Christopher & Banks Corporation (CBKC) CEO Keri Jones on Q4 2019 Results - Earnings Call Transcript

Christopher & Banks Corporation (CBKC) Q4 2019 Earnings Conference Call March 10, 2020 8:30 AM ET

Company Participants

Jean Fontana - IR, ICR, Inc.

Keri Jones - President & CEO

Richard Bundy - SVP & CFO

Conference Call Participants

Eric Beder - Small Cap Consumer Research, LLC

Operator

Greetings and welcome to the Christopher & Banks Corporation Fourth Quarter and Full-Year Fiscal 2019 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. Thank you for joining us for the Christopher & Banks fourth quarter and full-year fiscal 2019 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 release that the company issued this morning.

During our call today, we will reference certain non-GAAP financial measures including adjusted items, reconciliations of GAAP to non-GAAP measures, as well as the descriptions, limitations, and rationale for each measure which can be found in the press release including in supplemental financial tables. 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 the 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 earning's release or 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.

And with that, I will turn the call over to Keri Jones.

Keri Jones

Thank you, Jean. Good morning, everyone. Our fourth quarter results illustrates further progress against our turnaround strategies. Comparable sales grew 3.6% in the fourth quarter, reflecting positive results across all channels. Merchandise margin expanded for the fifth consecutive quarter, while gross margin increased 290 basis points largely due to occupancy cost reductions when combined with an SG&A improvement of 220 basis points, we delivered a $4 million adjusted EBITDA improvement as compared to last year.

The work we’ve done in enhancing her shopping experience, improving our marketing and promotional effectiveness, expanding omni-channel capabilities and reducing our costs are working collectively to drive substantially improve results. The consistent progress we made throughout fiscal 2019 enabled us to deliver on our full-year guidance across all matrix.

For the year, we generated .2% comparable sales growth, the first positive full-year comp since 2013. Notably, we saw a major change in our year-over-year trajectory in the fall season, generating a 4.1% increase in comp sales, while delivering gross margin expansion and SG&A expense reductions, resulting in a $9.6 million EBITDA improvement to nearly breakeven EBITDA for the fall season.

We ended the quarter with inventory of 2% and in a healthy position with fresh and relevant product. We also ended the year with positive cash and no borrowing. As you may have seen in our press release on February 27, we announced a new credit facility package. The new facility provides us with increased liquidity and financial flexibility to support our growth strategies as we continue to gain momentum in our business. Richard will provide additional details on this shortly.

We are pleased to see our momentum extend into the spring selling season as we continue to benefit from the strategic initiatives we’ve been executing. We look forward to building on the progress in 2020 across each of these initiatives.

Beginning with enhancing her shopping experience. We were pleased to see the high level of customer engagement and strong response to our product offering during the quarter. As we said in the past, our goal is to offer a curated assortment of relevant and inspiring product complemented by compelling visual display and enhanced by our excellent customer service.

We believe the combination of these efforts creates an exceptional and differentiated shopping experience for our customer. Our offering of sweaters and knit tops led our fourth quarter performance. We also saw strength in accessories as we presented pieces for her to coordinate and complete her outfit. We merchandise the store in a way that was easy to shop, and our sales associates further augmented her experience by leveraging our style and selling program to help her create her outfit. These combined efforts drove higher UPTs and conversion in the quarter.

Overall, we delivered on our mission to create a highly engaging shopping experience where customers meet with their stylists to create outfits that align with the needs and the versatility of her lifestyle. Our spring assortment is positioned to be much more aware now than last year. We have a greater breadth of fabric weight and color palette, which we believe, she will find both versatile and compelling.

As we move through the spring, you will also see a much larger emphasis on the dress business, where we see a significant opportunity to grab market share and delight our customer. We will support our standard dress assortment by featuring them prominently in our stores, on our site and in our marketing vehicle.

Looking ahead, we will leverage the learnings from the season to go deeper into some of the fashion items that are driving her purchases. As our assortment have become more compelling, we see an opportunity to buy deeper into some of our fashion pieces. Put simply, we ran light on some of the most desirable pieces. This will not represent a sea change in our assortment strategy, but rather an opportunity to leverage our data to drive more volume and productivity into our current assortment.

