Vince Holding Corp. (VNCE) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Jessa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corporation's Second Quarter Earnings 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. Ms. Jean Fontana, of ICR, you may begin your conference.

Thank you, and good morning, everyone. Welcome to Vince Holding Corporation's second quarter fiscal 2018 earnings conference call. Hosting the call today are 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 Web site. Investors should not assume that the statements made during today's call will remain operative at a later time, and the company takes 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, Jean, and good morning everyone, and thank you for joining us today. During the second quarter, we once again saw great response to our product assortment. This was evidenced by the double-digit comp growth in the Direct-To-Consumer business, as well as the strong sell-throughs we saw in the Wholesale channel. Our summer and pre-fall deliveries resonated with consumers and provided continuity of product flow during the season. Based on our results in the second quarter, we have increased confidence that we are moving the brand in the right direction. Dave will discuss these details shortly. Highlighting our results, we saw a 17% sales increase in our Direct-To-Consumer segment with comp growth of 14%. Our best performing stores remain those in close proximity to department store doors that we exit. In the Wholesale channel, sales were down less than 4%, in line with our plan due to the transition out of Saks and Bloomingdale's full-price stores. At both Neiman's and Nordstrom's, we substantially increased our market share in our category, signaling the progress we are making in winning back the Vince customer. We believe that the strength in sell-throughs during the quarter combined with the positive response for our fall collections is a great indication that we are on track with our assortment and bodes well for the remainder of the year. The double-digit growth in our Direct-To-Consumer business combined with strong full-price sell-throughs in the Wholesale channel drove higher full-price selling and gross margin expansion of nearly 200 basis points. This contributed to a more than $6 million year-over-year improvement in EBITDA for the second quarter. These results are primarily a function of the work we've done in our product assortment as we returned our brand to our brand DNA. The Beach collection, which delivered in April, was a highlight. We brought in new third-party categories such as swimwear, towels, accessories, including beach hats and bags to complement the beach collection in the store. Key Neiman Marcus stores double-exposed the collection increasing our visibility and enabling us to reach more customers throughout their stores. As we move to the summer, our collections are more seasonally mindful, with appropriate summer and pre-fall offerings that are wearable across seasons. Our summer 2018 collection was comprised of uncomplicated clothing and light transitional weights as we focused on buy-now wear-now product. Athletic details balance feminine crushed pleats, airy cotton and linen, prints and colors in the collection were very well received. Our men's assortment, reflecting Patrik Ervell's first collection hit the stores last month and has been met with great initial response, with particular strength in knits and wovens. We continue to gain traction in the men's business, and we will look to build on these early successes. In our Direct-To-Consumer business, we are seeing an increase in traffic driven by a more relevant and well-designed product assortments as well as targeted marketing efforts. We continue to focus on capturing department store customers in locations where we exited those stores, and that's where we continue to see the biggest comp increases. We continue to support this strategy through digital marketing campaigns focusing on markets with significant walk-away traffic. Initiatives include mobile targeting, location awareness targeting, and targeting through purchase intelligence. Notably, we were included on Women Wear Daily to The Best Fashion Ad Campaign for fall 2018 list, reflecting the work we have done on branding. Our retail strategy is also progressing well. Our Short Hills, New Jersey, Palm Desert, California, and Naples, Florida stores that we opened in the first-half are all continuing to exceed expectations. In our Austin, Texas store, which opened at the end June, is off to a great start. In August, we hosted multiple events celebrating our Austin store opening featuring our fall women's collection and Patrik's first men's collection for Vince. We're also extremely excited about the opening of our new flagship in Pacific Palisades scheduled to open later this month as part of Palisade Village grand opening event. We also have a store in Palm Beach Gardens scheduled to open later this fall. Overall, we are pleased to see improving profitability in our Direct-To-Consumer segment, and we will continue to target locations that offer favorable economics, including shorter-term leases. Our ecommerce business remains strong as we continue to benefit from enhanced production combined with improved visuals, in addition to better overall online experience for our customers. That emphasis on storytelling we launched Vince Lens within our mobile app. This is a visual blog that offers exclusive custom content including interviews, editorials, and imagery designed to infuse the brand with a distinct personality and voice. These stories primarily feature influencers, tastemakers, chefs, creators, and artisans based in Los Angeles to educate our customers about who and where we stand as a brand. This allows us not only to gain content but also build organic ongoing relationships within the Los Angeles community. This also ties to our Palisades Village store which invokes a similar ambiance throughout the store design and outdoor patio. Another way we are enhancing engagement with our customers is through our app -- through the app is by providing early access to promotions and announcements on new arrivals to generate excitement and additional visits. Looking ahead, we will continue to refine and elevate the mobile customer experience with custom content for the app. We also launched an international e-commerce and logistics platform, in August, which enables us to better and more directly serve our customers in key markets globally. Our marketing strategy for fall will remain centered around capturing brand awareness around our collection and capturing the Vince customers that shopped us elsewhere in the past through both print and digital advertising. In summary, we have accomplished a great deal over the last 18 months. We recaptured our brand DNA with the overhaul of our product assortment. We transitioned our Wholesale business to optimize our presence in this channel. We strengthened our Director-To-Consumer positioning through an enhanced retail environment and elevated e-com experience, and moved our systems from Kellwood to our own platform. I am extremely proud of our team and want to thank our employees for their hard work and dedication. Overall, we are excited to see our strategies taking hold, and look forward to building on our successes as we work towards returning consistent profitable growth over the long-term. With that, I'll turn it to Dave to review our financial results.

