Q2 2016 Earnings Conference Call
July 28, 2016 04:30 PM ET
Matt Hyde - CEO
Jeff Lasher - CFO
Joe Pulford - Divisional Vice President of Financial Planning and Analysis
Jimmy Baker - B. Riley & Company
Ronald Bookbinder - Coker & Palmer Investment Securities, Inc.
Good afternoon. My name is Doris and I will be your conference operator today. At this time, I would like to welcome everyone to West Marine's Second Quarter 2016 Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Mr. Joe Pulford, who will read the forward-looking statement.
Thank you, Doris. On the call today, we will be making forward-looking statements either in our prepared remarks or in the associated question-and-answer session, which may include financial projections and other statements of the Company's expectations, plans, objectives or intentions. The Company's actual results may differ materially from those projected in any forward-looking statements due to a variety of factors, risks and uncertainties which are discussed in detail in our filings with the SEC. The Company does not undertake to update or revise any forward-looking statements which speak only as of the time they are made. To provide greater clarity into our business performance, our statements or answers to questions today may include EBITDA and adjusted EBITDA non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP can be found in our press release and in the 8-K with our second quarter results dated today and posted on our investor relations page at westmarine.com.
And now, I would like to turn the call over to Matt Hyde, our Chief Executive Officer.
Good afternoon. Joining me on the call today are Jeff Lasher, our Chief Financial Officer, and Joe Pulford, our Divisional Vice President of Financial Planning and Analysis. After some brief remarks on the progress of our strategies and the quarter's performance, Jeff will take you through our key financial and operating metrics and finally we will open your call to your questions.
West Marine delivered a 1.1% comparable store sales increase for the second quarter of 2016. Revenue growth strengthened throughout the three months period after a challenging start in April. Sales to retail customers had stronger performance than our professional or port supply business, which ended the quarter slightly negative.
Over the past three and half years, we've been working on repositioning West Marine's business from a boat parts retailer to a waterlife outfitter that serves all who recreate on and around the water. This repositioning has been executed through three strategies, store optimization, e-commerce growth, and expanded merchandise offerings.
In the first half of this year, I've had the opportunity to visit 51 of our store locations across the country. There is probably no market that’s going through a bigger shift in the Bay Area right here in our support centers backyard. About two years ago, we had five older styled stores located from Sausalito to Santa Cruz California. We're just finishing up our optimization work of consolidating down to three stores in this market, repositioning two stores into larger, better locations, and we revitalized one location in San Carlos, California.
As a result, West Marine is providing our customers the retail experience that is dramatically better and our customers are responding. Our Sausalito flagship store delivered a 9% comp for the quarter with retail sales growing double-digits and our sales to our professional customer comping up mid single-digits.
Our San Carlos store was revitalized during the second quarter, and since project completion the store delivered a 20% sales increase compared to the same period last year. Finally, in August we will be opening up a new location in Santa Cruz, California. This store is positioned to better serve one of the most water centric communities on the West Coast, along with acting as our newly designated test store. Because of its proximity to our support center, we will be utilizing Santa Cruz to test, learn, and rollout innovations for our retail store business. This should have the effect of speeding up improvements across our fleet.
In addition to the changes in the Bay Area, this spring we completed revitalization work on seven store locations across the U.S. Revitalization consists of light remodeling, space optimization, product assortment changes in associated training. Our store revitalization strategy has proven to be an efficient and effective way to increase sales and grow our customer base. We expect to complete an additional four stores in the second half of this year.
The optimization of our store fleet continues to be one of the primary drivers of revenue growth for West Marine. But it wasn't the only driver of success as the second quarter delivered sales increases across all three of our growth strategies, with our waterlife stores and e-commerce business delivering about 60% of the sales and nearly all of our sales increase.
Regionally, the South was up 3%, while our Northern stores were down slightly. We believe that the softness in the north was a result of a cool and wet spring weather impacting maintenance and usage. In total, our sales performance improved each month through the quarter with June delivering the highest increase.
