Joe's Jeans Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.15.13 | About: Joe's Jeans (JOEZ)

Joe's Jeans (NASDAQ:JOEZ)

Q3 2013 Earnings Call

October 15, 2013 4:30 pm ET

Executives

Lori Nembirkow - Corporate Secretary

Marc B. Crossman - Chief Executive Officer, President and Director

Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Analysts

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

James Fronda - Sidoti & Company, LLC

Steven Chang

Operator

Welcome to Joe's Jeans Fiscal 2013 Third Quarter Earnings Call. My name is Leslie, and I'll be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Lori Nembirkow, General Counsel for the company. Please proceed.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO; and Hamish Sandhu, our CFO. Before we start, let me review the company's Safe Harbor language.

Today's call may contain forward-looking statements, which are statements of the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. I also refer you to our reports that are filed with the SEC, which includes our quarterly report on Form 10-Q filed today.

This report includes information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this conference call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today.

In addition, we will be sharing certain non-GAAP financial measures today during this call. Reconciliations to GAAP for the non-GAAP measures are contained in our earnings release that we released earlier today, which is available on our website at www.joesjeans.com under the Investor Relations heading.

Finally, a recording of this call and a telephone replay will be available for 1 week from today on the same part of our website.

Now I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the third quarter results and then I'll turn the call over to Hamish for a discussion of our other financial results. Finally, we will end with a Q&A session.

In the third quarter, net sales decreased by 3% to $29.4 million. However, it's important to note that the entirety of the decline could be attributable to sales of our Else brand. Sales of our Joe's brand grew in the domestic and international wholesale distribution channel and in our company-owned retail stores.

We generated an operating loss of $295,000. However, this quarter included transaction expenses of approximately $1.3 million related to the acquisition of Hudson, which we completed just a few weeks ago. As a result of these additional expenses, we generated an operating loss. If we exclude these transaction expenses, we would have had operating income of approximately $1 million.

I'll now discuss the topline results in the 2 divisions in a little more detail.

Joe's wholesale sales, excluding Else, increased 2% to $22.3 million versus $21.9 million in the year-ago quarter. Our Joe's domestic women's business increased 2% over the prior-year period, while our men's declined slightly by $100,000 for the quarter. Let me give you a little bit more color on the various segments.

Joe's women's wholesale sales increased by 2% on a comparative basis, driven by healthy increases in both our department and specialty store segments.

Our department stores segment increased 7% and our specialty store segment was up 13%. Our strong department store performance is led by a 43% increase in sales with Nordstrom and further enhanced by double-digit increases from other retailers such as Saks Fifth Avenue and Neiman Marcus. These positive data points are solely a reflection of our increased sales per door.

Our specialty channel growth was driven by increases in average dollars per door across our store base. In particular, our e-tailers like SHOPBOP, Amazon and Zappos experienced healthy double-digit increases. We are pleased with these results. They reflect an increase in offerings through an expanded base of denim line and a fashion line that resonated with our customers. This is a positive indicator of the brand's momentum as we expand our presentation.

Joe's men's sales experienced a slight dip in business of less than $100,000. This decline was entirely attributable to a sizable return from one of our department store's replenishment programs. Excluding this return, our men's business was up 3%. We continue to invigorate our men's offering and work closely with our store partners as we move into the back half of 2013 and into 2014. This will ensure that we have a healthy mix of updated product available to continue to comp up against several years of consistent double-digit growth.

Our Else brand sales were down $2.1 million from the previous year. This was a challenging quarter for us as we are up against a major door rollout of 175 doors from Macy's in the year-ago quarter. On a positive note, we just launched Small Pass [ph] in Dillard's and Von Mauer with Else in August. Both doors are currently placing immediate reorders to fill in existing gaps and are expanding distribution points for spring.

Our international sales channel continues to improve, growing 3% from the prior-year period.

We continue to open new distributors such as Ashaiti [ph], the biggest distributor in the Middle East. Ashaiti already owns 40 stores in addition to the traditional distribution channels. We are opening a Joe's branded store in Canada at the end of October. In addition, we have contracted to open a Joe's branded store in Thailand with a plan of 5 stores over the next 3 years. Further, we are in advance discussions to open 6 Joe's brand stores in the Philippines over the next 4 years.

We continue to grow in the U.K. and are picking up momentum there. For instance, due to the above average softwares, Harish [ph] chose to feature Joe's in their in-store advertising for the contemporary department for all of November. We continue to be optimistic about our international business and look forward to leveraging opportunities in light of Hudson's strong international presence.

