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CPI Corp. (NYSE:CPY)

F1Q08 Earnings Call

June 4, 2008 11:00 am ET

Executives

Jane Nelson - General Counsel and Corporate Secretary

Dale Heins - Chief Financial Officer and Senior Vice President of Finance

Renato Cataldo – Chief Executive Officer

Analysts

Nicole Jacoby - Liberation Investment

Will Hamilton - SMH Capital

Operator

At this time, I would like to welcome everyone to the CPI Corporation First Quarter 2008 Conference Call. (Operator Instructions). Ms. Nelson, you may begin your conference.

Jane Nelson

Good morning. My name is Jane Nelson. I am General Counsel for CPI. We would like to thank you for joining us for our first quarter fiscal 2008 conference call. By now, you should have received a copy of the press release that we issued last evening. If you need a copy, please go to our website at www.cpicopr.com to obtain a copy of the release.

Dale Heins, CPI’s Chief Financial Officer and Senior Vice President of Finance, will present management’s comments and field your questions today. He will be joined in fielding your questions by Renato Cataldo, our CEO.

 Before I turn the call over to Dale, I would like to remind you that certain statements made during this conference call, which are not historical, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that the expectations will be attained. Factors and risks that could cause actual results to differ materially from the expectations are detailed in last night’s press release and from time to time in our filings with the Securities and Exchange Commission.

We would also like to let you know that the information and statements made during this call are made as of the date of this call. Listeners to any replays should understand that the passage of time by itself will diminish the quality of these statements. Finally, the content of the call is the property of CPI. Any replay or transmission of the call may be done only with our consent.

It is now my pleasure to turn the call over to Dale Heins.

Dale Heins

Thank you, Jane, and good morning everyone! Like many other retailers, our first quarter results reflect a challenging economic environment as consumers struggle to meet increasing cost of fuel and food and defer discretionary spending. While we’re disappointed with our first quarter sales performance, we did maintain a strong EBITDA through continued productivity gains, effective cost controls, and steady progress in our PictureMe integration efforts. Even as we continue to reap the benefits of our cost-reduction activities, restoring sales growth remains our prime focus, and on this score, we are aggressively implementing a series of customer acquisition and retention initiatives to increase active customer accounts and visit frequency.

In the first quarter of 2008, we saw sales increase 79% to $103.3 million from the $57.8 million in the 2007 quarter due to the inclusion of the results of the PictureMe Portrait Studio business acquired in June 2007. On a brand-specific basis, our Sears Portrait Studio sales declined 8% to $53.1 million, as sittings declined 10.2% and only partially were offset by a 2.6% increase in the average sale per customer sitting. For our PictureMe Portrait Studio brand, we recorded $50.2 million in first quarter 2008 sales, which represent a decrease of approximately 12% in same store sales versus the comparable period the prior year, a period which precedes our date of acquisition.

As noted in the press release, this sales comparison was significantly impacted by the aggressive discounting and heavy advertising in connection with the relaunch of Wal-Mart Portrait Studios as the PictureMe Portrait Studio brand in the first quarter of 2007.

On a net income basis, we recorded a loss of $256,000 or $0.04 per share in the first quarter of 2008, compared to net earnings of $2.6 million, or $0.40 per share in the 2007 period. As discussed in the press release, the earnings comparison is significantly affected by non-cash charges and one-time costs associated with the acquisition.

We believe that adjusted EBITDA is the best measure of our operating performance, and we are pleased to report that first quarter adjusted EBITDA improved 23% to $9.5 million from $7.8 million in the 2007 quarter, despite approximately $1.2 million in extraordinary labor and travel costs associated with the digital conversion, the accrual of a contingent commission to Sears arising from the acquisition of the PictureMe brand, and the presence of a favorable vacation policy adjustment in last year’s period. We are particularly pleased with the strong positive contribution from the PictureMe Portrait Studio’s brand in a relatively low-volume quarter. This was achieved through substantial reductions in corporate support costs and productivity enhancements in both field and production areas. Our first quarter performance reflects excellent progress realizing planned synergies, and we believe we are on target for the guidance we provided on our last call. We are also well on our way to full digital conversion by the start of our busy season with over 900 studios already converted to digital, up from just over 600 studios eight weeks ago.

Consistent with past practices, our press release includes our current quarter-to-date sales performance for both brands. Sales at Sears Portrait Studios declined 7% in the first four weeks, while the PictureMe Portrait Studio brand sales decreased 5% during the same period, as lower volumes of sittings were only partially offset by improved pricing.

