Start Time: 11:00
End Time: 11:24
Gordmans Stores, Inc. (NASDAQ:GMAN)
Q3 2016 Earnings Conference Call
November 30, 2016, 11:00 AM ET
Andrew Hall - President and CEO
James Brown - EVP and CFO
Brendon Frey - ICR
Neely Tamminga - Piper Jaffray
Good day, everyone, and welcome to the Gordmans Stores, Inc. Third Quarter Fiscal 2016 Earnings Conference Call. My name is Augusta, and I will be your operator for today's call. At this time, all participants are in a listen-only mode but we will be conducting a question-and-answer session at the conclusion of today’s presentation. [Operator Instructions]. Please note that today's call is being recorded.
I would like to now turn the call over to your host, Brendon Frey of ICR. Please go ahead, sir.
Thank you and good morning. Before we begin, I would like to remind everyone that the information contained in this conference call, which is not historical fact, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, which are described in the company's filings with the SEC and our earnings release.
I would now like to turn the call over to Andy Hall, Gordmans' President and CEO. Andy, go ahead.
Good morning, and thank you for joining us. On the call with me today is James Brown, our Chief Financial Officer. Although our third quarter comp store sales trend improved by 160 basis points from the second quarter and fell within our guidance range, we are disappointed in the overall performance as the business continues to underperform our long-term expectations. We are expecting our comp store sales trend to continue improving as indicated by our fourth quarter guidance for comps to be down in the 5.5% to 8.5% range.
Our third quarter got off to a challenging start as our August receipt flow was slower than anticipated. This was accentuated by our intended 11% decrease in comparable store inventories entering the third quarter. October was our best month for comparable store sales performance even as unseasonable weather continued throughout the month and throughout our geographic base of operation.
To put the third quarter weather in perspective, sales of the cold weather classifications of accessories, fleece, outerwear, slippers, sweaters and throws hurt the third quarter comp by 232 basis points. I am proud of how our organization managed inventories and expenses in the face of the top line headwind.
As we discussed last quarter we expected to realize meaningful third quarter expense efficiencies related to the completion of our comprehensive expense review. Our third quarter results reflect the expected savings and we continue to believe that the 2017 full year annualized savings will benefit earnings per share between $0.19 and $0.28.
Our end of quarter inventory investment in content is in great shape. We ended the third quarter with comp store inventory down 5%. In addition, versus last year, our aging has improved and our clearance marking is much more current. This will result in fourth quarter flexibility to take our markdowns timely, increase our inventory turn, drive timely clearance sales and enter 2017 with a much improved inventory aging and marking.
During the third quarter we had several successful merchandising classifications. We started seeing a late third quarter payoff in businesses where second quarter inventories were reduced and rebuilt with fresh receipts in the third quarter. In apparel and accessories we had stronger than company performances in men's accessories, young men's, infants, missy career, missy plus, intimates, and junior active. In home, novelty decor and accents, domestics, pet, luggage and food and candy outpaced the company trends.
We are optimistic about improving the comparable store sales trend in the fourth quarter. We saw significant improvement in traffic and comp store sales once colder seasonal weather finally arrived in the second half of November. During the second half of November, we experienced significant positive comps in the following key fourth quarter business drivers; men's gifts and accessories, men's furnishings, young men's, all of kids, fragrances, handbags, holiday home, all of home decor, pet, home gifts and electronics, food and candy and toys.
We have invested in receipts, expanded selling floor space and improved signage for these key drivers. These key businesses are off to a good start and should carry forward into December helping offset continued weakness in junior tops, denim and cold weather classifications.
From a marketing perspective we are increasing investment in fourth quarter digital advertising as we adjust our approach to reflect behavioral trends in how the guest shops and our growth in eCommerce. Mobile marketing and social media are proving to be cost-effective platforms for reaching existing guests and new guests at large-scale.
