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Joe's Jeans (NASDAQ:JOEZ)

Q1 2011 Earnings Call

April 11, 2011 4:30 pm ET

Executives

Hamish Sandhu - Chief Financial Officer and Principal Accounting Officer

Lori Nembirkow -

Marc Crossman - Chief Executive Officer, President, Executive Director and Head of Operations - Innovo Inc

Analysts

Steven Chang - MBF Capital Management

Charu Sharma - KeyBanc Capital Markets Inc.

Richard Molinsky

David Griffith - Roth Capital Partners, LLC

Operator

Welcome to Joe's Jeans Fiscal 2011 First Quarter Earnings Call. I will be your conference coordinator for today. [Operator Instructions] 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're 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 2011 quarterly report on Form 10-Q filed today. This report contains information that could cause our actual results to be materially different than 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. Finally, a copy of our earnings release and a recording of this call will be available on our website, www.joesjeans.com, and a telephone replay will be available for one week from today.

Now I'll turn the call over to Marc.

Marc Crossman

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

In the first quarter, our net sales were $21.2 million, a decline of 9% from $23.3 million. Excluding the Leggings, revenues would have increased by 4%. Our domestic's Women's Wholesale business, which is our largest and most mature segment, decreased double-digits on a year-over-year basis. Excluding Leggings, it only decreased 8%.

During the quarter, we made mid-stream changes to the Spring line and have seen improved sales. For example, we initiated new fits like the Skinny Micro Flare, which is an update to the skinny jeans. We also keyed in to the high-rise and wide-leg trends and several different washes. In addition, we revamped our core for Spring with lighter washes and new super-stretch fabrics, and for the first time, we offered our strongest Kicker body as a part of the core replenishment program. We have seen our sell-throughs improved dramatically, but will not fully recognize these changes until future season.

For Fall 2011, we built on this momentum from Spring by placing more focus on fashion-forward trends and silhouettes, as well as fabric innovation. In addition, our collection that we launched, the Camarillo project, has a slightly more sophisticated feel than it has in the past. We have had a great response from our stores on the collection and it has been picked up by new key retailers.

Our Men's Wholesale business grew by 6% on a year-over-year basis. We have seen double-digit increases in the specialty store sector, as the efforts of our sales focus on this market are paying off. We experienced a 39% increase in door growth with our specialty stores on a year-over-year basis and continue to concentrate heavily on this sector, as this is still an under-penetrated business for us. Further, as a result of the evolution of our non-denim categories and offerings, we saw a 32% increase in sales in these categories. It now represents 13% of our total Men's business. We continue to see sales in door growth coming from these new categories.

Our International Wholesale sales decreased by 13% on a year-over-year basis. However, again, if you exclude the Leggings, we were up by 7%. This was led by a 62% increase in our Shop and Shop program in France.

Our Wholesale gross margin was 45.1% during the quarter compared to 47.6% a year ago. This decrease was largely a result of dilution from higher returns as we rebalanced the inventory on our retailers' floors. In the meantime, we continue to improve on our sourcing for other product classifications, and our denim sell and gross margins have remained consistent on a sequential and year-over-year basis.

Our Wholesale SG&A declined by $517,000 to $3.4 million on a year-over-year basis. Our Wholesale SG&A decline is attributable to reduced sample costs for our new product classifications, a decrease in our facilities and distribution expenses and lower commissions. Despite our cost-cutting efforts, the reduced sales volume resulted in our operating income decreasing to $4.4 million from $6.2 million on a year-over-year basis.

Our Retail sales increased 105% from $1.8 million to $3.7 million during the quarter as a result of increasing our store base from six to 18 stores. The six stores on our same-store sales base for a full quarter posted a 9% decrease. This same-store sales decrease was a function of a slight dip in our conversion rate and a 3% decline in our average transaction value. Our conversion rates and average transaction value dropped due to a shift in the mix of our denim inventory to a greater percentage of second-quality goods at our outlet stores. We're working through the inventory mix and we expect to have these things cleared from the floor by fall.

