Body Central's (BODY) CEO Brian Woolf on Q1 2014 Results - Earnings Call Transcript

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 |  About: Body Central Corp. (BODY)
by: SA Transcripts

Body Central (OTCQB:BODY) Q1 2014 Earnings Call May 7, 2014 4:30 PM ET

Executives

Jean Fontana - Managing Director

Brian P. Woolf - Chief Executive Officer and Director

Thomas W. Stoltz - Chief Operating Officer, Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Body Central Corp. First Quarter 2014 Earnings Release Conference Call. As a reminder, today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Ms. Jean Fontana of ICR. Please go ahead, Ms. Fontana.

Jean Fontana

Thank you. Good afternoon, everyone. Thank you for joining us today for Body Central's first quarter 2014 earnings conference call. Hosting the call today will be Brian Woolf, the company's Chief Executive Officer; and Tom Stoltz, the company's Chief Operating Officer and Chief Financial Officer.

You can access a copy of today's press release on the company's website at www.bodycentral.com or by dialing (203) 682-8200.

Before we begin, let me remind you that certain statements made on today's call during our prepared remarks and in response to your questions may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Such forward-looking statements are subject to both unknown and known risks and uncertainties that could cause actual results to differ materially from such statements.

Those risks and uncertainties are described in the company's reports and registration statements filed with the SEC. Investors should not assume that the statements made during the conference call today will be offered at a later time. Body Central undertakes no obligation to update any of the information discussed on today's call.

And with that, I'd like to turn the call over to Brian Woolf.

Brian P. Woolf

Thank you, Jean, and thank you, all, for joining us. On today's call, I will review our first quarter performance, highlight some of our more recent progress and discuss the steps we are taking to improve the business. Tom will then take you through details in our first quarter financial results and provide some additional updates.

While our first quarter sales results were disappointing, we are encouraged by the improvement in our gross margin from the fourth quarter last year. Our gross margin improved nearly 700 basis points from the fourth quarter as a result of improved merchandise margins from selling more regular-priced merchandise. We controlled our receipt flow and inventory levels as we moved through the quarter. Our expenses were up year-over-year, primarily due to onetime cost associated with professional fees, financing efforts and severance.

During our last call at the end of March, we discussed our negative cash flows from operations, and therefore, our need to manage our cash position closely as we move to the balance of the year, which we continue to do. However, there are execution risks related to our 2014 plan, and there can be no assurance we will achieve our plan and have sufficient liquidity to support the operations of the business.

Since we reorganized our merchandising team in January, the focus has been on improving the product assortment, especially in tops, dresses and jewelry. These are the categories that have been very weak over the past several quarters. The new merchandise team has not been able to flow new receipts into the stores for these weaker categories just mentioned, and we are seeing improved sell-throughs in these new receipts.

Our direct business continues to be challenged as the catalog business remains unprofitable. We continue to evaluate the feasibility of our catalog business as we move through the balance of the year. We just mailed an advertising piece targeted to our best catalog customers and select store customers that have recently shopped our website. The cost of these mailers is a fraction of the cost of the catalog, and we will be evaluating its impact on eCommerce sales in May.

We believe there are more cost-effective ways to drive traffic to our eCommerce sites than the historical catalog drops. We hope this move will enhance our cash flows overall, although our direct sales will be significantly diminished due to the elimination of the catalog drop in May.

As mentioned, we continue to manage our inventory levels closely to current sales trends and have been able to work directly with vendors to keep the new receipts flowing into our stores. Our strategy is to be less promotional and take hard markdowns when necessary, which has resulted in improved merchandise margins.

We believe it also reflects a better product assortment that is more reliably selling at full price. After our year end release in March, we traveled to New York then to L.A. and had interest meetings with all of our key vendors. It was important to us to be able to explain our plans for turning the business around and to assure them that they are an integral part of the process. We discussed terms that would be beneficial to both parties. Since that time, we have kept new product flowing consistently into our stores, although this outcome required reduction in our days payable outstanding.

