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Executives

Lori Nembirkow -

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

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

Analysts

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

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

Steven Chang

Unknown Analyst

James Fronda - Sidoti & Company, LLC

Joe's Jeans (JOEZ) Q4 2011 Earnings Call February 28, 2012 4:30 PM ET

Operator

Welcome to Joe's Jeans Fiscal 2011 Fourth Quarter and Year-End Earnings Call. I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. 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 annual report on Form 10-K filed today. This report includes information that could also cause our actual results to be materially different from those contained and 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, everyone, for joining us today. I'll speak about the fourth 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 fourth quarter, we generated net sales of $25.4 million, an 8% increase. The increase in sales is indicative of 2 trends: First, our Wholesale business is starting to stabilize; and second, our retail strategy is now providing a material diversification of our revenue base.

During the quarter, we incurred a net loss of $268,000 compared to net income of $817,000 in the prior year. However, we invested an additional $1.3 million in advertising during the quarter.

More specifically, during the quarter, we launched an advertising campaign around our colored jeans. Right now, we are in a colored denim trend and rather than trying to identify and offer a handful of colors, we launched a program of 55 colors, which we cut to order. This program allows us to custom tailor our product offering to each retailer without maintaining too much inventory. The program has been a success in generating reorders. In addition, the ad campaign has had a very positive impact in our retail stores where we have had a presentation of all 55 colors on a single wall. With this advertising launch already underway, in future quarters we expect our advertising costs to taper.

Our Retail division sales increased 44%. Sales growth was driven not only by operating 7 stores more than a year ago, but also by very healthy 12% same-store sales growth. In the first quarter of 2012, which ends tomorrow, we have seen similar double-digit same-store sales growth. Most encouraging, same-store sales gains in our full price business exceeded the same-store sales gains from our outlet. This speaks to the fact that the customer is reacting positively to our new product delivery. We believe this positive consumer reception will filter down to our Wholesale business in the coming quarters.

Similar to the third quarter, we were [indiscernible] at our retail stores than a year ago. Accordingly, gross margins expanded 4 percentage points from 61% to 65%. Strong same-store sales gains coupled with increased gross margins led to an 8.4% operating income margin, our highest yet for the division.

Also, our store-level operating margin doubled as compared to a year-ago margin. We were pleased with the results of each and every store in our base. During the quarter, we opened our flagship store in New York, and it continues to outperform our expectations.

I would like to point out that we opened the New York store with only $200,000 of capital expenditure, and as any customer will tell you, it's an absolutely beautiful store. Going forward with improvements in our store design, we believe we can cut our store-level capital expenses in half.

Our wholesale sales were flat during the quarter, reversing a trend we have seen over the last several quarters. The slowing decline in our women's wholesale sales, coupled with sales gains in men's and international sales, led to comparable sales for last year. Our Women's business is starting to feel the positive impact of a revamped core line, the 55 Colors program and a few great collection items.

While we are still feeling the impact of drawer reductions from prior seasons, by offering great products, we are starting to see increases of several of our big department store accounts. We feel this bodes well for the coming year. Our future plan is simple, continue to generate brand stature and relevance with our new, unique and exciting fashion product, but also maintain a consistent core basic program that we can rely upon year round.

Our International sales were up double digits. The bulk of the increase was driven by France, where we are seeing traction in our shop in shops and by the U.K., where we recently signed a new distributor. In addition, we generated international sales that we didn't have a year ago through sales at our franchise stores in the Middle East. We believe the international market continues to represent a sizable opportunity for the company.

Men's wholesale sales continued to outpace the market growing 27%. We saw increases in both our door count and our average sales per door. While core basics are driving half of the business, our fashion continues to perform very well, and in some cases, has even been added to our core offering. We are very pleased with the direction of our men's singles [ph] and expect to build off its continuing success.

