New York & Company, Inc. F2Q08 (Qtr End 08/02/08) Earnings Call Transcript

New York & Company, Inc. (NWY)

Q2 2008 Earnings Call

August 15, 2008 9:00 am ET

Executives

Allison Malkin – IR

Richard Crystal – CEO

Ronald Ristau – President & CFO

Leslie Goldman – Chief Merchant

Analysts

Neely Tamminga – Piper Jaffray

Barbara Wyckoff – Buckingham Research

Mark Montagna – CL King & Associates

Eric Beder – Brean, Murray, Carret

Samantha Panella – Raymond James

Presentation

Operator

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

Allison Malkin

Good morning. Before we begin I would 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 10-K. Unless otherwise noted the results of operations discussed below are for the company's continuing operations only of 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 Crystal

Thank you Allison, good morning and thank you for joining us to discuss the company’s second quarter results. On the call with me today are our President and Chief Financial Officer, Ronald Ristau, and our Chief Merchant, Leslie Goldman.

Following my opening remarks, Ronald will review our financial highlights and then I will provide closing comments and turn the call over to the operator to conduct the question and answer portion of this call.

We are pleased to continue our positive momentum from the first quarter and report better than expected second quarter results. Our performance in this challenging environment clearly demonstrates that our strategies are working and driving intended results.

We continue to deliver great fashion and value which are resonating well with our customers. At the same time, we are tightly managing inventory and expenses while continuing to eliminate non-brand building promotions.

In total second quarter net sales were $295.7 million reflecting a 2.2% decline in comparable stores sales which followed a 4.9% positive comparable store sales increase last year. On a positive note we were able to improve merchandise margin by 260 basis points in the quarter through the elimination of a major non-brand building promotion and the continuation of disciplined inventory management.

As a result of increased margins and tight expense control, we were able to report a 75% increase in second quarter earnings per share to $0.14 from $0.08 per share last year.

Our emphasis on increasing the penetration of new fashion items within our assortments continues to generate positive results. We continue to believe in this environment we need to offer customers newness in order to build sales and margins.

We believe our offerings will entice customers to shop in our stores as we present them with merchandise they do not already have in their closets. Our wear-to-work and accessory businesses performed well in the quarter as both areas were able to achieve positive comparable store sales and higher margins.

Ecommerce continued to grow at a fast pace as sales more than doubled during the quarter reflecting an increase in both site traffic and conversion.

During the second quarter we opened 10 new stores and we remain on track to open 25 to 30 new stores for the year and remodel approximately 13 existing locations.

In July we launched our new marketing program in an effort to strengthen the emotional connection to our brand. We believe this new campaign will allow us to heighten brand awareness and loyalty as well as convey our message of New York style and great deals to our customers.

As we look ahead we believe we are well positioned to accomplish our goals. Consumers are responding to our offerings, we expect our marketing to assist in building traffic and sales and we continue to be diligent in the management of margins, inventory and expenses.

And now I would like to turn the call over to Ronald to review our financial performance and guidance in more detail.

Ronald Ristau

Thank you Richard, good morning everyone. As Richard indicated net sales for the second quarter of fiscal year 2008 were $295.7 million as compared to $285 million for the second quarter of fiscal year 2007.

Comparable store sales decreased 2.2% for the quarter. This decrease was offset by an increase in non-comparable store sales driven by net sales from new store openings not yet included in the comparable store sales base.

In the comparable store sales base for the quarter average dollar sale decreased 2% and transactions per average store were relatively flat with a decline of 0.2%. Gross profit for the second quarter of fiscal year 2008 was $88.4 million or 29.9% of net sales as compared to $78.7 million or 27.6% of net sales in last year’s second quarter.

The 230 basis point increase in gross profit as a percentage of net sales was driven by a 260 basis point improvement in merchandise margins reflecting the success of the company’s strategy to improve margin through disciplined inventory control and targeted well planned promotions.

The improvement was partially offset by a 30 basis point increase in buying and occupancy costs as a percentage of net sales. The increase in buying and occupancy costs is primarily due to the loss of leverage resulting from the comparable of negative comparable store sales combined with an increase in real estate costs related to the impact of new and remodeled stores.

Selling, general and administrative expenses for the second quarter increased by 5.5% to $73.9 million or 25% of net sales as compared to $70.1 million or 24.6% of net sales last year. This increase was largely due to the affect of increased store expenses necessary to support 39 additional stores in operation versus last year’s second quarter.

As a percentage of net sales, selling, general and administrative expenses increased by 40 basis points primarily due to the decrease in comparable store sales partially offset by the impact of our ongoing cost saving initiatives. On an average store basis, selling, general and administrative expenses declined by approximately 1.6% versus the prior year again reflecting the impact of our expense control efforts.

