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Joe's Jeans (NASDAQ:JOEZ)

Q2 2012 Earnings Call

July 16, 2012 4:30 pm ET

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

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Edward D. Timmons - Roth Capital Partners, LLC, Research Division

James Fronda - Sidoti & Company, LLC

Operator

Welcome to Joe's Jeans Fiscal 2012 Second Quarter Earnings Call. My name is Dejira and I'll be the conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like to turn the presentation over to your host for today's conference, 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 are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made.

I'll also refer you to our reports that are filed with the SEC, which includes our quarterly reports 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 1 week from today.

Now I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks, everyone, for joining us today. I'll speak about the second 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 second quarter, we increased net sales 16% to a record $28.6 million. This increase built upon the trends we started to see in the fourth quarter of fiscal 2011. First, our domestic wholesale business continues to post healthy increases, growing 12% over the prior year. Second, retail sales grew 26% over the prior year, now representing 20% of our consolidated revenue. Due to the positive results from both wholesale and retail, our operating income increased 82% to $3.1 million for the quarter.

Our retail division sales growth of 26% was driven by a healthy 10% same-store sales increase and the addition of 3 more stores. For the second quarter, both our full price stores and our outlets had positive same-store sales gain. It's important to note that our full price same-store sales were up 38% for the quarter, with the first half of our third quarter under way, we are continuing to see a positive same-store sales growth.

Our retail gross margin increased by 6 percentage points to 71% from 65% primarily due to less commercial activity at the outlets and the addition of 2 full price stores. Our strong same-store sales gains, coupled with the increase in gross margins, led to store-level EBITDA margins of 22% compared to 16% a year ago. We continue to be pleased with the results of each and every store in our base.

We recently announced the location of our 25th retail store on Melrose in Los Angeles and expect to have both this and our 24th store in South Coast Plaza open in August, in time for the fall shopping season. Both of our new stores are located in highly coveted shopping destinations.

We expect these stores to increase brand awareness with new and existing customers. We expect the capital expenditures for these 2 new stores to be consistent with Aventura and SoHo which costs about $200,000 each to build out. Looking forward, we have signed leases for another 2 stores opening later this year. We are continuing to aggressively pursue our retail strategy and expect to have several more leases signed in 2012. Our wholesale sales increased by 14% to $22.9 million. Sales gains came from both our men's and women's sales channels and from our else brands. Our Joe's men's wholesale sales continued its strong growth trajectory with an increase of 11% over the prior-year period. We continue to see strong growth in denim and consistent growth in collection. I would point out that colored denim also proved to be a volume driver on our men's business as it was incremental revenue to our denim plans. Similar to last quarter, we saw increases in our door count and dollars per door.

Our Joe's women's wholesale sales grew 8% this quarter. We saw our women's denim business draw positive increases in both department and specialty stores. Again, a portion of our sales growth was attributable to the strength of our 55 Colors program. In addition, we generated a meaningful amount of reorder business as a result of our printed denim campaign. Our international sales also increased this quarter compared to the year-ago period. Similar to our domestic wholesale business, we saw significant increases in international women's denim sales as a result of our printed denim and 55 Colors program. We recently announced a new distribution agreement for France and currently the restructuring of the Paris office. As a result, our European business generated a healthy profit slate during the quarter. We continue to believe the international market represents a sizable opportunity for us and with this new distribution model, we expect to reduce corporate overhead and increase profitability.

Finally, our else brand, which we commenced shipping in February, contributed $750,000 to the top line sales for the quarter. It's important to note that excluding else, our Joe's Jeans sales still would have been up 13% for the quarter. That said, the performance of the else brand continues to exceed both our own and Macy's sales expectations. Building on the success of the spring launch, we will be doubling our door count for the fall season, all of which bodes well for the future of this brand.

We'll have more to say on the third quarter call as we are shipping fall product to the stores at the end of this month.

Our wholesale gross margin was down 1 percentage point coming in at 41.4% compared to 42.5% in the year-ago period. This quarter, we continued to produce a higher number of garments domestically than we have historically in order to meet the short lead times to catch our market share on our printed denim offerings and our 55 Colors. In addition, wholesale gross margins were impacted by our else brand internationally, carrying a lower gross margin than premium denim. It's important to note that gross margins on the Joe's business was consistent with the year-ago margin. We certainly are very optimistic about the outlook for the company. Our order book for the third quarter is up, our same-store sales are up and our significant fall program for the else brand begins shipping at the end of the summer.

I'll now turn the call over to Hamish for a more detailed discussion of our financials.

Hamish S. Sandhu

Thanks, Marc. For the quarter on a consolidated basis, net sales increased 16% to $28.6 million from $24.7 million over the prior-year period. Retail sales led the increase by growing 26%. Same-store sales growth for the 18 stores opened at least 12 months and new shops increased 10%. Retail sales represented 20% of overall net sales for the quarter.