Our g-Rewards loyalty program continues to be our strongest opportunity to leverage for incremental traffic. In Q4 we are executing on initiatives such as tighter integration with our private label credit card and utilizing the increased functionality and guest visibility of our new CRM/POS system. The new POS system launched in Q3 has given us more opportunities to enhance guest experience and personalized promotional activities which will be part of our marketing mix for the fourth quarter.
These marketing strategies worked well in the second half of November. Our guests responded well to the opportunity to shop before Black Friday for great values and one day doorbusters during our second annual Bag Event on Saturday, November 19. We were able to increase traffic to the event through increased awareness with digital, social media and TV media. This media mix success continued into the following Black Friday weekend. Additionally, we were able to leverage great public relations nationally and across our local markets.
During the third quarter we completed our rollout of the new point-of-sale system. Among the key benefits of this rollout are near future PCI compliance with increased flexibility and promotional handles, the ability to identify and recognize our loyalty guests at the start of the checkout process, a much improved guest and associate checkout experience, reduced fraud and markdown risk and improved private label credit solicitation.
We were encouraged by the efficiency of a new system during the highly traffic Bag Event and Black Friday weekend. We are excited to be in a position to take advantage of these benefits over the remainder of Q4 and into next year.
We continue to climb the learning curve and add functionality to our eCommerce platform. Third quarter sales penetration was approximately 1.1%. We expect the sales penetration to continue to grow in the fourth quarter and fiscal year 2017.
And lastly, during the third quarter, we had successful store openings in Colorado Springs, Kansas City and Cleveland. In fact, all five 2016 new stores are meeting expectations.
As we mentioned last quarter, we remain confident in the scalability of our business model across new and existing markets. But based on the current macroeconomic environment for brick and mortar retail, we do not expect to open any new stores in 2017.
Before I turn the call over to James, I want to reiterate that despite the current operating environment and results we continue to be confident that we are focusing on the right initiatives and strategies to make the company successful and enhance shareholder value over the long term.
Now to James.
Thank you, Andy. Now on to our third quarter performance. Net sales for the third quarter of fiscal 2016 decreased 6.7% to 143.5 million as compared to 153.9 million in the same period last year. Comparable store sales on an owned basis decreased 9.5% primarily due to a decrease in guest traffic, partially offset by an increase in the average sales per transaction.
Gross profit decreased to 62.9 million. Gross profit margin was 43.8% for the third quarter compared to 44.4% last year. This represents a 60 basis point decrease driven primarily by a higher markdown rate. The higher markdowns as a percent of sales were used to ensure we have inventory appropriately valued as we head into the holiday season. The markdown dollars were slightly less than last year.
SG&A expenses for the third quarter decreased 2 million to 69.9 million or 48.7% of net sales versus 71.9 million or 46.7% of net sales last year. This represents a 200 basis point increase year-over-year. Store expenses decreased 1.2 million primarily due to in-store merchandise credit breakage recorded in the third quarter and lower store payroll in existing stores as a result of the company's comprehensive expense review.
These savings were partially offset by an increase in expenses associated with new stores and an increase in variable eCommerce expense as eCommerce sales grew over last year. Store expense increased to 120 basis points as a percent of sales primarily driven by deleveraging of fixed or costs associated with the comparable store sales decline.
Advertising expense decreased 1.5 million or 80 basis points due to a decrease in television advertising, direct mail and preprint expenses. Distribution center expenses decreased 0.5 million due to lower delivery costs as a result of lower inventory receipts. Preopening and closing expenses decreased 0.1 million through the opening of three new stores in Q3 fiscal 2016 compared to opening two new stores and closing one existing store in fiscal 2015.
Depreciation expense increased 0.4 million or 50 basis points due to increased investment in technology, including the launch of a new point-of-sale system and new store openings. Corporate expenses increased 0.9 million or 110 basis points primarily due to higher professional service fees related to the company's engagement of an outside party to assist in identifying expense savings opportunities.
