Christopher & Banks Management Discusses Q3 2013 Results - Earnings Call Transcript

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Christopher & Banks (NYSE:CBK)

Q3 2013 Earnings Call

December 04, 2013 8:30 am ET

Executives

Jean Fontana - Managing Director

Luann Via - Chief Executive Officer, President and Director

Peter G. Michielutti - Chief Financial Officer and Senior Vice President

Analysts

Kayla Berg - Piper Jaffray Companies, Research Division

Christina Brathwaite - Sidoti & Company, LLC

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Operator

Good day, and welcome to the Christopher & Banks Corporation Third Quarter 2013 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Jean Fontana of ICR.

Jean Fontana

Thank you. Good morning, everyone, and thank you for joining us today to discuss Christopher & Banks earnings results for the third quarter of fiscal 2013. Joining us on the call today are Luann Via, President and Chief Executive Officer; And Pete Michielutti, Senior Vice President and Chief Financial Officer. After management has concluded their formal remarks, we will open up the call for questions.

Before we begin, I would like to remind you that certain statements to be made during today's conference call are forward-looking statements. They are based on assumptions and expectations of future events, which may not prove to be accurate. These statements also involve substantial risks and uncertainties. The company's actual results may vary -- differ materially from those expected or implied by these forward-looking statements. These forward-looking statements may be identified by such terms as will, expect, believe, anticipate, initiative, estimate, estimated or similar terms or variations. All the company's outlook and financial expectations, as well as assumptions underlying the outlook or expectations, constitute forward-looking statements. You are directed to the cautionary statement included in the company's earnings release issued today, as well as the most recent Form 10-K report and other SEC filings made since the date of that report, all of which are available under the Investor Relations section of the company's website at www.christopherandbanks.com. They are applicable to the statements made during today's conference call.

I will now turn the call over to Luann Via.

Luann Via

Thank you, Jean. Good morning, everyone, and thank you for joining us today to discuss our third quarter fiscal 2013 earnings results. I will begin with the highlights of our third quarter and provide an update on our strategic plans for fiscal 2013. Pete will then discuss our third quarter financial results in more detail and provide our outlook for the fourth quarter.

We were pleased to see the continued momentum in the business during the third quarter, despite the tough retail environment. We delivered our sixth consecutive quarter of positive comparable store sales growth. We also drove significant gross margin improvement, which combined with our lower operating expense, led to operating income growth of nearly 140%.

Our same-store sales increased 4.9% during the quarter on top of a 13.6% same-store sales increase in the third quarter last year. While traffic was still negative, we saw a strong increase in our conversion rates, as well as higher AURs and UPTs.

In addition, we kept to our preplan promotional schedule, incurring fewer markdowns, which enabled us to deliver gross margin expansion of 290 basis points to 38.1%. This is despite the more aggressive promotional stance that we continued to see from our peers.

For the quarter, EPS was $0.23 per diluted share versus EPS of $0.10 last year.

Importantly, we continued to drive the business forward during the quarter into effectively leverage our strategic initiatives. While clearly we have been making significant strides, we still have a lot of runway ahead of us, both in the short and long terms.

Now let me walk you through some operational highlights from the third quarter.

Our merchandise offering continues to be a key priority for us. We must consistently present her with the quality, versatility and style that she wants at the value that she has come to expect. During the third quarter, we saw particular strength in bottoms, including denim, wovens and skirts, as well as core knit tops. In addition, our focus on presenting her with complete outfitting ideas has continued to be successful, as we saw particular strength in the accessories category during the quarter.

We also began to see improvement in our sweater business, as the weather turned colder in October. As you may recall, due to the longer lead times, we were not able to meaningful impact the content nor the depth of our sweater selection last year. By reducing the level of receipts in heavier weights and better matching the assortments at current trends, we expect improved sell-throughs in gross margin during the coming months.

In the area of marketing, we continued to test and learn from our promotion events and direct marketing efforts. Our new Fall Favorites "starting at $19" event drove significant volume in early September. We also saw improved results in our Fall Fashion events in September, with more customer shopping and spending an average of 12% more than last year.

Like other retailers, October was more challenging for us. However, we state the course with our planned jacket and sweater promotions rather than reverting to additional entire store sales events.