Looking across our growth strategies, we are especially pleased with the success of our e-commerce business, which delivered another consecutive quarter of sales growth of nearly 27% on top of a similar increase last year. Sales were lifted by a year-over-year conversion rate increase as a result of improvements in our technology platform, our search engine, and the increased availability of products to our ship to store and ship from store initiatives.
Additionally in May, we launched West Marine outlet online and its delivering a conversion rate that is more than triple the site-wide rate and sales are exceeding our early expectations. Our team has done a terrific job of continuing to execute on e-commerce and digital marketing improvements resulting in gains in both conversion and traffic.
We were also pleased with the results of our two super sale events, the May sale event finished with a double-digit comparable store sales increase while the July event was up mid single digits. Both of these events were on top of last year's record performance.
A portion of the success from e-commerce and our store project is driven from the work that we're doing to broaden our product offering with kayaks, stand up paddle boards, fishing, clothing and everything you need to recreate on the water. We call these are merchandise expansion products and in the second quarter we delivered a 4% comparable store sales increase led by year-over-year sales gains of about 20% in travel, seating [ph] and lifestyle accessories. These gains were partially offset by softness this year in paddle sports and footwear.
As I said previously, our customers are embracing the changes we're making in our business to enable them to byproducts they want wherever and however they choose to shop. We now have enjoyed 10 straight quarters of active customer growth. And in the second quarter, our active customer base increased 5% with those increases coming primarily through our waterlife stores and e-commerce division.
With improved sales and customer interest, we're also working hard on driving more profitable growth across all dimensions of our business. For example, our super sales have delivered on the strategy to concentrate our promotional activity into fewer better events. By reducing the amount of promotional activity and concentrating it into larger events, we've been able to simultaneously increase products sold at regular price, while reducing products sold at markdown prices. And this is really an unusual feet in today's retail environment.
We improved product margins in our merchandise expansion categories by over 40 basis points in the quarter. This was a result of less clearance activity and managing inventory levels aligned with sales. We believe we have an opportunity to increase the profitability of our professional business by improving our go-to-market strategies and focusing on a compelling offer to our most valuable customers. And finally we're implementing initiatives to drive organizational efficiencies and process improvements to enhance productivity and profitability.
As I look back on the quarter, I'm pleased with how the entire West Marine team continues to execute against our repositioning strategy across all of our different areas, retail, e-commerce, marketing, merchandising, and the professional business, our associates have made significant changes that have improved the customer experience and better position West Marine for long-term success.
I'm proud of the work the entire team has accomplished across the company. That said, West Marine is competing in one of the most difficult environments the retail industry has experienced. For us to continue to win, we need to stay focused on finding ways to manage both the long-term profit and the growth of West Marine, as well as the quarter-by-quarter performance of the business.
As we turn to the second half of the year, we see opportunities to further drive sales increases during the holiday season. I’m excited about the work that our teams are doing right now in creating a differentiated position in the fourth quarter.
At this point, I will the call over to our Chief Financial Officer, Jeff Lasher, to go over the numbers in greater detail.
Thanks, Matt. West Marine had positive same-store sales of 1.1% in the second quarter. Certain key areas of emphasis such as e-commerce and our waterlife locations continue to yield promising year-over-year results, helping bolster sales and mitigate the effects of a slow start in the first half of the quarter.
Total revenue was down $0.06 or 1% compared to 2015, reflecting 15 less stores compared with this point a year-ago. Our top line results were highlighted by a 26.7% gain in e-commerce sales, which drove a 210 basis point increase in the penetration of this channel to 10% of sales up from 7.9% in the second quarter of 2015.
As Matt mentioned, our results are influenced by weather. While we experienced favorable weather in Q1, Q2 got off to a tough start as general weather and boarding conditions in April and early May were unfavorable. For the remainder of the quarter, we achieved comparable sales growth of 4.7% fueled in part by the important Memorial Day and 4th of July super sale events.
Our sales and margin results reflect an increase in merchandise expansion products, which increased 3.3% from last year driven by strong gains in accessories for waterlife activities. Sales from merchandise expansion products represented 22.8% of total sales compared to 22% a year-ago. The same time core boating product sales decreased 1.7% during the same period, which pressured overall margins.
