Vince Holding Corp. (VNCE) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is [Sylvia] and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Q4 2016 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. [Amy Levy] Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Vince Holding's fourth quarter and annual fiscal 2016 earnings conference call. Hosting the call today is Brendan Hoffman, Chief Executive Officer; and Dave Stefko, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expect. Those risks and uncertainties are described in today’s press release and in the company’s SEC filings, which are available on the company’s website. Investors should not assume that statements made during the call will remain operative at a later time and the company undertakes no obligation to update any information discussed on the call. In addition, in today’s discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. In addition the company is presenting an estimated impact to earnings per share related to certain asset impairment charges as well as the valuation allowances reported against the company's deferred tax asset. Certain components included in the calculation of such impact are non-GAAP measures. Discussions of these non-GAAP measures and reconciliations of them to their most comparable GAAP measures are included in today’s press release and related schedules, which are available in the Investors section of the company’s website at investors.vince.com. After the prepared remarks, management will be available to take your questions for as long as time permits. Now, I'll turn the call over to Brendan.

Thank you, Amy, and thank you everyone for joining us today. As we look back at 2016, our organization has undergone a number of changes that were necessary to create a solid infrastructure and to reestablish Vince as a luxury fashion brand. We engaged our Founders as consultants to help us recapture our brand ecstatic. We rebalance the assortment to bring more fashion into the mix and reset our basic replenishment business and we once again began to work with number of our former factories and fabric mills to enhance the quality of our pieces. We also continuously gathered feedback from our wholesale partners, our store associates and our customers much of which are design team is incorporated into our upcoming collections. Finally, we migrated to a new IT infrastructure and a new warehouse as we separated from Kellwood systems. Unfortunately, the complex systems transition was met with a number of challenges, including integration and process issues leading to a reduction in visibility in our financial reporting systems and causing a delay in our 10-K filing. This also led to material weaknesses in our internal controls which Dave will discuss in more detail. While we completed the implementation of these systems, which ran across several functions of our business, the integration and process issues also caused delayed shipments, particularly in the off-price channel and some order cancellations as well as returns, primarily for pre-spring product. In addition, performance of our pre-spring collections fell short of our expectations as we did not have enough buy -- enough of the buy now, wear now product that she was looking for. These factors in addition to the malaise in the apparel industry continue to weigh in our business. Lastly, we significantly reduced promotional activity during the year. Our business have become far too reliant on up and down promotions, both in our own DTC business and our wholesale partners and was not sustainable. While this impacted both our top and bottom-line in 2016 and is now behind us as evidenced by our first quarter DTC trip. This cleanup was a necessary decision for the brand, but we also realize in the current environment, we need to be relatively competitive to our peers. Going forward will further refine our strategy to ensure that we balance our promotions and messaging with protecting brand integrity. Our spring collection which largely shipped in the first quarter has been more in line with our expectations. Notably, we have some pants [Indiscernible] garnering strong positive response in addition to the success that we're having a lux lounge items. During the first quarter, we've also seen a vast improvement in our e-commerce business with double-digit growth as well as in our retail store performance with stores currently tracking in the high -- down in the high single range, far less than they did in the fourth quarter. Turning now to some of the areas that we will be focusing on in 2017. First, we will continue to enhance our product offering as we work to add more fashion femininity into the line. I think our biggest opportunity is embracing the instant gratification that customers are looking to get from their purchases by incorporating more buy no wear now pieces indoor assortment. We added back a pre-fall delivery in May, which we believe will benefit the second quarter. This delivery will feature lots of lighter weight fabrics and transitional colors and we believe will mark the start of a more relevant wear now collection from Vince. Overall, our assortments in 2017 will select fabrications and color palettes that are wearable in the current season, a better balance category offering as we intensified classifications such as outerwear and bottoms and a more appropriate mix of fashion versus core basics. These enhancements to our assortment will help our customers round out their wardrobes with great seasonal pieces and high quality core pieces that complement our fashion offering. We want to ensure that our floors always have the appropriate balance of fashion product complemented by core items and promotional pieces that are being bought in advance