New York & Company, Inc. F1Q08 (Quarter End 05/03/2008) Earnings Call Transcript

New York & Company, Inc. (NWY)

F1Q08 Earnings Call

May 22, 2008 8:00 am ET

Executives

Allison Malkin – Integrated Corporate Relations

Richard P. Crystal – Chairman of the Board & Chief Executive Officer

Ronald W. Ristau – President, Chief Financial Officer & Director

Leslie Goldman – Chief Merchant

Analysts

Neely Tamminga – Piper Jaffray

Mark Montagna – C. L. King & Associates, Inc.

Eric Beder – Brean Murray, Carret & Co.

Jeffrey Halper – Retail Apparel Partners

Christopher Kim – JP Morgan

Analyst for Lyn Walther – Wachovia Capital Markets

Connie Wong – Cowen & Company

Presentation

Operator

Welcome to the New York & Company first quarter 2008 earnings conference call. (Operator Instructions) It is now my pleasure to turn the floor over to Allison Malkin of ICR.

Allison Malkin

Before we begin I'd like to remind you that some of the comments made on today's call either as part of our prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provision in the Private Securities and Litigation Reform Act of 1995.

Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the company’s documents filed with the SEC including the company's fiscal year 2007 Form 10K. Unless otherwise noted the results of operations discussed below are for the company's continuing operations only the New York & Company brand.

With that, I'd like to turn the call over to New York & Company's Chairman & CEO, Richard Crystal.

Richard P. Crystal

Thank you for joining us to discuss the Company's first quarter results. On the call with me today are our President & Chief Financial Officer, Ron Ristau, and our Chief Merchant, Leslie Goldman. Following my opening remarks, Ron will review our financial highlights and then I will provide closing comments and then turn the call over to the operator to conduct the question and answer portion of this call.

We are pleased to begin the year positively reporting better than expected first quarter results reflecting the success of our key strategies to one, deliver great fashion and value to our customers, maintain tight control of our inventory and expenses, eliminate non-brand building promotions, and direct our marketing towards building awareness and loyalty for our New York & Company brand. In total first quarter net sales were $270 million reflecting a 6.6% decline in comparable store sales due primarily to reduced traffic and our efforts to eliminate non-brand building promotions. That said, we were successful in driving a 7% increase in our average dollar sale and as a result we significantly improved our merchandise margin which is up by 430 basis points in the quarter compared to the prior year. As a result earnings per share increased 37.5% to $0.11 from $0.08 per share last year for continuing operations.

With regard to fashion our emphasis on increasing the penetration of new fashion items within our assortments is generating good results. We are experiencing solid trends across all categories while continuing to capitalize on our strongest category of wear-to-work. Our accessory business continues to improve benefiting from upgraded fashion, quality and better pricing. In particular our jewelry and handbags led the way towards achieving our goal of increasing sales and margin in this category. Our updated store visuals are also assisting us to increase units per transaction as we make it easier for our customers to coordinate outfits. eCommerce continued to exceed our expectations. During the quarter we achieved 170% rise in eCommerce sales which sales are more than $7 million for the quarter reflecting an increase in site traffic and conversion as we successfully implemented an upgrade of our site.

Our store expansion program continued with the net opening of eight stores. For the full year we continue to expect to open 25 to 30 new stores and remodel approximately 12. We believe this pace for openings, which is lower than our fiscal 2007 schedule, is prudent as we focus on preserving cash flow given the current environment for consumer spending. To that end, during the first quarter our operating cash flow improved by $27 million compared to the same period a year ago. Finally, we ended the quarter in a favorable inventory position with inventory at cost down 10.5% on an average store basis. As we look ahead, we recognize the consumer spending environment remains difficult yet we believe the continuation of our stated strategies will enable us to continue to achieve our goals.

And now I would like to turn the call over to Ron to review our first quarter financials in more detail.

Ronald W. Ristau

First I'd like to mention the results of operations we'll be discussing today are for our continuing operations in New York & Company brand. As Richard indicated net sales for the first quarter of fiscal year 2008 were $270.1 million as compared to $274.2 million for the first quarter of fiscal year 2007. Comparable store sales decreased 6.6% for the quarter. These decreases were partially offset by an increase in non-comparable store sales driven by net sales by new store openings not yet included in the comparable stores sales base. In the comparable store sales base for the quarter average dollar sales increased 7.1% and transactions per average store declined 12.8%.

