New York & Company, Inc. Q2 2009 (Qtr End 08/01/09) Earnings Call Transcript

New York & Company, Inc. (NWY)

Q2 2009 Earnings Call

August 26, 2009 8:30 am ET

Executives

Allison Malkin – Integrated Corporate Relations

Richard Crystal – Chairman and CEO

Sheamus Toal – EVP and CFO

Leslie Goldmann – EVP, Merchandising

Analysts

Neely Tamminga – Piper Jaffray

Sam Panella – Raymond James

Robin Murchison – Sun Trust

Eric Beder – Brean Murray

Presentation

Operator

Welcome everyone to the New York & Company second quarter fiscal 2009 results conference call. (Operator instructions) I would now like to turn the call over to Allison Malkin of ICR. Please go ahead.

Allison Malkin

Thank you. Good morning. Before we begin, I would like to remind you that some of the comments made on today’s call, either as part of our prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provision in the Private Securities and Litigation Reform Act of 1995. Actual results may differ from those projected in such forward-looking statements.

Such forward-looking statements are subject to risk and uncertainties as described in the company’s documents filed with the SEC, including the company’s fiscal year 2008 Form 10-K.

With that, I would like to turn the call over to New York & Company’s Chairman and CEO, Richard Crystal.

Richard Crystal

Thank you, Allison. Good morning. Thank you for joining us to discuss the company’s second quarter results. On the call with me today is our Executive Vice President and Chief Financial Officer, Sheamus Toal. Unfortunately our Chief Merchant, Leslie Goldmann, is not on the call due to a death in the family. Following my opening remarks, Sheamus will review our financial highlights and then I will provide closing comments and turn the call over to the operator to conduct the question-and-answer portion of this call.

Our second quarter bottom line results met our expectations as we tightly managed expenses and inventory. Our top line remained under pressure as consumers continued to be selective in their discretionary spending. Our customers remain focused on those purchases that deliver unique fashion and outstanding value and we believe our fall collections are reflective of this trend. As we start the season we are seeing favorable responses to our merchandise. We have implemented a marketing message that is better aligned with the mindset of consumers today and we are seeing improvement in categories that have previously lagged our overall results.

While our second quarter bottom line results met our expectations our performance was negatively impacted by lower traffic and increased promotional activity during the quarter which pressured sales and gross profit margin. This year we also made a decision to not bring in a transitional delivery in June which typically consists of summer silhouettes. While this negatively impacted our second quarter results, it strongly positions us for the third quarter to drive sales of fall merchandise and generate better margins.

During the second quarter we continued to make progress towards achieving our goal in reducing expenses and managing our balance sheet. To this end SG&A declined by 13.3% on an average store basis driven by the success of our cost reduction initiatives. We now expect to exceed $30 million in annual savings this year targeting both SG&A as well as buying and occupancy cost reductions.

Inventory also remained well controlled with inventory per average store declining by 10.9% at quarter end and we maintained strong liquidity. At quarter end our cash on totaled $53.1 million and we maintained no borrowings under our credit facility.

Across categories, our accessory and dresses continued to lead our performance with a particularly strong performance in the jewelry category. Also encouraging is that our pants business started showing signs of improvement. By mi-July our customers started to respond favorably also to our woven and mid tops in the casual department as well as denim.

Regarding e-commerce, we completed the re-launch of our New York & Company site in June. As expected, with any new technology we experienced certain issues which impacted results. Sales levels in e-commerce were also affected by lower levels of clearance product available on the site and the decision to reduce the amount of coupons available to web customers. While e-commerce sales in the second quarter were slightly below prior year levels, we have resolved many of the issues and the e-commerce site is back to posting increased sales. We continue to believe e-commerce offers us strong growth potential and we have increased our Internet marketing to drive traffic to the site. We expect to continue to drive our e-commerce business to 5% of our total sales in the near future with expectation of increasing this percentage to 8-10% of total company sales over the next several years.

As we begin the third quarter we believe we are well positioned for the fall selling season. Our total inventory levels were below last year and we have significantly less spring and summer clearance which should bode well for sales and margins. Regarding our assortments, we are providing more reasons for women to shop with us as we offer great value and fashion. Currently, our customers are favoring our long tops over narrow pant styles which we appropriately invested in for the fall season.

In addition, we expect to continue our positive performance in accessories and dresses while driving our casual business with our casual knit and woven tops and our newly revamped denim collection. With regard to denim, we not only broadened our assortment but we introduced new fits and washes along with the introduction of a good/better/best pricing strategy. We also introduced new marketing nomenclature to elevate our position in the denim category as we saw a significant opportunity to provide our customer with this category that she was already buying at other stores. While consumers are favoring our skinny styles which are quickly becoming the new uniform of choice for women today, we are also seeing a positive reaction to our boyfriend, boot cut and straight leg styles.

