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Dover Saddlery, Inc. (NASDAQ:DOVR)

Q3 2008 Earnings Call

November 11, 2008 8:30 am ET

Executives

Stephen Day – President & CEO

Michael Bruns – CFO

Janet Nittmann

Analysts

Lawrence Petron – WR Hambrick

Nadine Francis – Roth Capital Partners

Operator

Good day and welcome everyone to the Dover Saddlery third quarter 2008 conference call. (Operator Instructions) At this time for opening remarks I would like to turn the call over to Jane Nittmann. Please go ahead.

Janet Nittmann

Thank you for joining us for Dover Saddlery’s teleconference. Today we will review the financial results for third quarter of 2008.

Joining me is Stephen Day, President and Chief Executive Officer and Michael Bruns, Chief Financial Officer. Stephen will begin today’s call by reviewing the business highlights, Michael will then discuss our financial results. After that we’ll open it up for questions.

Before we begin I’d like to remind you that today’s conference call may include business and financial projections and other forward-looking statements. Such statements are based on current expectations and are subject to risks and uncertainties which may cause actual events to differ materially.

These uncertainties include factors affecting our revenue, earnings, expenses and business outlook as well as other risks that are discussed in our S1 Registration Statement. We disclaim any duty or intention to update forward-looking statements.

Now, let me turn the call over to Stephen.

Stephen Day

Thanks Janet, good morning everyone and thank you for joining us today. As you are all aware the retailing environment continues to be challenging. On Friday The Wall Street Journal reported retailers wallow and see more gloom.

Although the third quarter is generally a weak quarter and the severe downturn in the economy brought about the lowest consumer confidence ever recorded, Dover weathered the storm quite well. Gloom is not the attitude here at Dover.

As noted in our press release total revenues for the third quarter of fiscal 2008 decreased only $900,000 from $19.9 million to $19 million. Our retail store sales increase of 6.3% was driven by new store openings.

Same store sales positive through the first six months, decreased by 5.8% in the third quarter resulting in a total decrease of only 1.5% for the nine-month period.

Also we are very pleased to report that the third quarter was a profitable one. We are laser focused on controlling marketing costs and maintaining inventory levels which will have the optimum in-stock position for our stores and to meet our direct customers’ needs.

In October we opened our first store in Georgia, in the very active equestrian community of Alpharetta, north of Atlanta. This was our best Grand Opening to date with a VIP reception attended by over 400 guests who were delighted to have both a Dover Saddlery store in their area.

Our customers enjoyed the wine and hors d’oeuvres and meeting our guest speaker, the Olympic Gold Medalist Beezie Madden. The cash registers ran at a all time rate of $49,000 in two hours, up 50% from our previous high.

In spite of this extremely successful Grand Opening our general position is that we are slowing our store expansion plans in 2009. We have just signed a lease to open our next store in February in Rhode Island and we are also reviewing leases for two additional store locations.

We are now being opportunistic and expect that we will be able to negotiate some very favorable lease rates in the coming year. In light of the present macroeconomic climate I’d like to take a moment to put Dover Saddlery’s future potential in perspective.

I have been in the equestrian industry since 1991 and the CEO of Dover Saddlery since 1998. Dover has been the absolute leader in equestrian retailing for over 30 years. Dover Saddlery although not totally recession proof has always prevailed through previous downturns and in fact, has usually picked up market share in these circumstances.

History would indicate that Dover is well positioned to take advantage in this downturn and come of this period with improved market share. Indeed it has been said that the Dover stock could provide a defensive position during these turbulent times and it could be described as the contrarian stock.

Now Michael will review the financial results for the third quarter in more detail.

Michael Bruns

Thank you Stephen, I want to begin by discussing those third quarter results. Total revenues were $19.0 million for the third quarter of 2008, a decrease of 4.5% from the $19.9 million for the corresponding period in 2007.

Revenues in our retail sales channel increased $0.4 million or 6.3% to $5.9 million. The increase in revenues from our retail market channel was due primarily to the opening of new stores and the resulting increases in retail revenues partially offset by same store sales which decreased 5.8% over prior year.

Sales in our direct market channel decreased $1.2 million or 8.7% to $13.1 million. This decrease in volume in both sales channels was attributable to consumer reaction to the global economic crisis and current uncertainty.

Gross profit for the three months ended September 30 decreased 5.1% to $7.0 million from $7.4 million in the corresponding period in 2007. Gross profit as a percentage of revenues was 36.8% compared to 37.0% for the corresponding period in 2007.

The decrease in gross profit of $0.4 million was attributable to lower revenues in our direct market channel and variations in our overall product mix. The decrease in gross profit as a percentage of revenues was attributable to variations in our overall product mix and increased costs.

