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Coldwater Creek (NASDAQ:CWTR)

Q1 2013 Earnings Call

June 05, 2013 4:30 pm ET

Executives

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

Analysts

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Maria C. Vizuete - Piper Jaffray Companies, Research Division

Operator

Greetings, and welcome to the Coldwater Creek 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, 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 first quarter 2013 conference call. Our press release this afternoon includes details regarding our first quarter 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 first 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 meaning of the securities laws. These forward-looking statements are based on management's current expectations, estimates, assumptions and projections that 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 from time to time 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 any forward-looking statements.

Now I will turn the call over to Jill.

Jill Brown Dean

Thank you, Lyn, and thank you for joining us. For today's call, I'll start off with an overview of our first quarter results and provide an update on our 2013 initiative. Jim will follow with a more detailed review of the quarterly financial results and our outlook for the second quarter. After our prepared remarks, we will turn the call over to the operator to take your questions.

Our first quarter results were improved from the prior year despite softer-than-expected sales. As the quarter progressed, we proactively took steps to achieve our profitability goals by increasing promotional activity and by further reducing expenses across the board. As part of our expense reductions, we lowered our catalog circulation understanding that this would further pressure sales while positively impacting profitability. This strategy was successful as our disciplined expense management, combined with our continued progress on our real estate optimization strategy, enabled us to deliver results that were $4.4 million better than last year and consistent with the higher end of our expectations.

For the quarter, comp store sales declined 10.5%. Similar to first quarter trends across the industry, we experienced significant variability in sales and traffic on a regional basis. Specifically, comps in the South and West regions were materially better than those in the Central and Northeast.

On a category basis, we experienced softness in seasonal merchandise, particularly in pants, tees and tanks. Our pants assortment transitioned too early in the season to ankle and crop length. We would've benefited from higher inventory levels in our franchise fabrications of ponte and studio stretch, which would have been more seasonally appropriate given the cool spring we experienced. Our results would also have been better had we offered a broader assortment in cardigans. Our strongest categories were no iron shirts and jeans.

In the direct channel, sales declined 1.8%. However, overall profitability of this channel continues to improve driven by a shift to higher full-priced selling and by higher markdown margins as a result of significantly lower levels of clearance inventory. We continued to use our direct channel as a testing ground for growth opportunities related to category extensions.

In that regard, we debuted new weekend and swimwear collections in the first quarter, both of which exceeded expectations. Based on these performances, the weekend collection will be added to retail stores beginning in the fall and we will broaden our swimwear offering in 2014.

Looking forward, we remain relentlessly focused on returning our business to profitability. To that end, the entire organization is focused on the execution of our strategic initiatives aimed at driving top line growth.

Strengthening the position of our brand in the marketplace is at the core of our strategic initiatives. Since the beginning of the year, this focus has reshaped everything we do, creating a disciplined approach to providing our customers with trend-right, age-appropriate fashion and a consistent multi-channel experience.

Our best performing categories during the spring season demonstrate to us that when we execute against this strategy, our customers' feedback is resoundingly positive. However, in areas where we have not applied these filters, we see softer sales trends. For example, we realized that not enough of our prints and patterns were offered in florals and stripes, which are the foundation of our brand.

To ensure that our collections have the appropriate balance, we will be applying color, print, pattern and outfitting filters by floor set rather than evaluating our assortment through a seasonal lens.

We continue to see positive customer response to our franchise yarns and fabrications and we are building on these successes by anchoring them as the core of our product assortment and leveraging our supply chain capabilities to project and plan these styles across multiple seasons. We have moved the collaboration between design and merchandising further upstream in the product life cycle to ensure our outfitting options align to our fit-to-flatter strategy, as well as to provide cohesive wardrobing options. We are confident that these refinements provide our designers and merchants the structure and precision to create each product flow with the clear brand edit [ph] and customer-centric focus which will lead to more consistency in our performance.

Lastly, our marketing initiatives are focused on driving traffic to all channels and our loyalty program represents our biggest opportunity. We now have 1.7 million rewards members, and for 2013, our key objective is to maximize existing customer spend by increasing the penetration of our active file enrolled in our loyalty programs.

