Christopher & Banks' (CBK) CEO LuAnn Via on Q3 2016 Results - Earnings Call Transcript

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Christopher & Banks Corporation (NYSE:CBK)

Q3 2016 Earnings Conference Call

December 1, 2016, 08:30 AM ET

Executives

Jean Fontana - IR, ICR

LuAnn Via - President & CEO

Peter Michielutti - EVP & CFO

Analysts

Neely Tamminga - Piper Jaffray

Jeremy Hamblin - Dougherty & Company

Operator

Welcome to the Christopher & Banks Corporation Third Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jean Fontana with ICR. Thank you. You may begin.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today for the Christopher & Banks third quarter fiscal 2016 earnings conference call. Hosting today’s call are LuAnn Via, President and Chief Executive Officer; and Pete Michielutti, Executive Vice President, Chief Operating Officer and Chief Financial Officer. This morning’s conference call is in conjunction with the earnings press release the company issued this morning.

Today’s earnings release and conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial conditions, results of operations, business initiatives, growth plans and prospects of the company and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company’s current earnings release and SEC filings for more information on these risks and uncertainties.

The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

I will now turn the call over to LuAnn Via.

LuAnn Via

Thank you, Jean. Good morning, everyone. Thank you for joining us today as we review our third quarter earnings results, share our outlook for the fourth quarter, as well as provide a few highlights on 2017. Our strong third-quarter performance reflects the benefit of our merchandising and marketing initiatives, along with the enhancements that we have made to the visual presentation across our store base.

We drove positive comparable sales in all three months of the quarter and expanded gross margin, despite the continuation of negative small traffic trends, a highly promotional environment and unseasonably warm weather. During the quarter, we saw existing customers spend more and our loyalty reward members and private-label cardholders continued to make up the majority of our sales.

Importantly, we also re-engaged more lapsed and acquired more new customers than the prior year. We believe this is significant and highly encouraging as we continue to target our various customer segments. Finally, we realized growth in all three of our size segments Missy, Petite and Women.

Further summarizing our third quarter results, total sales grew 2.9% to $106.7 million and comp sales increased 4.5%. Our eCommerce channel realized 16% growth, which follows a two-year spec sales increase of 32%. Our strong topline performance was attributable to a right sized and well-balanced offering of key items and key programs along with improved in-stock levels as we continue to benefit from our retail intelligence platform.

In addition, customers responded favorably to the category promotions we offered during the quarter, while our special in-store events continued to entice her to visit shop and engage with our associates. We also continued to see strong response to our direct and digital marketing effort.

Relative to product, our investments in our key program items yielded favorable results. The woven’s category saw major improvement in sales trend from Q2 with strong gains in glasses, vests, and jackets.

Strong results in our Denim business were led by our fashion and signature slimming programs, while we also saw gains in our woven bottoms key program. With the warmer weather, our sweater business remained soft; however, we delivered continued growth in knit top.

In addition, our new categories including sleepwear, handbags, and footwear performed well in the quarter. For the fourth quarter, we expect to see continued momentum in the categories that drove strong performance in the third quarter. Additionally, our holiday collection, which includes our casual looks and heritage thematic tops, also offers more day into evening looks with our knit dressing coordinates, which have resonated well with our customers this season.

Looking at our inventory productivity, during the third quarter, we realized improved in-stock positions due to our focus on store tiering by volume and climate. We also began to benefit from our replenishment initiative in Denim and woven bottom along with core knit top. Our new store grading tool, which we implemented in late August, is allowing us to manage in-season adjustments by store at a more specific program level.

For the balance of the year and beyond, we will continue to improve our flow of inventory on our key items and basics, while we deliver fashion newness that will be featured in the front of the store to drive repeat business and capture the attention of potential new customer.

In terms of marketing during the quarter, we increased our direct-mail effort, which led to gains in active and reactivated chopper. We also introduced several new branding elements in our marketing as well as in-store visual.

