Coldwater Creek Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Coldwater Creek, (CWTR)

Coldwater Creek (NASDAQ:CWTR)

Q4 2012 Earnings Call

March 13, 2013 4:30 pm ET


Lyn Rhoads Walther - Divisional Vice President of Investor Relations

Jill Brown Dean - Chief Executive Officer, President, Director and Member of Succession Planning & Management Development Committee

James A. Bell - Chief Financial Officer, Chief Operating Officer and Executive Vice President


Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division


Greetings, and welcome to the Coldwater Creek Fourth Quarter and Fiscal Year 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Lyn Walther, Investor Relations for Coldwater Creek. Thank you. Ms. Walther, you may begin.

Lyn Rhoads Walther

Good afternoon, everyone, and welcome to Coldwater Creek's Fourth Quarter 2012 Conference Call. Our press release this afternoon includes details regarding our fourth quarter and full year results. Participating in today's call are Jill Dean, President and Chief Executive Officer; and Jim Bell, Executive Vice President and Chief Operating and Chief Financial Officer.

We will provide certain information on an adjusted basis during today's discussion. We have provided information on these adjustments in the schedule titled GAAP to Non-GAAP Reconciliation of Selected Measures included with the fourth quarter earnings release issued today.

As a reminder, we will continue to record quarterly noncash losses or gains associated with the mark-to-market activity related to the derivative liability, primarily as a result of fluctuations in our stock price. In general, an increase in our stock price will result in additional noncash losses, whereas a decrease in our stock price will result in gains.

During today's discussion, we will also make forward-looking statements within the meanings of the securities laws. These forward-looking statements are based on management's current expectations, estimates, assumptions and projections and are subject to change, and actual results may differ materially from those expressed or implied in the forward-looking statements.

Factors that could cause actual results to differ materially include those risks and uncertainties described in our most recent filings with the Securities and Exchange Commission. Any forward-looking statements are made only as of this date and we do not assume any obligation to update these statements.

Now I would like to turn the call over to Jill.

Jill Brown Dean

Thank you for joining us. I'm pleased to be with you today in my new role as CEO of Coldwater Creek. I will begin today's call by sharing with you our accomplishments in the fourth quarter and the full year 2012, Then I will provide an overview of our 2013 strategic initiatives. Following this, Jim will review our fourth quarter financial results in more detail and provide our outlook. After our prepared remarks, we will turn the call over to the operator to take your questions.

Fiscal 2012 was an important year for Coldwater Creek. We planned and executed strategies in merchandising and marketing to return our business to positive comp store sales and margin and in continued SG&A reduction, all in an effort to build sustainable, long-term profitability. While we made solid progress, particularly in the third and fourth quarters of the year, much work remains ahead of us.

As it relates to the fourth quarter, on an adjusted basis, which removes noncomparable items referenced in our press release, our efforts led to a 2.7% increase in comparable store sales and an 8% increase in direct sales, reflecting a 25% contribution from this channel. This is the first time we have experienced year-over-year growth in the direct channel in 10 quarters.

During the fourth quarter, we responded to weak traffic in early November and mid-December and were more promotional than we planned in order to have a clean inventory position exiting the quarter. While this strategy negatively impacted our gross margin, we ended the quarter with total inventory down 5%. Our best performing categories were sweaters, jeans, outerwear and jewelry, with softness in the tops and jackets.

For the full year, we delivered a 1% increase in comparable store sales and 280 basis points in gross margin expansion. This, coupled with expense discipline, drove a $29 million improvement in our fiscal 2012 adjusted net loss as compared to 2011.

We accomplished a great deal in 2012. Highlights include: Stabilizing our product offering by leveraging our top 30 styles as the base of our business ground in trend-right styles and the compelling color, print and pattern that our customers love; adding incremental product flows, which provided newness and freshness to the assortment and increased our full price sell-through; and in aligning our creative positioning across all channels, bringing an integrated shopping experience to our customers.

We also launched a new loyalty program, Coldwater Creek Rewards, in early 2012 and ended the year with 1.5 million members. 17% of these customers are new to file and are younger than our database average. The rewards customer spends on average 2.7x more annually than non-reward customers.

Also as an outcome of the strength of Coldwater Creek Rewards, we experienced a 10% increase in the size of our promotable e-mail file and more than doubled our e-mail capture rate in 2012.