We are in the process of restructuring our rewards and ONEcreek programs to combine them into one comprehensive tiered program, which we will relaunch in July across all channels. We are clearly communicating the new program by outlining the incentives and benefits associated with each level to encourage customers to spend more, enabling them to elevate to the next level.

Our associates continue to be focused on adding new customers and maximizing email capture rates. We believe that these initiatives will lead to a higher penetration of our database enrolled in rewards.

We are also pleased with the progress we've made on our operational initiatives. During the quarter, we successfully rolled out a new inventory planning system and continue to see gains from our real estate optimization program. Jim will speak to both in a moment.

In closing, as we move into the second quarter, the disciplined approach that we've taken to our open to buy has allowed us to read and react to our proven winners and we're continuing to edit and refine as the customer responds to our offering. In addition, we made significant changes to our promotional cadence based on learnings from last year. These modifications include the reintroduction of a June summer sale event that was not part of the calendar last year. This event increases the importance of June's results to the overall quarter and we believe that our planned promotional progression will enable us to optimize our margins and enter the fall season with clean inventory.

Now I will turn the call over to Jim to discuss the financial results in more detail.

James A. Bell

Thank you, Jill. Before I begin, I'd like to welcome Stephanie Allen, a seasoned financial executive who recently joined our team as Vice President, Financial Planning and Investor Relations. Stephanie came to us most recently from a long tenure at Nordstroms. As you know, building our leadership team is one of our key strategic initiatives and adding Stephanie to our organization is another example of the great progress we are making on this front.

Now turning to our results. The first quarter marked our sixth consecutive quarter of improved year-over-year performance on an adjusted basis. We delivered results at the better end of our guidance, despite a challenging macro environment, a strong testament to our ability to swiftly respond to changes in our business and achieve our expectations.

Importantly, these results represent continued progress against the strategic operating initiatives we have undertaken to return our business to profitability.

During the quarter, our store optimization program continued to deliver benefits, enabling us to leverage occupancy expenses despite year-over-year lower sales. In addition, we actively managed our SG&A expenses, down $9 million, in response to top line softness. In combination, these 2 factors led to the improvement in bottom line results for the quarter.

Specifically, our results for the first quarter were as follows. Consolidated net sales were down 8.3% to $155.7 million compared to $169.9 million in the first quarter of fiscal 2013. In the retail segment, net sales declined 10.2% to $117.8 million from $131.2 million in the first quarter of 2012. This decrease was primarily related to the 10.5% decline in comparable premium store sales. The sales decline associated with our store closures was offset by the impact of the shift in weeks as a result of the 53rd week.

During the quarter, our comparable conversion rate increased 8%. However, this was offset by a 10% decline in comparable traffic. The average transaction value declined 8% as a result of 7% reduction in average unit retails, driven by an increase in our promotional and markdown activity, primarily in response to the unseasonable and variable weather throughout the quarter. As Jill mentioned, we experienced notable variation in regional traffic performance during February and March time frame. The comp impact of which we estimate to be several hundred basis points.

First quarter net sales in our direct segment declined $700,000 or 1.8% to $38 million, primarily due to a reduced order volume, which was mostly offset by a 9% increase in average transaction value as we continue to realize benefits from the significantly lower levels of clearance inventory.

Consolidated gross profit was $51 million or 32.7% of net sales compared to $54.4 million or 32% of net sales for the prior year period. The 70 basis point improvement in gross profit margin was driven by occupancy leverage. Despite increased promotional activity in response to softer sales trends, our consolidated merchandise margins were essentially flat for the quarter.

Selling, general and administrative expenses were $68.4 million or 43.9% of net sales, compared to $77.5 million or 45.6% of net sales in the first quarter of 2012. The 170-basis-point improvement in SG&A resulted from a $9.2 million or 11.8% reduction in our expenses versus the prior year quarter. While we were able to impact all expense categories, the largest declines were in both marketing and employee-related costs.

Interest expense related to our term loan was $3.6 million in the quarter and compares to $561,000 in the first quarter of fiscal '12. The income tax benefit for the quarter totaled $690,000 and compared to an income tax expense of $71,000 for the first quarter of last year. Our adjusted net loss for the 3-month period ended May 4, 2013, was reduced to $20.3 million or $0.66 per share, compared to a net loss of $23.8 million or $0.78 per share in the prior year period.

