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dELiA*s (NASDAQ:DLIA)

Q4 2012 Earnings Call

March 28, 2013 10:00 am ET

Executives

Marc G. Schuback - Senior Vice President, General Counsel and Secretary

Walter Killough - Chief Executive Officer and Director

David J. Dick - Chief Financial Officer, Senior Vice President, Principal Accounting Officer and Treasurer

Operator

Good morning, ladies and gentlemen, and welcome to the dELiA*s, Inc. Fourth Quarter and Full Year Fiscal 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded on March 28, 2013, and may not be reproduced in whole or in part without permission from the company.

Today's conference call will be available for replay beginning at 1:00 p.m. today through 11:59 p.m. April 28, 2013, on dial-in number (877) 870-5176 for domestic, or (858) 384-5517, international, passcode 1253048. I would now like to introduce Mr. Marc Schuback, Senior Vice President, General Counsel and Secretary of dELiA*s, Inc. Mr. Schuback, please proceed.

Marc G. Schuback

Thank you, Jessica. Good morning, ladies and gentlemen. If you need a copy of our fourth quarter press release, it is available on our website, www.deliasinc.com.

Before we continue, let me remind you that our statements today regarding the company’s future business plans, prospects and financial performance are forward-looking statements that we make pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements, which can be identified by the use of the words believe, expect, should, estimate, plan, project, anticipate or similar expressions are based on management’s current knowledge and assumptions about future events.

Forward-looking information and statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from our expectations as a result of many factors, including those contained in our annual report on Form 10-K as well as in our subsequent filings with the SEC.

These filings are available on both the SEC and dELiA*s websites. All forward-looking information and statements are made as of the date of this call, and we disclaim any intent or obligation to update them. As a reminder, this call is being recorded on March 28, 2013.

At this point, I would like to introduce our Chief Executive Officer, Walter Killough.

Walter Killough

Thanks, Marc. Good morning, everyone. Thank you for joining us for the dELiA*s, Inc. fourth quarter and full year 2012 earnings call. With me today is David Dick, our CFO.

During 2012, we continue to evolve our merchandise assortments, inventory flow and promotional cadence in our dELiA*s Brand. For the year, both channels of our dELiA*s Brand were able to decrease their operating losses, but this improvement was partially offset by a significant increase in Alloy's operating loss. The combination of increased comp and merchandise margin, coupled with our initiatives to reduce selling expense and work with our landlords to reevaluate our store base, drove an almost $8 million improvement in our retail operating loss.

However, our overall fourth quarter results did not meet our expectations, primarily driven by some merchandise misses and a slowdown in both mall and web traffic.

As mentioned in our press release on January 7, for the November, December time period, our merchandising efforts resulted in positive comparable stores performance for the retail segment and a revenue increase for the dELiA*s Brand in the direct segment. However, after week 1 of January, we experienced a significant slowdown in sales trends due to a falloff in traffic in both the stores and in our web businesses. Retail sales were driven by clearance product leading to the lower average transaction values and resulting in a comparable sales decline in January.

The January negative sales caused us to miss our inventory and cash projections. We also increased inventory reserves at year end and changed our timing of jobbing overstock into the first quarter of 2013 versus the fourth quarter last year.

In terms of merchandising, while we believe our model is correct, our assortment for the fourth quarter reflected too many market buys and not enough product development and, therefore, lacked sufficient different imitation.

During the fourth quarter, the dELiA*s Direct business showed some very positive signs. Sales for the quarter were up in the low double digits at higher margins, driven by denim, dresses and our footwear business. This increase in our business caused our 12-month buyer file to increase at a double-digit rate.

We began to see the slowdown in traffic and conversion with our January book, which is our first spring book. In Alloy, we had double-digit decline in revenues, which drove an increase in our fourth quarter operating loss in the direct business. We tried aggressively to promote to a free shipping and promotional pricing, which lowered margin rates but did not drive enough -- did not drive a major trend change in the business. Outerwear and footwear were the biggest negative comping classifications in our Alloy business.

Both direct businesses were affected negatively to their plan and margin rates from the competitive promotional environment that included free shipping and handling offers.

