program. We’re going to let our core products sell down, our existing core in the stores.

And so usually what they’ll do is they’ll ramp up in the fourth quarter during the holiday selling season bringing in, bring in more inventory to bulk up and what we’re going to do is let that start to sell down and then as we move into the first quarter, our first quarter which is December, January timeframe we’re going to start bulking back up in the new core.

So there’s a time issuing there and then the second is just the timing of opening the stores, a lot of events have been pushed back, we had expected originally to have all four of them open in time for fall, fall being September, so we’re going to roll through the fourth quarter with the majority of those not open until the last couple weeks of November.

Operator

Our next question comes from [Stephen Cane] with [Rudgear Capital].

[Stephen Cane] -- [Rudgear Capital]

I wanted to ask that you had mentioned that you had some independents close and that was partially offset by some new stores in the middle of the country. Could you talk about overall kind of what’s the door count like for independents?

Marc Crossman

So again you have to look at it on an average basis over the course of the year. I think that the best way to really answer that is if you look at the women’s side of the business in our peak which was the fourth quarter we had shipped about 918 accounts. This was a year ago and this year at our peak we have shipped 940 accounts. This is on the women’s side.

On the men’s side it’s 149 compared to 170. So again it’s because the specialty stores they don’t come in and order month in and month out and sometimes they’ll order in one quarter and not the next.

Part of what we saw this quarter and the third quarter is they had a real build up going into end of the summer season from the specialty stores and then do the heavy promotional period from department stores, the, a lot of denim wasn’t selling that great during the summer timeframe because of the weather.

It’s easily adjusted against last year and so when you saw it as the number of accounts that came in and bought in the third quarter was down from the second quarter which is our obviously summer timeframe but in terms of active accounts, our active accounts still up.

[Stephen Cane] -- [Rudgear Capital]

Could you talk about any general fashion trends if it’s still skinny or darker washers, lighter washes, more distress, less distressed?

Marc Crossman

Okay I think you covered most of it but there’s a lot of hand stitching, a lot of embellishment, we’ve updated our muse, brought the new opening in, gosh, it’s more distressed looks to them for sure. White denim has still been strong for us. Back denim is going to be really strong for us going into end of the fall selling season.

So it really, again, it comes down to differentiation. There’s no better way to put it and that's across silhouettes, washes, details. We really, in this environment you have to be a lot more creative to kind of pull away from being a very basic five-pocket so that runs the gamut across everything you can do to the jean.

Operator

Your next question is a follow-up from the line of Eric Beder – Brean Murray, Carret & Co.

Eric Beder – Brean Murray, Carret & Co.

Are we still on track next year or Q4 to have gross margins over 50% and how is that shifting in terms of international pieces?

Marc Crossman

In terms of the gross margin we're still on track with where we sit in terms of the trajectory. One of the good things is I know there's been a lot of talk about rising transportation costs and we're just looking at that number a couple days ago and in fact our cost to bring the fabric over here or the actual jeans themselves has fallen from the peak of the summer by 28%.

So hopefully that headwind seems to be going away and it's going to turn into a tailwind for us going into 2009, but our plan is to basically exit the year again, 2009, carrying the same types of margins that we're finishing with.

Eric Beder – Brean Murray, Carret & Co.

In terms of, I know it's only been a week or so at the store, what's your initial read on how the store is and what you're thinking in terms of that?

Marc Crossman

Well we can't really same store comps obviously, but our read is that it's meeting the expectations that we had set for it. It's a really cheap rent. I mean we're paying $12,000 a month for that location and it takes three people at most to man the store at any given time. So it's a very inexpensive store for us and the traffic that we're getting is really good. We're very pleased with it.

Eric Beder – Brean Murray, Carret & Co.

When is the next opening?

Marc Crossman

The next opening is going to be the last week in October and that's Woodbury.

Eric Beder – Brean Murray, Carret & Co.

In terms of international where are you in terms of Europe in terms of the expansion? Are you going to keep the self-distribution or are you going to start branching out from that?

Marc Crossman

We're going to keep the self-distribution because it's working and we're seeing margins well in excess of 60% on a net basis, or on our gross margin, net gross margin basis. So everything that we're seeing in terms of the direction we're going with it is working. We want to open stores, a store in [Printemps]. Galleria wants to expand what we're doing with them, so all of are things that we couldn’t do if we had a distributor, ultimately leading up to one day further on down the road where we could open up our own stores.

So as we look at how we've situated ourselves from a cost standpoint and from the flexibility to really control our European distribution and destiny if you will, I don’t think it makes sense to use distributors except in a country like Italy or Russia. But other than that all the primary markets we want to control ourselves.

