Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

New York & Company, Inc. (NYSE:NWY)

Q3 2009 Earnings Call

November 19, 2009 8:00 am ET

Executives

Allison Malkin – Integrated Corporate Relations

Richard Crystal – Chairman and CEO

Sheamus Toal – EVP and CFO

Leslie Goldmann – EVP, Merchandising

Suzanne Rosenberg – Director of Investor Relations

Analysts

Neely Tamminga – Piper Jaffray

Robin Murchison – Sun Trust

Eric Beder – Brean Murray

Alex [Furman] – Raymond James

[Jeff Talper – Retail Apparel]

Operator

Welcome everyone to the New York & Company third 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 third quarter results. On the call with me today are Executive Vice President and Chief Financial Officer, Sheamus Toal; our Chief Merchant, Leslie Goldmann and our Director of Investor Relations, Suzanne Rosenberg.

For the call this morning I will review our third quarter results and provide an update on the progress of our strategic initiatives. Then Sheamus will review our financial performance in more detail. Following my closing comments we will turn the call over to the operator to take your questions.

Our third quarter results were in line with our expectations and included solid progress toward our strategic goals. Notably, we saw strengthening of our sales trends in October as we posted our strongest monthly sales comparisons in over a year and this momentum continued into the first few weeks of November.

For the third quarter results, our comparable store sales decline of 8% improved sequentially from the 16% comp decline we saw in the second quarter. This trend is encouraging and as I will discuss in a few minutes bodes well for the very important fourth quarter.

During the quarter consumers responded favorably to our fall product assortments, most notably in our casual business including our revamped denim assortment, graphic tees, tunics and our street wear line. In each of these categories we increased our fashion offerings and added more unique, novelty items while maintaining our great style and value. In fact our total casual business delivered a positive comp for the quarter and we saw double digit gains for the month of October. We also continued to see strength in the quarter in both dresses and jewelry.

We posted a 110 basis point improvement in merchandise margin compared to a year ago and these margins continue to remain in line with historical levels. We also continued our stringent management of expenses. On an average store basis, SG&A declined 8.8% and we remain on track to generate over $30 million in cost savings this year. We ended the quarter with a strong balance sheet including $39 million in cash while inventory declined by 24.6% on an average store basis. In addition, at quarter end we had no borrowings on our credit facility and produced positive cash from operations.

While we are not satisfied with our bottom line results, we are making solid progress in our strategic initiatives and are encouraged by our current business trends. Our merchandising initiatives are focused on providing the most current fashion trends in all our assortments while continuing to offer our core key items such as stretch shirts and our 7th Avenue pant. This two pronged strategy appeals to both our existing customers and continues to attract new customers to our brand. We expect to build upon this progress as we move into the holiday season.

As we enter the fourth quarter we believe our stores look great with compelling fashion item assortments that deliver clear value to our customers. We are encouraged by the initial response to our exciting new holiday floor set. In fact, our business during the first two weeks in November has continued to improve as fresh [fashion] has enabled us to continue the positive momentum we experienced during the last two weeks of October.

We are cautiously optimistic about opportunities in the fourth quarter especially as mall traffic builds as the holiday season gets underway. As I mentioned earlier, for holiday we have continued to build upon our core strategies. As it relates to fashion, we have greatly improved our casual business driven by our upgraded denim and street wear assortment. Our new denim fit to washes are resonating strongly with consumers and in our street wear assortment leggings and tunics continue to be strong performers throughout the third quarter and we would expect this to continue as we move through the fourth quarter.

Within our holiday assortment we are emphasizing fashion newness and maintaining our strong value message with our New York Style Great Deals brand platform. We believe we have increased our must have items across all categories in our business. We are particularly pleased with the strength in our sweater business with our novelty cardigans performing extremely well. We continue to anticipate growth in our casual business driven by street wear, woven tops and tunics along with the denim business.

Wardrobing is also a key area of focus this holiday and integral to raising [audio break] per transaction and overall transaction value. Mannequins throughout our store showcase outfits that are fully accessorized and make it easy for customers to coordinate complete outfits and accessories are integrated into each area of our store. We will promote gift giving during the holiday season by standing strongly behind sweaters, velour, jewelry and accessories which will be highlighted in our in-store marketing, online and in our direct mail.

We continue to upgrade our assortments to appeal to the trade down consumer. We were pleased with the performance of our Red Label collection that was reintroduced this fall through our in-house design team to 30 doors chain wide. Based on this success, we will reintroduce Red Label in a small way to all doors beginning this spring by integrating the collection within our existing assortment.

This initiative will allow us to broaden our customer base and elevate our offering with a selection of higher quality, more fashion forward offerings. At the same time, we remain focused on our core customer by delivering great value and we remain cognizant of our opening price points and their appeal to this consumer. Red Label’s price points remain affordable, about 20% above our regular pricing which also makes this collection attainable for existing customers.

