Tween Brands Inc. Q2 2009 (Qtr End 08/01/09) Earnings Call Transcript

Tween Brands Inc. (TWB)

Q2 2009 Earnings Call

August 19, 2009 9:00 am ET

Executives

Julie Sloat - Vice President Corporate Finance and Investor Relations

Mike Rayden - Chairman and CEO

Rolando de Aguiar - Executive Vice President and Chief Financial Officer

Analysts

Linda Tsai – MKM Partners

Tracy Kogan – Credit Suisse

Kimberly Greenberger – Citigroup

Marni Shapiro – Retail Tracker

Scott Krasik – CL King

Tom Filandro – SFG

[Eric Marzugal] – Dominick & Dominick

Presentation

Operator

(Operator Instructions) Welcome to the Tween Brands Second Quarter 2009 Earnings Conference Call. It is now my pleasure to introduce your host Julie Sloat, Vice President Corporate Finance and Investor Relations for Tween Brands.

Julie Sloat

Thank you for joining us today to discuss Tween Brands second quarter performance. With me here today are Mike Rayden, Chairman and CEO, Rolando de Aguiar, Executive Vice President and Chief Financial Officer.

Before we begin this morning I want to remind you that our discussion today will include statements about Tween Brands future expectations, plans and prospects of the company which constitute forward looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such forward looking statements include known and unknown risks and uncertainties that can cause actual future results to differ materially from such statements. Those risks and uncertainties are described in today’s press release and in our filings with the SEC.

I’ll now turn the call over to Rolando for commentary on second quarter performance and then Mike will make a few comments on the state of our business and the status of the merger with Dress Barn.

Rolando de Aguiar

This morning we reported a second quarter loss of $0.11 per share versus the $0.27 loss we posted last year. As I stated during our first quarter earnings call, although we hate to be in negative territory we had anticipated an incredibly difficult sales environment driven by the continued macro economic pressures in 2009. However, we believe the business is beginning to show improvement in response to consumer recognition of our value proposition and our strong back to school merchandise assortments which Mike will speak more about in a few moments.

Our performance exceeded our internal forecast as sales for the period were better then our expectations and our cost savings were better then our plan. When we exclude the $3.5 million pre-tax non-cash impairment charge associated with 31 of our stores and $1.9 million of merger related costs that we recorded during the quarter.

Our tight inventory management helped to reduce the pressure on margins and conserve cash. We remain confident in our ability to continue to realize the cost savings we have previously discussed with you and that our discipline around inventory and general working capital activities is in fact working to preserve margins and enhance liquidity.

On to the particulars of the quarter. Net sales for the quarter were down 8.1% driven by a 12% decrease in comp sale stores as compared to last year. Gross income was $54.3 million for the quarter and gross margin was 26.5% down from the $61.8 million and 27.7% respectively in the corresponding 2008 period.

The year over year decline as a percentage of net sales is the result of our inability to leverage the $2.3 million decline in buying and occupancy costs against the 8.1% drop in sales during the period. Although buying and occupancy costs were down year over year the benefit was largely offset by the impairment charge. Excluding the $3.5 million store impairment charge gross income was $57.8 million and gross margin rose to 28.2% a 50 basis point increase from the corresponding prior year period.

Internal gross margin which includes merchandise margin, sourcing and other margin, increased to 56.2% for the second quarter. The decline in IMU which we expected as the result of the transition to the Justice Brand along with increases in planned promotional activities during the quarter, were offset to increases in sourcing and other margins to deliver a 20 basis point increase in internal gross margin over the prior year period. Excluding the $3.5 million store impairment charge, internal gross margin increased to 57.9% a 190 basis point increase from the prior year period.

SG&A expenses were lower by $6.5 million year over year largely due to a decline in marketing expense and store and home office payroll costs associated with headcount reductions. We also have approximately $1.9 million of merger related expenses embedded in the SG&A line which somewhat tempered the beneficial impact of our cost savings efforts this period.

SG&A as a percentage of sales decreased 40 basis points despite the drop in sales and included in merger expenses, reflecting our cost cutting initiatives. Excluding the $1.9 million of merger related expenses SG&A as a percentage of sales decreased 130 basis points.