And finally, we announced the engagement of Houlihan Lokey as our financial advisor to assist the company in analyzing and considering a wide range of financing, transactional and strategic alternatives. We cannot get any assurance that a transaction will occur.

In summary, we are making progress, but still have work to do. While we continue to face stagnant mall traffic trends in a highly competitive retail environment, we will continue to manage our business cautiously, maintaining lean inventory levels and carefully controlling expenses. We look forward to sharing additional progress as the results of these strategies continue to unfold.

Now I will turn it over to Tom for business updates and a recap of the financial results in our first quarter.

Thomas W. Stoltz

Thanks, Brian. As discussed in our last call and as Brian mentioned, it was a tough business environment during 2013 that continued into the first quarter of this year. We are focusing on cash preservation through reduced expenditures, tight inventory management and raising more capital through our engagement with Houlihan Lokey.

As previously disclosed, we closed on our credit facility with Crystal Financial during February, and it gives us a total commitment and borrowing capacity of up to $17 million, with $12 million currently outstanding on the term loan portion.

As of May 5, the company has no outstanding borrowings under the revolving line of credit and had approximately $12.7 million of cash on hand. Also as previously communicated, we continue to delay further work on our new DC and office facility until the existing business stabilizes and cash from operation returns positive. Again, for the same reason, we continue to delay new systems development pertaining to a new ERP platform and a new WMS system for our new DC. At this time, there is no definitive time frame for restarting these projects.

From a store project standpoint, our capital expenditures will be largely maintenance capital expenditures for our existing store base and should not exceed $1 million for 2014. We have closed 12 stores to date during the first quarter this year and plan to close at least 5 more during the rest of the year. All of these closures are being completed based on lease expirations or kick-out clauses.

Management has taken several actions to increase our liquidity during the 2014 fiscal year. And if we are successful in executing our plan, our current forecast indicates that our cash position, net cash provided by operating activities and new credit facility, we believe, should be adequate to finance our working capital needs throughout fiscal 2014. There are, however, execution risks related to the 2014 plan, and there could be no assurance we will achieve our plan and have sufficient liquidity to support the operations of the business.

We have forecasted in 2014 that our operational changes will improve gross margin on a year-over-year basis as a function of better assortments and merchandise planning. Additionally, we expect a lessening and ultimate reversal of both the negative quarterly comparable sales trends and our negative trends in our direct business by the second half of 2014. If, however, our future comparable store sales continue to decline or do not improve consistent with our forecast or our direct business does not improve from the prior year, our cash flow projections could be materially and adversely impacted.

We historically have averaged up to 30 days to pay our merchandise vendors. Our 2014 forecast does anticipate that terms will tighten with vendors and factors. However, if we deviate from our 2014 forecast and consequently our vendor payment terms were to change significantly from our expectations, this also could result in a significant adverse change to our cash flow projections.

Due to the inherent uncertainties in making estimates and assumptions in our forecast, there can be no assurance that the company will be able to execute on its strategic initiatives. Therefore, if the company's operations underperformed in comparison to its forecasted results, its financial position, results of operations and cash flows could be materially and adversely impacted.

Now I will discuss our financial results for the first quarter. Net revenues decreased 26.6% to $59.7 million for the first quarter this year from $81.4 million last year. Store sales decreased 24.8% to $54.6 million for the quarter from $72.6 million last year. This decrease was driven by a 26.8% decrease in comparable store sales for the quarter, partially offset by net store unit growth of 3 stores or a 1% increase in store units.

Our comparable store sales decrease for the quarter was driven primarily by a decrease in the number of transactions per store, down 24%; and lower average units per transaction, down 10%. Our AURs for the quarter increased 7%.

Direct sales, which included catalog, eCommerce, shipping and handling fees, totaled $5.1 million for the quarter as compared to $8.8 million last year, a decrease of 41.7%. This decrease was driven by a 44% reduction in catalog distribution and an approximate $0.34 decrease in revenue per catalog.