Selling, general, and administrative expenses were $6.3 million in the third quarter of 2008 compared to $6.2 million for the corresponding period in 2007 with the quarterly increase limited to $100,000.

Interest expense including amortization and deferred financing costs attributable to our subordinated debt and revolving credit facility for the three months decreased to $0.3 million compared to $0.04 million for the corresponding period in 2007.

This decrease was primarily attributable to reduced rates in our revolving credit facility. Resulting net income for the third quarter of 2008 decreased to $174,000 compared to $444,000 in the third quarter of 2007.

This decrease was due primarily to reduced revenues attributable to the soft consumer spending demand. Resulting quarterly earnings per diluted share decreased to $0.03 compared to $0.08 per diluted share for the same period last year.

Now turning to the year-to-date results, total revenues for the nine months of 2008 were $56.6 million a decrease of 3.6%. Revenues in our retail sales channel increased 12.5% to $16.0 million due primarily to the opening of our new stores in 2007 and 2008 and resulting increases in retail revenues.

Same store sales decreased 1.5% over prior year attributable to consumer reaction to the global economic crisis and the current uncertainty which began in the third quarter. Revenues in our direct market channel decreased $3.6 million or 8.2% to $40.7 million attributable to the continuing consumer spending slowdown and the overall economy.

Gross profit for the nine months ended September 30 decreased to $20.3 million a drop of 6% from $21.6 million for the corresponding period in 2007. Gross profit as a percentage of revenues was 35.9% compared to 37.0% for the corresponding period in 2007.

This decrease was due to lower revenues in our direct market channel and variations in our overall product mix. Decrease in gross profit as a percentage of revenues was primarily attributable to higher proportion of consumer spending on sale merchandise and to increased costs.

Selling, general, and administrative expenses decreased 3.6% for the nine months ended September 30 to $19.2 million, a decrease from the $19.9 million for the corresponding period in 2007.

As a percentage of revenues SG&A expenses were reduced to 33.9% of revenues down from 34.0% of revenues in the corresponding period in 2007. The $0.7 million decrease included tactical reductions in marketing costs to $0.7 million, primarily catalogue costs, and decreased professional fees of $0.4 million due to decreased litigation costs.

Labor and facility costs increased modestly, $0.6 million in support of retail market channel revenue growth.

Interest expense for the nine months ended September 30, decreased to $1.0 million compared to $1.2 million for the corresponding period in 2007. This decrease is primarily attributable to the reduced rates in our revolving credit facility.

The resulting net income for the nine months ended September 30 increased 169% to $65,000 compared to a net loss of $94,000 for the corresponding period in 2007.

The increase in net income was due primarily to reduced SG&A and interest expenses as well as the absence of the prior year litigation settlement expense, all partially offset by reduced revenues and corresponding gross profits attributable to the soft consumer spending demand.

The resulting earnings per diluted share improved to $0.01 per share compared to a loss of $0.02 per diluted share for the corresponding period in 2007.

Now turning to the balance sheet inventories increased a modest $1.0 million in support of additional retail stores for the first nine months of 2008, a significant improvement from the prior year inventory increases.

Pre-paid catalogues and other pre-paid expenses are seasonably higher. The increase in intangibles and other assets represents the non-cash equity investment in Hobby Horse Clothing Company which we acquired with the issuance of 81,000 unregistered shares of Dover common stock in April, 2008 as represented an additional paid in capital in the equity section of the balance sheet.

Current liabilities are reduced by seasonal levels and reduced inventory activity. Total working capital requirements of $3.1 million were provided by seasonal increases to our revolving credit facility.

A word about guidance, due to the current uncertain economic environment, it is extremely difficult to predict sales for the fourth quarter. Therefore we are at this time neither reaffirming nor disavowing our previous 2008 full year guidance.

At this time I’d like to thank you for your interest in Dover Saddlery and now we’d like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lawrence Petron – WR Hambrick

Lawrence Petron – WR Hambrick

Just to be clear, at this point for 2008 you’re looking at adding one new store as you mentioned the Rhode Island store is tabbed for 2009, do I have that correct?

Stephen Day

Yes the Rhode Island store has flipped from what we thought was going to be a mid-November opening over into next year because of the lease negotiations sort at the last minute on the lease the landlord inserted a provision where Dover Saddlery would be responsible for the structural elements of the building including the roof, which is an abnormal clause, particularly in a tough time.

So we had to go through a round where we actually said we’re done, we’re walking away from this lease unless you eliminate this clause so its delayed it by about 60 days to get that all cleared up.

Lawrence Petron – WR Hambrick

Just approximately, do you expect it to be towards your largest sized stores, do you think it’ll be in the middle of the range? What’s your expectations for that store?

Stephen Day

Middle of the range, it’s a B store.