Now turning to our marketing strategy. During the fourth quarter, we continued to make strides in attracting new customers to our brand and reactivating last customers. New customer acquisition grew double digits, while reactivated customers also increased. Customers are responding favorably to our assortments as well as our reframed brand identity, effortless style for real life.

We are communicating with a better balance of promotional and brand messaging that resonates with our target audience and showcases how our product fits within her life. We have also evaluated and reallocated our marketing spend in the fourth quarter to achieve the best returns, and we employed a balanced approach of driving traffic to our stores and to our e-commerce site.

Our marketing efforts have improved in efficiency and are also driving awareness and improving perception of our brand. Our holistic marketing and advertising communications extend across all marketing channels, including digital and traditional media, email, social media, direct mail and in-store marketing.

In addition, our focus on important events such as our Style Show, Black Friday and Cyber Monday resulted in strong performance during this timeframe. We continue to test new marketing tactics to take advantage of market disruption. While it's still early, we've seen a sales lift in stores where we shared the same mall with a closed dress barn location. We will leverage our upcoming style events and friends and family event to continue to take advantage of this disruption.

Our omni-channel strategies remain a key component of meeting our customers desires to shop wherever, whenever and however she chooses. During the fourth quarter, we completed shift from store in all of our base stores. These stores fulfilled 33% of our direct volume.

As a reminder, shipping from store allows us to better leverage our inventory across our channels, driving sales and improving inventory turn. Enhancements for buy online, pickup in store will launch this quarter as planned. Buy online, pickup in store, while just a small percentage of our business will become a more meaningful opportunity as we execute this capability at the item level.

Looking ahead, we have an opportunity to bring the elevated experience that we are now delivering in our stores to our direct channel. As you know, we have a healthy direct business at over 22% of our sales. We believe that improving the shopping experience online will enable continued strong growth through foundational improvements on product pages, check out and order tracking, all of which will elevate her experience.

Additionally, our style and selling program has been so powerful in our stores, particularly around outfitting that we want to bring this experience to life online. As part of this initiative, we are excited to be launching dialectic in the online outfitting tool this spring. We believe this will further enhance for customer experience as well as provide opportunity to drive higher sales.

Now turning to our real estate portfolio. As you know, we have been selectively opening stores in brand appropriate market. In the first half of 2020, we will open seven stores with short-term favorable leases and markets that we had historically been successful, but had since exited.

With the work we have done to enhance our shopping experience, combined with our more effective new marketing strategies, we believe that this is the time to re-enter these markets. We believe this could be a meaningful opportunity to recapture customers and drive incremental growth in our business.

On the expense side, over the last year, we've driven considerable expense savings across real estate and non-merchandise areas. Looking ahead, we will continue to realize savings and manage our expenses carefully. In summary, our focus initiatives continue to gain traction and drove a large trajectory change in our business in 2019, particularly in the back half of the year.

We look forward to building on these accomplishments in the coming year as we work to drive consistent, long-term profitable growth and establish a differentiated brand positioning in the marketplace. Before I turn it over to Richard, I would like to address the coronavirus. Our thoughts go out to those who have been impacted. We are monitoring the situation closely to assess the potential implications and the situation, as you know, remains very fluid. As such, we have not factored any potential negative impact from the coronavirus into our 2020 guide.

I will now turn the call to Richard, who will discuss our financial results in more detail and provide our 2020 guidance. Richard?

Richard Bundy

Thank you, Keri. Good morning, everyone, and thank you for joining us today. We're pleased to have ended the year with substantially improved financial performance as we continue to make headway on our strategic initiative.

For the fourth quarter, net sales increased 4.5% to $88.1 million, compared to $84.3 million in last year's fourth quarter. The increase was driven by comparable sales growth of 3.6%, which was driven by positive trends in both our retail stores and e-commerce. Higher conversion was partially offset by a decline in store traffic as compared to the same period last year.

That said, we were pleased to see the sequential improvement in traffic trends as compared to the third quarter. Average dollar sale was up 4.7%, reflecting a 6.6% increase in units per transaction, partially offset by a 1.8% decrease in average unit retail.

Gross margin expanded 290 basis points to 30.4% of net sales. The increase was driven primarily by occupancy cost savings and a 15 basis point improvement in merchandise margin.

