Here’s the entire text of the prepared remarks from Alloy’s (ticker: ALOY) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Jodi Smith, Investor Relations
Matt Diamond, Chairman and Chief Executive Officer
Rob Bernard, Chief Executive Officer, dELiA*s Inc.
Jim Johnson, Chief Operating and Financial Officer
Jeff Van Sinderen, B. Riley, Analyst
Douglas Anmuth, Lehman Brothers, Analyst
Paul Suns (ph), Suns Partners, Analyst
Brian Gonick (ph), Corsair Capital, Analyst
Good afternoon. My name is Kiwi and I will be your conference facilitator. At this time I would like to welcome everyone to the Alloy Third Quarter Earnings Conference Call.
Thank you, Miss Smith, you may begin your conference.
Jodi Smith, Investor Relations
Thank you, the following discussion may contain forward-looking statements that involve risks and uncertainties including statements regarding Alloy's expectation and beliefs regarding its future results or performance. When used in this discussion the words anticipate, believe, estimate, expect, expectation, project, and intend and similar expressions are intended to identify such forward-looking statements.
Alloy's actual results could differ materially from those projected in the forward-looking statements. Alloy does not intend to update any forward-looking statements except as required by law. For a complete articulation of Alloy's Safe Harbor language and factors that could cause actual results to differ, please refer to have the Company's earnings release issued this afternoon and its filings with the Securities and Exchange Commission.
I will now turn the call over to Matt Diamond, Alloy's CEO.
Matt Diamond, Chairman and Chief Executive Officer
Thank you. Good evening and thank you for joining us to review Alloy's third-quarter results for fiscal 2005. With me today are Jim Johnson, our Chief Operating and Chief Financial Officer; and Rob Bernard, the Chief Executive of our dELiA*s Inc. merchandising business. We are pleased to report that the Company produced strong financial results in our important fiscal third quarter.
Sales, gross profit and net income were all will up significantly over last year and each of our business segments contributed to the strong performance. Total company adjusted EBITDA improved approximately $6 million in the third quarter versus last year and after three quarters of fiscal 2005, adjusted EBITDA has increased $17 million versus last year. Although we haven't yet reached peak holiday season. We expect our operating and financial momentum to continue to the fourth quarter.
As we have previously announced we plan to execute a spinoff of our dELiA*s merchandise business such that each company, Alloy Media Marketing Service and dELiA*s will be an independent publicly traded company before the end of this fiscal year. We believe that our year-to-date 2005 results confirm that the two businesses have effective experienced management teams, compelling business models, a recent history of significant financial improvement and sufficient capital to grow and succeed as independent entities.
Rob Bernard will discuss the specifics of the dELiA*s business but I am pleased to report that Rob and his team continue to improve the operating metrics of the merchandise business and have an excellent business strategy under way for building a premiere teen specialty retail and direct marketing business. We could not be happier with the job that Rob and his team has done over the past 18 months.
Alloy Media Marketing turned in a strong third quarter with increased sales and substantially increased adjusted EBITDA versus 2004. Third-quarter revenues increased approximately 13% versus last year's third fiscal quarter driven by strength across our entire Media Marketing Service business. Our promotions, placement, and media businesses all significantly exceeded their prior year revenue levels.
A large factor in the increased revenue is the improved productivity of our sales force. Through continued improvements to our sales management techniques and a commitment to continually upgrading sales personnel, our sales forces achieved increased penetration into new and existing clients. Year-to-date, our sponsorship revenues are approximately 7% above prior year levels and are in line with our previously announced sponsorship revenue forecast of mid single digit year-over-year growth.
Adjusted EBITDA for our sponsorship business increased approximately 30% or over $3 million versus the third quarter of last year. Significant contributors to this increased profitability were increased sales, especially in our high margin media properties and the continued streamlining and other cost reductions in our promotional marketing business. Total company corporate costs increased year-over-year by approximately 5% driven primarily by increased salary cost at dELiA*s as they continue to build an independent management infrastructure. Alloy Media Marketing Corporate costs decreased approximately 16% quarter over quarter.
Looking beyond the dELiA*s spinoff, we believe that Alloy Media Marketing is well-positioned for success. From a market opportunity perspective, the nontraditional media space continues to grow as major advertisers look for improved ways to reach their customers. The youth market also continues to grow and does so at a rate faster than the overall population. We believe that we should grow profitably in this market going forward.