Interest expense was 0.9 million during the third quarter which is consistent with interest expense during the same period last year. Our combined federal and state effective income tax rate for the third quarter was 39% this year compared to 38% last year.
The net loss for the third quarter of 2016 was 4.8 million or $0.25 per diluted share compared to a net loss of 2.8 million or $0.14 per diluted share in the third quarter of fiscal 2015.
For the first nine months of fiscal 2016, net sales decreased 5.7% to 417.8 million as compared to 443.2 million in the same period last year. Comparable store sales decreased 8.5% on an owned basis. The decrease was primarily due to lower guest traffic, partially offset by an increase in the average sales per transaction.
Gross profit decreased to 181.9 million and represented 43.6% of net sales compared to 196.1 million and 44.3% of net sales last year. The 70 basis point decrease was primarily due to higher inventory markdowns as we cleared through fall transitional merchandise earlier and took steps in Q3 to ensure we entered the holiday selling season with inventory appropriately valued.
Selling, general and administrative expenses decreased 1 million to 199 million for the first nine months of the year and represented 47.6% of net sales compared to 200.1 million and 45.1% of net sales last year. The expense decrease was primarily due to lower store and advertising expenses, partially offset by higher professional fees related to the comprehensive expense review, eCommerce operations which was launched during the second quarter of fiscal 2015 and higher depreciation.
The decrease in store expense during the year was largely attributed to lower payroll expenses, inclusive of new stores, as we adjust to lower sales and started to realize benefit from our expense review process and in-store credit breakage recorded during the third quarter.
Interest expense decreased 0.4 million to 2.5 million compared to 3 million for the first nine months of fiscal 2015 due primarily to the term loan refinancing in 2015, partially offset by higher borrowings on our revolving line of credit facility. The net loss for the first nine months of 2016 was 12.5 million or $0.64 per diluted share compared to a net loss of 5.4 million or $0.28 per diluted share last year.
I would now like to turn to our balance sheet. Cash and cash equivalents at the end of the quarter were 8.4 million compared to 8.9 million a year ago. We have continued to focus on inventory and reducing inventory receipts based on the fall season sales trend. Inventory was 153.6 million at the end of the third quarter which is down 7% compared to 165.1 million at the same time last year.
Our brick and mortar comparable store inventory was down 5.2%. Our working capital was 0.7 million at the end of the third quarter compared to 17.7 million at the same time last year. This decrease primarily relates to a reclass of income taxes receivable to deferred income taxes and higher borrowings on our line of credit facility.
As discussed in Q2 we are beginning to see new store expenditures normalize to last year’s levels as we have finished the construction phase and complete sale-leaseback transactions. In aggregate, capital expenditures for 2016 are anticipated to be less than last year. We had excess availability on our revolving line of credit of 36.1 million at the end of the quarter which compares to 40.6 million a year ago.
With respect to forward-looking guidance, we are projecting fourth quarter of fiscal 2016 net sales to be between 197 million and 203 million which reflects an 8.5% to 5.5% decrease in comparable store sales on an owned basis. We expect gross profit margin to be comparable to last year.
Selling, general and administrative expenses are expected to be at or below last year primarily due to decreases in brick and mortar store expense and lower distribution costs offset by higher eCommerce and depreciation expense. Based on this, we project diluted earnings per share for the fourth quarter in the range of $0.01 to $0.06.
We would now like to open the floor up to questions.
Thank you. [Operator Instructions]. We’ll go first to Neely Tamminga with Piper Jaffray.
Great. Good morning. It’s good to hear about positive comp over Black Friday weekend; certainly a nice turn in the tide here. Could we ask a little bit more about that though? The flat gross margin guidance as it relates to that positive comp, did you have to be more promotional to kind of get there, or how should we be thinking – are you signaling with the flat gross margin kind of a tempered view on more kind of the merch margin side?