We are focused on building our omni-channel capabilities to create an integrated network that is customer focused and provides a consistent branded shopping experience in all channels. Our multichannel customers are our most valuable, spending twice as much on average annually than single-channel customers.

We launched mobile commerce for holiday by introducing our mobile site that functions across all smartphones, along with an iPad app, acknowledging this growing trend and our customers' increasing comfort level with this technology.

Finally, and critically important, are the investments that we have made to build our leadership talent to ensure that we are able to execute our strategies at the highest level. In the last 18 months, we have brought a new leadership in merchandising, sourcing, inventory planning, creative services and information systems. We are currently focused on filling key leadership roles in marketing and human resources. In addition, as we focus on continuing to build the brand and our fashion leadership, we are in the process of transitioning all of the design team to our New York office under the leadership of Jerome Jessup.

As we begin the new fiscal year, we are focused on strengthening our brand and by continuing to reposition Coldwater Creek as a leader in the marketplace, providing trend-right, age-appropriate fashion and a consistent multichannel experience to our customers as her trusted advocate.

To this end, we have recently completed a comprehensive qualitative study of our target customer. This work has helped us define who she is, how she lives her life, what she values and her unique emotional connection with fashion. It will guide our decision making and enable our organization to execute consistently with one voice, one target, one vision.

In merchandising and design, we will continue to build on the base that we established in 2012. Our assortment architecture will continue to evolve by emphasizing a higher penetration of on-trend fashion interpreted for our target customer and focused on building a thoughtful assortment of complete outfits.

We are focused on regaining our leadership in color, print and pattern that are the DNA of our brand. And to that end, we have redefined our color and print architecture to focus on what we are best at: rich, vibrant color and feminine prints.

Broadening our core product offering is an important part of our strategy. For spring, we launched our Weekend by Coldwater Creek collection in our e-commerce channel. This collection of relaxed, knit shapes in light layers has performed very well, and we will be launching it in our retail stores this fall.

For summer, we are launching our swimwear collection, as well as a small footwear assortment. We have also recently introduced into the e-commerce channel Destinations by Coldwater Creek, a collection comprised of easy wear, no-wrinkle coordinated separates, a cashmere collection and an expanded assortment of our jeans. Supported by presentation in our catalogs, we will continue to use e-commerce to showcase new businesses with the potential to be rolled out to retail stores in the back half of 2013.

Our marketing initiatives in 2013 will continue to be focused on driving traffic to all channels. Our loyalty program represents the biggest opportunity to drive traffic, as just over half of our customers are currently enrolled in these programs.

We are focusing on driving more of our current customers into the rewards program and on driving current rewards members into our upper-tier programs, One Creek and One Creek Elite.

Our store associates will continue to be focused on adding new customers into the program and on maximizing e-mail capture rates.

We are also focused on refining our promotional and e-mail cadence, attracting new customers to the brand through our store windows, online advertising and public relations initiatives, all focused consistently expressing our brand position and to drive traffic.

Equally important are the initiatives to optimize our supply chain capabilities, which are designed to increase our speed to market and lower our cost of goods, our continued store optimization program, with an incremental focus on maximizing cross-channel sales recapture and optimizing sales and profits of store repositioning and remodels, and our commitment to rigorously manage our inventory. Jim will speak to these initiatives in more detail.

In summary, while the task to return the business to profitability is the relentless focus of our entire organization, we are pleased with the progress made in fiscal 2012, where we delivered positive comp store sales and an $11 million EBIT improvement in the second half of the year. Our customers are responding enthusiastically to the changes that we have made, and we are energized by the initiatives that we have in place in 2013 to build the brand and continue our momentum.

Now I would like to turn the call over to Jim.

James A. Bell

Thank you, Jill. During the fourth quarter, we continued to make good progress on our initiatives to improve our financial performance. In our press release issued this afternoon, we detailed our results of operations for the fourth quarter and full year of 2012, which included a number of noncomparable items. I will go through the details of those items with you momentarily. But first I would like to provide a few highlights, so that you have a clear comparison of our operating performance to last year.

On an adjusted basis, in the fourth quarter, we reduced our net loss per share to $0.65 from $0.73 last year. And as a result, have a 2.7% increase in comparable premium store sales, a 7.7% increase in our direct segment sales, 20 basis points improvement in our gross profit margin and a $1.4 million reduction in our SG&A expense. As I mentioned, these improvements are on as-adjusted basis, reflecting the following noncomparable items that impacted the fourth quarter and fiscal year.