This concludes my prepared remarks, and we’ll now open up the lines for questions and comments.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nicole Jacoby from Liberation Investment.

Nicole Jacoby – Liberation Investment

Dale, I wanted to know if you could give a little bit more of an update on what’s going on with Sears, the expected timeframe, or any information you can give us about the nature of the discussions you’re having.

Dale Heins

We get this question all the time, and it’s our practice really not to comment on that. The only thing I would tell you is that obviously Sears and CPI have had a longstanding relationship. It’s been beneficial to both parties. Negotiations are ongoing, and that’s where we’re at.

Nicole Jacoby – Liberation Investment

So, other than before the expiration of the current contract, you don’t yet have an idea about timing as to when this negotiation might be concluded?

Dale Heins

No, we don’t.

Operator

Your next question comes from Will Hamilton from SMH Capital.

Will Hamilton SMH Capital

I was wondering, Dale, if you could give us a sense as to how the Sears EBITDA margins compared year over year, whether there was any material change in that, just given the operating environment and some of the declines you’re seeing in sales.

Dale Heins

That’s one we’re really not prepared to comment on. As we merge these two enterprises, it gets a little more challenging to separate the two businesses. There are a lot of activities now that are shared services between the two brands, and it’s really difficult to distinguish those margins.

Will Hamilton SMH Capital

Could you talk a little bit more detail about what kind of initiatives you’re implementing on the customer acquisition and marketing side to turn around the sits and the sales declines?

Dale Heins

Sure. One major thing going on is we’ve launched a new loyalty program that we hope to get some traction on. We’ll start getting probably some sits hopefully related to that later in the year. We’ve got a lot of tools that we’re putting out there to improve our grassroots outreach programs at the location levels. There’s a lot of training going on in terms of improving our outreach efforts, accountability programs to help those people that aren’t quite performing the way we need them to on that respect and help them do that a lot better.

Will Hamilton SMH Capital

With the Wal-Mart conversions, are you seeing a similar response in improvement that you saw with Sears in regards to just the customer feedback, the margin returns from that? Is that playing out similarly, even obviously in this environment that we are in?

Dale Heins

Yes. I would say we’re very pleased with the results. I think customer response, it’s the first time in that business that they’ve had a new product to look at in the long time, and the quality and diversity of product people are excited about. I can’t really quantify how that compares to Sears, but I think the response is very positive.

Will Hamilton SMH Capital

Previously, I think you had said that you plan to take out $26 million in overall costs due to this conversion.

Dale Heins

No, it wasn’t $26 million. I think what we said on the last call is there are two buckets that we group the cost reductions into. The first was what we referred to as corporate supports costs, and the $26 million came from at the time of the acquisition we had identified $26 million in what we referred to corporate support costs, and we expected to, on an annualized basis once everything is done and the dust settles and we’ve removed all the duplicate structures out there in terms of legacy systems, we’ve consolidated all the functions from their headquarters to here, out of that $26 million, we will have realized $15 million in annualized savings. That won’t all come in 2008. You will see the full impact of that in 2009 once everything is done, and then we also referred to another bucket of potential costs related to production costs related to the changes from film to digital, improvements in product mix, more efficient use of labor scheduling activities in terms of creating a more flexible workforce in the PictureMe Portrait Studios where we use more part-timers. Through a lot of those activities, there was potentially another bucket of savings even larger than that $15 million that we talked about.

Will Hamilton SMH Capital

That’s good update. Thanks. How far along that $15 million at this point are you? You gave some guidance as to being 40% done with the digital conversions and actual studios. As it relates to the corporate support side, how far along might you be at this point?

Dale Heins

I would tell you that we are closer to the end than we are to the beginning. I’m not sure I could exactly say where on that timeline we are, but we have consolidated a great deal of those functions. All of the financial-type activities pretty much have been transitioned to St. Louis, and the structures in Charlotte have been eliminated. A lot of the operation support functions have been moved to St. Louis. There’s still a lot of work to be done yet. There are still a lot of IT functions and some other support activities related to legacy systems that are still out there, but we’re getting pretty far along on that one.

Operator

At this time there are no further audio questions.

Dale Heins

Thanks everyone for joining us today, and we look forward to our next call at the end of the second quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: CPI Corp. F1Q08 (Qtr End 4/26/08) Earnings Call Transcript

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