Executives
Bob Aronson – VP Investor Relations
James Scarborough – Chairman & CEO
Andrew Hall – President & COO
Edward Record – Executive VP & CFO
Analysts
David Mann – Johnson Rice & Co.
Jeff Blaeser – Morgan Joseph & Co.
David Glick - Buckingham Research
Robert Drbul - Lehman Brothers
Stage Stores, Inc. (SSI) Q1 2008 Earnings Call May 22, 2008 8:30 AM ET
Operator
Good morning and welcome to Stage Stores conference call. (Operator Instructions) I would now like to introduce your moderator for today’s conference call, Mr. Bob Aronson, Vice President Investor Relations. Mr. Aronson you may begin your conference call.
Bob Aronson
Good morning and welcome to Stage Stores first quarter conference call. Speaking this morning from the company will be Jim Scarborough, Chairman and Chief Executive Officer; Andy Hall, President and Chief Operating Officer; and Ed Record, Executive Vice President and Chief Financial Officer.
Before they begin I would like to point out that any reference to earnings per share during this morning's call will be a reference to diluted earnings per share. I would also like to point out that our comments this morning contain forward-looking statements. Forward-looking statements reflect our expectations regarding future events and operating performance and often contain words such as believe, expect, may, well, should, could, anticipate, plan or similar words. Our forward-looking statements include comments regarding our sales and earnings outlook for the second quarter, second half and full 2008 fiscal year. Our forward-looking statements also include comments regarding the number of stores we plan to open and relocate during the second quarter, the number of stores we plan to open, relocate and close during the 2008 fiscal year and
the number of Estee Lauder and Clinique counters that we expect to open over the remaining three quarters of the year.
Such forward-looking statements are subject to a number of risks and uncertainties which could cause our actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include but are not limited to those described in our most recent annual report on Form 10-K as filed with the Securities and Exchange Commission and other factors as may periodically be described in other company filings with the SEC.
And now with that said I would like to turn the call over to Jim.
James Scarborough
Thanks Bob and good morning everyone. We appreciate you joining us today for our first quarter conference call. I’ll start off today’s conference call by spending a few minutes providing you with a high level overview of our Q1 results then Andrew will follow me with a review of our operational highlights for the quarter. After Andrew is finished with his remarks, Edward will discuss our first quarter financial results with you in greater detail. He’ll also cover Q2, second half and full-year sales and earnings outlooks. Then when Edward is finished with his comments, we’ll open it up for questions.
Our first quarter results are clearly reflective of just how challenging the current economic and retail environment is. With consumer confidence now at a five year low, and consumer sentiment now sitting at a 26 year low its clear that consumers are concerned about the combination of rising fuel and food prices, declining home values and a weakening job market. Their heightened worries over these issues have now translated into concerns about their current and future financial conditions which have led to the slowdown in consumer spending.
Our first quarter comp store sales decline of 5.4% is a clear indication of just what impact the slowdown in consumer spending had on our business during the period. And while we’re disappointed with our own results, we also recognize that the slowdown is being felt across the entire retail sector and in fact, our comp store sales decline for the first quarter was actually not as severe as the comp sales declines posted by many of our peers.
In review, sales generated by our new or non-comp stores did not fully offset our 5.4% comp store sales decline which led to an overall 1.3% drop in our total Q1 sales versus last year. The combination of lower sales, lower gross margins, and higher store opening costs results in first quarter earnings of $0.06 a share. Last year’s net income excluding a non-comparable gain of $0.04 per share related to our 2004 sale of the Peebles credit card portfolio of $0.16 a share.
In spite of our Q1 statistical results we are proud of the way that all of our associates have responded during this challenging economic environment. They clearly recognize that maintaining strong customer relationships, strong customer loyalty, is job number one in this critical difficult time. They’ve all been working hard to ensure that our customers have had an excellent shopping experience every time they come into one of our stores. They’ve also been diligent in managing our inventory levels and our merchandise receipt flows as well as controlling our operating expenses.
As a result of our tightened inventory management practices, we ended the quarter in good shape with inventories down 4.8% on a comp store basis compared to last year’s level. Overall our inventories totaled $381.5 million this year, versus $366.9 million last year. The year-over-year increase of $14.6 million is due to the fact that we have 50 more stores in operation at the end of this year’s first quarter then we had at the end of last year’s first quarter.
In addition to appropriately managing our inventory levels and operating expenses we are also pleased with the progress that was made during the quarter on a number of our key strategic initiatives which Andrew will discuss in detail with you shortly. We firmly believe that we have the right strategies and initiatives in place to further strengthen and improve our business which will position us well for the long-term. Now as we enter the second quarter we believe that our inventories are at appropriate levels and we’re generally pleased with our merchandise assortments.
