Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Stage Stores, Inc. (NYSE:SSI)

F4Q08 Earnings Call

March 10, 2009 8:30 am ET

Executives

Bob Aronson - Vice President Investor Relations

Andy Hall - President and Chief Executive Officer

Ed Record - Executive Vice President and Chief Financial Officer

Analysts

David Glick - Buckingham Research Group

[John Conowith] - Barclays Capital

David Mann - Johnson Rice & Company

Operator

Good morning and welcome to the Stage Stores conference call. (Operator Instructions)

I would now like to introduce your moderator for today's conference call, Bob Aronson, Vice President, Investor Relations. Mr. Aronson, please begin your conference call.

Bob Aronson

Thank you, Operator. Good morning and welcome to Stage Stores fourth quarter conference call.

Speaking this morning from the company will be Andy Hall, President and Chief Executive Officer, and Ed Record, Executive Vice President and Chief Financial Officer. Andy will provide a high level overview of the financial and operational highlights for the fourth quarter. Ed will discuss the quarter's financial results in greater detail and will also cover the company's 2009 first quarter and full year sales and earnings outlooks.

Before they begin I would like to point out that our comments this morning contain forward-looking statements. Forward-looking statements reflect our expectations regarding future events and operating performance and often contain words such as believe, expect, may, will, should, could, anticipate, plan or similar words.

Our forward-looking statements include comments regarding the number of new stores that we plan to open in the first quarter, second quarter and in the fall of 2009, as well as the number of Estee Lauder and Clinique counters that we plan to roll out in the first quarter of 2009. Our forward-looking statements also include comments regarding our net sales, comparable store sales, gross margins, SG&A expenses and earnings outlooks for the first quarter and full 2009 fiscal year and our anticipated depreciation expense, interest expense, tax rate and capital expenditures for the 2009 fiscal year.

Such forward-looking statements are subject to a number of risks and uncertainties which could cause the actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include but are not limited to those described in our most recent annual report on Form 10-K as filed with the Securities and Exchange Commission and other factors as may periodically be described in other company filings with the SEC.

And now, with all of that said, I would like to turn the call over to Andy.

Andy Hall

Thanks, Bob, and good morning, everyone. We appreciate you joining us for our fourth quarter conference call.

The fourth quarter concluded what was one of the most difficult and challenging years for our industry. Continuing weakness in the housing and job markets translated into reduced customer traffic throughout the period. This, combined with a heightened promotional environment, led to a comparable store sales decrease of 7.2% and earnings of $0.67 per share, which were 14% lower than last year.

We are nonetheless pleased with several of our accomplishments, which reflect the hard work put forth by our 14,000 dedicated associates. We ended the quarter with comparable store inventories down 17%. We reduced fourth quarter SG&A expenses by $3.4 million versus last year, while operating 45 more stores. For the year, the increase in SG&A expenses was limited to $1 million. We increased cash by $9 million and ended the year with 63% less net debt. Also we ended the year and continue today to have no borrowings on our $250 million revolving credit facility.

Benefiting from strong fragrance demand and 31 additional Estee Lauder and 23 additional Clinique counters versus last year, cosmetics again achieved a comparable store sales increase. Dresses, footwear, intimate apparel, men's, missy sportswear and petites all had comps which were at or better than the company average. We ended the year with 156 Estee Lauder and 141 Clinique counters. We plan to install 6 new Estee Lauder and 5 new Clinique counters during the first quarter of 2009.

In looking at fourth quarter comparable store sales by region, the South Central and the Southwest were the best-performing regions and the Northeast and Southeast were the weakest.

With regard to comparable store sales by market size, our small markets were once again the best performing, at down 6.3% for the quarter. Our midsized markets were down 7.6% and our large markets were down 8.9%. We will continue to open new stores primarily in underserved and less competitive small markets.

During the fourth quarter we opened 11 new stores, reopened three hurricane-damaged stores, relocated one store, expanded one store, and closed six stores. For the year we had a net increase of 45 stores and ended with 739 stores.

