Joe's Jeans Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.13.14 | About: Joe's Jeans (JOEZ)

Joe's Jeans (NASDAQ:JOEZ)

Q4 2013 Earnings Call

February 13, 2014 4:30 pm ET

Executives

Lori Nembirkow - Corporate Secretary

Marc B. Crossman - Chief Executive Officer, President and Director

Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Analysts

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

James Fronda - Sidoti & Company, LLC

Steven Chang

Operator

Welcome to the Joe's Jeans Fiscal 2013 Fourth Quarter and Year End Earnings Conference Call. My name is Robert, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Lori Nembirkow, General Counsel for the company. Please proceed.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO; and Hamish Sandhu, our CFO. Before we start, let me review the company's Safe Harbor language.

Today's call may contain forward-looking statements, which are statements of the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made.

I also refer you to our reports that are filed with the SEC, which includes our 2013 annual report on Form 10-Q filed today. This report includes information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this conference call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today.

In addition, we will also be sharing certain non-GAAP financial measures today during today's call. Reconciliations to GAAP for the non-GAAP measures are contained in our earnings release that we released earlier today and is available on our website at www.joesjeans.com, under the Investor Relations heading.

Finally, a recording of this call and a telephone replay will be available for one week from today on the same part of our website. Now I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the fourth quarter results, and then I'll turn the call over to Hamish for a discussion of our other financial results. Finally, we'll end with a Q&A session.

We're pleased to announce that in the fourth quarter, net sales increased by 50% to $50.5 million. This included $16.1 million to our top line as a result of the purchase of Hudson that we closed at the end of September. It's important to note that sales at both companies increased during the quarter.

Our operating income decreased to $1.5 million from $3.2 million. However, these results included nonrecurring transaction fees of $3 million and a $2 million noncash charge associated with an increase in the valuation to fair market value of Hudson's inventory at the time of purchase. Backing out these nonrecurrent items, we generated operating income of $6.5 million, 105% higher than the $3.2 million of operating income from 1 year ago.

In the first quarter, we will record an additional $165,000 in transaction-related costs, and we'll book an additional $1 million noncash inventory charge. Our second quarter results will not be impacted by any cash or noncash costs associated with the transaction.

I'll discuss the sales growth of our wholesale and retail segments in more detail now. During the quarter, our wholesale business grew 60%. More specifically, Hudson contributed $16.1 million, which, on a pro forma basis, was an increase over their prior year. Else grew 37% and Joe's contracted 2%. Hudson's wholesale growth sales grew double digits, with growth coming from both men's and women's department and specialty stores. In the women's business, Hudson continues to sell more dollars per door through the department store channel, which was driven by a healthy reorder business during the quarter.

Women's specialty store sales growth was driven in part by selling more dollars per door and increasing the number of doors. We're very encouraged by the opportunity in front of us to grow the specialty store segment of the business for both men's and women's and for both the Hudson and Joe's brand, as a result of sharing our distribution list.

We've identified approximately 200 accounts that each brand can call on to generate additional business. To be clear though, Hudson's growth during the quarter did not include incremental revenues from cross-pollinating the account list.

Hudson's men's business is less mature than its women's business and continues to represent a big growth driver for the brand. During the quarter, the men's business experienced strong double-digit revenue growth. The men's business grew with all department store partners. In addition, we continue to grow through adding new specialty store accounts.

Hudson's international business contracted slightly during the quarter. The contraction was solely a function of transitioning the distribution model in Korea. We continue to grow in Europe as a result of our partnership with a master distributor in Europe. This partnership not only streamlines the logistics and workflows, but more importantly, ensures consistency in our branding, messaging and product presentation.

Joe's wholesale sales contracted 2% during the quarter due to a 10% decline in our women's business. The deficit was partially offset by growth in our men's and international wholesale businesses.

The women's wholesale business had similar declines in both department and specialty store segments. The decline was largely as a result of us taking back older fashion product in order to freshen up the floor and bring in new fashion style.

Our men's business grew mid-teens during the quarter. Similar to prior quarters, the department store business remains challenging, though. Our replenishment business continues to drive the bulk of the growth in this segment. Accordingly, we've been making adjustments to increase our core basic stock levels relative to our fashion offerings.