Our wholesale gross margins decreased by 6 percentage points for 2 reasons. First, with the success of our 55 Colors denim program, we've had to produce garment dye domestically in order to meet short lead times. In addition, we were still working with our factory in Mexico to bring the quality of these pieces to a level that is acceptable to our customer. As a result, we manufactured twice as many garments in the U.S. as we did a year ago. We expect the mix to shift back to Mexico in the coming quarters. Second, we had some sales of previously marked-down items, which carried no margin.

I'll now turn the call over to Hamish for a more detailed discussion of the financials.

Hamish S. Sandhu

Thanks, Marc. For the quarter on a consolidated basis, net sales increased 8% to $25.4 million from $23.6 million over the prior year period. Retail sales led the increase by growing 44%.

Same-store sales growth of the 14 stores opened at least 12 months and e-commerce increased 12%. Retail sales represented 22% of our overall net sales for the quarter. Wholesale sales were flat during the quarter. Declines in women's wholesale sales were offset by increases in international and men's sales.

Our overall gross margin decreased to 46% from 49% in the prior year quarter due to the sales of the Jean Legging, which were written down during the third quarter. These items were sold during the fourth quarter at their new selling cost [ph]. Excluding sales of these items, our overall gross margins would have been 48%, 1 percentage point lower than the fourth quarter of 2010.

We had an operating loss of $131,000 compared to operating income of $1.9 million in the prior year. In addition, for the quarter, we generated cash flow from operations of $2.6 million.

For the full year, on a consolidated basis, net sales decreased 3% to $95.4 million from $98.2 million over the prior year period. Our overall gross margin decreased to 45% from 47% due to a $1.6 million write-down to market value of the Jean Legging and other collection inventories and the subsequent sale of these items at the new carrying [ph] cost. Excluding this write-down and sale of these items, our overall gross margins would have been 48%, 1 percentage point higher than the prior year gross margin.

Operating expenses were higher in fiscal 2011 compared to 2010 at $43.9 million compared to $40.2 million, respectively. Operating expenses decreased in our Wholesale segment due to continued effort to reduce our sampling and distribution costs. Operating expenses in our Retail segment increased due to having 7 more stores in fiscal 2011 as opposed to the comparative year, and recording an impairment charge of $1.1 million, which is a lower carrying value of capital expenditure at our Chicago and San Francisco stores.

Operating expenses for corporate was flat compared to the prior year. Within this expense category, advertising expenses increased as we continued to invest in advertising to promote and raise awareness for our new products. We were able to offset these high advertising costs by better managing our other corporate expenses.

As a result of the write-downs, we had an operating loss of $565,000 compared to operating income of $6 million in the prior year. It is important to note that excluding these 2 onetime charges, our operating income would have been $2.2 million for fiscal 2011. In addition, in fiscal 2011, we generated cash flow from operations of $10.6 million.

Now I will turn the call back over to Marc for some closing remarks.

Marc B. Crossman

I want to close my prepared remarks by outlining several of the near-term initiatives we have for 2012. We confidently believe these initiatives will drive the business forward on both the top and bottom line. First, we're going to roll out retail stores at a quicker pace than we did in 2011. We have 2 signed leases and have 1 lease in draft form. We hope to open 10 stores in 2012. We would like to keep the footprint of each store to 1,500 square feet and the capital expenditures to $250,000.

Second, we expect to increase our wholesale gross margins by moving more production down to Mexico and taking advantage of reduced fabric pricing. We have already started dying white and black garments in Mexico and would anticipate moving the rest of this program to Mexico in Q2.

Third, we're going to restructure our European office into a distributor model, with the opportunity for franchise stores. Restructuring Europe will drop sales to the bottom line without its current [ph] expense structure. In addition, we're looking to build out international distribution beyond Europe.

Fourth, we're launching a new brand called Elf ph] in conjunction with Macy's, utilizing and leveraging our adjusting infrastructure. At price points 40% of Joe's, the brand is focused on the girl aspiring to buy premium denim. However, because premium denim is only sold in less than 15% of Macy's doors, through this price point, Elf's [ph] has the broader addressable market. Having started shipping in this month, we'll have more to say about the brand in the coming quarter.

Operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question will come from the line of Edward Yruma, KeyBanc Capital Markets.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

This is Jane in for Ed. I just had a couple of questions. First, I was wondering how orders and reorders are looking for fall. And then, secondly, how much more of the previously marked down inventory do you have left to sell through in 2012?

Marc B. Crossman

Okay, I'll start with the first and back up. The previously marked down goods, we sold all of those in the quarter. So pretty much, going forward, you're not going to see any of those sales going forward. It was all done ahead of time. So that's been cleared out of the system. In terms of orders for fall and reorders, right now, we're tracking up slightly against our year-ago number. So when we look at -- now, again, this is first quarter just closed, so as we're looking out into the second quarter, we're tracking up slightly to where we were a year ago on our Wholesale business. I gave a glimpse into our same-store sales being up double digits for the first quarter, so that gives you a picture of kind of where we stand.

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

Guys, this is Ed. One other quick follow-up. On Macy's, is your intention longer term for this to be an all-doors-type rollout? And I guess if you could provide a little bit of quantification in terms of the initial financial impact.

Marc B. Crossman

Okay. So this one's tough and I presume you're talking about Elf [ph], the new line. It's rolling out their Impulse doors. And right now, there are about 141 doors that our initial rollout is going to. I believe Macy's has just under 300 Impulse doors. And obviously, they have a chain that's much bigger than that. And I think as they try to upgrade their business, it has the potential to roll [ph] that along with that. I don't want to get into their specific numbers, but just to give you a sense, it's at a price point -- the introductory price point is $68 on this jean. And if you look at kind of the addressable market for a $68 jean, and you look down the rest of the Macy's line of stores, there's a ton of potential there.

Operator

The next question will come from the line of Steven Chang, Rudgear Capital.

Steven Chang

A few questions. You touched on this a little bit, but your retail results were better than your wholesale results this quarter. Is that because in your own stores, you're showing newer product, like your 55 Colors, that hasn't quite hit wholesale yet?

Marc B. Crossman

I think I'd characterize it a little bit differently. The first thing I would say is, yes, it's all being shown in a collection and a lifestyle, so it has a better presentation in our store. You're absolutely right, in the colors, we have to pick and choose the colors that we put into the various retailers, whereas our stores, we have an entire wall that's filled with 55 different colors. So it's definitely a little bit more appealing from that perspective. But I think probably the overarching theme that I would take from this is that we see the direct results in our stores of how a product's selling a lot faster than we're trying to push it through the wholesale channel. So we're in the process of building back our wholesale distribution, certainly on the women's side, in terms of bringing in the door counts back up to where we were so we don't have as large of an audience to speak to on our wholesale relative to, say, the year-ago. So you really have to have good product, build that channel back up before you see those results filter back into our numbers. So if you see us have results that look better, or even slowing declines to year ago as I was mentioning, you've got to put that into perspective of that we're working with fewer doors than we were in the past. So our same-store sales numbers within the department stores look better than the overall number would project.

Steven Chang

And I noticed a nice increase in your backlog. Is there any onetime items or anything we should consider when comparing your backlog year-over-year?

Marc B. Crossman

Unless Hamish saw something in the numbers, no, I don't think there's any onetime item or something that you'd want to pull out of our backlog to compare to a year ago. Hamish is shaking his head, no.

Operator

The next question comes from the line of Gary Purcell [ph], Garvin Consultants, Inc. [ph]

Unknown Analyst

I just have a question, what do you think of your stock at this price and -- or what's your opinion on its current valuation? Seems pretty low...

Marc B. Crossman

We typically don't comment on the stock's valuation. The one thing I would say in this case, given where we are, I think, for everyone in the company, it's a little bit frustrating because we see that the value of the brand, the value of the company is a lot greater than where we're trading at right now. I think we're 0.4x revenues, a $40 million market cap on $100 million company. What we're going to show you in 2012 is that the numbers, the bottom line earnings that this company can deliver by leveraging that brand is really going to come back into perspective. So we went through a little phase, I think it was like 5 or 6 years ago, where kind of the value of the brand was definitely worth more than what it was trading for from a numbers perspective. We're going to get back to that [ph] position. I think 2012, we're going to show you that the health and value of the brand, like I said, $100 million company has the ability to generate some very nice returns and some very good bottom line earnings. And I think we'll see that the stock's going to be or should, that should reflect in the valuation of the stock...