Turning to e-commerce, our sales in the third quarter grew above the prior year driven by an increase in traffic to our site and the right inventory positioning. We continue to offer differentiated product online and look forward to building on this opportunity in the future. We continue to believe e-commerce offers our company strong growth potential and we continue to expand our internet marketing efforts to drive traffic to our site. We expect to drive our e-commerce business to 5% of total sales in the near future with the expectations of increasing this percentage to 8-10% of total company sales over the next several years.

Marketing support will be strong this holiday season. Our stores are our most powerful marketing vehicle and clearly demonstrate the strong fashion value proposition that we offer consumers. This holiday we believe our message will be even more impactful and entire more shoppers to our stores. This effort begins with great window marketing that features compelling high fashion imagery coupled with a strong value message. We also made our email marketing and direct mail offerings more targeted and more impactful as we tailor specific promotions to those customers’ shopping patterns.

In summary, we are pleased with our positioning as we begin the holiday season. We feel comfortable with our inventory position and we will closely monitor the trends by department to quickly react to and chase business as necessary. While we are continuing to plan for a very challenging environment we believe our initiatives will enable us to achieve market share gains, achieve profitability in the fourth quarter and approach breakeven levels for the second half of the year.

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

Sheamus Toal

Thank you Richard. Good morning everyone. Net sales for the third quarter of fiscal year 2009 were $227.9 million as compared to $249 million for the third quarter of last year. Comparable store sales decreased 8.4% for the quarter. In the comparable store sales space for the quarter ABS decreased 2.6% and transaction per average store declined 6.0%.

Gross profit for the third quarter was $57.7 million or 25.3% of net sales as compared to $62.9 million or 25.3% of net sales in last year’s third quarter. Merchandise margins improved by 110 basis points compared to the third quarter last year and continued to remain in line with historical levels. This improvement was offset by 110 basis points increase in buying and occupancy expenses primarily attributable to the de-leveraging resulting from lower sales levels. In total, buying and occupancy costs decreased by $3.6 million compared to the prior year, reflecting the impact of our restructuring and cost reduction programs.

Selling, general and administrative expenses decreased by $7.4 million to $68.7 million or 30.1% of net sales as compared to $76.1 million or 30.6% of net sales during last year’s third quarter. The decrease in selling, general and administrative expenses as a percentage of net sales is primarily a result of savings recognized in connection with our restructuring and cost reductions program and the net impact of charges relating to management changes in the prior year and current year partially offset by the impact of negative comparable store sales. On an average store basis, selling, general and administrative expenses declined by 8.8% during the three months ended October 31, 2009 as compared to the prior year period.

Net loss from continuing operations in the third quarter of fiscal 2009 was $6.3 million or $0.11 per diluted share inclusive of a charge of approximately $0.01 per diluted share relating to the restructuring of our real estate group. This compares to a net loss from continuing operations of $8 million or $0.13 per diluted share for the third quarter of fiscal 2008 which included a charge of $0.03 per diluted share relating to the company’s previously disclosed management changes.

Moving to our quarter end balance sheet, we ended the quarter with $39.3 million in cash and no borrowings under our revolving credit facility. Inventory at cost was $117.4 million as compared to $157.9 million in the prior year reflecting a 25% decline on an average store basis as we continue to focus on managing inventory conservatively.

Capital spending for the first nine months of 2009 was $8.9 million as compared to $40.2 million last year. During the first nine months of fiscal 2009 we opened 11 new stores including three temporary locations and we closed eight stores, ending with 592 stores and 3.3 million selling square feet in operation.

Now looking at the fourth quarter we continue to believe that the business environment will remain challenging. We expect promotional activity to accelerate throughout the key holiday selling period. We expect comparable store sales trends to improve versus the third quarter due to positive customer response to our merchandise and strong inventory management. Merchandise margins are expected to significantly improve as compared to the prior year resulting from sourcing efficiencies and significant decreases in promotional activity.

Buying and occupancy costs are expected to decrease during the fourth quarter as compared to the same period last year due again to the success of our restructuring and cost reduction programs. However, we do expect these costs to de-lever based upon anticipated sales levels. We anticipate that total gross margins will improve significantly during the fourth quarter as compared to the same period last year reflecting sourcing efficiencies, less promotional activity and the impact of the restructuring and cost reduction programs.

Selling, general and administrative expenses are expected to decrease by a low to mid single digit percentage during the fourth quarter as compared to the same period last year reflecting the benefits of our restructuring and cost reduction programs partially offset by continued investment into growth areas of the organization. We continue to expect to exceed the $30 million pre-tax savings target for fiscal year 2009 established when we initiated our restructuring and cost reduction programs in January of 2009.