Gross profit for the first quarter of the year was $83.9 million or 31.1% of net sales as compared to $79.4 million or 29% of net sales in last year's first quarter. The 210 basis point increase in gross profit as a percentage of net sales was driven by a 430 basis point improvement in merchandise margin resulting from our strategy to improve margins for disciplined inventory control and targeted well-planned promotions partially offset by a 220 basis point increase in buying and occupancy costs as a percentage of net sales largely due to the impact of negative comparable store sales combined with increases in real estate costs related to the impact of new and remodeled stores.

Selling, general and administrative expenses for the quarter increased by 2.9% to $72.6 million or 26.9% of net sales as compared to $70.5 million or 25.7% of net sales during the first quarter last year. The slight increase was largely due to the effect of increased store expenses necessary to support 41 additional stores in operation versus last year's first quarter. As a percentage of net sales selling, general & administrative expenses increased by 120 basis points primarily due to the decreasing comparable store sales partially offset by the impact of our ongoing cost saving initiatives.

On an average store basis selling, general & administrative expenses declined by approximately 4.3% versus the prior year, again reflecting the success of our expense control efforts. Net income from continuing operations in the first quarter was $6.7 million or $0.11 per diluted share as compared to net income from continuing operations of $5.2 million or $0.08 per diluted share for the first quarter of 2007. This improvement versus last year is due to the improvement in gross margin offsetting the impact of the expected decrease in comparable store sales. During the quarter we opened 10 new stores, remodeled two stores, and closed two stores, ending with 586 stores and 3.3 million selling square feet in operation.

Regarding the balance sheet, inventory was $119.7 million which is down by approximately 10.5% on an average store basis compared to inventory of $124.4 million at the end of last first quarter. The company balance sheet included $61 million in cash and working capital of $89 million as of May 3, 2008. Capital spending for the first quarter was $14.7 million as compared to $11.5 million last year primarily reflecting the impact of our store opening program, remodeling programs, and IT systems development.

Regarding outlook, we are introducing our earnings outlook for the second quarter and updating our outlook for the full year of 2008. We expect to continue our successful strategy of improving margins for discipline promotion and inventory control during what we anticipate to be a challenging business environment. Our outlook for second quarter of fiscal 2008 reflects comparable store sales in the negative mid single digit range and margins improving versus a year ago. Our current outlook is for earnings per diluted share to range from $0.05 to $0.10 which compares to actual second quarter earnings in 2007 per diluted share of $0.08. During the second quarter of fiscal 2008 we plan to open 13 stores and ending the quarter with approximately 599 stores.

For the full year 2008 we are planning for comparable store sales to be in the low to mid single digit range with earnings per diluted share now to range from $0.44 to $0.54. This compares to our previous guidance range of $0.42 to $0.52 and compares to actual fiscal year 2007 earnings per diluted share of $0.44. During the year we plan to open 25 to 30 stores, close approximately 12 stores, and remodel 12 stores, ending the year with 591 to 596 stores and again 3.3 million selling square feet in operation. Capital expenditures are estimated in the range of $48 to $52 million versus $75 million in 2007 and our depreciation expense for the year is estimated at $44 million.

We also announced today that beginning at the second quarter of fiscal 2008 we will publically report comparable store sales results at the same time we report earnings. Quarterly comparable store sales and earnings for the second quarter are expected to be released on or about August 21, 2008.

And now I'd like to turn the call back to Richard for closing remarks.

Richard P. Crystal

In conclusion, we are pleased with the direction of our business as we begin the second quarter. With prudent strategies and an intensified focus on maximizing earnings, we are optimistic regarding our ability to enhance shareholder value despite the difficult operating environment.

And now I would like to turn the call over to the Operator to begin the question and answer portion of this call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Neely Tamminga – Piper Jaffray.

