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Executives

Lori Nembirkow - Corporate Secretary

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

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

Analysts

Andrew Y. Kim - KeyBanc Capital Markets Inc., Research Division

Steven Chang

Unknown Analyst

Joe's Jeans (JOEZ) Q1 2012 Earnings Call April 12, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen. Welcome to Joe's Jeans' Fiscal 2012 First Quarter Earnings Call. My name is Caris, and 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, 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 include our 2012 quarterly report on Form 10-Q filed today. This report includes information that could also cause our actual results to be materially different from those contained in 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 one week from today.

Now I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the first quarter results, and then I'll turn the call over to Hamish for a discussion of our financials. Finally, we will end with a Q&A session.

In the first quarter, we generated net sales of $26 million, an increase of 23%. The increase in sales is indicative of 2 trends that we started seeing in the fourth quarter of fiscal 2011. First, our wholesale business has stabilized and even begun to show increases, with else being 19% increase from the prior year period. Second, our retail strategy continues to provide material diversification to our revenue base, representing 20% of our revenues for the quarter and increasing 40% over the prior year. During the quarter, our operating income increased by 244%, resulting in operating income of $1.8 million.

Our retail division sales increased by 40% to $5.2 million for the quarter. Sales growth was driven by a very healthy 22% same-store sales increase, plus the addition of 4 more stores. For the first quarter, both our full-priced business and our outlets had healthy same-store sales gains, with our full-priced same-store sales up over 70%. With the first half of our second quarter underway, we are continuing to see solid same-store sales growth at our stores. Our retail gross margins increased 70% from 68% in the prior year quarter, primarily due to the addition of 4 stores, which included one full-priced store. Our strong same-store sales gain, coupled with the increase in gross margins, led to a 5% operating income margin, a big improvement over our negative 3% operating income margin a year ago. Also, our store-level operating margins more than tripled from the year-ago margins.

We continue to be pleased with the results of each and every store in our base, especially our full-priced stores. We recently announced the opening of our 23rd retail store in South Florida at the Aventura Mall. We continue to improve our store design and expect the build out for this store to be roughly $200,000. Given the store will be opened next week, we are pleased with our quick turnaround time of 4 weeks between lease signing and store opening. In addition to Aventura, we have 2 signed leases and expect to have another several signed leases in the coming months.

Our wholesale sales increased by 19% for the quarter, with sales of $20.8 million compared to $17.5 million in the prior year period. Sales gains came from both our men's and women's sales channels and the addition of sales attributable to our new brand, else. Our men's wholesale sales continue to exceed our expectations, increasing 58% over the prior year period, with strong growth in both denim and tees. Similar to last quarter, we saw increases in our door count, our average sales per door and presentation sizes at our retailers. Our Joe's women's wholesale sales increased this quarter, reversing the downtrend of the last several quarters. Most encouraging is the fact that we saw increases in Joe's women's denim, which further built upon the trends from the fourth quarter. As we have seen over the last several months in our company-owned stores, our fashion product is resonating with our customer. Based on the results of the last couple of quarters, we are cautiously excited that we are seeing the same trends filter down to our wholesale channel.

Our international sales are essentially flat for the first quarter of fiscal 2012 compared to the prior year period. Similar to our domestic wholesale business, we saw increases in our international men's and women's denim orders, as we delivered new and exciting fashion products, coupled with a revamped core basic program. We continue to believe the international market represents a sizable opportunity for us. We are currently renegotiating our contracts in Japan and we are restructuring our operations in Europe. The end result should be increased sales and reduced costs.

Finally, our else brand, which we only commenced shipping in February, contributed $1.5 million to our top line wholesale sales. Even without else, our sales would have been up 10% for the quarter. The performance of the else brand is strong and is exceeding both our own and Macy's sales expectations and plans.

Our wholesale gross margin was up 1 percentage point, coming in at 46% in the first quarter of 2012 compared to 45% in the first quarter of 2011. In addition, our gross margin was up 5% sequentially. This quarter, we continued to produce a higher number of garments domestically than we have historically in order to beat the short lead times of reorders of our 55 Colors denim program. However, we have made progress in bringing the factory we use in Mexico up to our standards. To date, we've been able to move more production back to Mexico.

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 23% to $25.9 million from $21.2 million over the prior year period. Retail sales led the increase by growing 40%. Same-store sales growth for the 17 stores open at least 12 months increased 22%. Retail sales represented 20% of our overall net sales for the quarter. Wholesale sales increased 19% during the quarter, driven primarily by increases in men's sales, a modest increase in women's sales and the addition of else. Our overall gross margin increased to 50% from 49% in the prior year quarter, primarily due to the positive effect of sales from our higher-margin retail channel.

Our operating income increased by 244% to $1,799,000 from $523,000 in the prior year period. Operating expenses were higher in the first quarter of fiscal 2012 compared to 2011 at $11.3 million compared to $9.9 million, respectively. Operating expenses increased slightly in our wholesale segment due to an increase in sampling costs for the development of our new spring and summer lines, which focus more on fashion-oriented styles. Operating expenses in our retail segment increased due to having 4 more stores in the first quarter of fiscal 2012 as compared to the prior year.

Operating expenses for corporate were higher at $4.1 million compared to $2.8 million in the prior year period. Expenses increased primarily due to advertising expenses attributable to print and other advertising commitments for our 55 Colors campaign that we launched in the fourth quarter of fiscal 2011. However, we continue to offset these higher advertising costs by better managing our other corporate expenses.

