Cost Plus, Inc. Q4 2009 Earnings Call Transcript

Mar.25.10 | About: Cost Plus, (CPWM)

Cost Plus, Inc. (NASDAQ:CPWM)

Q4 2009 Earnings Call Transcript

March 25, 2010 4:30 pm ET

Executives

Barry Feld – CEO

Anne Mirante – VP, Finance

Jane Baughman – EVP and CFO

Analysts

Budd Bugatch – Raymond James

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2009 Cost Plus Earnings Conference Call. My name is Melanie and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the call over to Mr. Barry Feld, Chief Executive Officer. Please proceed, sir.

Barry Feld

Thank you. Good afternoon and thank you for joining us to discuss our fourth quarter and fiscal 2009 results. With me for this conference call are Jane Baughman, Executive Vice President and Chief Financial Officer; Anne Mirante, Vice President of Finance; and Charlie Miltner, our Corporate Controller. Following my opening remarks, Jane will discuss the financial results in detail, after which I will make some concluding remarks and then open the call for questions. But before beginning today's discussion, Anne Mirante will read the company's Safe Harbor Statement.

Anne Mirante

Certain forward-looking statements regarding the company's future performance and initiatives will be made during this conference call and will usually be preceded by words such as belief, anticipates, projects or expects. Any such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements. Such forward-looking statements include, but are not limited to, statements relating to our first quarter sales trends, our fiscal 2010 gross margin, our projected fiscal 2010 peak borrowing capacity and liquidity and our financial guidance for the first quarter of fiscal 2010.

The risks and uncertainties include, but are not limited to, continued deterioration in economic conditions that affect consumer spending, changes in the competitive environment, currency fluctuations, , timely introduction and customer acceptance of merchandising offerings, foreign and domestic labor market fluctuations, interruptions in the flow of merchandise, changes in the cost of goods and services purchased, including fuel, transportation and insurance, material, unfavorable outcomes with respect to litigation, claims and assessments, unseasonable weather, the effects associated with terrorist attacks and changes in accounting rules and regulations. A more complete listing of risk factors is included in the company documents on file with the Securities and Exchange Commission.

Barry Feld

Thank you, Anne. Fiscal 2009 was an extremely challenging year by any measure. The economic collapse that occurred in late 2008 caused many retailers to reevaluate their business models with respect to the new value-based economy and focus on core strengths.

Economic visibility and operating predictability were severely limited. Our strategic objectives for fiscal 2009 focused solely on improving cash flow and strengthening the fundamentals of our business model.

Our merchandising strategy was straightforward. Restore initial mark-ups and reduce markdowns, maximize the consumable business to drive repeat footsteps and exploit our core competency and seasonal products across the three pillars of the brand, home decorating, home entertaining and gift-giving.

Additionally, several strategic initiatives within marketing including alternate media and a royalty program were developed and tested throughout the year. With the exception of reducing markdowns, the strategy was executed.

Our financial plan for fiscal 2009 was conservative and did not anticipate an economic recovery. It allowed the company to continue its turnaround efforts with cash preservation as the overriding principle.

For the first nine months of the year, the company reduced its EBITDA loss from continuing operations, excluding store closure costs by 12%, despite a 10% decline in same-store sales. In the fourth quarter, we generated net income and $17 million in EBITDA, with a 2.5% decline in same-store sales.

Although, we fell short of our breakeven EBITDA target for the full year by $12 million on a non-GAAP basis, we dramatically reduced our annual non-GAAP EBITDA loss from continuing operations by 48%, with a 7% decline in same-store sales. The company exceeded the $21 million in planned cost reduction initiatives with the incremental savings flowing to the bottom line.

The primary cause of the EBITDA shortfall was gross margin. Consistent throughout the year, we experienced strong sales and margin performance in the seasonal areas of our business, including Easter, Halloween, fall harvest and holiday. This was offset by higher price point categories, primarily dining and living furniture, which are considered purchases that depressed the average ticket. However, we did achieve positive comps in gourmet food and several home businesses such as kitchen, textiles and outdoor furniture, which have lower price points than our indoor furniture.