We continue to operate our assortments to appeal to the trade down customers already shopping in our stores. To this end we are on track to reintroduce our Red Label in September in approximately 30 doors with this offering also available online. While a small initiative today, with Red Label we are able to grow our customer base and elevate our offering with a selection of higher quality, more fashion forward offerings.

As it relates to marketing, we expect our promotions to be more impactful in the fall season and we aim to improve traffic and conversion without compromising margin. As you know, we moved away from store wide 40-50% off promotions during the year in favor of branding events. Our New York Styles great deal message is resonating well with consumers and will build on this success in the fall season with promotions to enhance the brand and drive sales.

For example, during August we are holding our semi-annual pant event, designed to drive pant sales across all categories. The intention of the event is also to encourage customers to buy tops in addition to those pants to complete their outfits, thereby driving up our average dollar sale. So far we are pleased with this event and its performance over the year-ago period.

While we expect the economy to remain weak, we are confident that we have identified the right strategies to gain market share and achieve positive cash flow this year as we continue to strengthen our product offerings, create consumer relevant and brand building marketing campaigns and benefit from our cost and inventory discipline.

Now I would like to turn the call over to Sheamus to review our second quarter results in more detail.

Sheamus Toal

Thank you Richard. Good morning everyone. Net sales for the second quarter of fiscal 2009 were $247.8 million as compared to $295.7 million for the second quarter of last year. Comparable store sales decreased 16.4% for the quarter. In the comparable store sale space for the quarter ABS decreased 6.6% and transaction per average store declined 10.5%. Gross profit for the second quarter of fiscal year 2009 was $56.1 million or 22.6% of net sales as compared to $88.4 million or 29.9% of net sales in last year’s second quarter.

The 730 basis point decrease in gross profit as a percentage of net sales is due to a 430 basis point decrease in merchandise margins resulting from increased levels of promotional activity and a 300 basis point increase in buying and occupancy costs primarily attributable to the decline in comparable store sales partially offset by savings recognized in connection with our cost reduction program.

Selling, general and administrative expenses declined by $9.9 million to $64 million or 25.8% of net sales as compared to $73.9 million or 25% of net sales during last year’s second quarter. On a percentage of sales basis the increase in selling, general and administrative expenses is primarily a result of the decline in comparable store sales partially offset by savings recognized in connection with our restructuring and cost reduction program. On an average store basis, selling, general and administrative expenses declined by 13.3% reflecting the impact of our restructuring and cost reduction program.

Net loss from continuing operations in the second quarter of fiscal 2009 was $4.8 million or $0.08 per diluted share as compared to net income from continuing operations of $8.6 million or $0.14 per diluted share for the second quarter of 2008. This result was primarily due to the decrease in comparable store sales and the resulting de-leveraging of expenses.

Moving to our quarter end balance sheet we ended the quarter with $53.1 million in cash and no borrowings under our credit facility. Inventory at cost was $87.3 million as compared to $98.8 million in the prior year. Inventory per average store was down 10.9% as compared to last year’s second quarter. This decrease in inventory is consistent with our expectations and reflects our ongoing effort to tightly control inventory levels during these difficult times.

Capital spending for the first six months of 2009 was $5.9 million as compared to $30.7 million last year reflecting the company’s scaled back expansion plans for fiscal 2009. During the first six months of fiscal 2009 we opened six new stores including three temporary locations and closed four stores ending with 591 stores and 3.3 million selling square feet in operation.

Despite the continued uncertainty in U.S. economic conditions and limited visibility into consumer spending patterns, we remain focused on our long-term corporate performance. Therefore, while we will no longer provide specific sales in our earnings guidance, we will provide meaningful trend information on business fundamentals, key metrics and strategic initiatives. We will provide general guidance on certain metrics for the second half of fiscal year 2009.

As we move into the fall season we expect comparable store sales trends for the season to improve versus the trend experienced during the first half of fiscal 2009 reflecting the easing of year-over-year comparisons, strong merchandising initiatives and appropriate levels of inventory.

Merchandise margins are expected to modestly improve during the third quarter as compared to the prior year with more significant improvements occurring during the fourth quarter resulting from sourcing efficiencies and an anticipated decrease in promotional activity. Buying and occupancy costs are expected to decrease during the second half of the year due to the success of our restructuring and cost reduction programs. However, we expect to de-leverage these expenses as sales continue to decline.

