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Joe's Jeans Inc. (NASDAQ:JOEZ)

Q1 2014 Results Earnings Conference Call

April 09, 2014, 04:30 PM ET

Executives

Lori Nembirkow - Corporate Secretary

Marc B. Crossman - CEO and President

Hamish Sandhu - CFO

Analysts

Jeff Van Sinderen - B. Riley & Co.

James Fronda - Sidoti & Company

Steven Chang - Rudgear Capital Management, LLC

Operator

Welcome to the Joe's Jeans Fiscal 2014 First Quarter Earnings Call. My name is Eric, and I will be your conference coordinator for today. At this time all participants are in a listen-only mode. However we will be facilitating a questions-and-answer session towards the end of today's conference. (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 quarterly 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 this 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 joining us today. I will speak about the first quarter results and I will turn the call over to Hamish for a discussion of our other financial results. Finally we will end with a Q&A session.

We are pleased to announce that in the first quarter net sales increased by 61%, to $47.3 million. This included $18.3 million to our top line as a result of the purchase of Hudson. Our operating income increased to $2.5 million, excluding the transaction investment as a result of the purchase of Hudson. This compares to a loss of $6.4 million in the year-ago period. For reference in the first quarter of fiscal 2014 we had non-recurring transaction fees of $165,000 and a $1 million non-cash charge associated with an increase in the fair value step up of Hudson's inventory that we saw during the quarter. Our second quarter results will not be impacted by any cash or non-cash 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 72% to $39.6 million. More specifically, Joe's branded wholesale sales grew 6%, Else branded wholesale sales declined 98%, representing $1.9 million contraction and Hudson branded wholesale sales contributed $17.3 million. Our men's wholesale sales grew 56% to $9.3 million. Joe's men's wholesale sales grew 4% during the quarter and Hudson contributed $2.1 million. Joe's men's full price department and specialty store business grew just under 20%. Joe's growth was driven by a strong replenishment business as we added several new washes and new fits to our line.

Towards the end of the quarter we shipped our non-denim offerings such as our 12.25 [ph] and we're already getting reorders. We expect this trend to continue into the second quarter. Our Hudson business is growing at approximately twice the pace and is experiencing similar trends. The growth in that business is also coming from replenishments.

Our women's wholesale business grew 91% to $26.7 million. Joe's women's business grew 4% and Hudson added an additional $12 million worth of sales. The premium denim in general, December was a very promotional period, fashion didn't sell well in the holidays and so retailers were aggressively promoting products to reduce inventory levels for spring product. However due to weather constraints the spring product we shipped into our retail partners didn't start moving until the back end of the quarter. More specifically our spring products shipped included our white denim and short and crops. In addition we're seeing that, that girl is turning to other fabrications rather than denim.

Our international business tripled from $1.2 million to $3.6 million. On that Hudson accounted for $2.1 million. Joe's international business was positively impacted by initial stocking orders for two new franchise Joe's branded stores. One store is in the Philippines which opened last week and one is in Thailand, which opens at the end of this month. Hudson's international business was positively impacted by an increase in sales in Europe under its new distribution agreement with Fashion Preview.

Sales of our Else line declined 98% from $1.9 million a year ago. We're no longer selling products in Macy's under the Else label. However we're testing a line with Dillard's and Von Maur here in the States. Internationally we've opened a chain of 80 stores in Canada that ship this fall and we've also secured our first distributor in Europe for the brand. We continue to believe Else has its place in the market both domestically and internationally.

Our overall retail sales grew 22% for the quarter. This growth was as a result of contribution from Hudson's eShop and operating four more stores this year than a year ago. However although a big improvement from last quarter our same-store sales decreased 4% which is attributable to traffic declines in the low to mid-teens and a decline in our average unit revenue. With the move towards more basic replenishment stocks [embraced] [ph] from the fashion of a year ago our average unit revenue declined approximately 12%. We were able to mitigate some of these declines with higher conversion rate, selling more units per transaction and a strong eShop business.

