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Joe's Jeans (NASDAQ:JOEZ)

Q3 2012 Earnings Call

October 15, 2012 4:30 pm ET

Executives

Lori Nembirkow

Marc B. Crossman - Chief Executive Officer, President and Executive Director

Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Analysts

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

James Fronda - Sidoti & Company, LLC

Steven Chang

Operator

Hello, and welcome to the Joe's Jeans Fiscal 2012 Third Quarter Earnings Call. My name is Maisha, and I will be your operator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for playback purposes. I would now like to turn the presentation over to your host for today's conference, Lori Nembirkow, General Counsel for the company. Please proceed.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO; and Hamish Sandhu, our CFO.

Before we start, let me review the company's Safe Harbor language. Today's call may contain forward-looking statements, which are statements of the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risks and uncertainties that could cause our actual results to be materially different. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made.

I'll also refer you to our reports that are filed with the SEC, which includes our quarterly report on Form 10-Q filed today. This report includes information that could also cause our actual results to be materially different from those contained in any projections, which may be made during this conference call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today. Finally, a copy of our earnings release and a recording of this call will be available on our website, www.joesjeans.com, and a telephone replay will be available for one week from today.

Now, I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the third quarter results and then I will turn the call over to Hamish for a discussion of our financials. Finally, we will end with a Q&A session.

In the third quarter, we increased net sales 25% to $30.3 million. This marks another record quarter since we exited the private label business in 2006. Like prior quarters, our growth trajectory continues to come from retail, men's, international and the addition of sales from else[ph] . Both our wholesale and retail segments continue to post healthy increases, with wholesale growing 26%, and retail growing 24%. Due to these positive results, our operating income increased to $2.7 million for the quarter from an operating loss of $2.6 million in the prior-year period.

Our retail division sales growth of 24% was driven by a healthy 7% same store sales increase and the addition of 4 more stores. Continuing the positive momentum from the second quarter, both our full price stores and our outlets saw positive same-store sales gains this quarter. Notably, our full price same-store sales were up 17%. With 7 weeks left in our fiscal year, we continue to see positive same store sales growth.

Our retail gross margin increased by 4 percentage points to 71%. The increase is largely attributable to the outlets, but also slightly aided by the addition of 3 full price stores. Our strong same store sales gains, coupled with the increase in gross margins, led to a store level EBITDA margin of 17% compared to negative 15% in the prior-year period for stores open the entire quarter.

Just last week we opened our 26th store in South Coast Plaza. We anticipate opening another 3 full priced stores and 1 outlet store by the end of the year, bringing our total to 30 stores. We continue to aggressively pursue our retail strategy. We expect to have several more stores slated to open in the first half of 2013.

Our wholesale sales increased 26% to $24.8 million versus $19.7 million in the year-ago quarter. The largest sales gains came from our men's channel, which was up 45%, and has been on a strong growth trajectory for the past few years. Our women's wholesale channel increased by 21% due to the addition of our else brand. The else brand represented 11% of our U.S. sales and now provided us with meaningful diversification.

Joe's men's sales continued to increase due to the strength of our denim and the addition of our fall-color program. The men's color trend, which began a season behind women's, continues to grow based upon strong retail sales. Colors has given us additional revenues beyond just denim, with most of our department and specialty stores.

Lastly, our department store door count increased, as did our average dollars per door. Our Joe's women's wholesale channel was flat on a comparative basis. We see the continuation of color and print, but on a smaller scale. This season, we tested a Vintage Reserve program at a cross-section of the best department specialty store retailers. The tests were extremely successful. We will build upon our Vintage Reserve program in the back half of the fourth quarter and early spring. Further, we will support this program with a marketing and advertising campaign.

Our else brand has proven to be a great addition to top line sales. During the quarter, else contributed approximately $3 million to our sales. We rolled to 314 doors for fall 2012, up significantly from the initial 149 door launches that started this year. Else generated strong sales for the replenishment denim this season. Accordingly, we are working to build a larger penetration of core basic denim. Looking at our current backlog, we are very encouraged about the future of the brand.

Our international sales channel increased by 52% this quarter compared to the prior-year period. Our growth came mostly from our Canadian and Japanese distributors, as our women's denim continued to perform well in these markets. Having successfully restructured our European operations, our international sales channel is improving both at top and bottom line performance.

With our wholesale backlog for both Joe's and else up, and our same store sales comps up, we are very optimistic about the outlook for the company as a whole.