Importantly, the supply chain cost to support our stores and customer delivery functions continue to decrease compared to 2015, as efficiencies in operations and lower freight rates resulted in improved cost to serve.
Selling, general and administrative costs declined 1.4% or $800,000 compared to 2015 in the same period as increased benefit expenses and higher store depreciation expenses were more than offset by a partial settlement from the Deepwater Horizon Summit program and reduced payroll expenses.
Operating income decreased $800,000 compared to last year as a $1.5 million decline in gross margin dollars was only partially offset by lower SG&A expenses. In the second quarter, we closed three stores as part of our planned waterlife stores transformation process. With respect to our progress toward our goal of 50% of sales from waterlife stores, we achieved 48.6% of total sales compared to 45.1% last year.
As of the second quarter of 2016, we operated 258 stores down from the 263 stores at year-end 2015. Our waterlife store count increased from 60 to 67. We still anticipate ending fiscal 2016 with 4% fewer stores in the end of -- than the end of 2015.
Net income for the quarter was $21.6 million, a 3.1% increase when compared to the same period last year. Our effective income tax rate for the quarter was 40.7%, which resulted in the provision of $14.8 million compared to $16.2 million in 2015, which included a one-time expense for the exit of Canadian operations.
Turning to the balance sheet, we ended the quarter with $89.6 million of cash as compared to $44.2 million of cash as of July 4, 2015. Inventory levels ended at $253.6 million down compared to last year's $258.1 million. Accounts payable ended at $77.2 million reflecting the combination of [indiscernible] quarter received intended to replenish store inventories, as well as favorable changes to terms and conditions with our trade vendors.
Turning to our outlook, we continue to expect 2016 overall revenue growth to be within our initial guidance range of 1% to 4% with comparable-store sales between 2% to 5%. However, with the sluggish start to our boating season in Q2, combined with the soft retail environment in general, we now expect sales to be towards the lower end of our stated ranges.
We still expect pre-tax profit to increase 50% over the last year. This concludes our prepared comments and we are ready to take questions.
[Operator Instructions] we have a question from the line of Jimmy Baker with B. Riley.
Hi, Jimmy. How are you this afternoon?
I’m doing well. How are you doing Matt?
Thanks for taking my questions. I just first wanted to start with the positive monthly progression commentary you had. Was that fairly consistent across your geographies that you started a little bit slower in the quarter but progressed well month-by-month.
That is true. It was probably a little bit more skewed towards a bigger ramp up in the north. The North East was particularly soft in April. So we saw a more dramatic increase in the North East. But yes it was generally across all of our geographies.
Okay. I guess and as the early part of the quarter started off of it more sluggish. Did you respond with any incremental promotional activity or did you see that coming from any of your competitors?
Actually, we have been doing as the strategy is; we have really been trying to be rigorous around concentrating our promotional activity into fewer bigger events. And so, we actually had less promotional activity into 2016 for the same time period as 2015. And as I mentioned in my comment, the results of this is that our rate -- our products that we sold at regular price increased, and our products that we sold on off-price whether that was a temporary markdown or a permanent markdown actually decreased through the quarter. So we’re proud of this and this is something that we’ve been really focused on as -- as part of our efforts to continue to drive higher profitability.
Sure. So if I understand, Jeff’s commentary that the margin pressure was really just a function of product mix?
At the GAAP level we had some margin pressure due to higher shrink in timing of inventory purchases. But if you look at just product margins, we experience product margin expansion in both for the quarter and for the year. And this is due as I mentioned to lower clearance, more profitable sales events and better terms with our vendors. And do you want to add anything Jeff?
Just as a reminder Jimmy, the margin impact from the inventory receipts -- the amount of inventory receipts determining the absorption rate, certain expenses associated with storage costs, so the changes in those receipts compared to the prior year can modify that amount slightly and that's what we saw in Q2.
Okay, sure. And then just give where you’re at through six months. Could you just talk about kind of what you’re seeing that gives you confidence in the business accelerating throughout the back half of the year in order to get to the guidance. And I guess it sounds like from your comments that you have particularly high expectations for holiday. I know you’ve made some improvements there in recent years. But just one understanding if we should think about the back half improvement being more heavily weighted to Q4 as a function of that?
