Liyuan Woo – CFO
Steve Birkhold – CEO
Jeff Vanderson – Blue Orleans Company
bebe stores, Inc. (BEBE) F1Q14 Earnings Call November 7, 2013 4:30 PM ET
Greetings and welcome to the BEBE Stores, Inc. Fiscal First Quarter 2014 Conference Call. As a reminder this conference is being recorded. It’s my pleasure to introduce you to Ms. Liyuan Woo, Chief Financial Officer. Ms. Woo, you may begin.
Thank you. Good afternoon. Welcome to BEBE Fiscal First Quarter 2014 update. On the call with me today is Steve Birkhold, Chief Executive Officer. After Steve’s opening remarks and business highlight, I will discuss the fiscal first quarter results as well as our expectations for the current second quarter of fiscal 2014. Our call will be limited in time, it’s one hour. After we have completed our prepared remarks, we will take your questions.
Before I get started, I’d like to remind you of the company’s safe harbor language. During the course of this call, we will make projections and there are other forward-looking statements regarding future events and the future financial performance of the company.
We wish to caution you that such theme and adjust predictions and actual event results may differ materially. We refer you to the company’s form 10K, 10Q and other filings made with the SEC for additional information on risk factors that could cost actual results to differ materially from our current expectations.
And now I’ll turn over the call over to Steve for his opening remarks.
Thanks, Liyuan and good afternoon everyone. Our first quarter results reflect significant progress under our strategic plan. We made this rise in assembling a compelling merchandise and assortment, launching an exciting marketing campaign that speaks to the bebe girl and we launched in our eCommerce site with a more sophisticated and streamline customer experience.
Our goal is to deliver sequential improvement in our financial results and that’s what did. We managed customer sales to a -2.8% compared to a decrease of 8.7% in the comparable period of the prior year and improvement over the -7.1% comp that we saw in the fourth quarter of 2013. This was despite weak mall traffic trends in a highly aggressive promotional environment.
Our gross margin was down just 50 basis points compared to the first quarter of last year which represents a huge improvement from the 960 basis points year-over-year decline in our fourth quarter of 2013 primarily driven by the strength of our new assortment and brand appeal.
We also largely reduced our legacy product to 20% of the total inventory down from over 40% at the beginning of the first quarter.
In addition we carefully managed our cost while investing in higher impact SG&A areas including people, technology and marketing. As a result we are able to achieve our financial objectives despite the challenging retail environment.
Turning to some highlights on our progress, we shared with you during our Investor Day in September our six strategic initiatives to move our business forward. First, increase product distinction with the contemporary accessible fashion merchandise offering, designed for the confident, sexy bebe girl. We believe our fall assortment has come a long way to achieve this as we saw favorable response to our new merchandise.
The bebe girl is returning to the brand and our new products are responding and resonating with her. Specifically we saw a strong performance in a variety of categories including bottoms, sweater dresses, knit top, leather and jumpsuits.
We are also very pleased with the strength of our logo business which demonstrates a strong connection that our customer has with the bebe brand. For non-apparel, the team was encouraged to see our shoe business turn positive and is focused on the turnaround on all the non-apparel categories.
The apparel categories that are still challenged include denim, woven tops and sweaters. As many of you probably been hearing denim has been a down-turning category all around so we are managing our inventories tightly and monitoring the trends.
Our legacy inventory was heavy into the evening dress category so we work hard to clear through this merchandise while our merchandise in teen continues to refine the offering in this category.
As I stated earlier we made excellent progress including our legacy inventory which now stands at about 20% of the assortment. We will continue to take aggressive markdown to ensure that we are out of this inventory by the end of second quarter.
We continue to refine our inventory management process to be focused on open-to-buy, test, chase or cancel strategies. We are learning and reacting as a team in finding the right balance between product penetration, flow and speed to market.