Selling, general and administrative expenses decreased 2% to $29.9 million, compared to $30.5 million in last year's fourth quarter. The decrease was primarily due to lower expenses for medical benefits and corporate overhead, partially offset by increased store payroll expense.

As a percentage of net sales, SG&A improved approximately 210 basis points to 34% due to lower expenses and leverage on higher sales. Depreciation and amortization was $2 million compared to $2.4 million in last year's fourth quarter. The decrease was primarily due to a reduction in average store count and lower depreciation related to impairment charges on store related fixed assets taken in the third and fourth quarters of fiscal 2018.

We delivered fourth quarter net loss of $5.1 million or $0.14 per share compared to a net loss for the prior year period of $11.3 million or $0.30 per share. Adjusted EBITDA, a non-GAAP measure improved $4.1 million to negative $3 million compared to negative $7 million for the same period last year.

Now turning to the balance sheet. Cash and cash equivalents totaled $3.2 million with no outstanding borrowings and net availability of $16.7 million under the credit facility as of the end of the fourth quarter. As Keri mentioned, the new credit facility package we completed will provide incremental liquidity of $6 million to $8 million to support our growth initiative.

Cash flow from operations improved $9.6 million in the fourth quarter as compared to the fourth quarter of last year. Total inventory was $41.7 million at the end of the fourth quarter of 2019, up less than 2% compared to $41 million at the end of the same period last year, largely due to increases in in-transit inventory.

We ended the fourth quarter with fresh inventory levels. Capital expenditures for the fourth quarter of 2019 were $400,000, compared to $1.5 million in last year's fourth quarter. This primarily reflect -- reflects the investments and technology associated with our omni-channel initiatives and expenditures to support new stores.

Turning to our full-year, we made strong progress in driving gross margin and cost reductions that begin early in the year, while we saw a positive trajectory in our top line beginning in the back half. As a result, for fiscal 2019, net sales were flat to last year with comps up slightly at 0.2%.

Gross margin expanded 180 basis points for the year as a result of occupancy cost savings and merchandise margin expansion. Cost reduction initiatives drove SG&A lower by $4.2 million, representing a 120 basis point decrease in SG&A as a percentage of sales. Combined, these factors led to a $9.8 million improvement in adjusted EBITDA to a negative $6.1 million. Combining the EBITDA improvement with our more disciplined inventory management, our cash used in operating activities improved by $16.6 million to just under $5 million.

Before I turn to our outlook, I wanted to echo Keri's comments that our thoughts are with those that have been impacted by the coronavirus. In regards to the COVID-19 coronavirus, the situation remains highly fluid and we are monitoring it closely to assess the potential implications to our business. Accordingly, our guidance does not reflect the potential impact of the COVID-19 outbreak.

With that said, for fiscal 2020, we expect comparable sales to be up low single digits in fiscal 2020, gross margin expansion of 200 to 350 basis points, resulting in adjusted EBITDA of flat to positive $5 million, and we expect to end the fiscal year with positive cash and no outstanding borrowings under our asset based credit facility.

We expect capital expenditures for 2020 to be approximately $3 million, which is in line with our 2-year average spend. In addition, we expect our store count to end the year flat to 2019, with seven new stores offsetting the expected closing.

Now we will turn the call over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question is from Eric Beder of SCC Research. Please go ahead.

Eric Beder

Good morning.

Keri Jones

Good morning.

Eric Beder

Congratulations on a nice turnaround. Could you talk a little bit about some of -- when you look at longer term what the gross margin can be? You've made obviously tremendous improvements in the SG&A side and you're projecting another significant improvement in gross margin longer term, what can the gross margin look like here?

Richard Bundy

Yes, as far as looking at the long-term opportunity, we're really focused right now on getting 2020 up to those levels as we look at over the last two years. We've got very significant gross margin expansion when we deliver on 2020, that's what we think we can get back to kind of our historical high levels that we've seen. But we're really focused right now on the 2020 200 to 350 basis point expansion.

Eric Beder

Okay. What are you seeing in the outlet stores and how it has that channel compared to the full price stores and what kind of is the thought process in terms of some of the new stores where you're going to put them whether outlet or full price?