Around our CRM efforts, we continued to monitor our CRM database trends. Our total 12-month back-to-file [ph] at $2.6 million was down only approximately 2%, despite operating an average of 7.3% fewer stores during the quarter as compared to the prior year. We continue to see our customers visiting more, up 4%, and spending more each visit, up 7%, as compared to the prior year 12-month file. Additionally, we are seeing increased retention of our new and reactivated customer groups.

During the third quarter, we increased our investment in direct mail. We mailed 5.4 million pieces this quarter versus 3 million last year, which included fashion mailers in each of August and September.

We continued to see positive results in terms of response and ROI. We are analyzing these results to determine the depth and frequency for future direct mail efforts, particularly with respect to both new and last customers.

We recently reached a milestone with our private label credit card program with more than 500,000 accounts opened. Cardholders accounted for 23% of year-to-date sales through the third quarter. These customers continue to shop more and spend more each visit, resulting in 2.7x more sales dollars per customer.

In early November, we held our first VIP cardholder event, and in mid-November, we began offering credit card payment in-store, which is an added benefit to the program and to our customers, giving her one more reason to visit.

Now I'd like to turn to our e-commerce channel. As you'll recall, we recently upgraded our e-commerce platform to better reflect the Christopher & Banks brand and improve our testing capabilities. While we experienced some transitional issues during the second quarter of this year, I am happy to report that those issues are behind us. Sales and e-commerce business grew 10.2% during the third quarter, with substantial improvement in gross margin, up approximately 500 basis points as compared to last year's third quarter.

We also recently launched the new mobile version of the Christopher & Banks website, and customers are responding positively to the improved functionality and design as part of our omni-channel offering. Since the launch, mobile website traffic and revenue per user have both increased. We are encouraged by these results as we focused on enhancing overall customer interaction with us by delivering an integrated multichannel experience.

Finally, we continued to optimize our real estate portfolio during the quarter, converting 6 existing stores to 3 missy, petite, women or MPW stores, and we opened 2 outlet stores. As a reminder, as we convert stores to the MPW format, we have seen overall productivity and gross margin improvements, with merchandise margins of these stores coming in above the combined margins of both CB and CJ Banks stores. For the full fiscal year, we have opened 6 outlets, 2 MPW stores and converted 40 existing stores to 20 MPW format, giving us a total of 61 MPW stores at the end of the fiscal year.

As we look to the fourth quarter, we are beginning to roll out new fit and fabric solutions. This will include the introduction of our new RELAXED. RESTYLED. weekend wear and Signature Slimming bottoms to all stores, as well as our easy, wear-everywhere soft-knit dressing at select stores.

We are also setting our denim mall in mid-December, ahead of the holiday season. Denim is an important category for our customers, particularly during this time of the year, and we want to ensure to provide her with a balanced assortment of everyday basics and novelty denims. Currently, we are under-penetrated in this category as compared to both our historical performance and our competition.

Overall, we are pleased with our improved assortments, inventory position and our marketing plans heading into the holiday season. However, we expect the promotional environment in the fourth quarter to continue to be very aggressive. We want to be positioned to capitalize on opportunities, while at the same time be prepared to mitigate risk as we manage through the difficult environment.

In summary, the business is on the right track and we have made great progress on our strategic initiatives during the third quarter. While we continue to manage through this challenging retail environment, we remain confident that we can achieve sustainable, long-term sales and earnings growth. I will now turn it over to Pete for a review of our financial results.

Peter G. Michielutti

Thank you, Luann, and good morning, everyone. My financial review today will cover the 13- and 39-week periods ended November 2, 2013, compared to the 13- and 39-week periods ended October 27, 2012, except as otherwise noted. I will also provide some general comments regarding our outlook for the fourth quarter and full year.

Let's start with the third quarter results. Total sales were $118.1 million in the third quarter of fiscal 2013 compared to $117.3 million from the same period last year. During the quarter, the company operated, on average, 7.3% fewer stores than during the comparable period of last year. Same-store sales increased 14.9% for the 13-week period ended November 2, 2013, and this follows a 13.6% increase for the 13 weeks ended November 3, 2012.

As Luann mentioned, the traffic remained challenged in the third quarter, down 8.4% to last year, which was sequentially better than last quarter, which was down 10.2%.

