David E. Ullman - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
R. Neal Black - Chief Executive Officer, President and Director
Jos. A Bank Clothiers (JOSB) Q4 2012 Earnings Call April 4, 2013 11:00 AM ET
Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] And as a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. David Ullman, Please go ahead.
David E. Ullman
Good morning, everybody. This is David Ullman, CFO of Jos. A. Bank Clothiers. I'm here with Neal Black, our President and CEO.
I will provide a financial overview and Neal will provide commentary on the business, and we will address some questions we have received recently.
Before we get started, I need to read this statement, that our statements concerning future operations contained on this call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this presentation, the words estimate, project, plan, will, anticipate, expect, intend, outlook, may, believe, goal, attempt, assume, potential, should and other similar expressions are intended to identify forward-looking statements and information. Actual results may differ materially from those forecasted due to a variety of factors outside of our control that can affect our operating results, liquidity and financial condition.
Such factors include risks associated with economic, weather, public health and other factors affecting consumer spending, including negative changes to consumer confidence and other recessionary pressures; higher energy and security costs; the successful implementation of our growth strategy, including our ability to finance our expansion plans; the mix and pricing of goods sold; the effectiveness and profitability of new concepts; the market price of key raw materials, such as wool and cotton; seasonality; merchandise trends and changing consumer preferences; the effectiveness of our marketing programs, including compliance with relevant legal requirements; the availability of suitable lease sites for new stores; doing business on an international basis; the ability to source products from our global supplier base; legal and regulatory matters; and other competitive factors.
The identified risk factors and other factors and risks that may affect our business or future financial results are detailed in our filings with the Securities and Exchange Commission, including, but not limited to, our annual report on Form 10-K for the fiscal year 2012. These risks should be carefully reviewed before making any investment decisions. These cautionary statements qualify all of the forward-looking statements we make on this call. We cannot assure you that the results or developments anticipated by us will be realized, or even if substantially realized, that those results or developments will result in the expected consequences for us or affect us, our business or our operations in the way we expect.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We do not undertake an obligation to update or revise any forward-looking statements to reflect actual results or changes in our assumptions, estimates or projections.
The following presentation includes information regarding sales to date in the current quarter. These interim period sales are not necessarily indicative of sales expected for the full quarter. Furthermore, sales are just one component of earnings, and no projection of earnings should be inferred from any discussion of interim period sales or other data in this presentation.
Turning to the financial report. For the year, we had a 7.1% sales gain. You can see on the income statement that sales exceeded $1 billion for the first time with a gain of more than $69 million over last year. However, with the gross profit rate decline of 380 basis points, we were not able to push the sales gains to the bottom line. As such, gross profit dollars grew to $612 million, which is an increase of $3.5 million compared to fiscal year 2011. We estimate that approximately 3/4 of the gross profit -- gross margin rate decline relates to higher cost of products with the remainder relating to lower retail prices.
Net income in 2012 was $79.7 million compared with $97.5 million in 2011, which represents an 18% decrease. The company previously announced that net income for fiscal year 2012 was expected to be approximately 20% lower than net income for fiscal year 2011.
Earnings were $2.84 per diluted share in fiscal year 2012 compared with $3.49 per share -- per diluted share in 2011.
So while we were still very profitable with net income at 7.6% of sales, we were not able to achieve the record earnings we set in fiscal year 2011.
For the year, comparable store sales decreased 0.5%, 0.5%, compared to increases of 7.6% in 2011 and 7.0% in 2010. The 0.5% decrease in comp store sales was a result of reduced traffic while dollars per transaction increased. The total sales increase of 7.1% in fiscal year 2012 was mostly attributable to the opening of 46 stores in 2012, and the 22.7% increase in Direct Marketing sales. Of the major product categories, dress shirts have the greatest unit gains while suits and sportswear had modest overall gains. We saw meaningful shift in our business to Tailored Fit and Slim Fit products compared to the Traditional Fit products.
The full year 2012 sales and marketing costs increased $36.9 million to $409.2 million. The $36.9 million increase in 2012 compared to last year relates primarily to growth of the company's store base and sales, as well as an increase in advertising costs. The primary increases in sales and marketing costs are from the following 4 categories: one, we had a $9.0 million increase of additional store and Direct Marketing payroll and benefits; two, we had $11.3 million of additional occupancy costs; three, we had $13.6 million increase in our total advertising; and four, we had a $3.0 million increase in our other variable selling costs.
