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Cache (NASDAQ:CACH)

Q1 2013 Earnings Call

May 14, 2013 9:00 am ET

Executives

Allison C. Malkin - Senior Managing Director

Jay M. Margolis - Chairman and Chief Executive Officer

Margaret J. Feeney - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

James Fronda - Sidoti & Company, LLC

Ross Haberman

Operator

Greetings, and welcome to the Cache Incorporated First Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you, Ms. Malkin. You may begin.

Allison C. Malkin

Thank you. Good morning, everyone. Today's conference call includes comments concerning Cache's business and contains forward-looking statements. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in such forward-looking statements. Statements made on this call should be considered together with the cautionary statements and other information contained in today's press release, in our most recent periodic reports filed with the SEC, including our most recent Annual Report on Form 10-K for the fiscal year ended December 29, 2012, including the sections contained therein entitled, Risk Factors. A copy of our press release is also available on Cache's website, www.cache.com in the Investor Relations section.

Now, I would like to turn the call over to Jay Margolis, Chairman and CEO of Cache.

Jay M. Margolis

Thank you, Allison and good morning, everyone. We had a challenging start to the year trimmed by a couple of factors. First, we entered the quarter with increased levels of inventory and carryover goods and we bought too heavily in spring.

Second factor is related to our actions to reduce promotional activity on the web. When I joined the company in February, I knew we had some work to do to clean up prior season's inventory and felt that our assortments could be improved, which we communicated on our Q4 call. What became abundantly clear as I became more entrenched in the business was that our spring receipts were bought way too high. Prior to my arrival at Cache, the decision was made to significantly increase buys across all of our styles in an effort to boost sales in our lower productivity stores. Clearly, this was a misaligned strategy as our stores became cluttered. We were over-inventoried, and we did not represent what our customers looked for in our brand.

I continue to view the process as our biggest opportunity and my highest priority. The new process starts with having the right amount to inventory that is targeted to the areas of our business where we see opportunity. And I will discuss this with you in more detail momentarily. Our new process will improve our decision making and add to our agility, so that we can quickly identify and react to trends. Steps we are taking include: modifying approach by improving the flow of information across all areas of our business by linking, planning, allocation and design. Daphne Pappas, who joined us in April as Executive Vice President and Chief Merchandising Officer, has a track record of success in developing the merchandising functions of Burberry and Saks that has already made huge contributions at our company. We are improving our sourcings to move quicker to market. And I'm pleased to have attracted Rich Owen to head up our sourcing effort. Rich and I worked together in the early days of Liz Claiborne in manufacturing. His industry experience, technical knowledge, speed-to-market mindset and logistics distribution background is already being felt.

We are implementing a test regiment so we can invest in the right big ideas. We are also changing how we flow inventory leaving open-to-buy dollars to position us to chase strong styles of the season. We are allocating inventory more strategically, recognizing the various needs of our southern and resort stores versus northern and western stores. All these actions will help drive sales productivity, reduce markdowns and advance our profitability goals.

Equally important is having our stores stand for what we are best at. At Cache, there's no doubt that we stand for dresses. Even with the tough first quarter, we had event dresses -- event dresses remained strong and we had another successful prom season. I'm increasingly convinced that our strength in event dresses needs to be maximized and represents a white space opportunity. We will intensify our emphasis on that it dress for day, evening and that special occasion and night out.

At the same time, we believe our sportswear assortments need to be refined and differentiated. Going forward, our offerings in sportswear will be more targeted. We will showcase a sexy, sophisticated assortment that is unique and appropriately conveys our sense of style. For example, you will see a great pair of black leggings with a perfect lace cami with an eye-catching jacket. This is how the Cache woman likes to dress head to toe. I see an incredible opportunity to differentiate from others in the mall within the sportswear category. We also continue to see opportunity in accessories, and in particular, jewelry.

