Joe's Jeans Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.16.13 | About: Joe's Jeans (JOEZ)

Joe's Jeans (NASDAQ:JOEZ)

Q1 2013 Earnings Call

April 15, 2013 4:30 pm ET

Executives

Lori Nembirkow - Corporate Secretary

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

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

Analysts

Jared Schramm - Roth Capital Partners, LLC, Research Division

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

James Fronda - Sidoti & Company, LLC

Steven Chang

Operator

Welcome to the Q1 2013 Joe's Jeans Inc. Earnings Conference Call. My name is Trish, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Lori Nembirkow. Please go ahead.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining us on the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO; and Hamish Sandhu, our CFO. Before we start, let me review the company's Safe Harbor language.

Today's call may contain forward-looking statements, which are statements of the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You're cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. I also refer you to our reports that are filed with the SEC, which includes our quarterly report on Form 10-Q filed today. This report includes information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today.

In addition, we will also be sharing certain non-GAAP financial measures today during this call. Reconciliations to GAAP for the non-GAAP measures are contained in our earnings release that we released earlier today, which is available on our website at www.joesjeans.com under the Investor Relations heading.

Finally, a recording of this call and a telephone replay will be available for 1 week from today on the same part of our website.

Now I'll turn the call over to Marc.

Marc B. Crossman

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

In the first quarter, net sales increased by 13% to $29.4 million. And our operating income grew 30% to $2.3 million. And we generated $0.03 per share, excluding the one-time charge we took this quarter.

Like prior quarters, our growth continues to come from both our wholesale and retail divisions and our men's and women's product offerings. We also continue to benefit from the addition of sales from our Macy's brand, else. More specifically, wholesale grew 11%, retail grew 23% and else grew 29%.

I'll now discuss the topline results of the 2 divisions in a little more detail. As I just stated, our Joe's wholesale sales, excluding else, increased 11% to $19.7 million versus $17.7 million in the year-ago quarter. Most importantly, our domestic women's and men's businesses continued to have increases. Women's increased by 4%, and Men's increased by 29%. In addition, our else brand, which is just a year old, generated $1.9 million in revenue, a 29% increase over the last year. The else brand continues to add diversification to our wholesale base.

Let me give you a little more color on the various segments. Joe's men's sales continued to see strong double-digit growth in the first quarter, despite only single-digit door growth. Men's replenishment was a robust part of our business this quarter and largely contributed to this increase. Department stores had larger-than-planned reorders based on extremely strong offers [ph].

On our last call, we mentioned the expansion of our core basic program. This quarter, we fully realized the benefit of the additional fits and washes. The strength of the core basic program continues to drive the business across both the department and specialty store channels. Further newness is coming from interesting denim fabrications, such as indigo linen blend, indigo canvas and selvedge denim in a variety of shades of blue and gray. In aggregate, these factors all contributed to a lift in our average dollars per door.

Joe's women's wholesale sales increased by 4% on a comparative basis, despite residual reductions in our department store door count and a very tough comparison to the 55 Colors program we ran in the year-ago period. Thus, we were very pleased to see this positive sales trend. Growth against this tough comparison from the year ago is being driven by the strong performance of our Vintage Reserve program, as well as offering varied inseams. Right now, we're seeing traction with offering washes in a variety of silhouettes, such as the straight or skinny ankle, the high water and the crop. The execution of these trends, coupled with sharper price points for our enhanced core basic program, has enabled us to begin to gain back market share from our competition and build a stronger base of business with our department specialty stores. The success of our 55 Colors program that we followed up with our Vintage Reserve and revamped core basic program has had a very positive impact on our women's wholesale business.

I'm pleased to announce that several of our largest retailers, most notably Nordstrom and Bloomingdale's, are currently planning sequential door growth in the back half of 2013 due to our successful sales performance.

Our else brand continues to be a nice addition to the topline sales. During the quarter, the else brand grew 29%. Else is currently in all 314 Impulse stores, which we expect to maintain through the back half of the year. We continue to work closely with Macy's to create successful product assortments. We're focusing on building a larger penetration of core basic denim to support the customers' positive response to the brand. We remain very encouraged about the future of this brand.

Our international sales channel continues to perform well. Our non-European business, in particular Japan, Mexico and Australia, grew with the performance of our Joe's women's denim. This quarter, we also added sales in China, Panama and Colombia and are optimistic about the growth of our presence internationally. This is the last quarter that we will anniversary the reduction of sales from France, which we restructured in the second quarter of last year.

Retail sales grew 23%. This growth was a result of operating 8 more stores this year than a year ago. As a side note, 2 of the 8 stores opened during the first quarter, so we did not get the lift from a full quarter of sales from those stores.

