Hamish Sandhu - Chief Financial Officer
Joe’s Jeans, Inc. (JOEZ) Wedbush Securities 14th Annual California Dreamin’ Consumer Conference Call December 10, 2013 1:20 PM ET
Thank you. I’d like to walk you through our current Investor Presentation. It speaks specifically to our recent acquisition of Hudson, what it means to us in terms of revenue growth, EBITDA growth and cash flow generation.
This slide here speaks to who we are and what we do, we’re a dominant premium denim leader with strong brands. For 2013, on a consolidated basis, we’re projecting pro forma revenue of about $200 million and pro forma EBITDA of around about $21 million, so a 10% EBITDA margin.
Our three brands Hudson, Joe’s and Else. Hudson accounts for about 40% of the revenue; Joe’s, 57%, and Else 4%. On an EBITDA basis Hudson accounts for 54% of the EBITDA and Joe’s 46%’ Hudson’s price points are lot higher and the overall infrastructure, they have results in lot more profitable in terms of EBITDA.
This presentation is really going to focus on the Hudson and Joe’s brands. Those are the two brands that can really move the needle for the company going forward. In terms of channel distribution, for 2013 we're in all the channels domestic women’s wholesale 60% the revenue came from that channel, like 20% for the men's wholesale 14% for retail and 6% for international. The domestic women’s wholesale channel is a maturing channel for us and the growth opportunities are really in the domestic men's and the retail as well as the international channels.
A question that continually comes up is who is the average premium denim shopper. We had a study done back in mid 2012 to solidify 2012 for the Joe’s brand and it was done by a firm called McGarrah Jessee. They identified the average premium denim shopper is being a 33 year old girl owns about 7 pants of premium denim, in fact she owns a lot more but it’s actively wearing the 7 pants, makes about a good six figure income, doesn’t have kids or 60% of them were found to be single women. So it’s very much skewed towards the single girl and buys the new pant every other month. So it provides a fairly good replenishment cycle for that.
The number one criteria in terms of denim, why she buys denim is, fitting my body right, that’s the number one criteria. It’s even more important two times more important than making her feel stylish. So being on trend is just the cost of doing business. So the color trend is in; coated denim trend is in; leather (inaudible) that’s just the cost of doing business.
Our brands as most of you know are always known for their fits. We've recognized that jeans one size doesn’t fit all these a multiple number of silhouettes and as a result of that big criteria the Joe’s men is the 3rd most owned premium denim brand. Both brands have a very different loyal customer base, but Joe’s brands is tailored towards an older customer base. A girl is looking for a great fitting five pocket jean, but the Hudson’s jean is tailored towards a girl who is looking forward to a forward fashion product with its signature of flat back pockets. About 75% of Hudson sales, unit sold comes from the back flat pockets.
Why invest in Joe’s? Several reasons; we have a growing legacy women’s wholesale business, maturing on the Joe’s side still growing on the Hudson style side. We have a expanding men’s wholesale distribution. We continue to develop new and existing international markets. On the retail side we are opening retail stores for the Joe’s brand reducing build ups cost and increasing profitability and also most importantly there are lots of outsourcing opportunities that we can live with. The presentation speaks in some detail to all of these points.
Going to an overview of two main denim brands, how they’re different, how they are similar. So we have $200 million in revenue, as you can see the Hudson brand has grown from $65 million all the way up to $80 million over the last three years; the Joe’s brand has grown from $95 million to $122 million over the last three years. So these brands are growing, we expect them to continue to grow.
In terms of product offerings, as you can see the Joe’s brand product offering is much more expansive than the Hudson brand and the primary reason for that is that we have retail stores, we’ve build out a collection over a period of time. So we are across all apparel categories. So we sell denim, knit and woven tops for the Joe's brands, sweaters, outerwear we also licensed some product. The price points of 158 to 234 for the denim unit, in knits and woven tops 50 to 150, sweaters 150 to 250, outerwear 250 to 500.
On the Hudson brand, it's a much narrow product offering. The denim price points are much higher, 150 to 450. They also have some non-denim and leather units that the sale, the price points are 150 to 950 and they license kids’ products as well.
In terms of brand representation. Joe's brand really it's best set for California lifestyle or lay back California lifestyle. The Hudson brand is rooted in the legacy of British cool with the Gini & Jack in signature back flat pocket.
