Christopher & Banks Corporation (NYSE:CBK) Q3 2018 Earnings Conference Call December 4, 2018 8:30 AM ET
Jean Fontana - IR
Keri Jones - President and CEO
Richard Bundy - CFO
Jeremy Hamblin - Dougherty & Company
Greetings and welcome to the Christopher & Banks Corporation Third Quarter 2018 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 with ICR. Please go ahead.
Thank you, Kevin. Good morning, everyone. Thank you for joining us today for Christopher & Banks Corporation’s third quarter fiscal 2018 earnings conference call. Presenting on today’s call will be Keri Jones, President and Chief Executive Officer; and Richard Bundy, Chief Financial Officer.
This morning’s conference call is in conjunction with the earnings press release that the Company issued this morning. Today’s earnings release and conference call include 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 the call over to Keri Jones.
Thank you, Jean, and thank you for joining us on today’s call. While we are disappointed in our third quarter performance, I am no less confident in our path forward. We've cycled past some short-term shipment delays and excess spring/summer inventory, which impacted our third quarter results. We’ve been encouraged by the response to the newer product as deliveries hit our stores. In fact, fourth quarter to date comparable sales are positive at expanded gross margin rate.
Importantly, we've done an abundance of work over the last eight months focused on building a stronger leadership team, strengthening our merchandising strategy, developing a more impactful marketing approach, enhancing our omnichannel capabilities, making process improvements, and reducing our cost.
As we’ve laid this groundwork, we remain confident that the steps we are taking will drive improved sales, cash flow, and operating results for our company. As such, we are initiating our preliminary outlook for fiscal 2019, which Richard will layout following his review of our third quarter performance.
Before I discuss our path forward in more detail, let me briefly walk you through our third quarter results. Net sales for the quarter decreased 7.3% as a result of a 7.5% decline in comparable sales. Gross margin contracted 400 basis points and adjusted netloss per share was $0.15 versus an adjusted net loss per share of $0.05 in the third quarter last year.
On our last earnings call, we discussed taking a more measured approach to flowing inventory this fall season. The intention was to run on slightly leaner inventory levels and flow in product more frequently to ensure that we offered newness each month. Last year much of the newness was frontloaded into the beginning of the quarter. Coupled with lower planned inventory levels, we had supply chain issues largely due to delayed shipments out of China.
Courts were backed up as a result of retailers pushing for shipment prior to the tariff impact. With this backdrop, we experienced significant shipping delays throughout the entire third quarter resulting in average inventory 17% lower than last year's level. This clearly had an impact on our sales.
As of mid-November, our supply chain has caught up and we've taken actions with our ocean carriers to mitigate the risk of this happening again. Simultaneous to owning less fall inventory, we had a spring and product overhang that we had to discount more deeply than we've had to historically.
To provide you with some context, spring and summer product represented approximately one third of our unit sales in the third quarter of this year as compared to less than one fourth last year and delivered a margin rate that was 540 basis points lower than last year. As of now, our aged inventory is in line with last year's level.
As we have moved through the spring and summer merchandise and broadened fall and holiday product, comparable sales thus far in the quarter have been trending positive at merchandise margin rates that have expanded in the fourth quarter to date as compared to last year's fourth quarter.
We are experiencing higher sell-throughs than last year across the majority of our categories, including woven tops and accessories, which have been challenging businesses this year. While it is early in the quarter, the results are encouraging and we believe that our strategic initiatives are beginning to take hold.
Now, I will highlight our progress on our five strategic initiatives designed to lead us to profitable growth. Number one, enhancing and simplifying her shopping experience. Our most recent deliveries are a clear step forward in this regard. We have an updated and balanced assortment that is more appealing and easier to shop. She has responded well to our mix of updated key items into our holiday fashion assortment.
Our goal this spring is to build upon this momentum and to further maximize key categories of business. One example is our bottoms business, where we think we have an opportunity to expand within both pants and shorts as well as increase the bottoms assortment within our popular Relaxed. Restyled. collection.