Our international business grew roughly 50% during the quarter. The biggest areas of growth came from France, the Philippines and Thailand. As a side note, I'm pleased to announce that our distributors in the Philippines and Thailand are both opening stores in the first half of this year. We expect those stores to operate in the same fashion as our license store in Canada.

Overall, retail sales grew 4% for the quarter. This growth was a result of operating 6 more stores this year than a year ago. However, our same-store sales decreased 10% in the face of very tough promotional activity from our competition during the quarter that we were forced to follow, traffic declines in the mid-teens and Cyber Monday not falling in the fourth quarter results as compared to a year ago. It's important to note that the trend line of our eShop business has been healthy. In fact, our eShop sales on a like-for-like basis from the Black Friday shopping period through Cyber Monday was up roughly 17%.

We made up a portion of the traffic deficit by increasing our conversion rates, putting the customer in higher-ticket items and selling more units per transaction.

Our gross margin decreased from 68% to 64% during the quarter. The promotional activity affected our gross margin.

In addition, our mix shifted in favor of collection items and licensee product, both of which carry a lower margin. I'll now turn the call over to Hamish for a more detailed discussion of the financial.

Hamish S. Sandhu

Thanks, Marc. As Marc just discussed for the quarter, on a consolidated basis, including 2 months of results from the addition of Hudson as one of our operating subsidiaries, net sales increased 50% to $50.5 million from $33.7 million over the prior year period. Both retail and wholesale sales increased by growing 11% and 60%, respectively.

Same-store sales growth for the Joe's stores opened at least 12 full months and eShop decreased 10%. Retail sales represented 15% of overall net sales for the quarter, decreasing from approximately 20-plus percent where it has been in prior quarters due to the addition of Hudson as an operating subsidiary.

Wholesale sales increased 60% during the quarter, driven by the addition of Hudson, increases in men's wholesale Joe's sales and the addition of Else. Our overall gross profit increased by 38% to $21.7 million from $15.7 million in the year ago period.

Overall gross margin decreased to 43% from 47% in the prior year period and was impacted by a charge of approximately $2 million in the fair value step-up of inventory acquired in the Hudson transaction, which was subsequently sold in October and November. Excluding this charge, our gross margins would have been comparable at 47% in both periods.

Our wholesale gross profit was up 32% to $16.7 million from $11 million in the prior year period. Wholesale gross margin was down 2 percentage points, coming in at 39% compared to 41% in the year ago period. Again, wholesale gross margins were impacted by the charge for Hudson's inventory. Excluding this charge, our wholesale gross margins would have been 44% compared to 41%.

Retail gross profit was up 5% to $5 million from $4.7 million in the prior year period. Retail gross margin was 64% compared to 68% in the year ago period.

Retail gross margins were impacted by heavy promotions by our competitors, which resulted in more promotions at our retail stores than the year ago period. We also benefited from the addition of $475,000 in net sales and $364,000 in gross profit from Hudson's eShop.

Consolidated operating expenses were higher in the fourth quarter of fiscal 2013 compared to 2012 at $20.2 million compared to $12.5 million. Operating expenses were higher in our wholesale segment due to the addition of Hudson. Wholesale operating expenses for Joe's without Hudson decreased by 6%, mostly due to lower commission and sampling cost. Operating expenses in our retail segment increased due to the addition of 6 more stores in our install base. Operating expenses for corporate were higher at $9.9 million compared to $4.6 million in the prior year period. Corporate expenses increased primarily due to $3 million in transaction expenses related to the acquisition and the addition of Hudson's corporate operating expenses.

Excluding these additional expenses, our Joe's corporate expenses would have been almost $1 million lower in fiscal 2013 compared to 2012, mainly due to lower employee-related expenses and no longer expensing the earnout we fixed with Joe Dahan in the first quarter of fiscal 2013.

We generated operating income of $1.5 million compared to $3.2 million in the prior year period. Excluding approximately $3 million in transaction-related expenses and $2 million related to the inventory fair value step-up, our operating income would have been $6.5 million for the quarter. We had a net loss of $1.8 million for the fourth quarter of fiscal 2013 compared to net income of $1.9 million for the fourth quarter of fiscal 2012 and a loss per share of $0.03 for the quarter.

