Joe's Jeans Inc (JOEZ) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.15.13 | About: Joe's Jeans (JOEZ)

Joe's Jeans Inc (NASDAQ:JOEZ)

Q2 2013 Earnings Call

July 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

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

James Fronda - Sidoti & Company, LLC

Steven Chang

Operator

Welcome to the Joe's Jeans Fiscal 2013 Second Quarter Earnings Call. My name is Robert, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Lori Nembirkow, General Counsel for the company. Please proceed.

Lori Nembirkow

Thanks, operator. Thanks to everyone for joining 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 are 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 include information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this conference call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today.

A recording of this call and the telephone replay will be available for 1 week from today on our website at www.joesjeans.com, under the Investor Relations heading.

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 second 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 second quarter, net sales increased by 8% to $30.8 million. Our operating income was $2.1 million and we generated $0.02 per share. Like prior quarters, our growth continued to come from both the wholesale and retail division, and in particular, our men's product offering. We also continued to benefit from the addition of sales from our Macy's brand, Else. More specifically, Joe's wholesale sales grew 6%, retail sales grew 14% and Else grew 67%.

I'll now discuss the top line results of the 2 divisions in a little more detail. As I just stated, our Joe's wholesale sales, excluding Else, increased 4% to $23.1 million versus $22.2 million in the year ago quarter. Our domestic men's businesses increased 61%, while women's declined single digits for the quarter.

Our else brand, which is just over 1 year old, generated $1.2 million in revenue, a 67% increase over the last year. The else brand continues to add diversification and top line sales to our wholesale business.

Let me give you a little more color on the various segments. Joe's men's sales continued to see a strong double-digit growth in the second quarter, even without any new door growth. Men's replenishment continued to be a key driver for our growth this quarter in both our department and special e-store channel. We've had tremendous success in expanding our inventory levels with our key specialty department stores. We've seen healthy growth coming from this strategy by layering in colored denim and new interesting denim fabrics.

In addition, over the past 2 quarters, we've mentioned the expansion of our core basic program for men's with additional fits and washes. Our department stores continued to roll new fits to all doors and we are expanding on the success of these styles as we aligned the sales to stock levels.

Joe's women's wholesale sales decreased by 7% on a comparative basis, which was attributable to a couple of key factors. Most significantly, with a tough comparison this quarter to the large 55 Color and printed denim program we ran a year ago. This proved to be a tough comp sales, as well as most of our competitors, as premium denim sales at retail were challenging for most of our retailers. While we did not see a positive sales trend this quarter, we were pleased with the performance of our vintage and reserve program that allowed us to mitigate the decrease to the single digits. In addition, the residual 15% decline in our department store door count also impacted sales.

On a positive note, these retractions have enabled us to build back a much stronger place of business. As a result, we will see sequential door growth with Bloomingdale's and Nordstrom in the back half of the year, which is a very positive indicator of the branch I'll mention at retail.

Our Else brand continues to be a nice addition to top line sales. During the quarter, the Else brand grew 67%. Else is currently in 314 Impulse stores, which we expect to maintain through the rest of the year. We will be testing Else with both Don Mara [ph] and Village [ph] in the fall and look forward to expanding the distribution of this brand.

Our international sales channel continues to improve as we open new distributors. We continue to be optimistic about the growth of our presence internationally. Retail sales grew 14%. This growth was a result of operating 8 more stores this year than a year ago. One of our stores, Tysons Galleria, did not open until late March and therefore, we did not get the lift from a full quarter of sales. Same store sales are now at 6%, and similar to what we saw in our wholesale business, we had tough comp from the prior period when we had our strong 55 Color program and our printed denim programs.

These programs, with a variety of offerings, naturally lends itself to multiple purchases by the customer. This season, while our Vintage Reserve program performed well, it do not lend itself to the same magnitude of repeat purchases as the prior year competitive period. Our gross margins for the period were comparable at 70%, compared to 71% the prior year. We continue to target opening 10 new full priced stores in 2013, with 3 already opened and 2 slated for later this month, we continue to aggressively look for opportunities with these smaller footprints at top locations.

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 8% to $30.9 million from $28.6 million over the prior-year period. Both retail and wholesale sales increased by growing 14% and 6%, respectively. Same-store sales growth for the stores opened at least 12 full months and e-shop decreased to negative 6%.

