New York & Company's (NWY) CEO Greg Scott on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: New York (NWY)

New York & Company, Inc. (NYSE:NWY)

Q2 2014 Earnings Conference Call

August 21, 2014 16:30 ET

Executives

Suzanne Rosenberg - Director, Investor Relations

Greg Scott - Chief Executive Officer

Sheamus Toal - Executive Vice President and Chief Financial Officer

Analysts

Rebecca Duval - Bluefin Research Partners

Jessica Schmidt - KeyBanc

Operator

Good day and welcome to the New York & Company Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Suzanne Rosenberg, Director of Investor Relations at New York & Company. Please go ahead, ma’am.

Suzanne Rosenberg - Director, Investor Relations

Thank you. Good afternoon. Before we begin, I would like to remind you that some of the comments made on today’s call, either as part of our prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provision in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the company’s documents filed with the SEC, including the company’s fiscal year 2013 Form 10-K.

On the call with me today are Greg Scott, Chief Executive Officer and Sheamus Toal, Executive Vice President and Chief Financial Officer. First, Greg will review our second quarter results, including the progress we have made on our strategic initiatives and update you on our priorities as we begin the second half of the year. Sheamus will then review our financial results in more detail and provide you with our near-term financial outlook. After our prepared remarks, we will open up the call for your questions.

With that, I would like to turn the call over to Greg.

Greg Scott - Chief Executive Officer

Thank you, Suzanne and good afternoon. We delivered a solid second quarter highlighted by positive comp store sales, gross margin expansion and expense reduction demonstrating continued progress against the key priorities we outlined at the beginning of the year. The second quarter marked the seven out of the past nine quarters, where the company has achieved positive comp store sales. It also marked the company’s highest second quarter gross margin performance since fiscal year of 2008. While we continue to operate in a challenging retail environment, traffic trends have improved from the first quarter.

During the second quarter, we also experienced increases in ADS, conversion and AUR. This led to a breakeven performance, which represented a significant improvement over last year’s operating loss and the company’s best second quarter operating performance since fiscal year 2008. Over the past two years, we have focused our resources on creating a more dynamic business model for New York & Company understanding that the retail landscape has changed significantly and continues to evolve. This model gives us omni-channel capabilities to best serve our customer, no matter where she shops, along with a keen focus on our growth businesses, e-commerce and outlets. At the same time, we have advanced our merchandising goals by capitalizing on our strength in bottoms, strengthening our performance in casual, and forging new business opportunities such as our collaboration with Eva Mendes that differentiates us from our peers and makes us a shopping destination.

On the expense side of the business, we also continue to be very disciplined. Our real estate optimization strategy has allowed us to reduce store selling and rent expenses while increasing sales productivity as we closed underperforming stores. All of this positions us to continue our comp momentum and build a platform to deliver sustained and consistent profit growth.

Turning to our second quarter in more detail, first in terms of product, we were very successful with our strategy focused on more wear-now summer merchandise with strong comps recorded in June and July. Second quarter results were driven by strength in bottoms, our dress category and the Eva Mendes collection. With respect to bottoms business, we continue to reinforce our position as an authority in pants, which is the key initiative for our company.

During the second quarter, our bottoms business was driven by denim with a strong leggings silhouette, along with our uptown pant category driven by Seventh Avenue shorts, crops and our famous boot cut pant. The soft pant trend continued in the quarter and was well represented in our assortment of palazzo and jogger styles. In our dress category, we were successful at chasing into jumpsuits and rompers, which are new businesses for us and resonated strongly with our customers. At the same time, our dress business remains strong and we have great opportunity to build into this strength in the second quarter of next year.

Turning to the tops category, while we continue to see strength in soft shirts such as our Mercer shirt, sales of stretch shirts were more challenging and we continue to see weakness in knit tops. As it relates to our collaboration with Eva Mendes, we continue to be very pleased with this collection, which is now in the majority of our stores and online. In addition to being a key differentiator for us, the Eva Mendes collection has attracted new customers into our stores and online with higher ADS than our existing customers.