Our gross margin decreased from 64% to 61% during the quarter. Promotional activity primarily in our outlet business affected overall gross margin. In addition the promotional discounts attributable to Cyber Monday and Green Monday had a meaningful impact on our business. It's important to note that gross margin in our full price business remained essentially flat though.

I'd now like to turn the call to Hamish for a more detailed discussion of the financials.

Hamish Sandhu

Thanks, Marc. As Marc just discussed for the quarter, on a consolidated basis, including a full quarter of results from the addition of Hudson as one of our operating subsidiaries, net sales increased 61% to $47.3 million from $29.4 million over the prior year period. Both retail and wholesale sales increased by growing 22% and 72%, respectively.

Same-store sales growth for the Joe's stores opened at least 12 full months and eShop decreased 4%. Same-store sales for our brick-and-mortar Joe’s stores decreased by 10% and same-store sales for our Joe's eShop increased by 50%. Retail sales represented 16% of the 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 72% during the quarter, driven by the addition of Hudson and increases in all channels of wholesale Joe's sales. Our overall gross profit increased by 50% to $21.5 million from $14.3 million in the year-ago period. Overall gross margins decreased to 45% from 49% in the prior year period and was impacted by a charge of approximately $1 million in the fair value step-up of inventory acquired in the Hudson transaction, which was subsequently sold during the first quarter of fiscal 2014. Excluding this charge our gross margin would have been 47%.

Our wholesale gross profit was up 64% to $16.8 million from $10.2 million in the prior year period. Wholesale gross margin was down two percentage points coming in at 42% compared to 44% in the year-ago period. Again wholesale gross margins were impacted by the fair value step-up charge for the Hudson inventory. Excluding this charge our wholesale gross margin would have increased by one percentage point to 45%.

Retail gross profit was up 16% to $4.7 million from $4.1 million in the prior year period. Retail gross margin was 61% compared to 64% from the year-ago period. Retail gross margins were impacted by heavier promotions by our competitors which resulted in more promotions at our outlets and eShop than the year ago period. We also benefited from the addition of $1.1 million to net sales and $714,000 in gross profit from Hudson's eShop.

Consolidated operating expenses were lower in the first quarter of fiscal 2014 compared to 2013 at $20.2 million compared to $20.7 million. Operating expenses were higher in our wholesale segment due to addition of Hudson. Wholesale operating expenses for Joe's without Hudson were mostly flat for the comparative periods. Operating expenses in our retail segment increased due to the addition of four more stores in our store base. Operating expenses for corporate were lower at $8.1 million compared to $12.8 million in the prior year.

Corporate expenses decreased primarily due to $8.7 million we recorded in the first quarter of fiscal 2013 related to the contingent consideration buy out expense in connection with the new agreement entered into with Joe Dahan that we did not have in the first quarter of fiscal 2014. Offsetting this charge was a $165,000 in transaction expenses related to the acquisition and $4 million in Hudson corporate operating expenses.

Excluding the additional expenses -- Joe's corporate expenses would have been mostly flat in the in the first quarter of fiscal 2014 compared to 2013. We generated operating income of $1.3 million compared to operating loss of $6.4 million in the prior year period. Excluding approximately $165,000 in transaction-related expenses and $1 million related to the inventory fair value step-up our operating income would have been $2.5 million for the quarter.

We had a net loss of $2.2 million for the first quarter of fiscal 2014 compared to $6.4 million for the first quarter of fiscal 2013 and a loss per share of $0.03 for the quarter. Included in our results for the quarter is a $2.6 million non-cash fair market value adjustment related to the conversion feature on the convertible notes. If we exclude the transaction cost inventory step up charge and charge related to the conversion feature our net income would have been approximately $100,000.

We continue to have healthy cash flows as we generated $2.4 million in cash flow from operation and had borrowing availability under our revolving credit facility of $26 million as of the end of our February quarter. Operator we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Jeff Van Sinderen. Please go ahead.