Net interest expense was up $1.4 million primarily due to higher interest rates associated with our credit facility amendment. While our cost structure was reduced significantly the decline in sales overshadowed the fruits of those efforts as evidenced by the $2.8 million net loss posted by the company for the second quarter of 2009. This compares to the $6.7 million loss posted in 2008.

On an earnings per share basis the company posted a loss of $0.16 in 2009 excluding $0.04 per share associated with the store impairment charge and the $0.01 per share expense associated with the merger as compared to a loss of $0.27 in 2008. Including the store impairment charge and merger expense the company posted a loss of $0.11 per share.

On the surface this may sound a little counter intuitive since you would expect the earnings per share excluding the impairment and merger expenses to be higher or better then the earnings per share including the expenses. The reason that this did not occur is due to the amount of income tax benefit we were able to recognize given the amount of the operating losses posted combined with the timing and nature of the one time items we are excluding.

Weighted average shares outstanding on a diluted basis were 24.8 million for the second quarter 2009 compared to 24.8 million in 2008. With our cash and cash equivalent balance of $71.5 million at quarter end and our $50 million revolving line of credit facility, our liquidity position at the end of Q2 stood at $121.5 million.

Taking a look at our balance sheet you will see that our current ratio as of the end of the quarter was 2.3 and debt to equity ratio was 0.94. Cash flow from operations for the six months year to date was $5 million versus the $5.3 million use of cash for operations last year. The year over year difference was largely driven by tax payments last year and lower inventory requirements this year.

I would like to quickly mention that our total inventory at the end of the quarter was down 18.5% per square foot of cost from the end of the second quarter 2008. In store inventory was down 19% per square foot of cost consistent with our expectations. Since the end of the second quarter of 2008 our total square footage has increased 1.3% to 3.78 million square feet. During the second quarter of 2009 we closed seven stores and ended the period with 903 stores versus 895 last year.

As I stated during our first quarter earnings call we continue to be diligent about our expense management, very discipline in our capital investment levels and our focus on the preservation of cash. Our CapEx for 2009 is expected to be approximately $10 million net of cash tenant allowance we see this year. During the first half of 2009 our capital expenditures net of cash tenant allowances totaled $5.7 million, mainly consisting of new store signage for the Justice transition and remodels.

With that I will hand the call to Mike for color on the state of our business and the status of our merger with Dress Barn.

Mike Rayden

I would like to make a few quick comments this morning to provide you with an update on our business and then we will get right into your questions. On June 25, 2009, we announced that Tween Brands would be merging with Dress Barn. I can tell you that the process to complete the transaction is well underway and with our necessary Hart Scott Rodino filing having been submitted to the FTC and Department of Justice on July 28, 2009, and the form S4 Registration Statement which contains our proxy statement having been filed by Dress Barn with the SEC for comment on August 11, 2009.

The 30 day waiting period for the Hart Scott Rodino filing is scheduled to end on August 27, 2009. Once the form S4 is declared effective, we will distribute a definitive proxy statement to Tween Brands stockholders in connection with the stockholder meeting to vote on a proposal to adopt the merger agreement.

As I stated, when we announced the merger on June 25^th, joining forces with Dress Barn will allow Tween Brands to complete its brand transition in an environment where many of the external pressures and influences we spend a lot of time addressing today will be eliminated. As a result, we will be able to direct our efforts and focus toward the success of our fundamental operation, ensuring that the product is exactly what our girl wants, making it available when she wants it and dialing in on the price point that is compelling to mom.

Identifying and utilizing marketing activities to drive the customer behavior we seek and being in locations that can optimally drive sales and earnings. We expect to complete the transaction in the fourth calendar quarter and are actively engaged in the required activities behind the scenes to facilitate this.

Moving on to our recent performance and state of the business. We had expected sales during the quarter to be soft for the obvious macro economic reasons and reduced Webkinz sales which cost us about four points in comps. The brand transition appears to be gaining traction with consumers as evidenced by recent NPD data indicating that Tween Brands market share in the tween girl seven to 12 year old market increased 114 basis point for the 12 month period ended June 2009.

What’s particularly intriguing about this statistic is that during the same period the tween girl apparel market contracted almost 6% and JC Penney, Kohl’s and Old Navy all lost market share. We are now in the number three spot behind only Wal-Mart and Target. So, our ability to pick up market share, slow the comp store sales erosion, reduce costs, and conservatively manage inventory all being done concurrently in an economy that continues to decline, is pretty encouraging to say the least. And, it’s all the more encouraging since we have also been involved in a bold complete brand transformation.

