Vince Holding Corp. (VNCE) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is [Liandra] (Ph) and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Q3 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. Amy Levy, Vice President of Investor Relations, you may begin your conference.

Thank you. And good morning, everyone. Welcome to Vince Holding Corp’s third 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. We were pleased with our results for the third quarter and the continued progress we are making on our strategic initiatives to drive sustainable long-term growth for the Vince brand. Over the last few months, we began the process of transforming our business, including reducing our wholesale channel partnerships, as well as placing increased emphasis on their direct-to-consumer business. While this will evolve over the course of 2018, we are pleased to see our business moving in a positive direction into the fourth quarter including a successful Black Friday weekend. In the third quarter, we grow 4% sales growth with increases in both our direct-to-consumer and wholesale segments led by double digit comps in our full price stores, as well as more than 20% growth in our e-commerce business. Wholesale segment sales grew 3.5%. We saw improved performance as new fall deliveries arrived throughout the quarter. We believe that our relevant and compelling styles are resonating with customers and we are seeing a favorable response to buy-now-wear-now product. Importantly, the lift in full price selling shows that she responds when she sees beautiful high quality seasonally relevant product. We also brought back updated versions on select strong selling styles from previous seasons that were missing from the assortment last year that check well in our stores. As we work to refine our product assortment, we have also continued to test a number of new categories. We recently debuted our capsule home collection and we are also very excited to be re-launching our handbag offering at select retail stores and online in December. As we said in the past, we continue to look for ways to expand the Vince brand in the complementary categories and are excited about the new categories that we are exploring for future seasons. In the whole channel, we began to build back our off-price business in a healthier way after resetting the business last year. Sales also benefitted from a current year shift and the timing of shipments from the second quarter to the third. This is partially offset by the expected reduction in full price sales as we shipped less inventory to our department store channels. As we mentioned last quarter, we made the strategic decision to rationalize our exposure in the department store channel in order to drive improved profitability and optimize our brand presence. As part of this strategy, we entered into a limited distribution arrangement for non-licensed products with both Nordstrom and the Neiman Marcus Group. We believe that this more focused approach will ultimately strengthen the business as we work closely with our partners. We began the transition process in the third quarter and the arrangement will become effective in fiscal 2018. We are excited about where we are going directionally. Over the last month, our merchandizing, marketing, sales and logistics team has spent time working collaboratively with the teams at both Nordstrom and Neiman to develop our go forward growth plan. First, we are focused on making sure we get product to the stores that aligns with their respective customers in a way that's appropriate for the Vince brand. Second, we’ve been working on some innovative solutions to ensure that we have the logistics in merchandizing process in place to deliver products in the most efficient and timely way possible. Third, in support of our merchandizing efforts, we are taking steps to increase our overall brand exposure and awareness in this channel. As part of this, we are working collaboratively with the respective teams, develop ways to cross market the Vince brand both in-store and through various traditional and social media channels. Importantly, as we collaborate with our wholesale partners, we are finding new opportunities for our business that benefits beyond what we originally anticipated. It will take us some time to evaluate these options and determine which makes the most sense going forward, we’re excited about what’s ahead for us in this channel. We expect to begin to see the benefits from this wholesale transformation as we head into 2018 and look forward to updating you on our progress. Overall, we are thrilled with our meetings to-date and believe that these partnerships will be successful for Vince as well as for Nordstrom and Neiman. As we transition the wholesale business, we will also emphasize our direct-to-consumer channels. We will take actions to drive traffic from existing, new and lapse customers both in our retail stores and online and let them know that our direct-to-consumer channels are an ideal way to shop and experience the Vince brand. We’re also focused on capturing sales from customers that shop in department store doors that we are exiting. We want to inform them where they can buy the Vince brand and make it easy for them to transition to shopping at our own retail store or e-commerce channel. We will invest in targeted marketing efforts to ensure current customers know where they can purchase the brand also to raise brand awareness among new customers. We are working with our landlords to enhance in-mall signage so that customers can easily find a Vince store or point them to a Nordstrom and Neiman market to find us. As part of our effort to capture customers from exited partners, we will also enhance our digital marketing and leverage our strategic partnerships. For example, we will selectively target mobile advertisements at markets where we no longer have a physical presence, encouraging customers to visit us online. We will also work closely with Nordstrom and Neiman markets to cross promote the brands through in-store events, social channels and national ad