We have learned from our customer that she is always in the need for newness so we are consistently bringing her new merchandise and balance in a broad, shallow assortment of fashion merchandise along with the deeper offering of key items where we see more consistent demand. This enables us to identify and chase strong selling styles and to quickly markdown or get out the products that she doesn’t react to.
As you are well aware in the fashion business there is inherent risk but we position ourselves to be as nimble as possible in order to optimize our assortments while avoiding undue risk.
In addition, we are refining our investment in key items and big idea outputting and supporting them with marketing across all channels.
While we continue to see strong signals that we’re headed in the right direction, we are at the beginning of an evolutionary process and we will continue to fine tune the assortments as we monitor selling trends.
Our second strategic focus is to align our marketing campaign across traditional and new media focused on messaging that speaks to the bebe girl. Our 9 AM to 5 AM marketing images and messaging that purposely overemphasize our core brand position and going out sexy have been strongly resonating with the bebe girl.
We have seen an uptick in both traffic in social media impressions. The improved traffic trends in our store during the first quarter were also an encouraging sign. We saw a very strong sales in merchandise that was represented in our marketing programs. We will continue to emphasize the party categories into the holiday season. At the same time, other key categories such as go-to-work, denim and non-apparel will continue to be highly visible across all categories in our stores and in our communications.
We’re well positioned in the inventory investment and catalogue images for Black Friday and the holiday season. As we create our marketing campaigns we want to continuously align the messaging with the fashion that we are emphasizing in our stores.
For example, in our spring campaign, you will see our sportswear sold in this feature more prominently along with stronger message in about daywear as this will have a greater emphasis in the store for that time period.
Our third strategic focus is to create an Omni-channel strategy to engage our customer wherever she shops. Our Omni-channel strategy delivered positive results for the quarter. On August 14th, we successfully re-launched our website with a cleaner, more sophisticated streamline customer experience reflecting our new brand direction will be set here as your look and feel.
The new set is offering easier browsing with better photos, enhanced product detail pages and more video including the looks we love outfits which I showed with strong filters [ph]. The online sales for the quarter are out page retail as expected. We held back markdown items in over and deck on new product messaging online to test the strength of these products which is in line with our brand new strategy.
We’re especially encouraged by the results of regular priced products. Going forward we will maintain a balance of full priced and markdown merchandise in order to optimize regular price selling while utilizing the site to clear through excess inventory.
Our fourth strategic focus is on bebe stores 2b stores optimization while we continue with our outlet conversion and expansion efforts. We are still in the process of evaluating our 17 mall-based bebe store 2b store concept and testing higher pricing strategies in select categories by elevating the product offering slightly.
We have changed our store signage to 2b bebe there in the first quarter of 2014, we should elevate the brand recognition and drive that traffic in the long term.
We are also investing in marketing and catalogue to fuel topline sales. For the first quarter, 2b was negatively impact by the traffic slowdown but we started to see margin improvement due to improved product assessment. Our 33 allied [ph] locations also experienced negative traffic but continue to perform with improved margins.
We try to convert all outlets signs from 2b to be the outlet in the spring and will start to introduce made for outlet products in our fiscal fourth quarter. We’ll provide you with further updates as we refine the strategy.
Our fifth strategic focus is on our international business. In the short term, we are rightsizing this business while developing a foundation for long term expansion. We closed 32 unproductive small shop-in-shops in our Israeli market during the quarter and plan to open 20 points of sale in the remainder of the year.
We believe that our free standing stores are much more effective in building brand awareness than shop-in-shops and generally provide greater returns. We are planning to renovate four stores in this market and open three or four new stores.
We ended the quarter with 108 points of sale, 98 which are free standing stores and 12 with our shop-in-shops. During the transitional fall period our focus will be on improving the product and branding domestically while rightsizing and managing tight inventory internationally.
In the long term, as we shared at Investor Day, there is substantial growth potential globally for us in retail, wholesale and online and we will talk more about this as the strategy unfolds.