Customer count was flat for the year. The 7% decline in same-store sales was the result of a reduction in the average ticket. The promotional activity, particularly from higher and specialty retailers, was fierce and the company responded by heavily promoting furniture, which negatively impacted gross margin to maintain market share. Additionally, the markdowns associated with scaling the new customer acquisition campaign in November and December were not contemplated in the fiscal 2009 plan.

We believe these were acceptable trade-offs needed to position the company for market recovery. In January, we announced a series of organizational changes. Our two senior merchants, Matthew Gee, Vice President of Consumables and Marilyn Incerty, Vice President of Home and Trend Development now report directly to me. To accommodate this change, store operations now report to Jeff Turner, Executive Vice President of Operations and our Chief Information Officer.

New merchandising structure enables me to work directly with merchants on pricing and refining assortments to address customers' changing needs based on purchasing patterns. Seamless integration between merchandising and marketing will increase the speed by which we can drive traffic and quickly restore gross margin.

Our financial projections for fiscal 2010 reflect a level of cautious optimism based on the continuation of the momentum experienced in the fourth quarter of fiscal 2009. The company's limited working capital requirements for fiscal 2010 and our $200 million revolving line of credit continued to provide sufficient liquidity for seasonal borrowing needs.

Specifically, in fiscal 2010, we expect to accomplish the following. Restore gross margin, continue to secure pricing concessions that allow for lower retail price points and reduce the need for promotional markdowns. Expanded use of alternate layered media to drive new customer acquisition and reduce reliance on price and item tab inserts.

Expand the world market explorer program to drive shopping frequency and increase the average ticket. Then came strong inventory discipline and tight skew count in conjunction with controlled inventory buildup to support the plans increases in same-store sales.

Continue to improve customer service levels to drive increases in both conversion and units per transaction. Fortunately, the relative newness of both our store fleet and our distribution centers continues to allow us to limit capital spending to system maintenance and compliance projects. The combination of the actions taken in January to restructure the merchandising organization and the ongoing refinements to our marketing strategy have placed the company in strong position to achieve positive EBITDA in fiscal 2010.

I will now turn the call over to Jane for our further commentary on the financials.

Jane Baughman

Thank you, Barry. As a reminder, the income statements included in this afternoon's press release clearly breaks out the results from continuing and discontinued operations for both the current year and prior year period. The company's balance sheet presentation remains unchanged.

Total net sales for the fourth quarter of fiscal 2009 was $320 million, a 4.6% decrease from the fourth quarter of fiscal 2008. As previously announced, same-store sales for the nine-week holiday period increased 0.3%. Same-store sales for the quarter decreased 2.5% compared to a 6.1% decrease last year. The decrease in same-store sales for the quarter was due to significantly less clearance activity in January 2010.

Customer count for the fourth quarter increased 2.7%, offset by a 5.1% reduction in the average ticket. While the eastern region continued to outperform the western region, the trend in the western region continues to improve. As I discussed on the third quarter conference call, the western region is responding strongly to the new customer acquisition campaign. This trend has continued into the first quarter of fiscal 2010.

The mix between home and consumables as a percentage of total net sales was 54% and 46% respectively for the fourth quarter of 2009 versus 56% and 44% respectively for the fourth quarter of 2008. For the full-year, the mix between home and consumables was 59% and 41% in fiscal 2009, versus 61% and 39% in fiscal 2008.

Gross profit rate for the quarter increased 340 basis points to 27.4% versus 24% last year. Excluding the $9 million inventory write-down last year, gross profit rate increased 80 basis points, primarily due to efficiencies realized in our supply chain. Occupancy costs as a percentage of sales for the fourth quarter deleveraged by 30 basis points over last year, primarily due to lower same-store sales.

Gross profit rate for fiscal 2009 increased 40 basis points to 26.4%, versus 26% for fiscal 2008. Reductions in the cost of merchandise were offset by promotional activity required to compete with aggressive discounting among other specialty retailers, particularly in the furniture category.

Occupancy costs as a percentage of sales for fiscal 2009, deleveraged by 90 basis points over last year, primarily due to the lower same-store sales. The savings from the company’s rent concessions will be minimized on the income statement due to the straight line rent method of accounting. On a cash basis, the company realized approximately $4 million in rent savings for fiscal 2009 out of the total $15 million obtained under our rent abatement program.

