Executives
Julie Lorigan - Senior Vice President of Investor and Media Relations
Trudy F. Sullivan - Chief Executive Officer, President and Director
Michael Scarpa - Chief Operating Officer, Chief Financial Officer, Principal Accounting Officer and Treasurer
The Talbots (TLB) Q1 2012 Earnings Call May 29, 2012 4:30 PM ET
Operator
Good afternoon, ladies and gentlemen. On behalf of Talbots, we would like to welcome you to The Talbots Inc. Conference Call covering the first quarter 2012 earnings results. I would now like to turn the call over to Julie Lorigan, Senior Vice President of Investor and Media Relation.
Julie Lorigan
Thank you. Good afternoon, everyone, and welcome to the Talbots Inc. First Quarter Conference Call. As our Talbots Board of Directors continues its evaluation of strategic alternatives, today's call is prerecorded and listen-only. We will not be taking questions at the conclusion of our prepared remarks.
With us this afternoon, we have Trudy Sullivan, President and CEO; and Mike Scarpa, Talbots' Chief Financial Officer and Chief Financial Officer. We will be disclosing non-GAAP financial measures in this presentation. For a reconciliation of these non-GAAP measures to the corresponding GAAP measures, please see the table attached to our earnings release, which is available under the Investor Relations section of our website. As a reminder, certain statements to be made today are forward-looking. These are based on assumptions and expectations of future events, which may not prove to be accurate. They involve substantial risks and uncertainties. Actual results may differ materially from those expected or implied. These forward-looking statements may be identified by forward-looking terminologies as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, intend, potential or similar statements or variations of such term. All of our outlook and financial expectations and plans, as well as our assumptions underlying this information, constitute forward-looking information. We direct you to the cautionary statements being read at the end of this presentation and included in our earnings release issued on Friday, May 25, 2012, as well as on our recent SEC filings, all of which are available under the Investor Relations section of our website. A replay will be available immediately after the conclusion of this call until the end of the day, June 1, 2012. The webcast will also be available on the Investor Relations page of our website. With that, I would like to now turn it over to Trudy.
Trudy F. Sullivan
Thank you, Julie. Good afternoon, everyone, and thanks for joining us. On Friday, May 25, 2012, we issued our first quarter 2012 earnings release. In a moment, I will discuss both results for the 13-week period ended April 28, 2012, and provide a brief update on our key strategic initiatives. Mike will cover our financial results in greater detail. Given our board's ongoing evaluation of strategic alternatives, this is a prerecorded, listen-only call and we will not be taking any questions at the conclusion of our prepared remarks. With that, I will proceed with the business review.
Our first quarter net sales decreased 8.4%, in part due to reductions in our store portfolio under our store rationalization plan. We achieved profitability in the quarter, reporting adjusted operating income of $10.5 million and adjusted earnings per share from continuing operations of $0.09. This is an improvement over last year and was driven by a gain in gross margin, due in part to stronger margin performance in our accessories and women's businesses, as well as stronger inventory management, combined with tighter expense control as a result of the cost-reduction initiatives that we started to implement last December. We experienced positive momentum in customer response to our products, particularly with our April and May merchandise assortments, which were delivered in the first quarter and had stronger sell-throughs than prior year. From a product perspective, we saw positive comp sales performance in our knit tops, dresses and sportswear categories and improving performance in accessories and woven. We have made healthy strides in our women's and women's petite business, which delivered strong positive comps in the quarter. We are encouraged to see where we had made investments in fabric weight, color and the penetration of print and pattern, our customers' reactions has been favorable.
As we discussed on last quarter's call, we directed our marketing spend towards customer reengagement. Similar to last quarter, our customer file increased on the trailing 12-month basis, with growth coming from reactivated and new customers. In addition, we saw a significant increase in charge penetration compared to last year, resulting from differentiated offers and benefits made available to our credit card holders during the quarter, as well as a stepped-up effort to increase new accounts.
