Executives
Charles Miltner - Controller
Barry Feld - Chief Executive Officer, President and Director
Jane Baughman - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary
Analysts
Braden Leonard
Joan Storms - Wedbush Securities Inc.
TJ McConville
Unknown Analyst -
Cost Plus (CPWM) Q1 2011 Earnings Call May 19, 2011 4:30 PM ET
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Cost Plus, Inc.'s Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Mr. Barry Feld, Chief Executive Officer of Cost Plus. Go ahead.
Barry Feld
Thank you, operator. Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2011 results. With me today for this conference call are Jane Baughman, our Executive Vice President and Chief Financial Officer; and Charlie Miltner, our Corporate Controller. Following my opening remarks, Jane will discuss the financial results in more detail, after which I will make some concluding remarks. Then we will open up the call for questions.
Before beginning today's discussion, Charlie will read the company's Safe Harbor statement.
Charles Miltner
Certain forward-looking statements regarding the company's future performance and initiatives will be made during this conference call and will usually be preceded by words such as believes, anticipates, projects or expects. Any such forward-looking statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those expressed or implied by these statements. Such forward-looking statements include, but are not limited to, statements related to our future operating margins, net income margins, EBITDA margins and achieving profitability in all 4 quarters.
The risks and uncertainties include, but are not limited to: deterioration in economic conditions that affect consumer spending; changes in the competitive environment; currency fluctuations; timely introduction and customer acceptance of the merchandise offerings; foreign and domestic labor market fluctuations; interruptions in the flow of merchandise; changes in the cost of goods and services purchased including fuel, transportation and insurance; material unfavorable outcome with respect to litigation, claims and assessments; unseasonable weather; the effects associated with terrorist attacks; and changes in accounting rules and regulations. A more complete listing of risk factors is included in the company documents on file with the Securities and Exchange Commission.
Barry Feld
Thanks, Charlie. We are pleased with our first quarter results. Strong gains in customer count resulted in a 5.5% same store sales increase on top of a 5.6% same store sales increase last year. We continue to drive increases in traffic, conversion rates and units per transaction. The average ticket decreased modestly, primarily due to the 4-week delay in the launch of our Outdoor business as a result of a late Easter. Jane will address the impact of the calendar shift on the first half in more detail later.
In February, we introduced several new aesthetics and silhouettes within the Indoor Dining and Living Furniture categories, which were very well received by our customers. A strong in-house trend and design capability allows the merchants to flow unique brand right products at everyday value prices with a level of sophistication that sets Cost Plus World Market apart from the competition. We are pleased with the increasing strength of the Indoor Furniture business and the continuing strong performance across the non-furniture and merchandise categories.
Once again, we had a very successful Easter. Our customers know they can find unique and value-oriented seasonal decorating, entertaining and gift-giving solutions down every aisle of our stores. We achieved an even greater sell-through of regular price than last year, leaving very little residual inventory to discount after the holiday.
The company continues its steady progression toward achieving profitability in all 4 quarters absent calendar shifts. We reported a $3.4 million net loss in the first quarter of fiscal 2011, which is a 67% reduction compared with the $10.3 million net loss in the first quarter of fiscal 2010. The company generated $5 million in EBITDA from continuing operations for the first quarter, compared with a $1 million EBITDA loss from continuing operations last year, and reduced its borrowings under the revolving credit facility by $20 million at the end of the quarter compared to a year ago.
Ongoing refinements to our marketing program and testing of new media, including partnerships, gives us confidence that we will continue to be successful in acquiring new customers and increasing our national presence. Additionally, our World Market Explorer loyalty program, which is less now than 2 years old, has nearly 5 million members and our total customer database is over 7 million. These loyal customers shop at our stores with greater frequency and have a higher average ticket than non-members. We believe we can increase loyalty membership to 10 million members in the next several years.
I would now like to turn the call over to Jane, after which I will make some concluding remarks.