Net income from continuing operations for the second quarter was $8.6 million or $0.14 per diluted share as compared to net income from continuing operations of $5 million or $0.08 per diluted share for the second quarter of 2007. This result is due to the improvement in gross margins and controlled increases in SG&A offsetting the impact of the decline in comparable store sales.

During the quarter we opened 10 new stores and remodeled four stores, ending with 596 stores and 3.4 million selling square feet in operation.

Regarding the balance sheet, inventory at August 2^nd was $98.8 million which is down approximately 22.3% on an average store basis compared to the inventory of $118.9 million at August 4^th, 2007. The reduction reflects the company’s planned optimization of inventory flow and establishes inventory support at the proper level for expected sales in the third quarter.

We were also pleased to further strengthen our quarter end balance sheet with $86.7 million in cash and working capital of $94 million as compared to $27.5 million in cash and $71 million in working capital in the prior year.

Capital spending for the first six months of 2008 was $30.7 million as compared to $35.3 million last year primarily reflecting the impact of our store opening program, remodeling program, and IT development. I would point out that we are on track to successfully implement our new POS system chain-wide by the end of the third quarter.

We currently have over 300 stores in operation and are experiencing no disruption in business. During the first six months of fiscal 2008, we opened 20 new stores, remodeled six stores, and closed two stores, ending again with 596 stores and 3.4 million selling square feet in operation.

We are also introducing our earnings outlook for the third quarter of fiscal 2008 and updating our outlook for the full year. We expect to continue our successful strategy of improving margin through targeted well planned promotions and tight inventory control, during what we anticipate to be a challenging business environment throughout the third and fourth quarters.

Our outlook for the third quarter of fiscal year 2008 reflects comparable store sales in the low to mid negative single-digit range with margins improving versus the same period a year ago. This outlook in the third quarter includes the affect of a shift in the timing of a key promotional program from the last week of the third quarter into early November in order to optimize customer response.

Our current outlook for earnings per diluted share in the third quarter which includes this shift is in the range of $0.08 to $0.12. This compares to actual third quarter fiscal year 2007 earnings per diluted share of $0.09.

During the third quarter we plan to open approximately five stores, close two stores, and remodel seven stores ending the quarter with 599 stores and 3.4 million selling square feet in operation.

For the full year we expect comparable store sales to be in the low to mid negative single-digit range and expect earnings per diluted share to now be in the range of $0.52 to $0.60. This compares to our previous guidance range of $0.44 to $0.54 and compares to actual fiscal year 2007 earnings per diluted share of $0.44.

During fiscal year 2008 we plan to open 25 to 30 stores, close approximately 12 stores, and remodel 13 stores ending the year with 591 to 596 stores in operation and approximately 3.3 million selling square feet. New stores will represent approximately 105,000 selling square feet this year.

Capital expenditures are currently estimated in the range of $52 million to $54 million versus $75.5 million in fiscal year 2007 and we expect the depreciation expense for the year will be estimated at $44 million.

I would now like to turn the call back to Richard for closing remarks.

Richard Crystal

In conclusion, we are pleased with the direction of our business as we begin the third quarter. We expect the environment to remain challenging, however we believe our ability to continue to deliver great New York style and great value while also focusing on inventory and expense management positions us to meet expectations for the balance of the year.

And now we will begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Neely Tamminga – Piper Jaffray

Neely Tamminga – Piper Jaffray

Can you give us a sense on the POS rollout, what some of the additional functionalities might be and how that might help you at the store, maybe back at home office?

Ronald Ristau

Well the POS system is a significant leap forward in capability from our existing system. It number one, speeds transaction processing time. Number two it enables improved capture of customer information and enables us to build our customer marketing databases much more efficiently and it saves a lot of time and efficiency within store operations.

We’re getting a lot of benefits from the system and we are very, very pleased with the success of the rollout and can assure everyone that there’ll be absolutely no impact to our business as we continue to rollout through the third quarter.

Neely Tamminga – Piper Jaffray

In terms of the trends for fall, are you seeing anything with respect, obviously overall the environment has been tough, you have been doing a pretty good job in this environment, just wondering where the trends are from a fashion perspective, are you noticing the customer migrating towards categories that do carry higher average unit retails, jackets and sweaters, etc. are you noticing a layered look, kind of a deconstructed suiting, some sort of perspective on the fashion?

Leslie Goldman

In terms of categories that we believe in with respect to AUR we are experiencing an increase in AUR in this environment which is a bit counter intuitive at the same time we believe that our customers, is really buying clothes that she does not already own and as a result we’re really pushing the fashion and she’s responding to it.

We also are looking to capture some of the trade-down markets and again believe by improved fashion offerings that in this particularly difficult environment that we might be getting that and that might also be increasing our AUR.