Having said that, we believe that consumers will face economic headwinds and as a result we anticipate that our top line sales will remain soft. Accordingly we are planning our inventory and expense levels conservatively. Now before I turn the call over to Andrew, I want you to know that we appreciate your continued support and interest in Stage Stores and we pledge to do all that we can to successfully navigate our company through these tough and challenging economic times. With that said, I’ll now turn the call over to Andrew.
Andrew Hall
Thanks James. As James discussed given the current state of the economy consumers are feeling pretty downbeat. With the price of most necessities on the rise consumers appear to be tailing back on their discretionary spending and our first quarter performance certainly reflects this. Spending patterns would suggest that consumers are principally event shopping as well as shopping based on need. As such we have increased our communications with our customers in order to reinforce Stage’s value proposition of providing great branded merchandise selections at moderate prices coupled with convenient locations and exceptional customer service.
To give you some insight into what we saw on the selling floor during the quarter versus last year our dollar amount per transaction was flat with the number of items per transaction decreasing approximately 1% and the average unit retail increasing approximately 1%. As such our 5.4% comparable store sales decline was driven by reduced customer traffic coming into the stores. The increase in average unit retail was driven by increased cosmetic penetration, and improved profitability of our clearance takedown versus last year which reflects our commitment to conservatively managing our inventories.
Moving now to a brief discussion of our major merchandise categories, cosmetics with a 12.9% comparable store sales gain was the only area that achieved an increase during the quarter. The cosmetics comp benefited from our continued installation of Estee Lauder and Clinique counters as well as a strong men’s and women’s fragrance business.
Merchandise categories with negative comps but performed better than the company average included children’s, footwear, intimate apparel, and men’s while dresses performed at the company average. The remainder of our merchandise categories which are primarily on the feminine side of the business performed below the company average for the quarter.
During the quarter we completed the installation of 17 new Estee Lauder and 14 new Clinique counters. These first quarter additions brought the total number of Estee Lauder counters to 142 and our Clinique counters to 132. Looking ahead we currently expect to open 16 new Estee Lauder and nine new Clinique counters over the remaining three quarters of the year.
With regard to our comparable store sales by market size, our small markets at down 5.2% performed slightly better than the company average. Our mid size and large markets were each down 5.5%. By region of the country, we performed best in Southwest, the South Central and the Northeast, while our weakest performing region was the Southeast.
Turning now to store-based activities during the quarter, we opened 23 new stores which included two Palais Royal, three Bealls, three Stage and 15 Peebles stores. We also relocated five stores and expanded two stores. We ended the quarter operating 717 stores comprising a total of 13.3 million selling square feet. Despite the challenging economy we are pleased so far with the performance of our new stores.
During the second quarter we expect to open five new stores and relocate three stores. Two of our second quarter openings will be in Idaho, which will increase our geographic presence to 36 states. For all of 2008 we anticipate opening between 55 and 60 new stores and relocating 13 to 14 stores. We also anticipate closing between nine and 11 stores. We are still targeting to be over 1,000 by the end of 2013.
Lastly a quick update on our Jeffersonville, Ohio distribution center, we continue to remain on schedule for a July opening. At full capacity this facility will be capable of servicing approximately 300 stores. Our Jeffersonville DC will play an important role in supporting our ongoing unit growth and geographic expansion.
We do expect the economy to remain soft and business conditions to remain challenging throughout 2008. Having said that we face easier year-over-year sales comparisons during the second half of the year and therefore we do not expect our comparable store sales to be down as much as in the first half. We will remain focused and conservative in the management of our inventories and we will keep a tight rein on our expenses. We expect to continue to make progress on our various strategic initiatives and we will continually seek out opportunities to grow our top and bottom lines.
That concludes my remarks; at this point I’ll turn the call over to Edward.
Edward Record
Thanks Andrew, I’ll begin by providing a quick review of our first quarter financial results and then I will spend a few minutes talking about our outlook for the second quarter, the last half of the year and then updated outlook for the full year.
Sales for the first quarter totaled $353.5 million. Last year’s sales were $358.2 million. In analyzing the components of our $4.7 million decrease, contributions from net new stores of $14.3 million were offset by a reduction of $19 million in comparable store sales due to our negative 5.4% comparable store sales for the quarter.
Our first quarter gross profit as a rate of sales decreased by 40 basis points, dropping to 27% from 27.4% last year. The overall 40 basis point decline in our gross margin rate reflects a combination of a 30 basis point increase in our merchandise margins which was offset by 70 basis point increase in buying, occupancy and distribution components of cost of sales. The 30 basis point increase in our merchandise margins is attributable to an increase in the profitability of our clearance liquidation versus last year. The 70 basis point increase in the buying, occupancy and distribution components is principally due to rent and depreciation expense for our new stores.