No. Again, so the flat gross margin is related to the fourth quarter, so it’s not tied to a positive comp over the entire quarter. So I wouldn’t misinterpret the positive comp for Black Friday that we think we’re going to have a positive comp for the entire fourth quarter. So that’s not what the guidance reflects. So I think the way I would read it is a flat gross margin in a minus 5% to minus 8.5% comp environment reflects the quality of the inventory that we have today both from a content standpoint and from an aging standpoint and that we’ll be able to manage to a flat comp gross margin in a negative comp environment.
Andy, I think taking that a little bit further though, I think the comp guidance on four, the quarter, we obviously appreciate conservatism but is there anything really precluding you from achieving trends somewhere to what you just experienced on the other side of the election for the balance of this quarter?
Weather, the macro environment, it’s still – traffic is still a challenge for our brick and mortar whether they had a good Black Friday or not. I think conservatism given the environment out there is probably the right course of action. We feel confident that we’re going to be able to hit the guidance. We would love to beat it. But we’ve got – in December we’re going to do twice the volume that we did in November. So there’s a lot of runway left and there’s a lot of external factors, factors that we can control and factors that we can’t control that rollup into how the quarter is going to play out.
There’s a lot of things that we like out there though. We like the fact that our key business drivers turned on in the last half of November. We do think that they’re going to carry forward into the fourth quarter. That’s very important. There are some businesses that continue to not work very well even in cold weather while the weather turned in the second half and our trend got better in cold weather. Cold weather still isn’t performing to what we would expect. So that’s a wildcard going into December. We like the fact that we’re up against very warm weather last year in the first three weeks of December.
So that’s a good thing but that’s not a strategy. That’s not something that you can throw out there and say, hey, we’re going to benefit from that. But we’re happier to go up against softer comps from December last year due principally to the weather pre-Christmas and a snowstorm on 26th and 27th of December last year. We ran a positive comp last year in November, so we went up against that comp in November. We ran a positive comp in the third quarter last year, so the comparisons are a bit easier, the calendar is better, the gift giving traffic drivers have turned on. So there’s certainly some reason for optimism but I don’t think that should turn into euphoria and go through a very aggressive guidance out there for Q4.
Very fair point. So what I wanted to ask also about is, if you’re willing, as we’re looking to kind of early spring sort of transition and some of the product merchandising side, would you be willing to share some of the meetings that you guys have been having, some deliveries that you’ve been seeing or some of the future deliveries that you’ve been able to kind of see and approve, are there certain categories that we should be watching for in terms of their ability to kind of turn on to the positive or the early spring trend into early next year? Are you guys been working on --?
Yes, some of the change in trend that we’ve seen frankly in October and then as weather changed in the back half of November is we’ve seen life in kids and missy, so that’s good to see. Both of those merchandise divisions struggled for the first two-thirds of the year or so. So that’s good to see. Home decor also turned on as well in October. So the entire home decor, wall art and novelty decor and all those areas had a 7 point improvement in their trend in October versus the third quarter. So we had high expectations for home decor going into 2017 as well. We still have some work to do in juniors and we have some work to do in some other areas.
Some key themes that we like currently and going into 2017 is the modern farmhouse theme. We like that it’s well. We’re expanding it into different classifications and different products that’s sitting principally on the home floor. And then we think in the fashion tops area, the cold shoulder, which we just saw when we were in market last month, looks good. Career has turned on for us. That’s one of the missy classifications that’s turned on and that’s certainly good to see and our young men’s business is still good and we’re looking for big things out of young men’s into 2017 as well.
All right. Happy holidays and best wishes to you guys out there.
Great. Thanks, Neely.
[Operator Instructions]. We have no other questions at this time. I’d like to turn the call back to Andy Hall for any additional or closing remarks.
Thank you. On behalf of the entire management team and our 5,000 plus associates in our stores, distribution centers and corporate office, thank you for your continued interest in and support of our company. Bye now.
That does conclude today’s conference. Thank you all for your participation. You may now disconnect.
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