As previously announced, these savings will be realized in financial results through a combination of selling, general and administrative expenses and buying and occupancy costs.

Inventory will continue to be managed tightly with inventory per average store at the end of the fourth quarter expected to be approximately flat to last year’s fourth quarter. Cash on hand at the end of the year is expected to be above the cash balances at the end of last year and we do not plan on having any borrowings outstanding on our revolving credit facility, reflecting no cash drain during an extremely difficult year.

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

Richard Crystal

Thank you Sheamus. In summary we believe we are implementing great strategies as we navigate through what we expect will be a challenging consumer spending environment. We remain focused on serving our customers with fashion right assortments at a compelling value and believe we are well positioned to improve our sales and marketing trends during the holiday season. 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

The pickup in business you have seen in October and into November, is this largely attributable to conversion rate improvement or are you seeing an overall increase in traffic and transactions per ticket? I am just kind of curious on that. Then I have a follow-up question.

Richard Crystal

The business pickup in the October period is a combination of things. More conversion, a little bit higher ABS and a little bit more traffic. All three really are a result and causing a better result basically.

Neely Tamminga – Piper Jaffray

In terms of cost savings, Sheamus I know you don’t want to get into too much on next year but any sort of preliminary thoughts on CapEx? [Fracture] would be helpful on another growth basis and then also just cost savings in general, how much of what you have achieved this year which has been fabulous is permanent or a one-time nature?

Sheamus Toal

As far as capital for next year, we haven’t really gotten to the point where we are going to disclose our plan for next year. We will do that in part of our fourth quarter call so we will get back to you on that one. As far as the cost reductions, obviously we have been very pleased with the cost reductions we have been able to achieve this year. As you may recall when we announced the program we do expect the vast majority of these cost reductions to continue into the future. As you may recall when we laid out our plan we said over a five year period we expect to see $175 million from these cost reduction efforts of which approximately $30 million would be in this fiscal year due to the time of when it would be initiated. So in future years we do expect the actual cost reductions to be a little bit higher due to the full-year effect of some of them. Therefore a vast majority of them will continue into the future.

Operator

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

Robin Murchison – Sun Trust

I wanted to ask you as you look at your merchandise assortment and the success on the casual side and maybe the consumer’s preference toward the casual side, any thoughts about further assortment allocation to the casual side or any changes in terms of how you did the wear to work, the [inaudible] the casual assortment as you begin to think about your assortment for next year?

Leslie Goldmann

That is a good question. The good news is we have the ability to get upside in the casual business or frankly any of our business as demand warrants given our strong chain ability. Our casual business, this is something we repositioned in the past year and we are very happy with the results. We will continue to push that. We still want to be known for our accessories, however, as we have a strong pre-sorted accessories business and we are also known for our wear to work. So our goal is really to drive growth in all categories.

Operator

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

Eric Beder – Brean Murray

Could you talk a little bit about, as you have talked before and talked about denim, how is the pants business doing? How is that doing right now?

Leslie Goldmann

Overall as you know pants has underperformed relative to other businesses. We have experienced sequential improvement in this category as we have total business. The idea is in Q4 we are less reliant on pants as a driver of the total business so really our fourth quarter business is driven primarily in tops, gift giving, etc. Does that answer your question?

Eric Beder – Brean Murray

In terms of the Red Label and the collection what are we going to see? You said it was in 30 stores and you are going to put it in all the other stores in a touch. How much is it going to be when it rolls out in spring in all the stores? What are we going to see in those stores in terms of that?

Leslie Goldmann

We are still working on our spring assortment so as Richard mentioned we are really trying to use that as a way to establish some higher price merchandise in all of our stores. It will not be in a majority or a significant part of our total ownership. We still believe we need to gear to our core customer with our value proposition. So while you will see it throughout all stores to a certain extent, it will not be a dominant part of our assortment.

Operator

The next question comes from the line of Alex [Furman] – Raymond James.

Alex [Furman] – Raymond James

I just wanted to talk a little bit about your use of cash going forward. I see you have extended your share repurchase authorization. I am just trying to wrap my head around this here. I know you said in the past you could have the potential to open a deeper number of these stores in North America and the United States. Just trying to get a sense of how we should think about your use of cash whether it is going to be new store openings, or share buyback in Q4 and 2010 and maybe what you would need to see to accelerate your store openings?

Richard Crystal

Obviously as we have disclosed previously our primary goal for this year was the preserving of cash and managing our liquidity. We were very pleased to be able to accomplish that in an extremely difficult environment. So our actions for this are primarily directed towards achieving that goal. As we look to the fourth quarter obviously we are not opening any new stores in the fourth quarter. It is our holiday season and all of our efforts will be focused on that during the fourth quarter and in completing the year as we have laid out in our plans.