for the season. As we add back some core replenishment items into the assortment beginning with men's, we believe that we can fill in some of these holes that we had -- previously had in our everyday offering. Secondly -- second, we will focus on growing our direct-to-consumer business. In particular, we believe that we are poised to capitalize in our e-commerce channel. As I said earlier, we have seen a significant uptick in business this quarter. We believe that this is attributable to how we're showcasing our product and the favorable customer reaction to our merchandise offering as well as the recent investments that we have made to improve our e-commerce side. We're also be more thoughtful in how we interact with our customers online, enhancing the way that we message our online sales and becoming more visible in our digital media and other online marketing efforts. Turning to our store portfolio, we're focused on methodically adding new stores, expanding select existing stores and better utilizing space across the store base. We plan to open a store in Honolulu, Hawaii in May and we continue to have conversations about new store opportunities, potentially for later in the year or in 2018. As part of this, we're adding men's to our flagship Madison Avenue store and have some additional store expansions that we are in the process of negotiating. As we discussed in our last call, we recently launched The Collective, which includes third-party product such as jewelry, art, bag, sunglasses, and the selection on home décor items in our Grove location in Los Angeles and our Madison Avenue store, New York as well as online. We're very pleased with the favorable response thus far as it clearly is extending customer engagement. We will be rolling out The Collective assortment to additional stores over the next few months. In our wholesale channel, we are taking steps to ensure that the Vince brand is optimally presented to the customer. We are analyzing this business to determine if there's an opportunity to better rationalize our points of distribution. We will have more detail on this initiative as we complete our evaluation. We will also reassess our off-price business. This channel has been a bright spot in retail and therefore, we want to leverage the opportunity to optimize this business. In the second half of 2016, we drastically reduced shipments to off-price retailers. We believe there is too much sale inventory buildup in this channel and we wanted to allow this product to sell-through so that we can better control the quality of the product as well supply and demand. Going forward we will look to rebuild this business in a more strategic way as we continue to focus on better managing the content and flow of inventory to this channel as well as the mix between excess and made for outlook product. We believe that this more strategic approach to off-price will ultimately enable us to capture higher AUR as well as higher margins in this business. Our last area of focus is our marketing efforts. Last year we made the strategic decision to take a step back in terms of marketing as we work to enhance the product, reduce the amount of promotions our brand was associated with and transition the business. Now, the product better reflects the Vince brand, we feel there is an opportunity to be more competitive in our messaging and marketing the brand of consumers. Our efforts will be focused around digital marketing including our social media networks, targeted emails, and of course, our own website. Hopefully, you've already had a chance to see this in action with our recent Instagram takeover where we work with eight style influencers design their own Vince look featuring this season illuminated color palette. As we focus on speaking more directly to our consumers over the last two quarters, we are pleased to have seen accelerated engagement in our social media channels. We'll also focus on some more traditional marketing efforts such as smaller billboards and targeted magazine placements. In addition we're working on a store level to [house for intermediate] events for our top customers and their friends, we believe will help drive additional interest among our loyal customers and bringing new ones. We're also working to gather data to better understand how our target customer prefers to interact with Vince to ensure that our efforts are focused on the most productive and efficient channels for our brand. Importantly, we will continue to be very thoughtful about the level and frequency of promotional activity in which our brand is involved. Finally, we are analyzing our cost structure to identify efficiencies that will enable us to better align our resources with the areas of growth in our business, which we will outline in more detail on our next call. In conclusion, while the company was required to access its ability to continue as a going concern in line with the new accounting standard, which Dave will discuss further. We continue to believe in the Vince brand. As we look ahead, we will continue to work on enhancing our product assortment, fine-tuning our promotional strategy and marketing programs, and completing work on our infrastructure. We also plan to optimize our wholesale business and place greater emphasis on the direct-to-consumer segment where we have begun to see improved trends in both our online business and retail stores. Overall, we remain encouraged about the long-term potential for the brand as Vince remains number one or two brand with our wholesale partners despite the challenges in our business. And we continue to get good [Indiscernible] feedback from our partners about customers' affection for the brand. With that, I'll turn it Dave to review our financial results. Dave?