Our average transaction value continues to be impacted by the diversification of our product offering beyond denim and into other categories. During the quarter, 25% of our sales at our stores were generated from non-denim categories. We increased our average transaction value for future quarters and we recently implemented new tiered levels of compensation and benefits for our sales associates.

Our Retail gross margins increased 68% versus 66% a year ago. Our gross margins improved in both our Full-Price and Off-Price business, as we were less aggressive in promotional activity this quarter than a year ago. On a consolidated basis, our Retail operating loss increased from $12,000 to $119,000.

I'll now turn the call over to Hamish to discuss our financial results.

Hamish Sandhu

Thanks, Marc. Consistent with our segment reporting format, I will discuss our Corporate and our Other Expenses. As a reminder, these are expenses that are not direct and dedicated expenses associated with either Wholesale or Retail, include employee costs and overhead for accounting, production and design.

For the first quarter, our Corporate and Other Expenses decreased by almost $1 million to $3.8 million from $4.8 million in the prior year. Also, this quarter represents a 7% decrease on a sequential basis, fourth quarter of fiscal 2010, as we continue to manage and reduce our corporate expenses.

For the quarter, on a consolidated basis, net sales decreased to $21.2 million from $23.2 million over the prior year period as Marc just discussed. At 49%, our gross margin remained flat versus the year-ago quarter, and first quarter operating expenses were consistent at $9.9 million in both periods. However, despite maintaining our operating expenses, our operating income decreased to $523,000 from $1.4 million in the prior year.

Finally, our effective tax rate for the quarter was 52%. Because of the nondeductibility of the earnout we pay as part of the merger consideration with JD Holdings from 2007, our reported income tax rate continues to be substantially higher than the statutory rate of 40%. And our cash tax rate is roughly 15%.

During the quarter, we generated $1.7 million of cash flow from operations, bringing our cash balance to $8 million at the end of the quarter. We are pleased to see this cash balance growth as we start our 2011 fiscal year.

Now I'll turn the call back to Marc.

Marc Crossman

Thanks, Hamish. Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of David Griffith with Roth Capital Partners.

David Griffith - Roth Capital Partners, LLC

Marc, could you talk a little bit more on your retail stores in terms of how the 12 non-comp stores performed kind of based on expectations and kind of where you see this going?

Marc Crossman

Yes. The 12 non-comp stores actually performed quite well. Though when I look at the overall average relative to the comp stores, the 12 actually did a little bit better. So in terms of the direction, each store seemed to be doing a little bit better than last.

David Griffith - Roth Capital Partners, LLC

And then on the Wholesale business, could you maybe kind of address kind of on a macro level what you're seeing for the premium market? It seems like we're seeing maybe a little bit of uptick on the floors, which seems a little bit encouraging.

Marc Crossman

Yes. I mean, for us, we feel really good about what's happening in Spring and going through to Summer. And so, we actually are seeing, even though we had some issues with Fall in our inventory levels in terms of sell-throughs going into Spring and Summer, we're actually really encouraged and we are selling faster than we were, certainly than we were selling in the fourth quarter.

David Griffith - Roth Capital Partners, LLC

Great. And then can you just give a backlog number in terms -- on the wholesale piece?

Marc Crossman

We don't. We always get asked. We typically give a general direction in terms of backlog. One of our problems is they're -- not problems, but one of the issues in giving a backlog number is that given where our inventory levels were and when we started to see the market slowdown, we went to a cut-to-order way of managing our inventory. And in doing so, we really have gotten the accounts to place their orders a lot sooner than they have in the past. So it's really tough between that and having a core basic reordering system in place. It's very tough to give a backlog number that really kind of trues up to what the numbers look like at the end of the quarter. That said, just to give you a sense of where we're going to be going, I think that obviously our revenues will be up sequentially going into the second quarter. I think a lot of the percent changes that we're seeing they’ll look relatively similar to what we saw in the first quarter. One of the issues we have is, for instance, the tragedy in Japan cost us about $500,000 this quarter.