Operator

Your next question comes from the line of Barbara Wyckoff – Buckingham Research

Barbara Wyckoff – Buckingham Research

Could you talk about the impact of the third party design goods on second quarter business, what was the penetration of receipts, the performance versus the private label goods and then where are you taking this going forward and then could you talk a little about accessories and what worked, what didn’t work?

Leslie Goldman

With regard to the third party designs, right now that’s actually a very small part of our total business and what you should keep in mind is that whatever we do from third party design actually goes through our design filter so that ultimately whatever is in our store looks like it is a part of our brand and is all one vision and one look. So it’s not really a major part of our business and we’ll look to continue to use that as we need just to ensure that we’re getting the best fashion.

With regard to accessories, we’re very pleased with our performance in accessories. We’ve seen an impact both in our jewelry and in our handbag business and believe that this is a result of the team really coming into play here and the product offering is improved and we’re quite pleased.

Barbara Wyckoff – Buckingham Research

How big could this business be? I think at one point I remember it was 15%, 16% to your total, could it get back to that again or are you looking for it to be even more then that?

Leslie Goldman

Actually we’re taking a little bit of a different approach to this, first of all we are starting to get back to our historical levels of penetration, however rather than looking to the future from the standpoint of penetration we’re really looking to say how can we maximize volume upside as well as profit and that’s really our approach.

Operator

Your next question comes from the line of Mark Montagna – CL King & Associates

Mark Montagna – CL King & Associates

On the accessories, can you tell us whether accessories comped positive or jewelry comped positive or maybe break it down a little for us?

Leslie Goldman

In accessories we actually did comp positive in the second quarter; both jewelry and accessories. Again very pleased with that performance.

Mark Montagna – CL King & Associates

How about the ecommerce, it’s up a lot. Can you tell us what the dollar volume was on that?

Ronald Ristau

It was a little better than $8 million in the quarter but it was terrific business for us. The site, we upgraded our site if you recall in March of this year and the customer response has been terrific. We’re continuing to rollout additional features and functionality in September and again at the early part of 2009 so the site keeps moving forward, the business keeps moving forward, our offerings on the site keep moving forward and we’re very pleased with that business.

Mark Montagna – CL King & Associates

Who is doing the fulfillment, is that being done out of your distribution center or do you have a third party?

Ronald Ristau

Fulfillment is being done by GSI [Commish].

Mark Montagna – CL King & Associates

Earlier in the year you had stated that you could get a comp leverage point in the low, actually down low single-digits, does that still hold or has it maybe moved up closer to flat to get leverage?

Ronald Ristau

I think you need closer to flat. You see what happened this year, we’re down 2.2 and our SG&A de-levered four tenths of a basis point. You need a little bit more comp and you would start to get flat.

Mark Montagna – CL King & Associates

Regarding new stores, can you give some color in terms of what percentage of the new stores are being opened off the mall, what percentage of the stores that are being closed that are in the mall?

Ronald Ristau

I’ll answer that a little more generically then you’re asking, we’re focusing on where we think the opportunities are. We continue to strengthen our mall business with remodeling program. Our new stores are going to be; right now they’re primarily targeted off mall because that’s where there were more opportunities for us. But we’ll see how that develops in the future. The mall business is still important to us and the off mall, they’re all important.

One of the things we would make a point on in new stores is we’re very pleased with our new store performance. It continues to do very well this year. Our new store performance has been a bright spot for us in 2008 so we’re continued to be pleased with it.

Mark Montagna – CL King & Associates

When you’re talking with the landlords about the lease deals, in this environment are you seeing rates go down or anything like that?

Ronald Ristau

The rates seem to be not adjusting as significantly as one might think. So we continue to be hopeful that there might be some adjustment in the future.

Operator

Your next question comes from the line of Eric Beder – Brean, Murray, Carret

Eric Beder – Brean, Murray, Carret

Could you talk about what we should think about in terms of inventories going forward, you had the 22% decline this quarter, how are the inventories going to flow for the rest of the year?

Ronald Ristau

Our inventory position, we’re monitoring the inventory very tightly as we go into the third and fourth quarter. We have, when we end the third quarter, we would expect it to be down in double-digit range. It won’t be down as much as it is right now which primarily reflects timing. Our inventory across the quarter won’t be down 22, it’ll be down closer to, in the range of 14%, 15%.

As we end the third quarter we would expect it to be down somewhere in the 12% to 14% range but we believe that, what we’re really doing is adjusting for last year where we thought some of our inventory flows had room to be further optimized and we’ve done that this year so we think that all the inventory planning is down very carefully and very well this year and supports our business at the levels that we need and also once the stability of the business does get a little better, we can drive to low single-digit comps with that inventory. So we think we’re in very good shape.