Again, if we exclude the transaction costs and inventory step-up charge, our net income would have been $2.4 million.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jeff Van Sinderen from B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

So I guess, my first question, you guys went through things fairly quickly. Could you maybe give us a breakdown for the Joe's brand in wholesale dollars? That would be helpful. I mean, I know the segment was up overall, I think, versus last year. But if you could give us the compare in dollars, that will be helpful, maybe the compared men's versus women's in dollars. And then if you could do the same for Hudson, that would be helpful as well.

Marc B. Crossman

Well, Jeff, in terms of just the Joe's business on a standalone basis, overall the women's business was down 10%, coming in at $15.3 million. The men's business was up 16%, coming in at $7.2 million. Our retail revenue was about $7.4 million.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

So total retail revenue for Joe's?

Marc B. Crossman

Yes.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, all right. And then for Hudson, I think you gave the total revenue number. But I'm not sure you broke out the men's and women's there.

Marc B. Crossman

Breaking out the Hudson revenue. The women's business generated $11.1 million, the men's business generated $3 million and retail was around $475,000.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, that's helpful. And then I guess it would be helpful maybe if you could give us the outlook for those segments for Q1, how you're expecting those businesses to trend.

Marc B. Crossman

Yes, we're not -- obviously, we're not going to break it down by segment. But the trends are pretty much moving in the same direction that they had been moving. The men's business is a directionally up business. The women's is -- as we're looking at our department store business on the women's side, really turning that around in the right direction. And that's been adjusting a lot of RP. We cleaned up a lot of summer goods off the floor and have a lot of exciting, let's call it spring line goods that have been hitting their collection capsule. So while we're not going to obviously tell you what the overall outlook is, I think the trends are moving in the same direction. I think that Joe's women's piece is where we have the biggest opportunity to turn it back in the right direction.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. So Joe's men's basically, you're saying directionally, the same as it was in Q4. So that would be men's up and that would be women's down somewhere along the lines of what it ran down in Q4, is that right?

Marc B. Crossman

Directionally, correct.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then for Hudson, there -- it sounds like you're expecting both of those to continue to be -- or the overall Hudson brand to continue to be up.

Marc B. Crossman

Yes, we are.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. All right, good. And then in retail, did you give the merchandise margin up or down versus last year? I don't think I heard that.

Marc B. Crossman

No, we didn't. We didn't break it out, whether we were talking about our denim side or our collection side.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. Can you give us more color on that? I'm just trying to get a sense of how much -- obviously, you had to be promotional, just like everyone was, in your own retail stores. Just wondering how much of a hit there was to merchandise margin versus the impact to occupancy delevered and so forth.

Marc B. Crossman

Yes. So it would be on a gross margin basis, instead of obviously talking about the wholesale piece, the vast majority of it was coming from the gross margin impact, not the expense. Obviously, the overall [ph] expense. What we're seeing is the place where we saw the real same-store sales decline was on women's denim. So all the other categories within both in our full price and outlet were up, especially the men's business. Men's denim was up. [Indiscernible] what was happening in the wholesale space, and we saw our average unit cost go up for 2 reasons. One was moving to the collection items as they're getting into the higher-ticket items in collection, which, for us, has historically carried a lower margin just to the scale. We don't benefit from the wholesale business and the amount of volume that we're doing. So we saw that. And then the overall averaging of cost was up slightly for the women's side -- for the denim side of the business.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. And then your comps, I think, you said were down 10% in Q4. And I'm just wondering, I believe in your press release you said your comps are turning better for your retail segment. Did I miss -- did I get that wrong?

Marc B. Crossman

No, they are trending better for sure.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. So would you expect to be positive comp, do you think, in Q1 for your retail segment or just -- should I think sequentially better?

Marc B. Crossman

Sequentially better, but we're turning in the right direction. Obviously, we have the spillover from Cyber Monday going into end of the first quarter or impact in the first quarter. So definitely trending in the right direction and much better sequentially than we saw this last quarter.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, that's helpful. And then did I miss -- I didn't see a balance sheet in the 8-K. Maybe it was in there and I missed it. Was that in there?

Hamish S. Sandhu

It wasn't in the press release, but it's in our 10-K. That should be out there.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. Your 10-K's already filed?