Turning to the channels of our business, first, our growth businesses, e-commerce and outlets continue to represent an increasing portion of our total business with both businesses combined now representing 21% of total sales. E-commerce grew to 9% of total sales versus 8% in the second quarter last year. Throughout the quarter, we experienced double-digit growth in AUR and a modest increase in ADS. Overall, our e-commerce sites saw increases in traffic and we also experienced stronger conversion with the improved features and functionality of our new sites across all devices, mobile, tablet and desktop. During the quarter, we also continue to pilot the next phase of our AskUs program, which allows customers to order online and pickup in stores. This third phase of AskUs, our proprietary omni-channel platform is currently in approximately 190 New York & Company stores.

Turning to the outlet business, this channel continues to be highly productive for us despite challenging traffic during the quarter. We are encouraged by the improving traffic that we saw at quarter end. We continue to be successful with outlet exclusive product, which carries a higher margin and strongly differentiates us this channel from both our New York & Company stores as well as our e-commerce business. Outlet exclusive grew to 81% of total sales, up from 62% in last year’s second quarter. During the quarter, we opened four new outlet stores and ended the period with 57 locations. We expect to end the year with operating between 59 and 63 outlet locations and we continue to see an opportunity for 75 to 100 locations.

Turning to our core New York & Company stores, as you know over the past several years, sales have decelerated in this channel as we focused on closing underproductive locations and downsizing where appropriate. In fact, since 2010, we have closed roughly 120 stores, which have reduced our store count to 451. As a result, our consolidated top line has been impacted by these closures. Second quarter marks a true inflection point for our business on the top line as growth in e-commerce at our outlet business offset sales declines from store closures. The majority of these closures are now behind us. As we stabilize the fleet, we continue to implement our strategy of downsizing and remodeling existing locations to improve sales, productivity and profitability.

As you may recall, we debuted our first Store of the Future in Columbia, Maryland which features our new store design that we will incorporate into a portion of these remodels we are implementing in 2014. The new design places a strong emphasis on our sub-brands, each with their own designated space and elevates the overall customer experience with sitting rooms strategically placed in the center of the store to enhance client counting and improve customer service.

Looking ahead, we remain focused on significant opportunities we have to drive sales and margins. First, we remain focused on driving top line and comp growth in each channel of our business, all of which will be anchored by a seamless omni-channel experience.

Second, increase brand awareness and drive traffic to our stores leveraging our partnership with Eva Mendes as a key factor in the strategy and we already see how this collaboration is driving conversion with a strong ADS while attracting new customers to our brand. This September marks the first year anniversary of our Eva Mendes collection. This year’s fall collection will debut in stores and online during the third week of September and will be offered in the majority of our stores versus a smaller number of locations last year. We also broadened the assortment and have introduced handbags into the new collection. To support and celebrate the collection, we are advertising in Glamour magazine and we will deliver a fashion book devoted exclusively to this sub-brand. We are planning an exciting event in New York City, celebrating the first year anniversary of the Eva Mendes collection.

Third, through key merchandising initiatives focused on our sub-brands, we will grow New York & Company. Optimizing our sub-brands allows us to differentiate our stores and our product from the competition by providing a full assortment appropriate for multiple lifestyle uses, that a customer can find nowhere else, but at New York & Company. In August, we launched our new Soho denim sub-brand, which has been met with great customer enthusiasm demonstrating the power of sub-branding within our assortment. We will continue to build on the success of our Seventh Avenue brand in the third quarter with compelling wear-to-work event featuring the must haves for fall. As you may know, two years ago, we branded our active category to Love, NY&C to capture more of the casual everyday lifestyle. This fall, Love, NY&C’s assortment will truly reflect the current trends taking place, with a new way of dressing that is focused on leggings, yoga and jog styles, all of which convey a more relapsed look with a New York attitude. The Eva Mendes collection rounds out our assortment and is another example of a successful sub-brand, which address the dusk to dinner and special occasion elements of our assortment.