Gross margins are expected to increase during the third and fourth quarters as compared to the same period last year reflecting less promotional activity and the impact of the restructuring and cost reduction programs. During fiscal year 2009 we expect to exceed the $30 million pre-tax savings target established when we initiated our restructuring and cost reduction program in January of 2009. As previously announced, these savings will be realized in the company’s financial results through a combination of SG&A expenses as well as in buying and occupancy expenses.

Due to the seasonal nature of certain expenses we were able to achieve a greater percentage of these savings during the first half of fiscal 2009 than we would expect to realize during the second half of the year. During the second half of fiscal 2009, selling, general and administrative expenses are expected to decrease by a low to mid single digit percentage as compared to the same period last year, once again reflecting the success of our restructuring and cost reduction program partially offset by continued investment into certain growing or developing areas of the organization. SG&A expense as a percentage of sales is, however, expected to de-lever based upon anticipated sales levels.

Inventory will continue to be managed tightly with inventory per average store expected to be down in excess of 15% at the end of the third quarter as compared to the prior year’s third quarter. Cash on hand at the end of the year is expected to be comparable to the cash balances at the end of last year reflecting no cash drain during an extremely difficult year.

Now I would like to turn the call back to Richard for closing remarks.

Richard Crystal

Thank you Sheamus. We believe there is considerable opportunity to improve our performance during the balance of the year. Our assortments are resonating with our customers across categories as we present better fashion and value. We are creating traffic generating marketing events and we will continue to apply strict cost and inventory discipline. We continue to possess a strong balance sheet and believe that collectively our strategies have poised us to report a sequential improvement in sales and marketing during the balance of the year.

With that I would now like to turn the call over to the operator to begin the question and answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Neely Tamminga – Piper Jaffray.

Neely Tamminga – Piper Jaffray

On the product side, denim obviously sounding like it has some signs of life. I know that bottoms have been a real tough category for you and really broadly within retail as women have been deferring on that purchase. Could we actually see bottoms as a category start to comp closer to break even in the next 6-9 months or do you think it is just not down 40 or that sort of thing? Can you size that up for us?

Richard Crystal

I think there is an opportunity to get close to last year’s levels. We are still being conservative about it. As we mentioned, the denim business has really taken off for us as we have re-merchandised the entire collection. We have changed our fit, our washes, our marketing nomenclature and it has really been successful. Casual pants has stabilized a little bit. We have some good product in the wear to work business with also silhouettes taking over and we expect the mid pant business also to be good.

There is a chance it could happen. If our silhouettes change, customers don’t really have a lot of narrow and skinny legs in their closets and we think that is an opportunity as we move forward. Clearly we expect this to improve dramatically from where we were in the spring season. I wouldn’t get to the current or plus yet but there is a possibility.

Neely Tamminga – Piper Jaffray

Related to that could you talk about you were saying in terms of easier compares in Q3 that is certainly the case on a one-year or two-year basis but it is even more so on a three-year basis when you look back. I guess what I’m trying to ask could comps in aggregate, not just for the category of pants, but could comps actually hit break even potentially in Q3 or are you inventory constrained to do that?

Richard Crystal

Good question. I think we are planning conservatively. What we stated is we expect comps to improve from where we have been. We sort of want to stay with that at this point in time. Inventory constraints will have some impact. However, we have done some work to get better speed to market. We do always and have always had the opportunity to chase merchandise and still have that for the fourth quarter. If we see the trend there and the trend comes we could get the merchandise but right now what we are publicly stating we see improvement from where we have been in the second quarter. It is easier comparisons but again the visibility we are not totally comfortable with the visibility at this point in time.

Neely Tamminga – Piper Jaffray

Did I detect that you increased your store openings a little bit? Could you talk a little bit about the store numbers again? Is there something going on with that?

Sheamus Toal

We did obviously have an increase in our store count so we opened three new New York & Company stores as well as three temporary locations so a total of six stores for the quarter. The three temporary locations are outlet locations in outlet malls and the reason they are temporary is we found in this market a unique opportunity to test an outlet concept for a short period of time. We were able to get the real estate on a short-term basis where we didn’t have to do significant improvements or significant cost outlay and thought it was a unique opportunity for us to test that given the real estate market out there now. So those are temporary. They may in fact come out in the future but we thought it was a good opportunity to test that concept.

Operator

The next question comes from the line of Sam Panella – Raymond James.

Sam Panella – Raymond James

I just wanted to talk about gross margin a little bit more. I believe on the last call you thought gross margin would be similar to what you experienced in the first quarter. Also within the buying and occupancy what are you seeing in terms of cost savings? Is that in leases or more in the sourcing area? Just a little bit more detail there.

