Vince Holding Corp. (NYSE:VNCE)
Q4 2015 Results Earnings Conference Call
March 29, 2016 04:15 PM ET
Jennifer Pohland - VP, Finance
Brendan Hoffman - Chairman and CEO
Dave Stefko - CFO
Jessica Schmidt - KeyBanc Capital Markets
Jeff Van Sinderen - B. Riley
Richard Jaffe - Stifel
Good afternoon. My name is Mike, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Q4 2015 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Jennifer Pohland, VP of Finance. You may begin your conference.
Thank you, Mike, and good afternoon, everyone. Welcome to our fourth quarter and full year fiscal 2015 earnings conference call. I am Jennifer Pohland, Vice President of Finance. Joining me today is Brendan Hoffman, our Chairman and Chief Executive Officer; and Dave Stefko, our Chief Financial Officer, who will be your speakers for today’s call.
Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that we expect. Those risks and uncertainties are described in today’s press release and in the Company’s SEC filings, which are available on the Company’s website. Investors should not assume that statements made during the call will remain operative at a later time and the Company undertakes no obligation to update any information discussed on the call.
In addition, in today’s discussion, we are presenting our financial results in conformity with GAAP and on an adjusted basis. The adjusted results that we present today are non-GAAP measures. Discussions of these non-GAAP measures and reconciliations of them to their most comparable GAAP measures are included in today’s press release and related schedules, which are available in the Investors section of our website at investors.vince.com. After our prepared comments, we will be available to take your questions for as long as time permits.
Now, I’ll turn the call over to Brendan.
Thank you, Jen, and thanks everyone for joining us today. I’ve been at Vince for five months now, and one of my primary goals was to build the strong foundation and position the Company to succeed over the long term. Everything we have done since that point has been moving us toward that goal. I am pleased with the progress we have made and proud of the work that we have done thus far.
We are making great strides with our product, our top priority, as we work to create everyday casual luxury essentials with modern effortless style. As you know, our founders Rea Laccone and Christopher LaPolice recently returned to Vince as consultants to oversee our product and merchandising. In addition, we have added a new artistic director overseeing all categories along with new leads in both product development and production, all three of them previously worked with Rea and Christopher to build Vince.
Last month was the first market that featured products from them and our design team and we are very encouraged by response that we received. Our wholesale partners were thrilled to see that we have recaptured the brand DNA that had made us so successful in years past. And we were pleased to see that the very emotional connection that our partners had towards the brand has been restored. The team has done a fantastic job creating a collection that embodies the brand with fashion that is both fresh and relevant to multiple generations. Vince remains a leading brand with our department store partners and we believe we have an opportunity to further strengthen our market share position based on the positive reaction we received to the new collection. I am confident that we are on the right path.
However, given the timing of Rea and Christopher’s return, we decided to focus on fall deliveries, which are primarily received in Q3 and dramatically reduce the pre-fall product that was already in the pipeline for Q2. Therefore, we’ll not be into our holiday delivery in the fourth quarter but you will see the on-floor assortment fully represent the look and feel of the brand.
In addition, despite the very positive feedback, given the tough retail environment, our partners are remaining conservative with their buys and taking a wait and see approach. This is not unexpected from our standpoint and has been built into the guidance. We are working on some initiatives that will enable us to quickly chase business and capture incremental sales if performance exceeds expectations, while remaining prudent in the way we manage inventory levels. Quite frankly at this juncture, we would much rather have demand our way supply and potentially miss a few sales than to build inventory too quickly and risk excessive mark down events.
Overall, we’re focused on doing what’s right for the business over the long-term and in some instances, this may mean we have to take a step or two back in order to move forward again in the right directions. To that end, we have also hit the pause button in our handbag business. We felt that the product did not accurately reflect the Vince brand and we have begun the process to find a designer to lead that business going forward. We fully believe that this is a great opportunity for us, but again we want to make sure that everything we are doing is right for the brand. So, we will be strategic and methodical as we work to reset this piece of the business and we will keep you updated.
In terms of our direct to consumer business, we are bringing more depth and focus to the merchandise assortment, which we believe will drive more full-price business. We are also reworking a small selection of stores to ensure that they reflect the go-forward DNA of the brand and serve as a roadmap for all locations. In addition, we continue to be pleased with our e-commerce business and will be migrating to a new platform that will enable us to increase the functionality of the site. This will be followed by a creative overhaul to ensure that the site is more reflective of the Vince brand as we want consumers to have a consistent experience across channels.