Fourth, maximize sales during holidays and peak traffic times of the year. To capitalize on the fall season, we have several compelling events in place, including the launch of our new Eva Mendes collection along with our wear-to-work event in September, fall finds in October and a sweater event in late October. We are also delivering two fashion books this season. The first book will leverage the power of all of our sub-brands and feature the breadth of our assortment. As I mentioned earlier, the second fashion book will be focused exclusively on the Eva Mendes collection.

In summary, we are seeing momentum in several areas of our business, both in products and by channel and I expect our initiatives to continue to result in improved sales and profit performance during the fall and holiday season.

Before I turn the call over to Sheamus, I would like to point out that today we issued a press release announcing that Laura Well has left the company effective immediately. I thank Laura for her contributions to New York & Company over the past two years and we wish her well in her future endeavors. We are confident that we have a strong team in place to effectively manage our operations and drive our initiatives forward while we are on a search for a new Chief Operating Officer, which is currently underway.

And with that, I would now like to turn the call over to Sheamus to review our financials in more detail.

Sheamus Toal - Executive Vice President and Chief Financial Officer

Thank you, Greg. Good afternoon everyone. Net sales for the second quarter increased 1.4% to $226.1 million as compared to $223.1 million for the second quarter last year. Comparable store sales increased 2.3% for the second quarter of fiscal year 2014. In the comparable store sales base, average dollar sales per transaction increased by 3.8% while the number of transactions per average store decreased by 1.5% as compared to the same period last year.

The company’s growth channels continue to experience increases in revenue with sales growth in e-commerce and outlets partially offset by decreased store sales primarily driven by the company’s lower store base, which included 506 stores at the beginning of the second quarter of fiscal year 2014 as compared to 519 stores last year.

Gross profit for the second quarter of fiscal year 2014 increased to $61.9 million as compared to $60 million or 26.9% of net sales in the prior year. The increase in gross profit as a percentage of net sales was primarily driven by a 120 basis point improvement in buying and occupancy expenses partially offset by a 70 basis point decrease in merchandise margin driven largely by increased promotional activity and increased net shipping costs.

Selling, general and administrative expenses were managed tightly at $61.7 million or 27.3% of net sales for the second quarter as compared to $62.2 million or 27.9% of net sales for the prior year. The decrease in selling, general and administrative expenses as a percentage of net sales during the second quarter of fiscal year 2014 was primarily attributed to a 70 basis point improvement in home office expenses, comprised of decreased variable compensation expenses, decreased appreciation and favorable insurance credits combined with a 40 basis point improvement in store selling expenses partially offset by a 40 basis point increase in marketing expenses.

Operating income was $200,000 in the second quarter of fiscal year 2014 meeting our previously issued guidance of approximately breakeven operating income and compares to an operating loss of $2.1 million in the same period last year. Net loss in the second quarter was $100,000 or breakeven per diluted share. This compares to a net loss in the prior year second quarter of $2.7 million or $0.04 per diluted share.

Moving to our quarter end balance sheet, we ended the quarter with $64.7 million in cash compared to $59.5 million at the end of last year’s second quarter reflecting our improved operating results partially offset by increased capital spending. Total quarter end inventories were up 3% as compared to the last year’s second quarter reflecting the lower levels of in-store inventory offset by higher levels of in-transit inventory due to longer lead times and delays associated with the company’s contingency plans related to potential work stoppage affecting the West Coast ports. As a result, inventory was slightly below our previously issued guidance, which reflected inventory up by a mid to high single-digit percentage.

During the second quarter, the company remodeled 4 existing stores, opened 4 new outlet locations and closed 1 store ending the quarter with 509 stores, including 57 outlet stores and a total of 2.6 million selling square feet in operation. Capital expenditures for the second quarter were $5.5 million as compared to $4 million in the prior year period. The current spending primarily represents the opening of 4 new outlet stores, remodeling of 4 existing locations and to a lesser extent investments in information technology.

Turning to our outlook for the third quarter of fiscal year 2014, net sales for the third quarter of fiscal year 2014 are expected to be up slightly versus the prior year. To mitigate risks from a potential work stoppage in ports on the West Coast, the company initiated contingency plans in May and diverted goods to alternative ports. One of these ports is experiencing shipping delays, which may impact our in-store inventory levels and sales early in the third quarter. Nevertheless, comparable store sales are expected to be up slightly for the third quarter.