In the 2009 first quarter we plan to open 10 new stores and reopen our hurricane-damaged store in Galveston, Texas. No new store openings are planned for the second quarter. While our full year guidance contemplates opening an additional 10 to 20 stores in the fall, at this point only one fall lease has been signed. Because of our short lead time between lease signing and store opening, we have the flexibility to look for the most attractive new store opportunities for the fall and still be in a position to hit our new store opening goal of between 20 and 30 stores for the year.

Our belief is that we will experience a challenging economic environment throughout 2009 and our sales and earnings guidance reflects this cautious view. Having said that, we are confident that we are taking the appropriate measures to strengthen our balance sheet and to maximize our cash flows. We also remain focused on maximizing sales by providing our customers with exceptional service, great selections and name brands, compelling values and convenience.

To that end, our 2009 key objectives include enhancing our merchandising effectiveness, improving our customers' in-store experience, and optimizing our north-south alignment. Our manufacturing objectives include piloting markdown optimization, enhancing our use of SAS merchandise planning system, and improving our assortment planning. Our customers will benefit from more impactful visual merchandising presentations, a new POS software platform, and better in-store sales promotion.

In addition to our key objectives we will conservatively manage our inventory levels, control expenses, lower capital expenditures, and enhance our balance sheet. We firmly believe that we are taking the appropriate steps to not only maximize our near-term results but to position our company for longer-term sales and earnings growth.

That concludes my remarks so at this point I'll turn the call over to Ed.

Ed Record

Thanks, Andy. I'll move quickly through the P&L and then spend a few minutes talking about our outlook for the 2009 first quarter and full year.

Total sales for the fourth quarter dropped 3.6% to $456 million from $473 million last year. Contributions from net new stores of $16 million were offset by a reduction of $33 million in comparable store sales. Comparable store sales for the quarter were down 7.2%. The comp decline reflects a 2% decrease in the average ticket value, with reduced transactions making up the remainder of the drop.

Our private label credit card portfolio continues to hold up well and in a year with average open to buy, account limits and account balances relatively unchanged from last year. Overall, credit penetration for the fourth quarter increased by 85 basis points. Delinquency rates continue to hold up relatively well and ended January up only 15 basis points year-over-year. While we sold our credit portfolio to Alliance Data Systems five years ago, we still share in the profits of the portfolio. Our credit income leveraged for the fourth quarter and we expect credit income to leverage in 2009.

The fourth quarter gross profit rate decreased 190 basis points versus last year 29.1%. The rate decline is comprised of a 10 basis point drop in our merchandise margins and a 180 basis point increase in the buying, occupancy and distribution components of cost of sales.

Merchandise margins benefited from the acceleration of our clearance liquidation into the third quarter and were negatively impacted by increased promotional activities. We ended the quarter with comparable store inventories down approximately 17% and comparable store clearance inventories down approximately 20%. The increase in the buying, occupancy and distribution component is primarily due to higher store rent and depreciation expense resulting from our increased store count versus last year as well as overall deleveraging due to our negative comps for the quarter.

The fourth quarter SG&A rate of 19.7% was flat to last year. The deleveraging impact of the reduced sales was offset by a $3.4 million reduction in total expenses versus last year, while operating 45 more stores during the quarter. All functional areas had a strong performance with corporate and credit both leveraging for the quarter.

Store opening costs were $600,000 this year versus $978,000 last year. We opened 11 new stores and relocated one store during the quarter, while we opened 12 new stores and relocated 10 stores during the same period last year.

Interest expense for the quarter was $1.3 million versus $1.7 million last year. The savings from the lower revolving credit facility borrowings during the quarter more than offset the higher interest expense in our equipment financing notes. These notes totaled $50 million at this year end compared to $32 million last year.

Our tax rate for the fourth quarter was 37.9% this year, while it was 37.4% last year.