The second factor that negatively impacted our first quarter results were our actions to reduce promotional activity online as we work to present our customers with a consistent message on the web and in store. Our opportunity at web is equally significant. But rather than relying on promotions, our emphasis will now be on utilizing the web to showcase our brand image with a terrific assortment, exclusive styles and targeted promotions. We recently announced that Arnie Cohen joined our company as Executive Vice President, Chief Marketing Officer. Arnie has over 30 years of experience working with many iconic brands, including J. Crew and Gucci, and is incredible at creative and brand building. He will focus on aligning our marketing and e-commerce functions, so we have a consistent and clear message in-store and online and assist us to capitalize on our e-commerce opportunity.

Turning to our stores. During the quarter, we closed 11 locations and feel good about our ongoing store base, which are in great locations in some of the best malls in the country. I'm so pleased to be working with Jane Inman. Our store base nationwide has stayed positive, and our team has adopted an amazing level of hospitality in our stores.

I am moved by our store associates' passion and commitment. Currently, we are working on a new store design, which we will unveil in Las Vegas. We expect to apply elements of this design to other stores in our fleet as we update our visual presentation to be consistent with our brand. In the second quarter, our emphasis will be on implementing our process, product and marketing strategies. And we expect to make good progress. However, we begin Q2 with inventory that is not yet consistent with our strategy and expect continued pressure on margins as we work through our spring and summer assortments.

We expect our strategies to begin having a positive impact on the fall season with greater impact on holiday. In fact, we are finalizing our holiday assortments, and I have to say that we look amazing. Our quality and style is elevated. We will have a concise, clear message and stand what we are best at, including dresses and outfits that make a statement.

Our goal is to increase our regular price sales, drive average dollar sales and average unit retail. And we believe we'll be in a position to achieve this objective as we move into the second half of the year.

With that, I would like to turn the call over to Maggie to review our financials and outlook in more detail.

Margaret J. Feeney

Thanks, Jay. Beginning with the income statement, first quarter net sales totaled $53.5 million, a decrease of 4.5% from $56 million in the first quarter of last year. Comparable store sales decreased 1.5%, following an increase of 9.4% in the prior year period.

Our comparable store sales decrease was driven by 9.1% decline in average dollars per transaction, which was partially offset by an 8.4% increase in transactions, as compared to the prior year period. Gross profit decreased $16.4 million or 30.6% from $22.2 million or 30.9% of net sales in the first quarter last year. The decline in gross profit margin was primarily driven by higher markdowns as compared to the prior year.

Turning to expenses. In total, operating expenses were $24.7 million or 46.1% of net sales compared to $24.2 million or 43.3% of net sales in the first quarter of last year. Breaking this down further, store operating expenses decreased $839,000 or 4.3% to $18.5 million or 34.6% of net sales from $19.3 million or 34.5% of net sales in last year's first quarter. This increase was primarily due to increases in pay -- decreases in payroll and depreciation expense.

General and administrative expenses decreased $197,000 to $4.7 million or 8.7% of net sales from $4.9 million or 8.7% of net sales in the first quarter last year. This decrease was primarily due to reduction in payroll and payroll-related costs. Employee separation charges in the current period totaled $1.5 million due to separation charges in connection with the separation agreement with our former CEO, as well as for other corporate employees.

Operating loss totaled $8.3 million and included the $1.5 million of severance loss I just mentioned previously and compares to an operating loss of 2 point -- of $2 million in last year's first quarter. Net loss for the quarter totaled $18.5 million or $1.38 per share, including a $10.2 million, $0.76 per share tax valuation allowance charge against net deferred tax assets. Due to cumulative losses incurred over the past few years and the uncertainty of executing a turnaround in the current year, as well as a $1.5 million or $0.11 per share in employee separation charges as compared to a net loss of $1.2 million or $0.09 per share in the first quarter of fiscal 2012. Adjusted net loss for the first quarter of 2013 totaled $6.8 million or $0.51 per share.