Hamish S. Sandhu

Yes, that's right.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, got it. All right, I haven't seen that yet. Let me ask you just kind of a broader question. In denim, are -- is there anything you're seeing in terms of a major trend developing that you think you can start to capitalize on? I mean, I know you went through the whole color thing and it's been harder. There's kind of let micro trends, I guess, I would call it. But is there anything major or do you think we're still in the period where it's largely micro trends?

Marc B. Crossman

Definitely micro trends. Because if you look at our business and what we're doing, it might say ours, Joe's and Hudson, where you saw a lot of strength from Hudson was in their Cuda product, in their camo, in their moto [ph]. For us, when we look at the Joe's side of the business, when we look at micro capsules we have from the sun faded to the spotless [ph] to the flawless [ph], our weekend group, it's all these microcapsules that are really driving the business. There are some updates to fabrics that we're seeing. But there's no, I guess, real meat to why the business like you're saying in terms of what happened with color where the girl's coming back and buying 2 or 3 pairs of jeans for her closet. Now that being said, at some point, we're going to eclipse that, and the girl is going to be looking at her closet and say, you know what, I have 2, 3, 4 pairs of jeans that I just don't wear anymore and that's from the color time period. So you will start to see that build. So I'm confident that we're going to see that momentum going into the back half of this year.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. So you expect some kind of a major trend for second half. Just, I guess, nobody's sure exactly what it's going to be?

Marc B. Crossman

No one's sure exactly where it's going to be. But I think there is a real meat to update the closet..

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Got it, okay. And then maybe you can update us on, just kind of refresh our memory on the -- I know you're very focused on getting sourcing efficiencies and leverage there. Maybe you could just update us on the shift to manufacturing and the time frame for that to come online.

Marc B. Crossman

It's so -- I know when we talk about the synergies that we have with Hudson, the first prices we'll be looking are really in airfreight, which is a huge component, and the trims so now we can pack really quickly. In terms of Mexico right now, I think we're running better than 80% down in Mexico on the Joe's side. And on the Hudson side, I want to say we're at 30% right now. And the Hudson side is really going to come up a lot faster during the course of this year. And the goal is to be at 60%, 70% with Hudson by the end of the year.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, good. And then anything else in terms of synergies that you're finding that you think maybe you can remove more costs than you thought 1 quarter or 2 ago as you combine the 2 operations?

Marc B. Crossman

Well, I mean, the 2 areas where we saw -- we are saying that, obviously transportation costs and then input costs, such as fabric and your hardwares, buttons, rivets, hang tags, and then the actual cuts or wash of the garment. We knew the cuts or wash is there. The trim cost savings is a lot better than we have thought. And I think, especially on the Hudson side, bringing more vendors to the mix, we're going to save a lot more on trims than we have thought. And I think from a shipping standpoint, it's not only we've negotiated between FedEx and UPS and we went back for 3 different bids and we dramatically reduced that cost. But actually, the shipping lanes airing goods in from Italy, which is a huge component to bring in goods. There we see just dramatic saving. So we're seeing a lot of savings on those, as you point out, I won't call them smaller issues, but the pieces that aren't readily noticeable by everybody other than just moving down to Mexico. So yes, we're seeing a lot of the savings that were better than we'd originally thought.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. But you're still -- at this point, you're still planning to keep the other elements of the business pretty separate so the cultures are maintained and so forth, correct?

Marc B. Crossman

Yes. Right now, we certainly are because there's enough -- there's a pot of dollars in front of us that if we have any disruption from a people standpoint, I worry that we'd lose that. So for right now, we're making sure that everything is staying very distinct and that the 2 groups are working with each other on the back end.

Operator

Our next question comes from James Fronda from Sidoti & Company.

James Fronda - Sidoti & Company, LLC

Could you just talk about the, I guess, the promotional environment going into fiscal '14?

Marc B. Crossman

Well, for us, we were running, I think we had 8 weeks of sale versus 6 weeks the year ago. We're going into 2014 with a slightly different attitude, where we are being less promotional. And that's important for us because I think our gross margin just got hit too hard when we try to chase everybody. One of the things we're doing less of is friends and family, where we've been aggressive with those deals in the past. And we just weren't seeing the return that we needed to see. So I think going into 2014 and who knows what happens in the back half of the year, we're going to run fewer weeks of promotion. And we're already seeing that going into -- or in this first quarter, where we're running fewer weeks of promotion and our comps are sequentially looking better.