In terms of channel representation for the individual brands which you can see with both and heavily into the domestic wholesale segments. Our retail segment on the Joe's side is 22% of the business, much higher than Hudson’s which is 3% and that's probably due to the fact that we have 34 stores. Domestic men's, Joe's brand 22%, Hudson's is 17%. International is much bigger on the Hudson side, a 10% versus Joe's 4%. So there is some channel differentiation there.
This slide here the sourcing difference, which is -- this is a very important slide. It really kind of speaks to some real opportunities here for us. On the Hudson side, close to 90% of the denim units are sourced in the U.S. and 10% comes from Mexico. For Joe's if you look at the denim component, it's about 80-20. The Asia segment here that sources most of our none denim items, but if you look at denim by itself it’s 80-20. So it’s really flipped as compared to Hudson and that really presents a wonderful opportunity in terms of sourcing and cash generation. The unit costs down in Mexico are about $10 lower than what they are in the U.S. the contract labor is quite cheaper. So we are using same fabrications, Italian fabrics, same trails, just a cheaper contact labor pool. I will go into much more detail about the overall sourcing and input cost savings further on the presentation.
Looking specifically at the Joe’s brand, we launched it back in 2001, as with the line of women’s premium denim being sold into the specialty sourced title. In 2008, we launched our men’s line, sorry, in 2006, we launched our men’s line and in 2008, we launched our retail stores, our first four retail stores.
So the revenues grown consistently over that time period. And if you look at 2013 domestic women’s wholesale accounts for $58 million of the overall revenue back in 2005, it accounted for 100% of the overall revenues. So you have had this constant diversification that has been taken place over the course of the brands [for business].
In terms of the women’s line, we have always been known for our fits. I am not saying that we’ve got the best fitting jeans, we just always have offered a multitude of fits different waist to hip ratios. We have got the Curvy Bootcut fit which is for the (inaudible) girl, the Petite cut fit which is for a shorter girl, it’s got a higher knee break, so the hands ending is where it should be on the premium denim.
So we have all these fits that we offer around about 10 to 12 fits. The girl finds a fit that works for her each season she comes back and looks at the different fabrications washes and [banishments] in that particular fit. So it makes a jean shopping very easy and builds a fairly loyal customer base.
Looking at the financial performance of this segment. This segment has been growing. In 2013, a bit decline by about 5%. It is our most matured business segment. In 2012, it was a great growth here for us in terms of the color and printed denim trend that really drove growth for 2012; the girl was coming in and buying her colors. We had a very, very large color campaign offering from over 55 colors of denim. And that was a very, very hard number to comp against this year, so that's primarily the reason that it went down. This year, 2013, the vintage jean and several new core basics with attractive opening pricepoints have been driving the business.
In terms of doors, we have about 350 department store doors in this channel and about 1,000 specialty accounts. It’s more so a 60-40 mix, 60% of the revenue comes from the department store doors and 40% from the specialty stores doors. And the specialty stores doors aren’t really concentrated, they are very broad in terms of value generation.
Looking at the men’s business. Once again that was launched in 2006. It’s a fit driven business as well, just like the women’s, we have five fits scales, the guys are much easier to fit than girls. In middle you’ve got the Classic regular fit with a 17 inch legs openings. To the right of that, you got the Rebel which has got a 18 inch leg opening and then the Rocker. And to the left of the Classic you’ve got a narrow skinnier jeans that's often called the Brixton and then the Super Slim fit with a much smaller leg opening.
In terms of financial performance of this particular segment; it's been growing, we keep rolling doors, sell-through have been very, very strong; in 2013, it was up 21%. It was the fastest growing segment for us in 2012. The denim replenishment program is a very, very integral part to the men's growth. Guys ended buying bulk several pairs of jeans of the same style. The way the replenishment program works is that we offer between 3 and 6 styles available for alone. (Inaudible) store set minimum inventory levels for these styles and as they sell-through, they particularly order it. So, that replan program generates close to 30% to 35% of the revenue.
Internationally for the Joe’s brand, it only represents 4% of our business at this point in time. We really are concentrated in Japan, Europe and Canada. We’re committed to growing this business; we're building out our own team domestically. We’ve hired a new VP of International Sales back in 2012 and she has been putting in place new distributors attending a lot more trade shows, hiring [PRs] in England and London. So we're putting all the pieces in place and we will definitely see revenue growth from this channel in 2013 and beyond. It really should represent 20% to 30% of Joe’s business and it’s just a question of capital investment and time to see that takes place. On another note, we've also opened up our first franchise retail store in Canada and we are looking to open up a couple of other franchise retail stores in the Philippines and Thailand.