First, during the fourth quarter of fiscal 2012, the company incurred a onetime expense associated with the CEO transition of $0.06 per share. Second, due to the change in the fair value of the derivative liability related to Series A preferred stock, the company recorded a gain of $0.05 per share in the fourth quarter, net loss of $0.10 per share for the full year. Third, we recorded a favorable cumulative onetime adjustment for gift card breakage income that represented $0.39 per share in the fourth quarter of last year and $0.47 per share for the fiscal year 2011. In addition, we recorded noncash store impairment charges of $0.08 per share in the fourth quarter of last year and $0.21 per share on a full year basis.

Additionally, I would also like to note that fiscal 2012 was a 53-week year with the additional week occurring in the fourth quarter, while fiscal 2011 was a traditional 52-week year.

Comparable store sales for the fourth quarter and full year are presented on a 13-week and 52-week basis, excluding the additional week. The additional week in 2012 represented $8 million in net sales and a net loss of $0.13 per share.

Now moving on to our detailed results for the fourth quarter. Consolidated net sales in the fourth quarter of 2012 were $220.8 million as compared to $224.4 million in the fourth quarter of fiscal '11.

In the retail segment, net sales declined 4.3% to $166 million from $173.5 million in the fourth quarter of 2011. The decline in sales was related to both store closures as a result of our store optimization program and a $10.7 million gift card breakage income recorded in the fourth quarter of last year.

Comparable premium retail sales increased 2.7% driven by 13% increase in our conversion comp, partially offset by a 4% decline in comparable store traffic and a 5% decline in average transaction, as a result of higher markdown sales in response to variability in the business both in early November and mid-December time frames. We saw our best performance in the Central region, while both the South and the Northeast were the most challenging, primarily as a result of severe and variable weather in those regions.

The retail segment net sales represented 75% of consolidated net sales compared to 77% in the fourth quarter of last year, representing both the impact of the store closures, as well as positive growth in our direct segment.

During the quarter, we closed 5 premium retail stores and 1 day spa, ending the period with a total of 349 premium retail stores, 38 factory stores and 8 day spa locations. For the year, we closed 15 premium retail stores and 1 day spa as part of our closed -- store optimization program.

Now turning to our direct segment. Direct segment net sales increased 7.7% to $54.7 million from $50.8 million in the fourth quarter of 2011, which is significant as this represents the first increase in sales in 10 fiscal quarters for this segment. The improvement was driven by a 7% increase in order volume and a continued expansion in merchandise margins driven by lower markdown selling as part of our inventory management strategies, which have significantly reduced clearance selling on the web.

Consolidated gross profit for the quarter was $64.1 million or 29.1% of net sales compared to $73.1 million or 32.6% of net sales for the prior year period. Last year's gross margin included a 370 basis point benefit related to gift card breakage income. Adjusting for this benefit, gross margin increased 20 basis points, driven by leverage of occupancy and buying expenses.

Merchandise margins declined 120 basis points in the quarter as a result of our strategic decision to increase our promotional stance in the retail channel in response to the variability in the business throughout the quarter. These decisions ensured we exited the quarter very clean in overall inventory.

Selling, general and administrative expenses for the fourth quarter were $82.5 million or 37.4% of net sales compared to $81.8 million or 36.5% of net sales in the fourth quarter of 2011. The increase in SG&A expense was due to a $2.1 million pretax charge related to our CEO transition, offset primarily by lower marketing expenses.

During the fourth quarter, our catalog circulation was down 3% versus the prior year, as we continue to rebalance our spending, increasing our utilization of both e-mail and loyalty marketing programs.

Interest expense related to our term loan was $3.7 million in the quarter and compares to $800,000 in the fourth quarter of fiscal 2011. The income tax benefit for the quarter totaled $607,000 and compares to an income tax benefit of $1.1 million for the fourth quarter of last year.

Now turning to our balance sheet. We ended the year with total cash of $21.7 million with no outstanding borrowings under our revolving line of credit. This compares to $51.4 million last year, which included $15 million of outstanding borrowings under our revolving line of credit. It is important to note that due to the timing of payments for certain rents and other accounts payable, the 53rd week reduced our comparative cash balance by approximately $13 million.