Lawrence Petron – WR Hambrick

Just looking at what you’ve seen in the third quarter, I was curious on the retail channel again, did you see any geographical differences in terms of store performance, or was it pretty negative across the board in terms of same store sales?

Stephen Day

Yes, we saw a little bit of a difference in the northeast market not only in our stores, but as reported by our vendors was a soft market, probably one of the softest markets in the country. Whereas the mid Atlantic market, particularly the areas around Washington, DC, as you might expect, have stood up quite well.

Lawrence Petron – WR Hambrick

Still negative in the same store sales numbers or slightly negative or did you see actually some stores with positive comps?

Lawrence Petron – WR Hambrick

We had some stores with positive comps and year-to-date we’re at minus 1.5% so we’re essentially even year-to-date. October was a bad month though just as you know from all the reports in The Wall Street Journal. It was a tough month in retailing and probably, there were a couple of weeks in there where things were down by 10%, 15% but they seemed to have bounced back from now and of course that was much worse then we were seeing in the earlier part of the year.

Lawrence Petron – WR Hambrick

On the product side, the last time we talked obviously you were facing like every other retailer facing increasing product costs, given the condition of the global economy just wondering and with commodity costs coming down some, just wondering what you’re seeing right now in terms of the cost of product you buy both here in the US and of course in Europe and other locations?

Stephen Day

Well two things are going on, one is that the actual cost in the product is moderating. I wouldn’t say its flat but the rate of increase has slowed way down in terms of the cost of the product. In addition to that we’ve had a huge change in the exchange rate as you know and that’s very favorable for us. We buy a lot out of Germany and the mid European countries and a lot out of England.

Definitely a favorable move on the exchange rate for us bringing our cost of goods down.

Lawrence Petron – WR Hambrick

So if I, and I’m obviously not asking you to give me guidance for Q4, but if I kind of take what you’ve just explained and given the normal pop in Q4, which I presume I suppose is largely attributable to increased volume that you normally see around the holidays, is your expectations going into this quarter that you’ll be able to maintain at least the maintain the margins that you’ve been able to do as you pointed out in a weak Q3 or normally seasonally weak Q3?

Stephen Day

I’m going to say as a guess that that’s a good guess but it is a guess because one of the things we’ve seen and you’ve seen it also in the macro retail report, is that our consumers are definitely shopping harder and they’re looking for bargains so a greater percentage of their purchase dollars being spent on sale merchandise which generally carries a lower margin.

I don’t know how much that will continue as we ramp up to Christmas here. In the past, really our margins have been the healthiest in the fourth quarter because of an opposite effect where we’re selling less sale merchandise as a percentage of our total sales then we would in the other three quarters.

We have to hedge that by saying don’t really know what the consumer is going to do. They may really be very picky and spend a greater percentage of their purchase dollars on sale merchandise.

Lawrence Petron – WR Hambrick

And I suppose that requires you to be nimble going into this holiday season in terms of whether you would discount more deeply then you normally do going into Q4.

Stephen Day

We really haven’t had a strategy of greater discounting. Our fall seasonal book, we did have a bit more sale merchandise in there then we would normally have but we really think it’s a bad idea for us to lead the pack on discounting. Remember our industry is made up of thousands of small retailers and they really look to Dover Saddlery as the price leader in the market.

Many stores you walk in to they’ll have a Dover Saddlery catalogue under the counter and when the customer comes in and says I want to buy this, or that and says well, I can get this cheaper at Dover, they’ll whip out their Dover catalogue, and they’ll change the price for the customer down to the Dover catalogue price.

We think we could start sort of a free fall in our little industry if we really are very aggressive on pricing. A lot of these smaller retailers are fairly bulletproof. Their major staffing expense is their own salary and they own their own building. So they really don’t have a lot of costs that they can’t cut or whatever.

We really feel that as long as our sales are staying in fairly good shape, its unwise for us to really start slashing prices.

Lawrence Petron – WR Hambrick

I suppose with your statement about neither reaffirming or disavowing the 2008 guidance, I suppose you’re saying that in an indirect way that there is a possibility you’ll meet something in that $81 to $87 million revenue range, is that a true statement. Otherwise if you felt you couldn’t meet it I presume you would just disavow the guidance and kind of leave it out there.

Stephen Day

Yes, that’s exactly what we’re trying to do. You hit it right on the head is that if the Christmas season comes in anywhere close to as it would in normal times, then we have a good shot at making our guidance. However we think right now nobody can predict what the consumer is going to do in this Christmas season and certainly if all the economists that spend their life doing this kind of thing can’t predict it, we don’t think we should be predicting it for you.

