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Joe’s Jeans, Inc. (NASDAQ:JOEZ)

F3Q09 Earnings Call

October 15, 2009 4:30 pm ET

Executives

Lori Nembirkow – General Counsel

Marc B. Crossman, Jr. – President, Chief Executive Officer & Director

Hamish S. Sandhu – Chief Financial Officer

Analysts

Elizabeth Pierce – Roth Capital Partners

Ronald Bookbinder – Global Hunter Securities

[Steven Tang – Redgar Capital]

[Mark Wallster – Metlife]

Donald Bridges – Bridges Capital

Operator

Welcome to Joe’s Jeans fiscal 2009 third quarter call. At this time all participants are in a listen only mode. However, we will be facilitating a question and answer session towards the end of today’s conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s conference Lori Nembirkow, General Counsel for the company.

Lori Nembirkow

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 results to be materially different.

You are cautioned not to place undue reliance on forward-looking statements that speak only as of the date they are made. I’d also refer you to our reports that are filed with the SEC which includes our 2008 annual report on Form 10k, our first and second quarter 10Q and our third quarter 10Q filed today. These reports include 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.

In making any forward-looking statements the company undertakes no obligation to update them for revisions or changes after today. Finally, a copy of our earnings release and a recording of this call will be available on our website www.JoesJeans.com and a telephone replay will be available until one week from today. Now, I’ll turn the call over to Marc.

Marc B. Crossman, Jr.

For the third quarter of 2009 sales and profits were up. More specifically, our net sales increased 16% to $21.2 million from $18.2 million a year ago. Our operating income increased 22% and we generated net income of just under $2 million or $0.03 a share. Essentially all of our distribution channels, namely domestic women’s, domestic men’s licensing and retail experienced sales increases. We’re continuing to manage our expense structure while launching new product categories, rolling out our company owned retail stores and investing in advertising and promoting the brand for long term sustainable growth.

In short, we had what we believe a very productive quarter which we continue to build upon in the fourth quarter of 2009 and in to 2010. Our domestic women’s business experienced a 14% increase year-over-year, the strongest of all our channels. Our department store sales came in with a mid single digit decrease over this time last year which was much better than we anticipated. If you remember, in our third quarter last year retailers were still sitting with far too much inventory relative to the significant decrease in consumer spending that was taking place. So, for our business to be down modestly we had to beat our department store plans which we did.

Our women’s specialty store business saw large double digit increase with the vast majority of this coming from anthropology which was up almost 30% over last year. This increase was attributable to the change of our merchandising mix where we layered in exciting new fashion items like the Ponte skinny ankle pants. Our specialty and boutique store business was modestly up driven in part by a shift in their purchasing patterns as they’re buying more heavily for the first and third quarters of each season and then on a more conservative basis for the balance of the year.

Regarding our domestic men’s business, we experienced a 10% increase for the quarter. We continue to penetrate the department store segment with double digit growth over last year led by Bloomingdales and Nordstrom. We also rolled out eight new Neiman Marcus stores for the fall season. Looking at our men’s specialty store business, our sales remain flat on a year-over-year basis. In terms of the overall men’s business, we are taking market share in this environment and rolling more department store doors based on our strong performance.

Our international business was down only $130,000 on a year-over-year basis. We’re laying the groundwork for Europe to be an international growth driver for us in 2010. We expect this growth to be led by France where we are currently negotiating to open eight shopping shops in Galleries Lafayette and two in [inaudible] based on the success we have seen from our existing sales with these two department stores.

In the licensing front we recently engaged ICM to lead our licensing effort. Since engaging ICM we have signed two licenses, one for belts and one for children’s apparel. In aggregate these two licensees have committed to a minimum guaranteed net sales of nearly $30 million during the initial term of their licenses. Both licensees debuted their first line and the responses have been very positive. [Inaudible] our belt licensee is placing product with Nordstrom, Macys, Bloomingdales and many of our best specialty stores. This has been a successful quarter for our licensing initiative.

