David E. Ullman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
R. Neal Black - Chief Executive Officer, President and Director
Jos. A Bank Clothiers (JOSB) Q3 2012 Earnings Call November 29, 2012 11:00 AM ET
Ladies and gentlemen, thank you for standing by. Welcome to the Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, David Ullman, CFO. Please go ahead.
David E. Ullman
Thank you. Good morning, everybody. And this is David Ullman, and I'm joined by Neal Black, our President and CEO. I will provide a financial overview, and Neal will provide commentary on the business. We will also address some questions that were submitted to us by the analysts.
Before we get started, I need to read this statement, that our statements concerning future operations contained on this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this presentation, the words estimate, project, plan, will, anticipate, expect, intend, outlook, may, believe, goal, attempt, assume potential and other similar expressions are intended to identify forward-looking statements and information. Actual results may differ materially from those forecasted due to a variety of factors outside of our control that can affect our operating results, liquidity and financial condition. Such factors include risk associated with economic, weather, public health and other factors affecting consumer spending, including negative changes to consumer confidence and other recessionary pressures; higher energy and security costs; the successful implementation of our growth strategy, including our ability to finance our expansion plans; mix and pricing of goods sold; the effectiveness and profitability of new concepts; the market price of key raw materials, such as wool and cotton; seasonality; merchandise trends and changing consumer preferences; the effectiveness of our marketing programs, including compliance with relevant legal requirements; the availability of suitable leased sites for new stores; doing business on an international basis; the ability to source products from our global supplier base; legal and regulatory matters; and other competitive factors.
The identified risk factors and other factors and risks that may affect our business or future financial results are detailed in our filings with the Securities and Exchange Commission, including, but not limited to, our annual report on Form 10-K for the fiscal year 2011 and our subsequent quarterly reports on form 10-Q filed through the day hereof. These risks should be carefully reviewed before making any investment decisions.
These cautionary statements qualify all of the forward-looking statements we will make on this call. We cannot assure you that the results or developments anticipated by us will be realized, or even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations the way we expect.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake an obligation to update or revise any forward-looking statements to reflect actual results or changes in our assumptions, estimates or projections.
The following presentation includes information regarding sales to date in the current quarter. These interim period sales are not necessarily indicative of sales expected for the full quarter. Furthermore, sales are just one component of earnings, and no projection of earnings should be inferred from any discussion of interim period sales or other data in this presentation.
I will now provide the financial overview. Starting with the income statement, our net income in the third quarter of 2012 was $13.3 million compared with $15 million in the same period in 2011, which represents an 11.2% decrease in net income. Diluted earnings per share were $0.47 in the third quarter of 2012 compared with $0.54 in the same period of 2011.
For the third quarter of 2012, we had an 11.1% total sales gain. Comp store sales increased 4.8%, and Direct Marketing sales increased a strong 25.8%. While sales were up nicely in Q3, gross profit margin declined by 560 basis points, so we were not able to push the sales gains to the bottom line. The gross profit margin rate decline relates primarily to higher markdowns resulting from increased promotional activity and higher sourcing cost.
For the major product categories, other tailored clothing, dress shirts and sportswear had the greatest gains, while suits had modest overall gains. The total sales increase of 11.1% was also attributable to the increase of 43 stores in operation since the end of the third quarter of 2011. We ended the third quarter of fiscal year 2012 with 587 stores.
In a few minutes, Neal will provide additional insight into some of the major drivers of the sales and gross profit margin rate, as well as discuss the trends.
From a productivity standpoint, we achieved better leverage on our expenses in the third quarter of 2012 compared to the same period last year as our sales and marketing leverage improved 100 basis points and our G&A leverage improved 220 basis points. The leverage in the sales and marketing costs was largely driven by the improvements in the stores and Direct Marketing payroll, occupancy and other variable selling costs. This favorable leverage was partially offset by negative leverage from our advertising and marketing cost. As a reminder, we include in sales and marketing all of our store and Direct Marketing occupancy, payroll, selling and other variable expenses and all advertising costs.
The leverage in our G&A cost was largely driven by lower corporate compensation cost, other corporate overhead and distribution center costs. As a reminder, G&A costs consist primarily of corporate costs, including the total company performance-based incentive compensation other than commissions and also includes distribution center costs.
