CPI Corp. Q2 2009 (Qtr End 07/31/09) Earnings Call Transcript

Sep. 1.09 | About: CPI Corporation (CPY)

CPI Corp. (NYSE:CPY)

Q2 2009 Earnings Call

September 1, 2009 11:00 am ET

Executives

Jane Nelson - General Counsel and Corporate Secretary

Dale Heins - Chief Financial Officer and Senior Vice President of Finance

Analysts

Will Hamilton - SMH Capital

Jim Brilliant – Century Management

Bob Sheehan – Granite Point Capital

Operator

Welcome to the second quarter CPI Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Jane Nelson, Corporate Secretary. Please proceed.

Jane Nelson

Good morning. Welcome to CPI’s second quarter fiscal 2009 earnings conference call. As the operator indicated, my name is Jane Nelson and I am the company’s secretary. By now you should have received a copy of the press release that we issued this morning. If you need a copy, please go to our website at www.cpicopr.com. In a moment, Dale Heins, our Chief Financial Officer and Senior Vice President of Finance, will provide a brief update on our financial results for the second quarter. After that, we will take your questions.

 Before I turn the call over to Dale, I would like to remind you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that the expectations will be attained. Factors and risks that could cause actual results to differ materially from the expectations are detailed in this morning’s press release and from time to time in our filings with the Securities and Exchange Commission.

Additionally, the information and statements made during this call are made as of the date of this call. Listeners to any replays should understand that the passage of time by itself will diminish the quality of these statements. Finally, the content of the call is the property of CPI. Any replay or transmission of the call may be done only with our consent.

It is now my pleasure to turn the call over to Dale Heins.

Dale Heins

Thank you, Jane. Good morning everyone. Although our top line results for the second quarter were disappointing and fell short of expectations, the reported improvement in adjusted EBITDA reflects the success of our integration of the PictureMe Portrait Studio operation as well as the impact of several productivity and cost containment initiatives.

Among other things we have increased average sales through improved photography and sales rather than price and improved our studio labor productivity. Not reflected in the quarter’s numbers is the significant progress we have made on various strategic initiatives aimed at: One, improving customer satisfaction. Two, increasing customer acquisition, retention and visit frequency. Three, leveraging our capabilities and infrastructure to tap to tap new demographics in the service categories.

As a result, we continue to experience substantial gains in key customer indicators such as loyalty plan conversion and customer satisfaction which we believe bodes well for the future sales development. Meanwhile our balance sheet and liquidity position are strong and improving. We paid down $7 million of debt during the second quarter and currently expect to pay down a range of another $20 million of term debt by year end. We are also pleased to report the completion of a new 6 year agreement with Sears Canada as announced in today’s release. With this agreement in place we expect to convert all of our Sears Studio Canada to digital by the end of September. Importantly, the contract will permit a number of structural adjustments which we expect to improve substantially the operating contribution of this unit.

Although we are disappointed with the sales performance in the second quarter we are encouraged by several internal metrics and believe we are well positioned for the busy season. With that as a background let’s take a look at the financials in more detail.

Net sales for the second quarter fiscal 2009 decreased $8.2 million or 9% to $81.4 million from $89.6 million in the second quarter of last year. Comparable store sales from our point of sales system which excludes the effect of store closures, foreign exchange and GAAP related revenue adjustments including revenue deferral from the first quarter due to the late Easter decreased 8% from the prior year quarter.

As reported in the press release we believe our sales were significantly affected by the overall macroeconomic conditions which have especially pressured consumer discretionary spending. Second quarter is historically our weakest quarter given consumer spending trends during the summer months and the lack of a significant holiday.

Our PictureMe Portrait Studios at WalMart saw second quarter comparable store sales increase 7% to $42.6 million from $39.8 million a year ago. This improvement resulted from an increase of approximately 25% average sale per customer sitting partially offset by an approximate 14% decline in sittings. The increase in average sale per sittings reflects customers’ continued positive response to our digital product offerings as well as the success of our new sales and performance management processes. We believe that client settings is a direct result of the difficult economic environment pressuring the demand of our customers.

Comparable store sales from our Sears Portrait Studio named brand decreased 20% to $37.3 million from $46.6 million a year ago. Average sale per sitting declined approximately 1% and sittings declined approximately 19%. Our sittings are down for the quarter as economic pressure led to a marked reduction in our walk in business which has far exceeded the clients traceable to our direct response marketing. We believe the customer declines were in part mitigated by our improving execution on our customer outreach and retention programs.

Moving down on the income statement, we reported a net loss of $3.4 million or $0.49 per diluted share for the quarter versus a net loss of $3.6 million or $0.56 per diluted share last year. Earnings for the quarter were impacted by costs totaling approximately $1.5 million related to litigation and the recently completed proxy contest.