Our sixth strategic focus is on the ROI-based investment for sustainable long term growth. As discussed during the Investor Day, we are also working on a new store prototype that will reflect our new, sexy, edgier look. We will focus on improving the store flow and incorporate better visual merchandising, including window displays and live streaming screens that highlight newness, create excitement and give her the Omni-channel experience we wish to convey across all of our points of sale.
Our goal is to add consistency across our website, retail stores and then our marketing message. The store prototype is still on the development stage and we will be testing the phase around March of 2014. We will evaluate the ROI, fine tune the model and roll out once we achieve our objectives.
While we are pleased with the progress that we’ve made in first quarter of the 2014, we are facing a few headwinds as we enter second quarter. As it has been widely reported, the macro-economic environment has been increasingly difficult starting the last week of September and continued in to our cover which has resulted in some decline in traffic trends as well as creating the highly promotional environment.
Given our focus on the margin improvement and overall profitability, we have been holding back on our promotional activity outside of the markdown on legacy product which may have impacted our traffic slightly.
Liyuan will provide a little more detail on this when she talks about our second quarter guidance in just a few minutes.
In summary, we are advancing on our merchandising, marketing and Omni-channel strategies with disciplined investment and analysis so that we can measure our progress and adjust accordingly.
We have consistently said that we plan to deliver sequential improvement on our results during our turnaround. With that said, we are navigating through some rough waters with the influences outside of our control. We plan to be extremely difficult in monitoring our sales performance, managing our inventory and controlling our expenses as we make our way through this turnaround.
We also continue to learn as we go and we’ll move forward with the same set of working while of course reckoning areas that aren’t generating adequate returns. Overall we remain focused on driving our strategic plan forward and feel good about the number of positive indicators we are seeing, giving us confidence that we can achieve our long term objectives.
With that I will turn the call back to Liyuan to go through our fiscal first quarter performance and provide some color on the second quarter guidance. Liyuan?
Thanks Steve. First quarter of fiscal 2014 results are in line with our expectations and exhibiting sequential improvement which is our transitional goal for the year.
Net sales for the first quarter of fiscal 2014 were 114.1 million, a decrease of 2.6% orf117.1 million reported the first quarter a year ago. Comparable store sales for the first quarter decreased 2.8%. This follows a decrease of 8.7% in a comparable period of the prior year and an aid [ph] of 7.1% comp in the fourth quarter.
The sequential improvement in sales was driven by slight improvement in both traffic and conversion. Gross margin decreased with 35.6% compared to the 36.1% in first quarter of the fiscal 2013. The decrease was primarily due to the increasing markdown to clear through the legacy products.
This is a drastic improvement over our gross margin performance in the fourth quarter as we see strong response for new merchandise and continue to drive down the legacy inventory.
SG&A expenses were 50.1 million or 43.8% of net sales compared to 46.2 million or 39.5% on net sales for the same period in the prior year.
The dollar increase in SG&A expenses was primarily attributable to the plans downloading, timing of marketing expenses and internal sales conference expense. As we have stated, we continue to make strategic investments in our business that we believe will yield improved results and better position our company for long term growth.
Net loss for the first quarter of fiscal 2014 was 9.6 million or 12 cents per share on 79.1 million shares outstanding, compared to net loss of 6 million or 3 cents per share on 84.4 million shares outstanding for the same period of prior year.
Know that fiscal ‘14 loss reflect the continuing impact on maintaining evaluation allowance against differed pass assets and that our impacted pass rate approximates 0%.
Our total cash and investment as of October 5, 2013, we’re 164 million versus 180 million at July 6, 2013. The decrease was primarily driven by loss of date, dividend payments and CapEx spends.
Inventories as of October 5th, 2013 were 38.4 million compared to 41.5 million last year.
At the end of the fiscal first quarter, average finished goods inventory per square foot decreased approximately 0.7% compared to the prior year.
This was in line with our expectations given the level of legacy inventory and reflect our strategy to ensure the company is positioned to taking through emerging trends.