Retail, so this is the most exciting opportunity for the Joe’s brand in terms of growth. It can really impact the overall business of the Joe’s brand. It’s the fastest in terms of revenue growth, in terms of profitability growth and also growing the brand of Joe’s.
Initiatives that we are undertaking, want to grow revenue through new store openings and increasing same-store sales. We’ve really simplified our design focusing on small footprints; those small footprints are much more productive in terms of overall contribution of EBITDA. We continue to invest in our e-commerce side. That channel of revenue has been growing steadily over the years and will continue to do so. And so all these measures, we expect to expand our consolidated EBITDA margin.
So, our long-term objective is to have 70 stores in the U.S. by 2018. Currently we have 34 stores, 14 full priced and 20 outlets. We opened six stores in 2012, another six in 2013. We have a lot going on in 2013, so that’s one of the reasons we just opened up six. But we are being very, very selective in terms of the stores that we open. We have a specific recipe that we are following that we’ll speak to in just a moment.
Same-store sales were projected to decrease by 6% for the full year 2013. As I said, in 2012, we had a tremendous year in terms of color. As you can see in the far left hand corner that whole backlog was just covered with color denim in our stores that we were offering, and it was a very difficult comp for us to meet. Going forward, we are targeting low single-digit same-store sales comps for 2014. And we are projecting growth to about $80 million in revenue by 2018.
In terms of retail CapEx, our current average size is about 1,900. We are targeting an average size of footprint of about 1,500 or less. We tested a 1,000 square foot stores; there were three of them in the first half of the year that was at Tysons Galleria, NorthPark and Fashion Valley San Diego. Looking at the last two quarters of full performance for those three stores, they are averaging about 14% EBITDA margin. So the lower rents associated with the lower footprints are really improving the productivity of those stores.
The key thing here with regard to the smaller stores is the selling space. If we can get 800, 850 square feet of selling space, be really smart about the backroom, these are very, very, very productive stores. So going forward, we expect to have smaller footprints and reduce capital expenditure without any loss of productivity.
E-commerce, this is running at about $2.5 million in revenue for 2013, it's been growing for the last three years at a cliff of about $300,000 a year. It's gaining a lot of traction and we expect that to continue to grow. We've implemented a new mobile website, also taken a few other measures on the website, personalized product recommendations tailored to Joe's customers. We're also in the process of implementing customer for the [chat software] to better provide customer care. So, we expect an improvement in all the metrics in this particular area, increase in conversions, reduction in returns, lift in the average transaction value and improvement in inventory management.
So overall, we expect to eventually target EBITDA margin to 25%. If you really look at the newer stores that we've added with the smallest footprint, as I said, they’ve just been opened for one year. And if you look at the four quarters that they have been opened for, the three stores, they are running at about 14% EBITDA margins. This year, one of the things that impacted to moving from 18% to 11% was -- it was a very, very promotional year in terms of retail. We had more [retail] sales with deeper discount. So, if you look at the retail segment, the overall margin went from 70% to 65%, which really obviously impacted EBITDA margin.
Now looking at the Hudson brand; just like Joe’s, product was launched in 2002 and has been growing steadily. They launched their men’s line; they started in 2002 with the women’s line, 2008 with the men’s line. And as you can see the women’s line currently accounts for about $55 million of the overall revenue and men’s has been growing steadily over the three year period.
Once again, it’s a fit driven business. The thing to notice here is the back flap pocket, it’s just a signature back flap pockets. If a customer is after that the gal goes to Hudson. They really dominate that marketplace. So, it’s a very different jeans if you will. They have a multitude of fits as well. In terms of the revenue growth, it’s been growing steadily over the last three years, 49, 53, 55. They’ve got a strong distribution, all premium, denim department fits a very fashioned for product and appeals a younger customer. The women’s line continues to meet the strong consumer acceptance. And it seems to be gaining a lot of traction.
Obviously there is about 330 doors, so there is a little bit of a maturity that’s taking place there, so sell-through is a key here. Men’s like Joe’s, we offer -- they offer a lot of different fits and it’s young business for them and it’s been doing very, very well. As you can see, $7 million to $13 million, so it’s pretty much doubled over the last three years, drawing the really steady cliff, not only through rolling into more doors, they have about 220 department stores doors they are in, but just through sell-through is doing very, very well.