Jane Baughman
Thank you, Barry. As a reminder, the income statement included in this afternoon's press release clearly breaks out the results from continuing and discontinued operations for both the current year and prior year period. The company's balance sheet presentation remains unchanged.
Net sales for the first quarter of fiscal 2011 were $199.7 million, a 5.9% increase from the first quarter of fiscal 2010. Same store sales for the quarter increased to 5.5%, driven by a 6.5% increase in customer count, slightly offset by a 1% decrease in the average ticket. During the first quarter of fiscal 2011, we continued to experience strong performance across the eastern and western regions, which resulted in a 5.9% and 5% comp increase, respectively.
The California market recovery continues to strengthen and delivered a same-store sales increase of 4.6% in the first quarter of fiscal 2011. The mix between Home and Consumables as a percentage of net sales was 60% and 40%, respectively, for both the first quarter of fiscal 2011 and 2010. Gross profit rate for the first quarter increased 120 basis points to 31.7% versus 30.5% last year. The 120 basis point increase was primarily due to lower occupancy expenses and increased leverage of those expenses on higher sales, as well as improved merchandise margin compared with the first quarter last year.
Selling, general & administrative expense, or SG&A, as a percentage of net sales for the first quarter of fiscal 2011 were 31.6% versus 32.8% last year for the first quarter. The decrease in SG&A expenses as a percentage of net sales is the result of increased leverage on higher sales. The company had $300,000 in store closure costs from continuing operations for the first quarter of fiscal 2011 compared to $2.7 million in the first quarter last year. The company closed 4 stores in the first quarter of fiscal 2011 versus relocating one store and closing 5 stores in the first quarter of fiscal 2010. The 4 stores that closed during the first quarter of fiscal 2011 were lease expirations and had no lease exit costs associated with their closures. All of the stores closed in the first quarter of both fiscal 2011 and 2010 are included in continuing operations.
Net loss for the first quarter of fiscal 2011 was $3.4 million or $0.15 per diluted share versus a net loss of $10.3 million or $0.47 per diluted share for the first quarter of fiscal 2010. For the first quarter of fiscal 2011, the company had an EBITDA from continuing operations of $5 million compared to an EBITDA loss of $1 million last year.
Net interest expense for the first quarter of fiscal 2011 was $3.1 million versus $2.7 million last year. Included in net interest expense is interest related to the distribution center lease obligation of $2.1 million for both the first quarter of fiscal 2011 and 2010.
The company ended the quarter with $41 million in borrowings and $7.8 million in letters of credit outstanding under its asset-based credit facility compared to $61 million in borrowings and $10 million in letters of credit at the end of the first quarter last year. Capital expenditures in the first quarter for 2011 projects were $497,000 versus $364,000 for the same period last year.
In this afternoon's press release, we have provided our outlook for the second quarter of fiscal 2011. I'd like to make a few comments about our second quarter sales guidance and the timing of the Outdoor business this year. The late Easter created some compression on consumer spending patterns in April and May, as we have historically launched our outdoor season directly following Easter. Similar to Indoor Furniture, the Outdoor Furniture business involves a considered purchase and sales momentum builds throughout the course of the season. However, with only 2 weeks between Easter and Mother's Day and consumer shopping closer to need, this resulted in a 4-week delay to the launch of our outdoor category in order to maximize the other seasonal businesses. Overall, we are well positioned for a strong Outdoor business this year, which will be truncated when compared with last year due to the shorter outdoor selling season.
With regards to gross margin for the second quarter, Cost Plus World Market faces the same commodity pressures as all specialty retailers and importers. While the diversity of our merchandise assortment mitigates a certain level of exposure, our merchants continue to work diligently with our long-term vendor partners to carefully navigate these commodity pressures. The expected impact to gross margin for the second quarter and the balance of the year remains unchanged and was incorporated into our annual margin guidance provided in March.