Turning to key balance sheet highlights. We ended the quarter with cash and marketable securities of $4.7 million. Following quarter end on April 25, 2013, we further strengthened our cash position through the completion of our rights offering, which boosted cash by $13.4 million. Total inventory cost decreased 1.6% from the year ago period. Capital expenditures for the quarter totaled approximately $1.7 million. We continue to anticipate 2013 capital expenditures to be in the range of $5 million to $6 million driven by store remodels, including the launch of a new store design in Las Vegas and the opening of 1 new outlet store. We expect depreciation and amortization to be approximately $6 million in 2013.

To date, during fiscal 2013, we closed 11 stores and expect to close approximately 2 to 5 more stores this year. The stores that were closed produced a loss in fiscal 2012, and their closure is expected to have a positive impact on fiscal 2013 earnings. We expect to end the year with approximately 245 to 248 stores and 500,000 square feet in operation.

And now, I'd like to turn the call back over to Jay.

Jay M. Margolis

In summary, I've been more -- I am even more excited today about the long-term potential of Cache than when I joined the company in February. I see a clear path for us to reach our long-term goals, and I am fortunate to be surrounded by talented executives, who share my passion and vision for our brand. This is a powerful brand.

And now, I would like to turn the call over to the operator to begin the questions-and-answer portions of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Alex Fuhrman with Piper Jaffray.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Great. I would love to drill into it a little bit more, what you're talking about with the event dresses and making that more of an opportunity. Is that specifically around the prom season, or are you looking at kind of targeting more of your core customer as well throughout the year? I mean if you could just give us an update on, I guess, how the prom season was for you guys this year? And then just a general housekeeping question, if you could give us some color on what we should expect to see your basic and diluted share count look like post-rights offering?

Jay M. Margolis

Thanks, Alex. So when I first got involved, we were in the heart of prom season, and I was really trying to understand how we leverage the whole concept of prom. Obviously, it's a young girl going in, buying her first -- her first big event thing or her first big decision of buying a dress to go out for evening. And interestingly enough in visiting the stores, it's like someone going out and buying a Vera Wang gown. The mom comes. We draw a lot of people into the mall, it becomes a big event. They come 4, 5 times to then make the commitment on the gown. And we had a really good season. We're down to minimal weeks of supply. We sold through really well on plan or ahead of plan, actually. So we feel good about it. We feel good also about the fact that there is this -- nationwide, there's really not a lot -- there's very few people that do what we do. When we looked at other prom where they're competing, we see the very, very more expensive levels or Saks or Neiman's in a little way, but it's almost like a niche we have. But more importantly, as we kept looking at prom, we were looking at our event dresses or cocktail party dresses. I'm going to a bigger party, could be homecoming, it could be a pre-prom party, mom's buying dresses for those kind of events, not necessarily gowns. And that business on a full price basis was turning really fast. And we realized, we have 2 black dresses and 1 red dress and not really a major assortment and there's something going on there. We also recognized that all of our event tops, so whether it was a date -- I call it a "date top," or something. You're going out a little more special, you want to dress up a little more. These all have higher average dollar sales. And when we looked around the mall with what we had in store, we really didn't have tons of competition. It seemed like there was white space in this area. I'm going to spend more money from going on my date, going out special occasion event. We also recognize that we were owed some business here because the whole concept of what a day dress is, then throw some jewelry on and go out to -- I want to say going out for a drink and meeting friends, but different than going or for a Margarita or going out for sushi. You were just dressing up a little bit more, and you were spending more money. And we recognize that through the history of Cache, we were always very good at this. And going after, again, more sportswear, more casual sportswear, a lot of competition in that world. And we just think there's a huge opportunity. We could test this though, so we started to move in x number of stores. We restored the amount of, I want to say day-to-day dresses. We've distorted the amount of event kinds of things, even prom got moved around in some ways to see that if we maximize that business, take our inventory down slightly in sportswear will it have a material effect. And we're in the process of learning from that. But we do believe we could the best in the mall from what I'm describing to you, and it fits into having smaller stores. Not having -- sportswear takes up way more space from a unit capacity point of view, and we seem to be really productive in our dress inventory. And even when we make mistakes in this category, there is a markdown factor that seems to move those goods at a higher margin. So all in all, we're testing the opportunity to be best at dresses and to really focus on that category, and especially, as it relates to the event side of it. On the -- so I think that answers your question of both prom and event.