Neely Tamminga – Piper Jaffray

I just wanted to get a sense of how much in the guidance for Q2 are you expecting a recovery on your easy compare really in July? If I think if I remember correctly the business really started to fall apart particularly in accessories in July last year? And I'm just wondering if the flow of the quarters are you expecting much to come back in July or is that for lack of a better term, just like a bonus relative to expectations?

Ronald W. Ristau

I would say that we do think there is some opportunity in July because of what should be number 1, better inventory and pricing and also some continued recovery in the accessory businesses via a year ago. We also think that the majority of our comp last year was actually driven by a delivery that we put in in late May into June, and we are replicating that delivery pattern this year, so we believe that we will be in reasonably good shape relative to the comp comparisons even though they are slightly higher in the second quarter. We feel confident about our guidance and our early trends are actually running slightly above our current plans so, so far, so good.

Neely Tamminga – Piper Jaffray

And then in terms of cost pressures, obviously everybody's pretty focused on what's been going on out there and China, just wondering, are you seeing anything whether it's with respect to logistics, having to bring in inventory deliveries early, or because of China, Olympics, can you just help us to understand from your perspective what you're seeing out there?

Ronald W. Ristau

Well, a couple of things, number one, the Olympics will not be disruptive, people have planned for that for many years so that's really not going to disrupt the supply chains in any way. We are seeing some cost pressures obviously out of the Asian economies due to increased oil prices, that's a fact of life. We are continuing to manage that by continuing to stay diversified and seek out sources of supplies that are most advantageous to us. We do have a diversified sourcing base so we continue to leverage that and also leverage our largest factories by making them more important and then continuing to consolidate our volumes.

So I believe that the cost pressures that we face are very manageable and the way we are offsetting it is by better controlling our inventory and controlling our pricing as well as improving the quality of the fashion offering we've been able, as demonstrated in the first quarter, to realize higher net prices and have a favorable mix of product that helps us to offset this. So while it is a challenge we certainly believe that it is a manageable challenge and I have confidence in our ability to improve our margins across the year.

Operator

Your next question is from Mark Montagna – C. L. King & Associates, Inc.

Mark Montagna – C. L. King & Associates, Inc.

First quarter you did a good job of getting rid of some 40% and 50% off promos. Are there opportunities to do the same thing in the second quarter?

Richard P. Crystal

We didn't have across-the-board those kind of promotions but there are opportunities to realize higher pricing because of the inventory we're in now. So that would be our strategy and we do believe there are margin opportunities as well in the second quarter.

Ronald W. Ristau

In other words Mark, actually what happened last year we started to build our inventories we think a little perhaps too high starting in the second quarter, so by not doing that we, while it's not a specific promotion, we can avoid some of the pricing pressure.

Mark Montagna – C. L. King & Associates, Inc.

Then, just regarding Accessories, it sounds like that's on the right track. Can you quantify for us, give us some metrics like comping positive or much less negative or jus something to help us quantify how much better accessories is doing?

Leslie Goldman

Well, we're definitely pleased with our Accessories performance. We are up against some weak results in second quarter last year so we are expecting to be positive in the second quarter. We've had great response to the products that we've offered, the updated product, as well as our new pricing strategy. So between these two things we really believe that we're going to see continued improvement and it's really made to date so far that we've seen them come through.

Mark Montagna – C. L. King & Associates, Inc.

If you expect positive this year, how was it last year?

Leslie Goldman

Well, we had a weak second quarter last year. It was really trouble.

Mark Montagna – C. L. King & Associates, Inc.

Very negative?

Leslie Goldman

Very negative.

Mark Montagna – C. L. King & Associates, Inc.

Are there any other pockets of expense opportunity that you may have or have you pretty much squeezed all the juice out of the expenses?

Ronald W. Ristau

Well, we continue to monitor all of our expenses on a daily basis. I would not say that it's never over relative to expense control. There's always new challenges and new ways for us to be creative so we remain focused on it. We have teams of people working on it, so our results have been that we continue to add to our savings as opposed to see some plateau as our whole organization realizes the importance of it and it's a dynamic process. Who thought oil prices would continue to build, they're continuing to go to $150, who knows? $175? I can't predict that but we have to be creative in finding offsets to these challenges which is our responsibility as managers of the business.