Importantly, conversion rates were up 7.2%, while UPTs and average unit retails, both rose approximately 3%, suggesting the merchandise assortment is resonating well.

E-commerce sales rose 10.2% as a result of the issues associated with our transition to an upgraded platform during the second quarter.

Gross profit increased 8.8% to $45 million in the third quarter as compared to $41.3 million in the comparable period last year. Gross margin was up 290 basis points to 38.1% as compared to 35.2% for the third quarter of last year. This was ahead of our expectations, as we required fewer markdowns to drive sales and continue to show IMU improvement. Compared to last year, lower markdowns, improved IMU and slight occupancy leverage, all contributed to the improved performance.

Selling, general and administrative expenses rose 1% to $33.2 million, or 28.1% of net sales, compared to $32.9 million or 28% of net sales in the same period last year.

While we continued to invest in marketing, particularly direct mail, we reduced our store apparel expense to align with lower mall traffic trends.

In the third quarter, marketing as a percent of sales was approximately 2.7% as compared to 2.1% last year.

We spent slightly less than our forecast, primarily on the e-commerce side, as we are transitioning to a new digital marketing partner.

Depreciation and amortization expense was $3.1 million in the third quarter compared to $4.4 million in the comparable period last year. There are no impairment charges recorded in the third quarter of fiscal 2013.

During the third quarter of 2012, we incurred a $333,000 pretax expense associated with the restructuring charges, primarily related professional services for negotiating lease terminations and rent restructuring.

Income from operations was $8.6 million in the third quarter compared to $3.6 million in the third quarter of 2012, or $3.9 million, excluding the aforementioned restructuring charge in last year's third quarter. At the end of the quarter, we maintained a full valuation allowance in our net deferred tax assets. As a result, we had an income tax benefit in the third quarter of approximately $55,000 due to reserve releases offset by minimum fees and taxes. In the third quarter of the prior fiscal year, we recorded an income tax provision of $39,000, primarily due to the assessment of minimum fees and taxes.

Net income for the quarter totaled $8.6 million or $0.23 per diluted share. Net income for the third quarter of last year totaled $3.6 million or $0.10 per diluted share, including a $0.01 per share expense related to restructuring charges.

For the 39 weeks ended November 2, 2013, total sales were $330.8 million compared to $314.3 million for the same period last year. Comparable store sales for the 39 weeks rose 11.3%. Net income for the first 3 quarters of 2013 was $9 million, or $0.24 per diluted share, compared to a net loss of $12 million or 34 cents per share last year.

Now turning to our balance sheet. We ended the third quarter with approximately $47.1 million of cash, cash equivalents and investments. This compares to $40.7 million at the beginning of the fiscal year and $33.2 million at the end of the third quarter a year ago.

Total inventory was $49.3 million as of November 2, 2013 compared to $58.2 million on October 27, 2012, a decrease of 15.4%.

Inventory per store, excluding in-transit and e-commerce inventory, ended the quarter approximately 10% below the level on October 27, 2012. This decrease is consistent with our expectations.

We have analyzed prior-year inventory levels, category performance, sell-throughs and margins for the fourth quarter. We believe we have an opportunity to generate improved performance in the fourth quarter due to our decreased seasonal inventory levels and by steady and transitional assortments earlier in the season. The composition of the inventory at the end of the third quarter was very current. With approximately 75% of the inventory represented by October as forward life-cycle products or core inventory. This is the same level at the end of last year's third quarter.

We had no outstanding borrowings at our revolving credit facility during the 13-week period ended November 2, 2013, and have not drawn on the facility other than to open letters of credit in the normal course of business. Capital expenditures for the third fiscal quarter totaled $3 million

During the third quarter, we closed 11 stores. Six of the stores that were closed were converted in 3 MPW stores. We also opened 2 new outlet stores and 1 MPW store. As of November 2, 2013, we operated 593 stores, consisting of 363 Christopher & Banks stores, 150 CJ Banks stores, 49 MPW stores and 31 outlet stores.

