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Joe's Jeans (NASDAQ:JOEZ)

Q4 2012 Earnings Call

February 21, 2013 4:30 pm ET

Executives

Lori Nembirkow - Corporate Secretary

Marc B. Crossman - Chief Executive Officer, President and Director

Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Analysts

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

James Fronda - Sidoti & Company, LLC

Jared Schramm - Roth Capital Partners, LLC, Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Operator

Welcome to the Q4 2012 Joe's Jeans Inc. Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to the Ms. Lori Nembirkow. You may begin.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our 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 management's 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 are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made.

I also refer you to our reports that are filed with the SEC, which includes our 2012 annual report on Form 10-K filed today. This report includes information that could also cause our actual 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 a telephone replay will be available for 1 week from today.

Now, I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the fourth quarter results and then I'll turn the call over to Hamish for a discussion of our other financial results. Finally, we will end with a Q&A session.

In the fourth quarter, net sales increased 33% to $33.7 million. In prior quarters, our growth continues to come from both our wholesale and retail divisions and from both our men's and women's product offerings. We are also benefiting from the addition of sales from our Macy's exclusive brand else. More specifically, wholesale grew 25%, retail grew 18% and else contributed $2.4 million to top line sales. This healthy top line sales growth coupled with a slight increase in gross margin and a slight decrease in SG&A resulted in operating income swinging from a loss of $131,000 to a profit of $3.2 million.

I'll now discuss the top line results of the 2 divisions in a little more detail. As I just stated, retail sales grew 18%. This growth was the result of operating 6 more stores this year than a year ago and a 6% same-store sales increase. As a side note, 3 of the 6 stores opened during the fourth quarter of this year, so we did not get the lift from a full quarter sales from those stores. We are very pleased with our 6% same-store sales increase in the face of very tough promotional activity from our competition during the quarter and from our own in-store promotions from a year ago. Despite this, we decided to make our promotions far less deep this year. As a result, we experienced a 3-percentage-point increase in our gross margins to 68% from 65%.

In 2012, we opened 6 stores, 2 outlets and 4 full price. In 2013, we expect to open at least 10 new full price stores. By the end of this first quarter, we will have opened 3 new full price stores. It's important to note that we have been refining our retail model. Last year, our average store footprint was approximately 2,200 square feet and our sales per square foot were approximately $430. Going forward, we are targeting stores with smaller footprints of approximately 1,500 square feet. The reason is that we are seeing significantly higher productivity in our existing stores with smaller footprints.

Our Joe's wholesale sales, excluding else, increased 25% to $24.3 million versus $19.5 million in the year-ago quarter. Most importantly, our 2 biggest segment for Joe's, domestic women's and domestic men's, both increased by double digits. Women's increased 25% and men's increased 32%.

In addition to our Joe's sales, our newly launched brand, else, generated $2.4 million in revenue and added meaningful diversification to our wholesale sales base. Let me give you a little more color on the various segments.

Joe's men's sales continued to see strong growth in the fourth quarter despite only single-digit door growth. The men's color trend, which began almost a full year behind the women's, was a big contributor to this increase.

Our department stores bought large color statements above and beyond regular denim receipts. Coated denim fabrics and washes also performed well and generated reorders during the quarter. Equally important, the expansion of our core replenishment business also contributed to this increase as we expanded our offering with additional fits and washes. In aggregate, these factors all contributed to a lift in our average dollars per door.

Joe's women's wholesale increased by 25% on a comparative basis despite residual reductions in our department store door count. We were very pleased with our growth in the quarter given that the fourth quarter was the first comparison against the 55 Color program. As a reminder, in the fourth quarter of last year, we launched the 55 Color program. This program generated a significant amount of business because it was a multi-purchase item at a great price point.

Growth against this tough comparison from a year ago is being driven by the strong performance of our Vintage Reserve program and our revamped core basic program. We began a limited rollout and saw the early success of the Vintage Reserve program in the third quarter of 2012. The fourth quarter saw a more aggressive rollout of Vintage Reserve and a deeper launch of our revamped core basic program at a sharper price point. Both programs have performed well with our department store and specialty store partners. We are continuing to build on Vintage Reserve for early spring and are supporting the program with a marketing and advertising campaign.