The full year G&A costs decreased $2.4 million to $74.2 million in 2012. The decrease relates primarily to $2.9 million of lower corporate compensation, including a reduction of total company bonus and $0.5 million of higher other corporate overhead costs.
Net interest income was $0.4 million for 2012 compared to flat in fiscal year 2011. The improvement is related to lower interest expense in 2012 while interest income was slightly higher.
Tax expense decreased $12.8 million to $49.1 million in 2012, mostly as a result of lower profits. The tax rate was 38.1% in 2012, which is 70 basis points lower than the tax rate in 2011.
Our inventory increased 8.5% compared to the end of 2011, which is in line with our sales gain. Neal will discuss the cost trends of inventory and our expectations for 2013 in greater detail later.
We used approximately $35.6 million on capital expenditures in 2012, primarily on the following 3 items: one, we had the opening of 46 new stores, including the addition of 10 Factory Stores; two, the relocation and/or renovation of several stores; and three, the implementation of various systems and infrastructure projects.
In fiscal year 2013, we expect to spend a range of approximately $42 million to $46 million on capital expenditures. These expenditures will cover the opening of approximately 40 to 45 new stores, the renovation and the relocation of several stores, the implementation of various systems and infrastructure projects, including the initial phase to implement a new POS system and the maintenance and expansion of our distribution capacity.
I will now turn the call over to Neal Black, our President and CEO.
R. Neal Black
Thanks, Dave. And good morning, ladies and gentlemen. I'd like to start by saying that in 2012 at Joseph A. Bank, sales were up and profits were still good, but not up to our standards nor at the record level of last year. Net income was still a healthy 7.6% of sales. We did break through the $1 billion annual sales milestone for the first time, we opened 46 new stores, including our 600th store, we had a double-digit sales increase in Direct Marketing sales and we continued to maintain strong cash flows and a solid balance sheet.
The up-and-down results which characterized the first 3 quarters of 2012 were followed by a weak fourth quarter ending with full year results that were both weaker than the prior year and weaker than planned.
On the top line, we achieved a 7.1% net sales increase for the full year 2012 and Direct Marketing sales were up 22.7% for fiscal year 2012 as compared to fiscal year 2011.
When combined as a measure of comp business, comp store sales and Internet sales were up 2% for the year. However, comp store sales alone were down slightly 0.5%. Comp store sales were down in both November and December, resulting in a weak holiday selling season.
The overall sales picture was one of volatility, and strong promotional activity had been having our sales increases. Some outside the influences such as Hurricane Sandy, which hit along the East Coast where many of our largest-volume regions are located negatively impacted the beginning of November and was followed by the distractions of the national election and then the fiscal cliff negotiations. And this was not exactly a good backdrop for putting our customers in the shopping mood. We believe that our customers who work in business or government are sensitive to political and economic turmoil. Our additional advertising drove additional sales, but not enough to offset the reduced margin resulting from more aggressive promotions.
We've done exhaustive analysis of our advertising spend, our media plan, our pricing and our merchandise assortment. We know what happened to us, and we have a plan to test corrections, alternative pricing, different media plans and new merchandise items throughout the first half of 2013 in order to attempt to get a better result in holiday '13 and for the full year '13.
In 2012, sales of dress shirts have the largest unit increases while sales of suits and sportswear had modest unit increases. Sales of the more luxurious Signature and Signature Gold lines represented over 30% of our total merchandise sales for the year. As I stated earlier, Direct Marketing sales were up 22.7% and accounted for approximately 11.4% of our total sales for the year. We have a continually evolving presentation on the Internet that continues to gain increasing customer traffic. While many of our marketing offers on the Internet mirror the offers in the retail stores during the quarter, we continue to refine our techniques for driving customer traffic onto our website and converting that traffic into sales transactions.
In 2012, we employed not only additional markdowns and promotional offers to drive traffic and sales, but also additional marketing, which was less productive as Internet marketing costs continued to increase. Even though the results were less productive, we're pleased with the 22.7% sales increase and our goal going forward is to find ways to deliver these sales and improve margins.
Our proprietary database of active customers for both stores and Internet grew 14% for the fiscal year 2012 versus the fiscal year 2011 and now totals 4.1 million active customers. In 2012, we continue to experience a shift in the age of our average customer who is getting slightly younger over time.