Overall, for the fourth quarter we earned $25.3 million or $0.67 per share compared to $31.7 million or $0.78 per share last year. Our diluted share count this year was 38 million shares while it was 40.5 million shares last year.

For all of 2008 our sales were $1.516 billion. Comparable store sales declined 6.1%. We had a net loss for the year of $65.5 million or $1.71 per share. Our full year results include a noncash goodwill impairment charge of $95.4 million or $2.49 per share recorded in the third quarter. Excluding the impairment charge, our net income for 2008 was $29.8 million or $0.77 per share.

We ended the fourth quarter in strong financial shape. We had invested cash of $10 million and no borrowings on our $250 million revolving credit facility. This compares to last year end, when we had $63 million outstanding on our revolver and no invested cash. Overall, we reduced our net debt year-over-year by $54 million.

With regard to cash flow, cash provided by operating activities totaled $163 million this year, a $38 million increase over last year. Free cash flow, which we define as cash provided by operating activities less capital expenditures, was $63 million for the year.

Capital expenditures for the fourth quarter net of landlord construction allowances totaled $21.5 million this year versus $32.1 million for the fourth quarter of last year. For the full year, net capital expenditures were $82.3 million. We anticipate that the net capital expenditures in 2009 will be approximately $50 million.

This amount assumes we open 10 to 20 new stores during the year. As Andy mentioned, we will be opening 10 new stores this spring. So far only one lease has been signed for fall. We will take advantage of our short lead time to open a store by maintaining our flexibility with regard to fall store openings. We will move cautiously over the next four to five months as we evaluate the economic environment as well as the strength of the deals coming to the table. With that said, we are projecting to open 10 to 20 new stores this fall.

That concludes my remarks on our 2008 financial results. At this point I would like to review our outlook for 2009.

We do not expect the economic environment to improve in 2009 and we have developed our sales estimate for the first quarter and full year with this in mind. I should also point out that given our limited ability to project how the economy, the housing market and unemployment will perform throughout 2009, we have given wider than normal ranges for sales and earnings.

For the first quarter we expect to report revenues in the range of $337 million to $347 million. We are projecting that our comparable store sales for the quarter will be in line with last year's fall season trend and are guiding down 6% to 9%. Within the quarter we expect the Easter calendar shift will hurt March's and benefit April's comparable store sales.

For the 2009 fiscal year we expect to report revenues in the range of $1.443 billion to $1.487 billion, with comparable store sales down 5% to 8%. We expect the comparable store sales for the second half of the year to benefit from easier comparisons, the anniversary of Hurricane Ike, and Goody's exiting over 90 of our markets.

For the first quarter and full year, we expect merchandise margins as a rate of sales to be flat with last year. This view reflects both the benefit of our strong inventory control and reduced clearance levels and the headwind of an increased promotional environment. We expect the total gross margin rate to be down to last year for both the quarter and full year due to the deleveraging impact of the buying, occupancy and distribution costs in a negative comp store sales environment.

For the first quarter we expect the impact to be 140 basis points at the high end of our sales range. For the full year we expect the impact to be 80 basis points, also at the high end of our sales range.

SG&A expenses in total are expected to be flat to down 2% to last year for the first quarter and full year.

We are projecting our Q1 EPS to be in a range of a $0.04 per share loss to a $0.03 per share profit. We are estimating the diluted share count to be 38 million shares. For the 2009 fiscal year we are projecting EPS to be between $0.35 and $0.65 per share and the diluted share count to be 38 million.

Before I conclude I would like to provide some guidance in other specific areas. Our tax rate for the year is planned at 38.3%. As I mentioned earlier, capital expenditures are expected to be approximately $50 million net of landlord construction allowances. Depreciation expense is projected to be approximately $61 million, and interest expense is estimated to be $5 million.

That completes my remarks, so at this time Andy and I would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from David Glick - Buckingham Research Group.

David Glick - Buckingham Research Group

I just wondered if you all could give a little bit of color on how you see the Goody's liquidation playing out in terms of the transfer, when you might start to see a benefit, and how we should think about how much of those sales could possibly transfer.

