R.G. Barry (NASDAQ:DFZ)
Q1 2014 Earnings Call
November 05, 2013 9:00 am ET
Roy Youst - Director of Investor and Corporate Communications
Greg A. Tunney - Chief Executive Officer, President and Director
Jose G. Ibarra - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance
Alexander Renker - Sidoti & Company, LLC
Good morning, and welcome to the R.G. Barry Brands First Quarter Fiscal 2014 Operating Results Conference Call and Webcast [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Roy Youst. Please go ahead, sir.
Good morning. By now, you would have an opportunity to review a copy of this morning's earnings release. Our releases are available at the Investor Room section of our corporate website, rgbarry.com. You also can contact us at (614) 729-7200 to be added to one of our distribution lists. An audio replay of this call will be available shortly after its completion. Joining us today on the call are R.G. Barry Corporation President and Chief Executive Officer, Greg Tunney; Senior Vice President, Finance and Chief Financial Officer, Jose Ibarra; and Corporate Controller, Summer Cogar.
Please note that statements contained in this call which are not historical facts should be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by forward-looking words such as may, expect, could, should, anticipate, believe, estimate or words with similar meanings. Any statements that refer to projections of our future performance, anticipated trends in our business and other characterizations of future events are subject to all Safe Harbor qualifications set forth in our news releases, investor communications and SEC filings. Actual events affecting the company and the impact of those events upon our operations may differ materially from what is currently anticipated. For a list of some potential risk factors, please refer to our news release or most recent Form 10-K.
Today, Greg is going to begin our call from Dongguan, China.
Greg A. Tunney
Thank you, Roy, and good morning, everyone from the Global Responsible Footwear Forum. I am honored to be here today, representing our company and addressing this international conference on the critically important industry issues of social compliance and factory efficiency for foreign manufacturers like ourselves. R.G. Barry has produced 8 years of consistent industry-leading performance, through both good and bad economic times. That is because we have established brands, a solid operating model and realistic vision. Our focus is to continue to provide growing value and a strong return to our shareholders.
No one was more disappointed in the first quarter than our team. After doing some much needed pruning of unprofitable elements in the Footwear business last year, we said in our September call that we expected to resume a pattern of increasing year-over-year revenue this year. However, softness at retail resulted in deliveries of fall holiday footwear orders being moved out to the second quarter. Lower-than-expected performance thus far has also hurt our replenishment Footwear business as well. The business units making up our Accessories segment also face some unique short-term challenges this year. There is, however, an ongoing issue that we view as one of the greatest challenges facing the accessory footwear business today. As we mentioned during the September call, there is a continuing erosion of the mid-tier department store businesses, not just for us, but for all suppliers in that space. These stores always have been one of the mainstays of our business, from both the gift and replenishment perspectives. We have considered the mid-tier business as an almost recession-proof annuity. We have come to believe that no longer is the case, and erosion of the mid-tier channel must be addressed head-on. Before I spend a few minutes talking about these challenges and our long-term strategy, Jose is going to run down the first quarter numbers for you first.
Jose G. Ibarra
Thank you, Greg, and good morning, everyone. Our consolidated quarterly net sales of $42 million were down 11% versus the first quarter last year. To reconcile the $5.3 million net sales shortfall for you is the following. A bit more than $2 million came from footwear shipments that were moved to the second quarter at the request of retailers. About $1 million came from low or negative margin businesses that we reduced or eliminated. And the remainder was spread across both segments of the business and tied to the general retail softness we sold during the quarter. Our consolidated gross profit as a percentage of net sales increased by 220 basis points for the quarter to 46.5%, despite a 7% decrease in consolidated gross profit dollars. This percentage improvement primarily reflects the impact of actions taken in both segments to redirect our business to our more productive channels. Consolidated net earnings of nearly $5 million or $0.41 per diluted share are 29% below consolidated net earnings reported last year's first quarter. The composition of our revenue mix and operating profit has continued to improve as we have moved from the profile of a single-season footwear supplier to a more diversified year-round accessories company. But as today's results illustrate, we need more diversification in our mix.