For the balance of the year, we are continuing to invest our marketing dollars to increase the spend of active customers to our refreshed tier-based loyalty program and our effective private label credit card. We will also increase our investment in direct-mail to further reengage lapsed customers.

Finally our Omni-channel customer first initiative continues to be a key focus as we work to optimize the customer experience. Our POS upgrade rollout is underway, which will provide a centralized view of inventory across stores and streamline the customer's checkout process. We anticipate that this will be completed in the fourth quarter.

We are very pleased with our third-quarter results and are encouraged with the progress being made this year. We will remain focused on the continued execution of our strategy to drive long-term profitable growth.

Looking forward into 2017, we expect sales increases to be largely driven by our eCommerce channel and outlet stores. We also expect our full price stores to generate positive comp. We expect our total average square footage to be down approximately 4% for the year.

In our eCommerce business, we see additional growth opportunity as we leverage our new web platform and expand our Omni channel capabilities, which will enable us to optimize our customer shopping experience.

Our plan for the outlet business is to reposition this channel given the traffic challenges we've experienced this year. The merchandise offering will have a strengthened point of view and increased value proposition. We are introducing exclusively made for fashion collection, which are being designed in stores with an external partner in collaboration with our internal product team. We will also continue to offer additional key items and key programs.

We are creating an improved shopping environment with a new visual presentation and signage. Lastly, we are introducing new promotional events and additional marketing efforts to drive increased traffic.

For our full-price stores and eCommerce channels, we will continue to diversify our assortments by adding new branded and lifestyle collections along with limited edition capital to appeal to a broader customer base. Across all channels, we plan to further leverage our retail intelligence platform as part of our merchandising strategy.

We will be rolling out additional merchandising planning tools in early spring, which we expect will result in continued improvement in our upfront assortment building. We intend to drive increased inventory turn as we reduce inventory levels and improve our merchandise presentation through the full-year use of the planning and store grading tools as well as enhanced replenishment capabilities.

Related to marketing, we have additional opportunities to enhance our targeted marketing efforts by utilizing our recently implemented customer analytics tool. Additionally, we will leverage paid media to also drive customer acquisitions. Lastly, we plan to hold more frequent in-store grassroots events for a differentiated customer experience as these events have been effective in driving traffic among existing and new customers.

In addition to the initiatives we are undertaking to increase sales, we continue to focus on improving our cash flow. After several years of investing in technology and stores, we intend to optimize these investments in fiscal 2017 and reduce capital outlays.

We are also taking a close look at our costs and identifying opportunities for additional savings in a number of areas, including occupancy, increased efficiencies and processes, and contract negotiations.

Our preliminary assessment suggests there is an opportunity for net savings in fiscal 2017 of approximately $5 million to $7 million before giving effect to the cost that company would incur in connection with potential growth in overall sales. We will provide further update on future calls.

I will now turn it over to Pete to provide us our third quarter financial performance and our fourth quarter guidance.

Peter Michielutti

Thank you, LuAnn and good morning, everyone. My financial review today will cover the third quarter ended October 29, 2016, compared to the third quarter ended October 31, 2015, as well as some general comments regarding our outlook for the fourth quarter and the full fiscal year.

Net sales in the third quarter of fiscal 2016 were $106.7 million, an increase of 2.9% compared to $103.6 million in last year's third quarter. Comparable sales in the quarter increased 4.5% driven by a mid single-digit increase in our full price stores and a 16% increase in eCommerce, partially offset by a decline in our outlet count.

For the quarter, sales per square foot increased by 5.3%. Overall average dollar sales increased by 6% driven by a 6.5% growth in average unit retail, partially offset by 1.5% decrease in units per transaction.

Gross margin increased to 36.8% of net sales, an improvement of 95 basis points, compared to last year's third quarter, primarily due to leverage in our occupancy costs. Merchandise margin increased by 16 basis points in the third quarter of fiscal 2016, penetrating from higher initial mark-ups.

Selling, general and administrative expenses were $32.5 million, compared to $33.6 million in last year's third quarter. The decline in SG&A dollars was due to lower store operating expenses, reduced professional and advisory fees, lower medical expenses and lower corporate expenses, partly offset by higher marketing and eCommerce operating expenses.