Lastly, we’re taking steps to reduce overall discounts and promotions. We eliminated the nearly four-week tiered promotional event that we had last year in our stores and online during Q1. As these types of promotions train the customers to wait for sales and handcuff our wholesale partners. While we expect these efforts to impact our sales in the short-term, which is already reflected in our guidance, we believe this is the right course of action to protect the long-term health of the Vince brand.
As we look at our outlet and off-price business, our primary goal was to see that the surplus of inventory was moved out and that we’re more thoughtful about managing the flow of merchandise into this channel. This remains a viable business for the brand. However there needs to be better controls in terms of what product and how much flows through this channel. As we employ greater diligence, we believe that the profitability in our off-price business should improve as well.
Internationally, we are also seeing great response to our new product. We are confident that the assortments the design team is creating will work equally well, both internationally and domestically. We continue to grow with our international partners and see significant opportunity for growth in these markets. As we look at 2016, we expect that the business will remain challenged throughout much of the year. We’re working through our spring product and looking forward to debuting our fall collection from our new team. Moreover, we’re very excited about what you’ll see on the floors in the back half of the year and believe that we will start to see an inflection point in our performance during the holiday season.
We know that this is not going to be an overnight fix; it will take time for us to return to growth but we’re taking the necessary steps to get there and doing what’s right for the long-term health of the brand. In some instances, as I mentioned earlier, this means taking a step back. We’re foregoing some short-term top line gains in order to build the brand back in a way that is sustainable. We are also focused on making the necessary investments in the business to support our long-term growth objectives and taking steps to put us in the financial position to do so with our recently announced rights offering, which we commenced today.
Overall, I am very proud of the work that the team has done thus far. We believe that we’re on track to achieve improved results for holiday 2016 and into 2017 and look forward to continuing on this path to deliver consistent sales and earnings growth over the long-term.
Now, I will turn it over to Dave to review our financial performance. Dave?
Thank you, Brendan. For the fourth quarter, net sales decreased 13.6% to $81.8 million versus $94.7 million in the prior year period. Our wholesale channel sales were down 30.2% to $48.1 million due primarily to a decline in our U.S. wholesale segment and to a lesser extent, declines in our international and licensing businesses.
Our direct-to-consumer segment sales increased 30.5% to $33.7 million in the fourth quarter driven by the addition of 11 new stores since the fourth quarter of last year as well as a 10.7% increase in comparable store sales including e-commerce. The increase in comparable stores sales was driven mainly by an increase in the number of transactions.
Moving onto profitability, gross profit in the fourth quarter was $41 million or 50.1% of net sales, which includes a $2.2 million benefit from the recovery on inventory write-downs taken in the second quarter. Excluding this benefit, gross profit was $38.8 million or 47.5% of net sales. This compares to $45.8 million or 48.3% of sales in the fourth quarter of last year. The adjusted gross margin decline was due primarily to increased discounts and mark downs partially offset by a channel mix shift to the retail channel and an increased mix of full-priced channel sales.
Selling, general and administrative expenses in the quarter were $36.2 million or 44.2% of sales. This includes a $300,000 favorable adjustment to management transition costs taken in the second quarter. Excluding this favorable impact, selling, general and administrative costs were $36.5 million or 44.6% of net sales in the quarter. This compares to $25.5 million or 26.9% of sales for the fourth quarter of last year. The increase in SG&A was largely driven by store labor and occupancy cost associated with 11 new store openings since the end of fiscal 2014 as well as expenses related to the new management team and other corporate related costs. The increase in SG&A as a percent of sales was attributable mainly to deleverage on lower wholesale sales.
The resulting operating income for the quarter was $4.8 million. This compares to operating income of 20.3 million in the fourth quarter of last year. Excluding the benefit from the recovery on the inventory write-down and favorable adjustment to management transition costs, operating income for the fourth quarter of fiscal 2015 was $2.3 million.
Net income for the fourth quarter was $1.8 million or $0.05 per diluted share, compared to net income of $10.5 million, or $0.28 per share in the fourth quarter of last year. Excluding the benefit from the recovery on the inventory write-down and favorable adjustment to transition costs, net income for the fourth quarter of fiscal 2015 was $0.3 million or $0.01 per diluted share.
And looking at our annual results, net sales for fiscal year 2015 were $302.5 million, a decrease of 11.1% compared to fiscal 2014. This was a result of a 22.4% decrease in wholesale segment sales and a 25.1% increase in our direct to consumer segment sales. Our comparable store sales including e-commerce for fiscal 2015, increased 4.2%. The comparable sales growth was driven primarily by an increase in transactions partially offset by a decline in transaction size.
