Joe's Jeans' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.11.11 | About: Joe's Jeans (JOEZ)

Joe's Jeans (NASDAQ:JOEZ)

Q3 2011 Earnings Call

October 11, 2011 4:30 pm ET

Executives

Lori Nembirkow -

Marc B. Crossman - Chief Executive Officer, President and Executive Director

Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

David E. Griffith - Roth Capital Partners, LLC, Research Division

Operator

Welcome to the Joe's Jeans Fiscal 2011 Third Quarter Earnings Conference Call. My name is Jeff, and I'll be conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would know 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 risk and uncertainty 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 includes information that could also cause our actual results to be materially different from 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 1 week from today. Now I'll turn the call over to Marc.

Marc B. Crossman

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

In the third quarter, our net sales were $24.2 million versus $25.5 million a year ago. During the third quarter, we generated an operating loss of $2.6 million due to a retail store impairment charge and an inventory write-down of the leggings and aged collection items. These charges totaled $2.8 million. Excluding these charges, we would have generated positive operating income.

Also impacting our operating income is our decision to increase our spending on advertising and marketing to facilitate the improvement of our women's business. This past quarter, our women's and domestic wholesale business decreased double digits. However, we're starting to see the positive effects of delivering many new fashion styles and a revamped core program.

While the previous quarter was marked by bringing our stock levels down to match our sales, this quarter, we are seeing that our sales are outpacing our stock levels. We're cautiously optimistic that this trend will continue through fall and into holiday, resulting in department stores bringing their inventory levels up and in line with our sales.

Our domestic specialty boutique store business increased during the quarter. Deliveries of our fashion denim and collection drove growth in this distribution channel.

Looking forward, the positive response to the new fashion we started delivering at the end of the third quarter has been very encouraging. For example, we delivered the Joe's Wild Collection, which included pieces like the leopard print skinny jeans. We supported the Joe's Wild Collection with a cross-platform advertising campaign. As a result, our initial production run was sold out, and we generated numerous new orders. We will continue to identify our best fashion pieces or themes that represent the Joe's brand each season, price the product in all the best stores and support them with significant advertising campaigns.

Our domestic men's wholesale business continues to be a strong growth driver for us, as evidenced by a 40% year-over-year sales increase. Expanding our slim fit product offering during the quarter drove significant sales increases in existing doors. Be certain, we did experience store growth during the quarter and believe there is a sizable opportunity to further expand our men's distribution.

In addition to denim, our men's collection continues to grow as we have expanded the number of specialty stores carrying our product offering. We expect our men's business to continue to grow in future quarters. Our international business remains challenging. Our largest market, Japan, declined again during the quarter. However, this current quarter, we are seeing a pickup in the business as a result of our fashion offerings. The same holds true for the rest of our international business. Our order book for the fourth quarter is up year-over-year.

Our wholesale gross margin was 34.3% for the quarter compared to 44.5% in the prior year. Impacting this decline was a $1.62 million write-down of the jean leggings non-denim pants and age collection items. The largest component of the write-down was the jean leggings. The write-down reduced our gross margins by 7 percentage points. Our SG&A declined this quarter on a year-over-year basis. Our wholesale SG&A was $3.6 million, down from $3.8 million in the prior year period. The decline is attributable to reduced sample costs and a decrease in our facilities and distribution expenses.

Despite the decrease in our SG&A, our wholesale operating income decreased due to the inventory write-downs and reduced sales. Our retail sales increased $4.5 million from $4.2 million in the prior year period, and our store base increased from 14 to 21. We had 13 stores in our same-store sales base for our full quarter.

During the last few quarters, we increased pricing and reduced the number and depth of promotions at our outlets. As expected, our same-store sales decreased to low single digits. However, we anticipated and realized increased profitability across our store base. This is evidenced by a 12 percentage point increase in our store level gross margin from 55% to 67%. Our store level operating margins also increased and by 2 percentage points during the quarter. It is important to note that September of a year ago marks the last month of tough comparison due to heavy promotional activity and lower pricing at the outlets.

Accordingly, thus far into the fourth quarter, our same-store sales are up. Our retail operating expenses increased as a result of impairment charges at 2 of our stores, totaling $1.14 million and as a result of having 7 additional stores in our base. The charges were against our first 2 stores located in Chicago and San Francisco. Both were leased early in 2008 at market peak. In addition, being our first stores, the capital improvements are significantly above our current average.

