Duckwall-ALCO Stores, Inc. (DUCK) F2Q10 Earnings Call September 15, 2009 11:00 AM ET
Royce Winsten – Chairman of the Board
Lawrence Zigerelli – Chief Executive Officer, President
Donny Johnson – Chief Financial Officer, Executive Vice President
Adam Peck – Heartland Advisors
Sam Lee – Private Investor
Welcome to the Duckwall-ALCO Stores second quarter fiscal 2010 earnings call. (Operator Instructions) We would also like to remind you this conference call may contain forward-looking statements as referenced in the Private Securities Litigation Reform Act of 1995. Any forward-looking statements are made by the Company in good faith pursuant to the safe harbor provisions of the Act. These forward-looking statements reflect management’s current views and projections regarding economic conditions, the retail industry environment and company performance.
Actual events or results may differ materially from those described in this conference call due to a number of risks and uncertainties. Factors that could significantly change results include, but are not limited to, sales performance, expense levels, competitive activity, interest rate, change in the Company’s financial conditions and factors affecting the industry in general. Additional information regarding these and other factors that could cause actual results to differ materially from those contained in the forward-looking statements set forth in the conference call are included in the Company’s 10-K and 10-Q filings and other public documents, copies of which are available from the Company on request.
Your speakers for today’s call are Mr. Royce Winsten, Chairman of the Board; Mr. Larry Zigerelli, President and Chief Executive Officer and Mr. Donny Johnson, Executive Vice President and Chief Financial Officer. At this time, I would like to turn the call over to Mr. Winsten. Please go ahead, Sir.
Thank you very much. Good morning everyone and welcome to the Duckwall-ALCO Stores second quarter fiscal 2010 conference call. Comparable store sales in the second fiscal quarter were not what we would have liked but compared favorably with the industry. Cash for clunkers may have been a shot in the arm for auto dealers but for everyone else it was a negative.
What we like very much is that the sales we made were profitable ones. Gross margin is increasing as our product mix has improved our share of private label sales increases and shrink is reduced. Additionally, the successful revamp of our distribution operations resulted in a sharp reduction in the number of miles driven to supply our stores. Expense reductions continue. The store transformation project we undertook with Accenture has delivered as advertised. Average weekly hours in our stores are coming down as is shrink.
In a very difficult retail environment the company has performed well. I want to congratulate the senior team on the success of their continuing efforts and with that I will turn the call over to Larry.
Thank you Royce. Good morning everyone. I am very pleased to be talking with you this morning about our continued progress in our turnaround program that started one year ago. We have been focused on six priorities to improve the core fundamentals of our business.
In merchandising the priority has been to provide a wide selection of outstanding valued product, introducing new brands and categories where appropriate, be up to date and capitalize on emerging trends, increase our private label penetration, better tailor our products to meet the needs of our diverse customer base and increase the sophistication of our merchandising planning and product allocation processes to maximize effectiveness and efficiency.
We are well on our way as evidenced by significantly growing Nielsen market shares and profitable, improved same store sales performance above industry results despite the weakened economy. We have introduced a plethora of new product and categories including Sony, Kodak Digital Photo Processing, Dish Network, Hewlett Packard printers, As Seen on TV, Faberware, diet aids, medical devices, Hispanic foods, Avia apparel and shoes and Dickies work wear with more to be introduced in the upcoming weeks.
In the private label area we have introduced 170 new items in the health and beauty care categories alone which are driving improved sales and margin. We recently joined the National Coop Consortium, Topco, which has exposed us to many new private label opportunities which we are capitalizing on. We are clustering our stores to ensure we have the right product at the right place at the right time, delivering both improved inventory productivity and in-stock levels.
An example in electronics is instead of sending 10 television SKUs to all stores we sent 10 to the best stores and only four to the lowest volume stores. New planograms that are being implemented on a disciplined timeline and process have contributed to the gross margin improvement we are experiencing.
Second, we have overhauled our marketing and promotional programs to drive traffic, build loyalty and achieve maximum productivity with our vendor partnerships. Analytics are guiding the development of our ads and email blasts are being used to highlight promotions and new items. Our new loyalty program recently rolled out and is hitting the objective. In-store we have significant improved our signage to highlight our brands and our value.
Our third priority is to improve our operating excellence by maximizing in-stock levels and the in-store experience. Here again the results have been excellent having achieved and maintained record in-stock levels day in and day out while delivering a superior customer service image versus the competition.