SG&A expenses as a rate of sale increased 200 basis points, rising to 25% from 23% last year. Last year’s SG&A expenses including non-comparable gain of $2.6 million which equates to 74 basis points. The remaining 126 basis point increase in this year’s rate is primarily related to higher advertising expenses, which are related to our efforts to drive sales, and overall deleveraging of SG&A expenses as a result of our lower sales for the quarter. As we said on our fourth quarter conference call, Q1 SG&A expenses were expected to be difficult. As we look forward we continue to expect to leverage our SG&A expenses at or below our flat comparable store sales performance for the year.
Store opening costs were $2.3 million this year versus $755,000 last year. We opened 23 new stores and relocated five stores during the quarter this year, while we opened 12 new stores and relocated two stores during the same period last year.
Interest expense was $1.3 million this year versus $769,000 last year. The year-over-year increase in interest expense is primarily due to higher average borrowings on a revolving credit facility this year versus last year offset somewhat by reduced borrowing rates. In addition, we had approximately $31 million in equipment financing notes outstanding at the end of the quarter while there were no such notes at the end of last year’s first quarter. The higher revolving credit facility borrowings are principally due to the $112 million that we spent last year on stock repurchases.
Our tax rate was 38% this year while it was 37.3% last year. The year-over-year rate increase is primarily attributable to recent changes in Texas’ tax laws. Overall we earned $2.3 million or $0.06 per share this year versus $9.1 million or $0.20 per share last year. As a reminder, last year’s first quarter results include a non-comparable income item of $0.04 per share. Our diluted share count this year was 38.9 million shares while it was 44.8 million shares last year. The reduction of 5.9 million shares from last year reflects the beneficial impact of our stock repurchase activities.
Our financial position remained strong during the quarter. At the end of the period we had outstanding borrowings under our $250 million revolving credit facility of $71.4 million, with excess availability under this facility of $150 million. Despite the softness in the quarter our cash flows remain strong as net cash from operations totaled $26.4 million this year versus last year’s $17.5 million.
Capital expenditures for the first quarter net of landlord construction allowances, totaled $20.6 million this year compared to $15.1 million last year. The higher level of expenditure is primarily due to the additional number of stores opened in the first quarter this year versus last year and capital investments that we are making in our third distribution center in preparation for the July opening.
That completes my remarks on the first quarter financial results, at this point I would briefly like to review our outlooks for the second quarter, the last six months of the fiscal year and an updated outlook for the full fiscal year.
As James and Andrew stated, we do not expect the currently tough economic conditions to improve significantly in 2008. As a result we are projecting that our comparable stores sales will be down between 3% and 5% during the second quarter. We are forecasting comparable store sales to be down between 1% and 3% during the final six months of the year. Based on these sales forecasts, our comparable store sales will be down between 2.5% and 4% for the entire year. This compares to our original 2008 guidance for comparable store sales of flat to down 2%.
For the second quarter we expect to report revenues in the range of $360 million to $368 million. We are projecting EPS of $0.17 to $0.23 per share. Our outlook compares to sales of $359 million and EPS of $0.23 per share for last year’s second quarter. In projecting earnings per share for the quarter we used an estimated diluted share count of 38.9 million shares versus 43.4 million shares last year.
For the last half of the year we expect to report revenues in the range of $852 million to $870 million. We are projecting EPS of $0.81 to $0.95 per share. Our outlook compares to sales of $828 million and EPS of $0.82 per share for the six month period last year. In projecting earnings per share we used an estimated diluted share count of 39 million versus 41.4 million shares last year.
Looking at the full year we now expect to report revenues for 2008 of between $1.566 billion to $1.591 billion and are currently projecting EPS to be in the range of $1.04 to $1.24 per share. Our outlook compares to sales of $1.546 billion and earnings of $1.24 per share for fiscal 2007. In projecting 2008 earnings per share we used an estimated diluted share count of 39 million shares versus 42.7 million shares last year.
Lastly our capital expenditures net of landlord construction allowances are expected to be approximately $85 million this year versus our previous forecast of $95 million. This new forecast reflects our 2008 store openings of between 55 and 60 stores.
That completes my remarks and with that I would like to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of David Mann – Johnson Rice & Co.
David Mann – Johnson Rice & Co.
On previous calls you’ve talked a little bit about your credit card portfolio and the performance of your customer base, can you just give us an update on what you’re seeing there. Are you seeing a deterioration?