In addition, we see opportunities in categories where we are currently underpenetrated, including dresses and our Easy Wear, Everywhere collection. Importantly, we have made many process improvements that will improve our execution and our ability to drive the business profitably.
Number two, delivering compelling promotions. While we instituted aggressive markdowns related to spring and summer assortment, we are simultaneously evolving our approach to better leverage data and analytics to drive more profitable sales with targeted promotions by product and customer.
Number three, growing our omni-channel business. We delivered 10.7% e-commerce growth in the third quarter and momentum has remained strong thus far in the fourth quarter as this channel continues to outpace the total business. We began the quarter shipping from 67 stores and are expanding that to 170 stores by month end.
We expect shipping from stores to allow us to better leverage our total inventory pool and to drive meaningful incremental sales in 2019 and beyond, and we are already seeing evidence of this. In just the 10 days in which we have exposed the store inventory online, the 67 stores have shipped orders approaching $1 million representing 18% of online demand during these 10 days.
Additionally, we intend to launch buy online, pickup in store late this year. By letting our customer shop in the way she wants, we can reduce the overall shipping costs and give our associates a chance to interact with her when she comes into our stores. We have found that when a customer picks up -- comes in to pickup her items, almost 25% of the time she will add to her purchases. We will look to further capitalize on this behavior to drive higher units per transaction.
Number four, building loyalty and growing our customer file. We're highly focused on stabilizing and growing our existing file by maintaining high brand loyalty as well as building our file by attracting new customers to Christopher & Banks. Our private label credit card momentum continued with new accounts in the quarter, up 42% and our tender share at 43%.
We will continue to focus on building loyalty and driving sales through our credit card program. One way in which we’ve discussed attracting new customers is through capitalizing on the market disruption of some of our competitors. As we’ve mentioned previously, we have 55 stores that we believe can potentially benefit from Bon-Ton closing.
For fiscal November, we saw top line sales growth in the stores near Bon-Ton closing averaging 400 basis points above the balance of our chain. To further drive revenue and build our customer base, we recently entered into a licensing agreement, so that we can direct mail a large list of potential customers.
Number five, reducing our cost structure. Richard will speak to this more specifically, but in short, we have renegotiated $2.4 million in annualized cost savings across non-merchandise expenses. We expect to realize some of this cost reduction in the fourth quarter and see additional expense savings potential in fiscal 2019 as we continue to identify opportunities across our organization. In addition, we also plan to realize additional rent reductions as we renegotiate leases.
Finally, before I turn the call over to Richard, as you might've seen in 8-K we recently filed, we're making a change to the leadership of our stores organization. We are excited to report that Carmen Wamre will be joining the team next week to lead our stores organization. Carmen brings over 28 years of stores experience, having most recently served as the Zone Vice President at Express. Carmen has a proven track record of driving results, developing high-performing teams, and delivering exceptional customer experience. I am confident that under Carmen's leadership we will drive our stores performance to a whole new level.
As I've [technical difficulty] in the past, we have long-standing relationships with our customers. Are plan is to take this to the next level through sales training with a higher focus on outfit and styling to drive higher sales per visit. In other words, we have an incredible asset that I believe we can more fully leverage.
In conclusion, during my first eight months at Christopher & Banks, we've done a tremendous amount of work to acquire new talent with extensive retail experience, especially within our executive team as well as setting priorities for initiatives across all functions of our organization to lay the groundwork for our path forward.
Our fourth quarter results to date are beginning to reflect the fruits of the labor. However, there is still much work to do. As we continue to execute our strategic plan, we expect this fourth quarter momentum to continue. Our entire team is energized and focused on the strategic initiatives that we believe will drive our sales and improve operating results in the future.
With that, I will turn the call over to Richard to discuss our third quarter results and our outlook for fiscal 2019.