SG&A decreased approximately 190 basis points to 30.5% of net sales compared to 32.4% in last year's third quarter. Depreciation and amortization was $3.1 million, which was flat to last year's third quarter. The third quarter net income was $3.5 million or $0.09 per diluted share. Last year's third quarter net loss was $350,000 or $0.01 per share.

As more fully explained in the financial schedules, accompanying our press release, adjusted EBITDA, a non-GAAP measure was $6.7 million compared to $3.8 million in the same period last year. We define adjusted EBITDA as net income adjusted for income tax provisions, other income and interest expense, depreciation and amortization, impairment of store assets, and certain non-recurring items.

For the first nine months of 2016, sales were $296.6 million up 2.5% compared to the comparable period of 2015. Gross margin for the first nine months expanded approximately 140 basis points to 36.1%. There we're a couple of items in the first nine months of both years that were nonrecurring in nature.

Year-to-date in 2016, the company incurred advisory fees in connection with shareholder activism of approximately $1.6 million and eCommerce platform transition costs of $684,000. In the first nine months of 2015, the company incurred advisory fees in connection with shareholder activism of approximately $687,000.

Excluding these items, adjusted EBITDA for the first nine months of 2016 was $10.7 million and 87% increase compared to adjusted EBITDA of $5.7 million in the prior year period.

Now turning to the balance sheet, we ended the third quarter with approximately $25.8 million of cash, cash equivalents and investments. This compares to $29.4 million at the end of the third quarter a year ago. Total inventory was $54.1 million as of October 2016, compared to $52.5 million at October 31 2015, an increase of 3%.

The increase in inventory during the quarter was due to higher in-transit inventory at the end of the quarter, partially offset by a 3.8% decrease in inventory on hand. The overall composition of the inventory at the end of the quarter was very current with approximately 70% of the inventory represented by October or lifecycle products, seasonal and core inventory.

Capital expenditures for the third quarter of 2016 were $2 million compared to $5.1 million in last year's third quarter. Capital expenditures in the third quarter of fiscal 2016 primarily reflected investments in new stores and technology associated with our customer first initiative.

The reduction year-over-year reflects fewer new stores and lower technology investments due to substantial progress we have made in our customer first initiative. We had borrowings in our revolving credit facility for the third quarter and have not drawn on the facility other than to open up letters of credit to the normal growth.

During the quarter we closed two MPW stores and one outlet store. We opened one new MPW store. At the end of the third quarter, we had $1.9 million in retail square feet which is down 4.9% for the third quarter of last year. We operated 6.3% of fewer stores at the end of the third quarter this year. As of October 29, 2016, we operated 504 stores, consisting of 314 MPW, 82 outlets, 55 Christopher & Banks, 53 CJ Bank stores.

Now on to our outlook. Following a slow start to November, which we attribute to distraction from the election and warm weather, we saw significant sequential improvement in sales post-elections in the last week of the month. Based on these trends, we anticipate sales for the fourth quarter to be between $93 million and $97 million correlating to 1% to 5% comparable sales increase as compared to $94.6 million and a comparable sales decrease of 3.4% in last year's fourth quarter.

Keep in mind that we'll be up against a two-year stack sales increase of 50% in our eCommerce business in the fourth quarter. We expect a net loss of $4.1 million to $5.9 million or $0.11 to $0.16 per share as compared to a net loss of $46.6 million or $1.26 per share in last year's fourth quarter, which included a $37.5 million or $1.2 per share valuation allowance for the project asset.

Adjusted EBITDA a non-GAAP measure is expected to be between approximately a negative $600,000 in a negative $2.4 million for the fourth quarter. Depreciation and amortization is expected to be approximately $3.4 million compared to $3.3 million in last year's fourth quarter. We expect on hand inventory across the decline by low single-digits, compared to the end of the fourth quarter of fiscal 2015.