On a GAAP basis for fiscal year 2015, the Company reported net income of $5.1 million or $0.14 per diluted share, which includes a $6.1 million, or $0.16 per share, net charge associated with the write-down of excess inventory and aged product to expected net realizable value incurred in the second quarter and a subsequent recovery of inventory in each of the third and fourth quarters; and $1.6 million, or $0.04 per share, in net management transition costs. This compares to net income of $35.7 million, or $0.93 per diluted share, in fiscal 2014, including the impact of Secondary Offering costs. Adjusted net income was $12.8 million, or $0.34 per share, in fiscal 2015, compared to adjusted net income of $36.1 million or $0.94 per diluted share in fiscal year 2014.
Now moving on to the balance sheet; our debt decreased by $17.9 million to $60 million during the quarter. Our debt to leverage ratio at the end of the fourth quarter of fiscal 2015 was 2.7 times on a reported basis and 1.7 times on an adjusted basis. Our debt to leverage ratio at the end of the fourth quarter of fiscal 2014 was 1.2 times on both the reported and an adjusted basis. At the end of the fourth quarter, we had $28.1 million of availability remaining under our revolving credit facility.
Inventory at the end of the quarter was $36.6 million compared to $37.4 million at the end of last year’s fourth quarter. The year-over-year decrease was primarily driven by the increase in inventory reserves, partially offset by the addition of 11 new retail stores since the fourth quarter of last year. Capital expenditures for the quarter totaled $3.5 million of which $2 million was attributable to new stores. Leases are signed for six stores that we expect to open in fiscal 2016. As of today, March 29th, the Company has 49 stores in the U.S. including 35 full price stores and 14 outlet stores.
Now, turning to review of our outlook for fiscal year 2016, which we introduced in our press release on March 7th; other than the impact of our current rights offering on diluted EPS, there is no change to the guidance we presented. We expect total sales for the year to be between $290 million and $305 million including revenues from six new retail stores and comparable sales growth inclusive of e-commerce sales in the flat to low single-digit range.
Total sales guidance reflects an expected mid to high single-digit sales decrease for the first half of the year and a low to mid-single digit sales increase in the second half of the year. While we don’t provide quarterly guidance, please keep in mind that last year spring product deliveries were moved forward into the fourth quarter of fiscal 2014 from the first quarter of fiscal 2015. The cadence of spring shipments this year had a reverse back to the first quarter of fiscal 2016 from the fourth quarter of fiscal 2015.
In addition, the reduction of shipments in the pre-fall line collection is expected to impact our second quarter sales, given that we reduced the size of this collection by approximately half. We expect gross margin to be approximately 47% for the year and expect SG&A to be between $132 million and $135 million. Diluted EPS is expected to be flat to a gain of $0.06 per share. For the first half of the year, we expect a net loss per share in the mid teens range due to higher SG&A growth from continued store and strategic investments early in the year as well as the annualization of store openings and strategic investments from the first half of last year.
Note that these EPS amounts do not -- do reflect additional 11.8 million shares outstanding that would result from the completion of $65 million rights offering. For 2016, we expect capital expenditures between $10 million and $12 million. Finally, we expect to receive the $65 million from the rights offering in mid-April which will enable us to further pay down our debt. Importantly, as Brendan noted, this will provide us liquidity needed to make investments to support the long-term growth of the business.
This concludes my comments regarding our fourth quarter financial performance and outlook for 2016. We will now take your questions. Operator?
[Operator Instructions] Your first question is from Ed Yruma from KeyBanc Capital Markets.
Hi, this is Jessica Schmidt on for Ed. Thanks for taking my question. So, I know inventory builds in the off-price channel has been a particular issue that you’ve been working to improve. But how do you feel about levels in the channel now; do you think that you’ve cleaned them up or I guess is there still more that you could work through?
We have still inventories that we need to move through, but we did get our off-price channel sales for the year close or in line. We’ve talked about a target of 20% to 25%, we made an improvement in that area and we’re targeting to be in that range for 2016 also.
And then in terms of the pause on the handbag business, I guess what do you think the handbags missed about the Vince brand? And then specifically on pricing, where do you think the Vince handbag should sit because I know that it moved from a sub 1,000 price points to then well below 500, but I guess what would be more appropriate?