Selling, general and administrative expense was up 8%, primarily reflecting increased investments in long-term growth initiatives not in place 1 year ago. These programs include new sales, marketing, e-commerce and international initiatives, which are intended to fuel future long-term growth.
Looking to the segments. Accessories net sales, although up modestly, was below what we demand from these businesses. Quarterly net sales increased by approximately 1.5% versus last year to $9 million. Gross profit, as a percentage of net sales, increased 250 basis points over the comparable quarter to 59%. And segment operating profit was nearly $800,000, down from $1.7 million 1 year ago. The quarterly operating profit in Accessories reflected the impact of higher selling and marketing expenses as a result of the investment in long-term growth initiatives and our decision to reduce quarterly net sales by approximately $400,000 to a large discount retailer. This reduction occurred in spite of growing demand through -- from this account to our products, and is in line with our policy of enhancing, controlling or eliminating businesses that hinder achievement of our margin targets. Additionally, we saw a slowdown in certain Accessories channels, and the introduction of some newer products did not occur as quickly as originally planned.
Footwear remains the largest component of our business and the most seasonally sensitive. A combination of timing, slow retail traffic, elimination of underperforming businesses and erosion in the mid-tier channel resulted in first quarter Footwear net sales of $33 million, off of last year's comparable quarter by 14%. This yielded an operating profit of about $9 million. And despite lower net sales, the favorable mix of customers and products pushed gross profit as a percentage of net sales up by 160 basis points versus 1 year ago to 43%. The negative margin department store program eliminated at the end of fiscal '13 represented approximately $2.2 million in annual net Footwear sales, with about 25% of those lot sales impacting the first quarter.
Looking to some order financial metrics. Cash, cash equivalents and short-term investments at just over $19 million were up 31% from about $14.5 million 1 year ago. Net accounts receivables at nearly $30 million were down from the first quarter last year by about $4.5 million, reflecting lower shipments to customers during the period. Net inventories are about $34 million, were up $3 million quarter-over-quarter, signifying lower first quarter shipments. As we move through the second quarter, we expect inventory to fall more in line with traditional patterns.
Net shareholders' equity was up 14% at $91 million. Depreciation and amortization for the quarter was reported at $725,000. And finally, we are using 39% for our effective tax rate for fiscal '14.
Based upon our first quarter performance, the visibility we currently have on the remainder of the year and the challenge in economic environment, we expect consolidated revenue for fiscal '14 to be down slightly versus last year. We will have a much better view of the full year when we report on the second quarter and first half in February. It is important for me to stress to our shareholders and our audience today that we continue to control costs, manage inventory and expenses and increase profit margins. We are confident about the company's future and our ability to continue utilizing our resources to best increase shareholder value.
And now, back to Greg.
Greg A. Tunney
Thank you, Jose, for those details. Some of our short-term issues we discussed are just part of the seasonality in our model. We have previously commented that ours is not a quarter-to-quarter or even yearly business, and that there will be some short-term challenges as we work toward our long-term objectives. It is necessary that we balance the kind of short-term issues we have discussed here today with a focus on long-term vision and driving the business forward through growth initiatives, such as diversification of our model, that is, adding more seasonally balanced accessory businesses, such as our Foot Petals and Baggallini to our portfolio. Increasing our pursuit of product and label extensions, developments like Technogel and Foot Petals, the licensing extension through fiscal 2018 that we are currently working on for our Dearfoams sleepwear, or the segmentation of the Dearfoams footwear brand for multiple retail channels. The expansion into new channels through growth avenues such as e-commerce and international, process improvements like our new ERP systems that were brought online in the core businesses last year and will be implemented in the Baggallini business during the second half. Our transfer to a single unified distribution center on the West Coast and the implementation of sales force affecting this training program and enhanced product development and engineering initiatives. These efforts will help us address some of the challenges our Footwear businesses face in the mid-tier department stores. But some time ago, we recognized and shared with you that a much different R.G. Barry is the future. We are on our way to becoming a diversified provider of a wider range of accessory category products. We want to be a business that does not have wide performance swings brought on by heavy dependence on 1 product category, 1 season, or 1 channel distribution. We are achieving these goals, just not as quickly as we would like.