Adjusted EBITDA increased to $4.5 million for the second quarter comparable with $2.9 million a year ago. As discussed earlier, the improvement in both earnings and adjusted EBITDA were driven significantly by our cost containment and productivity initiatives as well as the integration and cost savings beginning to roll through the income statement.

Cost of sales decreased $2.2 million quarter-over-quarter to $6.7 million due primarily to lower overall manufacturing production levels, improved product mix, manufacturing productivity gains, reduced film and shipping costs as a result of the digital conversion and the elimination of duplicate overhead costs.

SG&A expenses declined $7.8 million to $70.3 million in the second quarter. Many factors contributed to the decline including the elimination of costs in connection with the PictureMe Portrait Studio integration, non-recurring digital conversion costs, lower studio employment costs due to scheduling improvements and selective operating hour reductions, reduced Workers Compensation expenses due to improved claims management and favorable foreign exchange rate translation. These decreases were offset in part by higher average hourly studio rates and increased sales in connection with the new studio and field initiatives.

Finally, depreciation and amortization remained constant with $5.6 million for the second quarter comparable with a year ago. Although depreciation expense increased as a result of the equipment purchased for the digital conversion throughout fiscal 2009 it was equally offset by a reduction in expenses related to the streamlining of manufacturing facilities and the closure of our unprofitable studios.

To summarize, although these difficult economic conditions continue to pressure customer portrait activity our focus on operational efficiency and customer engagement continues to drive improvement to our bottom line. We remain confident in our business and long-term growth strategy which we believe will deliver increased shareholder value in the coming years.

With that I will turn the call over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Will Hamilton - SMH Capital.

Will Hamilton - SMH Capital

With the Sears business I was wondering if you could talk a little bit more about the walk in portion of the business. How much is that typically for you? Can you tell us maybe how much it was down in this period?

Dale Heins

It is difficult to quantify it exactly. At different times of the year it is at different levels. It could be as much as 8-10% of our business. What we have seen particularly in the last six months to a year is that on any given Saturday if you typically would get 1,000 sittings, and I am just speaking hypothetically here, if you get 1,000 sittings that we consider walk ins. Walk ins we characterize as a customer who wakes up Saturday morning. The kids are in a good mood. They just got their hair cut the day before. They decide to go to a Sears Portrait Studio and get their pictures taken. They weren’t responding to necessarily a marketing piece we had sent them; it is just a decision they made kind of spur of the moment.

Those folks we consider walk ins. There are others as well but truly walk ins, coming through Sears or WalMart location or the mall or whatever. As you take those customers, at 1,000 they are down probably 50% year-over-year in terms of how many people are coming in. It can have a fairly significant impact on our sittings. As to mall to mall, obviously mall traffic is down and it is all impacting that walk in business.

Will Hamilton - SMH Capital

You mentioned the loyalty programs are seeing some improvement to help offset the walk in and the overall studio sales. Are you still seeing the effect of not having the contract in place from last year impacting the sales trends?

Dale Heins

I think what you are seeing now is our loyalty program conversion and that backlog of customers in that program are building. We are optimistic we will start to see the impact of that in the second half of the year. If you look at where we were on year-over-year we have got in the Sears business a very significant improvement, a 100% increase in loyalty plan conversions year-over-year. WalMart has substantially more than that because they didn’t really have a loyalty program last year. Both of them are getting into the 30+% conversion range for the plan. That just helps you build your future sittings and what people can get in those programs.

Will Hamilton - SMH Capital

So you said 100% increase in the Sears loyalty program?

Dale Heins

Approximately.

Will Hamilton - SMH Capital

So the thinking is come holiday season, no one knows what the macro environment is going to be for sure but that is going to help to even more so offset versus what you had last year?

Dale Heins

We hope that we will start to see some improvement in the frequency related to the sales of those loyalty plans.

Will Hamilton - SMH Capital

The Sears Canada, is CapEx still going to be around $4-5 million or because of that new contract and the conversion of those studios?

Dale Heins

It will be closer to $4 million. That was already in the plan for this year.

Will Hamilton - SMH Capital

Depreciation in the quarter was a little bit higher than I had anticipated and I think at the beginning of the year you had targeted around $21 million for depreciation for the year. I think you are running a little above $11 million for the first half. Can you update us as to what you expect for the full year on that?

Dale Heins

I don’t remember targeting that number but we should still be around $20 million. It is just timing with the quarter.

Will Hamilton – SMH Capital

With the run off?

Dale Heins

I think your Sears digital conversion that took place in 2004 or 2005 happened primarily that was done the second quarter of 2005. Those assets would then at the end of this year start to be fully depreciated so you will see some reductions going into Q3 and Q4.