Keri Jones

So I'll take that one, Eric. We saw a demonstrable change in our outlet business starting in the back half of last year. When I joined the company, I didn't feel like we were treating the outlets in a brand right way, and so our goal has been to offer the Christopher & Banks brand experience at a slightly better value. So what you would have seen as we work through the year we had less clearance in the stores, more desirable product, better visual displays, windows, in-store and we increased our marketing to our outlet customers. We felt like the outlets have been a little bit like a stepchild, so to speak. So we really were pleased with the trajectory in the back half and that combined with some occupancy savings gets our outlets in a good position. You want to address the new stores return?

Richard Bundy

Yes, as far as we look for new stores, our short-term growth strategies around stores is more focused on base stores, not around outlet. We still have some outlets that we opened that were not performing to the level that we want. So I would expect to see outlet counts to go down a little bit and then the new stores will be base stores.

Eric Beder

Great. And last question on ship from store and pick up from store, how -- this is the first thing you've been doing it as it rules out. How important do you think that could be in terms of managing inventory and pickup from store that's also rolling out? How do you feel when you look at that as a crucial piece to your customer offering that level of convenience?

Keri Jones

Well, on the ship from store, Eric, we started that actually a year ago, fourth quarter. So in the fourth quarter, we lapped that, but we did stand up all of our base stores to ship. And as I referenced, they shipped about a third of what the online business demand was. And so what we're seeing is, obviously it opens up your inventory across the board. And then so you're less likely to miss the sale, because you have the inventory and we see that helps improve inventory turns, we believe, over the long haul. Now Buy Online, Pick Up in Store, this I call the trifecta because what happens is the guest comes in, you get a drive traffic to your store, we get a chance with our style and selling program to add units, and of course we would avoid the shipping expense. And so we're really excited. We've had the capability to do it at the order level. This spring, we're very focused on getting at the item level and we think that that's going to be a big win for us this year.

Eric Beder

Well, great. Again, congratulations on a impressive turnaround.

Keri Jones

Thank you.

Operator

This concludes the question-and-answer session. I will now turn the floor back over to Keri Jones for closing comments.

Keri Jones

Thank you for joining our call today. I'm proud of what we've accomplished as a team in 2019. We are starting 2020 from a position of operational and financial strength as we continue to advance our strategies. I look forward to updating you on our next earnings call.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Comments

[BeCall]

CBK has filed 8-K regarding $10M forgivable loan on June 3 (yesterday). This is essentially a grant with no interest payments until the Fall and then only 1%, and eventually highly likely to be forgivable as stated in 8-K.

Check out the 8-K at:
ir.christopherbanks.com

[BeCall]

PS this is likely relevant - page 49 footnote 2 of recent Schedule 14A released May 5 - note 60-day period ending June 20 - huge amounts of exercisable stock options for Keri Jones (CEO) and Luke Komarek (who is RECENTLY RETIRED General Counsel and been there for 13 years) This seems very odd, but perhaps is being rewarded for putting together the deal:

(2) The amounts listed include the following number of shares of Common Stock for which the directors and executive officers have the right to acquire beneficial ownership within 60 days from April 20, 2020, through the exercise of stock options: Ms. Jones, 740,699; Mr. Bundy, 55,253, Ms. Kellick, 30,000, Mr. Komarek, 282,043; Ms. Wamre, 63,334; and all directors, director nominees and executive officers as a group, 1,196,329.

[BeCall]

Been hearing rumors, so did some digging - just found this 88c per share buyout possibility:

www.singaporestar.com/...

[Monocle Accounting Research]

No. I'm fairly certain you have not been hearing rumors. I'm also fairly certain that your "digging" didn't lead you to that Singapore Star "article."

I'm curious - what kind of digging did you do, exactly, that led you to that article? Because when I type in "Ulla Popken" and "Christopher & Banks" into various search engines, including Google, Yahoo and Bing, this article doesn't appear. You see, "Singapore Star" is one of these suspicious online news aggregators that allows anyone (such as someone who owns shares of a company that is about to go under for good) to pay a mere $10.95 to plant their own story:

www.singaporestar.com/...

Dubai-based Big News Network FZ LLC owns Singapore Star as well as countless other quasi-legitimate sounding online news sites. For example, there is the Buffalo Breeze:

www.buffalobreeze.com/...

...the Oklahoma Star:

www.oklahomastar.com/...

...and the Cincinnati Sun:

www.cincinnatisun.com/...

The list goes on. See www.bignewsnetwork.net/... for a complete list.