We are pleased that Lee Smith is now heading up our Footwear business unit as its new President. Lee has played a critical senior role in reinventing R.G. Barry over the past 7 years, leading our creative, strategic and brand development efforts. We believe he is the right leader to drive alignment of our legacy business with the many changes taking place in the retail marketplace. Lee brings to his new role a deep understanding of brands, markets and processes. Before joining R.G. Barry, he was the President of Airwalk footwear brand. There, he led a team that created an entirely new category of athletic casual footwear and a label that grew from its infancy to a $200 million in relatively short time under his leadership.
We continue to invest heavily in our future, focusing on a combination of organic growth in our existing lines of business, and growth through mergers and acquisitions. We are shifting resources from slow growth channels like mid-tier department stores to faster growing areas of the retail world, such as e-commerce, international and better independence.
We continue making great inroads in international development. We are increasing awareness of our brands in select markets, refining our product mix for global markets, and developing relationships and distribution strategies. We foresee international business growing at a double-digit rate on a consolidated basis over the next 3 to 5 years. Without a doubt, one of the biggest opportunities for existing business growth is in e-commerce. We expect our business, in both our owned and other retailers' online stores, to grow to above 10% of our total consolidated revenues within the next 2 to 3 years.
Our business model generates strong operating cash flow and our balance sheet is extremely healthy. So even despite a difficult quarter, we are confident that we have the marketing, creative and operational strengths to continue to grow our business for the long term.
As we told you in the September call, our M&A efforts have increased and we are building a strong network of targets, contacts and potential acquisition targets. We have not been able to execute a meaningful deal as quickly as we would like. We have, however, significantly increased the number of MD&As executed, and are pleased with the quality of businesses we are seeing. We believe M&A success requires patience and a proactive approach. We have both, and expect to be well-positioned financially and strategically when the right deal comes along.
Before turning to your questions, I want to touch on several additional items. First, we are quite pleased with the federal lawsuit brought against us by Totes Isotoner has been dismissed with prejudice, fully vindicating Dearfoams. The dismissal of all claims, which were or could have been brought in this case, is final. We believe that this was a federal lawsuit brought against us by an unhappy competitor who had lost market share to Dearfoams in JCPenney, and was attempting to disrupt our business.
Next, you no doubt saw the recent announcement that our board has formed a committee of independent directors to evaluate the unsolicited nonbinding acquisition proposal from Mill Road Capital to buy the company. The committee has retained Peter J. Solomon Company, a well known and highly regarded financial advisor, to assist the committee and board in the evaluation. We will not answer any questions on today's call regarding Mill Road's proposal, the valuation process or its status. The company will provide updates when the evaluation has been completed and the board has decided on a response.
Finally, we hope you come away from today's call with a clear understanding. Despite the tough quarter and short-term outlook, we continue to be very enthusiastic about our business long-term. R.G. Barry remains a top performer in its category, returning value to its shareholders. We have a clear vision of where we are going and a road map on how to get there. We have established brands, great people and resources necessary to win.
Before we turn to your questions, please remember that I'm participating in this call from China, so there may be a delay in the question-and-answer process and we ask for your indulgence. Now, operator, we are ready for your first question. Go ahead.
[Operator Instructions] Our first question is from Alexander Renker from Sidoti & Company.
Alexander Renker - Sidoti & Company, LLC
So I was just wondering if you guys can maybe elaborate a little more on some of the shelter issues you saw during the quarter and what was driving those? Was that mostly -- was it really the mid-tier channel? Was it across channels generally? Just any kind of patterns there, I think, will be helpful.
Greg A. Tunney
Yes, Alexander. Let me just kind of address that a little bit. When you start to look at our conference call from September until now, we begin to see shifts in sales in July to August, and then August to September. So if you remember, I don't think you were covering us back then, but probably about 3 or 4 years ago, we had the same issue where we started to see some seasonal shifts in shipments that lapsed over into the second quarter, and we begin to see that in early July. They started to push things to August, and then August to September. And of course, as it moves over into October, and that's where you start to see the shortfall. I will tell you that those shifts that took place in October -- excuse me, that took place in September, they've already been shipped in October. September had historically been one of our strongest months as far as total volume, and those unexpected shifts accounted for more than $2 million in footwear shipments, as Jose mentioned earlier in the details. In addition, about another $1 million was related to low or negative margin businesses that we reduced or eliminated, and that $600,000 of it was due to elimination of a negative margin department store program that we exited out of. The remainder of the shortfall was spread across 2 segments and tied to retail softness that we experienced, primarily our replenishment business that one of our larger customers caused that. We are clearly optimistic as -- we are clearly too optimistic, excuse me, as we look back at the back-to-school period. That's typically when we start to get kind of the first wave of replenishment sell-through. And the fact of the matter is, it was softer than we had anticipated.