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Yes, definitely. And then yes, sorry Maggie, go ahead?

Margaret J. Feeney

On the share count, we're looking at 21.6 million shares outstanding is what we'll model...

Operator

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

James Fronda - Sidoti & Company, LLC

Do you think the improvement in revenues, I guess, do you think it's more related to the economy, or do you think it will be more related to you guys in your, coming through with better assortment in the fall?

Jay M. Margolis

Oh, I'll go down swinging that, it's better assortment. I'm not a weather report person. I think it fits in the demographics of more people with a lot of money. We think we're under designer, so we think our women may spend a lot of money on a Vuitton [ph] bag or something special at that level. But when she comes to sportswear, we think she likes stopping with us. And so we think that customer does have money. We think how we're flowing goods and not kind of competing with ourselves in terms of our own markdowns and how we think about the floor and how we could test and move it, all the things we're pointing out, we think that if we could just get x percent better at selling through our goods, knowing where our goods should be that we'll improve dramatically. Never hurts that there's a rising tide, if everybody's doing great, we're happy for everybody I guess.

James Fronda - Sidoti & Company, LLC

Right. So I guess the possibility you could see revenue growth in the third quarter?

Jay M. Margolis

We're not wanting to answer that kind of -- we're feeling -- second quarters can be tough as you said. Third quarter we're starting -- a lot of the things were caught in August time period that I think we got our hands around, cut back some things, moved some things forward. Really love the way August and September are looking together as we think about how groups get together. We just hope the consumer shows up and votes yes, right? That's always -- prices are not going up dramatically. We're not making radical changes. We just think we changed the flow of merchandise, maybe, maybe the taste of it, the style of it and broadened the brand. We have a very strong brand. I believe the brand is stronger than our business. And that Cache, if you ask women, they all know Cache, so brand recognition, in fact, is a great brand. And we think there's whole bunch of things to do with it as we improve the flow, as we improve the taste, as we get Cache to this whitespace we talked about.

Operator

Our next question comes from Ross Haberman with Haberman Management Corporation.

Ross Haberman

Just a quick question. A follow-up regarding the inventory. Do I understand it right, that basically, you're going to have further write-downs in the second quarter, basically, to clean up the inventory, is that a good assumption?

Jay M. Margolis

Yes, that's a good assumption. We just bought tighter in terms of SKUs. The concept was to tighten up our SKU count and let's buy more depth per style. And in a small store, getting through that, having -- knowing our traffic patterns and how we do business, the concept was that C&D stores were being starved, which I'll happen to agree. Our C&D stores have room for growth. They, in some cases, just maybe haven't gotten enough goods or haven't gotten new flow or haven't gotten the fashion aspect of what we've been shipping to the stores. These stores -- and I've watched this happened when I was at Limited, these stores kind of get cut back. So the concept of maximizing at these stores was right. I just don't think it means putting in a lot more inventory with fewer SKUs to get that right. And I think now, that was done across the chain, and so we're having just too much to get through. So even a good style is not selling through to the level that it should. So we're really on that number, really looking at it; and looks like to me, an opportunity to just get better on how we think about each store.

Ross Haberman

You think you're more than halfway through in terms of the inventory write-downs or 3 quarters? Could you give us a feel in terms of that?

Jay M. Margolis

From a quantified -- how we quantify things through July, I would say, through part of July, most of July, we caught some things. We were in the situation of making inventory decisions as I described to you. After that, we're thinking differently.

Ross Haberman

And just 1 follow-up question. You talked about closing 11 stores and that will be accretive. How much did those stores lose in total, which will hopefully be accretive once they're closed?

Margaret J. Feeney

We really don't disclose to that detail level.

Operator

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Jay M. Margolis

Thank you so much for joining us. We look forward to speaking with you when we report second quarter results in July. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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