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

Hamish S. Sandhu

Thanks, Marc. For the quarter, on a consolidated basis, net sales increased 25% to $30.3 million, from $24.2 million over the prior-year period. Both retail and wholesale sales increased by growing 24% and 26%, respectively.

Same store sales growth for the stores opened at least 12 months and eShop increased 7%. Retail sales represented 18% of overall net sales for the quarter.

Wholesale sales increased 26% during the quarter driven by an increase in men's sales and the addition of else. Our overall gross margin increased to 46% from 40% in the prior-year period. Our wholesale gross margin was up 6 percentage points coming in at 40%, compared to 34% in the year ago period. Impacting both our overall and wholesale gross margin in the year-ago period was the $1.6 million write-down to market value of the jean leggings, nondenim pants and all [ph] collection items. In addition, wholesale gross margins were impacted by our else brand, which naturally carried a lower gross margin than premium denim.

It is important to note that gross margin on our Joe's products were consistent with the year-ago margin. We generated operating income of $2.7 million compared to an operating loss of $2.6 million in the year-ago period.

Consolidated operating expense was low in the third quarter of fiscal 2012 compared to 2011 at $11.1 million, compared to $12.4 million, respectively. Operating expenses decreased slightly in our wholesale segment due to lower trade show [ph] expenses. Operating expenses in our retail segment decreased due to the impairment charge in the third quarter of fiscal 2011 of $1.14 million and the carrying value of our capital expenditures at our Chicago and San Francisco stores. We also had 4 more stores in our store base in the third quarter of fiscal 2012, compared to the prior year.

Operating expenses for corporate were lower at $4 million compared to $4.5 million in the prior year. Expenses decreased primarily due to decreases in our print and other advertising commitments and professional fees.

We had operating income of $2.7 million compared to an operating loss of $2.6 million in the prior year. We generated net income of $1.4 million for the third quarter of fiscal 2012 compared to a net loss of $2 million for the third quarter of fiscal 2011. And earnings per share of $0.02 for the quarter. We ended the quarter with a cash balance of $12.8 million.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Jane Thorn Leeson.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

I just had a couple of questions. The first one was, how should we think about gross margins in Q4 this year and, really, into next year, 2013? And more retail versus -- and also, if you could give more color on retail versus wholesale, given the drag from the else brand, also by the opening of retail stores; and then also, given the impact of the European franchise distribution restructuring?

Marc B. Crossman

Let me see if I can get that -- I'll put together -- let me just sum up what we are seeing at -- retail should have a positive impact on our gross margin. Obviously, else will have a negative impact on the gross margin in that it will bring down the contribution. And then Europe, going from a company-owned model to just a straight distributor margin, it should have a downward impact. I think as you look at the business going forward into, certainly, the next quarter and then 2013, if you were to sum all that up without getting into the piece parts, you should see a roughly -- the gross margin push out exactly like you've seen in the third quarter.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay, so that's also -- so then would it be fair to assume that Q4 would have a similar level of increase?

Marc B. Crossman

Jane [ph] , well, in terms of the level of increase, you have to normalize out the inventory write-down that we had a year ago. But if you normalize it, it should be a relatively similar number to what we saw in Q3. Because, really, the else sales -- really when you kind of push everything out over to the side, the percentage mix of retail to international to else and our Joe's wholesale business, the composition isn't going to look too different going into the fourth quarter from a percentage standpoint.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay, that's fair enough. And then also, can you give us an update on your women's performance in the department stores and progress towards increasing door count? And also, I was just curious, who you feel you are taking share from?

Marc B. Crossman

So in terms of our wholesale -- women's wholesale business and the progress, what we saw is really, our 2 bigger decrease in doors we saw in the first quarter and second quarter that we just reported, obviously, over the last couple of quarters. And so despite that, we still grew our women's business despite the decline in the number of doors. And that will be our toughest comp period. So I guess, the point I'm trying to make is we are able to grow our business despite the fact that we are comping against tougher door counts, because what we saw as we were closing smaller doors, we're exiting smaller doors and intensifying the larger doors and then as we've layered in our colored program, or layered in the print programs, all the fashion pieces, we've actually been able to grow our dollars per door. So that's what we anticipate. I've said that in 2012, we were going to come up against some pretty tough door comps on the women's wholesale department store side. But making sure that we're putting the right fashion product into that channel, we can still grow that business.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

So would the comparisons in 2013 get easier on that front then?