Also included in today's press release is an update to our annual guidance. We now expect fully diluted earnings per share from continuing operations to be in the range of $0.54 to $0.63 for fiscal year 2011, up $0.08 to $0.09 from our prior guidance.
I will now turn the call back over to Barry for his concluding remarks.
Barry Feld
Thanks, Jane. The repositioning and re-launching of our brand in fiscal 2010 continues to gain traction in fiscal 2011, resulting in an increasing level of predictability and performance. For the last 6 quarters, we have met or exceeded our guidance. Our business model generates sufficient cash flow needed for working capital and planned future expansion. Our first quarter 2011 results continue to bring us closer to our historic sales per square foot and customer count metrics, which will result in substantial operating leverage on the business. We remain confident that we can achieve a 6% operating margin, a 3% tax effective net income margin and an 8% EBITDA margin over the course of the next several years.
With that, I would like to turn the call over to the operator for the Q&A portion of the call.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Budd Bugatch of Raymond James.
TJ McConville
It's TJ McConville again, filling in for Budd. I did have a couple of questions. Jane, we were just -- you just mentioned some commentary on the gross margin outlook for the second quarter. It looks like we took the -- or you took the full year outlook up by 10 basis points at the low and the high end, but that second quarter number implies a decent year-over-year contraction. Now is that all commodities? Or is there -- I would assume there's not as much leverage based on the sales commentary you provided as well. Can you walk me through some of that?
Jane Baughman
Certainly. So the change in the annual growth margin rate is really the flow-through of the favorability from the first quarter. The margin guidance that was implied in our annual guidance that we issued in March is the same, and so the delta in gross profit rate for the second quarter versus a year ago is really the combination of all the things that you just mentioned. It is the impact of some commodity pressures on the supply chain, as well as some mix differences as a result of the outdoor and then gap on the outbound transportation side. So it's really kind of -- all of those things are impacting the second quarter.
TJ McConville
And likely, except for some of the leverage that you can't make up, but you would make that up as you expect the solid outdoor furniture season. Is that fair?
Jane Baughman
Correct.
TJ McConville
Okay. And then Barry, great to hear the news on the World Market Explorer program. Can you give us a sense for what that $5 million represents as far as maybe year-over-year growth? And talk about what that program's allowed you to do from maybe marketing and increasing returns on marketing perspective.
Barry Feld
Well, I think I can answer that 2 ways for you, TJ. First, the program is less than 2 years old, and it's obviously more than doubled from last year, so year-over-year growth has doubled for us. What it's enabled us to do is, it's enabled us in a more granular way to electronically market directly to an existing customer base, which obviously has positive implications as it relates to increasing the frequency of visit with that existing customer base because special promotions in the wine category and the food consumable category, non-furniture home, really drives -- gives us the ability to drive a repetitive behavior in a much larger database that we can communicate directly with versus even a year ago.
TJ McConville
That's very helpful. And it looks like it's flowing through to some of the SG&A line. On the ticket decline this quarter, Barry or Jane, can you give or maybe provide for us what that number might have looked like if you excluded some of that shift maybe early on in the quarter? What did it look like before we would get into any of those calendar issues?
Barry Feld
I think I can give perspective in a different way. It may or may not be helpful, TJ, let me know. But essentially, when you look at the late launch of the outdoor, it cost us essentially about a point in same-store sales. It's about a $2 million delta between the timing of when we were able to launch last year and this year. And so the vast majority of the truncation in average ticket comes from that much-later loss because most of the average ticket is really driven by the outdoor in terms of our current run rate versus where we were at this time last year in the end of the first quarter and moving into Q2.
Jane Baughman
The other thing that makes it difficult is because of the Easter shift. Your March and April comparison year-over-year are very distorted because Easter was so much earlier. So you kind have to look at the whole quarter, which makes it difficult to break that out.
TJ McConville
Okay. The very early part of that, that was helpful there, Barry. The last question I had was on weather. We talked about the seasonal shifts here of some of the holidays, and I know that's very important to you folks, but a lot of the other retailers we've been talking to have talked about some weather. Did you guys experience any issues there or expect to experience any lingering issues going forth?