The company expects gross margin to be up slightly from the prior year’s rate reflecting improved product costs and improved leverage of our buying and occupancy expenses. On a GAAP basis, selling, general and administrative expenses are expected to increase by approximately $4 million from the prior year reflecting increases in variable compensation expenses, non-recurring duplicative rent associated with the relocation of the company’s brand headquarters, increases associated with the company’s fast growing e-commerce and outlet businesses and severance cost associated with executive transitions.

On a non-GAAP basis, excluding approximately $1 million in duplicative rent related to the relocation and approximately $700,000 of severance cost, selling, general and administrative expenses are expected to increase between $2 million and $3 million versus the prior year period.

Moving beyond the third quarter, we are expecting selling, general and administrative expenses excluding one-time items to move back to our traditional leverage point, which requires sales growth in the low single-digit percentage to leverage our core expense structure. As a reminder, in the fourth quarter the company is expecting $3 million to $4 million of additional non-cash duplicative rent related to the relocation, which will be broken out as a non-GAAP adjustment.

On a GAAP basis, the operating loss for the third quarter of fiscal year 2014 is projected to increase from last year’s operating loss of $3.1 million due primarily to the non-recurring duplicative rent and executive transition costs. On a non-GAAP basis, excluding the non-recurring duplicative rent expense and the severance charges, the operating loss is expected to be approximately flat to last year’s operating loss. As a reminder, the company continues to carry deferred tax valuation allowance resulting in an approximate 0% effective tax rate, excluding certain required taxes which are expected to approximate $300,000 a quarter.

The company expects total inventory at the end of the third quarter of fiscal year 2014 to be up by a low to mid single-digit percentage versus the end of the third quarter of last year. This reflects the further acceleration of holiday receipts to mitigate any risk and delays associated with the potential work stoppage affecting certain ports on the West Coast.

Capital expenditures are expected to be approximately $16 million for the third quarter reflecting $4 million related to the company’s previously announced relocation and build-out of its new corporate headquarters paired with additional real estate spending to support new and remodeled stores and continued investments in information technology and e-commerce. This compares to $5.6 million of capital expenditures in the third quarter of last year.

Depreciation expense for the third quarter of fiscal year 2014 is estimated at $7 million. During the third quarter of fiscal year 2014, the company expects to open approximately 5 new outlet stores and 1 New York & Company store, remodeling 6 existing locations and closed two stores ending the third quarter of fiscal year 2014 with roughly 513 stores including 62 outlet stores.

With that, I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Rebecca Duval with Bluefin Research Partners.

Rebecca Duval - Bluefin Research Partners

Hi guys. Congratulations on managing sort of really a tough quarter. The stores look great.

Greg Scott

Thank you.

Rebecca Duval - Bluefin Research Partners

You are welcome. So, I was wondering you guys seem to continue to make progress on your AUCs. And I am wondering how much more opportunity do you think you have out there on that? And then Greg, can you comment a little bit on knits and why you still think that that category is struggling? And then also what you think about denim going into the third quarter, there has been a lot of debate on whether denim will have any sort of strength with all the soft pant trends that are out there?

Greg Scott

Yes. So, we will first start with AUC, yes, we continue to make improvement on averaging the cost. Since 2011, we have really put initiatives in place to continue to hyper-focused on our product sourcing and determining where the best place to make the product is and continued to expand on our country migration, so that we can really look for the best value where we can get the product made the best at the best quality. And so I would say that we continue to see opportunity in certain categories because of whether we are buying more units of a certain item or we found a new factory based in a new country. So, we are always looking for those opportunities. As we have said often, we don’t think we will continue to get the same growth in leverage that we have been getting over the last three years. However, we still believe there will be upticks of a couple of basis points from quarter-to-quarter based on improved sourcing initiatives.