Its really designed to be a cautionary flag to say on the one hand, we may make our guidance. On the other hand if things break the wrong way and the consumer really slams their wallet shut during Christmas then we’re not going to make our guidance. Its kind of a, I didn’t think I could put our two paragraphs on guidance so it’s a short way of saying, hey we may make it but on the other hand there is a chance that we won’t make our guidance.

Operator

Your next question comes from the line of Nadine Francis – Roth Capital Partners

Nadine Francis – Roth Capital Partners

On the tax rate in the quarter it was around 47%, can you give us some explanation for that.

Michael Bruns

The income tax rate was slightly increased due to increased costs that we’re seeing on the state side of the income tax equation.

Nadine Francis – Roth Capital Partners

Going forward should we just continue modeling the 41% that we’ve been modeling.

Michael Bruns

The 42% is a very preliminary estimate based on our initial estimates for the year and since then we’ve encountered some decreases in our income before taxes and some of our permanent items factor in there as well as some additional state tax exposure so we’ll be at the 47% or higher for this particular year.

Nadine Francis – Roth Capital Partners

For the fourth quarter what are you planning to do, whether to drive traffic into the stores or drive customers to the website, anything different from last year given the current environment?

Stephen Day

Yes we have a lot of small individual events and actions planned, more emails to intrigue the customer and get them to come to the store. We have in our mailings actually generally we have decreased our mailings and really watched our budget on marketing expenses but in the fall catalogue we made an exception to that and loosened up our criteria in the fall seasonal catalogue which is primarily a driver of traffic between now and Christmas.

We’re doing some rather unique things where we’re creating webinars on specific products that have seasonal interest at this point in time and having those live in some of the stores as well as live on the web. So sort of a series of individual targeted actions but no real major campaigns that would be different, nothing that I can sum up and say okay, we’re going to have a campaign to dramatically reduce our prices or anything like that.

Its just a series of individual action.

Nadine Francis – Roth Capital Partners

How many mailings are there going to be in the fourth quarter? How many books will you be sending out?

Stephen Day

Lots.

Nadine Francis – Roth Capital Partners

Is that comparable to last year or is that down from last year?

Stephen Day

Probably about comparable. The reason we’re all laughing at our joke of lots is when I go to my buyers and they say, we’re going to take on this new product, and I say well that’s great how much are you going to sell, and they’ll say, well, a lot.

Nadine Francis – Roth Capital Partners

Have you noticed kind of a shift in sales, maybe a slowdown in kind of discretionary product and a pickup in needed product like if I want to look at it by product sales. Did you notice any variation there? Maybe people cutting down on saddles but they’re buying other products that they need for the horses.

Stephen Day

Yes, that’s definitely going on. Its more prevalent in terms of, instead of in terms of product, in terms of price point. So the very expensive merchandise obviously the most expensive item we sell is saddles and the Hermes Saddle at $6,200 has literally ground to a halt since they raised the price from $4,000.

So its more the very expensive saddles and the very expensive riding jackets, custom boots, things like that have slowed down. Although I have a fun scenario about the Alpharetta Grand Opening, two things happened that were, I thought, really telling.

One was that a woman came up to me and said, you know, it is so great that you’ve opened a store here in Atlanta. I’ve been a long-time customer of Dover. I’ve been buying through your catalogue for four or five years now and recently I fly up to Dulles, because you know your Chantilly store is just a few miles from the Dulles Airport so I fly up there to go shopping and now of course I don’t have to do it because I have one in my own backyard.

So that kind of show you how avid our customers are, they’re willing to fly from Atlanta to Dulles Airport in Washington to shop.

And then the second one was we had a customer who won at the VIP party we have a custom boot maker there at the store for the Grand Opening weekend, and he took an order at the VIP party for a pair of paddock shoes and half chaps. Now that is something you just wear schooling and training your horse. Its an informal type of footwear. You couldn’t wear it in the show ring for instance and the woman paid $1,950 for this custom pair of paddock shoes and half chaps.

Nadine Francis – Roth Capital Partners

Regarding Hobby Horse, can you give us any update, how did that perform during the quarter?

Stephen Day

Yes, Hobby Horse is a very small company and run by an entrepreneurial team of a husband and wife and they got a little bit behind as a result of our acquisition and negotiating that and were a little late in their mailing so they will be profitable for the year but a little bit behind our plan.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Stephen Day

In closing this morning, I’d like to thank management and all our employees for the work they’re doing. These are hard times with all this negative press and we’ve got a really good morale here of people digging in and working hard to get to the other side of these times.

I’d also like to thank our stockholders for their continued support. We appreciate you taking the time to listen to our conference call today and hope you all have a good day. Thank you.

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Source: Dover Saddlery, Inc. Q3 2008 (Qtr End 09/30/08) Earnings Call Transcript
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