Retail sales grew 14%. This growth was the result of operating 8 more stores this year than a year ago. Same-store sales were down 6% though. From the onset of the third quarter, our competition was very promotional. We believe this was driven by weaker-than-expected traffic. However, we did not start our promotions until later in the quarter. As a result, in the first month of the quarter, we saw negative comps. However, the comps turned into positive comps by the third month of the quarter.

Likewise, we saw the same directional improvement in our traffic during those months. Our gross margins for the period declined from 71% to 67%. Most of the decline was attributable to the full price store margins, where we conducted deeper promotions.

I want to make a few additional comments about our recent purchase of Hudson. As you know, we closed the transaction at the end of last month. Accordingly, when we announce our fourth quarter results we'll have been 2 months into the integration and we'll have very concrete and specific results and expectations to report. That said, just 15 days into the integration, I can tell you that the opportunity in front of us is as big, if not bigger than we expected. I'm confident that we will drive incremental top line growth for both companies by building upon each other's strength in the domestic, international and e-commerce businesses. Further, there's no doubt that we can reduce some meaningful portion of the over $150 million of combined cost of goods sold and SG&A excluding employee expense while still preserving the DNA of each brand. We continue to believe that keeping the existing employees of the 2 companies separate is the right approach and that this will be one of the major factors in preserving the individuality of each brand.

I'll now turn the call over to Hamish for a more detailed discussion of the financials.

Hamish S. Sandhu

Thanks, Marc. As Marc just discussed, for the quarter, on a consolidated basis, net sales decreased 3% to $29.4 million from $30.3 million over the prior-year period. Retail sales increased by 14% while Joe's wholesale was up 2% and Else was down $2.1 million. Same-store sales growth from stores opened at least 12 months and eShop was a negative 6%. Retail sales continued to represent approximately 22% of the overall net sales for the quarter.

Our overall gross profit decreased to $12.8 million compared to $13.8 million in the year-ago period. Overall, gross margin has decreased to 44% from 46% in the prior-year period. Our wholesale gross profit was down 13% to $8.6 million from $9.9 million in the prior-year period.

Wholesale gross margin was down, coming in at 37% compared to 40% in the year-ago period. Wholesale gross profit and gross margin was impacted mostly by our product placement mix with our wholesale customers and a shift from higher-margin fashion products to cold basics as we cycled out of the color trends.

Retail gross profit was up 8% to $4.2 million from $3.9 million in the prior-year period. Retail gross margin was 67% compared to 71% in the year-ago period and decreased due to more promotional activity in the third quarter of fiscal 2013 compared to 2012.

Consolidated operating expenses were higher in the third quarter of fiscal 2013 compared to 2012 at $13.1 million compared to $11.1 million, respectively.

Operating expenses increased mostly due to transaction expenses related to the acquisition of Hudson as well as increasing our store base by 8 stores. Excluding the transaction expenses, our consolidated operating expenses would have been $11.9 million compared to $11.1 million in the year-ago period.

Operating expenses for corporate was higher at $4.9 million compared to $3.9 million in the prior-year period due to the expenses related to the Hudson transaction. Again, if we excluded these expenses, our corporate operating expenses would've decreased, coming in at $3.7 million compared to $4 million in the year-ago period.

Operating expenses in our retail segment increased to $4.7 million compared to $3.8 million due to the addition of 8 more stores. Operating expenses from our wholesale segment were essentially flat at $3.5 million compared to $3.4 million in the prior-year period.

As a result of transaction expenses of approximately $1.3 million related to the acquisition of Hudson, we had an operating loss of $295,000 compared to operating income of $2.7 million in the prior-year period. This translated to a net loss of $287,000 for the third quarter of fiscal 2013 compared to net income of $1.4 million in the prior-year period. Excluding these expenses, we would've generated operating income of close to $1 million and net income of $492,000 for the quarter. We ended the quarter with a cash balance of $16 million.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

This is sort of, I guess a multipart question. And I know you just completed the merger transaction. I guess, let's start with this. Maybe you can just give us a better sense of what we should be thinking about in terms of the P&L, how that will look for the combined entity for next year? I understand you may not want to be too precise at this time but maybe you could speak to a range for certain metrics like revenues, gross margin, operating margin, interest expense. For example, does an EBITDA margin around 12% seem like a reasonable number? Does that seem too high, too low? Maybe you can give us some direction. Also if you could speak to where you expect the growth to come from for each brand in 2014? I know you were only planning to open about 6 Joe's stores next year. Do you expect to go back to that 100-store target eventually? Also, maybe you can just speak to what you see driving the Joe's retail comps next year and the wholesale business, and then -- also speak to the same kind of turns for Hudson. I guess, we can start with that.