Our next question is from Ethan Star, your private investor.
Could you -- to the extent you can do so, could you please discuss the additional spending on investments R.G. Barry is making in the sales, marketing, e-commerce and international initiatives?
Greg A. Tunney
Yes. I'll take a little bit of time to discuss that because we believe right now that quite frankly, if you look at the next 3 to 5 years they are, by far and away, our largest growing segments that we have in our business. And I think I talked enough about the shortfall, what we're seeing going on in mid-tier. But first and foremost, to start with, e-commerce. We see e-commerce as really growing to be a significant part of one of our key channels, as I mentioned earlier. We thought it would be in excess of 10% of our total business as we move forward. And if you look at that, that traditionally has been less than 2% or 3% of our total business, so we see that investment that we're making in platforms and websites, what we've invested in people to not only grow our own websites internally, but also to grow e-tailing in general. You can see somebody like Baggallini that, less than a year ago, they weren't doing that much with, say, an Amazon.com. And today, they're doing over $1 million annually at Amazon.com and growing at a rich double-digit level. And at the same time, Amazon is adhering to our MAPs policy and selling that product at full price. When you look at international, this is our first year, full year that we'll actually have somebody full-time dedicated to it. And Jose and Eric Desmonts, who's heading that up for us. We're starting to see them kind of do the spade work, if you will, Ethan, for long-term growth and really put in the foundation in place for us to move that business going forward. We like the growth that we're seeing in some of our key brands and it really varies by region, by brand. If we take the Far East, whether it's in Japan, whether it's in Singapore, we like the growth that we see with Foot Petals. And then you can take more traditional markets such as Canada, where we're seeing significant growth, double-digit growth on a business that has already over indexed as a country with Baggallini. And in Canada -- the Canadian market, it actually indexes to a much higher price point and really kind of a higher, richer channel distribution than we see even in the United States with it. So we're continuing to invest in that. Whether it's investment of people, processes, products, we think that, that is critical down the road. And then last but not least, you heard me talk a little bit about our better grade independence. That part of our business is very healthy. We're seeing right now, for this year, it's tough with the economic climate is out there and certain channels of distribution, it's up 11% in our independent channels with Baggallini. And it's actually up quite a bit more with our independent business with Dearfoams, but that was based on a very small basis. So hopefully, Ethan, that will give you and our other callers a little bit of a feel of why we feel it's important to invest in those channels and distribution. We need to lay down the critical foundation and placecards, if you will, so that we do continue to see that growth and we're not left behind in there.
Okay. For the Accessories segment, could you please expand on the comment in the press release that the increased gross margin year-over-year was due to a strategic shift out of discount and lower margin businesses, resulting to change in products and channel mix across the segment. I mean, I'd thought that you would generally avoid a discount and lower margin businesses in that area anyway?
Greg A. Tunney
Yes. It's a great question, Ethan. While we are committed to driving strong sales, that growth can't come with the expense of weak margins. Last year, we decided that for the long-term health of our brands, it was important for us to find the right balance of profit margin and sales growth. We intend to enhance and control and eliminate businesses that hinder achievement of that margin target. So what really happened was that we just felt that Baggallini was growing too fast in a certain discount channel. And that discount channel was made up of closeouts and makeups that we just really felt that it was accelerating too fast as a percent of total. So we really trimmed back. So when you start to look at the first quarter performance of Baggallini and you really kind of take back that number that we pulled out strategically, they really had quite a good quarter as far as growth. But we felt it was important, Ethan. It wasn't so much of exiting out of businesses like we had in the past with our Footwear division, it was really more of a strategic approach with the brand and positioning the brand so that long term, it could have growth. We could turn those levers if we wanted to at the proper time and have that growth out of the discount channel, but we thought it was premature at this point with the brand growth and what's going on with Baggallini.