campaigns. In addition, we’ve planned to open new stores where it makes sense on either a permanent or temporary basis. We are aggressively evaluating these opportunities which include exploring new doors in select locations where we can negotiate shorter term lease terms and at lower rent rates than our historical leases. A good example of our real estate efforts is the relocation of our Melrose store, while just a few blocks away from the previous location, we see higher traffic better neighboring stores and more favorable lease terms. Performance so far has exceeded our expectations. We’re currently evaluating a number of similar opportunities both for on-street locations in key cities as well as for more traditional mall locations. Overall, we believe that opportunistically opening locations with shorter leases and better terms will help us grow our business more profitably, while mitigating our long-term risks. We have also begun to upgrade the aesthetic in our stores with a variety of natural textures and colors to fill each space evoking a coastal lifestyle. In addition, we have brought in more sculptural desert plans and have begun to weave in elements of our home collection both of which add warmth and life to the stores. Enhancements have already gone a long way to making our locations more inviting to consumers, elevating our customers shopping experience. As I mentioned, e-commerce is an important part of our strategy and great way to capture customers from exit partners. We are making improvements that will not only enhance our experience on our site, but will also drive traffic, conversion and average order value. During the quarter, our e-commerce sales grew more than 20% as customers are responding well to our product as well as to recent improvements we’ve made in the look and feel of the site. We’re focused on selling on the details on our products which would normally be noticed only in person. To that end, our product images are now larger, enabling customers to see more detail immediately and are shot in a more editorialized fashion should resonate well with our consumer. We have also enlarged the detail shots of our products so that the customers can easily see the exclusive craftsmanship and features that each item offers. We will maintain elevated investments in our e-commerce business going forward to ensure that we are capturing her attention, delivering the most relevant message to her, both when she searches for us online as well as when she visits our site. We will do this both by optimizing our current online strategies, including our testing and targeting capabilities, as well as launching some new tools that will enable us expand our reach. We have recently launched our mobile app which provides an enhanced experience for customers every time they shop Vince from their mobile devices. Turning to our outlet business, which did not perform to our expectations during the quarter. While we believe that some of this underperformance reflects the tougher overall environment for the outlet channel, much of it was self inflicted. We reduced our dependency on made-for-outlet product which represented approximately 20% of our outlet assortment in the third quarter compared to more than half of the assortment historically. We are working diligently to bring our outlet business more in line with the historical balance of made for and excess merchandise heading into 2018, which we believe will lead to improvement in this channel. Overall, we are pleased with the progress that we are making in the business as we refine the product assortment, collaborate with our wholesale partners to enhance our performance and build on the momentum in our direct-to-consumer business. We expect that our focus on executing our strategic initiatives will enable us to stabilize the business and ultimately drive growth for the Vince brand. With that, I will turn it to Dave to review our financial results. Dave.

Thank you, Brendan. Overall, we are pleased with the direction of our business as we saw improved momentum in our direct-to-consumer segment and we have positioned ourselves to execute our wholesale transformation strategy. We also successfully completed our rights offerings and reverse stock split as well as identified and achieved cost savings in a number of areas thereby enhancing our liquidity position. Turning now to the details of our financial results. Third quarter net sales increased 4.1% to $79.1 million compared to $76 million in the prior year period. Our wholesale channel sales were up 3.5% to $53 million, primarily due to an increase in off-price sales as well as current year shift in deliveries into the third quarter from the second quarter which we discussed on our last call. In terms of our off-price business as you will recall, in last year’s third quarter we did not have a large presence in this channel and we’ve been building back this business in a healthy way during fiscal 2017. This growth in the off-price channel was partially offset by the expected decrease in full-price channel shipments. Our direct-to-consumer segment sales increased 5.3% to $26.1 million in the third quarter and comparable sales including e-commerce increased 4.4%, reflecting an increase in average unit retail. As Brendan mentioned, we saw solid growth in both our full-price and e-commerce businesses where our outlet business did not near expectations. Gross profit in the third quarter was $36.7 million 46.4% of net sales. This compares to $38 million or 50% of net sales in the third quarter of last year. Gross margin was negatively impacted by higher product and supply chain costs, a higher mix of markdown sales in the direct-to-consumer segment and one-time cost associated with the execution of our wholesale distribution strategy. This was partially offset by a decrease in the rate of sales allowances as well as reduced discounts in the off-price wholesale channel both of which were related to previously discussed strategies to improve the profitability of these businesses. As part of our cost reduction strategy in conjunction with a