During the fourth quarter, we anticipate closing six MPW stores and closing 24 CB and CJ stores and converting them into 12 MPW stores. The average square footage in expected to be down 5% year-over-year and no new stores are planned in the fourth quarter. We expect average square footage for the year to be down approximately 1.6% as compared to fiscal 2015.

We expect capital expenditures for the year to between $12 million and $12.5 million, representing investments in new stores as well as capital expenditures associated with completing the technology aspects of our customer first initiative.

We expect our taxes for the year to be nominal to represent minimum fees and taxes. We anticipate ending the year with cash, cash equivalent investment in the low to mid $30 million range as compared to $34.5 million at the end of last year’s fourth quarter.

That concludes our prepared remarks. We will now open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Neely Tamminga with Piper Jaffray. Please proceed with your question.

Neely Tamminga

Great. Good morning.

Peter Michielutti

Good morning, Neely.

LuAnn Via

Good morning.

Neely Tamminga

Yes, congratulations. This is the most stable earnings and report I think we've seen in the entire earnings season, so well done to you all.

LuAnn Via

Thanks.

Neely Tamminga

Couple questions, I think probably for LuAnn, we would love to hear a little bit more specifics because we’re really intrigued by concept of the reactivation of the relapsed customers.

So, you guys have a really strong [set phone] calling event based grass roots efforts at the home at Christopher & Banks, but where has that been integrated with print and digital for the specifics, not just on acquisition, but the reactivation of the relapsed customers? We would love to hear more about the marketing efforts on that.

LuAnn Via

So Neely, I think the most important piece is the direct mail. We get a really strong response to direct mail generally and we have increased our circulation as it relates to lapsed because it relates to those customers that you know we may be lost as we combined stores. So we have really put a major focus on expanding deeper into the file to get the -- get those customers to come back into the store.

And I think one of the things to that as you know and you said we're calling our customers our associates obviously are a major differentiator for us, and they are very much engaged talking to the customers about we’ve redone the store, come back and see us, we have a great selection, we have more style.

So I think we lost some traction obviously when we did the collapse and combines and the sizes were split, and the customer -- the CJ customer thought that we closed her store and took hers the way; and the conversion, the Missy customers thought that we obviously took her store away. So combining the sizes and the new visuals we have in store is, also I think based on what we're getting right now, a big piece of it as well.

So if you want to have just a couple of specifics, we actually had, in direct mail we were generating 13% more sales to last year with 48% more customers who spent 5% more per shopper. So this whole active, which we really focused on, we've now really focused on extending that circulation to lapse.

Neely Tamminga

That’s great. And that is really some good news. I have two separate types of questions on the merchandizing front if I may as well. So first it sounds like you guys are doing a really good job at these exclusive collections of the third-party brand. I may also personally own a pair of those Diane Gilman jeans that you guys stock, so really good products,

But I was wondering if that’s opening up as you guys are doing more of that, and you are obviously finding some positive comp traction. Are you getting people coming up out of the woodwork to do more of this with you? Just what does that landscape look like? What is the potential for what that could be? Was that really a time period on it, but over time I guess.

LuAnn Via

So personally I think that we need additional differentiation in our assortments and one of the things when you are mainly a private label company, sometimes the customer has the opinion that you don't have the brands obviously because you only have one brand and it is your name and the collections are also a differentiator.

It's not about the same merchandise that we have. So as you know, with Diane Gilman, it's been a big win for us as it relates to bringing new customers into the store and we are looking to expand it. So we do have a couple of other collections that are coming out in the Spring season delivering in March.

And I don't know that they're coming out of the woodwork, but there are plenty of brands that really can create some major differentiation for us in the assortment and also get customers that just might not shop in our store.

And it's really exciting for us because Diane Gilman obviously does a lot of business on air, and once they get the product, they are really liking it. So we're pretty excited about it. So I think for the future, nearly that we would continue to do that, obviously we have a strong heritage with our brand, but I think it's time to make a little bit of a move as it relates to our total assortment and those branding efforts.