The success of our 55 Color program, followed by the success of our Vintage Reserve and a revamped core basic program have had a very positive impact on our women's wholesale business. We are cautiously optimistic that we will start to see sequential door growth from department stores in the back half of 2013.

Our else brand continues to be a great addition to top line sales. During the quarter, else contributed approximately $2.4 million. In the third quarter of 2012, we rolled a 314 Macy's doors, up significantly from the initial 149 door launch at the start of 2012.

As we examine signs from this brand, we're now focusing our efforts on building a larger penetration of core basic denim to support the customers' positive response to these offerings. Looking at our current backlog, we continue to be very encouraged about the future of this brand.

Our international sales channel performed well during the quarter. Excluding the impact of our restructured operations in France, our international business grew. As a reminder, in the fourth quarter of 2012, we operated under our new restructured model with our distribution partner in France. Accordingly, we no longer recorded retail sales from our shop-in-shops at Galeries Lafayette and Printemps. In addition, we are no longer selling direct to accounts in France. Rather now, we only record wholesale sales from the U.S. to France under our distribution agreement. To be clear, our business in our other major markets, specifically Japan, Australia, Russia and the U.K., grew with the performance of our women's denim.

In summary, our evolving and more aggressive retail store rollout, coupled with the strong performance of our wholesale channel and revenue diversification from else, leads us to be very optimistic about the growth prospects for the company in 2013.

I'll now turn the call over to Hamish for a more detailed discussion of the financials.

Hamish S. Sandhu

Thanks, Marc. As Marc just discussed, for the quarter, on a consolidated basis, net sales increased 33% to $33.7 million from $25.4 million over the prior-year period.

Both retail and wholesale sales increased by growing 18% and 37%, respectively. Same-store sales growth from stores opened at least 12 full months, and eShop increased 6%. Retail sales represented 21% of overall net sales for the quarter. Wholesale sales increased 37% during the quarter, driven by increases in both men's and women's wholesale Joe's sales and the addition of else.

Our overall gross profit increased by 34% to $15.7 million from $11.7 million in the year-ago period. Overall, gross margin increased to 47% from 46% in the prior-year period. Our wholesale gross profit was up 39% to $11 million from $7.9 million in the prior-year period.

Wholesale gross margin was up 1 percentage point, coming in at 41% compared to 40% in the year-ago period. Wholesale gross profit and gross margin were impacted by our sales mix and our else brand, which naturally carries a lower gross margin than premium denim. It is important to note that gross margin at our Joe's products have improved compared to the year-ago margin.

Retail gross profit was up 23% to $4.7 million from $3.8 million in the prior-year period. Retail gross margin was 68% compared to 65% in the year ago period. Retail gross profit and gross margin improved due to fewer promotions at outlook stores.

Consolidated operating expenses was higher in the fourth quarter of fiscal 2012 compared to 2011 at $12.5 million compared to $11.8 million, respectively. Operating expenses increased slightly in our wholesale segment due to high sample costs, operating expenses in our retail segment increased due to the addition of 6 more stores in our store base.

Operating expenses for corporate was lower at $4.7 million compared to $5.3 million in the prior year. Corporate expense decreased primarily due to decreases in our print and other advertising commitments and professional fees. Due to our increases in sales and gross profit, coupled with only slightly higher increases in operating expenses, we generated operating income of $3.2 million compared to an operating loss of $131,000 in the prior-year period.

We generated net income of $2 million for the fourth quarter of fiscal 2012 compared to a net loss of $268,000 in the fourth quarter of fiscal 2011.

We had earnings per share of $0.03 for the quarter. We ended the quarter and the year with a cash balance of $13.4 million.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question online comes from Jane Thorn Leeson from KeyBanc.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

My first question was regarding the performance of your new doors. What is the range of new store productivity that you're targeting for that? You said, last year at 2,200-square-foot, you were tracking at $430. So I was just curious what the new -- using 1,500-square-foot, how much higher are you kind of targeting?

Marc B. Crossman

Yes. So out of our 1,500-square-foot stores, we're seeing, and this just collectively on our base, somewhere close to $700 a square-foot.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

And is that kind of your model for going forward with just all your new doors going forward?