Our retail business generated revenue of $1.3 million with a 56% gross margin. Once again, we’re very pleased with our retail store’s performance. In July we opened our third outlet store bringing us to a total of five stores. Our third outlet store located in Camarillo California has also far exceeded our expectations. Based upon the success of our outlet stores we are in discussion to sign an addition five outlet locations in 2010. Regarding full price store openings, we are still looking for an attractive deal in New York and will open a store there when appropriate. In addition, based upon the performance of our brand at retail in the company’s top malls, we plan to identify and open five mall locations in 2010. Our retail initiative has been successful and is an important growth vehicle for the company in future years.

Regarding the fourth quarter we anticipate a sales increase commensurate with if not larger than our third quarter. In summary, despite the current economic environment, we feel that Joe’s brand is in the best position that it has ever been in since inception. I will now turn the call over to Hamish to discuss our financial results.

Hamish S. Sandhu

During the quarter net sales increased to $21.2 million from $18.2 million over the prior year period. Our sales increase was primarily due to sales increases across our domestic women’s, domestic men’s licensing and retail channels as Mark just discussed. Gross margins came in flat at 49% for both quarters. Our margins were flat primarily due to both of the comparative periods, realizing full penetration of production sourced from Mexico and Morocco.

Our gross profit increased by $1.4 million to $10.4 million in the third quarter from $9 million in the prior year period. The gross profit increase is on par considering our 16% increase in net sales and maintaining our gross margins at a consistent level of 49% in the two periods. Third quarter SG&A was $7.4 million, an increase of $850,000 from $6.5 million a year ago. The increase over last year is mostly attributable to additional head count and rent costs associated with the four retail stores we opened in the fourth quarter of 2008 and the one store we opened in July 2009.

Depreciation and amortization expense increased by $62,000 to $132,000 in the third quarter of 2009 from $70,000 in the prior year. This increase was due to the additional depreciation expense associated with the purchase of leasehold improvements to our retail stores subsequent to the end of the third quarter of 2008. Income tax expense was $824,000 for the third quarter of 2009 compared with $368,000 in the prior year. This increase is primarily attributable to the increase in our effective tax rate from 17% in the third quarter of 2008 to 30% in the third quarter of 2009. Our effective tax rate differs from our statutory rate due to utilization of net operating loss carry forwards.

In summary, these results led to an increase of 6% in net income to $1.9 million compared to $1.8 million during the prior year period. We earned $0.03 per share for both quarters in 2008 and 2009. Speaking of our cash flow from operations, during the nine months we generated $5.3 million in cash flow from operations bringing our cash balance to $9.6 million at the end of the quarter. We’re very pleased to see this cash balance continue to grow each period as we prepare to exit 2009 fiscal year.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Elizabeth Pierce – Roth Capital Partners.

Elizabeth Pierce – Roth Capital Partners

Marc, I’m very curious on your projects, your comments you said about Q4 particularly since you alluded to this time and you mentioned it in the third quarter that specialty store is kind of bifurcating their sales. It sounds like you still feel that you can show another good increase in the fourth quarter?

Marc B. Crossman, Jr.

Yes, we do. We just feel, there’s no other way to put it than we feel like our product is the best as its ever been. It’s turned right, it’s fresh, it’s new so we just feel so good about the product and we spent the last six to nine months really working on reworking our product as we said in prior calls a lot of what we were seeing in terms of our momentum that we needed to bring down our core basic, really start working closer towards fashion silhouettes, more extreme washes, decals, etc. It really has been us changing our product.

We’re putting a lot more – I don’t know what the right way to explain it is but we’re really doing a much better job with our product and refocusing in the right direction and spending a little less time on our core basic program and that seems to have made all the difference in the world. Even things in our non-denim categories are doing well so really across the company we feel really good about our product and that’s helping us in a tough specialty store environment for sure. I would anticipate going in the fourth quarter being able to show results that are equally as strong as we saw this quarter.