Thank you, Brendan. Before I begin the overview of our financial results, I like to take a moment to address our 10-K filing extension and material weaknesses noted in the filing. First, we'll file our 10-K later today within the available period. During the transition from legacy Kellwood systems, we experienced some issues related to integrating our new ERP system with our internal business processes and third-party systems. Ultimately, we believe these systems will serve to increase our operational efficiency. However, this system's transition and implementation resulted in delays in compiling financial reports and other data -- controls. As a result of material weakness identified, we performed additional analysis, substantive testing, and other post-closing procedures to help ensure that our consolidated financial statements were prepared in accordance with U.S. GAAP and we believe they present fairly, in all material respects, the financial results of the company. We have made progress in our remediation plan to address these material weaknesses relating to both IT general controls and governance of IT projects. We have been remediating our control weaknesses over the last two months and have implemented a number of controls to address these weaknesses. However, we will need to test the effectiveness of these fixes and make adjustments as necessary. There are still additional controls to be implemented and tested, which we are diligently working on. Until our systems and material weaknesses are fully remediated, which we expect be completed by the end of fiscal 2017, we will continue to conduct additional diligence around our quarterly closing procedures to ensure the accuracy of our financial results. Now, turning to our financial performance, as Brendan mentioned, our fourth quarter topline sales results did not meet our expectations, primarily due to the challenges we encountered as a result of our complex systems conversion as well as lower than expected performance of our pre-spring collection and the general difficulties in the apparel industry. While sales in both of our business segments were challenged, our wholesale business was significantly below our plan due to these factors, while the retail segment came in just slightly below our expectations. Fourth quarter net sales decreased 21.9% to $263.9 million compared to $81.8 million in the prior year period. Our wholesale channel sales were down 28.4% to $34.4 million. Our direct-to-consumer segment sales decreased 12.6% to $29.4 million in the fourth quarter and comparable sales including e-commerce declined 20.5%. Gross profit in the fourth quarter was $29.2 million or 45.7% of net sales. This compares to $41 million or 50.1% of net sales in the fourth quarter of last year, which included a $2.2 million benefit from a recovery on $14.4 million inventory write-down that was taken in the second quarter of last year. Selling, general, and administrative expenses in the quarter were $39.1 million or 61.1% of net sales, including a $2.1 million non-cash asset impairment charge related to certain retail stores. SG&A was $36.2 million or 44.2% of sales in the fourth quarter of last year, which included a $323,000 favorable adjustment to management transition costs taken in the second quarter. Operating loss was $62.9 million, which includes a $55.1 million in non-cash long-lived asset impairment charges of which $53.1 million was related to goodwill associated with our direct-to-consumer business and the tradename intangible asset and $2.1 million was related to the aforementioned non-cash charge for retail stores. Operating income for the fourth quarter of fiscal 2015 was $4.8 million and excluded the aforementioned benefit from the recovery on the inventory write-down and the favorable adjustment to management transition costs totaling $2.5 million. Provision for income taxes for the fourth quarter fiscal year 2016 was $98.2 million. During the quarter, we incurred $121.8 million charge, reflecting the recording of an income tax valuation allowance against our deferred tax assets. As you'll recall, our tax rate earlier in the year was higher than normal due to certain non-deductible expenses. As a result of an internal business event that occurred in the fourth quarter, we now expect these expenses to be deductible for income tax purposes, which resulted in adjustment to our tax rate in the fourth quarter of this year, bringing our full year adjusted tax rate to 40.8%, which excludes the impact of the tax valuation allowance. Due to the combination of this significant valuation allowance and net operating loss carryforwards, we expect any tax expense or benefit for the company in fiscal 2017 will be near zero. Net loss was $162.1 million or $3.28 per share including an estimated impact of $3.13 per share related to the aforementioned non-cash long-lived asset impairment charges as well as the valuation allowance against the company's deferred tax assets. This compares to net income of $1.8 million or $0.05 per diluted share for the fourth quarter of fiscal 2015 which included a $0.04 per diluted share benefit from the recovery on inventory write-down and favorable adjustment to