Now turning to our balance sheet. We ended the quarter with total cash of $10.9 million compared to $23 million last year. At the end of the first quarter, we had $15 million of outstanding borrowings under our revolving credit facility, which is unchanged from the prior year. Additionally, we ended the quarter with approximately $50 million of availability under our revolving credit facility.

We ended the first quarter with total inventory of $126.5 million as compared to $127.7 million at the end of last year, representing a decline of 1%. Inventory per square foot, which includes inventory in our retail stores and the retail inventory in the distribution center, increased 6.7%. As a reminder, our inventory per square foot in the first quarter last year was down over 30% from the first quarter of 2011.

Capital expenditures for the quarter totaled $1.9 million in depreciation and amortization was $10.8 million.

During the quarter, we closed 2 premium retail stores and 1 factory store, ending the period with a total of 347 premium retail stores, 37 factory stores and 8 day spa locations.

Turning to our 2013 strategic initiatives. I am pleased to report that we made significant progress on our inventory management initiative this past quarter. Our goal, with regard to inventory, is to take a comprehensive approach to managing the entire life cycle of an item. In March, we launched a new Oracle-based inventory planning system, which provides inventory visibility that simply was not possible for us in the past. Today, we have weekly SKU level performance detail planned across all channels. Because of this new capability, we will be able to more accurately budget and forecast, make better buying decisions and react more quickly to a product's demand by either purchasing more or using promotional mechanisms to strategically clear merchandise faster. Ultimately, this will lead to further reductions in aged inventory and allow us to increase our full-priced selling, making us more productive and profitable.

Now turning to our store optimization program, which is focused on improving the performance of our fleet by closing underperforming stores and downsizing square footage on oversized stores. To date, we have closed a total of 34 underperforming stores and are on track to close an additional 11 throughout the remainder of fiscal '13. We remain focused on maximizing transfer sales from these closed stores and have thus far realized over 50% sales recapture in key multi-store markets.

Since 2011, we have reduced the square footage in 11 stores and plan to downsize 8 to 10 more in fiscal '13. To date, our downsized stores have been reduced by over 30% on average and they have realized over 60% improvement in four-wall operating income.

And finally, we remain diligent regarding expense management, generating savings of $9 million in the first quarter. We now expect to reduce total SG&A expense between $12 million and $14 million in fiscal '13 with the weighted -- balance weighted more towards the fourth quarter. This compares to our previous guidance of $4 million to $6 million of reduction throughout the entire year. In addition, we now expect our full year capital expense to be between $15 million and $18 million versus our prior guidance of $17 million to $20 million.

Now turning to our second quarter outlook. We expect our comp store sales to be flat to down in the low single-digit range. We expect our gross margins to be flat to up 100 basis points and our adjusted net loss is expected to be in the range of $0.55 to $0.75. This guidance excludes any quarterly impact in the change of the fair market value of the derivative liability associated with our preferred stock.

Finally, we expect total inventory to be down in the mid-single digits compared to the second quarter of fiscal 2012.

In summary, ongoing improvement on our operating efficiency is key to our continued progress in returning the business to profitable performance. To that end, we will continue to focus on the 3 strategic areas I just discussed. Our results for the first quarter demonstrated our ability to actively manage our business in response to challenging sales trends and still generate results that are consistent with our expectations. We remain focused on executing all of our strategic initiatives, including the brand, product and marketing-related elements that Jill discussed, which we believe in total will lead to sustainable and meaningful improvements in our performance over time.

Now I'd like to open up the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jeff Van Sinderen of B. Riley & Co.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Nice work on controlling expenses in the quarter. Inventory, maybe you can just talk a little more about that. I understand it's up about almost 7% per foot. Just wondering how clean it is at this point and how we should really think about the June promotional strategy and where you think inventory on a per-square-foot basis would be at the end of Q2, if you make the plan that you talked about.