Marc B. Crossman

Yes, it is. It's definitely what we're looking for is that smaller footprint. We have tested a couple in NorthPark and Fashion Valley stores did and South Coast, well, close to, but they're closer at 1,000 square feet. But those were recent openings, so we haven't seen -- we definitely haven't seen a full quarter's worth of performance out of those stores. But I would say 1,500 square feet at $700 a square foot is really what we're targeting.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay, perfect. And what kind of store ramp up is it? Is it a typical 80% productivity right out of the gate, or is it slightly less than that? How should we think about that?

Marc B. Crossman

It's really all over the map. Our Melrose store took a little bit longer, the Street location take a little bit longer in terms of their productivity to come up to speed. The full price stores that are located within a mall, they pretty much -- they come up pretty quickly, I would say more than 80% the way their -- we feel their natural operating level is.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Wow, okay. And then just on your comps in the quarter, the 6%. What was the composition of that? What -- like AUR transactions, how -- what drove that?

Marc B. Crossman

What drove the comp increases?

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

The comp.

Marc B. Crossman

Yes, a lot of it was both our AUR and our UPTs. So it's really on those bottom line metrics that we saw a lift. The AUR obviously being a reduction in promotions. UPT just been better productivity in the stores.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay. And then just on your marketing spend. I guess that is what drove a lot of your SG&A. How should we think about marketing spend in 2013, similar to this year or more?

Marc B. Crossman

We're looking at our target to be about 3% of sales this year.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay, so 3% of sales in 2013?

Marc B. Crossman

Yes.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay. And my last question was on else. What's the growth trajectory for else? I think you added about 100 doors, is that right? You went from 140 to...

Marc B. Crossman

We went from 149 to 314. So about 160-some odd doors. And that's going into the fall, so you'll see that lift as we go -- as we kind of comp into the first half of this year, 2013. And then we're still finalizing and working on plans for the back half. So looking at our 630 deliveries going forward. So we're not done with those yet, but everything looks really good for the ramp up. But again, I can't speak to you on the numbers until the next couple of weeks.

Operator

Our next question comes from James Fronda from Sidoti & Company.

James Fronda - Sidoti & Company, LLC

Do you guys have any accessories business? And if not, have you thought about getting into the business at all?

Marc B. Crossman

Yes, from an accessory standpoint, we do have bags that Joe designs himself, and then we also have a licensee that helps us out. And then, clearly on the belt side, we have belts. And then we do have a sprinkling of jewelry and knickknacks that are hand-picked out by Joe.

James Fronda - Sidoti & Company, LLC

Okay. And is that contributing? Is that a big factor to the growth you're seeing at all?

Marc B. Crossman

No, I see where you're going with it. No, that's not what's driving comps this year.

James Fronda - Sidoti & Company, LLC

Okay. And I guess could you just talk about the fashion trends that you're seeing for 2013?

Marc B. Crossman

Yes, as I laid out, for us, what we're really focused on in the first half of the year is Vintage Reserve.

James Fronda - Sidoti & Company, LLC

Okay, right. Okay, and does the else brand have any type of vintage products in it? Or is it completely separate?

Marc B. Crossman

The else brand mirrors a lot of what we're doing on the Joe's side. What we're seeing as take steps on Joe's, we definitely translate that into else.

James Fronda - Sidoti & Company, LLC

All right. But it doesn't have any mix of a vintage product within the else brand, right?

Marc B. Crossman

What do you mean a mix?

James Fronda - Sidoti & Company, LLC

Like the else brand, it doesn't offer vintage products? It's all -- it's just completely different type of style?

Marc B. Crossman

Yes -- no, it's the same. I mean, the styling of washed down blues, we definitely have. We're not calling it vintage else. It's more of a vintage-type product, yes.

James Fronda - Sidoti & Company, LLC

Okay, all right. And the tax rate for 2013?

Hamish S. Sandhu

The tax rate for 2013 will be a little mix from the standpoint that we'll be taking a charge in the first quarter, relating to the Joe's buyout. But for Q2 and 3 and 4, the back end of the year, it'll be a tax rate of about 41%.

Operator

Our next question online comes from Jared Schramm from Roth Capital Partners.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Looking at the else brand real quickly, I think it's been touched on a couple of times here. But where do you really see the growth trajectory for that? And just an experience you've had with Macy's that's been beneficial enough that you look at rolling out a similar label at another large retailer?