Now I would like to update you on our outlook for the fourth quarter of fiscal 2013. We expect same-store sales in the fourth quarter to increase in the low single-digits. This follows a comparable store sales increase of 18.5% for the fourth quarter of last year. This represents an acceleration and stock comp store sales compared to the third quarter. We expect approximately 100 to 250 basis point of gross margin improvement in the fourth quarter as compared to the comparable prior-year period. We expect SG&A dollars to decline, in absolute dollars, due to the 53rd week last year, offset to some extent by increases in marketing and medical costs.

Marketing is projected to increase to 2.9% of sales during the fourth quarter from 1.7% of sales last year. The increases in marketing relate to both the higher number of direct mail pieces, as well as increases in online marketing. Overall, SG&A as a percent of sales in the fourth quarter will be between 30% and 30.5% as compared to 30% in last year's fourth quarter. We expect to recognize a nominal tax benefit for the fourth quarter, and the company's reserve releases will slightly, will offset to the valuation allowances that we continue to defer. We expect our inventory levels to continue to show improvement in churns. We also plan to convert 26 stores into 13 MPW stores during the quarter.

Now I'd like to provide you with some of our expectations for the full fiscal year. As planned, we expect average store count to be down 8.4% for the full fiscal year as compared to the comparable prior year.

Capital expenditures are expected to be approximately $9 million to $9.5 million.

For the full fiscal year, we expect to open 6 outlet stores, 2 new MPW stores and converted a total of 40 stores to MPW -- to 20 MPW stores. We expect to end the fiscal year with 560 to 565 stores.

Finally, depreciation and amortization for the year is expected to be between $13 million and $13.5 million.

Overall, we believe we are well positioned to benefit from the initiatives we have been executing over the last year, and we're very excited about the opportunities that lie ahead as we continue to build upon this foundation.

Now, I'd like to turn the call back to Luann.

Luann Via

Thanks, Pete. Looking further out, we remain on track to deliver our 3-year growth plan, starting in fiscal 2014, including mid-single-digit annual comparable store sales growth, an additional 300 to 400 basis points of gross margin expansion and a high-single-digit operating margin by the end of the third year. In order to achieve these goals, we remain focused on several key areas to continue to drive growth.

We will continue to refine our merchandise strategy, providing her with new solutions and collections. Our assortment will reflect a strong price value equation, with a well-balanced, good/better/best pricing structure. We will continually evaluate and refine our marketing programs to drive traffic and brand awareness. We are also positioned to capitalize on our multichannel opportunities, with the new platform for our e-commerce channel that will enrich her outline experience.

Finally, the store environment remains a vital part of our relationship with the customer, and enhancing her in-store experience remains a key priority. These strategies are all geared towards driving comparable store sales growth and operating margin expansion.

Now, I would like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Kayla Berg with Piper Jaffray.

Kayla Berg - Piper Jaffray Companies, Research Division

My first question is for Luann. Within sweaters, you mentioned that they -- you guys saw some success, especially in October. Where, specifically, were you seeing the success? Was it with cardigans, novelty?

Luann Via

A collection of all 3, actually. So August and September, were a little softer, obviously, due to the climate in September. We have anticipated that we would be stronger. But as we moved into October and the weather became cooler, we were selling more cardigans, we're selling novelty and we are selling, what I would call, sweater vests. So our vests business overall has been very strong and sweaters was also a key part of it.

Kayla Berg - Piper Jaffray Companies, Research Division

Okay, and one more, maybe more for Pete. You mentioned the composition of the Q3 comp. Do you guys expect that the Q4 comp will be similar in composition to what we saw in Q3?

Peter G. Michielutti

Yes, we're still looking at down traffic trends, but continued improvement in the UPTs and AUR and conversion. So we don't see any significant change in the trends on that.

Operator

We'll go next to Christina Brathwaite with Sidoti.

Christina Brathwaite - Sidoti & Company, LLC

First, I was wondering, are you seeing any difference in the comp store sales at the MPW stores versus your single-brand stores and the margin differential at both of those?

Peter G. Michielutti

Yes, the comps continue to improve as we put those stores together. As we create a new store in [indiscernible] as an example, the new store is mirroring the old store sales or actually some increases in smaller square footage. So from an economic standpoint, it's a big win. And as we've said, the margins continue to be above the average of the CB and CJ stores independently.

Christina Brathwaite - Sidoti & Company, LLC

Okay. And then you just -- has the pilot stores changes been tabled? You haven't really talked about that or mentioned that at all this quarter.