Retail sales represented 21% of overall net sales for the quarter. Wholesale sales increased 6% during the quarter, driven by increases in men's, wholesale Joe sales and the addition of Else. Our overall gross profit was flat at $13.5 million compared to $13.6 million in the year ago period, although gross margin decreased to 44% from 47% in the prior-year period.

Our wholesale gross profit was down 6% to $9 million from $9.5 million in the prior year period. The wholesale gross margin was down, coming in at 37% compared to 41% in the year ago period. Wholesale gross profit and gross margin was impacted mostly by our Vintage Reserve program being manufactured locally in LA, which carries a high unit cost compared to units manufactured at our Mexico facility. Retail gross profit was up 12% to $4.6 million from $4.1 million in the prior-year period. Retail gross margin was similar in both periods, at 70% compared to 71% in the year ago period.

Consolidated operating expenses were higher in the second quarter of fiscal 2013 compared to 2012 at $11.4 million compared to $10.5 million, respectively. Operating expenses increased mostly due to increasing our store base by 8 stores and preopening costs associated with new store openings.

Operating expenses for corporate was slightly lower at $3.7 million compared to $3.8 million in the prior year. Operating expenses in our retail segment increased to $4.4 million compared to $3.5 million due to the addition of 8 more stores in our store base and preopening expenses associated with new stores.

Operating expenses for our wholesale segment was flat at $3.2 million in both periods. We had operating income of $2.1 million compared to $3.1 million in the prior-year period. We had net income of $1.2 million for the second quarter of fiscal 2013 compared to $1.4 million in the prior-year period. We had earnings per share of $0.02 for the quarter. We ended the quarter with a cash balance of $14.9 million.

Now I'll turn the call back to Marc for some additional remarks.

Marc B. Crossman

Thank you, Hamish. I want to make a few comments about the transaction to purchase Hudson. Upon completion of the transaction, we will have nearly doubled the size of the company across all metrics from revenue down to EBITDA. We're purchasing 100% of the company for just under $98 million. The implied transaction multiples below the multiples we have seen for premium denim companies experiencing similar growth trajectories. In addition, the existing management of Hudson is rolling over its entire equity stake into Joe's Jeans. In a nutshell, I'll describe the acquisition as an opportunity to drive further top line growth by expanding the distribution base and reduce expenses by lowering the input cost of both companies.

I want to be clear. Preserving the distinct and separate DNA of each brand is of paramount importance. We believe each brand, while sitting in the same department in a number of accounts, serves a different customer and or purchasing decision. Accordingly, we will keep the existing employees of the 2 companies intact and separate. We believe this will be one of the major factors in preserving the individuality of these brands. In that vein, will maintain separate facilities across all aspects of our respective businesses.

We expect to drive incremental top line growth for both companies by expanding each company's distributions. Joe's and Hudson will build upon each other's strength in the domestic, international and e-commerce businesses. It is very clear from the early stages of exploring a combination, that each company has had areas in their distribution that could be filled through cross education.

Reducing sourcing cause is also a major opportunity for both companies. To put the opportunity in perspective, doubling the size of our company would put our combined input cost into making a jean that's over $100 million. We can easily recognize -- realize significant cost savings across all 3 components of making a jean, namely, fabric, trends and labor. Sheer size alone will provide us with significant leverage with all the vendors we use or plan to use in the future. The savings don't stop there. Equally important, utilizing just a small piece of our cross-border manufacturing can produce significant cost reduction. Garments using our cross-border manufacturing capabilities could see up to a 30% savings.

In summary, we are extremely thrilled to be combining the 2 companies. We're confident that we can drive incremental sales growth and leverage our sourcing capabilities. Further, we expect the integration to be quick and the accretion to be meaningful over the long term.

With that said, I think we'll take Q&A now.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jared Schramm from Roth Capital Partners.

Jared Schramm - Roth Capital Partners, LLC, Research Division

So a couple of quick questions before I jump to Hudson here. As far as the Tysons Galleria store, how has that been trending to date versus expectations?

Marc B. Crossman

The Tysons store has actually been trending, it's a smaller store and it's been trending above our expectation. So the idea of taking a 1,000 square foot store and working with that is definitely something that we're seeing could work, or has worked and could continue to work in the future.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Does that continue to validate the thesis for the smaller store footprint?

Marc B. Crossman

Without a doubt, taking the average store size down from 2,700 to 2,200 square feet in the past down to that 1,500-square-foot level is definitely something we want to do. It's achievable. If you look at Tysons, I think Tysons is just under 1,000 square feet. The productivity of those stores is definitely higher than the productivity of our largest stores.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And Marc, you mentioned you're still targeting 20 full price retail stores at the end of fiscal '13. Will these be pretty evenly distributed over Q3 and Q4? Is that going to be weighted towards the back end of the fiscal year?