Ed Record

Sure, David. Goody's actually closed their doors, I think, about two weeks ago, so we're starting to see the benefit now. As you know, they're exiting 91 of the markets we overlap with them in, so overall it's about $220 million worth of sales that's leaving those markets. We've already seen us getting some of that share in the last two weeks and we expect to see it throughout the rest of the year.

In the guidance standpoint we feel we've been relatively conservative in how much we baked in from a transfer percentage.

David Glick - Buckingham Research Group

So you have baked in some of it?

Ed Record

We have. When you look at, you know, we're guiding Q1 down 6% to down 9%, you know, we haven't given Q2 yet, but assume it looks like Q1, to hit the 5% to 8% that would make the fall season down 4% to down 7%. So we have baked some of that improvement in.

David Glick - Buckingham Research Group

Is conservative 5% transfer - 10%?

Ed Record

I think 5% would be conservative. We're hoping to see it clearly north of 5%.

David Glick - Buckingham Research Group

And I know they were very strong in the younger businesses like juniors and young men's. Are you targeting certain areas? Are there brands that maybe you didn't carry that they carried? Or are you just kind of letting the transfer happen and not really changing your assortments?

Andy Hall

Well, David, we're not just going to sit back and let the transfer happen. I think your question is right on the mark. They were strong in juniors and they were strong in the young men's. They knew what they stood for in young men's and juniors; basically it was denim and Ts, and in juniors it was junior tops and denim. So I think that based on the market we will expand our inventory assortments in those areas.

I don't think they had any vendors that we did not carry, but they may have been a little deeper in their inventory on some of those brands. Obviously, Levis is a big opportunity for us in those markets, especially over in the Peebles division, where Goody's did significantly more denim business than the Goody's chain did over in those markets. So we are expanding our assortment in denim, Ts and junior tops.

David Glick - Buckingham Research Group

As you look at the schedule for opening your fall stores and you look at the calendar, what are the real trigger dates for you and what do you need to see to be at the higher end of the range in terms of the number of stores that you want to open?

Andy Hall

Well, I think that we have lead times of anywhere between 90 and 120 days typically on one of our real estate deals from lease signing to when we can get the store open, so we do have the flexibility to look at the macroeconomic environment out there and make sure that we're comfortable opening that number of stores in the current environment.

I think the bottom line on being able to open 10 to 20 this fall depends on the economic terms of the deals that come to the table. Certainly we're not going to change our hurdle rate requirements for our new stores in this environment of a minus 6% to 9% environment here in the first quarter to a minus 5% to 8% environment for the full year. We'll certainly reflect that into what we think the first year sales are for a new store. And if we can get the economic terms of that real estate deal to hit our hurdle rate we'll go forward and open the store. So it remains to be seen.

We are going to focus more; we're going to look inward and focus more of our new store openings this fall on infill markets. And a lot of those infill markets will focus on real estate opportunities that are out there with Goody's exiting the market. So a lot of it depends on those landlords coming to the table with an appropriate economic deal.

David Glick - Buckingham Research Group

Is the biggest obstacle to assuming some of those Goody's locations the size of their stores and their willingness to pay for the downsizing of the store?

Andy Hall

Yes, I think that is one of the hurdles. Goody's tended to build their stores too big for the markets that they went into and we're certainly not going to go into those stores and pay for that excess square footage, so the landlord is going to have to recognize that and build that into their lease terms.

David Glick - Buckingham Research Group

And those stores are about what, a third too big or 25%?

Andy Hall

Well, it depends on the market but that's probably a good range, anywhere from 20% to 40% too big.

Operator

Your next question comes from [John Conowith] - Barclays Capital.

John Conowith - Barclays Capital

Just a question around your SG&A. You've been able to really control the expenses and obviously take some out the past couple quarters. I was just curious within that flat to down 2% number where you see those SG&A expenses coming out of?