Simultaneously, we have expanded eCommerce efforts, which primarily include e-mail, display ads, pay-per-click and affiliate programs. The revenue growth in these new marketing channels has increased 14% in the first quarter of this year compared to last year.

Gross profit for the quarter decreased 41.5% to $16.2 million from $27.6 million last year and as a percentage of sales decreased to 27.1% from 34% last year. The decrease in gross margin was attributed to 150 basis points decrease in merchandise margins related to markdowns taken in reserves for slow-moving items and 540 basis points due to deleveraging freight, occupancy, distribution and buying cost against the lower base of sales.

As Brian mentioned, our gross margin in Q1 of this year compared to the fourth quarter last year improved 690 basis points to 27.1% from 20.8%, primarily from better inventory management and reduced markdown rates as we have focused on being less promotional. We ended the quarter with per store inventories down 5.1%, ahead of the build for Easter this year.

Selling, general and administrative expenses increased 6.7% to $23.5 million for the quarter. The increase in total expenses resulted primarily from additional marketing spend to drive traffic to the eCommerce site and to stores; and an increase in corporate expenses, primarily from professional fees related to strategic planning and financing due diligence work and other consulting work. This consulting and diligence work in the quarter resulted in unplanned expenses totaling approximately $800,000.

The additional marketing spend related to eCommerce for the reallocation of marketing dollars previously spent on catalog production costs that are reported in cost of sales. As a percentage of store sales, store operating expenses increased to 23.5%, resulting from deleveraging against negative comparable sales in the quarter. Corporate costs increased to 15.8% of overall sales. Overall, SG&A expense increased to 39.3% of sales, including corporate costs.

Depreciation and amortization expense increased to $2.1 million as compared to $1.8 million in the same quarter of last year, primarily from the addition of new stores and new systems. As a result of these factors, operating income decreased to a loss of $9.4 million from $3.9 million in income last year.

Finally, our net loss for the quarter was $9.3 million or $0.56 per diluted share based on 16.4 million weighted average shares outstanding. This compares to net income of $2.7 million or $0.17 per diluted share on 16.3 million shares outstanding last year.

Turning to our balance sheet. Cash, cash equivalents, restricted cash and short-term investments totaled $20.4 million at the end of the quarter compared to cash, cash equivalents and short-term investments of $43.4 million last year.

Our total inventories were $23.7 million at the end of the quarter and $26.8 million at the end of the quarter last year, which includes the direct business and inventories in transit.

On an average store basis, inventory was down 5.1% at cost and down 14.3% on a unit basis compared to last year.

As stated, we ended Q1 with $20.4 million in total cash on hand. As of May 5, our total cash on hand was $12.7 million. The $7.7 million change in cash on hand was a result of the following: a $3 million decline in trade payable terms, as forecasted, due to the going-concern audit opinion; a $2 million build in inventories, especially in areas where we needed more new receipts, such as dresses, tops and jewelry; and approximately a $2.7 million loss from operations. We believe our inventory levels are now sufficient to support our planned sales and that most of the trade terms decline has now been realized.

We believe that the steps we have taken to improve performance will take hold with new merchandise receipts flowing into the stores. However, this will be a gradual recovery, particularly in light of the challenging environment. So we remain diligent in our efforts to drive the top line, while remaining very disciplined in taking additional steps to preserve cash.

And now, operator, please open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to Jeremy Hamblin with Dougherty & Company.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

And wanted to ask some questions. First, I want to start with kind of quarter-to-date sales trends and what you're seeing out there in terms of the current promotional environment. Are you seeing any improvements in terms of your sales trends today?