Fourth quarter SG&A expense includes $680,000, an impairment charges for the write-down of property and equipment to net realizable value. Additionally, the company recorded the $383,000 severance charge in the fourth quarter related to the merchandizing reorganization.

Excluding the items outlined in the press release, SG&A expenses as a percentage of sales were 23.9% for the fourth quarter of fiscal 2009, versus 26.4% last year. Fiscal 2009 SG&A expenses as a percentage of sales, excluding special charges were 31.1%, compared to 32.7% for fiscal 2008. The decrease in SG&A expenses reflect the ongoing benefit of the company’s cost-cutting initiative including store closures.

Reopening expenses for fiscal 2009 was $238,000, compared to $3.2 million for fiscal 2008. The company opened two new stores in fiscal 2009 and opened 15 stores in fiscal 2008.

For the fourth quarter of fiscal 2009, the company reported earnings from continuing operations before interest and taxes, or EBIT, of $10.7 million, a $22 million improvement over the prior year. For the full-year, the company had an EBIT loss of $48 million, an improvement of $39 million versus a loss of $70.7 million last year.

The company believes that the non-GAAP financial measures for EBIT and EBITDA outlined in today’s press release allow analysts and investors to understand and compare the company’s operating results in a more consistent manner.

On a non-GAAP basis, the company generated $17.6 million in EBITDA for the fourth quarter of fiscal 2009 and an EBITDA loss of $12.2 million for the full-year. While the company did not achieve the breakeven EBITDA target for the year, as Barry already discussed, we have made the organizational changes needed to restore gross margin and return to positive EBITDA in fiscal 2010.

Net interest expense for the fourth quarter was $2.8 million versus $3 million last year. Net interest expense for the full-year was $11.2 million versus $12.8 million last year. Included in full-year interest expense is $8.2 million related to distribution center leases for both 2008 and 2009. The decrease for the year and interest expense is due both to lower weighted average interest rate and lower borrowings on the company’s asset-based credit facility.

Net income on a GAAP basis for the fourth quarter of fiscal 2009 was $21.1 million or $0.95 per share versus a loss of $18.3 million, or $0.83 per diluted share for the fourth quarter of fiscal 2008. Net loss for fiscal 2009 was $63.3 million, or $2.87 per diluted share, compared to a net loss of $102.7 million, or $4.65 per diluted share last year.

In the fourth quarter of fiscal 2009, the company had an income tax benefit of $13.1 million, primarily as a result of the NOL tax refund that was received in February 2010. Total inventory decreased $40.9 million, or 18.8% to $177.2 million when compared to last year. The reduction in inventory is the result of store closures, planned decreases in SKU count and lower weeks of supply.

Per-store inventory levels are expected to rise modestly to support the planned sales growth in fiscal 2010. Accounts payable was $66.1 million versus $75.2 million last year. Days payable at the end of the fourth quarter of fiscal 2009 were 41 versus 44 for the same time last year.

For the year, capital investments for 2009 projects were $2.9 million versus $11.9 million in fiscal 2008. Capital spending for fiscal 2010 projects is forecast to be $4 million for the full-year.

The company ended the year with $48.5 million in borrowings and $12.9 million in letters of credit outstanding under its asset-based facility, compared to $38.5 million in borrowings and $13.5 million in letters of credit last year. The $200 million revolving credit facility expires in June 2012.

As a result of our credit agreements, inventory reduction and minimum capital expenditures, the company’s liquidity position is sufficient to meet planned expenditures through the next 12 months.

In this afternoon’s press release, we have provided our outlook for the first quarter of fiscal 2010. The company expects first quarter net sales in the range of $185 million to $188 million based on the same-store sales increase in the range of 3% to 5%.

Gross profit margin for the first quarter is expected to be 200 to 240 basis points higher than last year.

For the first quarter of fiscal 2010, the company is projecting a loss from continuing operations before interest and taxes in the range of $11 million to $13 million versus a loss of $22.3 million last year.