Edward Record
We’re not seeing anything material. Our current aging is within 30 basis points of last year and our 90 days plus is materially the same as last year. So from an approval rate standpoint we are seeing some fluctuations by region of the country but in general we’re flat to last year and our penetration is flat to last year, roughly flat to last year.
David Mann – Johnson Rice & Co.
On the unit growth, can you just clarify how many fewer stores have you cut back from your previous guidance and is this a more final number or is there the potential to pull it back further, how many leases are actually absolutely signed?
Andrew Hall
When we came out at the beginning of the year we were talking about 70 stores and that was really kind of a high end of the range as we were thinking at that point. We talked about 70 and not a range because we wanted to bake into our guidance an actual number and not a range in the sales number. So the 55 to 60 is a very solid range at this point. We’ll certainly land in between there. The fluctuation from the 70, when we’re always thinking about 70, the range was always about 60 to 70 and now we’re 55 to 60 and quite frankly the reason that came down a little bit was the current economic conditions.
Not a decision to pull back on the openings but when we look at these new markets and look at the sales that we’re going to have for the first 12 months of operations, when we compare them to like-sized markets, obviously with our comps down this year, at the low end, I guess we’re guiding about 2.5% down to 4% down, that pulls the sales down on those new stores. So on several of our leases we kicked them back to the landlord to renegotiate stronger terms for us. Some of those leases during that process will be delayed into 2009 as we work through with the landlords’ terms that meet our hurdle rates. We’re very consistent and very requiring on our new store approvals that we are not going to sacrifice our hurdle rate given the current economic climate. We’ve got solid hurdle rates out there that we expect the new stores to meet in year five and we’re not compromising on that.
David Mann – Johnson Rice & Co.
In terms of the SG&A comments you made, can you give us a little more detail on how much the increased advertising was in terms of the impact on SG&A and how are you approaching or how should we think about your advertising spend that’s built into your guidance?
Edward Record
I don’t know if I’m going to give you exact numbers in advertising but it was up significantly, rather significantly and a lot of that is just a year-over-year comparison. As we go forward and within the range of down 2.5% to down 4%, advertising is not going to lever. We don’t expect it to lever but it shouldn’t be as high as it was in the first quarter and a lot of that was what we anniversaried over last year. The rest of the SG&A expenses, a lot of it was just a shift between Q1 and Q2 that came out of our budgeting process and so we feel pretty good about expenses as we go forward and again advertising won’t deleverage as much as it did in Q1.
Andrew Hall
Our advertising philosophy in today’s economic times is we don’t feel that it’s appropriate to pullback on advertising. We think that would be not wise. So we are maintaining our advertising plans. It doesn’t mean that we’re not looking at different advertising that we have that is unproductive. We’ll pullback on the unproductive advertising and reinvest it into areas that are more productive. We’re not pulling away. We think it’s very important to stay in front of the consumer during this economic climate and I think we had it in our scripts and it’s certainly our philosophy going forward for the balance of the year.
Operator
Your next question comes from the line of Jeff Blaeser – Morgan Joseph & Co.
Jeff Blaeser – Morgan Joseph & Co.
Staying on unit growth could you give us an idea of what we should look for in 2009 and 2010, should we still stick with the 70 or drop that down a little bit?
Andrew Hall
Well I think we probably should give you a range as opposed to a point. I would tell you 55 to 70 in 2009. In 2010, 55 to 65 I think are fair ranges at this point in time.
Jeff Blaeser – Morgan Joseph & Co.
Is there any rhyme or reason for the timing of the openings, probably not as much in the fourth quarter because that’s your stronger period, but is it pretty much just when the leases come up and no way to really time that going forward?
Andrew Hall
It’s a combination of things, obviously from an execution standpoint we do need to spread, when we’re opening 55 to 60 stores this year, we do need to spread those openings out so that we can execute the openings well. We try to spread those frankly between the second and the third quarter. Some of them will fall into the first quarter. We try not to open a store post November and that’s why on some of these leases that we kicked back for renegotiation with the landlord, if we couldn’t get them renegotiated and online before November 1st, they’re going to shift into 2009.
Jeff Blaeser – Morgan Joseph & Co.
On merchandise mix, have you seen any consumer trends going away from the branded names to more private label or going down a price point on the branded names, or is it when they’re in there, their buying patterns haven’t remained consistent?
