Vince Holding Corp. (VNCE) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp., First Quarter 2017 Earnings 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 [ph], Vice President of Investor Relations, please go ahead.

Thank you, and good morning, everyone. Welcome to Vince Holding Corp’s first quarter fiscal 2017 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 expects. 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 the 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. After the prepared remarks, management will be available to take your questions for as long as time permit. Now, I'll turn the call over to Brendan.

Thank you, Amy, and thank you everyone for joining us today. Our first quarter results were largely in line with our expectations. As anticipated our wholesale sales during the quarter were impacted primarily by the elimination of our summer delivery. While we are still facing challenges in this segment, we are making progress and continuing to evaluate ways to optimize our presence in this channel, including potentially rationalizing our points of distribution. We also continue to refine our off price channel distribution as it remains a strong area for the retail industry overall. We believe we can drive profitable growth in this channel without sacrificing our brand’s integrity. Our DTC channel we saw strong performance in our e-commerce business with gross demand of 25% in the quarter and further acceleration in the second quarter to-date. We also saw trends in our full price retail stores dramatically improve in the first quarter and so far into the second quarter. We attribute this to better management of our product offering, promotions and marketing. Turning now to product, while we have brought back the quality and DNA inherent to the Vince brand, we will continue to evolve our product offering to ensure that we are aligning the assortment with the needs of our customers. We plan to continue to offer the season less layering pieces that puts Vince on the map, but we will build more variation within each category, as well as infuse more [feminity] [ph] into the line. In addition we are under penetrated in certain categories where we see strong potential and where we know we have core competencies. By expanding the offering in these categories including dresses and bottoms we can round out the assortment and elevate the overall presentation of our collection. Finally, while we have an opportunity to capture higher AURs within certain classifications, we will focus on creating a better balance of good, better, best pricing within categories. You’ve heard us speak about our third-party brand initiative, which currently features jewelry, art, sunglasses and the selection of home decor items in key locations and online. We have been pleased with the favorable response to this initiative and seeing opportunity to further expand our assortment by offering additional third-party brands. While this will represent a small part of the assortment, we believe this led more variety and excitement within our stores to further engage existing customers and draw in new ones. We are looking to expand the presence of third-party brands in other categories where we can complement our current assortment. We are in the early stages of evaluating opportunities and we will keep you updated as they unfold. In addition to refining our product assortment, we are focused on enhancing our customer shopping experience in our direct-to-consumer channel. We want our customers to feel welcome and engaged every time they walk into a Vince store or visit vince.com. And believe we can do this by bringing more warmth and a relaxed feel that reflects the modern effortless style we stand for. We believe that these modest cosmetic enhancements can make a big difference to customers’ overall experience. We were also pleased to share that we opened our first Hawaii store in Honolulu at the end of May. With initial response meeting our expectations, the aesthetic of the store reflects the local relaxed vibe with clean lines, neutral tones and an inviting atmosphere. We continue to evaluate additional retail locations opportunistically. We will also apply this richer experience on our e-commerce channel. For example we will enhance our photography and improve the layer of the site to better showcase our elevated product. In addition we will seek to tell more brand stories and look for other ways to further engage our consumers. This will dovetail nicely with our overall marketing efforts as we are looking to bring the brand back to our L.A. roots and build the story around our luxury product that allows her to be fashionable and very effortless in a low key way. We will work to ensure that this comes through all of our touch points as we build a cohesive story around the Vince brand. In addition, as we’ve mentioned previously we are now working to heighten the marketing effort around our brand. To that end we have seen good success with our new social media campaign including our Illuminate Instagram Influencer series, which generate thousands of new followers. We also just completed a survey of our customers to gain additional insights into what they want to see from the brand. We received some great feedback and are working to analyze the responses and come up with appropriate go forward strategies. In addition we are strategically getting our message out around sale and promotion in a way that feels exclusive and brand appropriate. To help execute these initiatives, we brought in Caroline Belhumeur, a multi classification creative director from Club Monaco as Senior Vice President and Creative Director. Caroline has an impressive track record of success with extensive and diverse design experience and creative expertise, brings with her tremendous talent, retail experience and leadership skills. We look forward to leveraging her product, branding and retail experience as well as her creative oversight. As I noted on our last call, we have been analyzing our cost structure to help better align our resources with the growth areas of our business. We recently engaged consultants to help with this process and are in the early stages of identifying and quantifying cost saving opportunities within the business. Finally we remain highly focused on remediating our systems and working to increase liquidity in our business. Dave will speak to you about this in more details shortly. Looking ahead, we will continue our efforts to drive further momentum in our direct-to-consumer segment, rationalize our department store business and capitalize on the strength of the off price channel, while taking steps to reduce cost in our business. With that, I'll turn it to Dave to review our financial results. Dave?