Capital expenditure for the first fiscal quarter were approximately 3 million and depreciation expense was approximately 5 million.
During this quarter ended October 5th, 2013, the company opened one outlet store, closed six bebe stores and two 2b bebe stores. We ended the quarter with approximately 945,000 square feet.
Now let me reveal the current second fiscal quarter expectations and items that relate to the fiscal year of 2014. As Steve mentioned, we expect to continue to deliver sequential improvement in most key financial metrics but as we operate in the challenging and highly promotional environment. In addition to the recent map for headwinds, we also have one best-selling week in the second quarter as compared to the last year.
Furthermore, we have 20% outlet [ph] inventory which we need to clear through during the quarter which will continue to negatively impact our margin. Taking this into account, for the second quarter of fiscal 2014, we expect comparable store sales to be bound in the mid-single digit range.
Gross margin is expected to be lower than in the prior year due to higher markdowns on outlet inventory and the potential for additional promotions due to the recent turn, highly aggressive competitive environment.
We’re also planning a modest uptick in our promotional activities versus the first quarter and as you recall from Steve’s remarks, we held back on markdowns offered our e-commerce like in Q1 and we will return to our normal cadence in Q2.
We will also continue to make strategic investments in our business while reducing cost in areas seemed appropriate. On that basis this still means that SG&A will continue increase as the percentage of sales on a year-over-year basis.
As a result of these factors, we expect net loss per share for second quarter to be in the low to mid-teens range. The expected loss per share range also reflect the continued impact and maintaining evaluation allowance against differed tax assets or a close to 0% effective tax rate.
Finished inventory per square foot as of the end of fiscal segment quarter of 2014 are anticipated to be flat to the prior year. For the remainder of fiscal year 2014, the company plans to open one bebe store and close up to five bebe stores and three 2b bebe stores which will result in approximately a 5% decrease in total square footage from the year-end of 2013.
In addition, our international licensees anticipated to add up to 20 points of distribution for the fiscal year offset by closure of the unproductive shopping shops as discussed earlier by Steve.
Depreciation spend for the year will be approximately 21 million. Total capital expenditure for the year anticipated to be up to 25 million which will include capital expenditures for new stores, remodel store extension, information technology systems and outlet improvement.
I will now turn the call over to Steve for his closing remarks.
Thanks, Liyuan. As we look ahead to the rest of our fiscal year 2014, we will continue to focus on executing our transitional strategies.
As I said earlier, we cannot control the macro headwinds but we have a very strong team in place and are well positioned to carefully manage our inventory and control cost is necessary while remaining focused on our customers and executing to our plans.
As to other macro factors, we believe our merchandise strategies will drag improved sales trends’ longer term. Although we’re in the early stages of our transitional cycle, we are learning and refining our initiatives along the way. In short we will continue to focus on our long term growth and manage through the current market environment.
I’d like to thank our shareholders for their support as we continue to work to transform the business and focus on long term sustainable, profitable growth. Thank you and I would like now to open up the call for questions.
(Operator instructions) Your first question comes from the line of Jeff Vanderson [ph] with Blue Orleans Company [ph].
Jeff Vanderson – Blue Orleans Company
Hello, everyone. First let me say congratulations on the progress that you’re making in a really tough environment. We’re seeing consistently improving merchandise content in your stores and I would say that brassiere entertainment doing great work.
Can you give us a little more color on the comp progression that you saw in Q1 and what you’ve seen so far in Q2 if there’s been any change at all? I know the last couple of months have been tough and maybe you just speak to that in terms of the comp traffic, et cetera. And then also how the trend coincided or what kind of response you saw with some of your new product introductions. And then maybe any promotional events that you ran and if you could just talk a little bit more about I guess how the customer’s responding to some of the new product.
Yes, Jeff. Thank you for your comments. I think – again we – the numbers that you see at the end of the first quarter were definitely hampered slightly based on some of the macro trends that were beyond our control and really in mid-October, so we definitely saw some short term decreases in traffic although I think our retail operations team has done a great job and we’ve seen an increase in conversion rates.
