Vince Holding Corp. (VNCE) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince first quarter 2018 earnings conference call. All lines have been placed 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 afternoon, everyone. Welcome to Vince Holding Corp.'s first quarter fiscal 2018 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 able to take your questions. Now, I'll turn the call over to Brendan.

Thank you, Amy. And thank you, everyone, for joining us today. We are extremely pleased with the growing momentum behind the Vince brand in both our women's and men's businesses. Sales associates in our own retail locations as well as our wholesale partner stores are energized by the strong response to the spring and summer product deliveries. We saw a 15% increase in our direct-to-consumer segment, with comps up over 12% as a result of strong sales in our full price stores and more than 25% growth in our e-commerce business. In the wholesale channel, sales were down nearly 20% as expected, primarily due to the transition out of Saks and Bloomingdale's full price stores as part of our transformation strategy. Importantly, we believe that the strong product sell-throughs we're seeing with our go-forward wholesale partners will help drive high reorders as we continue to gain market share in our points of distribution. Our financial performance improved by $3.8 million with an operating loss of $4.4 million as compared to a loss of $8.2 million in the prior year's first quarter. In our direct-to-consumer business, we are thrilled with the strong full price sales in our stores and online as our product resonates with consumers. We expanded our retail presence in select markets, focusing on locations where we can capture walkway sales from the department stores we exited. Similar to what we experienced during the holiday season, our highest sales growth occurred in locations adjacent or near these department store doors. Recent openings including Short Hills, New Jersey and Palm Desert, California in the first quarter as well as Naples, Florida in May are all exceeding our expectations. As we drive greater profitability within the retail business, we are focusing on negotiating shorter-term lease commitments with favorable economics. We anticipate opening a few additional stores in key locations throughout the remainder of the year. We are also excited about the continued momentum in our e-commerce business, which we attribute to our improved product offering, enhanced online experience, as well as our decision to strategically reduce our exposure in the wholesale channel. During the first quarter, we launched a digital campaign designed to capture customers that previously shopped us at Saks and Bloomingdale's, which was successful in driving incremental traffic to our website. We remain focused on further enhancing the overall online experience by adding new features to make the site easier and more efficient to shop with upgraded technology. In addition, we expect to soon launch an international e-commerce and logistic platform, which would enable us to better and more directly serve our customers in key markets around the world. As we have said previously, mobile continues to be a growing channel and we're seeing strong response to our mobile app. As we look ahead, we will continue to refine and elevate the mobile customer experience by developing custom content for the app, offering early access to promotions for mobile users and better communicating with customers via our app to drive sales. In our wholesale business, we continue to be pleased with our transition in the department store channel as we focus on two partnerships where we saw an increase in sales despite reduced inventory levels. We believe that the strong full-price, sell-throughs at both Neiman Marcus and Nordstrom bodes well for the future quarters. In addition, our men's business in Nordstrom's performed very well and the collection will be increased with a total of 50 doors by this fall. Our teams continue to work collaboratively with theirs to optimize our product assortment, drive efficient and timely inventory flow, and heighten our brand exposure. We believe the strength in our business is clearly illustrating the progress we have made in our product offering. We are seeing strong results across our women's categories as the assortment has become more seasonally relevant with buy now, wear now styles. Importantly, we are seeing customers engage in the categories that made Vince a destination brand including knits and wovens, in addition to categories that we were less penetrated historically such as dresses. Our strong performance signals us that we have successfully returned Vince to the luxury brand positioning and product aesthetic that is inherent in our DNA. Recently, our beach and summer collections have seen a fantastic response, including a focus on a specialized beach theme, which incorporates product categories from third-party brands such as swimsuits and accessories. We are equally pleased with the strong growth in our men's business, and look forward to continued momentum as we expand our presence as Patrick Ervell's first collection hits stores this summer. We are working to leverage the strength into other categories where we see potential synergies with our core businesses. For example, we recently partnered with LA-based trade denim to create an exclusive capsule for our stores featuring unique washes and fits all selected for their vintage LA-inspired aesthetic. We are very excited about this collection with pieces that fit great and, importantly, are designed and made right in LA. This partnership has received great consumer response thus far and has also been featured in Women's Wear Daily. Similar to denim and beachwear, we will continue to look for additional opportunities to expand the brand into areas that make sense for both the Vince customer and for our company. As our product continues to resonate, we have ramped up our marketing efforts, focusing on elevating customer engagement as well as capturing new customer. We've been working to drive customers to stores through geolocation-targeted marketing in key markets with great success. In addition, we are using digital channels to target both new and existing customers and drive them to stores and partner locations. Our Creative Director, Caroline Belhumeur, was recently profiled in a Day in the Life piece on lifestyle site too. The piece showcased our first collection for the company and the effortless chic style that both Caroline and the Vince brand embrace. We are also driving strong support for our product within key lifestyle publications. For example, our beach collection was recently featured in InStyle magazine. Finally, we continue to optimize our process to ensure that we're getting product to our partners and consumers in the most effective and efficient manner. This includes getting product more quickly, maintaining strong relationships with key suppliers, and continuing to work with Neiman Marcus and Nordstrom on ways to cut time out of the supply chain. As we look ahead, we will continue to focus on further refining our product assortment, driving growth in our direct-to-consumer business, and enhancing our collaborations with our wholesale partners. Based on the increased confidence and visibility in the business, we've reinstituted annual guidance, which Dave will speak to shortly. Overall, we strongly believe that we are on the right path to drive profitable and sustainable growth in the business over the long-term. With that, I'll turn it to Dave to review our financial results.