I’d also like to point out that we have successfully executed on the key activities and reached the milestones I had presented to you at the beginning of the fiscal year. Specifically, while the company did not provide earnings guidance, I stated that it was our expectation that the company would experience difficult comp store sales in the first quarter of the year but that this pressure would begin to ease appreciably from quarter to quarter.

In fact, this is exactly what the company posted, with a -23% comp in quarter one which was essentially cut in half with -12% comp in quarter two and July cut that in half with -6% comp. The trends and the composition of our sales meaning UPT, AUR and ADS are all falling in line with our expectations as well. The $32 million in pre-tax cost savings that we plan to achieve in 2009 as compared to 2008 remains solidly in place as we continue to make rapid progress in the realization of those dollars that fall to the bottom line.

As Rolando mentioned a few moments ago, our reduced cost structure helped to mitigate the impact of top line pressures that persisted during the quarter. Year to date we have realized $33 million in cost savings year over year excluding the impairment and merger expenses recorded in the second quarter. Our amplified marketing efforts in the second quarter also helped to mitigate top line pressure.

You may recall that I mentioned during our first quarter earnings call in May that you should expect to see us increase the frequency of communication with our customer through a greater number of contacts then we had originally planned and direct mail efforts that extend deeper into our database during the second quarter.

Given that customers do not appear willing to shop without a deal in hand, we need to adjust our promotional cadence and consequently plan to increase the number of days we were offering some type of promotion versus last year. We had also planned to sweeten our offers at various times such are more 40% off events as compared to the 30% off opportunities.

Throughout the second quarter we in fact engaged in all of these activities and saw improved performance for the period particularly late in the quarter with the excellent response to our back to school merchandise assortments. This improved performance and our ability to mitigate top line pressure indicates that the Justice branded merchandise is being embraced by our customers because it is appealing to her and the price is compelling.

The last three catazines that were distributed included bold language on the cover directed to moms to point out that our prices are every bit as value oriented as those that are offered at Kohl’s, JC Penney, Macy’s, and so on. Justice has everything her daughter needs at a competitive price, in addition to the fun shopping experience and industry leading fashion assortments that she loves. The value proposition which was the fundamental reason for the brand transition has now been well established and we are going to continue to reinforce the message in all of our marketing efforts so that we can further accelerate the momentum we are beginning to experience.

By joining forces with the two concepts that are Dress Barn and Maurice’s that are very well known in the value specialty retail space, we believe we will be positioned to galvanize our value proposition. We’re not out of the woods yet by any measure but I am quite pleased with the progress we have made.

With that I’d like to take your questions.

Julie Sloat

So that everyone has a chance to participate we ask that you limit your number of questions to one with one follow up on the first go round and then you’ll be placed into a listen only mode after your follow up. In this way we will better have a chance to get to each questioner in the time allotted. You are welcome to get back in the queue in the same way you did originally.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Linda Tsai – MKM Partners

Linda Tsai – MKM Partners

I was just wondering if you could discuss a little bit what’s different about the BTS merchandise this year versus last year, are there certain fashions, I know you talked about the prices already being compelling.

Mike Rayden

I think that when we talked about the merger I think we talked about the best of both worlds. I think that in a very short period of time our merchandising and design team have been able to gel and come up with an assortment that offered the best of the basics and price areas that Justice was always good at and also come up with the fashion and leading fashion that Limited Too was at. I think we have an incredibly balance assortment that covers pretty much every major market fashion trend that a tween girl would want as opposed to being as one dimensional as one of the brands might have been last year.

Our inventories are turning at lightening speeds, probably at all time records. With the decreased inventory I think that’s evidence of the fact that our UPTs are up and our transactions dropped drastically in the second quarter from the first quarter and four quarters. I think it’s a well balanced assortment that represents the fashion trends, represents the young girl and represents the slightly older tween as well.

Linda Tsai – MKM Partners

Are there certain categories you could comment on or is the improvement just kind of across the board?