Unknown Analyst

Typically what time sales should stocks in the apparel business such as yours be selling at?

Marc B. Crossman

I mean, I'd love to tell you, 10x sales. I mean [indiscernible].

Unknown Analyst

No, no, I'm just -- you're a fraction -- you seem like you're a fraction of that. It's very interesting down here, I guess, so.

Marc B. Crossman

Yes, I mean, you've seen deals done at 1-plus x sales. I mean, I would tell you that it really is kind of all over the map. The only thing I would say for -- to us, is that it definitely is undervalued from our perspective, what we feel.

Operator

[Operator Instructions] The next question will come from the line of James Fronda, Sidoti & Company.

James Fronda - Sidoti & Company, LLC

I guess the one concern I had was a potential for a rise in commodity costs. And do you have any specific strategy in place to handle this, if commodities do rise?

Marc B. Crossman

Yes, I think what we're seeing is we had the impact of cotton being up to, I think, like $2 and it's come down to $0.90 or somewhere in that range. So really the impact of cotton we would hope would offset any increase that we'll see from a fuel pricing perspective. And that's where we're seeing some costs go up, is from a transportation perspective. I think one of the things that we suffered from in 2011 was, yes, the rising cotton prices that filtered through. We're starting to see the leverage swing back to us away from the vendor in terms of renegotiating fabric pricing. The other thing I would add is, and this is kind of an important point, we spent about $1.4 million airing goods in from a lead-time perspective that really we should have put on a boat. So I think the amount of money that -- if we see the fuel surcharges go up, we can save multiples of that by bringing goods in earlier.

James Fronda - Sidoti & Company, LLC

Okay. All right. That works. And tax rate going forward, do you have any idea what it might be?

Marc B. Crossman

Yes, it's still -- because the treatment of that earnout and how the SEC had put that forth, it's going to be anywhere between 52% and 55%. It really is basically the SEC made us book an earnout on our income statement. And earnouts, by definition of the IRS, are tax -- not tax deductible. So we're still suffering from that.

James Fronda - Sidoti & Company, LLC

All right. And any ideas, thoughts on a store rollout for fiscal '13? Would it be the same as fiscal '12? Or less? Or more? I guess we'll see how it goes?

Marc B. Crossman

It would be more. I mean, we -- provided we continue to see the results that we're seeing, we'd like to move an even faster pace. Absolutely, right now, it's finding the leases.

Operator

The next question comes from the line of Ed Comeau [ph], Four Rivers Capital Management [ph].

Unknown Analyst

Couple of questions. Could you comment on the franchise opportunities in Europe and both in terms of size and timing?

Marc B. Crossman

Sure. From a franchising perspective, we don't have a plan laid out as to near term we're going to add this many stores and x number of stores like we did with the Middle East. Right now, we're negotiating with 2 distributors to take over the master distribution rights for all of Europe. And then consolidate it to make managing that business much easier, in that we're looking at do we carve the retail business out or not. I'd just note that as we look at that business, it'll either be -- either we'll do it or preferably, we'll work with one of our distributors. I just wanted to make sure people understood that as we roll out stores, we're not looking to stay just domestic. Just like we did in the Middle East, we want to roll out doors all over the world.

Unknown Analyst

But is that something you think, takes place this year?

Marc B. Crossman

No, I don't think -- well, I think we'll get the, obviously, the distribution deal done. I don't think we'll be opening stores in Europe in 2012. I think that's more of a 2013 objective.

Unknown Analyst

Okay. A couple of more questions. Your commentary earlier on this is the year you'd show us -- I think, in response to the question about your stock, you indicated there that this would be the year you'd show us in earnings. Does that mean you're expecting to have earnings this year? Positive earnings growth?

Marc B. Crossman

Yes.

