GMAN (GMAN) 2016-03-18 Earnings Call Transcript

Good day ladies and gentlemen and welcome to the Gordmans Stores Incorporated Fourth Quarter Fiscal 2015 Earnings Conference Call. My name is Kayla, and I will be your operator for today's call. [Operator Instructions]. I would now like to turn the call over to your host today, Brendon Frey of ICR. Brendon, please go ahead.

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. The company may refer to certain non-GAAP metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metric can be found on the earnings release, filed early today. I would now like to turn the call over to Andy Hall, Gordmans' President and CEO.

Thank you and thank you for joining us. On the call with me today is James Brown, our Chief Financial Officer. I will start by discussing our 2015 accomplishments and how we are approaching the management of our business in 2016, given the uncertain sales environment that has enveloped most of retail. Lastly, I will add some color to our fourth quarter performance, before I turn the call over to James. James will present our financial results for the fourth quarter and full year in more detail, as well as discuss our 2016 first quarter guidance. We will conclude by answering any questions you may have. While 2015 ended on a challenging sales note, there were a number of accomplishments and investments, that have strengthened our foundation and improved our prospects for growth. Our adjusted non-GAAP diluted loss per share was $0.16 in 2015 versus an $0.18 loss in 2014. While this 10% improvement is notable, once we factor in the impact of recent investments, our improvement is more evident. Specifically, the 2015 $0.16 loss includes a $0.07 year-over-year negative impact related to e-commerce and a $0.09 year-over-year negative impact related to depreciation. We are pleased with our e-commerce results to-date, and believe that this initiative is an important catalyst for future sales growth. The depreciation impact, principally relates to our 2014 investment in our second distribution center, and a relocated corporate office, as well as 2014 and 2015 investments in new stores and technology. We opened six new stores in 2015, and have executed leases to open five new stores in 2016. All five 2016 new stores will open in existing markets, and will help rationalize existing marketing costs. Other 2015 accomplishments include, posting our first quarterly comp increase in some time in the third quarter. Our full year comp decrease of 1.3% was a meaningful improvement compared to the 4.8% and 7.4% decreases generated in 2014 and 2013 respectively. We grew our guest loyalty program membership by 35% to 5 million members. We continue to leverage our guest loyalty database through a robust marketing program that benefits from an increasing penetration of email addresses. This program adds a sense of urgency to our guests, and drives incremental traffic to our stores. Loyalty members comprise 73% of our sales in 2015. In addition to loyalty, we rolled out a new broadcast marketing campaign, focused on value and e-com convenience. We will continue to run and refresh this campaign throughout 2016. We drove meaningful improvement in gross profit margin, with a 60 basis point increase over 2014. We expect gross profit margin rate expansion, again in 2016. We streamlined and strengthened our management team in 2015. We eliminated the Chief Operating Officer position, and reduced the number of traditional merchandising managers reporting to the Chief Merchant from seven to five. We now have all feminine apparel reporting to one DMM, and our kids business now reports to a seasoned DMM with kids experience. In addition, James has now been on-board as CFO since September. Lastly, we continue to strengthen