Mike Rayden

Our active business has been excellent all season and continues to be. Our denim assortment is off to a fabulous start and when you’re having a good denim season you seem to have a much better level of business. The girly look of plaid skirts have been absolutely off the charts. Sublimation print tops have been spectacular. Scarves continue in accessories. Most of the assortment actually is doing quite well; it would be hard actually to point out a particular area that wasn’t off to a good start at this point.

Linda Tsai – MKM Partners

Could you discuss a little bit the magnitude of the lift that you see from the 40% off events versus the 30%?

Mike Rayden

The magnitude of the 40% off is, I will say this, the August book that we just mailed which was at the end of July and the beginning of August was the highest incremental return of any book that we have ever mailed. It was a coupling of obviously the new back to school assortment, the second delivery and 40% off for our customer. We’re starting to get reactions to our catalogs on incremental response that we have not seen before. The lifts are excellent and I think to share them specifically wouldn’t make much sense.

Operator

Your next question comes from Tracy Kogan – Credit Suisse

Tracy Kogan – Credit Suisse

Now that Dress Barn has had a little bit more time to look over your portfolio of stores, I’m wondering what the current view was on the number of closings both mall based and off mall for this year and next year. Second, I was wondering if you could talk about why you think you gained share. Is it you’re doing a better job of marketing, is it better product, is it better prices or are the competitors just doing a worse job currently?

Mike Rayden

On the store closing I think we just announced through the end of the second quarter, with a very careful look by us and our auditors and I think the Dress Barn folks over our shoulder a little bit, we only came up with 31 stores out of a fleet of 903 that needed to have an impairment. I think that makes one statement unto itself. Clearly impairment and store closings are not the same kind of calculation. We have said that we would close somewhere around 30 stores this year. I still think we’re on track for that number and I don’t see any higher number then that as our business is starting to tick up and we’re looking at continued improved comps as we go forward.

On the market share question, we were out again last week visiting stores in the Midwest and other markets outside of Columbus. I think the answer to your question would be quite simply go visit by competition and then go visit a Justice. I think that we are doing a really good job sort of getting back to our old days of a single Limited Too brand and I think my competition is well focused on other areas then tween girls if we’re talking about Kohl’s, Penney’s, Old Navy and those people. Just take a trip to any of those stores any weekend or any week and compare them to a Justice and I think the answer will be self evident.

Operator

Your next question comes from Kimberly Greenberger – Citigroup

Kimberly Greenberger – Citigroup

I was wondering if you could tell us, are there any circumstances under which Dress Barn can walk away from the transaction? Separately on the second quarter business, if you could give us specifics on the transaction metrics, the number of transactions in an average store, the AUR and the UPTs that would be great.

Mike Rayden

On the aspect of Dress Barn being able to walk away I think its all clearly stated in the S4 and to be honest with you not being a lawyer it would be a little difficult for me to explain all of those reasons. We’re pretty confident that this transaction will go through at this point. I think we’re all excited about the future together.

You asked about UPTs and all of that, UPTs in the quarter on a total were up 9% in the second quarter, AUR was down 13%, ADS was down 5%. If you look at the components as they are by brand there was a double digit low teen increase in UPTs in the Limited Too footprint and that is offsetting a low teen negative AUR in the brand which is what we expected that UPTs would offset it. Justice, the entire decline in the quarter was related to basically transactions with all other components being relatively flat or slightly better.

Operator

Your next question comes from Marni Shapiro – Retail Tracker

Marni Shapiro – Retail Tracker

If you could just clarify that you said Justice, the transactions were down but you said that the Limited Too stores for the transactions in those converted footprints up, just to clarify that point.

Mike Rayden

The transactions in the Limited Too footprint were not up but they were down in the low single digits which is obviously an incredibly changed improvement from where we had been in the last two quarters. We believe that it is really gaining traction and I think that as we look forward now with these fall assortments and the new marketing which only started at the end of June the acceleration of transaction erosion, UPT increase, etc. is continuing.

Marni Shapiro – Retail Tracker

Can you touch on, if you could bring me up to speed, how many leases actually come up this year and over the next couple years? If you could touch on the direct business since your website has looked pretty good of late.

Mike Rayden

We have between now and 2012, 361 leases that come up for either kick out or renewals. In the next two and a half years we basically have a little more then a third of the fleet to be able to adjust. I think 2010 is somewhere in the range of 200 alone, opportunities to make those decision in that year alone.