Unknown Analyst

Okay. And in terms of guidance, does that -- you just choose not to give earnings guidance?

Marc B. Crossman

Yes.

Unknown Analyst

Okay. And then last question, Hamish, with everything going on, what should we expect in terms of the inventory levels this year? They've come down consistently? Will they start going back up?

Hamish S. Sandhu

We're at a point now where these are somewhat reflective of where our current store base is and our wholesale business is. So as our store base grows, obviously, inventory level per store will grow. So I would say that about 10% higher than the current rate, after we open all the other stores for the 2012 fiscal year.

Operator

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

Steven Chang

Guys, one more question. For the rollout of Elf [ph], does your current SG&A, did it reflect the sampling and design costs for Elf's [ph]? Or are those expenses that haven't hit the income statement yet?

Marc B. Crossman

That's a good question that I have an answer to. Yes, I didn't want to complain about those costs as they're hitting our P&L, but as we've been doing the development, the sampling, the traveling, it's all been hitting our P&L, and we've sampled out through fall. So we were getting hit with spring, summer, fall sample line. Having the design team on it, everything's been fully loaded and baked into our numbers. Because really, you know this, as you roll a line out, you're 9 to 12 months deep before it even hit the stores. So, yes, it's all in there, and it's been up and running. And now we're going to layer some revenues on top of it.

Operator

The next question comes from the line of Will Corso [ph].

Unknown Analyst

I had a question about you had mentioned the women's wholesale line. I guess lately, it's kind of been flat. Is there any particular reason why that's been happening or particular reason you attribute that to? And what are the plans to kind of get that wholesale line back up and running?

Marc B. Crossman

We had -- on previous calls had talked about the product going a little bit flat, being a little too heavy on the core basics and not designing into the right fabrics. So we had, had the meat and potatoes of our business, which is our core basic, I think we had really left on a little too long. So we shook that up completely. I don't think you'll find a jean on our core basic today that was on our core basic a year ago. So it's really getting our meat and potatoes back in line. As you do that, obviously we have to build up the distribution base because as you're underperforming, they will cut you back on your addressable audience. As we start performing, they'll start building us back up. The point about talking about our retail business was to show you that if your retail business is quite healthy, that means your product is selling, it is resonating with the consumer, and so we'll see that start to filter. We're very -- we'd anticipate that, that would start to filter down to our wholesale business. It's just changing your -- I don't know what the right analogy is, but moving the needle on the wholesale business, in terms of your distribution side, is a little bit harder than obviously your retail stores where you're able to swap your product in, literally, overnight.

Operator

The next question is a follow-up question from the line of Edward Yruma, KeyBanc Capital Markets.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

This is Jane again. I actually wanted to ask about that point too on your wholesale side. So should we expect to see share gains in 2012 sequentially as the year progresses?

Marc B. Crossman

I think what -- it's more of a back half issue. Or not issue, I think it's more of a back half when you'll see those door counts rise again. Really, we're getting the door counts that we went through in 2011 that were declining to stabilize and really right size the doors that we needed to be in to intensify doors. It's really more of making sure that we have the right product in the right doors, which is the soft way of saying that there were doors that we were underperforming that we had to exit. Now it'll be getting back into those doors with the success of the product. That's a back half of the year. Like I said, front half is stabilize, back half is really to grow that distribution base.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay. And then in terms of your retail, in 2012, what should we anticipate in terms of percentage? Like what's your sort of goal for total revenue for retail as a percent of total sales?

Marc B. Crossman

Yes, it all comes down to really to how many stores we can open. I'd love for that to be at least 1/3 of revenue, and possibly more, but it depends upon how many stores we're able to get open. As I said, right now, I see 3 that without a doubt will happen. We have a lot of LOIs out, a lot of spaces that we're actively negotiating, but it's never done until it's actually done.

Operator

This concludes the question-and-answer portion for today's call. I would now like to turn the call back to Marc Crossman for closing remarks.

Marc B. Crossman

Okay. Appreciate everyone being on the call. If you need to get in touch with us, please feel free to call either me or Hamish.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.

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