Neely Tamminga

That's great, thank you for that LuAnn, and then also on sweaters, you called it out as a weakness. I think no-brainer as the weakness around weather has just not been exactly most cooperative for all of retail, but you guys are known for sweaters and so I guess what we're trying to -- we're wondering about is, where have sweaters been for you guys on the second half of November where it got really cold.

We removed the Election distraction. Is that a category that's still showing signs of weakness and therefore we might have a merchandising issue or a mix issue or is it -- did it pop?

LuAnn Via

So I think there's two things to note here and you know our stores pretty well. So our heritage was in sweaters. So we really have looked at what is it that we need to do in the sweater business as a total, because it's been weak actually for the last five years, six years.

And there is opportunity I think for us to bring back some of those really unique sweaters. So one of the things that we found this year and it actually came in November, late October, early November and while yes whether absolutely did impacted, I also think there were opportunities within the assortment to really differentiate us from our competitors and specifically department stores.

So how do we become put that special back in specialty and to really have that unique customer that comes to us for something special and sweaters has been our heritage. So what we did was we said okay, we're going to look back and say what was relevant to us, what did we really get from what details etcetera and we brought in a lot of novelty and I will tell you a little more expensive, but the customer reacted very strongly to it.

And it's interesting because they are more special. So we actually were doing a sweater style-out yesterday for next year and I will tell you the special pieces that we're going to integrate, I think is going to really turn our sweater business throughout because the sweater business overall has been tough in the industry and some of it again is weather-related.

But there is more jackets and coats and different things that are really just taking over some of that business and we really need to make sure that we're just different Neely and that does set us apart. So we did get a pop obviously when the weather came, but it still is not our strongest category and there's an opportunity for that. So it's really a focus for us for 2017.

Neely Tamminga

Okay. That's great. Best wishes and Merry Christmas. Happy holidays.

LuAnn Via

Thank you. Same to you.

Peter Michielutti

Thank you.

Operator

Thank you. Our next question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your questions.

Jeremy Hamblin

Good morning. And I just want to add my congratulations. Really impressive results in a tough environment and great guidance. I wanted to just make sure that I understood something on the Q4 guidance. I think Pete that you had said, you expect all channels to come positively in Q4, does that include the store channel and then the online business?

Peter Michielutti

No. We said that there was mistake and we do not expect for it to comp positively in the fourth quarter.

Jeremy Hamblin

Okay.

LuAnn Via

It was '17, we were talking about.

Peter Michielutti

Yes in '17 we haven’t given any sales guidance for '17 and we've talked about the initiatives that we have in '17 and the opportunities that we have for '17 but we really haven’t -- we don’t take anything what we said for sales guidance for '17. Do you want to talk about that?

Jeremy Hamblin

No, no, no, I'm talking about Q4 specifically.

Peter Michielutti

Yes in Q4, and neither for Q4 we do expect continued positive performance out of the base stores and eCommerce stores in outlet stores we're still working on, we expect improvement in that in the next year.

Jeremy Hamblin

Okay. Great, but coming back to Q3, then for a second, your online business, I think you said was up 16% in the quarter, which you gave like a two-year stack of 42%?

Peter Michielutti

Yes I believe that's correct.

Jeremy Hamblin

Right, up 26% last year. As we look at '17 in general in online, it sounds like you're continuing to expect that to be a big driver of business. How much of that is just the opportunity to improve the efficiency, the effectiveness of the platform and how much investment do you need to make in that business next year?

Peter Michielutti

We believe we do have opportunity to continue to capitalize on the investments we have made this year and last year into the platform. As we look to next year, it's more of a case of optimizing our marketing efforts and how to drive people to the website as well as when we look at and these end up being online sales through the store, we call it AOS.

As we do more tearing to our stores, there is an opportunity to these inventories to be more productive by having it online rather than having in some of these volume stores. So that's going to be driving throughput on eCommerce platform in efficient manner.

Jeremy Hamblin

Okay. And further on that, it sounds like the technology investments, the systems investment in QuantiSense are starting to pay off because it sounds like you're really getting a better match on your inventory levels and your tearing by stores and by AUVs of those stores and that's helping you to control where inventory should be.

