Dover Saddlery, Inc. (NASDAQ:DOVR)
Q2 2014 Results Earnings Conference Call
August 11, 2014; 04:30 p.m. ET
Stephen Day - President & Chief Executive Officer
David Pearce - Chief Financial Officer
Janet Nittmann - Senior Director of Corporate Communications
Good day ladies and gentlemen and welcome to the Dover Saddlery, Second Quarter 2014 Earnings Conference Call and webcast.
At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference will be recorded.
I would now like to turn the conference over to your host, Ms. Janet Nittmann. Ma’am, you may begin.
Thank you operator and good afternoon everyone. Thank you for joining us for Dover Saddler’s conference call. Today we will review the financial results for the second quarter of 2014.
Joining me is Stephen Day, President and Chief Executive Officer and David Pearce, Chief Financial Officer. Stephen will begin today’s call by reviewing the business highlights; David will then discuss our financial results. After that we’ll open it up for questions.
Before we begin I’d like to remind you that today’s conference call may include business and financial projections and other forward-looking statements. Such statements are based on current expectations and are subject to risks and uncertainties, which may cause actual events to differ materially. These uncertainties include factors affecting our revenue, earnings, expenses and business outlook, as well as other risks that are discussed in our S1 Registration Statement. We disclaim any duty or intention to update forward-looking statements.
Now, let me turn the call over to Steve. Steve, please go ahead.
Thank you Janet. Good afternoon everyone and thank you for joining us. As reported in our earnings release today, total revenues for the second quarter increased 6.2%; retail store revenues increased 13.2% and same store sales were up by 5.8%.
Our recent report from Moody’s on sporting goods states that we believe the continued interest in healthy, active lifestyle, coupled with the continued product innovations will support ongoing growth in the active lifestyle factor overall. The report also states that there is a continuing need to develop brick and mortar stores along with eCommerce.
We are also pleased that our efforts to improve gross profit margins have resulted in an increase from 37.6% to 38.4%. At the end of this month we look forward to opening our second store this year in Huston, Texas, bringing a total store count to 24. This store, including our large Western Store in Denton will make four stores in Texas.
The other Dover stores are in Dallas and Austin. As both the Dallas and Austin stores are performing extremely well, we can expect the same strong sales from the Houston location. After all Texas has the largest horse population of any state at approximately 1 million horses.
David will now review the financial results for the second quarter in more detail. David.
Thank you, Steve. Let me begin by discussing the results for the second quarter of 2014. As for revenues, total revenues increased $1.5 million or 6.2% to $24.4 million for the quarter ended June 30, 2014 from $22.9 million for the quarter ended June 30, 2013.
Revenues in our direct market channel decreased $100,000 or 1.1% to $11.1 million from $11.2 million in 2013. Revenues in our retail market channel increased $1.6 million or 13.2% to $13.3 million from $11.7 million in 2013. The decrease in our direct marketing channel was due to weakness in consumer spending in this channel and the shift from direct to retail for some purchases.
The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, three additional retail stores opened in 2013 and promotions. Same store sales for the quarter increased 5.8% over the prior year. In addition, breakage income from gift cards was $27,916 during the quarter as compared to $30,146 for the same quarter in 2013.
Gross profit for the quarter ended June 30, 2014 increased $800,000 or 8.5% to $9.4 million as compared to $8.6 million in 2013. Gross profit as a percentage of revenues for the quarter ended June 30 increased 0.8% to 38.4% from 37.6% for 2013. The increase in gross profit as a percent of revenues was attributable to price increases.
As for SG&A, expenses increased $900,000 or 12% to $8.7 million for the quarter ended June 30, 2014 from $7.8 million for the quarter ended June 30, 2013. SG&A expenses as a percent of revenues increased to 35.9% of revenues from 34.0% of revenues for 2013 as a result of the increased cost.
SG&A increased primarily as a result of additional marketing costs, labor lease expense and depreciation expense. Labor, lease and depreciation expense increased primarily due to the additional number of stores as compared to last year.
Interest expense, including amortization of financing cost attributed to our term note and revolving credit facility increased $21,000 or 14.5% to $168,000 from $147,000 in 2013, due to the increased balance of our revolver facility.