Brian P. Woolf

We were down 11.6% comp in the month of April. Of course, in the month of March, we were up against Easter. We picked up Easter in the month of April, but we made our plan in the month of April, Jeremy. We are flowing consistent receipts, and we said that we are happy with the regular-priced sell-throughs that we are getting. The 2 areas that we are looking to beef up, which should occur over the next 3 to 4 weeks, is jewelry and dresses at this particular point in time. So we feel very good about the receipt flow. We feel very good about the way the stores look at this particular point in time. Our inventory position is relatively low and clean, pretty much where we want it. So the controllables in the business in terms of receipts, inventory, markup, promotional markdowns, we're controlling very well. Obviously, there's pieces of the business that are beyond our control, weather, mall traffic, macroeconomic conditions, and that's the big bugaboo, I would guess, that we're facing right now.

Thomas W. Stoltz

I would just add that traffic has been down and depressed, and that's been an issue that we continue to deal with.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Are your conversion rates still at levels that you're comfortable with?

Brian P. Woolf

Yes. Again, we have no basis of comparison to last year. But certainly, since we put in our traffic counters, the conversion rates have remained stable. In fact, over the past 10 days, they've actually increased slightly.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. That's positive to hear. And then in terms of just looking around against your competitive set, and a lot of the -- a lot of your competitors saw severe declines in gross margins, both in Q4 and from what we've heard so far in Q1 as well, you guys have actually now made a couple of quarters of improvement on gross margins. How would you assess the promotional environment where it is today in the beginning of May, end of April versus where things were during holiday time and the beginning of this year, particularly as it relates to challenging weather? Do you -- is it starting to loosen up at all? It does seem like inventories at some of your peers have been worked off, at least a little bit.

Brian P. Woolf

Well, I think that the promotional activity that we can see until the end of last week was pretty similar to what we experienced in the fourth quarter from a competitive landscape. It feels like as you get into some key selling areas, a lot of the competitors, in order to gain market share, become even more promotional. We have found that our best sell-throughs are not coming in the markdown racks but are really coming through regular-priced fashion. And that as we are promoting less, the AURs are strengthening, the margins are strengthening. And we like the overall sell-throughs that we are getting on the regular-priced fashion and trend. And we have also seen, from our customer base, excessive amounts of markdowns and excessive amounts of promotional activity has not really turned the business around and it doesn't necessarily increase traffic. So as long as we can continue to manage the receipts in our inventory levels and keep our inventory clean, we see a pathway to success more easily in terms of trying to drive the customer into regular-priced fashion rather than excessive amounts of markdown units.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then should I assume that given some improvements in April, and obviously, you're getting the Easter benefit, and so forth, that would you continue to see gross margins trend upward from where you were in the March quarter?

Thomas W. Stoltz

Well, I think we feel good about managing merchandising margins, which we obviously don't report on that level. Until we get better comp sales performance, we're going to continue to deleverage some of the period costs like occupancy and distribution. But just on a pure merchandise margin basis, we continue to see good results.

Brian P. Woolf

That's right.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Right. So I guess -- well, I guess what I'm saying is historically, Q2 I think is a better sales quarter or its at least in line with Q1.

Thomas W. Stoltz

Well, yes, historically, the best quarters for us, if you go back to our better years, '11 and even '12, the fourth and first quarters are our very best quarters. The second quarter would probably be our third best quarter and the third quarter is the weakest quarter.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Right. Okay. So -- but just thinking about, I guess, if comps have improved obviously considerably at least in the month of April, and part of that might just be comparative on the holiday shift, but even if you're doing a little bit better than the minus 26.8%, I would assume that your deleverage -- your occupancy deleverage should be doing better. So if merchandise margins are doing better, then I would think that overall gross margins would improve again versus March. I know you're only 1/3 of the way through the quarter.

Thomas W. Stoltz

Right. Yes, and it's true that as our comp sales improve, get less negative, the deleveraging obviously has less of an impact on the reported gross margins.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Right. But I mean, really, in terms of merchandise margins, it sounds like you're expecting merchandise margins to improve in the second quarter versus first quarter.