Luann Via

We've incorporated all of the learnings from the pilot stores into the rest of the base at this point.

Operator

[Operator Instructions] We'll go next to Jeremy Hamblin with Dougherty & Company.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

I wanted to just ask about your marketing expenditures. And you mentioned, I think you did 5.4 million pieces in the third quarter.

Peter G. Michielutti

That's right.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

I think, though, in terms of your plan, it sounds like you maybe came in, still a little bit lower than the original plan in terms of your expenditures, are you seeing that you are just more efficient in the targeting of your marketing spend? Or how should we think about marketing spend going forward as you've -- in the second of the year, really started to increase that spend? Is it something where you are likely to continue to see the marketing spend as a percent of sales go higher? Or do you think that now that you've gotten to a level, we would see it level off going forward?

Luann Via

I think there is 2 things, Jeremy. The first is the reduction that you see to the original forecast that we put in was the reduction in e-commerce marketing, so our normal media marketing, direct mail, or those numbers were consistent with what we had originally spoke about. But we have been transitioning with the platform, et cetera, and changing things on our e-commerce channel. So that is where you see the reduction. As we move forward, we're analyzing and we are deep into it at this particular point, specifically, as it relates to the return on the investment on prospecting and gathering new customers. We don't see it going higher as a comparable in third and fourth quarter next year, although, in the spring, we will be up to the previous year. We were very lowly penetrated on marketing as a whole. So we think that we found the common ground here for us. But again, it's really more about the distribution of the dollars and where we're getting the biggest return on our investment.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

And do you have some initial sense on that as of now? I mean, are you starting to see -- as you move to the new platform with e-commerce, are you starting to get better returns on investment on that side of the business, or is the reduction versus plan on e-commerce, indicating that maybe you're not getting as much return on investment as you initially had thought on that side of the business? Because up 10% is clearly a very good result.

Luann Via

It is. So we believe that we have additional opportunity once we do make the investments in the e-commerce marketing. Does that answer your question?

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Yes, it does.

Luann Via

Okay. And then as it relates to our other marketing and CRM, we're seeing some nice results in new customers and reactivation. We're right now, like I said, doing a deep dive on the October mailing, which was the prospect new customer lookalikes mailing. So we'll see there and then we'll be reallocating. And we've been shifting right along. As we get the data back that from each one of our mailings, we're really seeing where the opportunities are and the teams are shifting continuously.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

And then if I could just ask a follow-up question on the credit card program. So you achieved 500,000 card members as of November, early November.

Luann Via

Right.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

And I just wanted to see what percent of your total sales -- I think, you said 2.7x of spending from your credit card users -- as the non-credit card users. What percent of your total sales are coming from the credit card program?

Luann Via

No. For the third quarter, it was 23%; in the second quarter, I think it was 21%. So, I think, you probably asked me what's my goal. So I would say that, from my past experience, it can be as high as 40-plus percent. So that's not our internal goal. However, I think, our expectation have been far exceeded on what we expected to get as -- only in the opening of accounts, but also in the penetration of sales. So, I think, there is a lot more room for growth on the PLCC as a percent to our total sales business. And as you know, not only do they shop more, but they are also spending more and they are much more profitable than our non-PLC customers.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

And then just 1 additional follow-up. The offering to be able to pay in-store, how -- what percentage of your users are actually using that option to pay down their bills? Do you have a figure on that?

Luann Via

We're actually just tracking that now. We launched it on November 11, and we have had great response to it. So we're analyzing that piece of it, how many are actually paying their bill and then how many are actually spending on top of it. We also have a lot of customers that pay their bill off, but once they actually charge. So we don't have the analysis back on that yet, but it's always an opportunity for the customer to make another visit to the store, and my past experience shows that they tend to make additional purchases at that time.

Operator

And at this time, there are no additional questions in queue. I'd like to turn the conference over to Ms. Luann Via for any additional or closing remarks.

Luann Via

Thank you so much for joining us, and we look forward to updating you on our progress in our next earnings call. Best wishes to all of you for very happy, healthy holiday season. Thank you so much and have a great day.

Operator

And ladies and gentlemen, thank you for your participation. This will conclude today's conference.

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