Fourth, in SG&A our major focus this past year was the Accenture store transformation project which was successfully completed in June 2009. The program is delivering the $8 million annual savings goal. Training plans and job certification testing is ensuring the benefits are being maintained.
In real estate, we are generating more than 10% savings in lease renewals and we have nearly 100 more in the next two years that we are negotiating. Our new store program is on track to open eight stores late in the fiscal year and we will open 20 new stores next year. We are also achieving a 20% reduction on building costs through a new developer. Additionally, Top Source, the not for resale coop buying division of Topco, offers substantial SG&A savings in many areas for the future.
Fifth, we have been fully achieving the benefits from our major technology investment. Successful utilization of our perpetual inventory system is helping to achieve the record in-stock levels, improved inventory productivity, shrink improvement and timely, fact based decision making. Technology will also be a key component of the store planogram clustering program with the roll out of our space [man] software.
Last and certainly not least, we are well on our way to becoming a world class organization as we now have the best organizational talent we have ever had. We continue to upgrade personnel as needed. We have incorporated formal performance reviews and incentive plans tied to our goals and we have ongoing training programs including e-learning to ensure sustainable operational excellence.
In closing, I fully anticipate continued progress in the weeks and months ahead. Thank you for your continued faith in us. Donny?
Thank you Larry. This morning I will address operational results during the second quarter of fiscal year 2010 for the following key areas; Sales and earnings from continuing operations, gross margin, selling, general and administrative expenses, trailing 12 period adjusted EBITDA and our revolver.
First, sales and earnings from continuing operations. Total sales for the 13 weeks ended August 2, 2009 were $125.3 million down $3.9 million when compared to the prior year sales of $129.2 million, an approximate 3% decrease. Of this sales decrease $1.8 million was due to the company’s two fuel centers, primarily attributable to an approximate 37% decline in the average selling price per gallon of fuel. Sales declined approximately 1.6% in the company’s retail store operations. Same store sales decreased 3% when compared to prior year second quarter.
On gross margin, total company gross margin percent was 33.8% for the second quarter fiscal 2010 compared to 33.5% for the second quarter of fiscal 2009. This increase in gross margin percent was primarily due to lower mark downs, lower freight cost and continued shrink improvement. The total company gross margin dollars decreased approximately $900,000 during the second quarter fiscal 2010 when compared to second quarter fiscal 2009. This decrease was primarily due to the decreased margin dollars of $1.3 million from the same store sales decrease and approximately $600,000 decrease from vendor consideration of which $400,000 was due to income recognized in the second quarter of prior year associated with the company’s 12 new store openings through the end of second quarter prior year.
These margin dollar declines were partially offset by approximately $600,000 in increased margin from the non-same store sales and reduced freight costs of approximately $470,000 and approximately $125,000 in improved margin. Fiscal year-to-date the company’s adjusted gross margin has increased $4.6 million or 6%. This is 110 basis points as a percent of sales to 33.6% compared to prior fiscal year-to-date of 32.5%.
Selling, general and administrative expenses. During the second quarter of fiscal 2010 the company continued to achieve reductions in total company SG&A from fiscal 2009. The store transformation project produced an approximate 10% reduction in average weekly hours used by store operations resulting in savings of approximately $1.2 million in ALCO store hourly wages and benefits. These savings are on track with expected targets and contributed significantly to the approximately 4% decrease in same store SG&A as shown in the supplemental data on page 12 of our most recent 10Q.
Offsetting these savings was approximately $800,000 in increased direct advertising costs and a reduction in coop offset, $700,000 incurred during the second quarter related to the company store transformation project, $300,000 in increased real property rent expense related to the six new stores opened during the second quarter of fiscal 2009. However, these increases were offset by approximately $500,000 in reduced equipment lease expense related to the store point of sale equipment.
Adjusting for the second quarter fiscal year 2010 store transformation charges, depreciation, amortization, share based compensation, store openings and closings, interest expense and income taxes, total company second quarter fiscal 2010 SG&A expense was 26.8% of sales compared to prior year second quarter of 26.4%. Even though the percentage of sales was up 40 basis points the dollars decreased approximately $450,000.