Marc B. Crossman

I'm trying to write this down as quickly as I possibly can. Let me start with -- and I'm going to turn it over to Hamish in 1 second on that P&L and kind of what you should look at from a directional standpoint. In terms of the growth from Joe's and Hudson just a start. I think internationally both of us stand to grow in the international market in terms of where we have strengths and where they have strengths, particularly in Europe and what they're doing in Europe and say, the U.K. for instance, which we're starting to see a lot of growth in. We're going to be going over to Japan and we can work with our trading partner to bring them to Japan. We're going to help each other going into China. I'm sure there's a lot of opportunity internationally. But for us, this quarter was a low single-digit grower. That's something that we should easily get into -- to the double digits. And I think that will be for both companies. In terms of our domestic wholesale business, where you look at our strengths and weaknesses, Hudson is really strong in the department store business relative to us. We're really strong in the specialty store business relative to them in terms of size of business. And they're both on an invert basis equal to each other. So I think that we're going to be able to leverage off of that. The first thing we're going to do is trade account lists on a specialty store side, and that will be -- those will be the easy dollars to go after. And then leveraging space. Let me give you an example, we're talking to Frank at Bloomingdale's, and one of the things we can do is in their new store that they just opened here in SoCal, we can hire a specialist that will cover both Hudson and Joe's, whereas in the past, we wouldn't have done that just for Joe's. That's just a small microcosm of the kind of the larger opportunities that's there. But I guess the way I would leave it is that, it is very definable, very concrete in terms of what we can do on the sales side on collaborating between the 2 companies. So really, as we look across the channel, I don't see an area where we can't help each other and we can't grow. The other piece of it is on the licensing. And again, when you have that kind of leverage between the 2 companies, it's going to be a lot easier for us to find licensees and good licensees to work with because we come with a bigger book of business. So that -- we're excited about. And then on the e-commerce side, again there's a lot of technology behind the site. We are both doing omnichannel integration that we can beverage off of each other and just move that much faster because we kind of look at all the pieces from a growth perspective, I really see both of the companies helping each other and having strengths where the others might have areas of opportunity that they can chase. It's a little bit high level, but certainly, in the fourth quarter, we're going to be reporting results with 2 months of their business integrated with ours certainly on the P&L. And Peter and I are working pretty hard right now to put the 2 together, I'm saying put the 2 together, the companies together and chase those opportunities. So I think personally it's going to be a big number that we're going to be able to show going into 2014. In terms of our retail growth and how we would look at that, I think we've opened half-dozen, 5 stores already this year. We want to pick up that pace. We've brought somebody in to run the retail business from a more macro level and identify spaces faster and really look at our 2014 book of business. And we do want to be at that 10 stores a year. There's nothing that would preclude us from continuing to do that. That's a completely separate team and as you know, the wholesale business is not a capital-intensive business, it's more of a working capital intensive business, so the CapEx that we have to set aside, as you know, Jeff is probably $2.5 million, $3 million if you include inventory to open 10 stores, so it's not something that we would back off of. We're still going after those 100 stores. I've said we've had about a six-month pause here as we tried to really to put the deal together, which is -- took a little bit longer than, than we would have expected. That's the kind of the high-level answers to those 2 questions. The retail comps going into the back half of the year, I mean, certainly, the third quarter we were late on the promotional activity that was -- that we're seeing in the marketplace. And we're trying to hold price at our full priced shops and recognizing that we really did see our comps turned from negative comps and then our traffic beat down well into the double digits to watching that slip on its head. We actually got right side and we started seeing those comps increase week to week, month to month. And we ended with positive comps going into end of the fourth quarter. The other thing that may concern me about fourth quarter, as we ended at the end of November. The Cyber Monday we're not going to catch that, whereas we caught that, some of that a year ago, in our fourth quarter but certainly going in the first quarter, that will really help our comps. In terms of our marketing at the store, I think we can do a better job of working on identifiable capsules that we can market around, like we did with the color program a year or so ago. So I think that's going to be one of our real focuses going into 2014, is doing a better job or improving how we're marketing around the individual capsules to draw the customer in.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. So just to clarify, you said, you're back to the 10 stores per year target for next year and your comps got better to some -- unless your comps got better when you started to get more promotional, is that right?