As we move into next year we do believe there are significant growth opportunities for us in our store base as we have previously discussed with you. We will look to start to ramp up our store opening plans as we become comfortable with the economic environment and the related cash balances that we have. I think we can give you a better perspective beyond the fourth quarter as we complete the year and see where the season ended and where our cash balance has ended and discuss with you our future plans for 2010 but it is something that we will start to [inaudible].

Alex [Furman] – Raymond James

Just to clarify on the outlook you gave for Q4 you said you expect our same store sales trends to improve sequentially. Is that on a one-year basis or a two-year basis? I know that in the third quarter you said you were trying to improve but on a two-year basis it looks like it weakened a little bit.

Sheamus Toal

There was actually a shift last year so we moved a promotion from October into November. So some of that will change on a two-year basis. We refer strictly on a one-year basis.

Alex [Furman] – Raymond James

Can you quantify at all the amount of your merchandising margin pickup due to sourcing as opposed to the improved customer assump?

Sheamus Toal

You are talking about for the third quarter? Most of it was due to sourcing efficiencies. As we discussed earlier this year we were more successful in negotiating certain pricing efficiencies, sell through, our discussions with our factories and agents as well as some favorable trends in the price of oil as compared to last year which impacted our sourcing costs. The level of promotional activity was relatively consistent to last year’s third quarter.

Operator

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

Robin Murchison – Sun Trust

I want to ask you if your product cost margins, do you perceive them as remaining fairly steady? When do you begin to anniversary some of the sourcing benefits? Also in terms of new season positioning, spring or early spring, when are you going to bring it in and then is it about the same time as last year?

Sheamus Toal

I will take the first on the product costs. As we laid out this year we did expect to see some sourcing benefits starting late in the second quarter into the third quarter of this year. Those have come to fruition for us. We do expect those to continue through the fourth quarter of this year and certainly into the early part of next year. We are continuing to work with vendors. Those were not temporary changes in terms of a quarter or two. So those will certainly continue into next year. We expect the full benefit of those pricing concessions.

The piece that is subject to some fluctuation is obviously the component of it that relates to oil costs. At this point they have been relatively in line with our expectations. As that price fluctuates there might be some variability in the product costing but other than that we don’t expect to see a dramatic swing there.

Robin Murchison – Sun Trust

Then in terms of positioning spring?

Leslie Goldmann

In terms of positioning spring our cadence will be fairly close to where we were last year.

Operator

The next question comes from the line of [Jeff Talper – Retail Apparel].

[Jeff Talper – Retail Apparel]

I would like to know regarding the merchandise margins that are starting to significantly improve in the fourth quarter and gross margins that are expected to significantly improve during the fourth quarter, for purposes of working on my model, could you quantify significantly in some sort of numerical range you would be comfortable with?

Sheamus Toal

We expect to wait from quantifying specific ranges. We are comfortable saying obviously last year was a weak performance from a merchandise margin standpoint. We had significant declines in our merchandise margins. We do expect to recover the vast majority if not all of those merchandise margin declines because we do expect that given our current very clean inventory position we will certainly not be forced into the liquidation mark downs that we were last year. So from a merchandise margin perspective we would expect to recover basically all of the margin losses last year.

As I said, we do expect based upon the anticipated sales levels that there will be some de-leveraging of our buying and occupancy costs so we will have a net decline associated with that. Other than that we can’t really quantify specific numbers.

[Jeff Talper – Retail Apparel]

What were the margin rates in the quarter for 2008?

Sheamus Toal

From a merchandise margin perspective it was 690 basis points was the merchandise margin loss.

[Jeff Talper – Retail Apparel]

So you will go as far on this call as to say you will recoup that?

Sheamus Toal

Again, we won’t comment on specific amounts. We will recover the vast majority of that but again that will be offset by negative or declining margins associated with the de-leveraging of buying and occupancy. So you can’t just add that and say that will be the amount we will recover. There will be some de-leveraging associated with the buying and occupancy costs which will reduce that.

Operator

I will now turn the call back over to management for closing remarks.

Richard Crystal

Thank you. Before we end the cal I just want to clarify a statement in my prepared remarks regarding cash flow in the third quarter. The reality is cash flow was not positive in the third quarter. That statement of positive cash flow should have reflected our expectations for the fourth quarter and full year instead.

With that I want to thank everybody for joining us today. We look forward to speaking to you in March when we announce fourth quarter results. I wish all of you a happy and healthy holiday season. Thank you.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: New York & Company, Inc. Q3 2009 (Qtr End 10/31/09) Earnings Call Transcript
This Transcript
All Transcripts