David Griffith - Roth Capital Partners, LLC

Okay. And then lastly, maybe kind of tell us kind of where you are with inventories and how you see that flowing through.

Marc Crossman

Based on inventory, during the quarter, it came down again. And I think it came down to the tune of about $2.8 million. And going into Q2 and beyond, we're going to continue to bring our inventory levels down, and part of that has been using a cut-to-order model. It allows us to more efficiently manage our inventory levels and that's in spite of the fact that we're rolling out more inventory to new stores.

David Griffith - Roth Capital Partners, LLC

Okay, great.

Operator

And the next question comes from the line of Charu Sharma with KeyBanc.

Charu Sharma - KeyBanc Capital Markets Inc.

So just first to clarify on the inventory levels, so you came in relatively flat year-over-year. Can you just talk a little bit about how comfortable you are with the composition of the inventory? I mean, is there any carryover inventory that you have? And I guess, if you could elaborate on how much of the inventory is leggings versus not?

Marc Crossman

Yes, so when we look at where we are -- when you're saying year-over-year, you're talking about to year-ago inventory?

Charu Sharma - KeyBanc Capital Markets Inc.

Correct.

Marc Crossman

Okay. So we're seeing on that side, the raw material component of it came down. And that's really the fabric ordering process. The finished good did come up relative to a year ago but we were building as we went through the year, so I was speaking specifically to what we've done from really August forward, when we really started seeing the fall season back up and then go to cut-and-order. In terms of leggings, I think leggings still represents somewhere around 8% of our inventory -- sorry, 6%.

Charu Sharma - KeyBanc Capital Markets Inc.

Got it. Okay, that's helpful. And then in regards to the 45.1% Wholesale gross margin that you mentioned, in terms of the rebalance of inventory on the retailers' floors, can you talk a little bit more about that in terms of what is the mix shift and what exactly happened there?

Marc Crossman

Well, for us, it's -- when we say rebalancing, it's really as we had our issues in the Fall time frame, our inventory levels came down at the retailers. We actually grew the number of doors in the first quarter that we were selling to both on the specialty and on the department store side of the business. It was just our inventory levels in those stores, as we were going into the Spring, they were bringing their inventory levels down with us a little bit. So that’s really when we say rebalancing, it was that in combination with we were pulling -- excuse [ph] me a lot of that Fall inventory out and putting in pretty big kicker and short programs with our retailers.

Charu Sharma - KeyBanc Capital Markets Inc.

Okay, understood. And just on the merchandising side, can you talk a little bit more about what worked and what hasn't with this new, I guess, more trend-oriented product? You alluded a little bit to the performance of the Skinny Micro Flare body that you introduced but is there other products that have not worked or you haven't seen traction on yet? If you could just give some more product-specific details, if possible.

Marc Crossman

Yes. For us, it wasn't a trend that didn't work. For us, we had two issues. One, our core basics slowed. We didn't have, for instance, enough skinnies on our core basic so what people were coming in to buy, we didn't necessarily have. And then the new super-stretch fabric, we weren’t as heavy into the new super-stretch fabric in the Fall. So those were really the two things that hurt us. Just to recap, the core basic did not have enough super-stretch fabrics on our line.

Charu Sharma - KeyBanc Capital Markets Inc.

Got it. Okay. And then in terms of the specialty store sector, which you mentioned has grown pretty meaningfully in the quarter, can you talk a little bit more about that? I mean you mentioned there is an opportunity there for growth. Is it geographically, is there a concentration of specialty stores you're targeting? Is it, more larger chain? Any color you could provide there would be helpful.