Wholesale sales increased 14% during the quarter, driven by increases in both men's and women sales and the addition of else. Our overall gross margin remains flat at 47% in both quarters. Our operating income increased by 82% to $3.1 million from $1.7 million in the prior-year period. Consolidated operating expenses was high in the second quarter of fiscal 2012 compared to 2011 at $10.5 million compared to $9.8 million, respectively. Operating expenses increased slightly in our wholesale segment due to an increase in capital costs for the development of our holiday spring 2013 line. Operating expenses in our retail segment increased due to having 2 more stores in the second quarter of fiscal 2012 as compared to the prior year.

Operating expenses for corporate were lower at $3.8 million compared to $4.2 million in the prior year. Expenses decreased primarily due to decreases in our print and other advertising commitments. We had operating income of $3.1 million compared to $1.7 million in the prior year. Our interest and income tax expense continue to be consistent with the prior quarters. This resulted to net income of $1.4 million for the second quarter of fiscal 2012, compared to $751,000 for the second quarter of fiscal 2011.

An 89% increase in earnings per share of $0.02 for the quarter. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Edward Yruma, KeyBanc.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

You've mentioned the margin drag from the success of the else brand. I guess now that you're rolling out to more doors, how do we think about the ongoing margin drag from that and kind of the margin differential relative to your core premium denim business?

Marc B. Crossman

Yes. So I would say that the margin differential from our core business is probably -- Hamish what would you say, about 10 points?

Hamish S. Sandhu

About 10 points, yes.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got you. So we should expect that then, I guess, the success of that to be kind of a continuing margin drag on the gross line?

Marc B. Crossman

Yes.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

And in terms of -- and you sound like you're in a great position from an inventory perspective or at least, particularly as it relates to the colored denim, at what point do you think you'll be able to normalize production and get kind of more Mexican production or non-U.S. production for some of the colored denim?

Marc B. Crossman

So we're -- it's a good question. Starting 10/30, we're moving to a different fabrics and -- that we're going to put our colors on different treatment. And -- so starting 10/30, we're switching the fabrics. Starting spring, we're going to be switching the treatment that we do on the colors. So I would say that comfortably by spring, we'll be producing down in Mexico. We'd hope to do it faster than that but I could commit to spring.

Operator

The next question comes from the line of Ed Timmons, Roth Capital.

Edward D. Timmons - Roth Capital Partners, LLC, Research Division

Going to the door count on the women's side, can you talk about that? And has that stabilized? And are you where you want to be there? And then on the men's side, can you talk about the process of, kind of, expanding? And how many more stores or how many more doors you can get to by the end of the year?

Marc B. Crossman

Yes. So on the women's side, we saw a slight sequential decline but we're still feeling the impact from the year-over-year decline. I'd say roughly, we're probably down 10 points in doors on the women's side. So we're still calling out some of the smaller doors on the year-over-year basis. We're not talking about the big showcase doors. So we're going through that but we are seeing selling pickup in the existing doors that we're in. On the men's side, I think that we have said we grew 7% on the door count on the men's side. And I think you have the potential to grow significantly more than that. So I would look for probably 20% to 30% increase in door count.

Edward D. Timmons - Roth Capital Partners, LLC, Research Division

Okay. And then I apologize, my connection is a little bad here so I missed a few things. But on the retail expansion, you said you had South Coast and one other open or planning on opening in August. And I think 2 outlet stores, where you either sign leases or expect it, then you said several others. Was that in addition to the 2 outlet stores?

Marc B. Crossman

Absolutely. Well, we don't have any other outlets planned. The -- it's -- we have 4 full price stores that we're looking at right now and that's in addition to the South Coast Plaza store and the Melrose store. So that would be 6 full price stores if we're able to execute on all of it. And then 2 outlets, really, that's all we have left on the table in terms of outlets for this year, Grand Prairie and Livermore.

Edward D. Timmons - Roth Capital Partners, LLC, Research Division

Okay. And then lastly, and again I apologize if I missed it, but the women's wholesale, I think it was up 8%. How much was that with else? Or without else, what would it have been?

Marc B. Crossman

Hamish, what would it have been without else?

Hamish S. Sandhu

That 8% growth is without else. So we did -- include else, it would have been 10%.

Marc B. Crossman

Yes. Else, was -- just to put it in perspective, else was about $700,000 that we shipped and it was really kind of our summer shipment which is not a big shipment. Really, big numbers are going to hit our P&L starting in the third and fourth quarters. And I think I said on the call that starting July, at the end of this month, we're going to have our first fall shipments.

Operator

[Operator Instructions] The next question will come from the line of James Fronda, Sidoti.

James Fronda - Sidoti & Company, LLC

I'm just curious to know how long it takes you guys to become profitable from one of these retail stores? What's the timeframe?

Marc B. Crossman

On every store -- we really only have 2, 3 stores in our base that are probably not at the level that we'd want them to be. But every store, if you look at-- kind of splice it down and say all right take a freshman store versus a sophomore and beyond store, they both run at pretty much the same operating income margins. So if we move from the high teens to the low 20s, you can look at both sets, ones that have been opened for a year and those that haven't and they're running at the same margins.

Operator

[Operator Instructions] And there are no more questions in the queue at this time. I'd now like to turn the call back to Marc Crossman, President and CEO, for closing remarks.

Marc B. Crossman

Great. I appreciate everybody listening today. If you have any questions, please feel free to give us a call. Thanks.

Operator

And ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect and have a great time.

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