Net income or losses from investment activities consists of the company’s share of net earnings or loss of its affiliates as they occur. The company’s net investment gain for the quarter ended June 30, 2014 was $56,000, an increase of $30,000 over its net investment gain of $26,000 in 2013.
The company’s investment income or loss from investment activities are related to its investments in Hobby Horse Clothing Company and Horse Farm LLC. The company stopped selling products under the Horse Farm brand in 2014.
The provision for income taxes was $248,000 for the quarter ended June 30, 2014, reflecting an effective tax rate of 49% compared to $351,000 for the corresponding period in 2013, reflecting an effective tax rate of 50%. The effective tax rate for the quarter was based upon management’s best estimates of the estimated effective rate for the entire year.
The net income for the second quarter of 2014 decreased by $94,000 or 26.4% to $261,000 as compared to $355,000 for the second quarter of 2013. This decrease in net income was due primarily to an increased SG&A expense. The resulting quarter income per diluted share decreased slightly to $0.05 in the second quarter of 2014 as compared to $0.06 per diluted share of 2013.
As for the six months ended June 30, 2014, revenues increased $3.1 million or 7.6% to $44.1 million for the six months ended June 30, 2014 from $41.0 million for 2013. Revenues in our direct market channel remain even at $22 million. Revenues in our retail market channel increased $3.1 million or 6.4% to $22.1 million from $19 million in 2013. The increase in revenues from our retail market channel was due to strong sales growth from our newer stores as they mature, three additional retail stores and promotions.
Same store sales for the six-month period increased 5% over the prior year. In addition gift card breakage income was $55,000 in 2014 as compared to $60,000 for the year in 2013.
Gross profit for the six months ended June 30, 2014 increased $1.4 million or 9.4% to $16.4 million from $15 million for the corresponding period in 2013. Gross profit as a percentage of revenues for the six months ended June 30, 2014 increased 0.6% to 37.3% from 36.7% for 2013. The increase in gross profit of $1.4 million was attributable to increased revenues in the retail channel and improved product margins. The increase in the gross profit as a percent of revenue was attributable primarily to price increases.
SG&A expenses increased $1.7 million or 11.3% for the six months ended June 30, 2014 to $16.8 million from $15.1 million for the corresponding period in 2013. Increased lease expense, marketing cost, labor cost and depreciation expense were the primary causes for this increase in SG&A.
SG&A as a percentage of revenues increased 38.0% of revenue from 36.8% of revenue. The largest increase was in our marketing cost as a result of mailing more catalogues and spending on investments to improve our Internet channel.
Interest expense including amortization and financing costs attributed primarily to our term note and revolving credit facility increased $38,000 or 14.3% to $309,000 for the six months ended June 30, 2014 from $271,000 for the same period in 2013, due to the increased outstanding balances for our revolving credit facility.
Net income from investment activity for the six months ended June 30, 2014 were $54,000, an increase of $17,000 over its net investment income of $37,000 in 2013. The company’s investment income from investment activities are related to our investments in Hobby Horse and Horse Farm.
The benefit from income taxes was $302,000 for the six months ended June 30, 2014, reflecting an effective tax rate of 52%, compared to a tax benefit of $89,000 for the corresponding period in 2013, reflecting an effective tax rate of 33%. The effective tax rates were based upon management’s best estimates, the estimated effective rate for each entire year.
The next loss for the six months ended June 30, 2014 increased $98,000 or 53.9% to a loss of $281,000 from a loss of $183,000 in 2013. This decrease in profitability was due primarily to increased SG&A expenses. The resulting income or loss per diluted share decreased to a $0.05 for the six months ended June 30, 2014 as compared to a $0.03 loss for the corresponding period in 2013.
As for liquidity and capital resources, for the six months ending June 30, 2014 our cash decreased by $110,000 since December 31, 2013. Total inventory increased $3.7 million since the end of the year, resulting primarily from buying inventory to stock new stores and increase retail stores. As a result of our performance in the first and second quarters of 2014 and in 2013, the company was in compliance with all covenants under both credit facilities.
In the third quarter the company renewed for two years its revolving credit facility with Citizens Bank. The bank increased the borrowing cap from $12 million to $15 million as part of this renewal. This additional borrowing capacity will allow the company to continue to pursue its store expansion strategy.