Barry Feld
Well, TJ, you know us well, and we really don't like to hang weather out there, particularly as it occurs in the early part of the quarter, because we really believe it fundamentally postpones sales versus eliminates them. But it did create, in terms of the start of the outdoor season some obvious challenges, particularly in the Western United States where it was quite cold and rainy. But regardless of weather, maybe to a lesser extent there's some impact but regardless of weather, it's really clearing through all of Easter at the end of April, and then having the capability to bring the expansive outdoor program into the front of the store is really what our challenges -- where our challenges lie in moving into the second quarter of this year.
Operator
Your next question comes from the line of Joan Storms of Wedbush Securities.
Joan Storms - Wedbush Securities Inc.
So on the outdoor furniture -- so you obviously had plans for that to come in later. So was that in line with sort of expectations? Or do you think that the Street will be disappointed by that?
Barry Feld
I don't know. We tried to give annual guidance for the Street to be able to lay out their models on a quarter-to-quarter basis, but this is not a surprise to us as we built our model through the year and built in our annual expectations for guidance out there. We always expected pressure on the second quarter of the year because of the timing of when we would be able to launch outdoor. And Joan, being familiar with the stores, you know Easter represents a very large center of the 4-seasonal shop for us, and so we always knew that Easter coming in at the end of April, not being able to formerly launch outdoor, move it to the front of the store early on in April to get the full benefit in May, it would put pressure on our second quarter. That's why I think you see the flow-through of the improved -- the improvements for Q1, we flowed it through the year because there really isn't anything that we are seeing at this juncture that is coming to us as an internal surprise as we plan the year out.
Joan Storms - Wedbush Securities Inc.
Okay, so that's good. And so now the Outdoor Furniture is in stores and things, and apparently -- I mean, I've seen it in stores, it looks great, must be selling well. So that's unplanned for you for the second quarter as far as you can see what it was.
Barry Feld
That's correct.
Joan Storms - Wedbush Securities Inc.
Okay. And then I was curious about on the product cost with the gross margin. So it seems like -- I mean, obviously, you have changed about your sourcing a little bit, so that should help you longer term. So in the near term, how could you -- sort of talk a little bit about where exactly -- is it coming from furniture? Is it coming from textiles? Is it coming from -- where are the product cost issues? Probably not consumables or maybe it is?
Barry Feld
Well, I think the majority of product costs are really coming in the forms of freight and increased field charges. We're able to mitigate and offset a significant amount of commodity pressure as a result of the vendor supply chain that we have established. That being said, our largest nemesis in certain textile categories continues to be cotton, and so we have had to go back and look at value engineering or revalue engineering in some of our cotton products to ensure the integrity of our everyday value pricing strategy. And then one other callout that we keep a close eye on and monitor is -- as you're aware, we have a very robust Coffee and Tea business. We've spent significant commodity pressure on coffee. Again, our primary objective is to maintain our everyday low-price value structure within our high quality coffee arena, but we are looking at selective price increases in some of the more complex flavor profiles. But they will still be vastly below the specialty retail competitive landscape that we operate in. So we are monitoring and watching and acting accordingly as we see the commodity pressures crop up around the globe, but we're well organized, particularly with our deep experience with our vendor community, to really deal with this. The main one that puts short-term pressure on the supply chain is the live fluctuations in diesel and bunker fuel.
Joan Storms - Wedbush Securities Inc.
Okay. So that being said, so do you have sort of a similar term loan like an ocean freight agreement? If I missed that earlier, I apologize.
Jane Baughman
Yes, we do. We have agreements with roughly 6 carriers, major ocean carriers. And we are a, in the scheme of things, relatively large importer, importing over 7,000 containers a year. So we do have some leverage there when it comes to making sure you can get on a boat without peak season field charges, et cetera. But yes, we have agreements.
