GMAN (GMAN) 2016-05-20 Earnings Call Transcript

Good day, ladies and gentlemen, and welcome to the Gordmans Stores, Incorporated first quarter fiscal 2016 earnings conference call. My name is Tony and I will be your operator for today's call. At this time, all participants are in a listen-only mode, but we will be conducting a question-and-answer session at the conclusion of today's presentation. [Operator Instructions] Please note that today's call is being recorded. I would now like to turn the conference over to your host for today, Brendon Frey of ICR. Please go ahead, Brendon.

Thank you and good morning. Before we begin, I would like to remind everyone that the information contained in this conference call, which is not historical fact, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC and our earnings release. I would now like to turn the call over to Andy Hall, Gordmans’ President and CEO.

Thank you, Brendon, and good morning. With me on the call today is James Brown, our Chief Financial Officer. As most of you are aware, the retail industry experienced first-quarter weakness in consumer spending, especially in apparel and related categories. For us, store traffic softened, starting with the week leading up to Easter through the end of the first quarter. Our first quarter comps ended down 5%, well below our guidance range of down 2% to flat. We were able to deliver bottom line results in line with our guidance due to our proactive management of expenses. We were also proactive in managing inventories. As you may recall, at our last earnings call, we said we expected to end first quarter with inventories flat on a comp store basis. We were successful in achieving this through markdowns and receipt management. Our first-quarter clearance activity pressured gross margin compared to last year, but was in line with our guidance. Given an expectation that consumer spending will remain soft for the second quarter, we will continue to manage inventories through markdowns and receipt management. As of second quarter end, we expect our comp store inventory to be down low-single-digits and have the appropriate merchandise content for the back-to-school season. While the macro-environment is challenging, we are taking steps to maximize sales and profitability. As it relates to merchandise, we had many categories that were successful in the first quarter. The common themes in these businesses were newness, innovation and experiential. Active across all zones, extended sizes in missy and men’s, home décor and furniture with a modern farmhouse theme, fragrances, pet, garden and outdoor living performed well in Q1. We will continue to feed receipts and expand floor space for these and other trending classifications. We are also taking marketing actions to drive traffic and support merchandise trends. Our new series of branding commercials launches in July. These branding commercials are solely 15-second spots to improve frequency and reach and will emphasize our everyday value proposition. Our gRewards loyalty program grew 4% from the end of 2015 to 5.2 million members and represents over 70% of our sales. gRewards initiatives to help drive traffic include tighter integration with our private label credit card, increased functionality and guest visibility with our new CRM and POS system, enhanced online sign-up experience, refinement of rewards such as events and point levels, improved in-store signage and digital reward redemption tools. We will continue to increase our brand exposure through a multilayered marketing approach. In addition to the branding campaign, we are testing more localized and geo-targeted strategies with traditional media and digital initiatives. We will be launching a cross-platform social media campaign for back-to-school. Lastly, we continue to make progress creating a more efficient organization that is easier to leverage. We are encouraged by the preliminary findings of our expense review. We will finalize the findings and begin implementing process simplification in the second quarter and expect to see meaningful financial and operational benefit in the fall season. Before I turn the call back to James to discuss Q2 guidance and results in further detail, I will briefly update you on e-commerce, our new point-of-sale system, and our store base expansion. We continue to make progress on our e-commerce platform. First quarter sales penetration, however, was lower than our expectations. Our conversion to spring merchandise and expansion of SKU count were lower than optimal. As of today, we have approximately 45% of brick-and-mortar spring SKUs online. Our goal is to have 70% of the brick-and-mortar SKUs by third quarter end. This will represent all of the e-commerce eligible SKUs. We are on track to roll out our new POS system early in the third quarter. This new system will improve the guest experience in addition to improving store efficiencies. Moving on to our 2016 new stores. We opened our first of the five new stores in Omaha. Our next new store opens in July and the last three stores open in September. All of our 2016 new stores are in existing markets and we’ll leverage with marketing and district management resources. Our steps to improve sales and profitability are being taken in concert with our strategic initiatives and should benefit both the short-term and longer-term results. There is one last item before I turn the call over to James for a detail of our first-quarter results as well as discussion of our second-quarter guidance. I'm sure that you all saw our recent press release regarding our hiring of Mike Ricart, our SVP of Stores. Mike brings a tremendous leadership and floor merchandising skillset. He has already begun making an impact in his first couple of weeks. Now to James.