Lastly, during the quarter, we opened a franchise store in Kuwait, our second store in the Middle East. And subsequent to the end of the quarter, we opened a pop-up store in SoHo, New York. The SoHo store is far exceeding our expeditions. I'll now turn the call over to Hamish to discuss our financial results.

Hamish S. Sandhu

Thanks, Marc. For the quarter, on a consolidated basis, net sales decreased to $24.2 million from $25.5 million over the prior year period as Marc just discussed. Our overall gross margins decreased to 40% from 46% due to a $1.6 million write-down to market value of the jean leggings, non-denim pants and all collection inventories. Excluding this write-down, our overall gross margins would have been 47%, 1 percentage point higher than the third quarter of 2010.

Operating expenses was higher in the third quarter of fiscal 2011 compared to 2010 at $12.4 million compared to $10.3 million, respectively. Operating expenses decreased in our wholesale segment due to continued efforts to reduce our sampling and distribution costs. Operating expenses in our retail segment increased due to having 7 more stores this quarter as opposed to the comparative quarter a year ago and an impairment charge of $1.14 million due to the low accounting value of capital expenditures at our Chicago and San Francisco stores.

Operating expense for corporate was $4.5 million, up slightly from the prior year comparative quarter of $4.2 million as we continue to invest in advertising to promote and raise awareness for our new products. We have seen the pay off of this investment as the new collections that we have been promoting have had tremendous sell-throughs at retail. As a result of these write-downs, we had an operating loss of $2.6 million compared to operating income of $1.5 million in the prior year.

It is important to note that excluding these 2 one-time charges, our operating income would have been positive for the quarter. In addition, for the quarter, we generated cash flow from operations of $1.8 million. Operator, we are now to ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Edward Yruma with KeyBanc Capital Markets.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

In regards to the inventory write-down, at this stage, are you comfortable with the existing inventory? Do you see the need for continued write-downs? And kind of how do you expect to prevent this going forward?

Marc B. Crossman

The bulk of the write-down was related to the jean leggings in that we sold a little bit at the price that we wrote them down to. We have firm orders against them going forward so that, we're basically clearing out. You're not going to see that happen again. We also, on some of those old, old, old collection items we've talked about a long time ago, decided to write those down also based on some small orders that we have had so that we can take our time liquidating that in the market slowly as possible. In terms of mitigating it in the future, as we've said before, we've gone to a cut-to-order program. We've relaxed that a little bit. But really, that just doesn't afford us to carry a whole lot of additional inventory that's not spoken for. Whereas on the jean leggings, for instance, we were carrying a pretty significant amount of inventory during the process that we were selling.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got you. And in terms of the women's wholesale business, obviously, I know you had some positive near-term commentary. But trying to understand the longer-term dynamics of that business and maybe as it relates to door count, are you seeing a reduction in door count? Is that [indiscernible] still a weakness? Or is it just simply some of the fashion transitions?

Marc B. Crossman

It's a little bit of both. I mean, we've seen door contraction at certain accounts where our inventory levels got a little bit -- spread a little bit too thin. Then so we actually, in a couple doors, decided to contract. But then also the inventory in those doors on the balance had contracted. I feel like we've gone through that. I mean, it's a lot of finding the smaller doors, exiting those smaller doors that aren't contributing to the overall pie, or at least not enough to really move the needle. I think we've gone through the bulk of that transition, if you will. And now, it's really about getting those inventory levels back up in those existing doors and then starting to roll through those smaller doors again.

Operator

[Operator Instructions] Up next, we have David Griffith with Roth Capital Partners.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Marc, a follow up on the write-down at the store impairment charges. Obviously, the timing wasn't great there, but it sounds like you've also refined your approach on some of the leasehold improvements. Can you maybe talk about kind of what you've learned and your approach going forward, especially on full-price stores?

Marc B. Crossman

Yes, it's -- and we're really excited about our retail business, and we're really going to start rolling that business out. We feel like we've found the right formula. I'll give you a little bit of some flavor behind the write-down. It was our first 2 stores that were really signed at -- and I hate to say it, but a market peak in the middle of 2008. We opened them at the end of 2008. Those were our first stores. So you really had that perfect storm of higher-than-usual CapEx, because they are your first prototype stores and higher than really sustainable rent, based on where we were. So we were able to take those 2 stores -- not able, we took the opportunity today to take those 2 stores and write off the CapEx related to them. So that was an impairment charge, it's not something that is going to filter through our base, and you're going to see this constantly. Those were the exceptions. And I don't want to get into the amount of money that we spent on those, but I will give you a kind of a sense of direction. We've actually gotten to the point where, the pop-up store in New York for instance that I believe we will be terming out, is one of the best-performing stores we've had. That store cost $200,000 to build out, soup to nuts. And if anyone wants to go see that store, you'll see it's as beautiful as any of our stores, and it is very inexpensive to build. It's our biggest and most profitable store. So we feel that -- we feel as though we've found the right model, we found the right footprint for our stores, and we've really worked on bringing our CapEx down so that we're building these things out for between $200,000 and $400,000.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And the SoHo store, that's what? A couple of thousand square feet?