Marc B. Crossman

We got back from ICXC and I think they're going to be weighted more towards the back half of the year. We definitely want to take advantage of the fourth quarter and the holiday selling season. But they definitely will be more weighted towards the back half.

Jared Schramm - Roth Capital Partners, LLC, Research Division

And as far as permitting issues are concerned, are you a little more ahead of the curve, I guess, with these stores opening up in the back half of the year than maybe Tysons was earlier on?

Marc B. Crossman

Yes. I mean -- you know what, it's store by store, depending upon where each one of them stands. In the malls, the boxes are a little cleaner. So I would -- given that we're going to do a lot of mall day stores and back half of the year, the permitting, the getting them done, should be quicker and easier.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And then one last one for Hudson here. As far as weather was concerned, we saw Memorial Day in the Northeast was a little tough. It started cold and damp. Summer got a very late start or spring did, depends on the way you look at it here. Any impact there on the same-store sales figure? I know you mentioned that premium denim had a difficult quarter, but could you kind of try and quantify the weather impact as well in the quarter?

Marc B. Crossman

We haven't really quantified the weather impact to the extent that, I think, the issue for us was really 2 things, mall, a lot of the mall traffic was down. So we're bringing our UBTs up and really working on our conversions. Then the tough comp against colors and printed denim. And those -- this second quarter, as we've alluded to, 4Q would be a little bit tough and incrementally will get tougher in 1Q. And 2Q was really when color and printed denim were all the ones hitting. So I would say that when we look at the comps, I'd say the tougher issues were the product mix rather than just the weather. Not that weather didn't have an impact, but I would say that wasn't the overriding issue.

Jared Schramm - Roth Capital Partners, LLC, Research Division

Okay. And then some high level questions on Hudson, then I'll pass it along here. I guess strategy-wise, where do you see the brand, West Hudson as an addition in 12 months from now?

Marc B. Crossman

Really, the brand is going to stay distinct where it is. They are extremely hot in the market right now. I say right now and continue to be. So we have no plans to come in. Peter's got a vision for it. He wants to take the brand where the brand identity is, just like Joe has for Joe's. And we have no intention of mixing the 2 in any way shape or form, because we really don't want to change the growth trajectory that both Hudson and Joe's are on in terms of the penetration and the momentum we're seeing at retail.

Jared Schramm - Roth Capital Partners, LLC, Research Division

I guess potential synergies, you see right now, or those something that you can actualize in the next 12 months? Would that be a longer-term event?

Marc B. Crossman

I would say the biggest synergy from a cost standpoint really is the input cost into Jean. And those don't happen automatically. We'll get started from Day 1. Clearly -- but to the extent that we want to move a little bit of production in Mexico to the extent that we want to negotiate better fabric pricing or better freight cost. Those are things you'd do today but these POs are cut today. You don't see those orders come in for 6 months and as long as 9 months. So it's really, you prime the pump today and you'll see the big benefits 6 to 9 months from now starting to push through.

Operator

Our next question comes from Jane Thorn Leeson from KeyBanc.

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

I just have a quick question on the Joe's wholesale. So how should we think about wholesale gross margins for the remainder of this year?

Marc B. Crossman

I think the gross margins should...

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

Given the growth of Else...

Marc B. Crossman

Pardon?

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

Given the growth of Else?

Marc B. Crossman

I think if we look at it 2 ways -- and I'll speak to that and then Hamish can kind of talk to the consolidated. The Else margins are relatively where they've been, maybe down a little bit, down slightly, due to some of the promotional activity that we've seen at Macy's on kind of a high low model. Joe's, itself, as Hamish had said, there was the production shift that we were seeing on our vintage, our vintage program, as we were trying to get that out as quickly as possible and then make the move down to Mexico with it. So that was really a shift. I think we'll start to see that shift back in the back half of the year.

Hamish S. Sandhu

So in terms of margins, if you look at the current margin for the current quarter, going forward, margins will begin to creep up a little for the wholesale division, primarily due to the fact that we are starting to move some of our vintage line down to Mexico, so that will really help with the average unit cost in that particular fashion category. Else, it's not really going to grow in terms of percentage of the overall mix. So the overall kind of change in Else won't be a dramatic impact on the margin for the rest of the year. So going forward in a nutshell, we see -- we expect the wholesale margin to begin to creep up again and get back to the 40% level that we've had for the last 3, 4, 5 quarters of the reporting years.