I think we have seen some slight shifts during the initial part of second quarter to where our online business continues to outpace what we’re seeing offline. And I think as you can imagine we have a new team and being in this macro environment with the fashion brand we do have categories that we continue to see positive growth and we do have categories that as any business would – we have to react to change in the product mix and redefining our strategies quickly as we navigate through this and I think that there’s a lot of cases that really positive sell through, all a point to our bottoms business just to see with really strong growth and which had not been so strong in the past, our footwear, our shoe business that I’ve seen some really good signs of improvement.
Some of the legacy products and inventories in certain categories is heavier than others so we’ve actually taken a strategy of making sure that we liquidate through our legacy so that it won’t have any further impact on full price selling but all in all I would say that the team is working very well together, Brigitte along with Katrina who’s our new head of merchandising and we’re navigating through difficult traffic but also when you have the right product the consumer just respond to it.
So we’re very quickly doing a lot of things to get more of the ‘14 and come up with strategies to get out of things that aren’t. So I’m very happy with the nimbleness of which we’re able to move and the reaction speed that our teams have put in place in order to respond to what the market dictates.
Jeff Vanderson – Blue Orleans Company
Okay. Good to hear. And then I know you mentioned SG&A expectations for Q2, just wondering how we should think about as SG&A for the rest of the year? I know it’s still early but if I recall your year is sort of front and loaded with some of the investments and new programs that you’re working on.
Yes. I would let Liyuan comment to the number part of it but I will tell you that we did make a strategic decision to accelerate some of the marketing expense in order to make an impact in Q1 which obviously had a positive impact. We have seen new customer coming in with the brand and positive commentary about the marketing and product mix on social media. And also as you know we have consumer generated content now on our website and I think you can all go in there and see that we’re really resonating with our core consumer and she’s showing us the looks that she likes and posting them very frequently on our eCom site.
So I think that our overall plan is to hit our budgets when it comes to SG&A. I will tell you or before somebody ask a question we are – Liyuan and I are very well positioned with different scenario planning based on what happens in Q2 when it comes to the different control on the levels of expense.
We’re not just investing blindly without understanding what’s going on in the macro and we will continue to monitor our progress as we navigate through some of this key dates. And as you know these six last selling days between Thanksgiving and Christmas, we always have to do some accelerated volumes in that time period and we need to invest on the spend that will drive customers into our store and on to our website.
Yes. And Jeff, I think Steve sort of already mentioned that for the frontloading of expenses, we’re already making sure when we planned for it we can’t cut down more at this back end. And also with – there are certain areas we shouldn’t cut because they will be good for top line sales that were not but any other areas that we can find room more certainly are controlling very tightly.
Yes. And Jeff, the other thing I want to add to piggyback on what Liyuan said is that we believe that we have a great brand and we know that we need to continue to invest in the long term equity of the brand and I think that although we do have contingency plans in place, we are pretty disciplined about understanding that we’re in a long term play here. We need to create long term brand awareness and really connect with our consumers, so we’ll be very careful to make sure that even if we to make some decisions, we still have a plan to grow the brand and growth the aspiration of the brand with the consumer long term.
And I think the important thing to mention is that although we did launch the campaign for the very specific personality with our 9 PM to 5AM going out occasion the campaign will morph into more lifestyle sportswear product categories going into the spring season which is the time of the year where we really have a huge amount of business that we do in these categories.
Jeff Vanderson – Blue Orleans Company
Okay. That’s great to hear. I’ll let someone else jump in. Thank you very much and good luck for the rest of the quarter.
At this time we have no further questions. I would like to turn it back to management for closing remarks.
So once again I would like to thank everybody for the call and I appreciate the – all of the questions and participation in our Investor Day back in September. And I look forward to our next discussion after this very important holiday season. Thank you.
Thank you. This will conclude the First Quarter Results call for bebe. Thank you for joining us.
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