Elizabeth Pierce – Roth Capital Partners

How are some of the non-denim products that we saw, the wovens at magic or at project, how are they doing?

Marc B. Crossman, Jr.

Just absolutely phenomenal. Our sell throughs have been have double digits on our woven shirt line. We sold out of our first delivery completely down to every last piece. We brought more goods in but really because it sold so well our next delivery is not coming in until the early spring, so January. But, you couldn’t have asked for a better launch or better sell through than we saw.

Elizabeth Pierce – Roth Capital Partners

What’s happening to – maybe we should break this down like the average order values that you’re seeing between let’s start with domestic women’s, between the boutiques and the department stores?

Marc B. Crossman, Jr.

You’re talking about the dollars per door or just order size in general?

Elizabeth Pierce – Roth Capital Partners

Order sizes in general.

Marc B. Crossman, Jr.

Order sizes in general I think what we’re seeing on the boutique side is that our dollars per door are actually going up and a lot of that is the boutiques, they don’t plan out their business to a level that the department stores do so you can have the most dramatic impact from quarter-to-quarter or month-to-month with boutiques because you’re not set in stone. So, as we’ve really been working on – when I say other product like this Ponte pant program that we had running to our fashion silhouettes to whatever we’re bringing in the specialty stores can react a lot faster so saw our dollars per door actually go up with the specialty accounts.

On the department store side, like I said, everybody was looking at what happened a year ago, their inventory levels they’ve been trying to get down so the dollars per door on the department side were down slightly.

Elizabeth Pierce – Roth Capital Partners

Then on the men’s side is very similar to what you’ve seen on the women’s side in terms of the order size?

Marc B. Crossman, Jr.

Actually on the men’s side of the business it was up on both. So the dollars per door for both department stores and specialties were up.

Elizabeth Pierce – Roth Capital Partners

Then Hamish a couple of questions for you, on the G&A as we think about the fourth quarter given the store openings that you’re planning and the stores that are opened, do we think of a similar dollar amount?

Hamish S. Sandhu

Pretty much so. We did open one store, the Camarillo store in the third quarter and that store was opened for two months so obviously in the fourth quarter the same store mix you might have a little bit of incremental expense relating to the new store. But, overall depending on the sales volumes we’ve been tracking our commission rates pretty consistently from quarter-to-quarter.

Elizabeth Pierce – Roth Capital Partners

That’s 6% right?

Hamish S. Sandhu

Yes.

Elizabeth Pierce – Roth Capital Partners

The tax rate for the fourth quarter?

Marc B. Crossman, Jr.

Let me handle that one. What we’re going to do is basically our tax allowance, deferred tax asset, we’re going to write that up. As we use our NOLs we write up just the amount of the NOLs that we’re using so you never see the deferred tax asset on our balance sheet. So the short answer is we’re going to be flipping that around, we’re going to be writing up the full valuation of that deferred asset and we’re going to be taking a onetime gain in the fourth quarter for that allowance so our tax rate will be a negative tax rate and a very huge negative tax rate.

Hamish S. Sandhu

We’re still finalizing that but it’s going to be around I would say between $16 and $19 million of a pickup relating to the income tax benefit if you will.

Marc B. Crossman, Jr.

So we’re running about $0.30 per share in the fourth quarter. Now, we’ll have some more guidance related to that but we’re really going to be focusing people to the operating income number or certainly the pre-tax number and look at that on a comp-over-comp basis.

Elizabeth Pierce – Roth Capital Partners

You’re going to provide additional guidance on that at some point?

Marc B. Crossman, Jr.

Well, when we have it in the fourth quarter, when we report the fourth quarter you’ll obviously see the number but it’s a onetime item.

Hamish S. Sandhu

It will be clearly disclosed so you can still compare our performance without that one time event.

Operator

Your next question comes from Ronald Bookbinder – Global Hunter Securities.

Ronald Bookbinder – Global Hunter Securities

This $16 to $19 million tax benefit, is that cash?

Marc B. Crossman, Jr.

No.