Operator

Your next question is from Eric Beder – Brean Murray, Carret & Co.

Eric Beder – Brean Murray, Carret & Co.

Could you talk a little bit about the loyalty program? How is that doing and where are we in terms of that?

Ronald W. Ristau

Well, the loyalty program continues to be a big success for us. We now have I believe crossed two million names signed up of new people and the customers are responding very favorably. We're starting to get in statistics on whether those people are spending more or less. Of course they are spending more money than non-rewards customers and people who have their rewards club on a credit card are certainly our highest spend. It's a fantastic program. We're continuing to develop it this year and work on continuing to develop our relationship with those customers, add special offers, make them feel special, make them come into the store, in new and unique ways so we're very excited about the program. It's functioning very well and a big success for the company.

Eric Beder – Brean Murray, Carret & Co.

If you look at your Q1 that was driven by traffic declines in double digits and you had the average spend was up in the mid singles, is that how we should look at it for the rest of the year in terms of thinking about how the comps come about in terms of how you look at it?

Ronald W. Ristau

Well, I don't know if it's specific numbers. Will it be down? Hopefully transactions won't be down as much because the biggest give up in transactions was most likely in the first quarter because it was the biggest individual promotional timeframe so we did not annualize as Richard indicated. But I do think in general we're expecting the level of transactions to be down slightly and we are planning for higher ADS because of again taking the inventory and liquidation pressures off the business as we move forward in second, third and fourth quarter combined with much better fashion offerings across the line and particularly in accessories.

Eric Beder – Brean Murray, Carret & Co.

Do you think you are seeing anything from these rebate checks or any of the pieces helping traffic?

Richard P. Crystal

It's hard to estimate. Rebate checks just started going out. We're not counting on any of that in our projections. If we happen to get it, it will be a plus for us. We think we can manage the business expectation without counting on any of that Eric.

Ronald W. Ristau

We're hopeful it happens but it's not in our projections.

Eric Beder – Brean Murray, Carret & Co.

This is my final question here, you historically have operating margins between 7% and 9% and I think about when you had that your inventories were probably not as clean as now and historically. Do you think that possible to get back to those levels down the road, obviously not in 08 or whenever, but do you think that is in effect a long term that is achievable?

Richard P. Crystal

It's very achievable. We would need to start getting back to positive comps which we think is in the cards. So, absolutely, at a point in time we believe we'll get back to those high operating margins.

Eric Beder – Brean Murray, Carret & Co.

What comp do you need to get leverage?

Ronald W. Ristau

Well, we set the Company up that about a flat comp will get us actually leverage this year and so we start to derive anything in positive territory would be just additional rapid beneficial leverage into the Company.

Operator

Your next question is from Jeffrey Halper – Retail Apparel Partners.

Jeffrey Halper – Retail Apparel Partners

Based on your diversification of your product mix, which is interesting, and based on the diversity of your customers which seem to have a nice age range between from almost teenagers through 60-year-olds, etc., you seem to have some mix of all of them, and based also on the diversity of their ethnic backgrounds, if you couple that with the difficulty in the women's retail sector today for a lot of the mall stores whether it be the Ann Taylors, the Coldwaters, the Chicos, the Talbots, they seem to be losing traction with their customers where you have seemed to be gaining some traction. Do you have any sense at all that the Company's business may be evolving into some sweet spot?

Richard P. Crystal

I think in general some of the people you mentioned do target a little bit older customer from what we can see. We have always stated our target as the 25 to 45. They may range a little older. It would be nice to see that. We think that our success is based on the strategies that we've given which include continuing to drive fashion, continuing to expand our position in the wear-to-work category which seems very favorable in driving higher margins both initially and net margin, our continued emphasis and expansion of our accessory business, so while also managing our inventory margins, etc. So I would say it's how we're running our business, the customers seem to be responding. We'll see what happens but it is still a difficult environment and we still see traffic patterns that are lower than the prior year but we're able to manage through that Jeffrey. I don't really know. It would be nice to say we had a sweet spot. We do feel that we have a niche we do a lot of business out there and we'll continue to press the strategies that are working for us.

Operator

Your next question is from Christopher Kim – JP Morgan.