Marc B. Crossman

Yes. The SoHo -- the top-selling space is about 2,500 square feet.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And you feel that's kind of the right space for you? Or I mean, obviously, it depends kind of market-to-market but...

Marc B. Crossman

Precisely. SoHo is a little bit different as you know, relative to the rest of the world. So that store is -- because it's our flagship store, because we want to put all of our products in it, that is one of our larger stores. So like I said, going forward, we don't want to have a footprint that's quite that big. But that is our flagship store, so I think that's why we were able to take a little bit bigger space. And it's SoHo. I mean, it's -- the amount of turnover that we're doing in that store is -- we couldn't be more excited.

David E. Griffith - Roth Capital Partners, LLC, Research Division

And it sounds like there's an opportunity there to make it a permanent store as opposed to pop-up?

Marc B. Crossman

Absolutely. It's either today or tomorrow, we'll officially be a permanent.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Okay, great. And so given that you do feel like you've gotten this a little more refined, how quickly should we look for more full-price stores, in the U.S. at least?

Marc B. Crossman

Well, I think what we're constrained with right now is our inventory levels and being able to build up our inventory levels quickly enough to support a quick roll out starting today. I think longer term, we've defined that we want to open at least one a month. We've shown that we have the capacity to open a lot more than that based on what we were doing when we opened 7 stores over the course of, I think it was 9 weeks. So I think, for us, we want to have a minimum base of about 12 stores and hopefully, we can roll faster than that over the course of the next several years.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Great. And then could you maybe talk a little about Kuwait and Dubai and how they're doing? And I think there are several more stores to come from that license agreement, right?

Marc B. Crossman

Yes. I mean, we're supposed to have another 5 stores over the next several years. The stores in Kuwait and Dubai, I mean, it's early. So the initial reaction has been good. But again, it's a new market for us, so we're going to be cautiously optimistic about our expectations for those stores. But the first run at it is really encouraging and really exciting, so much so that our franchisee wants to come back. And actually, we've started talking about giving them wholesale distribution in the area. So it's actually very exciting. That's a model we'd love to replicate across the rest of the world.

David E. Griffith - Roth Capital Partners, LLC, Research Division

Very good. And then coming back to the U.S. and your outlet business. I mean, it sounds like you're doing a little bit less promotion, and that's driving profitability.

Marc B. Crossman

Yes, absolutely. I'd make 2 comments on outlets. The first is, we have been very heavy on the outlet side. It allowed us to build up an infrastructure to support a faster roll of retail. I think we're -- our goal is tops to be 3:1. So 3 full-price stores to every outlet, maybe get to 4 to 1, but somewhere in that range. So I think as we look to us to open stores in the future, we're going to be much more heavily skewed towards full price. I really think that over the next year or 2, we may open a couple of outlets, that will be about it. The rest will be full price. And so I want to make that one clarification. Within our outlets, there are 2 things that we've done. One, the prior margins, gross margins dipping into the 50s, there was, getting back to Ed's question, we had a lot of old collection items that we tried to push through our outlet. So that's one thing impacting the margins. And the second thing was the price point of our denim. We were really trying to find what's that right price point relative to the volume you're doing and the gross profit you generate. And what we found is, where we're pricing the denim now in their buckets, we're maximizing the profitability. And it just shows through the numbers. So I think we finally found the right mix of where we need to be at pricing to obviously pricing the sales. And let me add one more thing. We have seen, as we made the shift to our outlet business, everything is comping up across the board, both on our full price and off-price business.

Operator

[Operator Instructions] All right, that will conclude the Q&A portion of today's event. I'd now like to turn the presentation back over to Mr. Marc Crossman for closing remarks.

Marc B. Crossman

Okay, I appreciate everyone joining us on the call today. If you have any questions, please feel free to reach out to me or Hamish.

Operator

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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