management transition costs. We did not record any non-cash long-lived asset impairment charges in the fourth quarter of fiscal 2015. Now, moving onto the balance sheet. Inventory at the end of the quarter was $38.5 million compared to $36.6 million at the end of last year's fourth quarter. This year-over-year increase was due to lower inventory reserves as we had less excess and aged inventory requiring lower reserves as compared to last year. We ended the fourth quarter with $21 million of cash. We had $50.2 million of borrowings under our debt agreements and availability in excess of $27 million remaining under our revolving credit facility at the end of the fourth quarter. During the month of April, we made specified equity contributions totaling $6.2 million to meet our net total leverage covenant requirements as of the end of the 2016 fiscal year. In accordance with new accounting guidelines that became effective for fiscal year ended January 28th, 2017, we concluded that there is substantial doubt about our ability to continue as a growing concern specifically relating to our ability to comply with the consolidated net total leverage ratio under our term-loan facility in future periods. Our future projections consider the uncertainty of trends in the retail environment in which we operate and anticipate that will make an additional specified equity contribution for the first fiscal quarter of 2017. Although, we expect to continue to use the remaining $15.2 million of cash retained at Vince Holding Corp to make additional contributions. There are limits on another contributions it can be made in any fourth fiscal quarter and there is a limit on the amount of cash has been retain for the purpose of making specified equity contributions On April 14th, we announced that we entered into a side letter with Bank of America which amends and restates the initial side letter dated March 6th, 2017. The side letter provides the company with the ability to July 31st, 2017 to borrow just a portion of the $15.2 million of cash currently held at Vince Holding Corp. In addition to the equity contributions and amended side letter, we’re looking at other strategies to increase our liquidity including cost rationalization initiatives. We have also had discussion with lenders and with our majority shareholder on additional financing options and actions to improve the capital structure of the company. Note that while we believe each of these actions is reasonably possible and could alleviate the substantial doubt, most of these actions have not been executed at this time and therefore cannot be considered under the existing accounting guidelines. Capital expenditures for the quarter totaled $1.6 million primarily attributable to IT migration costs. As of today the company operates 54 stores in the U.S. including 40 full price stores and 14 outlet stores. Now looking ahead to fiscal 2017. We have made the prudent decision to suspend our sales in EPS guidance, as we work to make our new systems more efficient and complete our business transition. Or we do want to provide you with some considerations to keep in mind as you think about our first quarter performance. First in terms of product timing as we previously discussed a portion of our spring deliveries originally planned for January were shipped in the first quarter of fiscal 2017. However due to our systems issues portion of the shipment -- missed shipping windows are ultimately cancelled. In addition, we limited our April summer delivery this year. Finally, as you may recall, excess inventory shipped in the off-price channel in the first quarter of last year drove higher wholesale sales. We did not have the same level of off-price shipments in this year's first quarter given the reduced levels of excess inventory. Therefore year-over-year shipments in the first quarter were lower this year than last. With the absence of excess inventory shipments, we expect wholesale gross margin rate to improve for the first quarter. On the expense side, we expect to incur additional systems related costs in the first half of fiscal 2017, as we work to correct the issue previously discussed. As you think about the rest of the year, in last year second quarter we limited one of our pre-fall shipments. We will be adding back our pre-fall collection in the second quarter of this year. For the fourth quarter 2017, we do not anticipate shipping delays somewhat to those experiences in the fourth quarter of 2016. We expect CapEx to be approximately $5 million for the year. We anticipate opening one new retail store in fiscal 2017 and to make investments in existing stores as well as continued investment in our systems. First quarter is our trough and cash receipts to end of year allowances to customers which are higher than last year. At the end of Q1, we anticipated an increase in borrowings which is also impacted by the timing of working capital needs. Also remember, we improve our liquidity with the side letter with [indiscernible]. We expect no borrowings under that facility. This concludes my comments regarding our fourth quarter financial performance and outlook for 2017. We will now take your questions, operator?