Operator

Your next question comes from Scott Krasik – CL King

Scott Krasik – CL King

The comment about balanced assortment what do you classify as basic product versus fashion item, seasonal, what’s that percentage mix?

Mike Rayden

We consider basics the bottom of the pyramid; we look at the pyramid in three levels. We look at what we call core which is on the bottom of the pyramid and today that does about 35% of our business. Then we call the middle of the pyramid, predictable fashion, which is obviously non-risky fashion sort of the next level up. That probably does somewhere around 60% of our business. The balance is the top of the pyramid which does about 5% to 10% of our business.

Scott Krasik – CL King

As you’re now buying for 900 stores or so in a more constant way, how are you doing on your IMUs, are there opportunities there are they improving, how does the outlook for the next six or nine months look on IMUs, talk about the product?

Mike Rayden

The IMU is something we had talked about an IMU is something that we have made the most progress on. In the first quarter we had 180 basis point decline in IMU from the blended rate of last year. In the second quarter we had a 60 basis point improvement, a 60 basis point decline so it went from 180 to 60 and in the fall season we expect each quarter to be positive to last year’s blended IMU and for the season to be positive also.

We are making excellent advances in cost savings and IMU and that does not include the additional opportunity that we have within our own direct sourcing which is why our internal gross margins have had an improvement both in the first and second quarter and will have an improvement as we move forward into fall.

Operator

Your next question comes from Tom Filandro – SFG

Tom Filandro – SFG

Can you give us an update on the Limited Too products, how many stores carrying the product and just your general view of that? I was curious if you could give us maybe some insight as to have you experienced any variance in performance both regionally as well as from the mall stores and off the mall stores? My final question, give us an outlook on how you’re viewing inventory for the balance of the year and 2010?

Mike Rayden

Limited Too product will be actually discontinued as we move into holiday. All of that product will be branded Justice. We saw no incremental lifts or any reason to continue to carry that brand forward. We also have assurances and an agreement with the Limited Corporation that they will not license that label and will continue to license to us for the next five years. There is no risk of a competitor there either. Our customers are embracing Justice and we found that the Limited Too product was confusing the customer and we can do the better level of our business with the Justice name on it just as well.

Regionally it’s basically they’re all pretty much the same for us; it’s not as if Florida, Arizona, etc. are way off any particular way. On off mall and mall for the season to date off mall has performed slightly better then mall. As we’ve entered back to school, mall is performing better then off mall. It’s not drastically different by type of center.

Rolando de Aguiar

As far as inventories are concerned, we expect to maintain the same level of lean inventories going forward. Obviously when we get into 2010 we’ll be lapping the year so that the decreases won’t be the way they have been this year but for the rest of the season we’ll continue to turn the inventories as fast as we’ve ever turned them and maintain them very lean.

Operator

Your next question comes from [Eric Marzugal] – Dominick & Dominick

[Eric Marzugal] – Dominick & Dominick

In regards to the merger, what’s been the feedback from your shareholders?

Mike Rayden

I’ve heard nothing but positive feedback. I don’t know what else to tell you then that.

Operator

Your next question comes from Tom Filandro – SFG

Tom Filandro – SFG

You had said that the Webkinz business negatively impacted the quarter comp I believe by 4%. Give us kind of the view of what you think the impact from Webkinz will be for the balance of this year.

Mike Rayden

Obviously we mentioned earlier in the first quarter that Webkinz was a continuing decreasing component of the business as we move forward each quarter. I would expect that in the first half of the year I think the first quarter the impact was over 5% and in the second quarter it was 4%. I expect it to continue to decrease by the end of the year. It will be marginally important as we get to the fourth quarter.

Operator

Your next question comes from Scott Krasik – CL King

Scott Krasik – CL King

Is this your first real close look at store impairment or are these charges that you have taken in quarters past?

Mike Rayden

We took one store I think at the end of the fourth quarter. Clearly we look at impairment every quarter. This is really the first impairment charge that I can remember other then the one in the fourth quarter that we’ve ever taken.

Operator

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

Julie Sloat

Thanks for joining us today. If you have any additional follow up questions please reach out to the IR group because we’re here to help. Thanks very much.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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