Jeff Van Sinderen - B. Riley & Co.

Good afternoon. I wonder if you could just maybe walk us through, Hamish, the breakdown in kind of an apples-to-apples way as best you can for the Hudson business, maybe just kind of give us the segment breakdown there and then also maybe just the puts and takes in the men’s versus the women’s businesses, what you are seeing there?

Hamish Sandhu

Okay. If you look at the overall results from the Hudson business on a comparative basis the revenue was up 11% and the overall EBITDA was up about 79%.

Jeff Van Sinderen - B. Riley & Co.

This is just for Hudson you are saying, right?

Hamish Sandhu

Just for Hudson, yeah. And then drilling down in term of the revenues all the segments were up, as we just spoke to, the women's line -- the women's channel was up by 2%, the men’s channel is up by 48%, International, 6% and the e-commerce business up 76%. So that business had a good comp in terms of growth.

On the Joe's side, in terms of revenue overall revenue was down by about 1% and if you look at the revenue in two buckets the Joe's channel and the Else channel, the women's line was up by 4%, men's up by 4%, international up by 23% and our retail was -- our revenue was up by 5% and offsetting that growth was Else, that was down by about $1.9 million.

Jeff Van Sinderen - B. Riley & Co.

Okay.

Marc B. Crossman

This is Marc. The way to characterize it is the Hudson business was up several digits on the top line and then very healthy contribution to the EBITDA line. Our Joe's side of the business really kind of the way the numbers shook out is that 1% down in sales was entirely attributable to the Else business.

Jeff Van Sinderen - B. Riley & Co.

Okay, and maybe you can just touch on what you think is driving the turnaround in the Joe's women's business, because I know that business was running negative for a while and I think you touched on a couple of things, some new products but then I also heard you say something to the effect of the customer moving away from -- or at least some of your customers moving away from denim to some other types of bottoms, maybe you can just touch on that?

Marc B. Crossman

Sure, and that was definitely not a negative comment because what we're seeing is we have that product there. We had a collection -- I think you had said that -- obviously identified that these microcapsules that we've talked about in the past, we had a weekender, which was really set around a lot of twills et cetera that performed really well. We're pushing marketing in our own stores, we're pushing at the partner's level and that really drove a lot of sales and in particularly in the specialty store market too where we did a lot of good presentation.

So I think that and then as we look out going into the rest of the year it's the same thing we've a lot of really good microcapsules coming up, did expand not just past the coat and denim offering. So what we're seeing replenishment doing very well, the fashion side of the business is all moving out of I'd say core denim and into the twills and corduroys et cetera.

Jeff Van Sinderen - B. Riley & Co.

Okay, and then maybe you can just touch on the retail comps for brick-and-mortar, obviously what you're seeing there is a little bit different than what you're seeing in wholesale and I understand you had to be more promotional. But maybe you could just kind of characterize how much of that was being more promotional in the outlets to clear and what was happening kind of in the full-price stores because I think you said your full-price gross margins were running basically flat?

Marc B. Crossman

Yes, so all that as you pointed out, all of the promotions relative to a year ago in terms of base merchandize we are running lower or deeper discount work on the [out of the office] [ph]. It was -- we're still running in the low 70s on the gross margin for our retail -- our full-price retail stores. In terms of what we're seeing the traffic characteristic were the same across the board. And we're seeing it both in the outlets and our full-price stores, granted you saw some spots in the Northeast where we're running I think we lost about 1.5% - based on that fall, we would have been 1.5% lighter than that based on the store closures, when we look at it on a comp-for-comp basis. But certainly the traffic patterns were the same across the board and then the decline was across the board. So it's in our full price and our off-price. So those trends are still characteristically the same just, Jeff, we were driving a more promotional outlet business on a comp-for-comp basis which caused those gross margins to come down.

Jeff Van Sinderen - B. Riley & Co.

Okay, just to clarify are you saying that the traffic in your outlets was down as much as the traffic in your full price stores?