Thank you, Andy. I'll now cover the financial results from the first quarter of 2016 and Q2 guidance. Net sales for the first quarter of fiscal 2016 decreased $3.8 million or 2.6% to $142.2 million as compared to $145.9 million in the same period last year. Comparable store sales on an owned basis decreased 5% due to a decrease in guest traffic, partially offset by an increase in average sales per transaction. Gross profit decreased to $62 million. Gross profit margin was 43.6% for the first quarter compared to 44.5% last year, a 90 basis point decrease. This was driven primarily by higher markdowns. SG&A expenses for the first quarter were $63.9 million or 44.9% of net sales versus $63.3 million or 43.4% of net sales in the prior year. This represents a 150 basis point increase. The recently launched investment in e-commerce operations had an impact of 70 basis points. Store expenses increased 70 basis points, primarily due to deleveraging of fixed costs associated with the comparable store sales decline. This store increase was partially offset by a reduction in store payroll expense. Depreciation expense increased 30 basis points, primarily due to increased investment in technology, including the launch of our e-commerce operations in the second quarter of fiscal 2015. Corporate expense increased 20 basis points, primarily driven by higher professional service fees related to the company's engagement of an outside party to assist in identifying expense-saving opportunities. This was partially offset by lower corporate payroll. Distribution center expenses decreased by 20 basis points, primarily due to lower inventory receipts and operational efficiencies gained from our supply chain initiatives. Pre-opening expenses decreased 20 basis points due to the opening one new store in the current quarter compared to two new stores in the same quarter last year. Interest expense for the first quarter was $0.8 million compared to $1 million for the same period last year. The reduction is primarily due to the term loan refinancing completed in the second quarter of fiscal 2015. Our combined federal and state effective income tax rate for the first quarter of fiscal 2016 and 2015 was 39% and 39.1% respectively. The net loss for the first quarter of 2016 was $1.6 million versus net income of $0.4 million last year. First quarter diluted loss per share was $0.08 compared to diluted earnings per share of $0.02 in the first quarter of 2015. Turning to our balance sheet, cash and cash equivalents at the end of the quarter were $8.5 million compared to $8.7 million a year ago. We have been focused on inventory and reducing inventory receipts based on sales trends. Inventory was $102.7 million at the end of the first quarter, which is down 2.9%, compared to $105.8 million at the same time last year. After accounting for the hoteling of goods mentioned on our fourth quarter earnings call, inventory at the end of the quarter is up 0.5% on a comparable store basis compared to the same time a year ago. Our working capital was $17.6 million compared to $21.7 million a year ago and the total debt outstanding, net of unamortized debt issuance cost, was $53.6 million compared to $41.6 million a year ago. The timing of capital expenditures was the main driver for the increase in debt in the first quarter. The timing primarily relates to the implementation of the new point-of-sale system as well as a significant timing difference on new store expenditures. The new store expenditures will normalize to last year levels as we finish the construction phase and complete the sale-leaseback transaction. In aggregate, capital expenditure for 2016 will be in line with last year. Our liquidity continues to be strong as we had excess availability on our revolving line of credit of $51.2 million at the end of the quarter. With respect to forward-looking guidance, we are projecting second quarter fiscal 2016 net sales to be between $139 million and $142 million, which reflects a mid-single-digit decrease in comparable store sales. We expect gross profit margin to be lower than last year from increased markdowns as we continue to manage inventory levels. Selling, general and administrative expenses are expected to increase in the second quarter, primarily due to additional professional fees related to the expense savings review and higher e-commerce and depreciation expense. Based on this, we project a diluted loss per share for the second quarter in the range of $0.29 to $0.25. We would now like to open up the floor for questions.

Thank you. [Operator Instructions] We’ll go first to Neely Tamminga of Piper Jaffray.

The plan D&A is up a little bit. It's up about 40 or 50 basis points from LY. And, Neely, what’s happening is our capital expenditure in 2016 will be flat with 2015, but we’re still feeling the impact of the investment in 2014 from the new distribution center and then the roll out of the corporate and then e-commerce as well. So it will be up this year. I would expect that to start to normalize as a percent of sales in dollar amount over the next few years.

Super helpful. Thanks, you guys. Good luck out there.

Thank you.

Thank you.