Thank you, Keri. Good morning everyone and thank you for joining us today. Beginning with our results for the third quarter, net sales decreased 7.3% to $91.3 million compared to $98.5 million in last year's third quarter. We operated an average of 2.3% fewer stores and comparable sales decreased 7.5% in the quarter.
As Keri discussed, our third quarter sales and gross margin results were negatively impacted by supply chain delays and the resulting lower levels of fall inventory together with excess spring and summer inventory. As of now our aged inventory is back in line with last year's level.
For the quarter, average dollar sale was down 5.8% reflecting a 4.6% decrease in the average unit retail related to the higher mix of clearance product, and a 1.3% decline in units per transaction.
Total transaction volume for the quarter decreased 2.5% due largely to traffic declines in stores coupled with the store count reduction. The momentum in our e-commerce business remain strong with comps up 10.7% as we continue to invest in our omni-channel capability.
Gross margin was down 400 basis points to 29.8% of net sales. Merchandise margin rate declined approximately 200 basis points primarily due to the aggressive steps taken to move out of excess spring and summer inventory as we head for the fall season merchandise.
Fixed store costs deleveraged 100 basis points due to a lower sales volume despite the rent reductions that we negotiated. In addition, the higher fulfillment cost as a result of the sales mix shift to the e-commerce channel impacted gross margin by 100 basis points. Notably, fall and basic product sold at merchandise margin rates that were 200 basis points above last year primarily due to better costing on the product.
Selling, general and administrative expenses were $30.5 million compared to $31.8 million in last year's third quarter. The decrease was due to non-merchandise cost savings and reduced store labor costs, partially offset by an increase in digital marketing spent. As a percentage of net sales, SG&A increased approximately 110 basis points to 33.4%. We continue to expect SG&A expense dollars for the fiscal year to be below last year's.
Depreciation and amortization was $2.5 million compared to $3 million in last year's third quarter due to lower store depreciation as well as to the sale leaseback of our corporate facility that we completed in Q1. We’ve recorded non-cash store impairment charge of $3 million related to underperforming stores.
Our third quarter net loss was $8.8 million or $0.24 per share compared to a net loss for the prior year period of $1.6 million, or $0.05 per share. Excluding the impairment cost of $0.08 per share related to long-lived assets and severance cost of $0.01 per share, adjusted loss and non-GAAP measure was $0.15 per share. Adjusted EBITDA, a non-GAAP measure was a negative $3 million compared to a positive $1.4 million in the same period last year.
Now turning to the balance sheet, we ended the third quarter with $15.5 million of cash and cash equivalents and no outstanding debt compared to $17.9 million at the end of last year's third quarter. Total inventory was $47.8 million at the end of the third quarter of 2018, down 7.1% as compared to the $51.4 million at the end of last year's third quarter.
We expect to end the fourth quarter with inventory down mid single digits as compared to last year's fourth quarter. We had no outstanding borrowings under our revolving credit facility for the third quarter.
Our capital expenditures for the third quarter of 2018 were $1.2 million, flat to last year's third quarter. During the quarter, we closed four stores and opened four new stores. Average retail square feet decreased by 2.5% compared to the third quarter of last year. We operated an average of 461 stores consisting of 314 MPW stores, 80 Outlet stores, 35 CB stores, and 32 CJ stores compared to 473 stores last year.
Before we discuss our outlook, as a reminder, the extra week in the fourth quarter of fiscal 2017 benefited net sales by approximately $5 million and was neutral to earnings. Looking ahead, we continue to believe that we will drive year-over-year sales growth, deliver improved gross margin and achieve meaningful improvements in earnings and cash flow by the end of fiscal 2019 as part of our path to long-term profitability.
For fiscal 2019, we expect sales growth of 2% to 3% to be driven through expanding our omni-channel capabilities, enhancing the overall product assortment in our stores, and implementing more meaningful impactful marketing promotions to drive customer file growth.
E-commerce sales are planned to increase in the double-digit range as a result of omni-channel initiatives, including ship from store and the exposure of our store inventory online, which is expected to be a meaningful contributor to the low single-digit total comp growth plan for 2019.