our balance sheet; following our 2014 paydown of $15 million on our senior term loan, in 2015, we refinanced the remaining $30 million balance, and reduced the interest rate by 225 basis points. The maturity date was also extended two years to 2020. We are pleased with the 2015 accomplishments, and are optimistic as we enter 2016. I believe that the strong management team that we have assembled, combined with our improved balance sheet and productive investments, provide a strong foundation for growth. However, under the current macro sales environment, in which retailers are operating, we feel that it is prudent to operate with a conservative sales plan, in order to control merchandise receipts, and then chase the business as it strengthens. By the end of the first quarter, we expect to be operating with flat comp store inventory, and continued expansion of our SKU representation online. We continue to work on initiatives to return the company to consistent comparable store sales growth and profitability. Our 2016 strategic business initiatives, build upon our 2015 accomplishments, that include, driving guest traffic. This initiative includes obtaining greater share of wallet from our existing loyalty guests, acquiring new guests and driving growth in e-commerce. We expect e-commerce to represent approximately 1.5% of sales in 2016. Identifying expense savings; while we have made strides in rationalizing our expense base, we are intensifying our efforts and have engaged a third party to commence an expense review in April. Optimizing our supply chain; we continue to believe that we could improve our supply chain efficiency, at most points from order entry to delivery to selling form. In addition to traditional supply chain activities, we have begun the formal process of hoteling goods. At the beginning of 2016, we had $3.7 million of hotel merchandise inventory. Implementation of our new point-of-sale system; we are still on track for a mid-2016 rollout to all stores. Strategically expand our store base, we have entered into five new store lease, all of which are in existing markets. Now I want to briefly speak to our fourth quarter results, before I turn the call over to James. Sales during the quarter were very uneven, both by month and within a month. The quarter started well, with a positive comp in November. December sales were very weak, until a few days before Christmas. Post Christmas sales were good through the middle of January; and the second half of January was very slow. Both December and January posted negative comps, with the quarter comp down 2.3%. We ended the year with inventories in excess of plan. While all goods that should have had a hard mark, were marked a clearance, we still had too much depth. Inventory on the balance sheet at year end is approximately 13% higher than last year. On a comparable store basis, our inventories are approximately 8% higher. However, this includes early receipts of February on order. Adjusted for the early receipts, comp store inventory is up approximately 2%. Hotel goods of $3.7 million and new store inventory account for the remaining difference between comp store and total company inventory increase. Again, we expect comp store inventory to be flat at the end of the first quarter. Our best performing merchandise divisions were young men's and men's and team, both posting positive comps. Our toughest businesses were outerwear and cold weather accessories. There are several classifications that have momentum entering 2016, including active in all divisions, plus sizes, big and tall, infants, fragrances, garden and domestics. James will now provide more detail of our financial results for the fourth quarter and the fiscal year, as well as our guidance for the first quarter of fiscal 2016. James?