I think that’s what we’re trying to establish. And in part, it will be dictated by the design talent that we can recruit. But I think that when I got here, it was a -- I was a little confused by the customer we were going after with our handbags as it relates to our core ready-to-wear. And then shortly after when Rea and Christopher came back and it was clear that the product offering was going to be elevated, the handbags just weren’t congruent with what we want the brand to stand far. So, as I mentioned in my remarks, we look at this year as a time to reset the brand and take some short-term hits to try and build a more -- a better foundation and a more profitable brand in the future. And so, we do believe that handbags and accessories are a big part of that but just felt it was better to -- rather than trying to reposition the handbag line while we were continuing to market it, to just take a pause, we hope it’s a short pause, and then come back stronger at. And we’ll see it at the price points. I think there will be a range of price points that like with the apparel will be a value, but that value isn’t necessarily the cheapest product out there.
The next question is from Jeff Van Sinderen from B. Riley.
Jeff Van Sinderen
Maybe we can just start, if you could give us any insight into the e-commerce versus brick-and-mortar comps. I was wondering also what drove transactions to be up, was that driven by discounting? I know you mentioned, you’re still working through some inventory, although I wasn’t totally clear if that was related to full-price or just an issue of off-price? And then, maybe if you could just touch on gross margin for wholesale and retail for Q4, if there is any color you could give us there? And then discounting and promotional levels by channel in Q4 versus last year? Thanks.
We do not split out brick-and-mortar stores from the e-commence side. I will tell you that the growth in transactions is driven naturally from the growth that you see in just traffic overall. And frankly, we’re happy with our e-commerce business and we see similar growth in that area that other e-commerce platforms are seeing. So, it’s definitely not from discounting, as Brendan mentioned to. We’re going more away from discounting; we eliminated promotions in the back half of fiscal 2015. And as we’ve talked about, the elimination of a promotion, a full rate promotion that we ran, that was ran last year in the first quarter of 2016.
Yes. And you’ll even see next month we have re-anniversary our friends and family event from last year. This year, we’re going to be much quieter about how we market it, both last we had details on the stores, we actually had sandwich boards out there. We did lots of email blasts, lots of affiliate marketing. This year, it’s really going to be -- it’s a bi-invitation event that’s going to be our customers. And so, we think that it will reset the brand and be more reflective of the brand we’re aspiring to be, and also as I mentioned in my remarks, be more cognizant of the fact that we have a big wholesale business. And when we promote within our own stores that directly impacts our wholesale business; and in many cases, they’ll price match us which just exacerbates all the promotions that are going on out there.
Jeff Van Sinderen
And maybe you could give us a little more detail on what you’re seeing in your wholesale order book. I know you gave some broad brush strokes there. But just wondering how much of the fall book is in at this point? Where are the relatively weakest and strongest areas? And I think you mentioned you see that evolving in second half. Maybe you could just give us a little more detail there, just wondering if second half order book for wholesale is expected to down overall, that’d be helpful.
So, I am not going to give you specifics, but I can give you little bit more color. So, in February, we had our fall market, as I mentioned, which is end of July, August, September deliveries, three months of deliveries. So, I am talking specifically for women’s wholesale apparel. This was the first collection that Rea and her team did and Christopher oversaw the presentation and the marketing. We were thrilled with the reaction we got there. There was standing ovation from one account that I won’t mention and tremendous enthusiasm across the board.
The accounts are generally cautious because business is -- that’s a tough environment out there, which we were anticipating. So, we know that the orders are much more -- we are bullish than the path we’ve been on and the trend of the business. But we also were anticipating having to earn our way back into major growth orders. And so we think fall is a great start. It gives us the platform and the assortment out there that we need. And as I mentioned in my remarks, we’re happy to what demand outweighs supply because that hasn’t happened here in a while.
Fall, when it delivers will sit with some of the summer deliveries that will still be on the floor and start to be marked down which is why I mentioned holiday as being when you’ll see the newest weekly [ph] assortment from the new team fully represented in both our wholesale partners and our own stores. And I think as they come back for market in June to place holiday or we call it pre-spring, I think they’ll be able to come back up with a little bit more confidence even though they won’t have selling on the fall merchandise but having had some time to digest what they saw in terms of the elevated product that they now can expect from Vince.
Jeff Van Sinderen
I’m sorry, just to clarify; are you saying that the fall order book is still down but you’re expecting it to be up for holiday; is that how I should read into it?
I didn’t give you any specifics on that, I just said we -- they came in line with what we had anticipated, which was reflective of the environment and their enthusiasm for the line, kind of balance together. So, we’re very comfortable that the orders will place to a level that will allow Vince to start to grow again and then hopefully anticipate further growth in terms of the orders as we move forward.
The next question is from Matthew Boss from JP Morgan.