Adjusted EBITDA for the second quarter fiscal 2010 was $8.8 million compared to prior year’s second quarter $9.2 million. This approximate $400,000 decline in adjusted EBITDA is due to a reduction in gross margin of approximately $900,000 but lower SG&A of approximately $450,000.
Trailing 12-period adjusted EBITDA. As of fiscal year end February 1, 2009, the company had achieved $13.6 million in adjusted EBITDA on sales of $490 million. This was 2.8% of sales. As of the end of the second quarter fiscal year 2010 trailing 12 period adjusted EBITDA has increased $5.3 million to $18.9 million on trailing 12 period sales of $495.6 million or 3.8%. This increase is primarily attributable to an increase in total company adjusted gross margin of $4.6 million and a reduction in adjusted SG&A of $700,000. Total company gross margin dollars are up $5.9 million for fiscal year-to-date 2010 when compared to the same period prior year. Prior year results were impacted by the $1.3 million inventory review initiative charge.
Revolver. As of the first quarter ended May 3, 2009, the company had $52.6 million borrowed under its revolving line of credit. This balance has been reduced $11.3 million to $41.3 million as of the end of the second quarter, August 2, 2009 due primarily to a reduction in inventory. The company continues to have sufficient borrowing capacity from its $105 million borrowing base facility. Average availability was approximately $54.5 million during the second quarter of fiscal 2010 which was a $5 million increase in average availability when compared to fiscal quarter one of 2010.
At this time I will turn it back to the operator to open it up to questions.
(Operator Instructions) The first question comes from the line of Adam Peck – Heartland Advisors.
Adam Peck – Heartland Advisors
As far as the 20 stores of growth next year can you help me understand what the balance sheet you think will look like at the end of the year? Next year?
The average investment we see from opening a new store, inventory on a gross basis is around $550,000 to $600,000 and the equipment is still running in the $300,000 range. So we are looking from a net investment perspective around $1 million when you will have about $140,000 of pre-opening. A lot of that is leveraged against inventory and payables will offset that.
So $1 million is what it is going to take to open a store. We have plenty of revolver capacity and actually the projected revolver change is really insignificant as the operating performance of these stores will mitigate much of the investment. So we are continuing to see the revolver come down. As of today, which I looked at our balance at the end of business yesterday we were $40.9 million on our revolver at the close of business yesterday and that same day a year ago we were $43.6 million. So even though at the end of the quarter you saw we were still up quite a bit compared to last year that has switched now and we were actually below last year as of the close of business yesterday. If you will recall, we added over $5 million to the revolver in the December time period of last year relating to the buyout of the POS equipment lease.
Not only have we overcome that, we have plenty of capacity to cover these new store openings.
Adam Peck – Heartland Advisors
Geographically, where will these stores be opening next year?
We have more than 100 stores located in existing markets where we can take advantage of the distribution efficiencies. We are not going into any new markets in the next few years.
The next question comes from the line of Sam Lee – Private Investor.
Sam Lee – Private Investor
Gentlemen, first of all congratulations on the second quarter and first half of the fiscal year. I noticed inventory was reduced significantly this quarter but it appears to remain at a relatively high level. Is this a level you are comfortable with or do you expect that further reductions will be necessary? More importantly, do you anticipate that there will need to be any more charges against cost of goods sold?
No. The inventory productivity just keeps getting better. We have been conservative in assuming that the current level of inventory is what we need but what we are finding is this clustering program I talked about where we are not doing one size fits all and sending the same amount of product in each category to every store is really accelerating the efficiencies we are seeing in inventory and turns.
What we are also seeing is the in-stock levels are staying good and our clearance inventory through the summer season and back-to-school is very little. We have come out of these seasons very clean. In fact, we just had an updated inventory evaluation with the state of retail. They came in expecting they might downgrade our inventory quality. They actually upgraded it. I just think you are going to keep seeing in the future less increase in inventory as our sales grow because our productivity is getting better.
We have no further questions in the queue at this time. I will turn the conference back over to Mr. Winsten for closing remarks.
Thank you very much operator. Thank you all very much for joining us on the call. We appreciate your interest in Duckwall-ALCO Stores and look forward to speaking with you next quarter.
Thank you. If you wish to access the replay of this call you may do so after 1:30 p.m. CDT by dialing 888-203-1112 with pass code 5278547 or you can visit the company’s website at www.alcostores.com and go to the Investors page. This concludes our conference for today. Thank you for participating and have a nice day. All parties may now disconnect.
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