Ed Record

We have done a nice job bringing them down, actually getting them to lever in the fourth quarter. We were pretty proud of that performance.

Everybody's contributing. Obviously, we've done a lot of work around stores and store staffing and getting that right with the new customer traffic. A lot of that savings has come out of - we've done a lot of things around signing efficiencies and efficiencies within the store to allow us to hit these numbers. And we actually saw customer service scores improve last year despite our reductions in staffing, so we feel really good about that and we expect that to continue through next year.

We've got a lot of utility initiatives that we really kicked in last year that we expect to pay back in '09 for us. Obviously we continue to control the corporate overhead as tightly as we can. Not a whole lot of blanket census reductions, but we're not adding any either and we're reallocating where we need to and managing all of our controllables there. And IS has been a big driver in some of the savings. We've really looked at in this environment, going back to all of our vendors and moving to lower-cost platforms and just asking for flat rate reductions. And as we talked about in the script, credit leveraged in '08 and we expect it to continue to leverage in '09 and be a contributor.

So we've really impacted just about every bucket here; it's come to the party and helped contribute to those results and we expect to contribute in '09.

Operator

(Operator Instructions) Your next question comes from David Mann - Johnson Rice & Company.

David Mann - Johnson Rice & Company

If I could just follow up on that last question, in terms of bonus in the fourth quarter and plan for '09, how did that track?

Ed Record

Well, there wasn't a whole lot of bonus accrued in the fourth quarter.

David Mann - Johnson Rice & Company

What would the year-over-year comparable look like?

Ed Record

For the fourth quarter actually I think it was a hurt for us because last year we didn't pay a whole lot of bonus either. Yes, we actually charged ourselves more bonus this year than last year. Last year when we decided we weren't going to pay it we decided in the fourth quarter and reversed it, so we had actually almost no bonus accrued last year and this year we had a small amount accrued in the fourth quarter. And we expect '09 to look pretty flat to '08 for the full year.

David Mann - Johnson Rice & Company

And then in terms of the outlook for distribution costs, if I think back, the whole premise of the third DC was predicated on a lot more growth than I think you're focused on now. Could you just talk through the kind of distribution efficiency you may not have and how distribution costs are going to track?

Ed Record

Well, clearly distribution costs were up last year as we brought the new DC online. We do expect to get most of that back this year and bring them back in line closer to 2007. Obviously we were looking at 50 to 70 stores a year when we opened the distribution center. And we probably could have gone another year without the additional capacity, but had we not opened it in '08 we would have still needed it in '09, even with our reduced store count. And it has been helping from a freight and transportation standpoint, particularly in the time it takes to get our goods into our stores.

David Mann - Johnson Rice & Company

And if you were to get back to '07 levels, what kind of leverage would that reflect?

Ed Record

From a raw dollar standpoint it's about $1.5 million.

David Mann - Johnson Rice & Company

You talked about openings. Can you give a sense on the number of stores that might be on the edge for closing? And also in that context can you just talk about B.C. Moore and where you stand there?

Ed Record

I think we closed 11 stores this year. We expect '09 to look pretty similar to that, probably in the 10 to 15 range. Probably a third to a half of those will be former B.C. Moore stores that were on the bubble when we opened them that, you know, we've been operating until their lease runs out. So we don't have a firm store count number yet. We'll play that as the stores come up and as we try and renegotiate with the landlords. And if we can get the rate that we think is appropriate to stay there, we will; if we don't we'll decide to close those. But we expect '09 closings to look pretty similar to '08.

David Mann - Johnson Rice & Company

And if you can remind us, how many stores are up for lease expiration this year?

Ed Record

I don't have an exact number, but it's about 70.

Operator

(Operator Instructions) I'm showing no further questions, sir.

Andy Hall

Great. Thank you. Well, we'd like to thank everyone for participating in our conference call and we look forward to speaking to you again after the conclusion of the first quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program; you may all disconnect. Thank you and have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stage Stores, Inc. F4Q08 (Qtr End 1/31/09) Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts