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) Q1 2013 Earnings Call June 6, 2013 11:00 AM ET
Ladies and gentlemen, thank you for standing by, and welcome to the Joseph A. Bank Clothiers First Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, David Ullman. Please go ahead.
David E. Ullman
Well, thank you. And good morning, everybody. This is David Ullman, and I am joined by 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 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 price 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 fiscal year 2012 and our first quarter 2013 quarterly report on Form 10-Q. 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 interim period sales 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.
I will now provide the financial overview. Starting with net income in the first quarter of 2013 was $8.1 million compared with $14.8 million in 2012, which represents a 45% decrease in net income. Earnings were $0.29 per diluted share compared with $0.53 per diluted share in 2012. For the first quarter of 2013, total sales were approximately $196 million, which is a drop of 2.6% compared to sales of over $201 million last year. Also in the quarter, comp store sales declined 8.5%. The lower sales, coupled with a 270-basis point drop in gross margin rate, led to the decrease in net income. The decline in comp store sales was primarily a result of reduced traffic and dollars per transaction.
On a positive note, the Direct Marketing sales grew 12.6% in the quarter. However, with lower gross profit rate and higher Internet advertising cost, the contribution in the Direct segment also declined. Combined comparable store and Internet sales in the first quarter of 2013 decreased 6.4% when compared to the first quarter of fiscal year 2012. As I mentioned, the gross profit margin rate declined 270 basis points with 60.8% primarily from increased product sourcing cost and lower selling prices. We estimate that approximately 1/2 of the gross margin rate decline relates to higher sourcing cost. The remainder of the gross profit margin rate decline relates to lower average selling prices driven primarily by an increased percentage of sales of winter and other clearance products. Neal will provide additional comments on this shortly.
Sales and marketing cost increased $2.9 million in the first quarter of 2013 to $88.7 million. A $2.9 million increase in 2013 compared to last year relates primarily to the growth of the company's store base as we have increased our store base by a net of 47 stores since the end of the first quarter of 2012. The primary increases in sales and marketing costs are from the following: $1.1 million of additional stores and Direct Marketing payroll and benefits; $2.7 million of additional occupancy cost; and $1.0 million increase in other variable selling cost including shipping cost to customers. These increases were partially offset by a $1.9 million decline in our total advertising cost.
The G&A cost for the first quarter of 2013 were essentially flat at approximately $17.5 million as we were focused on controlling expenses throughout the quarter. Cash expense decreased $4.6 million to $5.0 million in the first quarter of 2013, mostly as a result of the lower profits. Tax rate was 38.3% in the first quarter of 2013, which is 110 basis points better than last year's tax rate. Our net income was 4.1% of sales in the first quarter of 2013.
If you compare the April 2013 inventory to the balance at April 2012, you would see an increase of about 3%. This increase in inventory relates mostly to additional new stores since the end of April 2012. We used approximately $5.9 million of cash on capital expenditures in the first quarter of 2013 primarily for the following 3 items: One, the opening of new stores including the carryover of prior-year capital additions that were not fully invoiced by our contractors by year end 2012; 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 $33 million to $37 million on capital expenditures. These expenditures will cover the opening of approximately 30 to 35 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. Our 2013 first quarter performance continued the weak trend that we had in the fourth quarter of 2012. Net sales were soft, down 2.6% with comp store sales down 8.5%, but positively with Direct Marketing up 12.6%. Net income was 4.1% of sales. These are results that are both weaker than the prior year and weaker than planned. Comp store sales were up in February and down in March and April. The colder-than-normal weather and an earlier-than-last-year Easter were a couple of external factors that negatively influenced our sales. But the biggest factor was the decline in effectiveness of our advertising, which simply did not generate enough customer traffic during our large promotional events, particularly in April. Sales in May, the first month of the second quarter, were also down.