Okay, thank you.

Thank you, both.

[Operator Instructions]. We have no further questions signaling at this time. I’d like to turn the conference back to Andy Hall for any closing or additional comments.

Thank you. On behalf of our entire management team and our 5000-plus associates in our stores, distribution centers and corporate office, thank you for your continued interest in and support of our company. See you next time.

That does conclude today’s conference. We do thank you for your participation. You may now disconnect.

Great. Good morning. Just wanted to ask you a couple set of questions, if I could. Let’s talk a little bit maybe about kind of the current trends and patterns. Are you seeing a similar traffic pattern to kind of what’s been broadly reported out there around just like a slowdown in mid-March kind of all the way through the quarter and possibly into Mother’s Day? Could you give some sort of contextualization of what you guys saw in your stores around the timing?

Sure. I would say that the - what we heard during the quarter was pretty consistent with our trends and it seemed like it was all different formats were seeing the same thing. So as we said in the script, we really saw the traffic slow down the week leading up to Easter and it really continued through the end of the first quarter. And I think that's generally consistent with what we've all heard on last week and this week's calls for the most part.

Andy, is the underlying guidance on the top line indicative of the fact that that has continued because there has been a varying degree of how people are responding to their Q2 outlook? Some people are saying, here’s our Q2 outlook, but we’re assuming things get a little bit better; or here’s our Q2 outlook and it’s actually a reflection of current trends. What side of the camp are you guys in?

Yeah. The latter, generally speaking. I think, philosophically, what we decided to do is, we might as well go out there and guide how we’re going to run the business. We think it’s prudent to be very conservative. There's a lot of unknowns out there with the consumer. While it seems like she should be spending more with the price of gas and jobs and employment wages, she's not. So if that changes, we’ll have the ability to chase. So that’s kind of how we’re running the business for the second quarter. We’re running it with a very conservative point of view. Our expectation, quite frankly, is to beat that. But we think that's the prudent way. So when we talked about guidance, we decided that we might as well guide on a conservative expectation. So the guidance is kind of in line with the way we’re running the business, so we don't think that's necessarily a bad thing.

That’s helpful. And then, as we think, again, a little bit here in the near-term, but as we think about, broadly, the weather is warming in the MidWest and Northeast - at least that’s what the forecast, fingers crossed, is holding forth for the balance of this month. We’ve got Memorial Day right around the corner. Are you guys tactically doing something differently with Memorial Day that we should be on watch for that says you're going to get your fair share for this Memorial Day weekend?

So as you know, we run an everyday-value-price department store model. This is one of the events that we try to protect market share with. So we will be out there with a little more aggressive stance to try to protect market share and drive traffic.

Okay. And then - okay, so that’s enough of the near-term. Thank you for that. Right around the corner, we’ve got this new POS system, can you just remind us the different facets of what you have available to you? I know you briefly mentioned some of the high-level aspects of what the POS system can do. But how does this ultimately tie back to inventory and data and assortment analytics? Does it - we’re just trying to better understand kind of the longer-term implications.

It will set a platform for some things down the road. Initially, there’s a few benefits that we’re getting from this. One is, there was a necessity to change the POS system from a compliant standpoint with protecting customers’ data and information. There was a practical side as well. Our POS system was pretty old. It was not tremendously guest-friendly and it wasn't particularly friendly to the sales associate as well. There is a lot of manual effort involved with the old POS system. So in addition to becoming compliant with - from a data and privacy protection standpoint, there’s some efficiencies that we’re going to get out of this on the front-end that, I think, the guests will appreciate and our associates will appreciate. And then, there is also a lot of different arms. So we’re changing out the CRM system at the same time as the POS system. So we think there’s going to be a lot of benefits in that. And I’ve articulated some of those in the script. So it's a POS install on steroids for us. But to your question about down the road, it definitely sets us up for developing better understanding and mining of the store inventory and tracking the store inventory for some omni-channel efforts down the road.

Neely, an added benefit is it’s going to put a little more structure around the markdown and promotional activity and there’ll be less overrides, which we think will help as well with the margin.

That’s helpful. Yeah, that’s definitely good. Okay, cool. And then one last housekeeping item, James, for me. On D&A, I’m sorry if I missed it, but what’s your plan D&A for this year?

We’ll go next to Richard Jaffe at Stifel.