For the full fiscal year 2012, we expect total SG&A dollars to increase over the comparable period in 2011, primarily for the following 6 reasons: one, the opening of 45 to 47 new stores in 2012; two, the full-year operation of the stores opened during 2011; three, an increase in our total advertising spend, including both volume and rate increases; four, an increase in the capacity of our warehouse and distribution center space; five, the continued development of our new business initiatives; and six, the potential increase in total company performance-based incentive compensation, which will vary depending on the results of the fourth quarter.
The effective tax rate was 37.5% in the third quarter of both 2012 and 2011. For the first 9 months of fiscal year 2012, the effective tax rate was 38.2%, which is 100 basis points lower than the rate in the first 9 months of 2011. The lower tax rate in the first 9 months of 2012 versus the same period last year relates primarily to lower overall state income taxes.
Our balance sheet continues to be strong, and it positions us to be able to focus on the long-term growth prospects of the company. We expect to continue to invest in our new full line of Factory stores, e-commerce and other growth initiatives as opportunities are identified.
Our inventory increased approximately 15% in the third quarter when compared to the end of the third quarter of last year. This level was better than our planned and previous guidance. Neal will discuss the inventory trend shortly.
We used approximately $22 million of cash on capital expenditures in the first 9 months of 2012 compared with approximately $26 million in the same period of 2011. We expect to spend approximately $37 million to $38 million on capital expenditures for the full fiscal year of 2012, including the $22 million we have spent so far this year.
I will now turn the call over to Neal Black, our President and CEO.
R. Neal Black
Thanks, Dave, and good morning, ladies and gentlemen. The up-and-down results which characterized the first half of 2012 at Joseph A. Bank continued in the third quarter. We achieved an 11.1% total net sales increase in the third quarter with comp store sales up 4.8% and Direct Marketing sales up 25.8%, but net income decreased 11.2% versus the same period a year ago. Comp store sales were up in August, down in September and up again in October. The overall sales picture is still one of volatility. The strong promotional activity is driving the sales increases.
Hurricane Sandy, which hit along the East Coast where the majority of our largest-volume regions are located, negatively impacted third quarter sales, particularly when we ran a big promotion right at the end of the quarter. The hurricane, along with the distractions of the national election, continued to have a negative impact in the first weeks of November. In November, for the start of the fourth quarter, comp store sales were down. Sales of suits had a modest unit increase in the third quarter of 2012. Other tailored clothing, which includes sport coats, blazers, dress pants and tailored outerwear, had the strongest unit increases in the quarter. Sales of the more luxurious Signature and Signature Gold lines represented over 30% of the business in the quarter.
Direct Marketing sales were up 25.8% and accounted for approximately 10.1% of our total sales in the quarter. We have a presentation on the Internet that continues to gain increasing customer traffic. While many of our marketing offers on the Internet mirrored the offers in the retail stores during the quarter, we continued to refine our techniques for driving customer traffic onto our website, and converting that traffic into sales transactions.
In the third quarter of 2012, we employed not only additional markdowns and promotional offers to drive traffic and sales, but also additional marketing, which was less productive as costs continued to increase.
Even though the results were less productive, we're pleased with the 25.8% sales increase, and our goal going forward is to find ways to deliver these sales at improved margins.
At the start of the fourth quarter, Direct Marketing sales were up. The Cyber Monday this year was the largest single day for sales demand in the history of our company.
Our proprietary database of active customers for both stores and Internet grew 14% for the quarter versus the same period last year and now totals 4 million active customers.
Gross profit margin declined 560 basis points in the quarter due primarily to increased markdowns and higher merchandise cost. The increased merchandise cost that resulted from the increases in cotton and wool raw materials last year are now flowing through our inventory, and we believe that they are peaking now. At the same time, we have been using more markdowns and progressively more aggressive promotional prices to drive top line sales.
Setting aside the short-term distractions from the national elections and the short-term setbacks from Hurricane Sandy, we expected to achieve even greater sales with this formula, and those additional sales did not materialize. So we are evaluating our pricing strategies and our marketing expense going forward in order to attempt to reset a more profitable balance.