Marc B. Crossman

Yes. It was -- we were kind of catching up to everyone from a gross margin perspective. Obviously, our gross margin had dipped. You saw a dip in the year ago -- I'm just trying to anticipate a question. In the year ago from 3Q to 4Q, you saw a dip. Now we had a pretty healthy dip going from 2Q to 3Q this year. But I think the level of promotional activity that you'll see out of us going from 3Q this year into 4Q of this year. It's not going to change in terms of where you'll see those margins. You're not going to see them dip further sequentially just due to the level of promotional activity that we had in this last quarter.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. That was really helpful. So it sounds like you want to hold off on giving any sort of specific revenue or operating margin target at this point?

Hamish S. Sandhu

Yes, we'll be filing our 8-K in mid-November. And as you know, we'll be disclosing 3 years' worth of historical financials as well as the subperiod. That will go through the 9 months. So you'll have the most up-to-date, current information. I can just very briefly touch on the revenue. 12 months' trailing revenue for Hudson, around about -- between $75 million and $80 million. And in terms of the EBITDA margin, you mentioned, yes, that's a good number to use. One other consideration to note is that the Hudson business has been growing well over the last 3, 4 years at very high single digits. The growth areas for them have been international men's and e-commerce and that trend continues. So it's a very good, good cash flow business and you'll see that in the financials that we'll be issuing in the 8-K.

Marc B. Crossman

Let me pick up on the EBITDA margins or target. We've been at that 10% to 12% level. Hudson has been -- or is at that level, of course to have [ph] that level, so I think that's not a tough -- and this is excluding all the one-times, and those pieces that we would pull out. It's -- and again, this is excluding any operational benefits we get from the 2 companies coming together. We're going to get back up to that level. Where we were we had a couple of things that impacted this quarter that we wouldn't anticipate going forward. So as we look at it, that's really what the business should be. And then on top of that, we'd laid those benefits. One of the things that we would look at is, our Mexico production and the amount of production we're doing in the third quarter versus first and second quarters, probably about I think 20 points below and this was just percentage mix, where it should be. And so we've really made an effort to push that stuff down and back in Mexico. And that would just speed the market and development of goods here, in the U.S. and then redeveloping them in Mexico. So there have been a number of reasons as there is always, but I can tell you going into 4Q and 1Q, that amount of Mexico production is going to pick back up. It's going to pick back up pretty substantially.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. So maybe just as a follow-up to that since I know Mexico and Mexico production and sourcing class synergies and efficiencies are a big part of the combined entity story. Maybe you could just talk a little bit more about the Mexico production situation. Obviously you have some factories there. Do you need to shift into some new factories? Are you using existing factories? What kind of progression should we look for? And I guess when will you be -- are you saying you'll be at the target by Q4? Any more color you can give us on Mexico?

Marc B. Crossman

Sure. So for Joe's, we'll be at that target, that production target. In Q4, it will bleed Q4 to Q1 as those goods fall into the channel. And we worked through higher quarters production in 4Q. So that will be -- that will flow through 4Q, 1Q and then obviously into 2Q. And this is from a Joe's perspective, as we see the 90% of our production for November or December is slated for Mexico, it takes time before you have 90% in -- that bleeds into the following couple of months. In terms of Hudson down in Mexico, they have 1 factory that they've used in Mexico to do a little bit of production. We do a little bit of production at that same factory, and then, of course, we have our main factory, Santi in Mexico. And yes, the goal is to leverage that factory. We're not going to run because there's enough -- there are enough benefits and units that have a real impact without having to move a ton of capacity over there. But certainly, we'll set it up, we'll get them set up on basics so that they -- we have that flexibility to hit our internal targets. Again, we have to be cautious and careful, just like we were when we made our production shipped down to Mexico. So we don't want to hurt the brand in any way, shape or form. We want to be cautious about it, but we have our internal projections to -- that we're going to hit and I would just tell you that it's not -- you don't have to move a lot of their goods down to Mexico to move the needle.

Operator

[Operator Instructions] And our next question comes from James Fronda with Sidoti.

James Fronda - Sidoti & Company, LLC

Can you just, I guess, talk about our trends in Vintage right now? Is it still strong? Is there any other avenue of fashion that you're looking into right now?