James Fronda - Sidoti & Company, LLC

Okay. And then on the interest expense line, is there anything that's onetime in there?

Hamish S. Sandhu

No, it's just pure interest relating to the debt financing that we've undertaken to apply Hudson.

James Fronda - Sidoti & Company, LLC

Okay. And I guess on the Joe's women's side, is there anything specific you guys can do, you think, that'll get it on the same level as Hudson?

Marc B. Crossman

For us, it's -- I want to call it a rebuilding. It's really putting in our core replenishment program in place that we get to -- that we really get to leverage. And I think that cleaning up the summer floor, the remainder of the summer goods that were on the floor, putting pressure fashion product in, we're seeing better sell-throughs. But again, that is our most mature segment of our business so you're not going to see a massive level of growth. You're not going to see back in the days where we're up 20%, 30%. But certainly, it is a business that we feel confident we can turn around and make a high-single-digit growing business.

Operator

Our next question comes from Steven Chang from Rudgear.

Steven Chang

A question for you. Has the factoring -- the way you guys factor receivables, is it different now? I see that before, you guys would have it mostly as cash in your balance sheet. And now it's a due from factor. Is that just borrowings that you could draw on if you need to? Could you explain that?

Hamish S. Sandhu

Sure. It was just a way of accounting for our factor relationship in the past. In the past, we basically used factor our receivables, as well as have a loan with our factor loan. So we used to net the 2 against one another and report that in our financial statements either as an asset or liability, depending on how much we drawn on the -- drawn down on the factor loans. Now that we've got an actual credit facility that is basically an asset-based agreement, but the factor receivables are part of that fact that that's really -- so we need to break them out separately. That being a lot of credit and the factor receivables.

Steven Chang

Okay, great. And kind of a broader question. Now that you -- now with the addition of Hudson, does that increase the kind of the design resources that you folks have? I'm thinking back to -- with Else, I'm sure you couldn't do 5 different of those type of deals because of the manpower you have. Now with the addition of Hudson, does that give you the additional design resources? Does that give you the opportunity to pursue some other things?

Marc B. Crossman

It gives us more production capacity, I guess, is the best way to put it. So yes, just like we had put Else on top of the Joe's infrastructure, you certainly could do the same thing for Hudson. That said, the 2 aren't going to leverage each other. But there's definitely -- you have a greater production pool to put more brands on if you see them. Now, that being said, Steven, we're not doing that right now. We're in the process of taking what we have and maximizing what we have as we stand here today.

Steven Chang

Yes, okay. And finally, I remember the Joe's was getting back into more department store doors. Has that happened or will that happen this fall on the women's?

Marc B. Crossman

Yes, if you -- yes, I mean, if you go back to -- and obviously, I look at things we've said in prior quarters, talking about what was going to happen in the back half of '13, we were saying this in, I think it's our fourth quarter call of 2012. I said that we were going to see some of these increases in the back half. And we are, relative to what we had. I would say that just looking at our numbers, we're in about 337 doors last year at this time. And right now, we're in about 350. And I think that that's going to continue in terms of the direction. Now the only thing that is muting that to some degree, and I don't want to say to some degree, is the -- Macy's. And Macy's is moving in the opposite direction. Now that's not been a surprise to us. That's something we've wanted to do is scale down that business and try to intensify in certain doors. So the number would be a lot better if it weren't for the fact that we have come out of about 10 doors in Macy's since then.

Steven Chang

Last question. The -- you mentioned you're doing a little bit more with collection. How much is collection or non-denim in your own stores?

Marc B. Crossman

Oh, on our own stores, as we look at the percent total, as it sits right now, it's roughly, I'd say, about 25% in this last quarter. And our licensee business, which is our kids and shoes, is running about 8% in this quarter.

Operator

And we have no further questions at this time. I would like to turn the call back over to Marc Crossman for closing remarks.

Marc B. Crossman

Okay. That's about it. Look forward to talking to you guys in the next quarterly call.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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