We had operating income of $1.8 million compared to $523,000 in the prior year. Our interest and income tax expense continues to be consistent with the prior quarters. This resulted in net income of $794,000 for the first quarter of fiscal 2012 compared to $190,000 for the first quarter of fiscal 2011, a 380% increase. And earnings per share for the quarter was $0.01.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Edward Yruma of KeyBanc.

Andrew Y. Kim - KeyBanc Capital Markets Inc., Research Division

This is Andrew Kim sitting in for Ed. Could you talk about your progress of your private label test at Macy's? And also, what have you learned and how that affects your plan going forward?

Marc B. Crossman

Yes, I mean, the progress, we couldn't ask for better. We got it rolled out to all the stores. The vast majority of the mannequins, the tables, the signage were up. I was on the East Coast touring every mall we went into -- or every Macy's where we're supposed to be. We saw our presentation as represented. So we're really excited with how it looks. In terms of performance, it has just performed -- and just to put some color around it, it's beating plan by 20% to 30% on a weekly basis, knock on wood. So as we're looking at the fall orders coming in and what we're doing, we're definitely looking to not only increase the number of doors we're going to be in dramatically, but also increase the presentations that we have in the existing stores, because our worry now is that we're going to be short on inventory in the back half of the year. So it really is we're all thrilled, both on our side and Macy's side, with the performance. In terms of what we've learned, I think that we're seeing that the fashion stuff, just like with our core Joe's business, that the fashion is turning really quickly and the basics aren't turning to the same level. Now when I put this in context, it's all turning very well, but in terms of which is turning better, the fashion is doing quite well. So when you look at our stock-to-sales, it's definitely skewed towards the fashion items: fashion and colors, et cetera.

Andrew Y. Kim - KeyBanc Capital Markets Inc., Research Division

Great. And can you shed some more light on your reorders for fall and spring? Have there been any other changes in the cadence for new orders and reorders?

Marc B. Crossman

Has there been any -- pardon, what did you say?

Andrew Y. Kim - KeyBanc Capital Markets Inc., Research Division

Changes in the cadence for new orders and reorders?

Marc B. Crossman

Yes, I mean, they're -- we're looking at doubling the doors and tripling the orders, just to give you kind of a rough sense of the magnitude of change. Now summer is already bought, locked in and on its way coming in, so we're not going to increase the doors or the presentations in the existing doors, because we're just already locked in. We don't have our final buys for the fall, but obviously, we're in constant communication with them, and we are obviously going to make a big step forward going into the fall season.

Operator

[Operator Instructions] And your next question comes from the line of Steven Chang with Rudgear Capital.

Steven Chang

I have a question. In your women's wholesale business, I know you had mentioned that your door count had gone down for a little bit. And can you talk about where you are in the process of getting back into some doors that you had lost?

Marc B. Crossman

Yes. I mean, right now, it's not -- I'd love to tell you that we're bringing up our door count. We're not. It's stabilized from where it was in the fourth quarter, pretty much, give or take a couple of doors based on the department store. So really, it's about acting as quickly or reacting as quickly as we possibly can to stuff that is turning in the existing doors, getting to a point where our stock-to-sales ratios are out of whack to the positive -- they were way outperforming our stock and really beefing up the doors we're in -- and then eventually moving to increasing our door count. So I know that's a long-winded answer. The simple answer is still the same number of doors. We're just performing better in the existing doors with the product that we have today.

Steven Chang

Great. And similarly, when you had brought some manufacturing back to the U.S., that obviously is lower margins and as I understand, you're shifting production -- some of that production back to Mexico. How far along the process are we in that shift?

Marc B. Crossman

We're pretty far down the process. I don't have the U.S.-to-Mexico number off the top of my head in terms of where the production was, but it was not a very hard or long thing to do. It was really just determining that, that was the route we wanted to go to -- go down and getting them up to speed. And it's not -- to get their dyeing up to speed is not a long process whatsoever and since we have the fabric, we can ship it down there and make it in Mexico. So it's been a very quick process.

Operator

[Operator Instructions] And your next question comes from the line of Jeff Fleming [ph].

Unknown Analyst

On what the other gentlemen just asked about going to Mexico, and I heard you say earlier you might be concerned if the else line does triple. Will you have to make that up in the U.S. so we can expect lower margins on that? Or is there going to be the ability to get all that down to Mexico to get the higher margins?

Marc B. Crossman

No, else -- the else business right now is coming out of China. There is discussion to take it down to Mexico, but it's not made in the U.S. and we have no intention of making it in the U.S., and that's why we aren't reacting to summer -- beefing up our presentation for summer, because of the longer lead times you have with making the goods in China. So for the fall and how far out we plan in our time and action calendar, we have no problem making our fall deliveries and beefing up the presentations to the degree we're going to. So it's -- that's not going to provide any margin pressure from that perspective.

Unknown Analyst

Okay, so you're keeping an eye on it. I'm just making sure you're not going to grow that faster than you can produce it at your margins.

Marc B. Crossman

Absolutely.

Operator

And at this time, there are no further questions in queue, and I would now like to hand the call back over to Mr. Marc Crossman for closing remarks.

Marc B. Crossman

Great. I appreciate everybody being on the call, and if you have questions, please feel free to call either Hamish or myself.

Operator

And, ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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