Eric Beder – Brean, Murray, Carret

You’ve been anniversarying some very heavy sales, what kind of sales are you looking at in terms of Q3 and Q4 that you don’t plan on anniversarying this year?

Richard Crystal

We’re looking, anything that we felt was not in the best interest of the brand, especially the across the board store-wide promotion, so we’re looking at those as being the ones we would like to eliminate and as we mentioned earlier, we are moving one event out of the third quarter into the fourth quarter in order to maximize our profitability for the back half of the year.

So we continue to be, we are a promotional brand, we do continue to promote, it’s not like we’re giving that up, we’re just being more strategic about it from a brand building point of view as well as trying to optimize profits.

Eric Beder – Brean, Murray, Carret

In terms of the inventories, obviously, what has been the affects on the store operations, have you been able to run the stores, and have these declines in inventories allowed you to kind of keep the stores better?

Ronald Ristau

The declines in inventory have had very positive impact on store operations. We believe that our fill to the floor is more efficient. We believe that our operation of the stores is improved so by managing the inventory better we see good results in store operations which are one of the reasons we were able to control our expenses in the second quarter because the two kind of go hand in hand. But we feel we’re doing everything we need to do to support the customer but spending less time moving inventory around in stores which is really counter productive. That’s all working quite well.

Richard Crystal

I think also, we’re getting a better customer experience because the people in the stores can spend their time and efforts in the front part of our store making the store look better, then spending their time trying to get through the backrooms with inventory.

Eric Beder – Brean, Murray, Carret

Could you talk about what traffic patterns you saw in Q2 and what are you kind of expecting and what’s baked into your guidance?

Ronald Ristau

Well traffic patterns were challenged in Q2 but again as I pointed out, transactions in our stores were essentially flat. So on lower traffic we saw our transactions being maintained. As we go forward into third quarter we do believe that traffic will be down. We do think transactions will be off slightly but we do believe we’re going to; our plan is to make that up with improvements in AUR and more strategic discounting and inventory management. So we don’t expect traffic to come flowing back in the third and fourth quarter, its going to remain a challenge but we believe our plan will work well.

Operator

Your next question comes from the line of Samantha Panella – Raymond James

Samantha Panella – Raymond James

When you’re looking out to 2009, what are you thinking in terms of store growth and then also any pressure you’re feeling in terms of sourcing costs?

Ronald Ristau

It’s a little early for us to go into what our store opening plan will be for 2009; we’re waiting to see how the market develops and make those judgments more towards the end of the year. But relative to sourcing, there is some sourcing pressure that we are witnessing. We’ve been able to manage it so far but it is an issue. It’s nice to see the dollar strengthening again. Its nice to see oil prices coming back down because those were the two major drivers of overseas inflation so if those things start to stabilize we’re hoping that the pressures as rapidly as they develop will start to minimize and decline somewhat.

In the meantime we’re taking an aggressive look at our sourcing base and adjusted as best as we can to the situation. But if the oil prices go back up it’ll be a problem worldwide but hopefully there’s some sanity that’s returned to market and it will ease inflationary pressures long-term.

Operator

Your final question is a follow-up from the line of Mark Montagna – CL King & Associates

Mark Montagna – CL King & Associates

On the inventory, you mentioned Q3 your target for the decline in Q3 inventory, how about year end Q4 inventory?

Ronald Ristau

By the time you get to the end of Q4, I don’t expect that, it’ll be relatively flat to a year ago because our inventory position as we came out of 2007 was really pretty good. We were not unhappy with where we ended 2007. You’ll be seeing some slight adjustments, nothing material. It could be down slightly I would say in the single-digit range, if it is down at all, up to flat.

Our main problem on flow what we perceived and looked at the business was across the second and third quarter flows and we’ve adjusted for that. So you see the flow and you see the difference per average store reflected in our second and third quarter as large down numbers but by the time we get to year end, you’ll see a little more stability in the inventory position.

Richard Crystal

But the inventory that we have will be much more forward. We have a lot less inventory coming out of the fourth quarter that we feel won’t flow into spring so if the inventory is equal or down a few points; it’ll be a much fresher inventory mix.

Ronald Ristau

The freshness factor of the inventory will be usually different so inventories will be in good shape.

Mark Montagna – CL King & Associates

Didn’t you towards the end of and throughout January you had to be very promotional with your inventory last year as opposed to this year, probably won’t be the same issue?

Ronald Ristau

That’s the theory that we’re applying.

Operator

There appears to be no further questions at this time. I’d like to turn the floor back over to management for any closing remarks.

Richard Crystal

Thank you again for joining us and we look forward to speaking to you when we report third quarter results in November. Thank you again.

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