A couple of things on the knit question, knit tops both casual and our uptown or wear-to-work knit tops were tough in the quarter offset by woven. This is not a new trend for us. Woven tops have really – have been taking over knits for us for, well, I don’t know two years, three years and I don’t think that has changed yet. The difference obviously is sweaters we believe will be great for Q3 and Q4. There is a lot of interest in new sweaters for those quarters. That I think are going to be exciting new things that the customer doesn’t have. I will say that within the woven top business, I think there has just been so much excitement over the soft shirt business, which I think has really propelled that category. I will say in knit tops, when you do have a mixed knit woven, we seem to have more success, which I think really speaks to the strength of woven tops.

And then lastly, on denim, we just came out of a strong – another strong quarter in our denim business in Q2 really driven by denim crops, which are really the strength of the business. We launch Soho Jeans in July, really leading into our pant and jean event. Our denim business remains strong. I think what I look at in denim we completely understand what’s happening there on the denim cycle. I think with the New York Post last week’s headline was denim is dead. And one of the things I will say is we have a unique legging business that is very, very strong, that is denim plus other fabrics based, super stretchy, super comfortable, fits a lot of body types. I think that has really propelled our denim business. And at the same time, I think we have always been under market share or penetrated in market in denim. So, for instance, we rank very, very strongly with women 25 to 45 in our uptown wear-to-work pants. We are in the top – it’s very high numbers, I am not going to quote them, but MPD has them. And in denim, in the same age group, we ranked lower, the market is bigger. So, we continue to see opportunity to leverage our strength in bottoms by growing denim even in a down-trending denim cycle.

Good news is we have two other sub-brands, Love, NY&C, where we have real expansion that can happen in the at leisure business, really in the jog pant in a more casual way, which we are really seeing great benefits there. And then in our wear-to-work business where we launched the jog pant really almost 18 months ago, we continue to deliver soft pants, including the jog pant, which has been good. I think as we move to Q3, Q4, the jog pant is specifically in our wear-to-work business will be one of our key pants, which it wasn’t a year ago. So, I think I hit on all the questions.

Rebecca Duval - Bluefin Research Partners

Yes, that’s very helpful. Thank you and best of luck to you guys. The stores look really great.

Greg Scott

Thank you.

Operator

And we will go next to Jessica Schmidt with KeyBanc.

Jessica Schmidt - KeyBanc

Hi, thanks for taking my question. Can you talk about your plans for holiday this year and how you are thinking about the promotional environment? I know that you are pretty flexible on promotions last year and just wanted to see if you expect to implement a similar strategy this year?

Greg Scott

Yes. I mean, we go into holiday thinking the promotional environment will be the same or worse every year. And we buy our goods that way, we source our product that way, always with a keen eye on fashion and what’s going to be, what the customer wants during that period at the best price. I am excited about some of the new items that we are going to be introducing, for instance, for the Black Friday period. Items I don’t think people would think New York & Company might have at what I believe are really market, market dominant prices. And I think people will be kind of shocked how inexpensive and what great values these items are for the quality. So, we play holiday. We have been planning this since last January or this January and we play this very strategically, knowing it’s a highly promotional time. We assume people will be more promotional than they were the prior year. And then – and that is how we set our game plan for the quarter, always with a real focus on fashion. Obviously, it’s been a lot easier planning this holiday. The calendar shift of a prior year really was kind of a real challenge as we shifted the calendar. However, this year everything lines up, I think we have some real good history. I am feeling excited about it. For us, we have our whole e-com business, which we plan to see great growth from in fourth quarter. As you can recall, our e-com business was still under our old platform last year during holiday. We are under a new platform a new site design as of this March and we are excited how that can play during holiday, specifically Black Friday into Cyber Monday.

Jessica Schmidt - KeyBanc

Okay, great. I will pass it along.

Greg Scott

Thank you.

Operator

(Operator Instructions) It appears there are no further questions in the queue at this time. I would like to turn the conference back over to management for any additional or closing remarks.

Greg Scott - Chief Executive Officer

Well, I thank everyone again for joining us. And we look forward to speaking with you when we report our third quarter results during the first week in December. Thank you.

Operator

That does conclude today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!