Can you just expand on that a little bit in terms of how that impact is developing here over the last couple of quarters and how we should expect that to continue to be a better match on inventory versus the store-specific metrics going forward?

LuAnn Via

So Jeremy, I think there is two things. First of all remember we implemented the store grading tool at the end of August. So what we're doing right now is utilizing that tool actually post the assortment. So if the assortment is already on the way, so that tool is now giving us guidance on how we're going to post allocate merchandise as it's coming in.

The great news is and that's been helpful obviously because we will be able to get it to the right stores etcetera. The best news is that as we have it now going forward in 2017, it's going to give us the ability and it really starts in second, back half of first quarter and the beginning of second quarter, excuse me, for us to do it before we make the purchases.

So it gives us an opportunity to have it before the goods are booked by store and here is what really helps us specifically as it relates to climate for our hot zones, so that tool is going to really be beneficial and really optimizing our inventory productivity next year.

Jeremy Hamblin

Terrific. And then just building on that a little bit more as we think about the statement in here of the $5 million to $7 million in potential for net savings next year, some of that seems like it's tied to store closures. I know that you're closing 18 net stores in Q4, how should we think about that going forward?

Pete, can you give us a little bit more detail on these store closures in terms of the net impact on a profitability standpoint are these stores -- some of these stores providing negative four-wall performance and that's why they're closing. Just any additional color on that $5 million to $7 million in savings and how it ties into your store base?

Peter Michielutti

So as it relates to the implications on the store closures, the store closures, the 18 at the end of the year, the 24 that becomes 12, which are the MPW stores, we expect improved border lines in closing those stores. So this should be accretive to performance for next year.

On the other six stores that are closing, they're marginally profitable or they're negative for all contributions and the ones that are marginally profitable, we get sales transfer opportunity into the current store base.

So, the way -- and the reason we discuss it the way we did is its early, we’re still early in the fourth quarter to start talking about anything specific from a sales standpoint, but we believe that by these cost reduction opportunities and some of them are, as we talked about there is occupancy savings and there and some of those occupancy savings, we do have a lot of short term leases that we have opportunities from reducing some of our rent cost on existing stores as we do these renewals.

And we've taken a lot of efforts this year and early analyzing each component of our cost and we have specific cost savings on a lot of things freight, we have on supplies that the new platform is going to give us savings next year or efficient platform.

So there is a lot of specific things that we’re doing from a cost perspective of taking cost out of the business and so we believe that based on where we are today and going into next year, even sales don’t change that we believe even with some store closings, you can get flat sales year-over-year. We can cut these costs and put us into a positive operating income range before any impacts of increasing sales.

Jeremy Hamblin

Wow, that’s impressive and great to hear. Last question I think and its really related to the rent that you just discussed, in terms of where you feel like you have negotiating opportunities and potentially reducing rents are you seeing that primarily in the B and C mall locations and how does it compare to what you're seeing in your A mall location on the rent front?

Peter Michielutti

As you know your ability to negotiating depends on a couple things where you are in your lease term and where the specific center is in their occupancy rate. So, I’m not going to give way into any of our negotiating power by having a discussion with you over the phone on this, but we believe there is opportunity wherever we are have to discussions with landlords because we think we are a meaningful player and I think they want to keep the occupancy up in their centers and we have very good relationships with our landlords.

Jeremy Hamblin

Great. Well, thanks so much for taking the questions and best of luck moving forward.

Peter Michielutti

Okay. Thank you.

LuAnn Via

Thanks Jeremy.

Operator

Thank you. Miss Via, there are no further questions at this time. I’d like to turn the floor back to you for further remarks.

LuAnn Via

Thank you. Looking back on the third quarter, I’m very pleased with the execution of our entire team and I’d like to thank everyone for their hard work and dedication. We look forward to speaking with you in March when we’ll share our fourth quarter results and our plans for 2017. Thank you for joining our call. Happy holidays everyone.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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