So far in 2013, we've seen the traffic decreases in all our channels, making the first quarter challenging with a continuation of negative comps and lower margins. This week, with the start of spring break seasons along with warmer weather, we are starting to see positive changes to our trends.

Next I want to touch on our announcements regarding the strategic review and senior leadership changes. We recognize that we need to take additional steps to improve our business, get back to positive trends and strengthen our balance sheet. As we enter the final stages of the -- of our CEO search, the board has asked me to stay on a month-to-month basis to help operate the business and focus on these initiatives. One, we've hired Janney as our strategic advisor with the initial focus on the sale of Alloy. We believe that the sale would both strengthen our balance sheet and allow the new CEO to dedicate all of our resources towards driving improvement -- driving improved performance in the dELiA*s business. Two, with the resignation of Dyan Jozwick, we retained a senior merchandise consultant, Paula Demaso [ph], to oversee the merchandising functions and assist with buys for the key Back-To-School and holiday seasons. Three, we are implementing changes to our occupancy, overhead and selling expense models that we estimate will save over $7 million as compared to last year, while limiting capital expenditures. Finally, we're aggressively managing our inventory to get back on our inventory plan and increase turns in all channels.

I would now like to turn the call over to Dave to review the financials in more detail.

David J. Dick

Thanks, Walter. Total revenue for the fourth quarter of fiscal 2012, which included 14 weeks, increased 1% to $66.2 million from $65.6 million in the fourth quarter of fiscal 2011. Total revenue for the retail segment for the fourth quarter decreased 2.4% to $32.8 million compared to $33.6 million in the fourth quarter of fiscal 2011, primarily due to store closings. Retail comparable store sales decreased 0.3%.

For the direct segment, total revenue increased 4.4% to $33.4 million in the fourth quarter of fiscal 2012 compared to $32 million in the prior year period. Catalog circulation increased by 1% compared to the fourth quarter of fiscal 2011. Total gross margin for the fourth quarter of 2012 was 31.2% compared to 32.3% in the prior year quarter. This decrease is primarily due to increased shipping and handling cost and increased inventory reserves, partially offset by the leveraging of reduced occupancy expenses. Merchandise margins for the fourth quarter of fiscal 2012 were 10 basis points lower than in the prior year quarter.

Gross margin for the retail segment, which includes distribution, occupancy and merchandising costs, was 20.9% compared to 20.5% in the prior year period. This increase was driven primarily by leveraging of reduced occupancy cost, partially offset by increased inventory reserves.

Gross margin for the direct segment in the fourth quarter of fiscal 2012 decreased 41.4% compared to 44.6% in the fourth quarter of the prior year. The decrease primarily resulted from increased shipping and handling costs.

SG&A expenses were $27.8 million or 42% of revenues in the fourth quarter of 2012 compared to $26.3 million or 40.1% of revenues in the prior year quarter. The increase in SG&A expense dollars resulted from increased selling and overhead expenses, partially offset by reduced depreciation expenses. Included in SG&A expenses for the fourth quarter of fiscal 2012 were approximately $0.6 million in costs related to our CEO transition.

Total company operating loss for the fourth quarter of fiscal 2012 was $10.4 million compared to a loss of $3.9 million in the fourth quarter of the prior year. Included in the operating loss for the fourth quarter of fiscal 2012 was a goodwill impairment charge of $4.5 million for the direct segment, primarily related to the performance of the Alloy business and the aforementioned CEO transition costs.

For the retail segment, operating loss for the fourth quarter was $5.6 million compared to an operating loss of $6.2 million in the prior year period. For the direct segment, operating loss for the fourth quarter of 2012 was $4.8 million compared to operating income of $2.3 million in the prior year period. Included in the 2012 operating loss for the direct segment is the aforementioned goodwill impairment charge of $4.5 million.

Income tax benefit for the fourth quarter of fiscal 2012 was $14,000 compared to income tax expense of $0.1 million for the prior year period.