Since 2008, at the beginning of the financial crisis and the recession, the overall sales picture has been one of volatility and strong promotional activity has been consistently and effectively driving our sales increases. This strategy was designed with 18 to 24 months of effectiveness in mind and we stuck with it for more than 60 months since -- as the economy remained weak. Now the strategy has become less effective. We've done exhaustive analysis of our advertising spend, our media plan, our pricing and our merchandise assortment. So far, the results are mixed. Day-to-day business is okay. The Internet business is good. The challenge continues to be annualizing the promotional spikes.
We know what's happening to us and we have ongoing plans 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.
As I stated earlier, Direct Marketing sales were up 12.6% and accounted for approximately 10.7% of our total sales for the quarter. We have a continually evolving presentation in the Internet that continues to drive customer traffic and improve conversion rates. While many of our marketing offers on the Internet mirrored 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. Even though the results were less productive, we're pleased with the 12.6% sales increase, and our goal going forward is to find ways to deliver these sales and improve margins and better advertising efficiency.
In the first quarter of 2013, sales of suits got modest unit increases, while sales of sportswear, dress shirts and other tailored clothing, which includes sportcoats, blazers and dress pants, had decreases. Sales of the more luxurious Signature and Signature Gold lines represented over 30% of total merchandise in its sales for the quarter.
Our proprietary database of active customers for both stores and Internet grew 12% for the first fiscal quarter of 2013 versus the first fiscal quarter of 2012, and now totals more than 4.1 million active customers. The gross profit margin declined 270 basis points in the first quarter due primarily to lower selling prices and higher merchandise cost. The previous year's increased merchandise cost which resulted from increases in cotton and wool raw materials, clearing [ph] through our inventory, we believe that they peaked in the fourth quarter of 2012.
In the first quarter of 2013, we were clearing unsold seasonal merchandise from that higher cost purchasing cycle. Pressure in our gross profit margin rate will remain through the second quarter due to additional clearance of goods undersold in the first quarter. Day-to-day gross margins on basic merchandise are stable.
Controlling merchandise cost without deterioration of quality remains a top priority. We expect our product cost 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 highest qualities that we demand.
Our inventory was up 3% at the end of the first fiscal quarter of 2013 as compared to the end of the first fiscal quarter of 2012. The increase over last years primarily build up for new stores opened in 2012 and opening in 2013, as well as some remaining unsold inventory due to sales below planned in the fourth quarter of 2012 and the first quarter of 2013.
Our internal growth initiatives remain the same, and here again is the list of our 5 growth initiatives. First, we continue to focus on driving additional revenue through our Internet website. We completed a software upgrade in 2012 and continue to invest in keeping the consumer functionality current. A growing percentage of our sales are now being transacted by customers on their tablet devices. One of our biggest challenges is the rapid increase of Internet marketing spending and cost, particularly with vendors like Google.
We'll be focused throughout 2013 on keeping the growth of Internet marketing cost more in line with the growth in the Internet revenue. We continue with other efforts including product expansions, new promotional activity, international shipping, refined tablet in mobile formats and social marketing in conjunction with our ongoing affiliate programs. 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 were pleased with our results in 2012 and started 2013 off with a good first quarter. We improved our results versus the prior year and the business contributed positively to sales and net income. Although it is not big enough to report separately and 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 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 plan to open approximately 8 more in 2013, and we continue to find that we are reaching new customers depth 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 fifth, is new Full-line store openings. When combined with approximately 8 new factory stores, we'll open a total of 30 to 35 new stores in 2013, totaling 631 to 636 stores, and which is an increase in our retail square footage of approximately 5% over 2012. We continue to focus on both filling into existing markets and on new markets. At this time, we expect to open stores in 2014 at approximately the same pace as 2013, 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're off to a slow start at 2013. And we're in a repositioning period regarding our promotional pricing and marketing strategies. However, 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 in any given time, and our strong balance sheet adds to that flexibility. To deliver good results in 2013, we'll need to be able to get our gross margin rate going back up towards previous levels and we'll need to get productivity on our advertising spending 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. 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 second quarter results.
Now I'll turn the call back to Dave Ullman who has some questions on topics that may be of interest to our investors.