Post spin Alloy Media Marketing will focus on targeted, high-margin sales growth in the mid single digit percentage range as well as continued efforts to reduce our sales and marketing costs. As an independent company, we have approximately $30 million in cash and marketable securities on the balance sheet as of 1/31/06. We will have a solid management team that has been in place for several years and we have achieved increasing acceptance with major advertiser as growing levels of profitability during the last year. We look forward to continue to update you on our progress as an independent company.
Now I would like to turn the call over to Rob for a review of the dELiA*s Merchandising business.
Rob Bernard, Chief Executive Officer, dELiA*s Inc.
Thanks, Matt. On our call in September we reported that the merchandising business had made significant progress in the first half of 2005 towards our overarching goals for the fiscal year. I would like to begin our third-quarter update by reviewing our full-year 2005 expectations. Deliver low to mid-single digit comp sales growth in retail; drive low to mid single digit top line growth in direct marketing through targeted circulation increases and productive mailing segments; improve gross margin rate by 50, 100 basis points. Improve our retail store metrics through increased focus on the selling culture with emphasis on key items selling resulting in improved productivity; increase our total square footage in retail by 15 to 20% by fiscal year end through the opening of new stores, net of any closures; develop merchandising assortments that invest more heavily in key sportswear categories while reducing our reliance on nonapparel; implement profit improving inventory planning and allocation strategies such as seasonal carry in reduction; target replenishment; tactical fashion investment; and vendor consolidation resulting in inventory churn improvement; and leverage our current expense infrastructure; and take additional operating costs out of our business.
Management has continued to improve operating and financial performance while remaining dedicated to optimizing the potential of our growing businesses over the last 13 weeks. Our continuous focus on upgrading the management team has resulted in an organization that is well-positioned to execute our business and creative strategy. Our creative merchandising, planning, and allocation instore selling teams have begun to develop a synergy that is evident in our results.
The third-quarter 2005 results for the merchandising business on a pro forma basis comparing our core lifestyle brands, dELiA*s, Alloy and CCS versus the third quarter of last year were as follows: Sales were up 24% and gross margin dollars were up 32% to last year. The sales increase resulted from strong results across all of our businesses and net comps, denim and outerwear. The gross margin improvement was driven by margin rate gains in both our direct marketing and retail store segments. Due primarily to reduced markdown sales resulting from a more current inventory position at the beginning of the third quarter and better sell through of back-to-school merchandise.
In our retail store segment, comp sales were up approximately 5% with our premiere stores comp sales up approximately 9%. During the critical back-to-school month of August, we repeated the double-digit comp sales increase in the premiere stores that we had experienced in July. Total sales for retail were up 18% in the third quarter, with an approximate 27% increase in premiere store sales, slightly offset by a reduction in outlet store sales.
With the closing of one outlet store at the end of August, we currently operate just four stores and outlet centers as compared to six outlet stores at the end of third quarter last year. We opened eight new dELiA*s retail stores in the third quarter, increasing our total premiere stores to 58 at quarter end as compared to 49 premiere stores at quarter end last year. Overall, we have opened 10 new stores this year, all of the new stores feature our new prototype which reflects more closely the brand image of dELiA*s. We plan to open one additional store in the fourth quarter of '05.
Gross margin dollars were up 29% for our retail store segment and 36% in the premiere stores. In the third quarter of 2005, it was driven by the contribution of new stores, as well as a 450 basis-point margin rate improvement year-over-year. This included a 370-basis-point improvement in our premiere stores. The margin rate benefited from adjusting our merchandise mix and floor space to highlight its style assortment that continues to be more apparel-driven. By owning a more current inventory to start the third quarter due to fewer summer markdowns remaining at the end of second quarter and better acceptance in the sell through of back-to-school merchandise.
Several initiatives also had a positive effect on margin including targeted investment in fashion, cut and sew and denim including an inseam program and a back-to-school floor set which had a better instock position and commenced earlier than last year consistent with our competitive set. The fourth quarter marked the sixth consecutive quarter of positive s sales in apparel as sales in premiere stores were up approximately 19% to last year. We believe that our apparel-to-nonapparel mix is now consistent with our overall branding and growth initiatives. Inventory in our retail store segment at the end of the third quarter was overall down approximately 11% to last year.
In our premiere business, in spite of the net addition of nine more stores, inventory on hand was down 2% at quarter end, due to a reduction in summer and back-to-school carry-forward merchandise. Consistent with our real estate rollout strategy, we combined favorable deal economics with the analysis of our direct marketing customer database to select locations where direct marketing customers already exist. We operated a total of 62 retail stores at the end of the third quarter as compared to 55 retail stores at the end of third quarter in 2004.