Christopher Kim – JP Morgan

Richard, could you comment on the competitive marketplace, what you're seeing out there? And it seems like you have been benefiting from the inventory rationalization across retail where it gives the customer a much more compelling point of view in terms of the price point to value in a proposition?

Richard P. Crystal

Well, I think our value proposition is what it is. It always has been to provide fashion with value. I would say that maybe we didn't execute it as well as a year ago in providing that fashion and value but having better fashion makes the value more compelling. We're continuing to push that envelope with the percentage of fashion that we put in our assortments versus basic. We're not as key item driven as we have been in the past. By controlling inventory maybe our customer's getting a little better trained. We don't have the excess inventory to liquidate so if they don't buy it at a higher price they're not going to see it in the store, so that seems to be working for us. We're building better outfits by accessorizing better, having accessories that complement our apparel assortments, getting the ADS to be higher, and it all seems to be working from a competitive viewpoint. What my competition does I can't control, I can only control what I do.

Christopher Kim – JP Morgan

And Ron, could you break out the average transaction size, what the components were there? Sorry if I missed that earlier. AUR versus UPT?

Ronald W. Ristau

I didn't break out AUR/UPT. What I said was that the average dollar sale was up 7.1% and the average transactions per store were down around 12.8%. That's the expense at which we'd be willing to break it.

Richard P. Crystal

But that would change again as we stated in the second quarter because we don't have those big over arching promotions so we don't expect transactions to be down at that level.

Ronald W. Ristau

They're probably down but down on a more reasonable level we would hope and we will continue.

Chris Kim - JPMorgan

So, we’ll get a normalization of AUR?

Ronald W. Ristau

We would hope we continue to press on average dollar sale.

Christopher Kim – JP Morgan

Finally, just on share purchases, it sounds like there's some underlying stability in the business now and looking at the valuation, etc. and it appears to be some momentum, would you again consider buying back some stock? It sounds like, with the banks, you are allowed to buy back some stock here?

Ronald W. Ristau

Yes, we continue to look at that. Right now we believe in this economy that preserving cash is a good strategy. Our positions strengthened considerably in first quarter. We expect them to strengthen considerably throughout the year. And as we first preserve our cash we can then consider options for deploying it, but right now we want to make sure that we're well financed to withstand anything that might further happen in the economy. But in the future we can of course look at many options. Also if we have the cash, there are many things to do with it.

Operator

Your next question is from Analyst for Lyn Walther – Wachovia Capital Markets.

Analyst for Lyn Walther – Wachovia Capital Markets

Could you give us some color on how your beauty sales are trending as well as new product introductions? I've noticed you're testing makeup in some of the stores?

Leslie Goldman

Oh, yes. Certainly. Well, this has been a really interesting learning for us in the beauty business. Certainly what we've found so far is that the items that are most like accessories in nature are really the items that are doing best so for example, the lip glosses, the color, mists, things of that nature. So we're really looking, now that we have some initial sales results back, we are starting to get a better idea on consumer preference to really formulate our strategies on where our distortions will be in the future and we're in this for the long term.

Operator

Your next question is from Connie Wong – Cowen & Company.

Connie Wong – Cowen & Company

Going back to an earlier question I think from Mark regarding your new marketing and branding initiatives rolling out in Q2, can we expect the full roll out in Q3? And if so, do you expect to see further reduction in the markdown cadence?

Richard P. Crystal

Well, we stated that we will be rolling out our new branding initiatives in quarter three. We haven't really done anything on that in Q2 so it will start in Q3. We believe we will continue to drive more fashion and we're still a promotion brand, we will have that, but the emphasis will be on product and not price as we move forward. Price will always be there; promotion will be part of our DNA and our brand, we're not going to lose that.

Ronald W. Ristau

Just as a follow up, our brand building is going to be a rather [inaudible] repositioning of our brand but it's something you should think of as a long term brand building. It's not like it's going to be a big campaign in the third quarter. It's a long term brand building of which we think we'll be creating value for the Company over an extended period of time, you should think about it like that.

Operator

There are no further questions.

Richard P. Crystal

Thanks again for joining us. We look forward to speaking to you when we report second quarter results in August.

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