Thank you, Andy. I will start with fourth quarter 2015 financial results. Net sales for the fourth quarter of fiscal 2015 increased $1.8 million or 0.9% to $205.7 million as compared to $203.9 million in the same period last year. The increase in net sales was driven by sales from the five net new stores opened in fiscal 2015, as well as the launch of our e-commerce operations in the third quarter of 2015. Comparable store sales on an owned basis decreased 2.3%, due to a decrease in the number of transactions, partially offset by an increase in average sales per transaction, which were driven by an increase in average units per transaction. Gross profit increased 1.9% to $78.3 million. Gross profit margin was 38% for the fourth quarter, compared to 37.7% last year, a 30 basis point increase. This was driven primarily by lower markdowns, mostly offset by unusually high shrink uncovered in the January physical inventories. We currently perform all other store physical inventories in the month of January, and the results of those inventories, on a retail basis, was 1.7% of net sales or 40 basis points higher than last year. It is unclear as to how much of the shrinkage increase resulted from theft or from process issues. As such, in 2016, we are investing a significant amount of energy to combat both areas, and return to historical shrink levels. This includes enhancing the audits of receipts into the distribution center, and store locations, as well as putting renewed emphasis on loss prevention reviews and store processes. We will also be moving roughly a third of our physical inventories into mid-year. This will allow us to monitor the progress of our efforts, and allows us to work on any additional issues discovered before year end. SG&A expenses for the fourth quarter were $75.5 million or 36.8% of net sales versus $72 million or 35.3% of net sales in the prior year, a 150 basis point increase. Marketing expenses were 90 basis points higher than last year, due to an increased investment. The recently launched e-commerce operations had an impact of 80 basis points. Depreciation expense increased 10 basis points, primarily due to increased investment in technology for the launch of our e-commerce operations, while corporate expenses were flat. Distribution center expenses decreased by 30 basis points, primarily due to operational efficiencies gained at our new distribution center. Interest expense for the fourth quarter was $0.8 million compared to $1.1 million for the same period last year, with the decrease a result of the paydown of $50 million on the senior term loan in November 2014, and the term loan refinancing during the second quarter of fiscal 2015, which resulted in a 225 basis point reduction in the interest rate. A combined federal and state effective income tax rate for the fourth quarter of fiscal 2015 and 2014 was 39%. Net income for the fourth quarter of 2015 was $1.1 million versus net income of $2.3 million last year. Fourth quarter diluted income per share was $0.06 compared to diluted income per share of $0.12 in the fourth quarter of 2014. Weighted average diluted shares outstanding were $19.4 million in both periods. On to the full year results, for the fiscal year, net sales increased $14.3 million or 2.3% to $649 million from $634.6 million last year. The increase was due to the four net new stores open in 2014, to five net new stores open in fiscal 2015 and the launch of e-commerce operations in the third quarter of 2015. Comparable store sales on an owned basis decreased 1.3%, primarily due to a decrease in the number of transactions, partially offset by an increase in average sales per transaction, which were driven by an increase in average units per transaction. Gross profit increased 3.8% to $274.4 million. Gross profit margin was 42.3% for the fiscal year compared to 41.7% last year, which represents a 60 basis point increase. This was due primarily to lower promotional markdowns, partially offset by the previously discussed increase in shrinkage. SG&A expenses for the fiscal year were $275.5 million or 42.5% of net sales, versus $265.3 million or 41.8% of net sales last year, a 70 basis point increase. This was driven by the launch of our e-commerce operations in the third quarter of 2015, and an increase in depreciation expense, as a result of our investments in technology, new store growth and infrastructure, including a full year depreciation expense from the 2014 opening of our second distribution center. Interest expense for the fiscal year, excluding debt extinguishment costs of $2 million, decreased $1.2 million to $3.8 million. The decrease was a result of the paydown of $15 million on the senior term loan in November 2014 and the term loan refinancing during the second quarter of fiscal 2015. Our income tax rate was 39% for fiscal year 2015 versus 41.4% last year. The adjusted net loss for the fiscal year was $3.1 million or $0.16 per diluted share, which excludes $0.06 per share of expense related to debt extinguishment. This was an improvement of $0.4 million or $0.02 per diluted share over last year's loss of $3.5 million or $0.18 per diluted share. GAAP net loss for fiscal 2015 was $4.3 million. Turning to our balance sheet, cash and cash equivalents at the end of the quarter were $7 million, compared to $7.6 million a year ago. Inventory was $106.6 million at the end of the fiscal year, up 13% compared to $94.5 million at the end of last year. Once you account for the hoteling goods Andy mentioned earlier, plus some early February receipts, inventory is up approximately 2% on a comp store basis. Our working capital was $21.8 million or 12% higher than at the end of last year, and the total debt outstanding was $46.8 million, which is $5.5 million higher than last year. This was primarily due to financing higher inventory levels. Our liquidity continues to be strong, as we had excess availability on our revolving line of credit of $59.3 million at the end of the year. Now on to guidance for Q1 2016; with respect to forward-looking guidance, we are projecting first quarter fiscal 2016 net sales to be between $146 million and $150 million, which reflects comparable store sales in the range of down 2% to flat. We expect gross profit margin to be down compared with last year, as we clear the year-end inventory build. We project a diluted loss per share for the first quarter, in the range of $0.10 to $0.06, which includes a onetime expense of $0.02 related to our engagement of a consulting firm, that is assisting us with identifying expense saving opportunities. We expect to start realizing the expense benefit in the second half of the year. We would now like to open up the floor for questions.