One store, Tysons Galleria, was slated to open in our first quarter, but did not open until late March. Same store sales were down by 1%, primarily due to lower traffic as a result of winter storms, which affected 30% of our store base. In addition, we faced tough comps from the prior-year period when we had our strong 55 Colors program at our full price retail stores. However, our outlets experienced same store sales increases.

Due to tough promotional activity from our peers from December through February, we had more in-store promotions than a year ago. This year, we ran 8 total weeks of promotions versus 6 in the year-ago period. As a result, we experienced a 6 percentage point decrease in our gross margins to 64% from 70%. That said, in this current quarter, our same store sales are up, and our gross margin has rebounded. We continue to target opening 10 new full price stores in 2013 with smaller footprints in top locations. Our recently opened store in Tysons Galleria is a good example. At just 1,000 square feet, it is now our fourth best-performing full price store.

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

Hamish S. Sandhu

Thanks, Marc. As Marc just discussed, for the quarter, on a consolidated basis, net sales increased 13% to $29.4 million from $25.9 million over the prior-year period. Both retail and wholesale sales increased by growing 11% and 23%, respectively. Same store sales growth for the stores opened at least 12 full months [indiscernible] decreased 1%.

Retail sales represented 22% of overall net sales for the quarter. Wholesale sales increased 11% during the quarter, driven by increases in both men's and women's wholesale sales and the addition of else.

Our overall gross profit increased by 9% to $14.3 million from $13.1 million in the year-ago period. Overall, gross margin decreased slightly to 49% from 50% in the prior-year period. Our wholesale gross profit was up 8% to $10.2 million from $9.5 million in the prior-year period. Wholesale gross margin was down 2 percentage points, coming in at 44% compared to 46% in the year-ago period. Wholesale gross profit and gross margin were impacted by our sales mix and our else brand, which naturally carries a lower gross margin than premium denim. It is important to note that gross margin on our Joe's products remained consistent from the year-ago margin.

Retail gross profit was up 14% to $4.1 million from $3.6 million in the prior-year period. Retail gross margin was 64% compared to 70% in the year-ago period. Retail gross profit and gross margins were impacted by more promotions at both our stores.

Consolidated operating expenses were higher in the first quarter of fiscal 2013 compared to 2012 at $20.7 million compared to $11.3 million, respectively. Operating expenses increased due to the one-time charge of $8.7 million related to the buyout of the continued consideration payments to Joe Dahan, which I'll discuss in a little bit more detail at the end.

As a result, operating expenses for corporate were higher at $12.8 million compared to $4.1 million in the prior year. Operating expenses in our retail segment increased due to the addition of 8 more stores in our store base and pre-opening expenses of approximately $127,000 associated with 3 new stores. Operating expenses for the wholesale segment were lower at $3.5 million compared to $3.8 million in the prior year. This expense decreased primarily due to the restructuring of our European operations and no longer having expenses associated with staff in Europe.

Due to the charge associated with the buyout expense, we had an operating loss of $6.4 million compared to operating income of $1.8 million in the prior-year period. Excluding this charge, our operating income would've increased to $2.3 million. We had a net loss of $6.4 million for the first quarter of fiscal 2013 compared to net income of $794,000 for the first quarter of fiscal 2012. We had a loss per share of $0.10 for the quarter. Excluding this buyout charge, our earnings per share would have improved to $0.03 compared to $0.01 in the prior-year period. We ended the quarter with a cash balance of $14.1 million.

Before I open up the call for questions, I want to discuss the impact of the buyout of Joe's earnout on our financials. This quarter, we recorded an expense of $8.7 million. This amount represents the net present value of the obligation, which is why it is slightly lower than the actual obligation. Further, on our balance sheet, we recorded a short-term and a long-term payable associated with this amount. However, it is important to remember that while we expensed the full amount this quarter, it will be paid over the next 2-plus years, thus only impacting our cash flow as we pay it. In future quarters, we will only record on our P&L statement that portion that is attributable to the interim expense for payments during that period. This will result in a more consistent income tax expense for us and an easier understanding of our financials.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jared Schramm from Roth Capital.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Marc, you mentioned that the core products are taking share. I wonder if you could provide us a little color on taking share from whom? And is this via a targeted campaign, or is this strictly consumers exercising their preference?

Marc B. Crossman

You're talking on the men's and women's side, or are you talking [indiscernible]?

Jared Schramm - Roth Capital Partners, LLC, Research Division

Yes.

Marc B. Crossman

I think we're probably taking market share from a consumer preference standpoint. I would say, if you look at our Vintage Reserve program, we were the first ones in the market with that. So we'd already started to build presentations faster than our competitors had. So I think it's a -- consumers coming in, looking for Vintage and they're seeing a bigger presentation from us. Now who specifically we're taking market share from? I couldn't tell you. I just know that we're turning faster than the departments -- than our overall department. So if you're turning faster, you're definitely taking market share.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And turning to the international side. With the restructuring in France now anniversaried after this quarter, can you talk about where you see international growth over the next 2 to 3 years?