We expect gross margin expansion of 300 to 350 basis points in fiscal 2019 as a result of improved inventory management, including supply chain and omni-channel initiatives, greater disciplines around our promotions and the continued reduction of occupancy costs. We're expecting two-thirds of the improvement to come from improved merchandise margin rates and the remaining one-third to come from occupancy cost reduction.
As we talked about last quarter, we were in the process of doing a deep dive into our real estate portfolio. That analysis is largely completed and based on our findings, we're rationalizing our store base and plan to close 30 to 40 stores over the next 2.5 years with the store closings starting at the end of 2019 as leases expire.
We've been making considerable progress on our expense reduction initiatives, and as Keri mentioned, we've negotiated $2.4 million in annualized savings split about evenly between cost of goods sold and SG&A. We expect the benefit of these cost savings initiatives to begin to take hold in the fourth quarter.
We have additional cost savings opportunities and coupled with plan leverage from sales growth, we expect to achieve 150 to 200 basis points in SG&A leverage in fiscal 2019.
Now we will turn the call over to the operator to begin the Q&A session.
Thank you. [Operator Instructions] Our first question is coming from Jeremy Hamblin with Dougherty & Company. Your line is now live.
Good morning and thanks for taking the question. I wanted to start by getting into the quarter-to-date trend. So clearly a significant improvement versus what you saw in Q3. I wanted to get a sense of the cadence of comps from last year's fourth quarter. You’re seeing quarter-to-date comps positively. In terms of what you're lapping last year, how did November, December, January fall for the Company last year? In other words, are comps getting easier throughout the quarter or tougher?
Hey, good morning, Jeremy. As we talked to the cadence, November we did say we’re off to a good start, but we are up against positive comps last year in the month of November. We do see them escalate a little bit as we move through the quarter, but we saw positive comps every month in the last quarter.
Last year [multiple speakers].
Right. And -- okay, so you’re saying that it does get a little bit tougher the rest of the quarter?
December comps were stronger than November last year. What I say about the 2-year stack though Jeremy, with the business in transition such as ours is, we haven't seen as much 2-year stack correlation as you would expect for the business that’s been more stable. What makes us excited about this fourth quarter is, how she is really resonating to the product as I mentioned across categories that had even been weaker season to date.
Okay. And then I actually -- I wanted to get into that in terms of category performance, and what we saw in terms of it has been a little bit cooler than normal. How -- can you talk to the categories where you would say the performance was maybe a little bit better than you expected in Q3, and in quarter to -- quarter to date Q4 versus the areas where you thought, well we had inventory that was in stores, but it just -- it didn't perform as we might have expected even though we actually had the merchandise to sell.
Yes. So just for some perspective on third quarter, the 17% under last year's inventory levels, obviously was large and impacted business across every category and every month within the third quarter. That being said, categories that we're really excited about and I will call this a signature business for us is our sweaters, and we were very aggressive in how we planned sweaters this year and we bought them higher and they’re selling through faster, so we are thrilled with the sweater business. We've had strength throughout the third quarter actually in our bottoms business, in spite of being lower inventory level and you heard me reference that in my comment that we think we’ve huge opportunity in the bottoms business as we move forward. So those are a couple call outs and I mentioned woven tops and accessories and we call those out because those have been really tough businesses season -- or year-to-date, I should say, and those have turned as she has responded to the plaid styles we have in top, and we reset our jewelry assortment and she really loves holiday theme motif within the hosiery department. So that just provides a little bit of color, I would say. If there is softness in the business as she's moved to more of our sweater assortment, knit tops have slowed a bit, but I would expect that just because of the trade-off purchase.
Okay, great. Thanks. And then, I also -- I wanted to just ask a follow-up question here with tariffs, clearly in the news. In terms of the impact that you foresee at this point in time, with a 10% tariff applied, what type of impact or what type of preparation is the Company undertaking to address that -- the potential risk? And what happens if we can't get a trade deal done and we move to 25% tariff? How does that impact your guidance?