Easter is next week, so we have got a little bit of the shift of Easter. So we have got the pre-Easter with this week, we got Easter with next week, and obviously, that's a big wild card.

Great. Thanks Neely.

Thanks Neely.

Sure. Thanks Richard.

Sure.

[Operator Instructions]. We have no further questions in queue at this time. I would now like to turn the conference back over to Andy Hall for any additional or closing remarks.

Great, thank you. On behalf of our entire management team and our 5,000 plus associates in our stores, distribution centers and corporate office, we thank you for your continued interest in and support of our company. Talk to you soon. Bye.

That concludes today's conference call. Thank you all for your participation. You may now disconnect.

[Operator Instructions]. And we will take our first question from Neely Tamminga with Piper Jaffray.

Good morning gentlemen. I just wanted to ask kind of three buckets of question if I may; so on the first related to spring trends, sounds like casual sportswear is not included beyond the active com trade? I think you made quarterly debates for the trend. Just wondering what you are seeing in denim, juniors? Do you feel like you're better positioned to kind of capitalize on what seems to be some pre-spring break purchasing behavior out there broadly? That's top line. And then from a gross margin perspective, I want to make sure I heard this correctly; you are going to be down in Q1, but you expect to be up in the full year. If you could give us a sense about that journey, or maybe I heard that incorrectly? And then lastly on the cost savings initiatives, Andy, if you could give us a little bit more detail on, you know, the consultant, and maybe some areas that you will be addressing, that would be helpful for us to kind of better contextualize? Thank you so much.

Thanks Neely. So I will start at the top; so spring trends, actually we are pretty excited about Missy Sportswear, because that was a project in 2015 and where we over-expanded our contemporary businesses into all doors, and got over inventory at the end of 2014 and kind of struggled through the spring of 2015 with that position. Missy has really kind of turned the corner, and I would tell you that, the Missy business in total, is really good. Clearly, Active is doing well. Tops are doing very well. Casual, bottoms and more of the clear [ph] related areas are doing well. I would tell you, we are seeing it in the sales line as well, and Missy is one of the best performing merchandise division so far this month, and in the month of March. So we are excited about that. Juniors is doing well also. Tops, are flying. I would tell you that, Denim is a little bit slow for us right now, but it's being more than offset with the Tops business that we are doing in juniors, and that includes all tops from tees to casual to career types tops as well. Fashion and basic are both doing well in junior. So the spring trends actually are -- spring merchandise, when the weather pops, is actually doing pretty well. So from a gross margin standpoints, you did hear correctly, down in Q1, up for the full year. Q1 is clearly being impacted probably to the tune of a couple of pennies, negative impact from the carryover of inventory from the end of the year. While we had a hard mark on everything that should have been marked at the end of the year, we were just too heavy. The sales miss in the fourth quarter backed up fall inventory, and we are working our way through that in the first quarter, but it's going to cost us some margin in the first quarter. Our approach is -- because we are too deep, is we are taking a promotional approach to clearing through the heavy clearance inventory that we have. Instead of taking another hard mark and devalue all of that merchandise, we are trying to go out there with a extra percent off clearance, and move through the units that way. That way we can actually maximize the amount of sales in revenue and cash that we get out of the clearance, as opposed to just taking a mark on all of the clearance, and then selling it every day at that reduced price. We are taking our shots on specific selected periods during February, and now in March, where we are going with an extra percent off of that clearance. But it does come at a cost, so it's costing us a couple of pennies in margin in the first quarter. As it relates to cost savings, I'd rather not mention the national firm that we are using, but it's one of the prestigious firms that are out there. We are happy to get them on board, and starting the project in April. I would tell you that, from an expense standpoint, we are pretty much looking across the board. We are looking at expenses inside the corporate office. We are going to look at stores. Obviously the supply chain and distribution center operations, it's all a fair game for the project.

Great. Thanks Andy. And may I ask one follow-up here; on job trends [ph] then overall, spring to-date, are you tracking positive, but you are planning conservative? Is that what we are hearing?

I would tell you that -- I can't get into a whole lot of detail on how we are tracking; we are certainly, obviously planning conservative, but we guided down two to flat. February was flat -- I would tell you that, sales so far for the first six weeks of the first quarter, is uneven, just like it was in the fourth quarter. So we got periods of time, where sales are doing very well, and the customer will turn off, and then we will struggle for a period of time. So the first half of February was very challenging, the second half of February was fabulous. First week of March was good. Second week of March was not so good. But I'd rather not quantify where we are.

Okay. Great. Thank you so much and best of luck out there.

We will take our next question from Richard Jaffe with Stifel Investment Bank.

Just I guess -- two thoughts, one is store closings. That was an issue, when you first came onboard, and there was an opportunity to edit the store portfolio, and wondering where that stands today and how the fleet of stores looks. And then, if you could just comment on hotel inventory, just to clarify what that is, and then, also the actual inventory level that you mentioned early, deliveries of February goods, and when does that deliver -- sort of even itself out? So I guess, stores first and inventories second please?