We also continue to implement sourcing changes as part of our strategy to offset cost increases with new lower-cost manufacturing. Controlling merchandise cost without deterioration of quality remains a top priority. Right now, we expect our product costs to decline modestly through 2013.
Our inventory was up 34% at the end of the first quarter 2012 as compared to the end of the first quarter of 2011. And now at the end of the third quarter 2012, it's up 15% versus the end of the third quarter last year. This improvement reflects, among other things, much lower receipts of cold-weather merchandise this year in the third quarter due to the carryover of unsold 2011 cold-weather merchandise. We're past that now. So all we need is a normal cold weather selling season and that lump of inventory will be fully annualized.
Assuming a normal seasonal sell down in the fourth quarter, we expect the 2012 year-ending inventory to be up 15%, 20% primarily due to 3 reasons: first, cost-to-value of individual units of new inventory is higher than last year due to cost inflation, which we project to be in the single digits as a percentage by year end; second, we are still in the process of building our core basic replenishment inventory to planned higher levels; and third, we are planning to open 45 to 47 new stores during 2012 and additional stores in 2013, which I'll discuss in a minute.
Progress on our growth initiatives is as follows. First, we continue to attempt to drive additional revenue through our Internet website. These efforts include product expansions, new promotional activity, international shipping, mobile formats and social marketing in conjunction with our ongoing affiliate programs. Our international shipping functionality is now fully in place, and we have successfully shipped orders to over 70 different countries worldwide.
Second, we will continue to grow our tuxedo rental program. We're pleased with the results so far in 2012. We improved our results in the third quarter substantially versus last year, and the business contributed positively to sales and net income, although our core business still accounts for the vast majority of our comp store sales. We expect that this business will be a significant growth vehicle in stores in future years.
Third, we will continue to develop our business in Big Tall and Regal size extensions, and we are achieving our goals. We expect that this business will also be a significant growth vehicle in future years for our direct channel.
Fourth, we will continue to open Factory stores. We are happy with our overall results and the business continues to contribute positively to net income. And we plan to grow this business at approximately the same pace in 2013 as in 2012, as long as real estate opportunities become available.
And fifth, new store openings for 2012 are projected to be between 45 and 47 stores, including approximately 10 stores, which will be an increase in our retail square footage of approximately 8% over 2011. We are focusing on both filling into existing markets and on new markets. We will open stores in 2013 at approximately the same pace as 2012, and we have recently revised our long-term store count goal. Looking forward, our goal is now to operate approximately 700 full-line Joseph A. Bank stores, increased from 600, and 100 Factory stores, increased from 50 to 75, all in the U.S.A.
We have meticulously mapped out the entire country by location, and we are confident that this store count can be supported by a potential new customer population. The timing of achieving this new total of 800 stores is dependent on real estate availability and other economic factors. So we will continue to announce future store counts by year, approximately 12 to 18 months in advance.
As I have stated repeatedly, our goal is to deliver net income. We have built a business model that allows us the flexibility to achieve increases in net income in a variety of ways depending upon the circumstances at any given time. We fell short of our goal in the third quarter, but we're taking steps to make corrections.
The fourth quarter is off to a slow start with comp sales down in November, but we'll be annualizing strong comp sales in December and January. However, December and January are big, important months with the potential to deliver big sales increases, of course remembering that sales are just one component of profit.
While keeping a tight hand on expenses, we will continue to focus on an aggressively sourced, high-quality, well-balanced, fully stocked assortment that is promoted with timely marketing and sold by knowledgeable professionals in convenient locations.
We look forward to speaking to you again when we report our fourth quarter results and our 2012 full year results.
Now I'll turn the call back to David Ullman, who has some questions that were asked by our analysts after the earnings were released yesterday.
David E. Ullman
Okay, thanks, Neal. And we did receive numerous questions, and I culled them down into 5 questions here. The first one starts with our promotional activity. And the questions are, "What was the strategy in the third quarter as far as the balance between the drive for sales versus the gross margin? Were you more promotional in the third quarter of 2012 compared to last year? If so, was the increased promotional activity necessary because of difficult customer demand or the desire to move through certain goods such as cold-weather items, or the desire to move through some higher-cost goods to be able to take advantage of lower cost next year or some other factor? Do you think you were too promotional in the third quarter? Also, what impact will these factors have in the fourth quarter of 2012?"