Over the last couple of years, we’ve been executing on growing our fourth quarter business to become a little bit less seasonal, a little less weather dependant. And the results of this is, of this focus is that we have delivered record fourth quarters for the last couple of years. And an important point to our holiday business is that a key dependency on this is our online business and having a strong fleet of waterlife stores. So in that context, we entered this year’s holiday season in the best position ever and my expectation is we’re going to deliver another record fourth quarter.
Okay, great. Maybe one for Jeff, just -- I was hoping you would quantify that deep horizon settlement and does your guidance include that benefit? And then I guess, if you’re willing provide I’m interested in what your waterlife stores represent as a percent of your total square footage?
Yes, so first the deepwater horizon was a partial settlement from the BP oil spillback in 2010. Our SG&A was down slightly even without that settlement. As far as the waterlife stores, we went from 60 to 67 stores in the -- on the year-over-year basis. The square footage of those stores increased in time. So we’re seeing a higher percentage of our overall square footage which is basically flat from last year being represented by our higher waterlife store in lower traditional store count.
I’m sorry, I just missed the last part. The waterlife store square footage is about flat from last year?
No, the overall square footage is about flat from last year. So we’ve increased our waterlife stores from 60 to 67. Our overall store count has gone from 273 to 258 and our square footage has been about flat year-over-year, down a little.
Right. But I mean those waterlife stores are larger. So I would assume that it makes up a substantially greater portion of your square footage than just the store mix?
Yes, that's correct. Yes.
Okay. Very well. Thank you guys.
[Operator Instructions] We do have a question from the line of Ronald Bookbinder with Coker & Palmer.
Hello. I was wondering about the inventory. Do you have an inventory on a per store basis?
We track the inventory on a per store basis internally. That's not something that we externally provide. We are down on a year-over-year basis in inventory which was one of the reasons why our cash balance was up significantly on a year-over-year basis. One of the things that we watch on a regular basis is our availability of core products in each one of our stores and we have seen improvements over time as our fill rates as we call them internally have improved because of the efforts of our merchandising and planning group.
Okay. And you mentioned the paddleboards were a little soft. What do you think that was?
In the second quarter we did experience softness in both Stand-up Paddleboards and Kayaks. And specific to Stand-up Paddleboards unit sales are actually up, but dollars are down because the consumer is right now making a shift to buying more inflatable Stand-up Paddleboards versus rigid boards and inflatable’s have a lower average unit price. Specific to Kayaks, we have seen some improvement in the business in the third quarter, particularly in fishing kayaks.
And you mentioned softness in footwear. How was the rest of the apparel and how was the margin on the apparel?
I’m really pleased with what the team has been doing in our clothing, and apparel business. So we’ve been focusing on making quite a few changes in that area, brining in new brands and rightsizing our inventory. In total for the quarter we were up in the mid single digits from a top line sales standpoint. But when you look at gross margin dollars, we were up double digits. So we have far less clearance and we have been selling a lot more apparel at full price. But the top line sales were kind of in the mid single digits. The team has done a really nice job in repositioning our apparel and driving more full priced sales through apparel.
And was that driven more by branded or private label?
It was driven by largely by branded. Part of our strategy has been, we have actually reduced private label in across our apparel both men’s and women’s apparel. And we saw even stronger performance in women’s than we did in men’s.
Okay. And one, you’ve talked about the Yeti products in the past. Are they still trending as strong as they have been in the past?
The cooler category for us has been stronger throughout the entire year and Yeti’s innovation has I think helped to lift the entire category for us. But to be honest with you there’s still one brand that's leading the way and that is Yeti.
Okay, terrific. Thank you very much.
[Operator Instructions] And we have no further questions. I will turn the call back over to our CEO, Mr. Matt Hyde.
Okay. Well thank you and thank you for joining us today. Our earnings conference call to discuss third quarter 2016 results is currently scheduled for Tuesday, October, 25. We look forward to talking to you then. Thank you.
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.
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