Thank you, Brendan. We are excited to have delivered strong performance in our direct-to-consumer business and have had a smooth transition within our wholesale segment. Our results reflect a highly favorable response to our product assortment in addition to progress we're making on our strategic initiatives. And we believe, as Brendan just mentioned, we will drive long-term sustainable growth and profitability. Turning to the details of our financial results. First quarter net sales decreased, as expected, 6.1% to $54.5 million compared to $58 million in the prior-year period. Our direct-to-consumer segment sales increased 14.9% to $26 million in the first quarter. Comparable sales on a 13-week basis including e-commerce increased by 12.3%, driven largely by an increase in transactions. We believe that the transaction growth is attributable to the positive response to our new product as well as to our efforts to drive customers who formerly purchased product from our exited wholesale partners into our own stores and website. Results in the DTC business were driven by solid growth in both our full price retail stores and our e-commerce business, which grew in excess of 25%. Our wholesale channel sales were down 19.5% to $20.5 million, in line with our expectations, primarily as a result of the planned exit from two full price department store partners as part of our transformation strategy. Gross profit in the first quarter was $25.5 million or 46.8% of net sales. This compares to $25.6 million or 44.1% of net sales in the first quarter of last year. The 270 basis point increase in gross margin rate was largely due to lower sales allowances in the wholesale channel and a favorable shift in channel mix, partially offset by the unfavorable impact of adjustments to inventory reserves. Selling, general, and administrative expenses in the quarter were $29.9 million or 54.8% of net sales. This compares to $33.8 million or 58.2% of net sales for the first quarter of last year. The reduction in SG&A spend was primarily the result of lower product development cost and the non-recurrence of investments made last year related to the remediation and optimization of the systems implemented during fiscal 2016. This reduction was partially offset by higher incentive compensation costs. Operating loss for the quarter was $4.4 million compared to an operating loss of $8.2 million for the first quarter of fiscal 2017. Our effective tax rate was 0.9% in the first quarter and 0.6% in the same period last year. The effective tax rate differed from the US statutory rates of 21% and 35% respectively, primarily due to the impact of the valuation allowance previously established against our deferred tax assets, partially offset by state taxes. Net loss for the quarter was $5.6 million or $0.49 per share compared to a net loss of $9.3 million or a loss $1.88 per share. The increase in weighted average shares outstanding in 2018 is a result of the issuance of common stock in connection with the completion of the rights offering and related backstop commitment that took place in the third quarter of fiscal 2017. We ended the 2018 first quarter with $5.2 million in cash and cash equivalents and $50.6 million of borrowings under our debt agreements. We have decreased borrowings under our debt agreements since the same period of last year by $15.5 million, primarily due to $14 million of payments to the term loan facility. Net inventory at the end of the first quarter of fiscal 2018 was $49.4 million compared to $32.2 million at the end of the first quarter of fiscal 2017. The increase in net inventory was primarily due to a change in the timing of shipments to our off-price wholesale channel, growth of replenishment program, and the reinstatement of our summer collection. We believe inventory levels are appropriate to support the current level of sales expectations. We expect year-over-year inventory levels to normalize in the back of the year. Capital expenditures for the quarter totaled approximately $0.3 million. We opened two stores in the first quarter. We are extremely pleased with the initial results in our recently opened stores, which reflect attractive lease terms and clean white spaces delivered by the landlord, requiring less time annd capital investment by Vince to open stores. As Brendan mentioned, these stores are near department store doors that we recently exit and we are very pleased with the level of walkway business we've already captured. Also, as Brendan mentioned in his remarks, we are highly encouraged by the forward momentum in our business and the progress we're making across our strategic initiatives. As a result of our increased confidence and visibility, we are reinstituting annual guidance. For fiscal 2018, we expect net sales to be in the range of $273 million to $280 million. We expect operating income to be in the range of $3 million to $6 million. While we expect wholesale sales to decline in each of the remaining quarters of fiscal 2018 as a result of our transformation initiative, we believe this will be offset by expected increases in direct-to-consumer sales. Additionally, our new wholesale distribution model should allow for improved full price selling and flow of inventory, resulting in lower customer allowances and givebacks and better profitability overall. In conclusion, we're pleased with the momentum in our business and look forward to building on this progress through the remainder of the year. This concludes my comments regarding our first quarter financial performance and outlook for the remainder of 2018. We will now take your questions. Operator?

Thank you, everyone, for joining us today. We look forward to discussing our Q2 results with you in early September.

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