Sure. So on the store closing, there were still a handful stores that are running significant negative for a while. They are on our list to -- that we are still actively pursuing. One of those stores will get closed in 2016, upon not renewing the lease. Couple of stores in Chicago, we continue to actively market. We don't have anything to report today, regarding that. But I would tell you, that it's in the handful -- it's in the four-five stores in the chain, that we are looking at opportunities from a store closing standpoint.

I'd also add in that, on some of the stores, where they're negative contribution margin, we have negotiated rent reductions. So we are tackling from that standpoint, is due to get them lease breakeven and slightly positive, so they are not a drain on earnings.

That's great. I mean, obviously, anything you can do there is helpful. Hotel -- if you could just clarify, hotel inventory, because you are buying today to sell it at discounted price next season, or is that how I should have seen that?

Yeah, it's goods that we are buying, typically at the end of the season or near the end of a season, at a very advantageous price, where the economics make sense that we can hold those goods in our distribution center, and bring them out the following year or the following season, whatever is appropriate at the beginning of that season. So it has got a rich margin component to it, and we go through and we are very selective in what we do this on, and we take into consideration, the cost of carrying the merchandise in our distribution center, in the equation. We are formalizing this more. We have actually made some investment in the distribution center from a racking standpoint, so that we can actually house the goods and then we can push those goods out in the appropriate season. So there was $3.7 million of hoteled goods at the end of fiscal year. Some of those goods will roll out in late spring, some of them will roll out early fall, as they were end of fall season buys, and some of them were end of spring season buys in 2015, where we are going to -- we will roll those out in the appropriate season here in 2016. We expect that -- so we had $3.7 m n at the beginning of the year. Our expectations is that, during the year, that would probably max out, and there will be goods flowing in and flowing out, but we think it would max out at about $9 million, and at any point in time that we would be holding in hoteled goods during 2016. Is that helpful?

Yeah, it's very helpful. And wondering how you think about the fashion component of goods you're putting into the hotel, how you are trying to assess the fashion risk, regarding the --

Yeah so, generally we will try not to do fashion goods; because obviously, fashion goods change from season-to-season. But there are opportunities out there, for example, most of the puffer jackets next year are going to Polyfill, so we saw some opportunities with downfill puffers, which we think will actually have some fashion element and fashion advantageous aspects to it, when we roll that out next year. We will bring out the downfills and be able to sell that at a premium, versus the Polyfill down that's out there. So there are some opportunities from a fashion standpoint, that we will take advantage of, but they are pretty rare. Mostly goods tend to be on the basic side of the equation.

Understood. Thank you very much.

[Operator Instructions]. We will take our next question from Bill Dezellem with Tieton Capital Management.

Thank you. What percentage of your revenues would fall into the positive momentum categories that you highlighted?

Really don't have a percentage off of the top of my head, Bill. Obviously, the clearance in that inventory that we own at the end of the year, we wouldn't put it in that classification. We have seen some good strong selling of spring merchandise, especially when spring weather pops. So that's a big component of our inventory, obviously, now that we are in spring. I really don't even have a guess as to what percentage of inventory that would represent.

All right. Let me switch gears if I may; you'd mentioned how the first quarter so far has started reasonably choppy, and I am wondering, to what degree has weather really been tied with the choppiness, either helping or hurting, or is it more undetermined factors?

I would say that, so far in this quarter, it's more undetermined. I mean, I think in the fourth quarter, we could actually see specific weather impacts, and we could actually point to quite a bit. I would say, in February and March, while there has been some weather, there has also been some -- weather goes both directions, right. So if you're anniversarying up against the weather last year, they are going to benefit on a day, if you got some weather this year, it’s a detriment. I would say that, weather, those pluses and minuses on weather, probably have evened themselves out here in -- so far in the first quarter, so I think the choppiness is less weather related and more consumer related. I am not sure why its consumer related, but I think it is.

All right. Thanks Andy.