The gross profit margin declined 380 basis points in the fiscal year due primarily to increased markdowns and higher merchandise costs. The increased merchandise costs that resulted from the increases in cotton and wool raw materials in 2011 are flowing through our inventory and we believe that they peaked in the fourth quarter of 2012. At the same time, we used more markdowns and progressively more aggressive promotional activity as we previously discussed to drive the top line sales. We expected to achieve sales increases with this formula and those additional sales did not materialize. So we are adjusting our pricing strategies and our marketing spends going forward in order to attempt to achieve a more profitable balance.
Controlling merchandise costs without deterioration of quality remains a top priority. We expect our product costs to decline modestly later in 2013. However, cost declines are not directly following the declines in the commodity prices of raw materials. Increases in other costs such as manufacturing, labor and currency valuations appear to be offsetting some of the commodity declines. We continue to seek the lowest cost in the world for the high qualities that we demand.
Our inventory was up 8.5% at the end of fiscal 2012 as compared to the end of fiscal 2011. We fully annualized the carrying over of unsold cold weather merchandise from 2011 into 2012. The inventory was rightsized for the 2012 season with a combination of go-forward carryover and new purchases. However, we did not have a good cold weather selling season in 2012 with the weather being warm again. And we are carrying forward into '13 similar levels of go-forward cold weather merchandise as we carried from 2011 into 2012. Clearance styles are being liquidated and go-forward styles will remain in inventory and will reduce 2013 purchases just as we did in 2012. Normal cold weather in 2013 should break this cycle.
Our internal growth initiatives remain the same, and here again is the list of our 5 growth initiatives and an update: First, we continue to focus on driving additional revenue through our Internet website. We completed the software upgrade in 2012 and continue to invest in keeping the consumer functionality current. A significant percentage of our sales are now being transacted by our customers on their tablet devices. Our biggest challenge is the rapid increase of Internet marketing costs particularly with vendors like Google. We'll be focused in 2013 on keeping the growth of marketing costs more in line with the growth in revenue. We continue with other efforts including product expansions, new promotional activity, international shipping tablet and mobile formats and social marketing in conjunction with our ongoing affiliate programs. Our international -- our international shipping functionality is working well, and we have successfully shipped orders to over 70 different countries worldwide.
Second, we continue to grow our tuxedo rental program. We are pleased with the results in 2012. We improved our results substantially versus the prior year and the business contributed positively to sales and net income. Although it was not big enough to report separately, our core business still accounts for the vast majority of our comp store sales. We expect that the tuxedo rental business will continue to grow and become a significant business in stores in future years.
Third, we continue to grow our business in Big, Tall and Regal size extensions, and we are achieving our goals with most of the effort and results being in our Direct Marketing segment where we have room to show and explain the whole product assortment. With all of the attention being currently -- paid currently to fit, the Big, Tall and Regal fits are becoming part of our overall fit story that includes our traditional classic fit, our modern tailored fit and our youthful slim fit. Big, Tall and Regal fits allow us to capitalize on the slogan, We Can Fit Almost Everyone.
Fourth, we continue to open Factory Stores. We opened 10 in 2012, and we continue to find that we are reaching new customers that, for the most part, do not shop with us in our Full-line stores. We are happy with our overall results and the business is contributing positively to net income. And we plan to add at least 7 more stores in 2013 as long as real estate opportunities become available.
And fifth is new Full-line store openings. In 2012, we opened 36 new Full-line stores. When combined with the 10 new Factory Stores, that's a total of 46 new stores plus expansions and relocations in 2012, which was an increase in our retail square footage of approximately 9% over 2011. We continue to focus on both filling into existing markets and on new markets. We expect to open stores in 2013 at approximately the same pace as 2012 and we are confirming our revised long-term store count goal to operate approximately 700 Full-line Joseph A. Bank stores and 100 Factory Stores in the U.S.A. The timing of achieving this total of 800 stores is dependent on real estate availability and other economic factors, so we will continue to announce future store counts by year approximately 12 months in advance.