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

Okay. How much of the Vintage program is in Mexico now? And what will it get to?

Marc B. Crossman

Right now, the entire Vintage program is being made down in Mexico. And I will say this, one thing I wanted to add with the duty issue going into Europe. We are transitioning and making a more conscious effort -- not that we haven't made a conscious effort of a bigger push to move more into production down to Mexico, to get around, not only get around to duties, but pay lower duties than we would otherwise.

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

Okay. And then what's the margin differential between denim and non-denim? And how many stores represent enough mash for the non-denims to start helping the margin contribution?

Hamish S. Sandhu

Are you talking about a retail store base here?

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

Yes, because I think most of it is in your retail -- [indiscernible] retail.

Hamish S. Sandhu

At the moment, the overall gross margins on the collection aren't as strong as the retail margins on the denim. Primarily due to the fact that if the overall buys of the collection aren't as scaled as what the denim are. So about 1/3, just shy of 1/3 of sales in our retail stores are driven from collection items. We've been tracking that level -- that mix for the last, I would say, 3, 4 quarters. So we expect that to be the same. The only time you're going to get an update from collection margins is, as we expand the store base beyond, I would say, 40, 50 stores, at that point in time, the overall buys of the collection will grow and you'll get some additional lift from the collection margins.

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

Okay, great. And then could you -- I know you touched on it earlier. Outside of the cost, what are the other synergy opportunities that you get from Hudson?

Marc B. Crossman

Well the other one, it's definitely the top line sales...

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

Okay, well are they -- okay.

Hamish S. Sandhu

So what I would say is, they're kind of 2 buckets, on the specialty store side, actually 3. On the specialty store side, there's a whole host of stores that Hudson sells to that we don't and vice versa. And because I feel like we had such a distinct purchasing decision, I don't think you're going to see that cannibalization. So I think that we can only help each other from the standpoint of educating each other on where our holes are. That would be the first. Second, in terms of the department store push pull, to the extent that one of us is doing better in the department store versus the other, we can definitely leverage off of the -- I'm trying to put this in the right way, the size of the combined company. So we definitely become more meaningful, which is always helpful. And then the third, I would say, is international. I know that Hudson has done a fantastic job in Europe. We're doing a good job in Europe. And then you look at Asia and for instance, Hudson right now doesn't have a Japanese distributor. And we will bring them into Japan and they will absolutely kill it. So there is a lot of that type of push pull that we can do on both sides that it's very tough to quantify. But I think it's actually going to be huge. And I know that from talking to our sales force today. Peter talked to his sales force. It's just been nothing but excitement on both sides in terms of how we can leverage and educate each other.

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

Would that be starting soon, in this current fiscal year? The top line thinners?

Marc B. Crossman

Yes, that's Day 1. We anticipate that the acquisition will close on August 31. And that would be Day 1. I mean, that's #1.

Operator

Our next question comes from Jeff Van Sinderen from B. Riley.

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

So maybe you could just give us a little more background on Hudson, because I don't really have a good sense of what their EBITDA was? Maybe you can just lay out revenues, EBITDA? Something like that would be helpful. Or say, trailing 12 months or I don't know, 2012?

Marc B. Crossman

We can't do that yet until we have the acquisition closed on August 31. But I will say -- in my comments, I said that we're basically going to double the size of the company and that's about as far as I can go.

Hamish S. Sandhu

With closing the transaction, we will be doing a filing. And we will have 3 years worth of financial statements that will be filed with that filing. And so you'll have a good idea of the trends, the EBITDA, history and the growth of the recorded date.

Marc B. Crossman

I would say this, that Hudson is a very strong company that's doing very well in the marketplace. And Peter has been growing that business consistently. And we don't see any change to that trend. So this is not a case of us buying an unhealthy company, this is a case of us buying a very healthy company that the 2 of us can leverage off of each other.

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

Okay. And I think you pointed to something along the lines of 9 months out being sort of an inflection point in the -- after you've made the acquisition. How should we think about accretion? I mean, should we expect that to be the point where it becomes accretive, and it's dilutive until then, or it's neutral? How should we think about that?

Hamish S. Sandhu

That is fair to put it that way. Then it becomes accretive, but it's not yet accretive at that level. But as we go forward, and start to transition or capitalize more and more the synergies, it will be further accretive as we go into the outer years.