Okay, good. And then let's see here. Yes. So how frequently are you introducing new Baggallini products or styles? It looks like there's -- on the website, there's a new luggage style products such as the Skyline Rolling Briefcase.
Greg A. Tunney
Ethan, when we acquired Baggallini, they were basically coming out with products one time a year or in some years, maybe twice a year. And what we've been able to develop with Baggallini as we've kept to the basis of the functionality of the business, DNA, we've also really introduced more of a fashion play. And hopefully, you've seen that on the website when you start to look at the colors and some of the new bag details that we're doing. And so the idea with Baggallini is that we've taken that from a 1- or 2-launch each year, to now 4 equal quarters. So now, you're starting to see an introduction or a flow through our product each and every quarter, so now it's 4 times a year. And we think that, that's critical in keeping freshness and moving that brand forward versus how they were doing in the past.
Okay, good. What about Foot Petals and its derivative brands or sub-brands?
Greg A. Tunney
I think that Foot Petals, the biggest story that we have there right now is just starting to launch in the Technogel. Nordstrom is really the first store in the country that's carrying Technogel, and we just started testing that in key markets. And you got to realizes it is a premium product. It is priced above the traditional Foot Petals pull-on online. So with Technogel, we have richer price points. And the good news is the early tests that we have seen, we've gotten a very strong response from it. We're very excited about the product. And as we strategically add additional storage and additional markets, I think it'll continue to enhance that franchise and move it forward. So that's the biggest opportunity that we see with it. I think your question on the other one really has to do with our Walmart launch. And I think we still have work to do on that, especially in regards to the pricing model of it. In other markets, we have not seen the price sensitivity on key categories in Foot Petals. And we just found in Walmart, there is a bigger price sensitivity to that consumer there. And so we're looking at testing various pricing models to find out what the correct price is. In some cases, the competitive subsets are half the price of what Foot Petals is currently at in the marketplace. So there's some additional work to do there on the pricing strategies.
Okay. And is the Signature by Dearfoams line already on retail stores at this point? And if so, where?
Greg A. Tunney
Yes. We have started to roll out the Signature program and that's in a couple of different channels. First of all, we've rolled it out to about 800 independents that are carrying the Signature brand, which is definitely at higher price points than Dearfoams brand itself. So that continues. We also are putting that out to various dot com websites that will be carrying the Signature label as well. And then we plan also to be layering that into much better grade department stores. So there's a whole different positioning for that, Ethan, that goes into the better grading. We believe that the independents, the full-price dot coms and the better-grade department stores is really the sweet spot for that brand and we look forward to it. And hopefully, you'll be able to see it at some better grade independents this holiday season.
Okay. Are any of those much better department stores new customers for R.G. Barry or Dearfoams?
Greg A. Tunney
They would be for Dearfoams. They would not be for R.G. Barry.
Okay. Any plans to introduce pajamas or other licensed products in the Signature line?
Greg A. Tunney
Those -- we will make this the last question for you, Ethan, and then we'll let you get back in the queue to let some other people ask questions. But right now, no. The Dearfoams pajama line that we are currently doing focuses more on the mid-tier and the mass channels. So it really isn't positioned at price points currently to align with the Signature brand at this moment.
[Operator Instructions] This will conclude our question-and-answer session. I would like to turn the conference back over to Greg Tunney for any closing remarks.
Greg A. Tunney
Thank you for participating in today's call. With only 49 shopping days until Christmas, you have -- you still have some time to pick up some great holiday gifts. We, of course, suggest Dearfoams slippers, Baggallini bags, Mosey, and of course, Foot Petals products for everyone on your holiday list. We will be participating in The Benchmark Company Micro Cap Discovery Conference at The Palmer House Hilton in Chicago on December 11th, and at the ICR XChange on January 13th in Orlando, Florida. We hope we will see some of you at one of these events. On behalf of the entire R.G. Barry team, we wish you a wonderful holiday season, and a joyous New Year. Please join us in early February when we will report our second quarter results. And until then, goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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