Joan Storms - Wedbush Securities Inc.
Okay. And then I wanted to ask about the store closings. Were those in maybe what you might have thought to be over-stored markets or markets that you had already exited and final exit or...
Barry Feld
The way we think about it, Joan, is that we're back to this sort of normal course of editing locations as opportunities present themselves. We evaluate each store. As you know, our long-term growth program is to resume building stores in existing markets and then expand to new markets. But currently, as each lease comes up, we evaluate it both on a reposition basis if we want to take the store and relocate it within an existing market or we want to close it. And we anticipate to be closing anywhere from 3 to 5 stores on a normal annualized basis as we go forward. And the store closing just simply represents that evaluation process as we continue to free the existing fleet of stores and position ourselves for new store openings.
Joan Storms - Wedbush Securities Inc.
Okay, I guess, I mean, my question was, curiously, like if they were in existing markets, would you expect some sort of negative -- like positive cannibalization where you might get customers that might travel to other stores to boost the comps in the area?
Barry Feld
I think with the sort of singular closings in a market-by-market situation, I think the impact of the comp, both negative or positive, would be negligible.
Joan Storms - Wedbush Securities Inc.
Okay. And then I was wondering if you could comment at all about your kind of ongoing test with Bed Bath & Beyond...
Barry Feld
Again, we tried to be very, very transparent. But all I can say is, we have a continued ongoing test with Bed Bath. We're pleased as the test continues to perform and really don't have any new news, other than the fact that the test is continuing, and we are pleased at the results thus far.
Joan Storms - Wedbush Securities Inc.
Are you still in the 3 stores?
Barry Feld
That's correct.
Operator
Your next question comes on the line of Stacy Lightwinter [ph] of Consumer Funds.
Unknown Analyst -
I was going to ask you about your brand World Markets. And I was going to ask about the Bed Bath & Beyond, but you can't comment there. But what about other stores, other chains, supermarkets or other discounters or Costcos of the world? Can you take this brand, World Markets, in the food SKUs and grow it another way?
Barry Feld
Well, theoretically, we can. In the Bed Bath & Beyond test as it exists, we don't plan to expand in any other external environments at this juncture. And I've talked publicly about our 4 opportunities for growth being the sales per square foot; growth productivity in our existing basis stores, which we believe is our largest opportunity; our Internet; the expansion of new stores; and then the potential expansion for a wholesale model in our retail store and store model in whatever form that would take. But I really have no more granularity beyond that at this juncture. We are organized to be able to begin growth in each one of those segments that I just mentioned.
Unknown Analyst -
And just a follow-up, Barry. When will you begin? Will it be the back half of this year or next year, beginning to open up square footage -- new square footage?
Barry Feld
Well, we are actually in the beginnings of that process now. We may have more new news on our next call. Nothing definitive or signed at this particular juncture, but we are moving forward with new store opening activity. And I don't have anything formal to report at this juncture.
Operator
Your next call comes from the line of Brad Leonard, BML Capital Management.
Braden Leonard
Just real quick, I think you've hit this pretty good. But when you laid out your guidance 2 months ago for the year, you planned this Q2 kind of below last year. Q1 was above, Q2 below. I mean, nothing has shifted in that? Or is that the way basically you've...
Jane Baughman
That's correct, Brad. So basically what you're seeing on the annual guidance is the flow-through of the favorability in Q1.
Braden Leonard
Okay. And so the gross margin hit in Q2, is that because the Outdoor Furniture's a lower gross margin? And it's going to be more in-depth into Q2 versus to Q1?
Jane Baughman
Actually, Outdoor is -- we really treat it as a seasonal business and it actually carries a higher margin than some of the other furniture categories. And it's the change in the penetration because of the truncated outdoor season that is helping to depress the gross profit rate for the quarter, plus the supply chain costs that we talked about before.