In our direct marketing segment, pro forma third-quarter 2005 sales were up 27% and pro forma gross margin dollars were up 33% over the third quarter of 2004. The increase in sales at our core brands was a result of our strategy of circulation optimization with an approximate 6% increase in pages circulated, resulting in a productivity increase of 6%, as measured by demand generated per book circulated. The increase in demand was accompanied by a significant increase in initial fulfillment across all businesses, due to better inventory planning and management.
Our ability to improve the initial fulfillment of customer orders in our direct marketing segment occurred despite a pro forma inventory that ended the third quarter 6% lower than the third quarter of 2004. The improvement of gross margin dollars and direct marketing resulted from both the sales volume increase, as well as an approximate 250 basis point improvement in margin rate. Like retail, direct benefited from targeted investment in denim and fashion knit wear, merchandise with an overall higher initial markup and an improved instock position for back-to-school. Inventory was more current throughout this year's third quarter resulting in less clearance activity.
During the third quarter of 2005, our direct marketing segment also benefited from last year's warehouse and other operations consolidation. Together with ongoing facility productivity improvements resulting in an approximately 150 basis point pro forma reduction in variable fulfillment expense. We continue to manage inventories conservatively. Pro forma inventory on hand at quarter end for the combination of direct marketing and retail stores was approximately 7% lower than the end of third quarter of 2004 with a higher percentage of this year's merchandise current. We began the fourth quarter with an inventory that continues to be seasonally current and in line with expectations.
The consistent business architecture we have installed has yielded business teams that have improved their focus on individual brands and brand positioning. These teams continued to develop merchandising assortments containing a strategic balance of key items in fashion investment that strive to highlight top performing merchandise by mixing in fresh, fashion debuting merchandise in every full-priced edition of the catalogs and on a monthly basis in the stores. As this fourth quarter begins, I would like to update you on early holiday business.
In retail, we set our holiday floor set one week earlier this year, consistent with our competitive set. And I am pleased to report that our initial holiday collection has met expectations in its first four full weeks of selling. We will update both our windows and floor this Wednesday in preparation for Black Friday. Our direct marketing business is meeting expectations in the earliest of their holiday catalogs.
I would now like to turn it over to Jim for a review of the financials.
Jim Johnson, Chief Operating and Financial Officer
My financial comments will only be for continuing operations and will eliminate the impact of the discontinued dance competition business which was sold in June of this year. Total revenues for the third quarter were $122.9 million, an increase of 17.7% versus last year's third-quarter level of 104.4 million. Merchandise revenues for the quarter were 59.9 million, an increase of 23.6% versus 48.5 million in the prior year quarter.
As we indicated, our revenues increased from strength in both direct marketing and retail segments as revenues were up 27% and 18% respectively. Sponsorship and other revenues for the quarter also increased from 55.9 million for the last year's third fiscal quarter to 63.0 million for the third fiscal quarter of 2005, a 12.7% increase.
Gross profit for the quarter increased 62.6 million versus last year's 50.2 million. Gross margin for this year's third quarter increased to 50.9 million compared 48.1% in last year's third quarter, primarily as a result of significant gross margin improvement in our media and promotional marketing businesses as well as the previously noted improvements in the direct marketing and retail segments.
Our selling and marketing expenses rose from 36.4 million to 42.4 million, an increase of 6 million in the third quarter versus last year's third quarter, the increase was primarily due to the greater revenues in our direct marketing segment. As a percentage of revenues, these expenses decreased from 34.9% to 34.5%. Our general and administrative expenses remained relatively flat at 9.5 million. As a percentage of revenues, our quarterly, general and administrative expenses decreased from 9.1% to 7.8% in this year's third quarter. The reduction resulted primarily from the cost savings derived from integrating the operations of dELiA*s, along with lower, general, and administrative costs overall.
Our adjusted EBITDA, as defined in today's press release increased from 6.4 million for the third quarter of last year to 12.4 million for the third fiscal quarter of this year. Our net income attributable to common shareholders for the third quarter of fiscal 2005 was 7.3 million or $0.15 per diluted share compared with the a income attributable to common shareholders of 1.6 million or $0.04 per diluted share for last year's third quarter.
At this point I would like to open the call up to Q&A.
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