Christopher & Banks' (CBK) CEO Joel Waller on Q4 2017 Results - Earnings Call Transcript

Christopher & Banks Corporation (CBK) Q4 2017 Earnings Conference Call March 8, 2018 8:30 AM ET

Executives

Jean Fontana - Investor Relations, ICR

Joel Waller - Interim President and Chief Executive Officer

Marc Ungerman - Interim Chief Financial Officer

Analysts

Jeremy Hamblin - Dougherty & Company LLC

Operator

Greetings and welcome to the Christopher & Banks Corporation Fiscal Fourth Quarter and Full-Year 2017 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jean Fontana of ICR. Please go ahead.

Jean Fontana

Thank you. Good morning, everyone. Thank you for joining us today for the Christopher & Banks Corporation’s fourth quarter and full-year 2017 earnings conference call. Presenting on today’s call will be Joel Waller, Interim President and Chief Executive Officer; and Marc Ungerman, Interim Chief Financial Officer.

This morning’s conference call is in conjunction with the earnings press release the Company issued this morning. Today’s earnings release and conference call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements address the Company’s expectations regarding its future performance, including but not limited to financial conditions, results of operations, business initiatives, growth plans and prospects, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to today’s earnings release and the Company’s SEC filings for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

With that, I'll turn it over to Joel Waller.

Joel Waller

Thank you, Jean. Good morning, everyone, and thank you for joining us today. We are pleased to have ended the year on a strong note, illustrating the significant progress that we have made across several areas of our business. As you know we set out a year-ago to transform the business and position Christopher & Banks for sustainable, profitable growth. Over the course of the year, we implemented a number of strategic initiatives around merchandising, marketing, e-commerce, and store operations designed to stabilize the business and drive more consistent financial performance.

We are pleased to see the fruits of our labor start to take hold beginning with the inflection point we hit in October and continuing through the fourth quarter. For the quarter, we achieved a comparable sales increase of 5.7% and experienced positive comps each month of the quarter. In addition for the first time in seven quarters, we saw year-over-year increase in all of the following metrics, number of transactions, average unit retails, and units per transaction.

In addition, we achieved positive comps across all three of our channels and all three of our size ranges during the quarter. We are also pleased with the improved quality of our sales as gross margin expanded 240 basis points which was driven by higher merchandise margin and to a lesser extent the effects of sales leverage on occupancy.

Turning to the balance sheet. Our inventory is well positioned heading into 2018 after adjusting for the 53-week, inventory growth was 6%. As you may recall, our ending inventory was down more than 13% at the end of last year, so we are essentially flat on a two-year basis. Our inventory is also very fresh with approximately 55% less than 60 days old compared to 40% last year. Cash at the end of the quarter was $23 million.

As you can see from our fourth quarter results, we have momentum behind the business and we are pleased with what we have been able to accomplish in a relatively short period of time. That said, significant opportunities for further improvement remain.

As previously announced, we are incredibly excited that Keri Jones will be joining the Company beginning next week. The Board and I have met with Keri a number of times during the process and are impressed with her background which includes more than 30 years of experience with leading retailers as well as the excitement about the future of Christopher & Banks.

With the progress that we have made so far as well as the clear path ahead for the Company, we believe that the time is right to make this transition, and Keri is the ideal person to guide the Company forward. I am excited to remain a Board member and look forward to working closely with Keri in a consulting capacity over the coming year to ensure a smooth transition.

Now let me walk you through the progress that we've already made in a number of areas of the business and touch on what we expect to continue working in 2018. Our first focus is to build on the enhancements we've made in our merchandise assortment to create the right balance among sizes, categories, and core versus fashion. As I mentioned, we are pleased with our current inventory position with approximately 70% of our merchandise and fashion – fashion product at the end of the year compared to 50% last year.

As we learn from our test stores, she wants more choices and newness more frequently. We have seen the success of the strategy demonstrated in a Relaxed Restyled athleisure collection and novelty knit offerings, which were top performers during the quarter, delivering double-digit sales increases.

Our holiday fashion styles were also solid performers with strong sell-throughs. We plan to roll the strategy throughout the rest of the assortment in 2018. During the year, we were also able to strike a better balance between missy and plus sizes. At the beginning of the year, our stock to sales ratio was significantly higher in women's than in missy resulting in lower margins in our plus size product. For 2018, we are well positioned to deliver the appropriate levels of all three sizes missy, women's and petite.

Going forward, we will continue to incorporate learnings from our customers with the goal of providing them the optimal assortment. We intend to ensure that our overall assortment offers the appropriate balance of fashion and core product as well as size ranges. This combined with a consistent flow of newness is aimed at driving higher frequency of visits.

Our second focus is further improving inventory productivity. We believe we are well positioned in 2018 with the right content and healthy inventory levels that we expect will enable us to drive sales growth in the first half of the year.