Net loss for the fourth quarter of 2012 was $10.7 million or $0.34 per diluted share compared to a net loss of $4.2 million or $0.13 per diluted share for the fourth quarter of 2011. Included in the loss for the fourth quarter of fiscal 2012 are the aforementioned CEO transition costs of $0.6 million or $0.02 per diluted share and a goodwill impairment charge of $4.5 million or $0.14 per diluted share. During the fourth quarter, we closed 3 stores, ending the period with 104 stores.

For the fiscal year ended February 2, 2013, which included 53 weeks, total revenue increased 2.6% to $222.7 million from $217.2 million for the prior year. Revenues for the retail segment were up 1.9%. Retail revenues were driven by a comparable store sales increase of 5.2%, partially offset by the reduced store count. Revenues for the direct segment increased 3.4%.

Total gross margin increased to 32.8% compared to 31.5% for the prior year. SG&A expenses were $93.4 million or 42% of sales for fiscal 2012 compared to $92.7 million or 42.7% of sales for the prior year.

Net loss for fiscal 2012 decreased $21.6 million or $0.69 per diluted share compared to a net loss of $22.7 million or $0.73 per diluted share for fiscal 2011. Included in the net loss for fiscal 2012 are store impairment charges of $0.2 million or $0.01 per diluted share, CEO transition costs of $0.6 million or $0.02 per diluted share, a goodwill impairment charge of $4.5 million or $0.14 per diluted share, store and customer contact center closing costs of $1.1 million or $0.04 per diluted share and a gift card breakage benefit of $4.2 million or $0.13 per diluted share.

Included in fiscal 2011 were store impairment charges of $0.5 million or $0.02 per diluted share and a gift card breakage benefit of $2 million or $0.06 per diluted share.

Income tax expense for fiscal 2011 was $0.1 million or $0.00 per diluted share compared to a benefit of 8 -- $0.8 million or $0.03 per diluted share for fiscal 2011.

Turning now to our balance sheet. At the end of the fourth quarter of fiscal 2012, we had cash and cash equivalents of $16.8 million compared with $28.4 million at the end of the fourth quarter of fiscal 2011. Availability under our credit facility with GE was $5.1 million as of the end of the fourth quarter of fiscal 2012 net of outstanding letters of credit of $11.9 million.

Total net inventories were $30.5 million at the end of the fourth quarter of fiscal 2012 compared with $30.9 million at the end of the prior year period. For the retail segment, inventory decreased to $15.6 million at quarter end compared with $16.1 million at the end of the prior year period. Due to the change in sales trends in the latter part of the fourth quarter and a change in the timing of jobbing overstock, average inventory per store in dollars was up 7.7% compared to the prior year. For the direct segment, inventory increased 0.8% to $14.9 million compared with $14.8 million at the end of the fourth quarter of fiscal 2011.

Cash CapEx for fiscal 2012 was $4.5 million. For the full year fiscal 2013, we expect CapEx to be approximately $2 million.

Based on current trends and the continued macroeconomic pressures, we see the first quarter of fiscal 2013 being down versus the prior year through sales and margins. Due to the transitional nature of our business right now, we will not be providing guidance for full year fiscal 2013 at this point.

We will be closing 1 store and relocating 2 additional locations during the first quarter. Also, please note that gift card redemption rates are now normalized and we would expect the gift card breakage benefit for the full year to be approximately $1 million compared to $4.2 million in fiscal 2012.

While the Board of Directors finalizes the search for our new CEO, dELiA*s team remains committed to driving improved performance and will continue to evaluate available alternatives to position the brand for success.

Before opening up the call for questions, I'd like to briefly comment on our announcement that we've retained Janney Montgomery Scott as strategic advisor to the Board of Directors with an initial focus on the potential disposition of Alloy. It is important to note that no decision has been made to engage in any transaction. There can be no assurance that any transaction will result from this process nor has the Board of Directors set a definitive timetable for any transaction. As you can appreciate, we will not be commenting on developments until the board takes some action, if any, or otherwise determines disclosure is appropriate or required.

I will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Marc G. Schuback

Okay. We would like -- we like to thank you for joining us today on our fourth quarter and full year fiscal 2012 earnings conference call. We wish everybody a good holiday weekend, and we look forward to updating you on our first quarter performance. Thank you, again.

Operator

This does conclude today's conference. Thank you for your participation.

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