Brian P. Woolf

That is our level of expectation. But of course, one thing that we have always maintained is we have to do what's right for the business. So we have to keep our inventories relatively low and clean. And we're a unit-intensive business, and we have to move units. At this particular point in time, we feel very comfortable where the margins have been and where they're going. But that doesn't say necessarily that the business really continues to even deteriorate more that we won't take more markdowns because we will take them if we have to. Right now, we don't see that happening, but it might.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then in terms of just some of the balance sheet items, you spoke to -- I want to make sure I'm clear on that. You had -- in terms of the declines that you'd seen in the second quarter on your working capital and so forth, you said $3 million of it, Tom, I think was coming from trades payable?

Thomas W. Stoltz

Correct. Since the end of the first quarter, I was speaking mainly from the end of March through the beginning of this week.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Right. And then would you assume that you would get a little bit back on that, as well as on your inventory side of the business from here going forward? I mean, would you plan total inventories to be down from where they are? Or how should I think about that on the balance sheet side?

Thomas W. Stoltz

Yes. We were definitely going to manage inventories down until the comp sales trends improved and try to keep a close relationship between the trend in inventories and the trend in the overall sales business. And so that's true. The inventories will not be building, certainly, and may be decreasing some as we go through the balance of the second quarter. And then the trade payables, it just sort of depends on continuing to work with vendors. And seeing where that goes, it's hard to predict. We don't think there'll be a lot more deterioration at this point, but whether we get some of it back in the next couple of months and in the second quarter is yet to be seen.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then just wanted to cover, too, in terms of capital expenditures in the first quarter, it looks like your -- it looks like there's about $3.8 million. At what point -- was so much of that really just spent in January? Or just in terms of thinking about what you said when you reported in March that you were expecting only $1 million to $2 million of CapEx, I guess, from that point forward is really what you were saying. Is that correct?

Thomas W. Stoltz

Yes. The $1 million of CapEx for the year relates to new projects that just starting and occurring in 2014. We had some projects that were completed at the end of the fourth quarter that we didn't pay for until the first part of the first quarter, primarily related to systems and the new distribution center. So those were payments of prior year CapEx projects.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

I see. Okay. And then do you think that in terms of that very low capital expenditure, is that at all going -- in any way going to hinder your ability to sell through at the store level? Or are you able to maintain the stores? I guess, how does the fleet look in terms of requirements? And I know obviously, you're trying to manage your cash. But do you expect that to drag from not being able to invest in the stores?

Thomas W. Stoltz

No. I mean, there's not anything that we will not do. Obviously, if something happens in the store, an air-conditioning unit goes out or whatever, we're going to replace that. That's all included in the $1 million we booked historically of what maintenance capital has been, and it's run in that range. What we will not be able to do at this point is to do any retrofits or major relocations. But we really, at this point, haven't planned to do that for '14, anyway.

Brian P. Woolf

Yes. CapEx and the way it's planned between now and the end of the year should not hinder our performance.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then just thinking about SG&A, you talked about some -- I believe you said you had $800,000 of what would be considered onetime costs -- or unplanned costs. As we look going forward, you had mentioned at the end of last year that you had a $90 million annualized SG&A rate. At this point -- and you've taken somewhere between $1 million and $2 million, I think, out since that time. Are you more on like an $88 million run rate at this point?

Thomas W. Stoltz

I think the best way to answer that is we continue to look for ways to cut costs out of the system here, and we're doing that every single week. So I think we can give you a better report in the next quarter on some things we're working on right now.

Jeremy Hamblin - Dougherty & Company LLC, Research Division

Okay. And then just interest costs and thinking about interest costs going forward on a quarterly run rate, are we looking at just a little bit less than $300,000 per quarter?

Thomas W. Stoltz

Yes, I think that sounds right, in that ballpark.

Operator

And we have no further questions in queue. At this time, I'd like to turn the call back over to Mr. Brian Woolf.

Brian P. Woolf

Thank you very much, and we look forward to speaking to everybody at the end of the next quarter. Thank you.

Operator

And this concludes our conference. Thank you for your participation.

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