Barry Feld
I would say, Brad, just to add on that, the truncation of the outdoor season actually puts pressure on the margin for the quarter. And this is the way we planned out the year: The minute we saw the end of last year, we were quite well aware that Easter was going to fall the worst possible time. What we have talked about as we were building our plan is no different than, for example, next year -- Fourth of July is a big seasonal holiday to be illustrative. The Fourth of July is a big seasonal holiday for us and a big seasonal weekend. Next year in July, Fourth of July falls on a Wednesday, which is absolutely horrible for us in the weekend before, and will actually have significant impact to margin and volume. We planned accordingly this year with the very late Easter. We knew it would pressure our Q2 and made our plans accordingly.
Braden Leonard
And so will that just require, since the outdoor season is shorter, that you'll have to discount it earlier or more?
Jane Baughman
Potentially, depending on what the marketplace looks like. And that's why you've got a bit of a range.
Braden Leonard
Okay, I think you hit most of my own. I just have one on like long-term store expansion. I think you guys have talked about 100 additional stores in, maybe, existing markets. I mean, do you really feel like there's a need or demand for those stores in those markets?
Barry Feld
Yes, we do. There are definite spots -- I mean, we're quite conservative in terms of the way we view bricks and mortar expansion, but that being said -- well, remember we only operate 259 stores, and we believe that this chain absolutely has the potential to be 500 stores, 100-plus in existing markets over time, because there are clearly markets right here in California where we believe that there are location shortfalls. Now that being said, the reason I don't make statements publicly that we can be an 800- or 900-store chain is because we've really edited out the deep suburban environments. We focus on close and suburban markets and urban markets, and we believe there's still tremendous opportunity in a lot of those markets, particularly if you look at the geography that we serve.
Braden Leonard
Very good. That's all I have.
Operator
[Operator Instructions] Your next question is a follow-up from Joan Storms, Wedbush Securities.
Joan Storms - Wedbush Securities Inc.
I forgot to ask about the eCommerce business. And that was something that -- every time I go online, things seems to be changing and doing better. So have you talked about sort of -- are you counting that as a separate store for comps? Or is that a separate channel? And how do you see that evolving over time?
Barry Feld
Well, Joan, we believe it's one of our big embedded opportunities. It's still relatively small in the scheme of our almost more than $900 million in annual sales, but we've put a lot of time and attention and energy into creating a scalable platform. It was up quarter-over-quarter over 85% obviously on small volume. We consider it a very, very large store within the fleet of stores. And we anticipate that there will be continued scalable opportunity there as we move forward. We do not include that in our same same-store sales performance, or it would represent essentially a full point in comp improvement, if it was there. But we don't include it.
Joan Storms - Wedbush Securities Inc.
Okay. So right now you're doing fulfillment through the current DC use?
Barry Feld
Through the current DC use and a 3Po that we use on the East Coast. We are well organized to do eCommerce nationally through our distribution centers in our 3Po.
Joan Storms - Wedbush Securities Inc.
I'm just -- because I saw Pier 1, just a question related. They're just restarting that business, and they're doing this Pier 1 To-Go, which is where you can go online and order it and pick it up at your local store. Do you guys have that capability?
Jane Baughman
Yes, we have the systematic capability to be able to do that. And as Barry mentioned earlier, that's certainly one of the opportunity areas for growth for the company.
Barry Feld
But I will say, Joan, currently, our continued focus is to selling products directly online. Ultimately, we will have, as Jane just pointed out, a online store capability, but we've really focused on being able to have a scalable initiative that allows us to continue to build our eCommerce platform online.
Joan Storms - Wedbush Securities Inc.
Okay, that sounds great.
Operator
You have no further questions at this time.
Barry Feld
Okay. Thank you, everyone, for joining us on the call. And again, we'll look forward to reporting the results of our second quarter when we're together again in August. Thank you very much.
Operator
Ladies and gentlemen, that concludes today's presentation. Thank you for your participation in today's conference. You may now disconnect. Have a great day.
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