Operator

Your next question comes from the line of Ronald Bookbinder – Global Hunter.

Ronald Bookbinder – Global Hunter

If you look at your Q4 sales projection, if you back out the timing issue what do you think growth would be? How big of an impact is this timing having on it?

Marc Crossman

Could you repeat that?

Ronald Bookbinder – Global Hunter

The Q4 projection of $19 to $20 million, how big of an impact do you drawing down that core product is having on the quarter?

Marc Crossman

I'd say probably close to $1.5 million. Now just looking at what our replenishment comes in at on a weekly basis and what we've planned out with all of our major retailers in terms of letting that sell itself down, but it's – listen, it's the right thing to do. It's expensive in terms of the revenue hit that we do take but it's going to be about a $1.5 million pull down if you will. Now as we move into the first quarter we're going to be building those levels back up.

Ronald Bookbinder – Global Hunter

Now you talked about shifting the percentage of fashion. What percent would you consider your product fashion now and what percent are you taking it to?

Marc Crossman

So as we look at our core basics right now, and this is on the department store side, it runs anywhere from %60 to, %50 at the low end to 60% on average is the core basic, the rest being fashion items. And really what we want to do is bring the core down to 30%, so a range between 30% and 40%.

Ronald Bookbinder – Global Hunter

And when you talk about the fashion you're talking about embellishments, whether it's hand stitching or I guess some sort of crystal or a little extra bling to it?

Marc Crossman

We could send you some bling jeans if you want them. But no, yes, when we say fashion we're also talking about fashion silhouette. So when we're doing the crops and the kickers and the Bermudas, whatever it is, fashion is anything other than our core basic five-pocket.

Ronald Bookbinder – Global Hunter

And have you talked about inventory? How's the inventory looking year-over-year and how comfortable are you with how it's positioned?

Marc Crossman

Yes, so it was, when we're looking at it year-over-year basically what we're saying about the inventory is that as we're going into the back half of this year we saw the inventory levels come up a little bit and that was by a couple million dollars and that was getting into our holiday selling season.

And then as I was explaining to Eric, as we work down this core replenishment program we're going to be bringing in new fabric and starting it up on our end in terms of the new core and building up our fabric inventory available to fulfill that. So as we look at the trend on inventory we think that we're going to start seeing that movement on the downside again as we roll into 2009 probably in the second quarter.

Ronald Bookbinder – Global Hunter

Is there any extra SG&A involved in this sort of shifting to the new core product?

Marc Crossman

No. There's business as usual. There's no incremental SG&A.

Ronald Bookbinder – Global Hunter

And are you prepared to give any sort of outlook on 2009?

Marc Crossman

Not yet. We will certainly put down on our guidance for our fourth quarter call and we'll drill it down instead of giving you a range on revenues we'll obviously give people a look as to what we think we're going to do on a per share basis. But we're going to wait until the fourth quarter call to establish guidance for next year.

Ronald Bookbinder – Global Hunter

But, so you'll be talking about revenues for company on retail, revenue for international and then domestic revenue?

Marc Crossman

We'll look at wholesale versus retail and then also a bottom line earnings per share number.

Operator

Our next question comes from [Richard Sosa] – Private Investor.

[Richard Sosa] – Private Investor

Hey guys, great quarter. Just two things, one I will definitely take a pair of those bling jeans; those sound great.

But more importantly, I mean obviously someone asked the question on macro. It's probably going to be a tough couple of years and you guys have been adamant about – it looks like you're positioning your business to kind of reflect that if things go wrong, but where do you see your customer in kind of the next two years just regarding all the macro stuff going on? And what levers can you pull in your business in kind of a doomsday scenario?

Marc Crossman

I think when we look at our customer I think our customer within the premium segment skews on the slightly older side so I don't know think – you won't see the bulk of our customers in that 16 to 20-year-old range. So I think we skew a little bit higher than that as evidenced by the fact that we do so well at anthropology which speaks to a slightly older customer.

So as, and we haven't done any studies on this, but I would be wiling to wager that if you looked at the discretionary income of our customer relative to the overall premium space, they'd probably fall in a higher bracket. And that's not to say that people aren't still buying premium denim. We're just saying yes, that it's a challenging environment out there. The numbers of the department stores thought that they were going to be hitting. They're not hitting so they have to reflect their inventory levels based on that to get their turns back up.

But I don't think that this is a category that's dead or going away in any way, shape or form. I just think you're seeing a little bit of a slowdown here relative to expectations or our retail partner's expectations. Did I answer the full questions?

Operator

And it appears at this time there are no additional questions.

Marc Crossman

Okay, appreciate everybody joining us on the call and if you have any additional questions please call us. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation.

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