Depreciation and net interest expense are projected to be $6 million and $3 million respectively, resulting in an EBITDA loss in the range of $5 to $6 million versus an EBITDA loss of $14.5 million in the first quarter of last year.

The company relocated one store and closed five stores in the first quarter of fiscal 2010 versus opening no new stores and closing 26 stores in the first quarter of fiscal 2009.

I will now turn the call back over to Barry for his concluding remarks.

Barry Feld

Thanks, Jane. In closing, the company made significant progress in fiscal 2009 by rationalizing the cost structure of the business and dramatically reducing losses. We have great confidence that both our financial plans and strategic initiatives for fiscal 2010 are realistic and achievable, which keeps the company on track to deliver net income in fiscal 2011.

And with that, I’d like to turn the call back over to the operator to open it up for the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) And our first question comes from the line of Budd Bugatch with Raymond James. Go ahead.

Budd Bugatch – Raymond James

Hi. Good afternoon, Barry. Good afternoon, Jane.

Barry Feld

Hi, Budd. How are you?

Jane Baughman

Hi, Budd.

Budd Bugatch – Raymond James

I’m well. I’m well. Hope you are too.

Barry Feld

We are. We are.

Budd Bugatch – Raymond James

Just you said that, you look forward to having positive EBITDA this year, is that what I heard?

Barry Feld

That’s correct.

Budd Bugatch – Raymond James

Okay. And the E and DA [ph] side of that equation is 28-ish or so? How do we…

Jane Baughman

Yeah. That’s fine. Slightly less than that.

Budd Bugatch – Raymond James

A little bit less than that?

Jane Baughman

Yeah.

Barry Feld

Yeah. But that’s definitely in the ballpark.

Budd Bugatch – Raymond James

Okay. And you talked about restoring gross margin, but I don’t know that I heard a number. To what level are we going to look to restore it to this year?

Jane Baughman

Year-over-year for the full year, we expect gross profit to go up at least 200 basis points.

Budd Bugatch – Raymond James

For the full year?

Jane Baughman

For the full year.

Barry Feld

That's correct.

Budd Bugatch – Raymond James

So from 26.4 to at least 28.4, is that right, is that the way?

Jane Baughman

Yeah.

Budd Bugatch – Raymond James

Okay. And on the operating expense line, what, what's the variability of the operating expense now to sales? How does that work today?

Jane Baughman

Well, store payroll and advertising have a fixed and variable component, so you'll see some movement in some of those. And then within SG&A, you have probably got, other SG&A I should say, about 4% variable expense.

Budd Bugatch – Raymond James

4% variable in the G&A side of it.

Jane Baughman

Yeah.

Budd Bugatch – Raymond James

And then the S side of it and the advertising, what do you think the variability rate is on that?

Jane Baughman

Well, I would say that with regards to our marketing spent, it will be comparable to this year.

Budd Bugatch – Raymond James

Is that a fixed chain? And that's a dollar amount.

Jane Baughman

That's a dollar amount.

Budd Bugatch – Raymond James

And did you give the number for this year so far? Did we get that number?

Jane Baughman

It's approximately the same number.

Budd Bugatch – Raymond James

From last year?

Jane Baughman

For 2009.

Barry Feld

Yeah. Budd, we didn't put that number out, but it will resemble what we spent in 2009.

Budd Bugatch – Raymond James

So, 2010 would be – 2011 would be the same?

Jane Baughman

Yeah.

Barry Feld

In fiscal 2010, the fiscal year that we're in will be the same as 2009.

Budd Bugatch – Raymond James

And that number for 2009 was the same as 2008? I'm trying to remember what the number is.

Jane Baughman

2008 was higher because we had significantly more media market.

Budd Bugatch – Raymond James

Okay.

Barry Feld

It's approximately $50 million.

Budd Bugatch – Raymond James

That's a good number, okay. Thank you.

Jane Baughman

For '9 and '10.

Barry Feld

Yeah

Budd Bugatch – Raymond James

Okay. For '9 and '10, okay. And the stores, which you expect to end the year with? Just to make sure, I –

Jane Baughman

263.

Budd Bugatch – Raymond James

All right. And as you're looking at your composition of sales in the fourth quarter between consumables and non-consumables, how did that run?