As we mentioned on the last call, our new inventory planning tool enables us to plan our buys by size, product type, and channel. We expect that this will be the key to driving continued improvements in the business as we better align our product with our customer's needs. We began using this tool with the planning of our resort assortment.

Looking ahead, we expect the benefit of this change to be largely realized in 2018. As spring is the first season, we were able to fully implement and leverage this tool. We believe our stores will now have an appropriate level and assortment of inventory on a much more timely basis, which we expect will ultimately enable us to drive sales and reduce markdowns. It's hard to overstate the massive amount of changes, the merchandise strategy underwent last year.

Now we have a more appropriate balance in our assortment and we expect 2018 to be a year where we will focus on increasing our speed and inventory turn reduce their markdowns and consistently deliver the newness that our customers crave. We expect that with these changes we will be able to drive improved financial performance this fiscal year.

Our third focus is making additional progress in our outlet business. As you recall, this was an area of the business that was a key priority at the beginning of the year and we are pleased with the sales and margin momentum that we have generated in these stores.

During the quarter, outlets achieved the comparable sales increase of 12% and it is clear that we have the right strategy in place as our initiatives continue to take hold. In fiscal 2018, we expect to drive further improve financial improvement and positive sales comps as we increase the percentage for outlet product with an improved margin structure and reduce the amount of slow selling merchandise transferred from the base stores.

Fourth, we focused on the growth of our e-commerce business. During the fourth quarter, we continued to see strength in this business with e-commerce comparables sales growth of 11.6% for the quarter. We benefited from our improved merchandise assortment as well as our enhanced site capabilities, which optimize the customer experience.

Most importantly, we continued our omnichannel migration and now have a single view of inventory across all channels. During the quarter we launched buy online Ship-to-a-Store giving customers more flexibility to shop our entire assortment to find exactly what they want. Over the next several months, we will continue to expand our omnichannel offerings to improve the productivity of store inventory.

Our final focus is on the further refining of our marketing programs. We experienced growth in our customer file for the second consecutive quarter. Our direct marketing programs including direct mail and email continue to drive positive responses and sales.

We expect to increase our circulation in 2018 as well as test a larger format with a focus on driving our existing and lapsed customers to shop. Additionally, our paid digital efforts are continuing to drive meaningful sales. We intend to increase our investment in order to reach more new customers.

As our server becomes more consistent, we are planning to enhance our in-store visual and lifestyle images. We believe that with the aid of compelling store displays and visuals in the windows. We can enticer into our stores more frequently.

In summary, we believe that as we continue to execute the strategy we developed over the past year, we will drive continued improvement in our sales comps and gross margin and ultimately deliver sustainable long-term growth. While there remains considerable work to do, we see ample opportunity ahead of us.

We are confident that we are moving in the right direction and that we are well positioned with our merchandise strategy, inventory levels, and marketing initiatives to build upon the momentum that started at the end of 2017.

In addition, we are extremely excited to welcome Keri to the business next week. She shares our vision and enthusiasm for Christopher & Banks and we look forward to her leadership as she builds upon the strong foundation we have established.

With that, I will turn the call over to Marc to review our financial results for the quarter.

Marc Ungerman

Thanks, Joel. We are pleased with our results for the quarter as we ended fiscal 2017 on a strong note and are well positioned for the new fiscal year. Net sales in the fourth quarter of fiscal 2017 were $92.3 million, an increase of 8.6% compared to $85 million in last year's fourth quarter. Excluding week-53 net sales of $5 million, net sales for the fourth quarter were $87.2 million, an increase of 2.7% compared to the same period last year.

We operated on average 6.1% fewer stores as compared to last year. On a 14-week basis, we are pleased to have driven a comparable sales increase of 5.7% as compared to the same 14-week period last year.

We saw strong performance across all three of our channels with positive comps in our base stores and double-digit positive comps in our outlet in e-commerce channels during the quarter.

Average dollar sale was up 4.7%, reflecting a 3.7% increase in average unit retail and 0.9% increase in units per transaction. Transactions per store increased 2.3% and e-commerce transactions grew 10% compared to last year.

As expected, gross margin rate improved compared to last year increasing 240 basis points to 27.2% of net sales. This is primarily due to 150 basis point increase in merchandise margin in addition to sales leverage on occupancy cost partly offset by an increase in product cost largely due to mix shift to fashion versus core merchandise.

Selling, general and administrative expenses were $31.4 million, compared to $35.2 million in last year's fourth quarter. The decrease was primarily due to the absence of net settlement costs related to an employment claim and severance benefits in addition to lower medical expenses.