Hi. It’s Christina [ph] on for Matt. In that roughly flat gross margin guidance that is down 20 basis points, how should we be thinking about the cadence throughout the year is and the drivers there?
I mean I think it’s -- we really haven’t gone down from the core standpoint, we don’t give. We expect if the back half of the year obviously to be a higher margin rate based on our expectation of seeing better full-price selling, from that standpoint, we’re still on the first-half of the year working through the spring product that was inherited. And appropriately, we would anticipate a higher mark down rate necessary there than we would in our fall product.
I mean we also -- we want to support our wholesale partners and make sure any liabilities we have in spring are taken care of so that we can clear the desks and give the new product every opportunity to perform, which we think we’re in the process of doing. And the product, as I mentioned in my remarks, it’s more depth and less breadth, and it’s a much more edited collection as over the last couple of years the assortment has gone way too wide. Now, we’re much more focused, which we think will allow us to stay and stock on best sellers, chase the winners. And really the goal, as I continue to talk about internally and externally, is raising our regular price selling that’s gotten away from us. We’ve become a very promotional brand over the last few years, both out of necessity and because of steps we’ve taken in our own direct-to-consumer channels. And as we’ve discussed, we’re working hard these last six months and the next few months to clean that up in anticipation of the elevated product and how it will connect with the consumer.
And then on your debt levels at this point, so with the rights offering you mentioned in line to pay down additional debt and to use the proceeds, do you have a target leverage ratio that you’re looking at or target amount of debt that you’d be more comfortable with and kind of time horizon behind that?
I guess that’s not really, I mean the Company is sitting on a $45 million of term approximately; two years ago it was $170 million. We will pay our revolver down completely with the rights offering in addition to settling our TRA liability that we have sitting on our balance sheet and then have that cash available for operations and investment going forward and have the full use of our revolver going forward So, we’re comfortable with where the rights offering is going to position us.
[Operator Instructions] The next question is from Richard Jaffe from Stifel.
If you could just comment on the store portfolio, you talked about I guess cleaning up or doing some work on some stores. Are there stores that are underperforming that you would consider closing, adding the store portfolio down? And given the tremendous direct-to-consumer without being specific, was it driven by the online business or the new retail stores; is the retail or the brick-and-mortar business really growing as strongly as direct-to-consumer or equally?
So, the remarks I made earlier were specific to the look and feel and ambiance of the store, the store environment, so we’re going to pick couple one store in the Los Angeles area, one store here in the city and just kind of reset them and hope that can be the kind of benchmark and the window into how we want all of our customer touch points to look like. So that wasn’t reflective of any numbers or anything. Certainly, we continue and we will continue to look at store portfolio. We certainly expect to continue to grow our retail footprint. Do we have stores that are underperforming? Sure, I mean the business has been so tough for us over the last year or so that clearly our own stores are impacted by the product we’ve delivering. So, as we talk about addressing the portfolio, we have to do it understanding that we have high expectations for how these stores will start to perform in the back half of the year and into 2017 and don’t want to make any premature decisions until we see what the stores can do with the Vince product of going forward.
And as we look for new locations, we just want to make sure that it’s in environments and we’re surrounded by where we believe our customer shops. And so we’re kind of evaluating that now to make sure that we make decisions appropriate for the way we reset the brand.
Just a question on margins in stores, did the full-line -- or the full-price stores and the direct channel become a venue for lot of the clearance activity? Just concerned about the margins going forward in stores than that but if you…?
No, I mean that -- coming from the department stores, I mean the mark up and margin environment so different in specialty store, even all the promotion doesn’t ding [ph] you too badly. That’s why in my remarks I talked about handcuffing our wholesale partners with some of our promotions and training our customers buy on sales. So, I mean we liquidated a lot of the over-merchandise, the overstocks through the off-price channels, both our own outlets and aggressively through third parties that they’ve alluded to pulling back. And one thing that’s important to me and Rea and Christopher is making sure that product whatever has the Vince label is reflective of the Vince brand. So, we thought that’s one of the reasons why handbags is being re-launched. Same thing with what’s in the outlet stores. We want what’s in the outlet stores to be reflective of the Vince brand because we that customer in many ways showcases her label more than somebody buys it at the full price store. So, we don’t want somebody to be introduced to the brand and see inferior product. So, we’re working hard, as I mentioned in my remarks, to make sure we’re able to produce products for the off-price channels that is worthy of the Vince label.
There are no further questions at this time. I will turn the call back over to the presenters.
Okay. Well, thank you everyone. We look forward to getting back to you after our Q1 ends sometime in late May. Thank you very much.
This concludes today’s conference call. You may now disconnect.
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