R. Neal Black
In the quarter, we were running aggressive price promotions just as we have been running all year. These promotions were at lower gross margin -- at a lower gross margin rate than a year ago due to higher markdowns and to the higher cost on inventory that was placed in manufactured last year when cotton and wool prices were at all-time high prices. So we knew that going in. Therefore, we knew that we needed to do extra sales to make up the difference. The strategy worked in the second quarter but not in the third. Sales were fine but not just not enough to make up for the lower margin, so the result was lower profits. All of these factors remain in the fourth quarter. The strategy is still to sell high-quality, classic menswear at compelling prices. We'll be making ongoing adjustments to our promotions to attempt to maximize both sales and the gross margin rate.
David E. Ullman
Okay, the second question is, "There were many factors impacting November, such as Hurricane Sandy, the presidential election, Thanksgiving openings and Black Friday. These events were followed by Cyber Monday and early fiscal December. Can you provide some color on the impact and results of some of these events? Also, you mentioned that you were cautious about the fourth quarter. Is there an opportunity in December and January to make up for some of the sales decline from November?"
R. Neal Black
Early November was tough, starting with the effects of the hurricane and the election. But things got better in the middle of the month, beginning right after the election. I was bullish going into Black Friday, thinking that we could fully recover from the negative events at the beginning of the month. On a comp store basis, we did not. Direct Marketing, which is mostly the Internet, was good in November and, as I mentioned earlier, was very strong and record setting on Cyber Monday. December and January are big months, and there are a lot of selling days remaining before Christmas. We have a chance, but we're starting in a hole.
David E. Ullman
Okay. The third question is, "You mentioned that sales in the third quarter were led by unit increases in other tailored clothing, dress shirts and sportswear, with modest increases in suits. What are the trends in your major product categories? Are the Slim Fit and Tailored Fit products increasing faster than the Traditional Fit category? How have the cold-weather products sold so far this season?"
R. Neal Black
Right now in the merchandise, it's all about fit. Tailored Fit and Slim Fit are growing and taking share from the Traditional Fit. This has been ongoing all year, and I think we've been managing the inventory pretty well. For categories in general for the full season, suits and dress shirts are trending a bit better than casual wear. It's too early to tell much about cold-weather goods, which includes sweaters, because so much of that is driven by holiday selling. On Black Friday, we had a better result on cotton sweaters than we did on cashmere sweaters, which tells me 2 things. First, this year, we have a lot of days between Thanksgiving and Christmas, so a lot of Black Friday was driven by self-purchasing rather than gift giving. And second, it's not cold enough yet for cashmere to sell this early. Early in the cycle and we need another 10 to 14 days to know for sure.
David E. Ullman
Okay. Fourth question, "Inventory increased approximately 15% at the end of the third quarter of 2012 compared to the same time last year. This percent increase is lower than the increases of the first 2 quarters of 2012 and lower than your previous guidance. What caused the improvement?"
R. Neal Black
Well, first, the lump of cold-weather inventory that we carried over from last year has been fully annualized. Thus, inventory purchases were made this year versus last year in order to offset the carryover, and that strategy has worked out fine. Second, top line sales have been okay. Our inventory levels are trending better than we said they would with, of course, the caution that the biggest part of fourth quarter sales are yet to come.
David E. Ullman
Okay. And then the final question is, "How have the new stores performed, including the Full-line stores and the Factory stores. Are you opening new stores later this year compared to last year?"
R. Neal Black
The new stores are trending well with sales averaging similar to the groups of stores we've opened in the last couple of years, which we're very happy with. Thus, based on the timing of leases and the real estate availability, we are opening more stores in the fourth quarter this year than last year. Almost all of those opened in November. We are projecting 45 to 47 new stores in 2012, which includes approximately 10 Factory stores. As of today, we've opened 43 stores, which includes 34 Full-line and 9 Factory stores. So that leaves up to 3 Full-line and 1 Factory store remaining between now and the end of January.
David E. Ullman
Okay. Thanks, Neal. And thanks again, everyone, for joining us this morning. As Neal mentioned, December and January are big months, and there a lot of selling days remaining before Christmas. Please have a great holiday season, and we look forward to talking to you after the fourth quarter. Take care, and have a great day.
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