Marc B. Crossman

Yes, in 2013, it will definitely get easier.

Operator

Our next question is from James Fronda.

James Fronda - Sidoti & Company, LLC

My question on the women's side was already asked, but I guess why was the tax rate lower than usual? And I guess, what can we forecast out going forward?

Marc B. Crossman

I will let Hamish take that.

Hamish S. Sandhu

The tax rate was slightly lower than what it had been. It came in at about 47%. In Q2, it was about 52%. Once again, in terms of calculating our quarterly tax rate, it's based on an estimate of our annual pretax income. And obviously, that changes as you get more and more clarity. I would think that going forward, depending on the forecast, the overall tax rate should be close to 50% as a starting point, and depending on how we do going into 2013, it could go a little bit lower.

James Fronda - Sidoti & Company, LLC

Okay. And do you guys have any use of the cash on the balance sheet right now, or are you just going to hold it there?

Marc B. Crossman

Yes, we're probably just going to hold it there because right now, I mean, we are going to continue to aggressively rollout stores. As I said, we have 4 more slated to open between now and the end of the year. But we are seeing, basically, those stores cost around $200,000 a piece, whether it's full price or the outlet business opened. So you're looking at about another less than $1 million that we're going to need over the course of the next quarter to open up what we want to do.

Operator

[Operator Instructions] Our next question is from Steven Chang.

Steven Chang

I just had one question. It looks like you guys used to have names for all the different fits like the Honey and the Provocateur, et cetera. Is that something you're deemphasizing? Is it just to simplify the message?

Marc B. Crossman

Yes, I think it's more to simplify the message. I mean, what we found is, when we first came out, we were one of the first ones pioneering the different fits and naming the fits. And I think that, that's becoming definitely a given or that's part of the barrier to entry but we're seeing all of our competitors do it, in terms of the wide array of fits. So we've really been more emphasizing exactly what that fit is, and making that front and center, and then the naming not as prominent.

Operator

[Operator Instructions] Next question is from Lee Beck[ph].

Unknown Analyst

Just a quick question. I really think that the else idea was really fantastic, and I just wanted to question, I know my concern of between retail and else, I understand what you guys are doing with the retail side. At which point are you going to reach a threshold where you know that if you go any more we're -- it may actually hurt us? And for the else side of things, are you guys looking at any different ways of kind of diversifying off that? How do you -- if you could talk a little bit more about the else. And did you guys meet the expectations of where you're at right now?

Marc B. Crossman

So I'll start with the else piece. The else piece, we're continuing to see the pace of the business move in the direction that it's been moving, which is up and to the right in a very significant way. We're still looking at, right now we're in about 300 doors. And we're still looking at, over the course of the next 12 months, rolling out to another 300. So we are in that process right now. So we feel really good about it. In terms of, I think, you're saying when the retail piece -- if you can just refresh my memory on what you're asking about the retail?

Unknown Analyst

Yes. The retail pace, just to make sure -- just to see what's your threshold on that? Sometimes you grow too fast, too quickly that could actually -- it may hurt and can backfire. I understand that we have to get the -- you want to present your -- the product the best that you can, but at the same time, it can actually hurt us, especially with the online and the onlinering [ph] as well. Because you could do that with less overhead.

Marc B. Crossman

Yes. So on the doors, I think, right now we've been trying to get that pace of around 10 stores added per year. From a capital expenditures standpoint, you're looking at adding $2 million into -- or reinvesting $2 million into the business. In terms of the overall size, I think we could definitely get up to 100 stores before we start -- have to really think about the next locations that we're opening. So there's a pretty big addressable market out there right now. Our online business, we are growing as quickly as we can grow, and we are doing a lot of -- adding a lot of functionality to the site that we haven't rolled out yet, that's in the process of being rolled out. Hopefully that answers your question.

Operator

Next question is from Jane Thorn Leeson.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

I just have one more question. It's really on commodity costs. Are you seeing any moderation in rising commodity costs?

Marc B. Crossman

We are not seeing here -- as we talked to our production guys, we're not seeing any major increases or movement in our input costs right now. As we look at the overall margin that we're pulling on at jeans [ph] . So if you kind of look at it holistically, we're not seeing a slowing, up or down.

Operator

We have no further questions at this time. I'd like to turn the call back over to Marc.

Marc B. Crossman

Great. I appreciate everybody joining us, and we look forward to having another good conference call after we're done with the fourth quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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