Will Hamilton - SMH Capital

I imagine there was more studio closures in the quarter. Can you give us those numbers as to for both brands?

Dale Heins

In the quarter we closed 12 Sears locations and WalMart 71 locations.

Will Hamilton - SMH Capital

71?

Dale Heins

Yes, these were all underperforming locations. I’m sorry; I just gave you the wrong number. I’m sorry, 59 locations for WalMart. 71 was the total with 12 in Sears and 59 in WalMart.

Will Hamilton - SMH Capital

Net/net that is a positive for the cash flow?

Dale Heins

Yes. That will have a positive impact on the bottom line.

Operator

The next question comes from the line of Jim Brilliant – Century Management.

Jim Brilliant – Century Management

First, what have you seen in terms of trends throughout the quarter and into the third quarter with regards to loyalty and then sittings?

Dale Heins

On the Sears side it has been pretty consistent. It really hasn’t moved one way or the other much the entire quarter. Loyalty plan conversions have continued to inch up as we emphasized that and begin to do a better job executing those programs out in the field. I think those things continue to be in the rise. In the WalMart business in the PictureMe Portrait Studio it has been kind of choppy throughout the quarter. It has been all over the place in terms of where the numbers have been. June was particularly slow but then in July the trends improved quite a bit and then as of late as you can see in the forward-looking sales numbers for the last five weeks which are the first five weeks of the third quarter and the trend has improved a little bit more as well.

Again what the PictureMe Portrait Studio in WalMart and loyalty program conversions we continue to emphasize that in those conversions continue to inch up.

Jim Brilliant – Century Management

Was the improved trend in July and August related to loyalty programs or was that just improvement overall?

Dale Heins

I think overall. June was a tough month. There wasn’t a lot going on. It seemed to improve quite a bit there starting in early July and that has continued into August.

Jim Brilliant – Century Management

You sold a warehouse I think for $1 million. Are there any other assets related to the analog side that could be monetized?

Dale Heins

Yes. We still have the former PCA headquarters facility in Charlotte. It has been on the market since January. That is in other assets held for sale. Its carrying value on our books is about $5.4 million but we have yet…it is a difficult real estate market out there and we have yet to get any real interest in that. We also have with this digital conversion in Canada we have a facility up there that has just gone on the market as well. In Canadian dollars that facility is probably worth $3-3.5 million and we hope to move that fairly quickly. We also have a facility in Connecticut which was another lab facility that we closed last spring. We hope to get the deal done there soon and that is maybe another $1 million or so.

Jim Brilliant – Century Management

In the mobile side of the business, any update there?

Dale Heins

We continue to develop the concept, build the systems and processes into our system so that you can frankly handle this thing on a national basis. There are a lot of details that go in the back office side of this thing that have to be constructed. We are continuing to fine tune the model in terms of pricing, marketing plans and all those things. I think we are in 8-9 markets at the moment. We are not doing any additional markets this year. We are just going to continue to tweak the model, build the back office that we need to manage and hopefully be able to expand it next year.

Jim Brilliant – Century Management

Sears Canada, as we move digitally what kind of cost benefit would you expect out of that in dollar terms?

Dale Heins

Quite a bit. It is not a huge portion of our business. It is less than 5% of our revenues. There are significant economic benefits associated with the new contract. I think we can get that business to improve by $1-2 million at the bottom line based on the new parameters we can operate under with the new contract and the digital conversion.

Operator

The next question comes from the line of Bob Sheehan – Granite Point Capital.

Bob Sheehan – Granite Point Capital

[inaudible] Lambert, actually. Could you comment on the average sales per sitting at the WalMart stores versus the Sears stores at this point in time? How do the two compare?

Dale Heins

We don’t provide that information. I would tell you clearly there is a fairly significant gap between Sears and WalMart. The makeup of the customers are different. The Sears average ticket is still quite a bit higher. The WalMart ticket though had gotten to a point that probably has exceeded our expectations probably this early in the digital conversion process. When we converted the Sears business we very significantly moved the average ticket up over about a 2 year period of time. Frankly the PictureMe business at WalMart has really beaten that curve quite a bit. It went up very quickly. Now we don’t think in the long run it can get to the level that the Sears currently generates but it has done quite well.

Operator

I am showing no more questions. I would like to turn the call back over to management.

Dale Heins

I want to thank everyone for your questions and your interest this morning. While we are not satisfied with the second quarter results we are pleased with the strategic and operational progress we made during the period and we remain enthusiastic about the outlook for the company. If you have any additional questions please don’t hesitate to call me directly. We look forward to keeping you abreast of our continued progress. Have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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