As a percent of net sales, SG&A was 34.1% compared to 41.4% in the prior year period. We saved approximately $2 million during the quarter under our cost reduction plan. In total for fiscal 2017, we saved $7 million reaching the high-end of our targeted annualized savings goal of approximately $5 million to $7 million.

Depreciation and amortization was $3.2 million, the same as last year's fourth quarter. Fourth quarter net loss was $8.8 million or $0.23 per share. This includes a net loss of approximately $0.3 million or $0.01 per share from the 14-week. Last year's fourth quarter net loss was $17.2 million or $0.46 per share.

As more fully explained in the financial schedule accompanying our press release, fourth quarter adjusted EBITDA and non-GAAP measure was negative $6.3 million, compared to a negative $14.1 million in the same period last year.

Now turning to the balance sheet. We ended the fourth quarter with approximately $23.1 million of cash and cash equivalents compared to approximately $35 million at the end of the fourth quarter a year ago. Total inventory was $41.4 million at the end of the fourth quarter of 2017.

On a two-year basis, our inventory was relatively flat as we have now returned to a more normalized clean inventory levels. In addition, note that due to seasonality, inventory at the end of the quarter was approximately 6% higher than it would have been on a 52-week calendar.

Capital expenditures for the fourth quarter of 2017 were $0.7 million compared to $1.6 million in last year’s fourth quarter. The reduction year-over-year in CapEx reflects the lower store capital as well as lower investments in technology as we finished building our omni-channel foundation in fiscal 2016 in planning and allocation modules earlier this year.

We had no outstanding borrowings under our revolving credit facility for the fourth quarter and if not drawn on the facility other than to open letters of credit in the normal course of business. During the quarter, we closed one CJ Banks store, one outlet, and nine MPW store. Retail square feet decreased 4.4% compared to the fourth quarter last year. During the fourth quarter, we operated on average 469 stores consisting of 319 MPW stores, 78 outlet stores, 37 CB stores, and 35 CJ stores.

That concludes our prepared remarks. And we’ll now open the call to questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now be conducting a question-and-answer session. [Operator Instructions] The first question will be from Jeremy Hamblin of Dougherty & Company. Please go ahead.

Jeremy Hamblin

Good morning and congratulations on the improved results.

Joel Waller

Thanks Jeremy.

Marc Ungerman

Thanks Jeremy.

Jeremy Hamblin

I wanted to just come back to a statement that I think you made Joel that you indicated you expect a return to growth here in 2018 or at least in the first half of the year. I wanted to get a sense; you're lapping some pretty easy comparison a year ago when comps were down about 9%. I wanted to see if you could give us a sense for how trends are progressing thus far in the quarter, given that you are in a pretty tough inventory position a year ago didn't have much inventory and not a lot of newness. Why don’t we get a sense of what you're seeing out there today?

Joel Waller

I'm going to be a little careful about this Jeremy, because I am really – I believe and I think you know this really not doing guidance in a company that's looking to find its way down the street. Having said that, I will tell you that we were extremely pleased with the quarter and we were extremely pleased with each month in the fourth quarter.

February, we did struggle at the beginning of February for a couple of weeks, so we had some weather issues, I don't usually like to talk about that. We had the Olympics, but the amazing thing is when we came out of the Olympics that we returned in February to our normal run rate or not if I say normal as the run rate was in the fourth quarter. So I think that's all I want to comment about February is our going forward business.

Jeremy Hamblin

Okay. That's good to hear. And in terms of thinking about SG&A this year, so you had on an absolute dollar basis SG&A was down about $10 million last year. And looking forward you do have fewer stores, what types of savings are you still seeing out there on the SG&A front because my assumption is that we maybe should expect SG&A to be down again in 2018, any commentary on that?

Marc Ungerman

Yes, Jeremy. This is Marc. We will continue to stay after our cost reduction initiatives. We continue to believe that there's opportunity there. We see opportunities in terms of our store operating expenses, including store supplies. We also see opportunities in other spaces such as our insurance coverage some of our DC operation efficiencies and the like and we believe that we can take those savings and reinvest those into driving the topline as well as contributing to our margin. It continues to be a focus of the Company to focus on areas that we can do things more efficiently and save money going forward.

Jeremy Hamblin

Okay, and Marc, what was the SG&A associated with a 14-week in Q4?

Marc Ungerman

The SG&A associate with a 14-week was a little north of $1 million.

Jeremy Hamblin

Okay. So if we were to back that out then the Q4 run rate was about $30 million for the quarter?

Marc Ungerman

Yes, I see the math that you're doing there, yes.

Jeremy Hamblin

Okay. And then the other thing that I would say, we're looking just to get some insight on, it was nice to see the gross margin improved in Q4 and that's the first time I think in four or five quarters that the gross margins were up. That does seem to be a real key as we look into 2018 to see an improvement on those gross margins. What steps are you taking on that front to really drive gross margin higher, because that seems really to be a key to the improvement in profitability in EBITDA in 2018 and beyond. Can you comment on that?