As for the business outlook for 2014, until there is greater long-term visibility on the economic recovery and consumer expectations and sentiment, the company is not providing revenue guidance on its business prospects for the third and fourth quarters of 2014 and beyond.
Thank you for your interest in Dover Saddlery and now we’d like to open the call for questions.
Operator, would you begin the polling please.
Thank you. (Operator Instructions) We have a question from [Guy Duchin] (ph). Your line is open.
Several quarters ago, I believe you retained (inaudible) to do a strategic analysis with you on your business and I wonder if you could share the results of that.
We don’t have results per say at this time. They’ve been working right along here. The process is going along. A little bit slower than planned. We ran into some vacations delays and so forth over the summer, but we don’t have a conclusion yet, but we do have the process well underway and going along nicely.
Could you give us a little more color on exactly what that process is?
Well, we are looking at all of our options as we mentioned in the beginning. One is to take a look at bring in a layer of preferred stock, so we’d be able to accelerate the retail store rollout from the four to six stores that we have planned this year.
By the way, we are on track to be in that four to six range. We’d like to pick that up, something like more like 10 to 12 stores. So we needed a little additional capital to take a look at that.
We’ve also interviewed several of the major retail asset based lenders to take a look at what they might do for us to provide extra capital on a debt basis as we increase the store account and we’ve got some very offers in from them that would also allow us to pick up the store account to something like 10 to 12 stores a year.
And then finally, we’ve talked with a variety of private equity firms that are interested in the possibility of taking the company private and adding additional financing to increase the store rollouts.
Those will be the three major areas that we have looked in so far. One thing we haven’t investigated yet is the possibility of a subordinated debt financing as opposed to an asset based lending financing. The asset based lending would be in the senior lender position and the subordinated debt would be in a sub-debt position.
But those are the alternatives we are looking at and we’ve gotten some quite nice response on all of the different offers, then we of course will wind this up for too long and announce what our chosen strategy would be going forward.
Okay, great. And I wonder if you could just comment a little bet on the growth of your online business. That seems to be struggling somewhat to get traction and I’m curious how you view the plan there going forward.
It’s not really struggling to get traction. What a lot of people don’t really understand or know about the online business is often times the online customer is in fact somebody who enjoys buying on a direct basis, but traditionally would have been buying from a catalog and placing their call on a telephone.
So we do have channel shift going on, where the number of people calling in their orders is decreasing and the number of people that choose to place their order on the Internet in increasing. Our email programs have been doing very, very well lately. We sent out an email the other day that had a revenue or over $0.30 per email, which is absolutely outstanding.
So those programs are going very, very well and in total the direct business, generally it suffered a little here in the first quarter, but genially its growing slowly, growing modestly which we expected, because the main channel which is underserved, dramatically underserved at this point is our retail brick and mortar channel, as evidenced by the 5.8% store comps in the second quarter, generally and we are about 5% year-to-date.
General retailing according to Moody’s is down a little less than 3%. So we are doing much better than general retailing on our store comps and those store comp numbers are quite substantial when you evaluate them from pretty much any direction. Sporting goods actually year-to-date are down a bit on the store comps, so we are doing very well in the retail store channel.
Right. And then just back to the private equity alternative for, may I say future growth. Are you also considering any sort of joint venture or perhaps acquisition proposals from existing strategic buyers?
Well, of course the process is open for anybody that would like to enter the process. So yes, that is a possibility and I’ll also tell you, we are looking at some acquisitions ourselves or some smaller sized strategic company. So we have a lot going on in that general area.
Okay, great. Thank you.
Thank you. (Operator Instructions). I’m showing no further questions. I would like to turn the conference over back to Stephen Day for any closing remarks.
Thank you very much operator. I’d like to let our shareholders know that we value their support and appreciate them taking the time to listen to our conference call today.
You might be interested to know that the United States Equestrian team that showed up in division, have just won the Aga Khan trophy at the Dublin Horse Show. Actually the Dublin Horse Show was the longest standing Horse Show in history. We also wish all the American competitors all the best at the upcoming World Equestrian Games in Normandy, France. Not too long ago they were Lexington, Kentucky and we did very well and we’re hopping to have a good performance over in Normandy.
So please enjoy the rest of your summer and thank you very much for joining us today. Have another pleasant evening.
Ladies and gentlemen, this does conclude today’s conference. Have a great day. You may now all disconnect. Thank you.
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