Thank you, Brendan. Overall, we are pleased with our second quarter results, and the continuing progress we are making on the execution of our strategic initiatives. Second quarter net sales increased 3.8%, to $63.1 million, compared to $60.8 million in the same prior year period. As expected, our Wholesale channel sales were down 3.6% to $37.8 million due to the streamlining of our full-price department store business. Our Direct-To-Consumer segment sales increased 17.2% to $25.3 million in the second quarter while comparable sales including e-commerce increased 14.4% reflecting an increase in the average unit retail price and in the number of transactions. We saw strong growth in both our e-commerce business and our retail stores, each delivering a double-digit comp increase for the second quarter. Gross profit in the second quarter was $27.7 million or 43.9% of net sales. This compares to $25.6 million or 42% of net sales in the second quarter of last year, a 190 basis point increase. The increase in our gross profit rate for the second quarter of 2018 reflects lower supply chain costs and the favorable impact to channel mix. This increase was partially offset by an unfavorable impact from year-over-year adjustments to inventory reserves. Selling, general, and administrative expenses in the quarter were $30.1 million or 47.7% of net sales as compared to $34.4 million or 56.6% of net sales for the second quarter of last year. The lower SG&A spend for the second quarter as compared to the prior year was primarily the result of the non-recurrence of investments made last year related to the remediation and optimization of the systems implemented during fiscal 2016 as well as a decrease in severance cost and a reduction in product development cost. Operating loss was $2.4 million in the second quarter as compared to an operating loss of $8.9 million for the second quarter of fiscal 2017. Income tax expense for the second quarter of fiscal 2018 was $28,000, compared to an income tax benefit of $4,000 in the prior-year quarter. Our effective tax rate for the second quarter of fiscal 2018 of seven-tenths of 1% compared to a zero rate in last year's second quarter differed from the U.S. statutory rates of 21% and 35%, 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 second quarter was $3.8 million or a loss of $0.33 per share compared to a net loss of $10.1 million or $2.05 per share in the second quarter of last year. The increase in weighted average shares outstanding in fiscal 2018 is a result of the issuance of common stock in connection with completion of the rights offering and related backstop commitment that took place in the third quarter of fiscal 2017. Moving to the balance sheet, net inventory at the end of the second quarter was $61.6 million compared to $41.8 million at the end of the second quarter of last year. The increase in inventory was primarily due to a number of factors including the early receipt of inventory for the fall season, the planned product returns from exit of wholesale partners, the growth of our replenishment program, and the reinstatement of the company's summer collection. We ended the second quarter with $5.3 million of cash and equivalents. We had $64.4 million of borrowings under our debt agreements. We decreased borrowings under our debt agreements since the second quarter of last year by $9.1 million, primarily as a result of $16 million in payments to the term loan facility partially offset by an increase in our revolving credit facility used to fund working capital needs. As you may have seen in our press release on August 21, we closed on the refinancing of our existing term loan facility and our revolving credit facility by entering into a new $27.5 million senior secured term loan facility and a new $80 million senior secured revolving credit facility. The new revolving credit facility is $10 million higher than our previous facility and carries a slightly improved interest rate of either LIBOR plus 1.5% to 2% or the prime rate plus 0.5% to 1%. The new term facility has similar interest rates too as our prior facility. Following the refinancing, we had $67.1 million of total borrowings under our debt agreements, and we had opening availability of $26.7 million under our new revolving credit facility. Capital expenditures for the quarter totaled $800,000 primarily attributable to new stores and related leasehold improvements. As at the end of the quarter, we operated 58 stores in the U.S. including 44 full price stores and 14 outlet stores. Also, as Brendan mentioned in his remarks, we are extremely pleased with momentum in our business as we advance our strategic initiatives. For fiscal 2018, we continue to expect net sales to be in the range of $273 million to $280 million, and we are slightly raising the high end of our operating income outlook to a range of $3 million to $7 million. In conclusion, we are very pleased to see the evidence that our strategies are taking hold with better-than-expected second quarter results. We remain focused on building on our progress as we continue to execute our strategies in the back half of the year. This concludes my comments regarding our second quarter financial performance. We will now take questions. Operator? [Operator Instructions] There are no questions at this time. Mr. Hoffman, I will turn the call back over to you.

Thank you for joining us. We look forward to updating you on our Q3 earnings call in December.

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