Vince Holding Corp. (VNCE) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Liandra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Second Quarter 2017 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. [Ph] Amy Levy (00:32), President of Finance and Investor Relations, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Vince Holding Corp.’s second 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 permits. Now, I'll turn the call over to Brendan.

Thank you, Amy, and thank you everyone for joining us today. During the second quarter sales were roughly flat in the wholesale and retail segments, with sequential improvement compared to the first quarter. In our wholesale business, sales were down approximately 1%. We saw some disruption in receipt flows related to our liquidity challenges, which have since improved as we continue to work with our suppliers. With the funds we expect to receive as a result of the completion of our rights offering, we anticipate disruptions of our receipt flow will minimize and expect that most of the products which shifted out of the second quarter will ship in the third quarter. Sales in our off-price channel increased as we had higher quality inventory this year compared to last year, which enabled us to be less promotional. Importantly, the quality of inventory in this channel has improved and we were much more profitable within the comparable prior year period. As you’ll recall in my – in last year’s second quarter, we were still working to move through excess and aged inventory, and therefore we were heavily discounted in this channel. We believe we are now building back our presence in this channel in a healthier, more brand appropriate way at improved margins. As we have mentioned previously, we have been working on ways to rationalize our department store distribution and strengthen this business overall. We evaluated a number of options for this channel and ultimately determined that the brand was too fragmented in some areas and that we could create a stronger presence of fewer, more focused points of distribution. Therefore, I am pleased to announce we have entered into a limited distribution arrangements for non-licensed products with both Nordstrom and Neiman Marcus beginning in fiscal 2018. These partnerships are anticipated to bring many benefits to all sides, including increased inventory commitment, enhanced marketing exposure, door expansion where appropriate, greater collaboration and future category support, in addition to more streamlined logistics. Note that our specialty store and web business are largely unaffected by the distribution change and should benefit as well. While we deeply value the relationships with our other partners over the last 15 years, we believe that by reducing our wholesale exposure and focusing our efforts on two partners we will be better able to enhance the representation of the Vince brand and improve profitability in this channel over the long-term. While this change will obviously impact sales in the near-term, we believe that it is the right strategy to strengthen our business and position us for future growth. Turning back to our second quarter results, sales in our direct-to-consumer business for the quarter were up 2.3%, driven by high-single-digit growth in our combined full price and e-commerce business. This was partially offset by weakness in our outlet business as we continue to face challenges due to lower inventory levels and difficult traffic trends. We are working to address these inventory challenges and expect that we will be back to a more normalized flow by the end of the year which we anticipate should lead to sequential improvement in this channel. In our full price stores and e-commerce businesses we saw strong revenue growth early in the quarter, although performance of our spring assortment did not meet our expectations. In addition, we didn't anniversary our April summer delivery from last year, which put pressure on sales in the quarter. While we didn't promote our regular price product, we did keep sale product on the floor longer term than we did last year, which impacted our margins in our full price and e-commerce business during the quarter. As I mentioned earlier, the rationalization in the wholesale channel will help us to simplify and streamline our business overall, and enable us to focus on other areas of growth for the brand, including increasing our emphasis in the direct-to-consumer business. We have already started conversations with landlords about our desire to open up new doors on an opportunistic basis in select locations with shorter lease terms and at lower rent rates than our current store average. This will help us grow our business more profitably, while limiting our long-term exposure. While we are still early in the process, we have received positive initial feedback from our landlord partners who seem receptive to these opportunities. We look forward to talking more about these selective openings as negotiations unfold in the future. In addition, we are moving forward with a test of several enhancements and upgrades to our overall in-store shopping experience at a select few locations and look forward to updating you on that as we progress. We also plan to invest more heavily in our e-commerce business and expect to launch a mobile app in the second half of the year. This app will provide an enhanced experience for customers every time they shop Vince from their mobile device. Turning to product performance, while we saw marginal improvement in our pre-fall line, we are highly encouraged by the performance of the fall product at our full price stores with sell-through rates above last year's performance. While products is just hitting the floors, we anticipate improved performance at our wholesale channel, given the initial response from those who have received product. She is responding to emotional outerwear and