Sheamus Toal

From a gross margin perspective we did obviously deteriorate from a merchandise margin about the 430 basis points. The only thing I would point out is that is on top of a very strong performance in last year’s second quarter so we had a relatively good second quarter. As we talked earlier in the quarter we did have an anticipated increased level of promotional activity as we had purchased inventory for the second quarter assuming a comp trend that was a little bit better than we actually came out with. So as we got through the Mother’s Day selling period we realized that and did communicate that. As far as the cost reduction efforts, we have seen significant cost reduction efforts in buying and occupancy expenses. That is a component of our restructuring and cost reduction program that is on track. That component of the cost reduction is slightly better than we had originally expected so we are certainly on track and exceeding those expectations.

We have seen in terms of sourcing some benefits associated with some pricing reductions and some changes that we made earlier in the year. During the second quarter we will see more of those benefits in sourcing efficiencies as we move into the second half of the year. That did affect the second quarter slightly.

Sam Panella – Raymond James

Openings and closings for the third quarter and fourth quarter what should we be expecting?

Sheamus Toal

At this point we don’t have any new New York & Company stores opening during the second half of the year. As I mentioned earlier we did open the three and three temporary locations so no new additional New York & Company stores. For closings, at this point we still expect to be in the range we had previously established so in total for the year we said a range of 10-15 stores. At this point we have closed three so we should expect in the range of 7-12 for the second half of the year and we keep on monitoring that.

Operator

The next question comes from the line of Robin Murchison – Sun Trust.

Robin Murchison – Sun Trust

Let me piggy back also on Sam’s last question, your inventory at the end of the second quarter was down 11% and change at the end of the second quarter and at the end of the first quarter it was actually up I think about almost 3%. I am guessing clearly that played into as you tried to position yourself for third quarter in terms of second quarter margins. The question is how are you planning your receipts in the third quarter and how should we think about inventory levels towards the end of the third quarter as we head into fourth quarter?

Sheamus Toal

First, you are correct we did have total inventories down about 11%. The only other thing I would point out with respect to that is that is on top of the 22% decline as of last year’s second quarter so it is rather significant declines from a couple of years ago. When we dissect the inventory a little bit more our inventory on hand which includes our in-store inventory and our DC inventory, it was actually down about 16%. Our new inventory coming in or inventory in transit was actually pretty flat to last year again reflecting the freshness of our inventory assortment.

As Richard indicated earlier we also eliminated a traditional summer delivery which again helped as far as the freshness of our inventory as we do have cleaner inventory and less carry over inventory than we had in the prior year. As we look to the fall season, we think we will get some benefit associated with that as we are entering the fall season with fresher inventory and more fall product. We do and have adjusted the receipt flows as we move through the third and fourth quarter based upon our conservative plans. Although we do have the ability to flex those to some extent to chase product as things improve, at this point we would anticipate that at the end of the third quarter we would be down in the double digits, probably in excess of 15% and again that is on top of a double digit decline as of last year’s third quarter. From an inventory perspective we think we are very closely monitoring those inventory levels and tightly controlling them although we are giving ourselves the flexibility to chase product if the environment improves.

Robin Murchison – Sun Trust

Any comments on the profile of your credit card customer? I think previously you thought there was some evidence of potential trade down based on the credit profile of that customer. Any comment in that regard?

Sheamus Toal

Nothing new. That is true. We did see that profile improve historically. We have not seen the results for the second quarter as yet from our credit card provider. We are monitoring that and we look at that as an indication of our ability to attract a trade down customer or an elevated customer to our brand. Once we get that data we can certainly provide you with some feedback on any new information that we glean from that.

Robin Murchison – Sun Trust

We should assume that margins in e-commerce are better than store margins, merchandise margins?

Sheamus Toal

They are similar. The merchandise margins in e-commerce we have different types of promotions running at different times so they are not dramatically different than our existing store brand. Different cost structures as far as store operating costs versus costs associated with the e-commerce business. From a margin standpoint they are relatively close.

Richard Crystal

We do fully allocate their costs so if they have excess merchandise to liquidate they are charging for that. That is why the merchandise margin is pretty similar.

Robin Murchison – Sun Trust

Regarding Red Label, how deep or are all categories in the store going to feature some component of Red Label or is it just going to be pants and tops? I am also wondering about the relative premium price point to the rest of the mix in terms of opening level price points. Are we looking at price points about 20% higher? Can you comment on that?