Ronald Bookbinder – Global Hunter Securities

So you’re not getting a refund from the government?

Marc B. Crossman, Jr.

No, it’s just purely right up an asset.

Ronald Bookbinder – Global Hunter Securities

Looking at the inventory it was down about 3.5%, how was that with the increase in woven’s and increase in stores? Is your inventory just a lot tighter overall?

Marc B. Crossman, Jr.

I’m glad you bring that up because on the balance yes. We’ve been doing a lot of work trying to bring down our piece goods so fabrics and trends, etc. is really what we’ve been working towards. The finished goods side obviously as we’re growing the business, opening retail that’s just going to climb as function of layering on additional revenues. I appreciate you bring that up. Us being able to bring the inventory down slightly or hold it flat when we’re growing the top line double digits, it does speak to the fact that we’re trying to manage the raw material portion of the business. I think if you look at just the raw material itself, we were actually able to bring that down by about $2 million in the quarter.

Ronald Bookbinder – Global Hunter Securities

That was a nice driver for your cash flow?

Marc B. Crossman, Jr.

Yes.

Ronald Bookbinder – Global Hunter Securities

Looking at the woven’s, are they mainly just being sold in the company owned stores or are they at the department stores? If they’re at the department stores, are they being sold as more of a collection with the jeans or are they sold in a different department?

Marc B. Crossman, Jr.

It’s a mixed bag. First, obviously we have them at our full priced stores. Second, we sold them to every single one of our major retailer partners from Nordstrom’s, Bloomingdales, Saks, you name it, every single one bought our woven shirts.

Ronald Bookbinder – Global Hunter Securities

Was it being sold alongside the jeans as a collection?

Marc B. Crossman, Jr.

In some cases it’s being merchandised next to the jeans, in other cases it’s being merchandises where the rest of the woven shirts are. It really depends on the retailer and what their floor set looks like. But, it’s really a combination of both. It can stand alone and in some cases, in other cases it doesn’t.

Ronald Bookbinder – Global Hunter Securities

On the gross margin, the gross margin was flat but you did have the addition of the five stores which ran a 66% gross margin, what was the offset?

Marc B. Crossman, Jr.

As we’re doing some more non-denim categories like this Ponte pant that we mentioned that was a big program, woven shirts, those are actually carrying lower gross margins than our overall denim. So, just a little bit of shift in the product mix, that’s number one. Then number two, stores weren’t a big number, we only really had five stores during that period and the incremental gross margin that would add on that 15 points is really when you boil it down not a significant enough driver to chip away at the gross margin.

Ronald Bookbinder – Global Hunter Securities

I think the last time you all spoke you talked about the style trends that there was a trend towards I think you said a motorcycle trend. I was wondering how that worked through and what sort of silhouettes, is it boyfriends, is is skinny, how’s that transitioning?

Marc B. Crossman, Jr.

That’s still playing out through the fourth quarter, a lot of stuff that we’re doing with studs and those types of details so that trend is going to play out through the fourth quarter. In terms of what is selling, skinny is selling like crazy, so that’s a very popular silhouette right now. The boyfriend we call it, the best friend is still doing well but not to the level it was doing even six months ago. So I’d say right now our most popular silhouette is definitely the skinny.

Ronald Bookbinder – Global Hunter Securities

I always get questions about price points, are you getting any push back on price points or is it all about the product?

Marc B. Crossman, Jr.

It’s all about the product. We had originally highlighted the $138 jean that we were putting in to the market on the women’s side and the men’s side of the business. The women’s side really didn’t have the traction, I mean it sold but not to the level that we thought it would sell. It really comes down to the quality and if a girl is going to pay $138 for a pair of jeans she’s certainly going to spend $158 if it looks like it’s that much better of a value. The men’s side, the $138 had a lot more traction and I think that’s just a function of either girls coming in and spending the $158 on her jeans and getting him the cheaper jean or he is a little more price sensitive. Whichever one it was, I’d sum it up by saying that the $138 on the men’s side actually had more traction than the women’s side did.