Thanks very much, guys. I guess a question about some of the specifics within the business. Could you talk about, I guess, the new brands that have been introduced and then some of the categories, drilling down a little bit deeper into the fashion that might be performing well? Obviously, apparel was pretty much overlooked in the favorite category. So I’m wondering if you could comment a little bit about some of the positives in apparel, if there are any, whether it’s brands or key SKUs.

Well, there certainly are some. We talked about active. So men's active, junior active and missy active are all doing very well. And when I say very well, it's very, very high positive comps. Nike is driving a lot of that business in men's and missy. Now, we don't buy directly from Nike, but we do get it through the off-price channels. So there are elements of apparel that are working. Our career business is pretty good in missy, driving positive comps. There's just more weakness in apparel that's offsetting some of the things that are happening elsewhere on the floor. So some basics, especially socks, are doing well. We talked about the plus size on the missy side and big and tall on the men's and young men’s side is doing well. I mentioned cosmetics, especially - on two fronts really. Fragrance is doing well, running a positive comp. And then, we’ve got a new vendor called e.l.f. - eyes, lips and face - that we introduced last year and that's growing tremendously. So when we look at personal care and fragrance, that's doing very well. Pet and luggage. So there's areas that are working. There are some vendors that we are getting ready to open up. I’d prefer not to mention who they are on the call, if you don't mind. If you want to give me a call, we can probably talk a little bit offline. I’ll still be a little vague, but I’d give you enough hints that maybe you can figure it out, Richard.

[Operator Instructions]. Next to Bill Dezellem at Tieton Capital Management.

Thank you. That’s Tieton Capital. And a couple of questions. First of all, May specifically and post quarter-end, what can you tell us about that or should we just read into it that you’re down about 5% with your comps and in line with your guidance?

Bill, I’m not going to - whatever you want to read into it, you can read into it. I think where we guided the quarter, again, is where we’re managing the business. And, obviously, we always hope that it's better than that. But a lot of that depends on some things that appear to be out of our control, with the consumer and her spending and savings levels and other things that are driving her behaviors today. So it's really early to take a read off of the two weeks of May, especially with Memorial Day pushed back a week versus last year.

Thank you. And then also, would we understand correctly that your earnings would have been much better had you achieved your expected comps of flat to a minus 2 or were there some expenses that you would have experienced had you had the higher or improved sales and so earnings would have been roughly the same? Would you walk through those two scenarios please?

Definitely, I think our earnings would have been better if we’d had a flat to minus 2 comp. There would have been some incremental expense associated with the increased sales. Of course, there’s some of the variable expenses that we incur. But I think we would've been able to harvest much of those to the bottom line.

So, Bill, if you think of it from a flow-through standpoint, if you get incremental sales, you’re getting about 41-and-change points of margin dollars and then your variable expense dollars that will go with those incremental sales are nothing close to the 41%. So there's, obviously, going to be a flow-through to the bottom line. So, yes, we would've been much more profitable at a minus 2 to flat versus a minus 5.

Right. And then, in the press release, you referenced expense savings initiatives that you had in place. Would you discuss where you're coming at this from? First, from a conceptual standpoint, meaning the line items that you are trying to attack the hardest, and then also, what you believe the total dollar savings will be when you get your way through the program?

Sure. So the expense review wasn't necessarily targeted at particular areas. It was really an expense review across all functions in the organization. That, we undertook in the first quarter. The preliminary results of that are very encouraging, as I mentioned in the script. In the second quarter, we still have quite a bit of work to ferret out and validate the initial blush on the savings. I would tell you, we’re not just talking about expense savings. What we’re trying to do is find process simplifications and improvements from an efficiency standpoint. So that’s why, in the second quarter, we’re going to be doing quite a bit of work on tools and processes that are going to improve simplicity and efficiency. We think that’s the best way to get savings on the current basis and keep those savings in the in the longer term. We’re not ready at this point because we’re still working through the organizations to ferret out the savings. We’ll certainly be in a position closer to the end of the second quarter to share what our expectations are from a cost-saving standpoint, from these simplifications and process improvements. I can tell you that we’re looking at a multiple of our investment in working with the outside agency that's helping us with this endeavor.

What are you spending with that agency?

We’ll share that as we get into the second quarter and completely nail down what the scope and how much of the scope of that work is going to be taken on internally versus externally. We’ll be able to share a number with you.