David E. Ullman
Okay, Neal, the first question. You stated that the comp sales trend reflected decreased traffic and lower dollars per transaction. You also previously disclosed that your traffic had declined in fiscal year 2012. What is the trend in your active customer file which have been growing at a double-digit rate?
R. Neal Black
Yes, in spite of decreased transactions, we continue to attract new customers at a healthy double-digit annual rate of increase. The decline in traffic is because existing customers are returning slightly less frequently and the decline in the transaction size is because both new and existing customers are purchasing slightly fewer items that's slightly below our prices. It makes sense when you consider the saturating effect of our intense promotional activity over the past several years. The good news is that new customers continue to come to Joseph A. Bank, at both stores and on the Internet at a good rate. And they recognize the high quality of our products and our value equation. For us, new customers are not just about their first transaction, but also about a lifetime of potential future purchases. We can continue to build on that.
David E. Ullman
Okay, the second question. Your Internet sales continue to grow despite the trend in the store sales. However, the higher profit levels of the direct segment have been declining. How do you expect the Internet sales to grow in proportion to the rest of your business, and what is needed to regain the higher profitability of the segment?
R. Neal Black
Our Internet business has kept pace with the growth of our total business for many years. We've been ahead of the curve compared to a lot of specialty brick-and-mortar retailers. It's a substantial and healthy business for us. Increased burden of higher marketing cost is a volatile moving target in a rapidly changing competitive landscape. We have strategies in place to attempt to improve our performance and we'll continue to evolve those strategies in order to maintain efficiency. However, the major factor in the reduction of the high profitability of our direct business has been in the decline of our merchandise gross margin across the whole company. As we attempt to straighten that out this year and as we get through our clearance inventory, we expect the profitability to move back up.
David E. Ullman
Okay. Third question is, you've reduced your store opening targets for 2013 from the range that you previously announced. Is this decision a reflection of your current marketing and merchandising trends or the availability of suitable store locations or other factors?
R. Neal Black
Well, many factors are in play here. Back in 2008 and '09, we slowed the pace of our new store openings considerably due to the economic uncertainty at the time. Then, as our sales firmed up because our promotional strategy and deals on real estates became available, we ramped the annual new store count back up. Right now, good quality, empty available space is not as distressed as it was, the lease prices are not always as compelling. And we have a soft sales trend. So we're being extra cautious on the real estate deals that we're doing, and that is causing us to slow down a bit. We also don't want to open many new stores late in the year so we can really concentrate on delivering sales during the critical fourth quarter. If all goes well, we'll pick up the pace again early in 2014.
David E. Ullman
Okay. And the fourth and last question, Neal, is, you previously mentioned that you became too casual in some of your merchandise offerings. What trends are you seeing in the market and what changes are you making to adjust your mix of business?
R. Neal Black
Our market niche and our brand identity are based on classically styled clothes that men wear to work. For the last few years, we've been in the suit cycle. Men have been buying suits and wearing suits to work. That doesn't change the fact that for the last 20 years, the long-term trend in the workplace is towards casualization. Last year, we tried to prepare for the inevitable slowdown of the suits cycle by adding more casual sportswear. It turned out to be too casual, more like weekend wear. As a classic tailored clothier, our best interpretation of casual wear for the workplace is on the comfortable but dressier, crisper side and not on the washed, rumpled and worn weekend wear side. Our assortment changes are ongoing and improving. We are consumer of menswear, if your workplace is professional or governmental or if you're a manager or if you aspire to management, and Joseph A. Bank has the answer to your question, what should I wear to work. We've always provided that answer with suits, shirts and ties for a formal workplace. Now, we're also focused on providing that answer with well-coordinated classic sportshirts, slacks, sweaters and jackets for the business casual workplace. Joseph A. Bank provides a real business casual solution.
David E. Ullman
Okay, so that closes this call. Thanks again for joining us this morning. On behalf of the more than 6,000 associates at Joseph A. Bank, we appreciate your interest in Joseph A. Bank Clothiers as both a shareholder and as a customer, and we look forward to talking to you after the second quarter. Take care.
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