Marc B. Crossman

Yeah, everything led to everything and it depends upon a store you're looking at. But traffic in general slipped down 10% to 12%, in that range, just if I just kind of combine it all together. So it's then and that's not just -- there's definitely something that's not specific to us that's what we're hearing from all the malls and we get our traffic data and we're in-line with where they said. So we're not hearing that - we're an anomaly.

Jeff Van Sinderen - B. Riley & Co.

Right, I think that's pretty broadly being discussed but I was just curious on the outlets because we haven't heard that the outlet traffic has been as bad as the mall traffic?

Marc B. Crossman

Yeah, for us we've seen the traffic and we can break out, we can talk about the individual stores themselves, when we look at our entire base we've seen that the traffic is relatively similar in terms of the decline. It's not that one is down single digits and the other one is down double-digits, it's pretty much across the board.

Jeff Van Sinderen - B. Riley & Co.

Okay, that's helpful. Thanks very much. I'll let someone else jump in.

Marc B. Crossman

All right.

Operator

Our next question comes from James Fronda. Please go ahead.

James Fronda - Sidoti & Company

Hey guys. How are you?

Marc B. Crossman

Hey, good.

James Fronda - Sidoti & Company

Just on the gross margin, of the 47% that you mentioned. I am guessing that does include the transition cost of moving production down to Mexico of the Hudson operations, is that the case?

Hamish Sandhu

Yeah, I guess the way I would characterize it everything that we're putting in place right now is going to take -- is really going to take hold in the back half of the year.

James Fronda - Sidoti & Company

Okay.

Hamish Sandhu

So we're aggressively moving product down to Mexico which is what we envisioned as we first put this deal together. Now they are running on their side, the Hudson business is running about a 1.5 million units, give or take. So there is a tremendous opportunity but everything we do today obviously you have to bring the fabric in, to move the fabric, cut, and wash and [fill in] [ph] so they take a while to run through the inventory. Right now Hudson is turning about I'd say three or so times a year.

So as we're bringing this in you will start to see that, (NYSE:A) the production is ramping up in Mexico and then (NYSE:B) it starts to filter into the numbers. But make no mistake there is a huge opportunity here to dramatically reduce the cost per garment on the Hudson side of the business and that we remain fully committed to and fully excited about because that's where we'll get the real cost savings.

James Fronda - Sidoti & Company

Right, but the significant cost wouldn't happen until 3Q is basically what you are saying?

Hamish Sandhu

Yeah. That's exactly right.

James Fronda - Sidoti & Company

Okay, all right. And what your thoughts on store expansion?

Marc B. Crossman

Right now with what we're seeing in terms of traffic pattern, we're I'd say cautious.

James Fronda - Sidoti & Company

Right.

Marc B. Crossman

If something comes up, yes but we're not looking at -- let's roll ten stores, right now we have a lot to do on the Hudson side. And right now it's -- we're being cautious and we're not seeing a big change in traffic patterns relative to rent rates.

James Fronda - Sidoti & Company

Right, so maybe one or two for the rest of the year is about it?

Marc B. Crossman

As it comes up optimistically.

James Fronda - Sidoti & Company

All right, thank you guys.

Operator

And our next question comes from Steven Chang. Please go ahead.

Steven Chang - Rudgear Capital Management, LLC

Hey guys. Nice quarter.

Marc B. Crossman

Thank you, Chang.

Steven Chang - Rudgear Capital Management, LLC

Just one quick one. How much of the business was non-denim or collection?

Marc B. Crossman

It's still running, I mean outside of wholesale about a third of our overall business. But that's just outside of outside wholesale. Within the wholesale business it's still a few percentage points.

Steven Chang - Rudgear Capital Management, LLC

Great, thank you.

Marc B. Crossman

That's it.

Operator

Now I'll turn the call back over to Marc.

Marc B. Crossman

All right. We appreciate it. If anybody has any questions please feel free to call Hamish. Thank you.

Operator

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

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