cloth and shearling, transitional knits and textured sweaters, along with the new pant silhouettes. We recently announced that we would be launching a home capsule collection in October, which features a line of Italian cashmere, pillows and blankets, extending our casual luxury DNA in this category. Reaction to the product has been positive with favorable write-ups in both Architectural Digest and vogue.com. We expect to re-launch our handbags in select retail stores and online for the holiday season, plan to rollout additional stores thereafter. In addition, we continue to explore ways to further expand the Vince brand in the categories that are complementary to our current offering. On the marketing front, we have been using the insight and feedback that we gathered in our recent customer survey to ensure that we are best addressing their needs. We are pleased that both our brand awareness and affinity are growing and customers continue to turn to Vince as a key resource for high-quality products that are effortless, modern and fashionable. That said, we learn that we still have room to improve our marketing and branding efforts to further increase brand awareness. As such, we have just launched our fall campaign, which will increase our visibility in major metro markets, celebrating the beauty and simplicity, and encouraging consumers to be found, be felt, be moved. In addition, now that we reset our wholesale strategy, we remain focused on analyzing our cost structure to help align our resources with the growth areas of our business. Dave will discuss in more detail in his remarks. Overall, we believe that we are executing the right initiatives for our brand and expect that we can stabilize the business and work to ultimately drive growth as we refine our wholesale distribution strategy and enhance our direct-to-consumer segment. We believe that our efforts to deliver product that is better aligned with customers’ needs and targeted marketing initiatives combined with our focus on reducing costs across the business will support our long-term growth objectives. Finally, as you may have seen today, we announced the results of our rights offering, which is expected to close shortly. We also entered into amendments to our term loan and revolving credit facility agreements. The term loan amendment is expected to become effective upon the closing of the rights offering. Taken together we believe that these actions will provide Vince with additional liquidity, improve the capital structure of the company, which Dave will speak to shortly. With that, I'll turn it to Dave to review our financial results. Dave?

Thank you, Brendan. Second quarter net sales were roughly flat at $60.8 million, compared to $60.7 million in the prior year period. Our wholesale channel sales were down 0.9% to $39.3 million, primarily due to a reduction in international sales. In addition, as Brendan mentioned, we saw an expected disruption in receipt flow throughout the quarter, which impacted sales both in the U.S. and internationally. Over the past few months we have worked closely with many of our vendors and partners and are pleased to have recently seen our receipt flows begin to normalize. With our completed rights offering, as well as the recent amendments to our credit facilities, we anticipate that we will get back to normal terms with our suppliers in the near future, and therefore, we anticipate disruptions to our receipt flow will minimize beginning in the third quarter. Our direct-to-consumer segment sales increased 2.3% to $21.6 million in the second quarter, while comparable sales including e-commerce declined 0.8%, reflecting a decrease in average order value. We saw sequential improvement in sales in our direct-to-consumer segment, with high single-digit growth in our full price and e-commerce businesses combined. Gross profit in the second quarter was $25.6 million or 42% of net sales. This compares to $27.4 million or 45.1% of net sales in the second quarter of last year, a 310 basis point decline. Note that last year's gross profit reflected a $1.9 million benefit or 310 basis points from favorable adjustments to inventory reserves. The gross profit rate for the second quarter of 2017 also reflected a higher mix of markdowns in the direct-to-consumer segment and unfavorable product and supply chain costs, which were partially offset by a decrease in discounts and allowances in the wholesale segment. Selling, general and administrative expenses in the quarter were $34.4 million or 56.6% of net sales. This compares to $31.6 million or 52.1% of sales for the second quarter of last year. The growth in SG&A dollars for the second quarter of fiscal 2017 was due to increased one-time costs associated with the remediation and optimization of our IT systems, severance and other one-time investments, primarily associated with our efforts to ultimately reduce costs and improve profitability, as well as increase costs associated with our standalone systems and back office functions. This increase was partially offset as we anniversaried costs we incurred in last year’s second quarter to transition our IT systems and infrastructure in-house, some of which was recognized as a capital investment and also costs related to the company's brand update initiatives and savings related to our previous consulting arrangement with the company's founders. Operating loss was $8.9 million compared to operating loss of $4.3 million for the second quarter of fiscal 2016. The higher year-over-year loss from operations reflects the aforementioned $1.9 million benefit from favorable adjustments to inventory reserves in the second quarter of last year. In addition, this included the aforementioned $2.3 million net increase reflecting investments related to the remediation and optimization of IT systems, severance, and other one-time investments, as well as savings related to the company's previous