In terms of our upscale outlet business, we opened 4 stores, ending the period with 47 upscale outlets. Upscale outlet comps continued to improve and for the first quarter, we drove a positive 10.4% comp, with increases in both traffic, dollars per transaction and average unit retail. Additionally, we launched an online outlet program with strong initial customer response. Our upscale outlet concept has proven to be successful and a profitable channel for us. I will now turn the call over to Mike to review our financials.
Michael Scarpa
Thank you, Trudy. Good afternoon. I will now cover the details of our first quarter financial performance. Total net sales were $276 million compared to $301 million last year, down 8.4%. Consolidated comp sales, including stores, direct marketing and excluding the stores closed or planned for closure under the store rationalization plan, were down 3.8%. First quarter cost of sales, buying and occupancy as a percent of net sales decreased 90 basis points from last year, at 63.5% of net sales versus 64.4% of net sales. This decrease was primarily due to a 60-basis-point improvement in merchandise margin, resulting from a slight improvement in both our mark-on and markdown rates. Occupancy expenses were also favorable in the quarter, decreasing 90 basis points as a percent of net sales, due in part to our store rationalization plan, partially offset by a 60-basis-point increase in buying expenses as a percent of net sales.
SG&A expenses in the first quarter decreased $7 million over last year to $93 million or 33.6% of net sales versus $100 million or 33.1% of net sales last year. The decrease in SG&A dollars was primarily due to planned reductions under our cost-reduction initiative and the benefits of a smaller store base as a result of our store rationalization plan. SG&A expenses also include approximately $2.5 million in connection with the executive search and legal and advisory fees associated with the company's exploration of strategic alternatives.
In addition, we recorded estimated incremental performance-based compensation for which no comparable compensation was recorded in the same period last year. Adjusted operating income for the first quarter was $10.5 million, an increase of $2.9 million compared to the same period last year. Our adjusted income per share from continuing operations was $0.09 versus $0.08 per share last year.
Moving to the balance sheet, we ended the first quarter with total accounts receivable of $159 million, down 3.2% versus $164 million last year. Our receivables remain in excellent condition and year-to-date Talbots charge penetration represents approximately 38% of our net sales volume, up 200 basis points from last year. Merchandise inventories at the end of the quarter were $166 million, down 6.2% to last year's $177 million, primarily due to a planned decrease in spring receipts. We have planned reductions in the level of merchandise inventory commitments for all of fiscal 2012.
Capital expenditures in the first quarter were $7 million, primarily related to investments in store refreshes, the opening of upscale outlet stores and IT initiatives. Total debt outstanding at the end of the quarter was $198 million, up $111 million compared to $87 million last year. Total outstanding debt includes $123 million under our $200 million ABL and $75 million in debt under our term loan, which we entered into on February 16, 2012. We ended the quarter with $22 million in cash and had 0 drawn on our $50 million straight payable financing line with Li & Fung. Cash used in operating activities was $32 million compared to cash used in operating activities of $51 million last year. The decrease was primarily due to improvements in our working capital management, including planned reductions in inventory and the timing of prepaid rent year-over-year, partially offset by reductions in accounts payable resulting from lower inventory buys and the timing of receipts. This concludes our call this afternoon. Thank you for joining in and have a good evening.
Operator
This concludes the Talbots Inc. prerecorded conference call. We will now proceed with our forward-looking statements. This conference call contains forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as expect, achieve, plan, look, projected, believe, anticipate, outlook, will, would, should, intend, potential or other similar statements or variations of such terms.
All of the information concerning our future liquidity, future net sales, gross profit margins and other future results, achievements of operating plans or forecasts for future periods, sources and availability of credit and liquidity, future cash flows and cash means, success and the results of strategic initiatives, the outcome of strategic review process, anticipated cost savings and other reduced spending and other future financial performance or financial position, as well as our assumptions underlying such information constitute forward-looking information.
Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about the company are not guarantees of future results or performance and involve substantial risks and uncertainties, including assumptions and projections concerning our internal operating plan, regular price, promotional and markdown selling, operating cash flows, liquidity and sources and availability of credit for all forward periods.
Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the following risks and uncertainties: the ability to achieve our operating and strategic plans for operating results, working capital and cash flows; the risks associated with our efforts to maintain traditional customer and expand to attract new customers; the risks associated with competitive pricing pressures in the current increased promotional environment; the ability to reduce spending as needed; the ability to access on satisfactory terms, or at all, adequate financing and other sources of liquidity, as and when necessary, to fund our continuing operations, working capital needs, strategic and cost reduction initiatives and other cash needs and to obtain further increases in our debt facilities, extend and continue our trade payables arrangements with our exclusive sourcing agent and obtain other and additional debt or credit facilities or other internal or external liquidity sources of cash flow from operating activities or other capital resources are not sufficient for our cash requirements at times or times; the ability to successfully increase our customer traffic and the success in customer acceptance of our merchandise offerings in our stores, on our website and in our catalogs; the satisfaction of borrowing conditions under our debt facilities, including accuracy of all representations and warranties; no defaults or events default; absence of material, adverse effects or change in all other borrowing conditions; the risks associated with our efforts to successfully implement, adjust or appropriate and achieve the benefits of our strategic initiatives, including store rationalization, store reimaging, information technology reinvestments, store segmentation, upscale outlet expansion and any other future initiatives that we may undertake; the ability to attract and retain talented and experienced executives that are necessary to execute our strategic initiative; the risks associated with our appointment of an exclusive global apparel sourcing agent, including that the anticipated benefits and cost savings from this arrangement may not be realized or may take longer to realize than expected; and the risk that upon any cessation of this relationship for any reason, we would be unable to successfully transition to an internal or other external sourcing function; any impact to or disruption in our supply of merchandise; the continuing impact of the U.S. economic environment on our business, continuing operations, liquidity and financial results, including any negative impact on the consumer discretionary spending, substantial loss of household wealth and savings and continued high unemployment levels; the ability to continue to purchase merchandise on open account purchase terms at existing or future expected levels and with the acceptable payment terms and the risk that suppliers could require earlier or immediate payment or other security due to any payment concerns; the ability to accurately estimate and forecast future regular price, promotional and markdown selling and other future financial results and financial position; any negative publicity concerning the specialty retail business in general or our business, in particular; the risk of any further increases in postretirement benefit and funding obligations; the risk that estimated or anticipated costs, charges and liabilities to settle and complete the transition and exit from the disposal of the J. Jill business, including both retained obligations and contingent risks for unsigned obligations may be materially greater than anticipated; the risk of material impairment of goodwill, trademarks or long-lived assets; the risks associated with our efforts in transforming our information technology systems to meet our challenging business systems and operations, including the ability to maintain adequate system security controls; any significant interruption or disruption in the operation of our distribution facility or the domestic and international transportation infrastructure; and the risks and uncertainties associated with the outcome of current and future litigation, claims, tax audits and tax and other proceedings; and the risks that actual liabilities, assessments or other financial impact will exceed any estimated, accrued or expected amount or outcome; the risks associated with any uncertainties arising related to our ongoing review of strategic alternatives.
All of our forward-looking statements are as of date of this conference call only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of or any material adverse change in one or more of the risk factors or risks and uncertainties referred to in this conference call or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the SEC can materially and adversely affect our continuing operations and our future financial results, cash flows, available credit, prospects and liquidity. Except as required by law, we do not undertake or plan to update and revise or -- such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this conference call, even if such results changes or circumstances make it clear that any forward-looking information will not be realized.
Any public statements or disclosure by us following this conference call, which modify or impact any of the forward-looking statements contained in this conference call, will be deemed to modify or supersede any such statements in this conference call. In addition to the information set forth in this conference call, you should carefully consider the risk factors and risks and uncertainties included in our annual report on Form 10-K for the fiscal year ended January 28, 2012, and other periodic reports filed with the SEC.
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