Marc B. Crossman

We're seeing international growth -- the U.K. is a big market for us that we're growing. Japan is a big market that's growing for us. And Australia is a very big market for us that's growing. So as we look at kind of the top 3 right now in terms of speed of growth, those are really at the top of the list. France is a big piece of the business, but France is growing single digits right now. So it's really those areas that we see growing the fastest of the upsized [ph].

Jared Schramm - Roth Capital Partners, LLC, Research Division

And could you make an attempt to quantify the impact you saw from winter storms on the Q1 sales figures?

Marc B. Crossman

It's tough to impact, internally, we were looking at it. As I said, about a 1/3 of our store base sits in the kind of Northeast, Midwest -- really Northeast side of the business. So it's tough -- what we try to go back and look at is store closures and then store comps, and I would definitely say our comp would have been up were it not for the storms.

Jared Schramm - Roth Capital Partners, LLC, Research Division

In the Tysons Galleria store, did that open up a little later than you expected, it sounds like?

Marc B. Crossman

Yes, it was delayed. We had some permitting issues that delayed it -- and I would say delayed it by about a month.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And that pushed it into March then from February previously?

Marc B. Crossman

Yes, it did. And I mean, again, we have 2 weeks of selling, but it's closer to that 700 a foot that we had talked about than the 400 a foot. So we've got a couple of those smaller footprints, and they're more productive than the larger footprints stores.

Jared Schramm - Roth Capital Partners, LLC, Research Division

And you mentioned that store is off to a pretty strong start though? I know it's a relatively short period of time, but...

Marc B. Crossman

Yes. I mean, I know it's only 2 weeks, so we want to be cautiously optimistic. But it opened a lot stronger than we thought it was going to open.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And lastly here, returning to the else brand, up 29% in the quarter, is this more of a push from your end to Macy's, or is Macy's seeing the return they're getting from the product and really putting a lot more weight behind the brand?

Marc B. Crossman

They're putting more weight behind the brand. We've talked a lot with them about making sure that they're bringing it closer to the aisles. The design, it looks better [ph]. So it's really been the looking at the business. Now granted, we're at more doors than we were a year ago. But a lot of that was set up. So now, as you look at it, that kind of ongoing rate is turning pretty quickly. So I think that else, in general, we had a big management meeting with them last week, and it's still a huge priority for them because it's just a white space that is not there. Now, I'll give you some sense that we had an exclusive with them. It is sort of coming to an end, so to speak. So we might be able to expand the door count within else. That's just between us, and every investor there. So there's a lot of opportunity for else in the marketplace.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Are you seeing some interest from other [indiscernible] -- retailers in that space that are looking to take that brand and either replicate it or take the else brand itself and...

Marc B. Crossman

The else brand itself -- and there is a ton of interest. It's -- we're working with Macy's on that. Clearly, they've been an amazing partner for us. But in terms of other retailers that we floated that to in the market, there is a tremendous response.

Operator

Our next question comes from Jane Thorn Leeson from KeyBanc.

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

Just on the else, how are you able to test else in other channels or retail -- with other retailers if you have an exclusive with Macy's?

Marc B. Crossman

Well, the exclusive with Macy's is coming to an end in terms of the period that we had committed to.

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

Oh, when will that end, or how much longer?

Marc B. Crossman

Pardon me?

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

When will that end, or how much more time that's on the exclusive?

Marc B. Crossman

It's ending at the end of the quarter.

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

Of this -- of Q2?

Marc B. Crossman

Of Q2. So it's -- for us, it's a matter of working with Macy's, looking at the rollout and getting a sense of what they want us to do. And I'm being cautious about my wording, but just discussing in the marketplace with other retailers what their level of interest is, and they've seen the success that we've had in Macy's with it. And so, they're chomping at the bit to have a bite of it. But again, we have to be cautious.

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

Okay. That's helpful. I mean, so would you be rolling out the same program or similar programs to other retailers once you're exclusive ends? Or would you be making specific products for other people?

Marc B. Crossman

It would, I mean, depending upon which retailer we're discussing. We'd use the else brand, for sure. But it all falls under the same operating method with the brand. But again, as I said, and I want to be cautious about it, it's something that we're discussing with Macy's right now. Nothing has been formalized. It's just there is a lot of opportunity for the brand in the marketplace as we've launched it.

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

Okay. And then, earlier on the call, you had said that comps and gross margins rebounded. Is that what you see so far in Q2? And then, what do you, I guess, attribute that to? Was the traffic improved?