Now, I'm not accusing you, BeCall (a/k/a "Bruce" on Yahoo! Finance), of engaging in attempted stock price manipulation (which is illegal) by planting this bogus story and then spreading the "discovery" of it on multiple forums. I will however be alerting SeekingAlpha to your posts, and I will let them decide if they want to do anything with this information.

mar

[BeCall]

What you say about Singapore Star may be true - I have no idea. But I can assure you I had nothing to do with the article, so I'm not at all worried about your extreme reaction. Nor am I worried about SA taking action, because what is posted on these discussion boards can get pretty crazy - it's not exactly well-regulated as I'm sure you know.

I've been on the record for quite some time that I think CB is going to get acquired, because they were righting the ship before CV-19 and have a very good management team in place servicing an underserved customer, but also for their omnichannel and digital marketing expertise. There are so many retailers that are far behind the curve on these capabilities and need to acquire this expertise and infrastructure to catch up and survive - especially now with CV-19. It is a much larger number of retailers than most people realize who need these capabilities, and many are bigger than CB and still reasonably healthy and know they have to take action. I thought that 6-9 months ago, and posted as such, and I still think that today. more or less.

The real reality is that we disagree about this stock and can learn from one another if each of us has an open mind - that's why we're here. I read counter-arguments with great interest and I appreciate SA for giving me that opportunity.

That's all I've got to say about your concern - I won't be commenting any further.

[Monocle Accounting Research]

The question remains though BeCall/Bruce - how exactly did you "just [find]" that article? You also said that you'd been hearing rumors. We actually know Christopher & Banks extremely well and have many industry contacts, and we have not heard any rumors whatsoever about anybody willing to provide shareholders with a massive premium in this environment. So, from where or whom did you hear these rumors?

mar

[Monocle Accounting Research]

It is very apparent that Christopher & Banks will not survive going forward. Equity holders need to be prepared for their remaining investments to be completed wiped out in the near-term should they choose to hold on. Christopher & Banks have amended hours, but they will need to follow others soon and shut all of their stores for an extended period of time. Quite frankly, considering they cater to older women, it would be highly irresponsible to do otherwise. The current deep recession in which we find ourselves will eliminate most if not all marginal retailers such as Christopher & Banks.

[BeCall]

I agree with you that their go forward path has been severely compromised, for 2020 at least. But I believe it will result in the sale of the company, in the next few weeks/months. They have a lot to offer the garden-variety fashion retailer - seasoned and highly integrated management team (ex-Target for several), omnichannel well-implemented (this was Keri's job at Target), integrated ecommerce, mobile, and digital marketing with strong seasonal fashion management, etc. It's a $350M+ business that was on the cusp of profitability before CV-19 - it has value to acquirers. Now the price of acquisition in this market of a company that at end 2019 was still not quite profitable - I believe there is really no way to predict.

[ShoeGal71]

Their response to CV is non existent. There have been no e-mails to customers letting them know what they are doing to keep them and store associates safe. There is nothing on the website, their idea of dealing with this is to demand stores cut their pay roll and only have one manager on duty with limited help. Even then they wouldn't admit that it is because of CV. They held a Spring Style Show this weekend, knowing the risks of large crowds in places and are still going forward with Friends and Family Event in April. If this pandemic gets worse, and it will before it gets better, it will come back on them. They will suffer a shortage in inventory, and loss of foot traffic in stores will add to the loss of revenue. If mall management starts limiting business hours that will hurt too. They are not doing themselves any favors by ignoring this. But that seems to be a pattern with this company.

[Wildstar]

I've been into CBK for a few years. What worries me about the CC is how they continually made a point of saying how their projections did not take the CV epidemic into account. They were very careful to tiptoe around and not downward revise their projections. I think that will be a mistake. I believe they will suffer some supply chain issues which will hit them in the next quarters. I think they will lose credibility by not getting in front of it now.

[Investor_From_San_Diego]

Seems mostly positive, but market doesn't seem to be too excited about it. Honestly the reaction might have been different if not for the craziness lately. Let us see how this plays out in the long run

[BeCall]

I agree... everyone is afraid CV is going to take the economy down, so not much else is gaining traction. Overall, this company is steadily marching to stable profitability and smart, intentional expansion. I am long.