International, it’s at $8 million, double the size of the Joe’s brand at this point in time. 2013 was a year with basically realigning some of their distribution arrangements in the UK and Germany. And they expect to really realize some growth from that next year. In terms of Asia, it’s kind of interesting because the Joe’s brand is in Canada, Europe and Asia. And they don’t really have a presence in Asia. We feel that the product is very well in Japan. So that's a new segment among that they can really tap into in 2013.
E-commerce, it’s running at about $2.5 million in revenue. It was launched in 2010 and it’s been growing very, very well. They are targeting it to be about 5% to 10% of their overall business going forward.
Gross margin expansion and EBITDA growth, I want to really focus on these couple of slides in the next -- for the rest of the presentation. There are some very, very important takeaways here. If you look at the overall net sales, for 2013, net sales grew by 5% on a pro forma annualized basis to $202 million, EBITDA declined by 10% from 23 to 21. The main driver there was overall promotional activity that took place in 2013, as well as the fact that ASPs were much higher in 2012 with the color trend, you are getting top ASPs on your fashion product back then.
We expect both brands to continue to grow into the future and that will help EBITDA growth. But more importantly, there are a lot of input cost savings that we can capitalize on to grow the EBITDA. I early on spoke to the fact that the contract labor cost in the U.S. is much higher than Mexico. So if you look at the current cost of manufacturing Hudson’s jeans it’s about $34 to $36 a unit ;and by moving that down to Mexico, it can become $24 to $26. So there is around about a $10 savings per unit.
So if you look at some numbers to that they’re at the moment on an average run rate of about 1.4 million units a year and then got about 140 units down there. If you were to take down 100,000 units down to Mexico, that’s another $1 million of EBITDA that can generate. I mean we've been down in Mexico for a long time. Our factories have capacity, they know how to generate premium denim product. So, it’s just a matter of executing it.
So if you were to move to say 40% of additional business down to Mexico, that’s close to 600,000 units, so they can translate into another $6 million. So it’s very, very appealing. That’s just looking purely at the contract labor. Now is that going to happen overnight? No. And the reason for that is that we have bought our fabrics all the way through to the second quarter. So in terms of beginning to move them down to Mexico, it really starts to impact the fourth quarter of next year and then into 2015. But in the meantime, we will be able to send down samples, get fit samples made, wash samples made and gear up the company so that we can actually increase the volume of Hudson product that comes out of Mexico.
Same fabrications, Italian fabrics, the same trend same quality product just sourced from Mexico. So there is a lot of overall savings that can be generated. So if you were to step back and look at the cost of goods sold lines for these combined companies, you are looking at about $100 million of cost of goods sold, we believe that you could save between 8% to 10% of that in savings.
On the trim side, that’s the buttons, the zippers, the threads, the [ribbons]. They were sourcing most of their trim from one vendor, we use multiple vendors. So we’ve moved them to the Joe’s environment of sourcing them from multiple vendors. That has a potential of saving close to $50,000 on a monthly basis on trim cost. So when we start buying our trims for the beginning of Q3, we’ll be able to save $50,000. Same thing with freight in terms of getting better freight rates, shipping fabrics from Italy all the way to Mexico, we will be able to choose the best freight rates and save additional cash there. So there are some tremendous opportunities in the cost of goods sold line that we can really capitalize on.
And also on the G&A line in terms of media buys, advertising buys, marketing costs, we can really leverage our scale to save substantial money in that particular area. So, all these items will result in significant cash flow savings for the company.
Looking at the balance sheet, we’ve got a significant amount of debt on the balance sheet. As you can see, we have a term loan of $60 million and ABL of $23 million. However, we do have a run rate EBITDA of $20 million -- $21 million that’s expected to grow with regards to all of the sourcing savings that I just spoke to, as well as a fact that with revenue growing as we move forward that will sort of grow EBITDA. So we feel that we’ll be able to easily service our debt and pay down debt over the upcoming years.
We've also got more than enough cash to grow our business. At the end of November, we had $22 million of availability on our line of credit. Our term loan has no fixed scheduled amortization, so that also gives us a lot of flexibility in terms of way we run our business. And cash interest cost on the current debt is amounted about $10 million.
So coming back to the reason side, why invest in Joe's Jeans, we're very excited about the opportunity that's ahead of us. As I touched based on the fact that we've got the legacy women's business that is still growing especially on the Hudson side. The men’s opportunity for us, that segment is really growing. International markets once again present a growth opportunity. And on Joe's side, we will continue to open up retail stores and increase our profitability there. And most importantly, all of these sourcing opportunities are within our control and we intend to capitalize on them.
Okay. Thank you. Any questions?
[No Q&A session for this call]
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