Operator

Your next question comes from [Steven Tang – Redgar Capital].

[Steven Tang – Redgar Capital]

I just wanted to clarify, when you’re looking at 2010 you might open up to 10 stores, five outlets and five off price stores?

Marc B. Crossman, Jr.

That’s correct.

[Steven Tang – Redgar Capital]

If we did open all 10 what kind of cap ex would that require?

Marc B. Crossman, Jr.

The outlets right now, and again it depends upon what the shell looks like when it’s delivered to us but, outlets right now – the last one in Camarillo cost just a hair about $200,000 to build out. Then the malls, again depending upon how the shell is delivered is probably $350,000 to at most $450,000 to put together. Those are kind of the capital budget numbers that we are looking at or using internally.

[Steven Tang – Redgar Capital]

That excludes inventory required, right?

Marc B. Crossman, Jr.

That excludes inventory required.

[Steven Tang – Redgar Capital]

Back to the woven’s, that’s mostly women’s correct, it’s not men’s woven’s that were doing well?

Marc B. Crossman, Jr.

No, that’s men’s and women’s.

[Steven Tang – Redgar Capital]

Could you kind of give us an idea of how much of the business is non-denim these days?

Marc B. Crossman, Jr.

It’s still predominately a denim business so if I had to just characterize it out of hand I would say that it’s still probably 93% to 95% denim.

Operator

Your next question comes from [Mark Wallster – Metlife].

[Mark Wallster – Metlife]

My question is with your American Idol style promotion that you did with Joe’s guy’s and girl’s, what are your plans for promoting them and your advertising to build the momentum throughout the rest of 2009 and 2010?

Marc B. Crossman, Jr.

We’re actually going to start advertising a little more heavily in the fourth quarter and certainly in 2010 so just in terms of our capital budget, we look at it relative to our percent of sales, as sales are going up we’ll invest more. Plus, as we manage our cost effectively I think we’re going to obviously put a little more back in to advertising. With that said, I think we’re going to start investing a little bit in print and certainly step up our efforts on outdoor advertising. We are going to be running the taxi tops again over the holidays. It’s definitely something we’re going to spend a little more money on during the later quarter of 2009 and then in 2010.

Operator

Your next question comes from Donald Bridges – Bridges Capital.

Donald Bridges – Bridges Capital

As you open more stores, particularly mall stores, do you feel you have any risk of cannibalization or hurting the program with existing customers?

Marc B. Crossman, Jr.

That’s always a risk. Everything we’ve seen – take our outlets for instances, the outlets we opened you’ll see a Sak’s Off Fifth or Neiman’s Last Call and what we’re seeing is it really is lifting our business whether it be Woodbury or Orlando or Camarillo. I think the simple answer from an outlet standpoint is it should lift our business. It really does showcase the brand, they see the full breadth of product. We’re seeing that definitely in Union Square with our store there. We haven’t seen any drop off in sales and we have a lot of points of distribution in downtown San Francisco and there’s been no cannibalization. We don’t anticipate that it will but that being said, we’re not going to open 50 of these things all at once. We’ll be able to watch it as they roll out and start getting settled in.

Donald Bridges – Bridges Capital

Would the mall stores have identical products to other customers?

Marc B. Crossman, Jr.

No because we don’t put – I’m not telling you there wouldn’t be any overlap but we’re not putting all of our product that we offer in to the stores nor do we put all of the product that we offer in to the department stores. The wholesale side works pretty closely with our retail side right now in terms of how they’re merchandising the stores and what’s going in to the different stores. It will be something that we’re careful about and that we watch but the breadth of our product is so wide that it’s something that we’ll be able to control.

Operator

I show no further questions at this time. I’d like to turn the call back over to Mark for closing remarks.

Marc B. Crossman, Jr.

I just want to thank everybody for joining us on the call and we look forward to speaking with you again in the fourth quarter.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. That does conclude the presentation. You may now disconnect.

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