So our categories to date haven't experienced any tariff impact. So -- but we do have a large portion of our product sourced in China. So, if there were to be tariffs enacted, obviously that’s the risk for our business. Contingency plans in the short-term that we’re looking at is a combination of how we could offset the cost internally. Number two, how can we work with our vendor partners to offset the costs, and number three, if tariffs are broad-based, how much could the customer and market bear and price increases to offset the cost. But we have not experienced any tariffs to date, but we're making plans – contingency in case that happens. Moving countries of production is a longer-term strategy, that would be into 2020 and '21, so that’s where we stand with the tariffs.
Okay, great. Another question I just wanted to ask too is in terms of freight rates have been obviously higher, can you give me a sense of what the impact was on freight rates? I might have missed it in Q3, and then what you're looking at thus far in Q4 quarter to date?
Yes, Jeremy, we haven't seen anything significant in our freight increases. We did see when we had some of the congestion in Q3, we had to pay some premiums to get the product moving and make sure we hit our -- got the product here as soon as possible. In the fourth quarter, we are not seeing anything substantial from a freight increase.
Great. Thanks. And then last one for me. In terms of the quarter to date results, really pleased to hear the turn in results with more inventories, better merchandise assortment. Can you give me a sense of how you’re comping at the stores versus what you're seeing as the online contribution? Are your store comps still running at a negative pace quarter to date?
Yes, we are not giving out detailed information between the two channels, but we are still seeing -- we saw an improvement in both channels as we moved into the fourth quarter. I would say stores are still slightly negative and we’ve seen a even greater acceleration in our e-commerce business.
So driving store traffic is something that we're very focused on and our strategic initiatives are aligned to support that. When we talked about omni-channel, and I'm super excited about the amount of goods at those stores shipped over a short amount of time. What that does is allows us to leverage the pool of inventory that that's in the store and to ensure that we don't lose a sale because we're out of stock online. The next step of that is buy online pickup in store, which obviously is good because it drives the customer into the store and gives us a chance to sell her additional product. At the same time, the improvements that we're making within our product we think will be appealing to slightly expand our customer base. So it's something we're very focused on. Additionally, within our marketing programs, we are looking at how we drive more effectiveness to current customers, so that we can invest in customer acquisition. So trends improved from where they were in the third quarter, but it's something we're highly focused on.
Okay, great. Thanks. And then, I’m sorry, Richard, in terms of thinking about cash projection year-end, so you mentioned that I think inventories were expected to be down mid single-digit. Historically, do you see cash build significantly sometimes in Q4? Is your cash balance something that we could expect to see build here in Q4 this year?
Yes, we’ve historically seen that. We are up against some headwinds in some [indiscernible] timing of when the goods are being paid for that we may not see the same level of build that we’ve seen in the past. But we do feel very encouraged by our results that we’ve seen so far in the fourth quarter. And as the sales continue, we expect to see a nice improvement.
Okay. And then last one here, just running through the full projection on '19, if you hit those numbers, does that get you to roughly -- back to a positive or flat to slightly positive EBITDA for the year?
Yes, we’re going to see how the fourth quarter plays out, but we see 2019 as a critical stabilization year. So our goal obviously is to maintain and grow cash. So we will have more updates on that Jeremy when we finalize our fourth quarter and see how this shapes out. But our goal for 2019 is to stabilize this business, provide a platform for growth.
Okay, great. Thanks so much for taking my questions. Good luck.
Thank you, Jeremy.
Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back over to Keri Jones for any further or closing comments.
Thank you for joining on the call -- us on the call today. I remain very excited about the opportunities that lie ahead for Christopher & Banks. With a strong leadership team in place and key initiatives underway, I'm confident that we can drive improved sales, cash flow, and profitability over the longer term. Thank you.
Thank you. It does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.
We thank you for your participation today.