Marc B. Crossman

So let me take that in 2 parts. The ultimate roll, I think for the rest of this year, we're going to be in that 300-door range. Ultimately, they do see it as an all door -- close to all door buy through their 600 doors. But for right now, in 2013, we're going to be in that same 300-or-so doors because this is really a learning process of, okay, what assortment mix, how deep can certain doors hold. So we're really kind of -- we know that we can get the 300, and now it's refining those 300, and then I would expect in 2014, we roll to additional doors. So there's a lot of growth in front of us just for this year 2013 without having to push down to further doors. And in terms of doing this with other retailers, at this point, we're not aggressively chasing it. Obviously, a lot of people know what we're doing, what we've done in the success of else. But I think we have a lot of things on our plate right now to grow in 2013 and grow pretty substantially. But it's definitely something we'd look out for 2014.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And any key highlights you took away from projects this week that you think would be impactful to 2013?

Marc B. Crossman

You know we had an amazing project. I think we wrote in the first day more than we wrote the last project. So our general take away is we really feel positive about our product going into the fall season. Now did that translate for everybody or are we just a microcosm? I don't know. I can just tell you we had an amazing project. Everybody came away, all our salespeople came away, very excited, our accounts were excited. But I guess I can't tell you enough about how good of a project we had and how excited we were.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Good to hear that. And a little further on the international opportunity. You mentioned the restructuring in France being completed now. What is the overall strategy though from a high level looking at international?

Marc B. Crossman

Yes, so the overall strategy from high level is to pick individual cities and target those with a lot of marketing and PR support. I think I said instead of doing the shotgun approach, we'll do more of the rifle approach. And the example I give is the U.K. We're really going after London. We've hired PR. We're investing in marketing. We'd ultimately like to open a store there. And it's all based around London. And then we'll see what the follow-on effect is around that, instead of trying to do everything at once. So we have a number of select cities, not just within the U.K. but within other countries where we're going to invest those dollars much more specifically. And we think we'll get a better bang for our buck.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And lastly here with the recent announcement of purchase of Joe's earnout, could you just provide some color on that? And where that positions the company going forward?

Marc B. Crossman

Yes. So it was just really taking his existing earnout and negotiating a number of the haircut, I guess the best way to put it, that Joe would take to help benefit the company and obviously in stock, which is very helpful to him from that standpoint, getting the stock up. But we're basically taking a charge against that. And then going forward, we're not recording his -- an earnout expense on the income statement.

Jared Schramm - Roth Capital Partners, LLC, Research Division

And that was roughly $350,000 a quarter, is that correct?

Marc B. Crossman

More than that, a little bit more than that.

Hamish S. Sandhu

Close to $440,000, around there on a quarterly basis.

Operator

[Operator Instructions] Our next question online comes from Ronald Bookbinder from Benchmark.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On the comps, was the traffic negative? And so what do you think was driving the conversion so much? Are you doing something different in merchandising the stores?

Marc B. Crossman

The traffic was kind of a mixed bag. What we saw is in the full price, the traffic didn't perform as well as the off-price. And the full price, I mean, again, it was I guess a little bit more challenging and we definitely weren't -- we didn't look promotional at all in our full price store. So I think that might have driven a little bit of the difference in the traffic that we saw. And again, it's just the stores and the clienteling that we're doing it. That's one of the things that when we look across our entire base that we're doing a better job of is selling back in to our existing customer base, which obviously increases your conversion rate. So I think that's probably the one thing that our new director of stores, when she's come in, what she's really focused on has been this clienteling approach.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And you mentioned how great project was. Was there any products in particular that buyers especially liked, Vintage Reserve or something that's really ramping up?

Marc B. Crossman

Yes, I mean, obviously, they love the Vintage Reserve. But one of the things we saw a lot of success with were our collection pieces. So we sold a lot more of the tops than we have in the past. So when I kind of look at it, like-for-like, yes we're -- Joe continues to hit on all of the right trends to be at the forefront of them. But on the balance, I think what we were very excited about was the collection and how well -- what the reaction was and how well it sold.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And what is your product mix these days of collection versus denim bottoms?

Marc B. Crossman

In the stores, it's well over 1/3. And in our wholesale business, it's about 8%. 5% to 8%, depending upon whether it's men's or women's.

Operator

At this time I show no further questions.

Marc B. Crossman

Okay, well I appreciate everybody coming on the call. And we'll be in touch next quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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