Marc Crossman

Yes, it's not -- on the larger chain side, the only larger chain one we've opened in any significant way is Metropark and obviously they have a fair number of stores. And it's not concentrated to any specific geographic sector for us. We've been opening new accounts, we've seen the closure of accounts come way down. And in addition to that, they're writing more business per store than they had in the past. It's not like the Department Store business where the inventory management component is much more difficult. The specialty stores, it’s more of a business that you sell it to them and they sell through, and there's no really rebalancing of your inventory levels.

Charu Sharma - KeyBanc Capital Markets Inc.

Got it. Okay. And then just a couple quick housekeeping questions for you, Hamish. In terms of CapEx and tax rate for this year, how should we be thinking about that?

Hamish Sandhu

In terms of CapEx, the first quarter, we should have had about $800,000 of CapEx. We've got another nine stores to open up, be averaging around about $250,000. So do the math, you'll end up with close to about a couple million of CapEx for the full year. In terms of tax rate, at the moment, we're looking at an effective tax rate of pretty close to 52%.

Charu Sharma - KeyBanc Capital Markets Inc.

Got it. And you said there's nine stores it sounds like you're planning to open for the remainder of the year. Is that correct?

Hamish Sandhu

That's correct. We've opened one, Mebane, in the first quarter and there are nine scheduled to open up in the next five months.

Charu Sharma - KeyBanc Capital Markets Inc.

Okay, great.

Operator

[Operator Instructions] And the next question comes from the line of Edward Comeau with Four Rivers Capital Management.

Unidentified Analyst

I won’t ask about backlog. Just had a question about sourcing cost pressures and issues that everyone's facing. I know you have a premium product and relatively short sort of supply cycle, but could you just discuss how you're looking at the second half and even into 2012 in regard to dealing with some of the sourcing issues that face the industry?

Marc Crossman

Yes, I mean one of the questions we always get is the cotton side of it. And I think right now, it's about $2.00 a pound. As far as we're concerned, over the course of last month, cotton prices have gone up again pretty dramatically. In terms of our mills and the pressure, they've obviously had pressure on their costs. We haven't seen or felt that pressure with the most recent increase. I imagine we're going to get a little bit of pushback that we're going to feel. One of things we've been doing to help offset this is develop into some NAFTA fabrics. So one of our biggest expenses are the duties that we pay bringing garments back up through Mexico. And that's $3 to $4 a garment. If we can work into to NAFTA fabrics, that actually helps offset that. Whereas cotton prices going up $0.30 a pound for us is not a huge impact on a per garment basis.

Unidentified Analyst

Okay.

Operator

The next question comes from the line of Steven Chang with Rudgear Capital.

Steven Chang - MBF Capital Management

Could I just ask how much of business was non-denim and are there any programs or launches that are upcoming for this year?

Marc Crossman

Yes. On the Women's side, non-denim was about 7% of the business and on the Men's side, it was about 13% of the business. In terms of programs, we continue to sell to both specialty and department stores our Fall collection that we launched here in the first quarter that's going to sell in the Fall month, we've gotten a tremendous response to. We've taken the direction away from the casual to a little bit more dressy, and the response has just been absolutely phenomenal. So we feel really good about the collection going into fall.

Steven Chang - MBF Capital Management

Great.

Operator

And the next question comes from the line of Richard Molinsky with Max Communications.

Richard Molinsky

You mentioned something about $500,000 for the quarter because of what happened in Japan. It cost you $500,000. Could you go to more detail in going forward this quarter? Do you see much more of an impact on that in the second quarter?

Marc Crossman

Yes, that's what I was speaking to, to the second quarter and it's about $500,000. And as we look out to the third, the best I can tell is it’s probably also going to be about $500,000.

Richard Molinsky

Okay, all right. I appreciate it.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today's call. I would now like to hand the call over to Marc Crossman for closing remarks.

Marc Crossman

Okay. I appreciate everybody joining us on the call. If you need to get in touch with us, please feel free to call either myself or Hamish.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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