Thank you, Brendan. First quarter net sales decreased 14.2% to $58 million, compared to $67.6 million in the prior year period. Our wholesale channel sales were down 20.9% to $35.4 million, primarily due to the elimination of our summer delivery. Our direct-to-consumer segment sales decreased 1% to $22.6 million in the first quarter and comparable sales including e-commerce declined 5.7%, reflecting a decrease in average order value. E-commerce has been a positive for the business with demand up double-digits in the first quarter, while retail stores continue to see improved performance. This momentum has continued into the second quarter. Gross profit in the first quarter was $25.6 million or 44.1% of net sales, this compares to $28.3 million or 41.8% of net sales in the first quarter of last year. The increase in the gross profit rate for the first quarter of 2017 reflected a favorable channel mix shift and decreased discounts from the liquidation of excess inventory in the first quarter of fiscal 2016, partially offset by higher allowances and supply chain cost. Selling, general and administrative expenses in the quarter were $33.8 million, or 58.2% of net sales, this compares to $31.8 million or 47% of sales for the first quarter of last year. The growth in SG&A dollars for the first quarter of fiscal 2017 was due to increased cost associated with the remediation of our new systems and higher product development, marketing and new store cost, partially offset by a decrease in incentive compensation, consulting and temporary labor cost. In addition, transition, severance and other strategic costs in 2016 did not recur in the first quarter of 2017. Operating loss was $8.2 million compared to operating loss of $3.5 million for the first quarter of fiscal 2016. Provision for income taxes for the first quarter of fiscal 2017 was $52,000, compared to an income tax benefit of $2.7 million in the prior year quarter. Our tax rate for the first quarter of fiscal 2017 was 0.6% compared to 58.1% in last year's first quarter. The tax rate for the first quarter of 2017 reflects the offsetting effect of the valuation allowance established against our deferred tax assets in the fourth quarter of fiscal 2016. Due to this offsetting impact, we expect any tax expense or benefit for the company in fiscal 2017 will be near zero. To further explain this, any tax rate used to generate an income tax expense or benefit in fiscal 2016 will be completely offset by an increase or decrease in the tax valuation allowance. Net loss for the first quarter was $9.3 million or a loss of $0.19 per share compared to a net loss of $1.9 million or $0.05 per share in the first quarter of last year. The impact of a tax valuation allowance I just discussed affects the comparison of net income or loss to prior year results. Now moving to the balance sheet, gross inventory increased $2.7 million in comparison to the first quarter of fiscal 2016, while inventory reserves decreased $6.1 million as a result of less excess and aged inventory. The year-over-year increase in gross inventory is partially due to additional stores in comparison to the first quarter of fiscal 2016, as well as the added pre-fall delivery. We ended the first quarter with $15.4 million of cash and equivalents. We had $66.1 million of borrowings under our debt agreements and availability in access of $15 million remaining under our revolving credit facility at the end of the first quarter. Our borrowings under the revolver increased during the first quarter, as a result of investments in working capital, driven by payments to vendors and the timing of collections of receivables. Since the end of the first quarter we have made specified equity contributions, totaling $11.8 million to meet our net total leverage covenant requirement as at the end of the first quarter. We are focused on multiple fronts to secure additional liquidity options and improve the capital structure of the company. As we previously announced, last month we received a rights offering commitment letter from Sun Capital that provides us with an amount equal to $30 million in cash proceeds. We are working to meet the conditions of this letter, which would allow us to pursue this opportunity. We are pleased with Sun Capital’s continued support of Vince. We are also in active discussions with our term loan facility lenders and our revolving credit facility administrative and collateral agent regarding amendments that would provide relief on covenants and additional borrowing capacity. In addition we are engaged in discussions with other third-parties on strategies to enhance our liquidity. The focus on these liquidity or capital enhancing opportunities are important as during the first quarter reserves have been placed on our borrowing capacity and we have seen accelerated terms and prepayment requirements from certain vendors. Also we anticipate that other factors could potentially result in further negative changes to the availability under revolving credit facility. These factors continue to put greater pressure on our liquidity and absent a timely resolution of the immediate working capital requirements the company could encounter product shipment delays, which would adversely impact the business. Further information regarding our liquidity can be found in our 10-Q. The execution of any of the opportunities with Sun Capital, our lenders, or other third-parties, which I previously referenced, would help address these liquidity pressures. As another part of our plan to increase liquidity we have engaged various specialized consultants to help us identify cost savings in the business. Additionally subsequent to the end of the first quarter, we have prudently managed expenses that have resulted in reduction of $2 million of annualized expenses. Capital expenditures for the quarter totaled $1.8 million, primarily attributable to investments in our retail stores as well as in our new systems. As at the end of the quarter, we operated 54 stores in the U.S. including 40 full price stores and 14 outlet stores. I would also note that we have made progress in our remediation plans to address the material weaknesses relating to both IT general controls and governance of IT projects that we identified at the end of fiscal year 2016. During the first quarter as part of the remediation plan, we established an IT Steering Committee, which has adopted comprehensive information technology governance policies and procedures. Additional details regarding our remediation plan can be found in our 10-Q. As we think about the rest of 2017, we have added back our pre-fall delivery in the second quarter which we eliminated last year. In addition we expect to benefit from some of our product enhancements, which was scheduled to hit the floors in our fall deliveries. As we mentioned earlier, our e-commerce business is performing well and we expect those trends to continue through the remainder of the year. While our systems migration challenges are not fully behind us, we have made progress and continue to focus on addressing open issues. As a result we expect to continue to incur costs associated with these remediation efforts through the third quarter of fiscal 2017. In conclusion, we are taking steps to create additional liquidity and are focused on the remediation efforts, as well as strengthening our systems. As Brendon stated in his remarks we are working on opportunities in our wholesale and retail segments to better capitalize on the brand equity, while taking actions to reduce our costs structure, which should enable us to stabilize our business and position us for longer term growth. This concludes my comments regarding our first quarter financial performance, we will now take your questions. Operator?

Thank you everyone for your continued support and interest. We look forward to updating you on our Q2 results in early September.

This concludes today's conference call. You may now disconnect.