Jane Baughman

For the fourth quarter, consumables ran about 2 percentage points higher than it did a year ago, so home was 54% and consumables was 46% in the fourth quarter.

Budd Bugatch – Raymond James

Have you seen much change in that this year?

Jane Baughman

On the go-forward?

Budd Bugatch – Raymond James

Yes, ma'am.

Jane Baughman

I want to be careful how I say it. So, we think that the continued – the consumables business, which has done well in the last year, will continue to do well. But we expect more from the home side of the business as we move into 2010 and that's where we put our inventory investments. So you could actually see a small or modest decline in the consumables percent to total.

Budd Bugatch – Raymond James

So that would be positive.

Barry Feld

I would add to that, Budd, is the penetration of consumables was by design in 2009 because the economic environment, we felt that given our core competency in the whole array of consumable and the lower price point activity related to that, lot of our marketing efforts and in-store initiatives were more weighted towards that consumable side of the business than otherwise would be the case in a more normalized environment.

Now that we're seeing improved activity on the non-consumables side of the business, I think one could speculate that our emphasis on that side of the business would be downplayed to some modest degree as we move into the holiday season later in the year, given the economic climate strengthening.

Budd Bugatch – Raymond James

Yeah. I mean if housing is starting to get better, you would expect the relative improvement in our home related business to be better than the rise and improvement in our consumables related business, which presumably had less tradability during this answer.

Barry Feld

That's correct. Okay.

Jana Baughman

If I go back to the comment on store closures, we expect to end the year right now around 263 stores, but we will continue to work with our landlord as leases come up for renewal and with our rent abatement program to evaluate what's best for the company.

Budd Bugatch – Raymond James

And how many stores come up for, come off rent role this year, potentially?

Jane Baughman

25 to 30.

Budd Bugatch – Raymond James

Okay. All right. And I want to make sure I got the answer for that. So for the year, I just, I'm trying to make sure I understand, Barry, on the improvement of gross margin, do you think – how much of that is due to the mix improvement that you are hoping for or expecting, how much is due to – maybe less markdowns, better IMU?

Barry Feld

I would say it's almost evenly split between our anticipation of positive same-store sales continuing as we move through the year. And so the leverage will get off the occupancy side which enters into our cost of goods. And then, obviously, the improvement on the nonfood side of the business, which has stronger margins than you would find in the consumables.

Budd Bugatch – Raymond James

Have you made any changes in the merchandising in the furniture side? I know that was an area of opportunity that you had identified before.

Barry Feld

I'm sorry. I didn't hear the first part of the question, Budd.

Budd Bugatch – Raymond James

Have you made any changes in the merchandising of the furniture side of your business? What can you describe? Since I don't always get to see a store with the frequency that I would like, I know that that was an area of opportunity that you were looking at.

Barry Feld

Yes. Well. And you also know, particularly in the Western United States, the higher price point of living and dining furniture, when we entered into 2009 was putting great pressure on the business model. And so as we moved through the year, we strategically edited out elements of that assortment for more aggressive price pointing, working closely with our supplier relationships to get underneath the cost of goods side of that, to be able to have even lower price points, smaller assortment of the higher price, particularly dining products.

And then, we have really continued to build up the emphasis on the S&P side of the furniture business. And we feel that we're really quite well positioned in 2010 to take advantage of some sort of modest improvement in this tent up demand, for the home décor, the home furniture side in the business that we anticipate with the consumer, particularly in the Western United States and with the lower price points and a more robust offering of the accent pieces. We think that will bode well for us as we move through the year.

Budd Bugatch – Raymond James

Okay, all right. Well, I'll let others ask their questions. Thank you very much for your time.

Barry Feld

Thanks, Budd.

Jane Baughman

Thanks, Budd.

Operator

(Operator Instructions) And, I show no further questions at this time. I would like to turn the call back over to management for any closing remarks. Please proceed.

Barry Feld

Thanks, Melanie. Well, again, thanks for all of your participation. We'll look forward to updating you as we move through the year and we have a successful completion of our Q1, which is in process. So we want to wish everybody a happy holiday season that's coming up and we'll look forward to updating everyone again in May. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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