Total inventory declined 5.1% to $125.2 million from $132 million at the end of fiscal 2011. Premium retail inventory per square foot, which includes retail inventory in the distribution center, increased approximately 8% as compared to fiscal 2011, due in part to earlier receipt timing of our spring merchandise, as well as the 53rd week. As a reminder, at the end of the fourth quarter of fiscal 2011, our inventory per square foot was down 24.3% from the previous year.

Capital expenditures in the fourth quarter totaled $2.3 million and for the year totaled $16.5 million. Depreciation and amortization was $12.4 million for the quarter and $51.4 million for the full year.

As we turn to fiscal 2013, we are focused on continuing to deliver incremental improvements in our financial performance by improving our inventory management, optimizing our real estate portfolio, leveraging our supply-chain capabilities and further reducing our overall expense levels. We plan to improve our inventory productivity through tighter inventory commitments by adjusting the depth, while maintaining the breadth in our assortments.

Additionally, in the first quarter, we will launch a new Oracle-based inventory planning system, which we believe, will -- when combined with our other initiatives, will lead to further improvements in our inventory turns and continue to reduce our clearance inventory levels.

In fiscal 2013, we will also continue our store optimization program, which we began in fiscal 2011. To date, we have closed a total of 30 underperforming stores and are on track to close an additional 15 in fiscal 2013. One area of focus will be to continue our efforts to maximize transfer sales from these closed stores, which we believe can be up to 50% or more in some key multi-store markets.

As part of our strategy to reduce the average store size over time, we will continue to opportunistically downsize and/or relocate stores in certain markets. We have been pleased with the performance of the 11 stores we relocated or downsized in fiscal '12 and plan to address some additional 8 to 10 in fiscal 2013. We have found that by reducing the square footage by just over 30%, we are seeing close to a 60% improvement in the four-wall operating income and a meaningful increase in sales per square foot productivity.

In addition, we are working to leverage our supply-chain capabilities, which we expect will reduce our cycle time and lower our cost of goods. We plan to reduce our cycle time by streamlining our product development process, improving our forecasting and planning of capacity and raw materials and enhancing our overall logistics model. To date, we have reduced the product life cycle by 5 weeks and believe we have an opportunity to take out an additional 5 weeks over time.

And finally, we have continued to be diligent about expense management, generating savings of $18 million in a year, ahead of our guidance of $13 million to $15 million. For fiscal 2013, we expect to reduce total SG&A expense by another $4 million to $6 million.

Now turning to our outlook. While we are confident that we are well positioned for fiscal 2013, we are somewhat cautious given the uncertain macroeconomic environment and the impact this will have on consumer spending. For the first quarter of fiscal 2013, we currently expect comp store sales to be down low single digits. We expect our gross margins, however, to continue to improve between 100 and 200 basis points. And adjusted net loss per share, we expect to be in the range of $0.60 to $0.80. This guidance excludes any quarterly impact of the change in the fair value of the derivative liability associated with our preferred stock. And finally, we expect our total inventory to be down in the low single digits as compared to the first quarter of fiscal 2012.

For the full year of fiscal 2013, we expect gross margin expansion of between 100 and 200 basis points. Our interest expense will be approximately $15 million. And we are on track to close 15 premium retail stores and open 2 factory stores during the year. Finally, our capital expenditures for the year are expected to be between $17 million and $20 million. And depreciation and amortization will be between $40 million and $45 million.

In summary, we're pleased with the progress made in fiscal 2012, and we believe these financial results show the impact of our strategic initiatives, as well as our efforts to reengineer the way we operate the business. We are focused on continuing to execute our strategic initiatives, which we believe will yield commensurate improvements in our financial performance in 2013.

This concludes our prepared remarks. I will now turn the call over to the operator to take your questions.

Question-and-Answer Session


[Operator Instructions] Our first question is from Neely Tamminga of Piper Jaffray.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

I just have a 2-part question here. First, I was wondering, Jim, if you're able to give us a little bit in terms of quarter-to-date trends. Obviously, that's consequated on your guidance. But just kind of sizing up the easing in traffic compares that we think you guys have in spring and then, obviously, your regional performance. Have you seen the Midwest actually outperform the chain average similar to what we saw in Q4, I believe, if I recall correctly? And just have you seen any sort of stabilization on the pattern? The second question is really for Jill. Could you more specifically describe some of the ways that you're actually improving consistency across channels? Is it people changes? Is it process changes? I think it's just really interesting and compelling, especially considering you guys are going to be doing a lot of your new category launches by e-commerce.