[Operator Instructions] Your first question comes from the line of Drew North of Robert W. Baird. Please go ahead.

Good morning. Thanks for taking our question. You mentioned rebuilding off-price business in a strategic way, what do you see as an optimal mix of full price versus off-price business for the brand overtime?

Well, as we've been discussing for last year and half -- one of our issues that we believe was how -- how much our off-price shipments have risen over the previous few years, when I first got here and walk into a lot of the off-price I think there was just a statement of Vince toward our competition. Dave mentioned that we kind of flush that out in the first quarter last year, but did so at unfavorable margins for us so that we pulled back and try to reset the supply and demand. During the course of the year, we got to have conversations with the leaders of our biggest wholesale partners to encourage us to support this channel as it become so important to them as they continue open up more and more location. As we went to the back half of last year, we really worked hard to try and see how we can take advantage of the opportunity, support our partners yet do it in a way that was accretive to the brand and to our profitability and I am not sure exactly where the number ends up because some of it has to do with the factors in the business but I can tell you the two things that most conscientious about is one what price are we selling the shop at because that's the biggest thing that tells us are we are flooding the market which are committed not to do and that we look relative to her peers out there in the stores. And so right now we are in very adventitious -- advantage of situation where there is tremendous demand because of how much we’ve cut back supply. I mean I’ve gotten countless notes from a different partners saying that their inventory is down over 50% from last year and really imploring us to ship them product. So, as Dave said a lot of the constraint was due to our systems in last three-months not getting a little bit more product out there, but we feel that we will be able to get a normalized flow out there that best calibrate the business for us and for them.

Thanks for the additional color. Regarding your wholesale partners, how is the end of the consulting agreement with the founders impacted these conversations? Are you seeing any change in their willingness to commit to orders for the upcoming seasons or I guess more broadly what are you hearing from them on order plan given the tough traffic in apparel spending environment?

I am sorry, can you repeat that you were cut out for a second. I apologize.

Sure. No problem. Just regarding your wholesale partners has the end of the consulting agreement with the founders impacted those conversations? And what are you hearing more broadly from them on order plan given the tough traffic in apparel spending environment?

Yes, sure. No I mean, I think everyone understood Rea and Christopher, the timing of their re-retirement as I call it, I mean they were incredibly important to me and to the company into our wholesale partners to help redefine and reset the brand. But as I said in when they left that their work was done and now we needed to move the business forward in for today's customer which has changed over the last few years as we continually talk about and I think our wholesale partners recognize that as well that they were very pleased that they were here, they re-establish those relationships, they the reset the brand, but that they understood the timing of them leaving and we’re very comfortable with the team in place here. I think that the second party of our question, business is rough out there I mean we hear that from all angles and certain of the department stores are being very cautious in terms of their receipt placements. They want to put more and more of the burden on the brand to hold inventory and as I mentioned in my remarks although I have heard maybe they want to cut out, we are analyzing the wholesale business to determine if there's a better opportunity to rationalize our points of distribution. We need to be smarter about part of that, but -- to make sure that we are being smart about the way we do we distribute the brand.

All right. Thanks for taking my questions.

Your next question comes from the line of Jeff Van Sinderen of B. Riley. Please go ahead.

Good morning. So, given Christopher and his departure, just wondering if -- and obviously [Indiscernible] fairly short time ago, is the recent improvement in trend in business that you're seeing in their business or is that due to changes that we're making, they left again. I guess what gives you confidence that you can turn the business around at this point?