Marc Ungerman

I'm rather excited about this one Jeremy, because I think we have a big upside here. But I want to be careful and I completely – tell this to the Company all the time that - that's not try and do major leads. Let's work this across the board and grow it on a consistent basis. I think we have a lot of upside in our margins and from a lot of different angles. Part of it's just from power flowing merchandise where we're making mistakes occasionally and we're going to continue to make mistakes, but we're addressing those mistakes quickly.

We've shortened that the weeks of supply when we buy merchandise which should bode well not only from a margin point because of how we’re buying it, but also from how we’re marking it down? How much will have to markdown? I think our markdowns will be less because of what we’ve started to see that already. So as really think that's where the – I think there's a lot of growth in this area over the next couple of years.

Jeremy Hamblin

Can you give me a relative sense on that comment about shorten weeks of inventory supplies that have we gone from let's say nine weeks to eight weeks or can you give me a relative scale to think about that?

Marc Ungerman

I can give you an example is really the only way I can give it because I don't have the numbers in front of me. But we've gone from in novelty tops for example we've gone from planning a 13-week and in 11 weeks to wear out. And we've done it by category. We've looked at each category and said, how much can we shorten it and how much can we drive them to maximize our sales?

Jeremy Hamblin

Okay, fair enough. I also have to ask that obviously the Company has explored the potential for sale leaseback transaction with a Company-owned headquarters and in the Minneapolis area. Could you give us a status update on whether or not that's still something the Company is looking at and when you would expect maybe a resolution on coming to a conclusion on that?

Marc Ungerman

We're still looking at a very hard. We've talked to a number of people, but we're actually negotiating with three different people all kind of within the same price range. We're very pleased with that price range, but we have not come to a decision point yet of who will give it to or whether we will give it out to somebody at all.

Jeremy Hamblin

Okay. And what about in terms of time to resolution on that decision, is that something that by the middle of this year, by a shareholder meeting? When do you have a sense of when that might be wrapped up?

Marc Ungerman

I would say our sense is that it should be in the next three four months. But the decision might be not to go forward that's always on our play to look at.

Jeremy Hamblin

Sure, okay. And then I wanted to – Marc, could you just remind me here of the store closures and where the ending store counts were by format, how many CB’s, how many CJ’s, MPW’s, and outlets at the end of the year?

Marc Ungerman

Sure. No problem Jeremy. At the end of the year, we had 463 stores. We had 314 MPW’s, 78 outlets, 34 CJ stores, and 37 CB stores.

Jeremy Hamblin

Okay. And then as we look forward to 2018, your store counts were down, I think 21 stores year-over-year. How should I be thinking about – first question would be what percent of your stores are unprofitable on a four wall basis today on a kind of a trailing basis for 2017, and how should I be thinking about your store counts overall as they progress through 2017 and where were the ending counts be?

Marc Ungerman

Jeremy, I'm not going to get into details on store level profitability. I would say in general that we're pleased with what our stores are delivering at this point, and especially as we see the traction that’s been demonstrated by the store population, especially since that inflection point that we reached at the end of October.

As we look ahead to fiscal 2018, we expect a relatively stable store count. Our best estimate at this point in time is that the number of stores will decrease by a net two store differential. So at a big picture level, we see seven store closings and five new stores.

Joel Waller

We have no plan for a massive expansion. On the other hand, even though we have our foot on the brake here. We're still looking at and opportunistically taking two or three deals we just have taken that were very good locations that were – locations that really didn't. We thought of them more as a pop-up store, although we did a three year lease on them, but we're working on a three-year lease.

And they were just such a good opportunity where in an area or a strip center where we – one example would be where we've been trying to get in for a number of years. They had a 21 store that closed, didn't took some lighting from us and instead of costing 300,000 the build out is going to cost us 40,000 or 50,000. It made a lot of sense to do that deal. So we're going to do those as they come open to us.

Jeremy Hamblin

Okay. Could you give me CapEx guidance for the year or a range?

Marc Ungerman

Yes, Jeremy based on our fiscal 2018 plan, we expect our CapEx somewhere in the range of $3 million to $4 million.

Jeremy Hamblin

Okay, great. Thanks so much guys. Good luck this year. Look forward to seeing you soon.

Joel Waller

Thanks Jeremy.

Marc Ungerman

Thanks Jeremy.

End of Q&A

Operator

And there are no further questions at this time. I would like to turn the floor back to Joel Waller for closing comments.

Joel Waller

I want to thank all of you for your interest in Christopher & Banks and look forward to talking to all of you with Keri in the near future. Thank you very much.

Operator

Thank you, sir. And that concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.