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

Okay. So -- all right, well I guess we'll have to wait to see the financials. So just relevant to Joe's -- just relevant to Joe's, maybe you can give us a little more on retail comp progression. Just wondering if -- I know your comps were minus 6, but just wondering what the progression looked like through the quarter? We're through the worst of the tough compares now, but the comparisons get easier in second half. How's the comp trend running? I'm just trying to get a sense of that. Maybe if there's anything to point out there in full price versus outlet? And then also, do you think that you'll be running positive comps in Q3 and/or Q4 for Joe's?

Marc B. Crossman

I think Q3 is probably about where we are today, as we're coming out of it, and at Q4 it feels like we're going to be comping flat to up.

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

Okay. Let me ask you this. Anything you could say about the performance of your new stores? Just wondering if they're making plan?

Marc B. Crossman

Yes, the new stores are performing well. There are -- I mean, we can talk a little bit about it offline. The smaller footprint stores are doing really well. So I think that that's really where we want to go, as to that side store. I guess the best way to put it, it's a little bit of a mixed bag. I'd say it's 75-25 in terms of the ones that are meeting plan versus -- or a little bit below plan.

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

Okay, that's fair. Well, hopefully, we can take the other questions offline and follow up.

Operator

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

James Fronda - Sidoti & Company, LLC

The wholesale women's sales were down for the quarter. They seem to be improving higher, significantly higher coming into the quarter. Is there anything specific going on there, or is it more of a one-time thing, or...

Marc B. Crossman

Yes. I think, again, it was coming out of that tough comp on colors and printed denim. So that really was the big impact, as we had nice growth in Q4, Q1. And we had highlighted that as our growth was coming down a little bit, we were going to be up against a really tough comp. As Q3 is feeling better and then Q4, obviously, will be much easier.

James Fronda - Sidoti & Company, LLC

Okay. And did the Else brand have, do you think, a significant impact on that gross margin? I mean, I know that Vintage had a piece of it, but was Else weighing that down as well?

Hamish S. Sandhu

Without the Else spend, the margin would have been a point higher.

Operator

Our next question comes from Steven Chang from Rudgear Capital.

Steven Chang

I wanted to clarify something about Hudson. When you mentioned that it roughly doubled the EBITDA of the company, is that -- that's before the kind of input cost savings that you would get, correct?

Hamish S. Sandhu

That would be correct. On an annualized basis, that would be correct.

Steven Chang

And I guess you'd implied this, but will the sales forces remain separate and will the Joe's on retail stores remain unchanged?

Marc B. Crossman

Yes. To be very clear about it, I'm glad you bring it up again, everything is going to remain separate from sales, marketing, distribution, et cetera. Their headquarters, even though it's right down the road, is going to stay separate and distinct from our headquarters. So from an employee base, which makes up the DNA of a brand, that will stay separate. So when we look at the pockets of expenses, I could speak to our company. I would say the 80-20 rule applies, 80% of our expenses are non-employee-related and 20% are. So the big buckets to go after are the 80%, not the 20%. And 20% is the most important. So as we look at it, the opportunity really is to go after that 80%, and that 80%, that isn't going to change the DNA of the brand. So, yes, sales will not be -- we're not going to mix the sales force. One of our salespeople is not going to go out and rep both a Hudson jean and a Joe's jean at the same time. They're either going to sell a Joe's or they're going to sell Hudson.

Steven Chang

And last question for you. As we look at the long-term opportunities for Hudson, could you talk about how Hudson does in non-denim? How much of their business is non-denim? And do they currently have any of their own retail stores?

Marc B. Crossman

Hudson right now in non-denim is very small. It's just a percent or so of their overall business. In terms of retail stores, at some point, I don't think we're at the point right now, where we're going to be investing the capital to open a bunch of retail stores. That's definitely something, as we look at the progression of any of these brands, we do believe that you have to have retail to really showcase your brands. Right now, from a retail perspective, they do have their e-shop, and their e-shop is very successful. And that will translate into retail stores at some point down the road. And we've always been a believer that retail is how you showcase the brand and we're going to go down that same path with Hudson.

Operator

We have no further questions at this time. I would now like to turn the call back over to Marc Crossman.

Marc B. Crossman

All right. Thank you very much. I just want to let you know we're very excited about the trend we see in our business and about this acquisition with Hudson. And I think that it's going to really create for a very big powerful company. So if you have any questions, feel free to give us a call.

Operator

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

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