Richard Crystal

When we talk about re-launch we actually took it and are designing and producing it in house. Our first few collections were done with an outside resource and we felt we could do a better job of providing more upscale merchandise as well as the design and doing it ourselves so we were able to offer actually more quality than we were able to get on the outside by providing it ourselves. We will be reintroducing it around the second week of September and it will be in all categories from coats to sweaters to pants to shirts and we think it is a very exciting collection. We have had a little bit of it out there in some of our test stores. We are very happy with it and we are excited about it.

That being said, it is still pretty small. We believe it is something we need to pursue for the future and we will continue to stay with it.

Robin Murchison – Sun Trust

Can you comment on the plaid trend? The printed tops look good. I was just wondering if you could give us a little insight into the reception by your customer base to your printed tops and also specifically plaid.

Richard Crystal

Specifically plaids have been great and it has been virtually a sellout at regular price so especially along the lines of tunics that we have had coupled with our skinny jeans it has been a great outfit for selling for us. We continue to believe plaids will be strong and printed tops, especially our novelty t-shirt tops have done exceptionally well as we have gotten more graphic and embellished tees. As I mentioned earlier our mid casual top business has turned around primarily on the basis of those tops. We are seeing a trend in novelty tops. Narrower bottoms we continue to believe that trend will go forward. We are seeing more and more tunics as we move through the season. That is where we have invested ourselves in terms of inventory. We think this is something the customer doesn’t have in their closet and therefore there is an opportunity to sell units and sell them at regular price.

Operator

The next question comes from the line of Eric Beder – Brean Murray.

Eric Beder – Brean Murray

Could you talk a little bit about the landscape in terms of leasing and in terms of rental rates and what you are seeing there? I saw you mentioned opening these outlet stores. What are you seeing in terms when you go back to your landlords?

Sheamus Toal

Obviously as part of our cost reduction program we do look at all areas of our business. We don’t really comment specifically on landlord negotiations but it is a component of our buying and occupancy costs and it is an area in which we have gone back and taken a look at our agreements in an effort to negotiate savings in that area as well as all areas of our business. It is certainly an environment out there right now where there is some flexibility and there are some benefits in new deals specifically in negotiating terms. As you know, there are a lot of vacancies out there and that is how we found ourselves with the opportunity for the three outlet stores as attach and something we could do on a short-term basis to evaluate that concept for us. So there is some flexibility. We have been receiving some benefits. That is a component of our cost reduction program. We are actively working on that still today.

Eric Beder – Brean Murray

In the last conference call you talked about this new campaign with shirts and some of the trade up for that. I am curious how that went and what you got from that?

Richard Crystal

The new campaign with what? I’m sorry, I didn’t hear that.

Eric Beder – Brean Murray

You mentioned last conference call you were going to roll out some higher end shirts.

Richard Crystal

Yes that was part of our Red Label collection. We will continue with that as well. Again, designing that in house once again. That comes back in around the second week of September launch with our entire Red Label collection. The shirt business hasn’t been as good as it has been in the past so we are a little more cautious there but we will continue testing that concept.

Eric Beder – Brean Murray

In terms of some other products you have rolled out some active wear, yoga wear, how is that going?

Richard Crystal

Our street wear has been terrific actually. As part of that, in motion continues to be okay although this is a soft time of year for that. The street wear collection we actually sold out and are repositioning ourselves as we probably will get a new delivery in September and then are positioned even stronger as we move into the holiday season. So it is a mixture of leggings, different kinds of tops and sweaters. It is very contemporary looking. We think it is an elevated product and it has done quite well.

Eric Beder – Brean Murray

What should we think about in terms of where you need to have same store sales to drive operating leverage? You have cut a lot of expenses, streamlined the whole delivery system for inventory. Where should we be thinking you can drive operating leverage? What level of comp gets you there?

Sheamus Toal

It is something we evaluate and obviously we are continuing to work on the cost reductions. At this point from a buying and occupancy standpoint we can leverage our buying and occupancy expense structure at kind of a low negative single digit comp reach. When we look at SG&A expenses that ratchets up a little bit towards the low to mid negative single digit comp range. If we can improve our comps to that threshold or better we would obviously obtain some benefits.

Eric Beder – Brean Murray

So if you had a low single digit comp the whole thing would be leveraged basically?

Sheamus Toal

Correct.

Operator

At this time there are no further questions. I will now turn the call back to management for closing comments.

Richard Crystal

Thank you for joining us today. We look forward to speaking to you in November when we announce our third quarter results.

Operator

This concludes today’s New York & Company second quarter fiscal 2009 results conference call. You may now disconnect.

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