James A. Bell

In terms of the trend, we -- so far in the quarter, February wasn't necessarily up to our expectations. But we did see, as we dropped a key spring flow early in March that we did start to see a little bit of improvement to those trends. So -- but I will say this, we think most of February was primarily weather related, as we saw a very distinct material difference in the performance in the Northeast than the rest of the regions. And our warmer weather regions somewhat, to what you're alluding to, were absolutely better performers during the month.

Jill Brown Dean

And in answer to your second question, I think that we have been engaged in trying to collapse the silos between our channels for quite some time. It's been a year since we realigned our merchant teams to be -- to not be channel focused. We have really collapsed the silos in our creative team and everyone is really working together to do a much more holistic job of the product, the creative expression, the brand voice across all of our channels. So it's a little bit of everything. It's a little bit of people. It's a little bit of process and it's very high-level shared commitment to focus on the customer experience cross-channel and to make it as seamless as we possibly can. And yes, we're very enthusiastic about the idea of using the e-commerce channel to test how to bring new products to market.

James A. Bell

In that light, I'll add also that we continue to see pretty solid momentum also quarter-to-date, this Q1 to date in the -- on the direct business as well. So gives us some good indication not only as -- to the results of those continuing activities but also some of the weather-related comments I made earlier.


[Operator Instructions] The next question is from Jeff Van Sinderen of B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

I wonder if you could just give us the comp drivers for Q4. I think you gave some of them, I believe you said transaction count was down 4%, if I caught that right. Maybe you can give us UPT, AUR, et cetera?

James A. Bell

Sure. Jeff, the biggest driver to the quarter in terms of comp was a conversion. It was a '13 comp. The -- and the other notes that I mentioned was the -- our average trans comp was down 5% and the traffic comp was down 4%.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And then inventory per foot, I think you said up 8% at the end of the quarter. But you're saying down low single digits at the end of Q1. When you say down low single digits, are you talking in terms of total inventory? Or is that inventory per foot? And maybe you can just give us the components of that.

James A. Bell

Sure. The inventory per square foot was up about 8% at the end of the quarter. And again, mostly because the timing of some of the shift -- timing shifts associated with some of our spring flows but also the extra week and when it fell, and when we're receipting [ph] goods to put into the stores. But again, I think total inventory, down 5%. What we're seeing is a continuation in, what I refer to as, the quality of makeup of the inventory, much less clearance and much more full-line inventory to support full-line sales in both channels. And then as we get into the end of Q1, my comment was down in the single digits on total inventory. I didn't give some perspective. But on a per square foot basis, I actually expect it to be slightly positive year-over-year. And again, the reason for that is continuing to see much more healthy mix of full-line inventory versus clearance inventory.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

And then maybe you can just touch on how -- in Q1 so far, since we're sort of halfway through the quarter now, how do your promotional levels compare to Q1 last year? And I guess, how should we expect your overall promotional level based on your current plan to compare for the whole quarter at looked at versus Q1 of last year?

Jill Brown Dean

So our promotional activity quarter-to-date has been relatively consistent with last year. We are looking at refining our promotional activity going forward, though. There are new components to our promotional strategy, such as returning to a private loyalty shopping event that are scheduled for the quarter. There are -- the redemption of our loyalty coupons as traffic drivers coming up here in the -- in the second 2 months of the quarter. And we are looking at really refining our promotional strategy, so that we are really sharp and aggressive when the traffic -- when the organic traffic is in the mall and really focused on maximizing the margin dollar opportunities when the traffic is there.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay, great. And then finally, maybe you can just touch on some of the omni-channel initiatives you're working on in 2013.

Jill Brown Dean

Sure. It's very early to talk about them actually. We launched our mobile site for smartphones in -- right before holiday and our iPad app. And I think certainly, we're seeing a very -- a quick movement of the customers' willingness to use the tablets to access our website and browse. I think we're still -- the actual transaction data is -- it's still way too early to really talk about that. But we're definitely seeing that movement for her, especially to using tablets.


We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional remarks.

Jill Brown Dean

Thank you for joining us today. We look forward to updating you on our progress on our next call.


Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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 All other use is prohibited.


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