In conclusion, our goal is to deliver net income and increase that net income every year. We have built a business model that allows us the flexibility to achieve increases in net income in a variety of ways depending on the circumstances at any given time. To deliver good results in 2013, we'll need to be able to get our gross margin rate going back up towards previous levels. We'll need to get productivity on our advertising spend going back up towards previous levels. We'll need to control expenses, maintain quality, keep our existing customers happy and continue to add new customers. We think we're up to the task. Sales so far in the first quarter of 2013 are up, but we're cautious because a lot of the quarter sales remain and we're not through the shift in the Easter holiday. We will continue to focus on an aggressively sourced, high-quality, well-balanced, fully stocked assortment that is promoted with timely marketing and sold by knowledgeable professionals in convenient locations.
And we look forward to speaking to you again when we report our first quarter results.
Now I'll turn the call back to Dave Ullman who has some questions that were asked of us recently.
David E. Ullman
Thanks, Neal. And we do have 5 questions that we have -- that have been posed by various analysts. And I'll start with the first one, which is your Direct Marketing sales were up 22.7% for the year while comp store sales were down 0.5%. What was different in your marketing activities in the Direct Segment to drive such a large sales increase?
R. Neal Black
Well, the Direct Marketing business, which is mostly on the Internet was quite strong at the top line. The interest thing about great direct marketing sales is that we're selling the same merchandising using most of the same promotional strategies online as we're using in the stores and getting a great result. That points us more towards making changes in the stores marketing and gives us continuing confidence in the merchandise assortment.
David E. Ullman
Okay, the second question. You mentioned that you have analyzed your 2012 marketing spend and are testing changes in the first half of 2013. Can you provide additional insight into this process and the marketing tests and/or changes you are performing? Will this reflect a change in your promotional business model?
R. Neal Black
We're running a high-low promotional pricing model that's been in place since long before this management team came to the company. We believe that it's part of the DNA of the brand. It's old school and we've learned how to be very good at it. We started adding a lot of extra promotional activities starting in 2008 when the economy got bad. I think we reached the limit of the effectiveness of that in 2012. Now rather than just focusing on price, we will also focus on our quality, our total value equation, our shopping experience and our brand. These changes will require testing and will be gradual and will take time. So the business model remains the same, but the marketing will be evolving.
David E. Ullman
Okay, the third question. You stated that sales of dress shirts had the largest unit increases while sales of suits and sportswear had modest unit increases. Can you provide more color into the performance of the various categories of products?
R. Neal Black
Right now, we're in a suit cycle. There's a lot of attention to fit. Shirts are the first add-on in a suit transaction so there's a lot of attention there, too. In casual wear, I believe that we got a bit too casual in 2012. Right now, in our stores you'll see a renewed emphasis on casual wear that's meant to be worn to work in a business casual environment as opposed to weekend wear. That's our focus in casual for 2013 and it's closer to the essence of our brand.
David E. Ullman
Okay, the fourth question. You have opened 135 stores over the past 3 years, which is more than 20% of the total store base. How are the new stores performing?
R. Neal Black
We have been really pleased with the performance of our new stores over the last several years right out of the box for both Full-line and Factory Stores. Our real estate formula is refined and very effective.
David E. Ullman
And the last question. You have previously discussed your commitment to increasing the Tailored Fit and Slim Fit products. Can you give us additional insight into the trends of the business in Tailored Fit and Slim Fit?
R. Neal Black
These modern fits are performing extremely well and are the focus of all of our new product innovation. With a finite number of a potential suit customers available, one of the biggest opportunities for us is with our existing loyal customers about whom we know a lot. Our opportunity is to turn over their wardrobes and replace what's hanging in their closets with updated fits. The beauty of our Tailored Fit model is that it will fit most guys and give them a more modern look. Add the Slim Fit model for a younger, thinner and perhaps new customer, and for the right fashion present -- position in the market, and we've got the winning combination for a great 2013.
David E. Ullman
Okay, so that was the last question. And thanks again, everyone, for joining us this morning. On behalf of the more than 6,000 associates at Joseph A. Bank, we appreciate your interest in Jos. A. Bank Clothiers as both a shareholder and as a customer. And we look forward to talking to you after the first quarter. Take care, and have a great day. Operator, can you please provide the instructions at this time?
Ladies and gentlemen, this conference will be made available for replay today after 1 p.m. today until April 11, 2013, at midnight. You may access the AT&T executive playback service at any time by dialing 1 (800) 475-6701 and entering the access code 286177. International participants may dial 1 (320) 365-3844. And that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.
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: email@example.com. Thank you!