Marc B. Crossman

The traffic's improved. We obviously, on the Northeast and the mid-Atlantic, are seeing the comps improve dramatically. The weather was difficult for us, so our level of traffic on a consolidated basis is -- has come back up, which is very encouraging for us.

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

Okay. And then lastly, how should we think about gross margin for the rest of 2013? Would that still be inching up just slightly year-over-year, given you're planning to expand else, which has a lower margin structure?

Marc B. Crossman

Yes. But we also -- as I said, our retail was lower -- a lot lower than we would have anticipated just because of all the promotions that were being run and the number of weeks of promotions. So I think the 2 are going to counter balance each other. And as we've discussed on the last conference call, I think it was a question you had asked, those -- we're going to see those margins rebound back to a more normal level. So I think that will counter balance with what we have. And this is, definitely in the second quarter with what we have relative to the else brand.

Operator

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

James Fronda - Sidoti & Company, LLC

Just the operating loss on the retail side. Do you anticipate future operating losses, I guess, as you grow? Or do you think that was just kind of a quarterly thing?

Marc B. Crossman

I would say that's more of a quarterly thing. As I said, with our gross margin being where it was, that was a significant contributor, and then we had a lot of pre-opening expenses that flowed through the bottom line with having those stores -- the 3 new stores that were opened. It was a combination of both.

James Fronda - Sidoti & Company, LLC

Okay. I guess, and my other question, you're not seeing any difficulty, I guess, with rising leases -- lease payments, I guess, are you? You're still getting the same deals that you're getting like a year ago, I guess?

Marc B. Crossman

As I said, we have, I think, 6 in the pipeline that we're working on right now. So those aren't -- those are kind of pre -- what's going on in the market place right now, leases that we had negotiated. So no. But, yes, the marketplace is not easy, so we have to pick and choose.

James Fronda - Sidoti & Company, LLC

All right, okay. And I guess, just your thoughts on the women's side for this second quarter, in what you're seeing. I mean, does it seem to still be improving and still be intact?

Marc B. Crossman

Yes. I mean, it's -- our [indiscernible] are amazing, and we've talked to our department store partners. Our largest, like the Blooming's and the Nordstroms, have already committed to door increases in the back half of this year. So we had talked about, as our business improves, so we'd like to see that. Well, we're already seeing those commitments now. So that's extremely positive for us. We didn't think we'd be talking about that until the second quarter. But already here on this call, we're talking about that. We had -- I think that's a very -- for us, it's very positive to turn faster than we're seeing the departments are [ph].

James Fronda - Sidoti & Company, LLC

Right. Okay. And a lot of this, I guess, is riding on the whole vintage style for the most part?

Marc B. Crossman

No. I mean, Vintage and our core basics, and the product that they've seen for fall -- and we're not really talking about what we're showing in fall, but the product that we're showing for fall has been beautiful product, and when they see it, that's when they do a combination of, what do you have coming up or coming down the line, how's you're selling today. They put those 2 and 2 together, and they want to roll us to additional doors in the back half of the year.

Operator

Our next question comes from Steven Chang from Rudgear Capital.

Steven Chang

Could you talk about how the non-denim has been doing in either wholesale or retail, non-denim bottoms and tops?

Marc B. Crossman

This year, what we've seen on the non-denim side of the business is that it started to take more market share, and I'm talking about -- let me talk about our retail store specifically, and it's picked up about 10 percentage points of share in our retail stores. So where we were running denim, it was about 16% of our business. It's running about half our business right now. So there's been a significant increase in the percentage of retail that non-denim represents.

Steven Chang

Great. That's fabulous.

Marc B. Crossman

Yes, it really is. I mean, it speaks to the product.

Steven Chang

Any traction so far at wholesale?

Marc B. Crossman

The wholesale is roughly about where it was. It's still very difficult to get that kind of traction out of wholesale. So we haven't seen a major shift in the amount that we're selling.

Steven Chang

And could you generally talk about, for the Joe's brand, how price points might compare year-over-year? And whether we're seeing any increases in price points.

Marc B. Crossman

You know what? We actually saw it -- no, we're not seeing increases in price points. So we had made a conscious decision to bring our price points down. And as where our starting margin is. But by doing that, we actually saw our margin in our women's denim go up, believe it or not, because we saw a decrease in our dilution, not in a major way, but the decreases that we made in pricing actually resulted in better selling and the follow-on effect of that is your net gross margin actually goes up. So a lot of what happened in our overall topline gross margin, which is really related to the retail business and else, the combination of those is being dilutive to the overall number, if you will. So our actual Joe's -- core Joe's product margin looks really good.

Operator

And at this time, we have no further questions. I will now like to turn the call back over to Marc Crossman.

Marc B. Crossman

All right. I appreciate everybody being on the call. If you have a question, please don't -- feel free to call us back.

Operator

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

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