new creative and merchandising team, we are taking steps to reduce our higher product and supply chain expenses. Selling, general and administrative expenses in the quarter were $31.4 million or 39.7% of net sales. This compares to $31.9 million or 42% of sales for the third quarter of last year. The decline in SG&A dollars for the third quarter of fiscal 2017 was primarily the result of the non-recurrence of investments related to last year's transition of IT Systems from Kellwood, as well as savings associated with ending the consulting arrangements with our founders. This was partially offset by increased incentive compensation costs and investments related to remediation and optimization of IT Systems. As we mentioned in previous quarters, we instituted a cost reduction strategy to improve ongoing liquidity. We continue to focus on cost savings initiatives and to-date have reduced ongoing cost in the areas of product development, payroll, telecommunications and leases to name a few. We believe we have identified $7 million to $10 million of opportunities, and we expect to see the full benefit of these actions in fiscal 2018. We continue to focus on exploring additional opportunities and expect to reinvest a portion of these savings in 2018 as part of the transition of our business. Operating income was $5.3 million compared to $6.1 million for the third quarter of fiscal 2016. The income tax benefit for the third quarter of fiscal 2017 was negligible compared to an income tax expense of $1.5 million in the prior year quarter. Our tax rate for the third quarter of fiscal 2017 was 0.2% compared to 30.3% in last year's third quarter. The tax rate for the third 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 have mentioned previously, due to this offsetting impact, we expect any tax expense or benefit for the 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 income for the third quarter was $3.5 million compared to $3.4 million in the third quarter of last year. The impact of the tax valuation allowance that I just discussed affects the comparison of net income to prior year results. Diluted earnings per share were $0.41 in the third quarter based on 8.6 million diluted weighted average shares outstanding. This compares to a diluted EPS of $0.68 based on 4.9 million diluted weighted average shares outstanding in the third quarter of last year on a reverse split adjusted basis. The increase in diluted weighted averages shares outstanding is a result of the issuance of common stock in connection with the completion of the rights offering and related backstop commitment. On October 24, 2017 we completed a one for 10 reverse stock split whereby every 10 shares of issued and outstanding common stock were automatically converted into one share of common stock. This was part of our plan to regain compliance with the New York stock exchange continued listing requirements related to the minimum stock price. Now moving to the balance sheet. Gross inventory increased $16.3 million in comparison to the third quarter of fiscal 2016 while inventory reserve decreased $600,000 as a result of less excess and aged inventory in 2017. The year-over-year increase in gross inventory is driven by the timing and growth of off-price shipments. As we have mentioned previously, in the first half of last year, we aggressively moved to excess and aged inventory in this channel and did not build inventory back up in the second half of the year. This strategy was executed to better balance the supply demand ratio and the off-price channel and we have now begun to build backup presence in this channel. In addition, we’re building inventory in anticipation of increased sales in our direct-to-consumer channel. We ended the third quarter with $5.7 million of cash in equivalence. We had $68.1 million of borrowings under our debt agreements and approximately $30 million of availability remaining under our revolving credit facility at the end of the third quarter. Our borrowings under the revolver increased during the third quarter as a result of our investments in inventory. In addition, during the quarter, we paid down the term loan facility by $9 million using proceeds from the $30 million rights offering and related backstop commitment. Our remaining balance on this original $175 million term facility was $36 million at the end of the third quarter. As part of our efforts to improve liquidity, we obtained the release of a portion of reserves that had been placed on our revolving credit facility. And following our visit with suppliers in China, we have returned to normal payment terms with our key vendors. As a result of all the aforementioned liquidity improving actions, we believe we have sufficient liquidity to satisfy our current needs and obligations. Capital expenditures for the quarter totaled 300,000 primarily attributable to investments in our retail stores and 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. As Brendon mentioned in his remarks, we had a successful Black Friday weekend. In the fourth quarter, we expect sales growth in e-commerce and full-price stores. In addition, we expect to see higher sales in our off-price wholesale business year-over-year as a result of our previously mentioned strategy for this channel. However, the fourth quarter will also be impacted by our full-price wholesale transformation strategy as we exit certain department store partners. As our pre-spring product will be the last season sold through these partners, we expect to see related lower shipments and additional exit cost in the fourth quarter. In conclusion, we continue to make progress in our business as we enhance our product assortments and capitalize on opportunities within our wholesale and retail segments. We are also taking action to reduce our cost structure and update our systems and processes. Overall, we believe that we have hit an inflection point in stabilizing the business and are positioned for future growth. This concludes my comments regarding our third 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 fourth quarter conference call.