Andrew Hall
I would tell you that the branded names are holding up well in today’s economic climate and we feel good about having these big power brands in our stores because we think that they’re going to be able to weather this economic storm better than some weaker brands. We feel good about the Nike and Levis and Dockers of the world. As we mentioned the average unit retail out the door in the first quarter was actually up 1%. I think that reflected a lot of strength in our clearance selling in the first quarter. We’re not seeing a whole lot of shift from customers moving down the scale and buying lower priced items. I think they’re more discerning about what they’re buying; if we have the right and we have newness. They’re certainly buying newness, they’re buying on need and we mentioned it here, they’re certainly event buying so when Mother’s Day or an event out there we certainly see the customer in the store shopping for those event.
Operator
Your next question comes from the line of David Glick - Buckingham Research
David Glick - Buckingham Research
Ed, just a question on your outlook in terms of the components gross margin and SG&A, your inventories are in very good shape and we’re seeing some other department stores that have reported whose inventories are also in good shape, believe that they can maintain the gross margins for the balance of the year if not increase them. Obviously the SG&A is more difficult to manage and that’s more a function of sales in terms of whether you can lever or not. Can you give us some color on how you are planning gross margin and SG&A for the balance of the year as a percent of sales?
Edward Record
As we talked about it, consider it the high end of our range, obviously if we hit the low end we’ve got that occupancy piece of margin that de-levers pretty quickly but at the high end, for Q2 we expect gross margin rate to be flat to slightly positive [to] last year and for the fall season we expect it to be roughly flat. On the expense side, we expect expenses to basically leverage at about somewhere between a one and a two negative comp. So given our guidance they’ll slightly de-lever but were we to run it down two for the rest of the year we would come in pretty flat on a rate standpoint.
David Glick - Buckingham Research
Why do you think your gross margin rate can improve relative to the first quarter? What gives you the confidence?
Edward Record
I think there are a couple of things. One is again we’re talking at the high side of our range so we had 70 basis points deleverage on the fixed that impacted our margin. Our actual merchandise margin was positive 30 basis points in Q1 and frankly we had planned it to be more positive. As Andrew talked about the event shopping and people moving more towards our larger discount days that had a negative impact on our margin to a small degree. So at the higher side, we won’t see this deleveraging and in fact the deleveraging of our occupancy gets reduced as we go forward because we start anniversarying some stores in our base so we really think that we can continue to hold at least flat margins if not slight gains.
David Glick - Buckingham Research
On the sales flow May, June, July, do you see any major differences in the comp relative to your range for the quarter?
Edward Record
You know they’re all pretty similar. We do pick up an event in May. We had an event shift, a Senior Day shift out, Club 50 Day shift out of April into May so we expect it to be slightly better than June or July. But other then that, we expect them all to be about the same.
Andrew Hall
No major shifts this year; Texas tax free and the back-to-school and all that good stuff we had last year.
David Glick - Buckingham Research
Any color you can give us on May other then that event shift which obviously probably helped you. I know that the Memorial Day obviously is going to set the tone for the month but any color there?
Andrew Hall
I’ll give you some very vague color, we saw the feminine side of the business was a little stronger the first couple of weeks of May then what we saw in the first quarter which you would expect, you’ve got Mother’s Day in the first week. But overall I don’t think we’re really comfortable giving too much detail.
Operator
Your next question comes from the line of Robert Drbul - Lehman Brothers
Robert Drbul - Lehman Brothers
The question that I have is when you look at the rest of the year; your inventories are in pretty good shape as you head into this quarter, how are you planning inventories maybe on a comp basis in the back half of the year when you look at your comp plan in terms of sales?
Andrew Hall
We’re planning them down. Even with ignoring the sales trend for a second and if we were operating in a flat sales environment, we would be planning our inventories down. We are, our expectations on turnover at both the Stage division and the Peebles division is to accelerate turnover in the back half of the year. That’s reflective of a philosophy that we need to reduce our end-of-season carryover into the next season for fresh receipts in season. We do expect, just given that, we would expect comp inventories to be down given the fact that we’re operating second quarter minus three to minus five and the back half, a minus one to minus three. That further pushes down the inventory expectations.
Robert Drbul - Lehman Brothers
So far this month, have you seen any impact or any signs that the stimulus checks are impacting your consumer positively?
Andrew Hall
That’s very difficult to see and really you could only in hindsight look back and at a macro level try to make a hypothesis about that. It’s really hard to see any detail about the stimulus checks. We didn’t plan any of that benefit into our sales expectations. If there is a pop from those checks, we have plenty of inventory to be able to handle the customer demand. I still think it’s a little early with the checks starting to roll out. So no, our crystal ball isn’t that good.
Operator
At this time I’m showing no further questions.
James Scarborough
We’d like to say thanks to everyone for participating today on our conference call. We look forward to visiting with you again at the conclusion of our second quarter. Thanks and have a great day.
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