consulting arrangement with its founders. The income tax benefit for the second quarter of fiscal 2017 was $4,000 compared to an income tax benefit of $3.3 million in the prior year quarter. Our tax rate for the second quarter of fiscal 2017 was zero percent compared to 62.8% in last year’s second quarter. The tax rate for the second quarter of 2017 reflects the offsetting effect of the valuation allowance established against our deferred tax assets in the fourth quarter of fiscal 2016. As we've mentioned previously, 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 2017 will be completely offset by an increase or decrease in the tax valuation allowance. Net loss for the second quarter was $10.1 million or a loss of $0.20 per share compared to a net loss of $2 million or $0.04 per share in the second quarter of last year. The impact of the tax valuation allowance I just discussed affects the comparison of net income or loss in prior year results. Now moving to the balance sheet, gross inventory increased $5.7 million in comparison to the second quarter of fiscal 2016, while inventory reserves decreased $1.5 million as a result of less excess and aged inventory in 2017. The year-over-year increase in gross inventory is driven by the timing of off-price shipments. As Brendan discussed, in the first half of last year, we aggressively move through excess and aged inventory in this channel and did not build inventory back up in the second half of the year. We have now begun to build back our presence in this channel, while doing so in a much healthier way. We ended the second quarter with $3.8 million of cash and equivalents. We have $73.5 million of borrowings under our debt agreements and availability, and approximately $18 million remaining under our revolving credit facility at the end of the second quarter. Our borrowings under the revolver increased during the second quarter as a result of investments in inventory. Earlier today, we announced the results of our rights offering. We expect to raise $30 million from the offering and our backstop agreement with Sun Capital and we expect to receive such funds on or about September 8. In August we reached an agreement to amend our Senior Secured Term Loan Facility which upon the receipt of proceeds from the rights offering and the payment of $9 million under the term loan facility and $50 million under our ABL facility will waive the consolidated net total leverage ratio covenant requirement through the first quarter of fiscal 2019. In June we reached an agreement to amend our Revolving Credit Facility, which immediately provided an additional borrowing capacity under such facility. These actions provide Vince with additional liquidity and improved capital structure, and we believe that they relieve many of the pressures that had previously led management to conclude that there was doubt about our ability to continue as a growing concern. With these important actions, I just mentioned, we are now focused on obtaining the release of our reserves that have been placed on our borrowing capacity and also getting back to normal terms with our suppliers. To further improve liquidity and business results, we have been working with various specialized consultants on the identification and achievement of cost savings initiatives. We are actively executing a number of initiatives identified and are committed to continue to remove costs to better align our cost structure and resources with the growth areas of our business. We expect to see the full benefit of these actions in fiscal 2018. Capital expenditures for the quarter totaled $900,000, primarily attributable to investments in our retail stores, as well as in our new systems. As of the end of the quarter, we operated 55 stores in the U.S., including 41 full price stores and 14 outlet stores. We also continue to make 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 second quarter we implemented segregation of duties and internal controls related to the payroll system and ensured access rights for retail store personnel, our largest group of system users were line with their job responsibilities. Additional details regarding our remediation plan can be found in our Form 10-Q. As we announced on August 10th, the New York Stock Exchange accepted our business plan to regain compliance with continued listing standards. Under the guidelines of the New York Stock Exchange we will work diligently to ensure that we make continued progress with our compliance plan over the next 18 months. As we think about the second half of 2017, we expect sales in the wholesale channel to benefit from shipments that shifted from the second quarter into the third quarter, an increase in off price shipments as compared to last year as we better flow inventory in this channel and continued strength of our e-commerce business. As Brendan mentioned in his remarks, while we believe that the rationalization of our wholesale distribution may have an impact on sales in the near-term, we strongly believe that it is the right strategy to strength our business over the long-term. In addition, we continue to make progress on the remediation of our IT systems, while our systems challenges are not fully behind us, we are pleased with our progress and expect to continue to incur costs associated with these remediation efforts in the second half 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 Brendan stated in his remarks, we are working on launching additional product assortments and new opportunities within our wholesale and retail segments to better capitalize on the brand equity, while taking actions to reduce our cost structure, which will enable us to stabilize our business and position us for future growth. This concludes my comments regarding our second 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 Q3 results in early December.

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