James A. Bell

Right. Thanks, Jeff. Appreciate it. We -- certainly, while we would have liked to have seen a faster inventory turn in Q1, I think we're pleased with our ability to read and react in terms of managing the inventory levels and if -- so I'm really not concerned about total inventory levels as they're down about 1%. Continues to indicate that our -- the aged portion or the clearance portion of our inventory levels are lower and we continue to see reductions there. I also feel we've taken really the appropriate action steps to ensure that as we progress through Q2, we'll be cleaner and that we'll progress certainly throughout the rest of the year.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, good. And then just so we're clear on the balance sheet and the drawdown, I think you said $15 million was drawn down on your revolver at the quarter end. Just wondering where that stands now and roughly where we should expect to see the cash balance and drawdown at the end of Q2. Would it look more like last year? Or anything we should note there?

James A. Bell

Yes. I think just as it was last year at this time, it remains at about $15 million level. We -- it's indicative at the end of the first quarter of sort of the low point, if you will, and a higher working capital point as we get through the year in terms of seasonality. So I expect that to continue to be similar to our progression through the rest of the year as we were in prior years except that our initiatives continue to improve on the trajectory of our cash flow towards positive territory. So I expect that to continue to be beneficial as we make our way through the year.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, good. And then one last one. Does your comp guidance of flat-to-down low single digits for Q2 reflect the current business trend? Just wondering how much we can read into that. And then also given what we saw in Q1 in terms of gross margin on a minus 10 comp, I would think that you might have more gross margin leveraged on a flat-to-down low single comp in Q2. Just trying to understand that better.

James A. Bell

Yes, absolutely. Jill, if you want to add any color, please, please do. But I think first of all in terms of the quarter, the outlook really represents the -- both the progression to date, as well as our outlook for the remaining part of the quarter. I think one of the most important points is -- that Jill talked about is the addition of our June sale event, semi-annual sale event that we did not have in our business last June. We've had it historically. We did not conduct that event last year and we think it's an integral part of our strategies as we progress forward to have that semiannual event in June. That is -- it makes June an important part of the quarter and that period is still to come.

Jill Brown Dean

It's a significant change. And as Jim and I both indicated, it happens in the month of June and so it makes the -- our ability to -- and how we think about margin is very much related to the -- to what happens in this event and how those components shake out here in the next couple of weeks.

James A. Bell

So moving on to the second part of your question regarding the leverage. I think that our guidance represents a couple of things. One, we're coming up on the anniversary of the second quarter last year, where we began to really see the impact of our real estate initiatives and started to see leverage even on top of a decline in sales for the second quarter of 2012 last year that we reported. So as we continue to anniversary that and we get down to the end of store closures, we'll still see leverage, but not as much as we saw over the course of the last year. Also, I think it's indicative of sort of what I would refer as a conservative approach as we make our way into this June sale period and how important this sale is to us and certainly, the difference in the promotional stance that it represents relative to merchandise margins.

Operator

Our next question is from Neely Tamminga of Piper Jaffray.

Maria C. Vizuete - Piper Jaffray Companies, Research Division

It's actually Maria Vizuete in for Neely. I was actually wondering if you could just maybe provide us with a little color on the expected product flows or trends as you progress through the second quarter, maybe in particular surrounding the June sale event and how that will impact those flows for the remainder of the year?

Jill Brown Dean

Sure. So I think as we've indicated, this change has been a fairly significant change of strategy. Last year, our June clearance consisted of one event. That event happened right after Memorial Day, followed up by 2 high summer floor sets. This year, what we've done in an effort to add back the semiannual event that Jim spoke about, that event is actually starting -- actually starts today. And we pushed out our clearance event by almost 2.5 weeks. We've made our high summer floor set broader, but not as deep as it was last year in terms of the inventory buy. We will have 3 flows of transitional products throughout June and July, driven towards very wear-now assortments. Along with color print patterns, we've been reacting to this assortment to really get back into some of the early things we saw in spring that were working. So we kept this open to buy very lean for high summer and have been really reacting and chasing into some of the early trends that we saw.

James A. Bell

I'd only add to that. It also gave us the opportunity to continue to find ways to use these brand filters that Jill talked about to our advantage as we make our way through high summer, but more importantly, as we go through seasons later in the year.

Operator

This concludes the question-and-answer portion of today's call. I would now pass the call back to management for any closing remarks.

Jill Brown Dean

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

Operator

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

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