Marc B. Crossman

Yes. The Vintage is not quite as strong as it was. I think right now, we're doing a lot of coated denims as you look at kind of the fashion -- the fashion end of it. Some pretty nice, sophisticated washes that we're doing is pretty much the trend that we're seeing. The beat up, destroyed, Vintage look is not a huge driver of our business right now.

James Fronda - Sidoti & Company, LLC

Okay. And I guess with the transaction quid, what is your current net debt position?

Hamish S. Sandhu

Could you repeat that question, James?

James Fronda - Sidoti & Company, LLC

With the completion of the transaction, what is your current net debt position?

Hamish S. Sandhu

Net debt position. Oh. Basically, the overall net debt position -- in the other structure, the structure basically is we took a term loan of $60 million. We all set a revolver and a couple of convertible notes. So overall, if you look at those 4 pieces that's coming from the debt, it's about $115 million, $116 million. And obviously the revolver balance, which is about $24 million, fluctuates on a monthly/quarterly basis, basically based on the overall cash flow. So the overall debt position can vary from $108 million to $115 million on a quarterly basis.

James Fronda - Sidoti & Company, LLC

Okay. And Marc, you said that there would be additional promotional activity going into the fourth quarter, right?

Marc B. Crossman

Yes, I mean, obviously, we will. But we saw 6 pretty strong weeks of promotions that we are running during the third quarter. And as you look at that going into the fourth quarter for us, it's -- we're not going to see that level of promotion -- promotional activity. Of course, I want to leave some room for if our competitors, and start there as a little earlier, go a little bit deeper, but the amount of promotions we rang -- ran in the third quarter, I think [ph] you look at kind of the net dollars of promotions will slide to the right. They were not going to see that level of promotional activity through Black Friday.

Operator

Your next question comes from Steven Chang with Rudgear Capital.

Steven Chang

I wanted to clarify, I think you said women's wholesale was up 2% and then you broke out department stores and specialty stores. And I think those were both more than 2%. I just wanted to clarify those numbers.

Marc B. Crossman

I'm sorry, I didn't -- Steven, you are cutting in and out. I didn't hear that.

Steven Chang

I want to -- I think you mentioned women's wholesale was up 2% and the -- could you break that out again in terms of department stores and specialty stores?

Marc B. Crossman

You see there are a couple of things. When you look at it -- one we're looking at the growth basis of department stores and specialty stores, and then you also have to include off price. We've been bringing our off-price business down, so that's the other current that we don't report but that would drop that number down to the 2% level when -- and I know what you're doing, you're doing the simple math of department and specialty. But we have internally broken out department specialty and off-price. So to the extent that we're bringing off-price down, which we are, yes, that changes the overall topline trend.

Steven Chang

And could you talk about how non-denim is doing in either your own stores or wholesale?

Marc B. Crossman

Non-denim is not a huge portion of our business in the third quarter. We have some stuff we're doing going into the fourth quarter, or really first quarter. But obviously, we don't want to talk about that until it actually hits the stores. I would tell you right now that non-denim -- if we're talking about non-denim bottoms, it's not a big piece of our business right now. And it never -- historically, it's never been a really piece of our business.

Steven Chang

And the capsules you're talking of, are those kind of fashion highlights in denim? Or does that also include collection?

Marc B. Crossman

It also includes collection. It's really kind of the whole story. Just like we had created that color story, when we created the Vintage story, it's about creating stories to pull people into the stores. And you're going to see the story that we've come out with or kind of the capsules that we're going to be coming out with over the next several months, that you'll really get an understanding and we're going to market around them and et cetera. So just be a little bit more focused on kind of that 1 or 2 reasons for the shopper to come in, and then sell them basics on top of that.

Steven Chang

And Hamish, did you say Hudson was doing about $75 million to $80 million trailing, is that right?

Hamish S. Sandhu

Yes. Just as a kind of frame of reference, that's the number that you could look at. But you'll get a lot more clarity in the 8-K that we'll be issuing in about 30 days.

Operator

And I show we have no further questions at this time. So I'll turn it back to Marc for final remarks.

Marc B. Crossman

That's it. I appreciate everybody listening today. I look forward to getting that 8-K issued by the end of November to give you some real insight into what the Hudson transaction looks like. In the meantime, you know where to reach us if you need to. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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Joe's Jeans (JOEZ): Q3 EPS of $0.01 misses by $0.01. Revenue of $29.4M (-3% Y/Y) misses by $3.97M. Shares -11% AH. (PR)