Well, I think that it’s a combination. It's hard to separate them and separated. As I said, there's so much value we got from them coming back and pointing us in the right direction and imprinting kind of the Vince DNA in the organization. I do think there's something we've done since they left in our own direct-to-consumer business that have helped message the brand that will bit more aggressively. That's spurred some of the improved trends we've seen both online and in the stores and better balancing the mix of end of season sale with new product the way we are re-merchandising the store. I think a lot of this was started and taught by Rea and Christopher, but I do think to a certain extent there, their retirement has freed up the organization to be a little more empowered and make decisions at a local level to drive business. And I think that helped our Q1 trends. So, I think it's building on the foundation that they helped rebuild here, but also recognizing that the consumer is changing and the way she wants to shop and be talked to and obviously, the product the same in our stores as it is in the wholesale channels more or less. And I just think it speaks to know our understanding of our brand, our connection with our customer, the way we present the merchandise, the way we romance the merchandise that has allowed for far improved performance.

Okay. And then you also mentioned that you're bringing a pre-fall shipment. I think you said that's shipped out in May. Just wondering if that I guess what kind of merchandise within that shipment, is that summer way merchandise or how should we think about that merchandise?

Yes. So, that was a delivery that had always important to Vince, but due to the timing year and a half ago when the Founders came back, we just could not get that delivery executed. So, we had to cut it. So, it's a big plus to have that back. It is exactly as you suggest. Its transitional merchandise that is wearable -- in ways that are wearable for June/July, but in colors that will start to transition to have longer life as we move on into early fall. And I think this goes back exactly to what we've talked about so much in the last few months with this buy now, wear now whereas that delivery two years ago would have been much more heavily geared towards fall with [heavier weights] and darker colors. And while there still will be as I said in my remarks some emotional pieces that really are meant to be with worn in fall, it has a much greater balance of instant gratification. So, we're really excited about that collection. The collection has gotten great response from our specialty store accounts and the reason I called that out is, specialty store accounts, we -- there is no -- there are long-term relationships, but there's not the same agreements that go along with the majors. So, they buy-in if they like it and the fact that we've gotten an increased response there both for pre-fall and fall as the teams hit the road is exciting for us to see that the merchandise is really getting on track.

Okay. Then another one if I can just add. As far as the stores go, your own stores, I'm just wondering what needs to happen for you to get that to positive contribution in those stores. In other words, what sort of account do you need to run? For how? What sort of gross margin improvement would you need to have? Just trying to get some sort of gauge on that and I guess how far away you might be from getting those back deposit contributions?

Well, I mean we're not going to lay out quite a specific as you suggest. But again, directionally, really pleased with what we're seeing in Q1. The website has been phenomenal and the full price of the -- all the stores have shown tremendous improvement in trend from where they were in 2016. I think a big part of this is the reduction -- great reduction in promotional activity that we did in 2016. I mean we kept trying to call out how much that hurt our comps in 2016, not anniversaring all those month-long buy more save more events that we had previously and n the aggressive nature of our friends and family promotions. Now, we're up against a much cleaner business that we can build off of and we're starting to see the benefits of that in Q1. So, as I mentioned in my remarks we're really focused on what we can do to drive more through the direct-to-consumer omnichannel business because we may go up our margin based -- if we get past the fixed cost as you're alluding to. So, we'll certainly have more on that as the year goes on, but it's definitely a focus of ours and starting to see some real momentum.

Okay. And one final one if I could. Just wondering if there's anything could you say about the potential resolution towers the [Indiscernible] in terms of how to write the capital structure?

Well, I mean Sun has been and continues to be a great partner for Vince. They have very senior representatives on the Board and are fully engaged on a day-to-day basis with management. As Mark Leder has quoted in the press release, big supporter of the company and its business plan and look forward to continuing to work with them on solutions and opportunities.

Okay. Thanks for taking my questions.

There are no further questions at this time. I will turn the call back over to Brendan Hoffman.

Thank you everyone for your interest in Vince Holding's. We look forward to updating you on our progress on our next conference call.