Vince Holding Corp. (VNCE) Q3 2018 Earnings Report, Transcript and Summary

Good morning. My name is Lisa and I’ll be your conference operator today. At this time I would like to welcome everyone to the Vince Holding Corp's, Third Quarter 2018 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 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 for as long as time permits. Now, I'll turn the call over to Brendan.

Thank you, Amy. Good morning everyone and thank you for joining us today. We are pleased with our third quarter results across all financial metrics. In our Direct-To-Consumer segment we saw continued momentum in our ecommerce business with strong growth in our mobile app. We continue to be pleased with the performance of stores we opened over the last year and we signed an additional lease for a store in midtown Manhattan due to open in the fall of 2019. In our wholesale segment we saw continued sales growth as our collections resonated with consumers, while we also achieved further market gains within existing department store doors. We were also excited to see the number of editorials on Vince in both the U.S. and international press, which we believe will help us to attract new customers to the brand. Overall it was another quarter of great results under our belt, combined with our performance through the Black Friday weekend, we are raising the low end of our guidance and we are more optimistic than ever about our future growth potential. Turning to some brief financial highlights from the third quarter. Net sales grew nearly 6%, driven primarily by growth in our Direct-To-Consumer segment which delivered a comp sales increase of 14%. While sales in our wholesale segment were flat, this was largely due to the exit of certain wholesale partners, which were offset by reduced allowances. Operating profit grew nearly 70% to $9 million and operating margin increased 400 basis points to 10.7%, reflecting both gross margin expansion and SG&A leverage. Looking at our Direct-To-Consumer segment, sales grew 17%. We remain laser focused on capturing walk away sales from partners we exited and have been serving ads on mobile, ecommerce and social channels based on geographical location, in an effort to capture that exited partners customers. Our retail expansion strategy is also progressing well. We opened a beautiful flagship store in Palisade Village that carries our full assortment of women's, men's and home merchandise, as well as our new handbag collection which we had rolled out to 43 stores for holiday. The store feature of an open air deck was ideal for hosting exclusive events. We also recently opened our store in Palm Beach Gardens. Looking ahead we are excited to announce that we are planning to open a store at 609 5th Avenue in Manhattan for which we were able to achieve attractive economics. This is a great location across from Rockefeller Center and we look forward to benefitting from a significant foot traffic. This location also plays nicely into our strategy to capture walkaway sales. We continue to expect to drive improved profitability in our Direct-To-Consumer segment as we targeted additional locations that fit the Vince brand DNA and offer favorable economics with shorter leases, as well for improved performance in our existing locations. Turning to our latest endeavor, you may have seen our recent announcement about the launch of VinceUnfold. This is an innovative new subscription service that will enable us to provide customers with unlimited access to our full collection of women's apparel for monthly flat fee. Subscribers received four garments at any one time for a monthly cost of $160 with the option to purchase any items. We have seen shopping patterns change over time and see this as becoming an increasingly popular way to shop. We launched this service in mid-November and initial sign-ups exceeded our expectations. While we do not expect a meaningful short term financial impact and we are in early stages, we believe this will help to further expand brand awareness and has the potential of being an additional revenue stream. Turning now to the wholesale channel, at both Neiman's and Nordstrom's, as well as across our specialty retail and third party ecommerce partners, we were extremely pleased with the sell-through of our new collections, as well as the performance of our replenishment business. As you may recall we reestablished our replenishment assortment to ensure we always have our customers’ everyday essentials, including T's, our Stretch Saturn Blouse and Seam Front Leggings for women. For men this includes Double Layer Hoodies, Essential T’s and our Slub Polo. We are excited to be achieving further market share gains within our department store partners as customers are rediscovering the Vince brand. Turning to product, each season we are gaining traction as we focus on offering high quality design and craftsmanship in a seasonably appropriate assortment. Our shift to it Buy-Now Wear-Now strategy is definitely aligning with our customers’ needs. In addition, we are winning with Color as she loved our fall palette fused with shades of copper, ink blue, sandalwood and vintage rose, purposely designed to be paired together tonally [ph]. Our dresses and our bottoms business performed well with the strength in pants and skirts as we capitalized on trends including Wide Leg Pants, Culottes and Pleated Skirts. We have also seen strength in our Active Leisure Styles that are great for everyday wear. For spring, our collection embodies a warm color palette with tonal prints of Jacquard, Pajama Plaid and Constellations, as well as Metallic for layering. We will also be adding new silhouettes to our luxe summer wear Kashmir offerings, as well as bottoms including Lo-Slung Jeans, Belted Pinstripe Trousers and a Silky Wide-Leg pair with a drawstring waist. We continue to increase our marketing investments to drive brand awareness and traffic among existing customers. This included the launch of two digital campaigns. We have also selectively allocated marketing dollars to print advertising in global and regional publications with similar customer demographics. On a more grassroots scale, we partner with some of our most influential customers to host private events aimed to expanding brand awareness and engagement with the Vince brand. We also received press coverage with editorials in Vogue, Man Repeller and Goop among others. Internationally we made progress in several fronts. Strong sell-through performance is driving retail growth of accounts and brand awareness with customers in key markets. We relocated our Shop & Shop with a presentation at Harvey Nichols. In February we plan to open a Shop & Shop in Selfridges after strong performance in their multi-brand area. Two Shop & Shop’s opened with El Corte Ingles in Madrid in Marbella, expanding our presentation and performance. During the quarter we launch Men’s in Japan and Korea. International press coverage has grown with features in Air France Madame, OCEANS Japan's, Safari Japan and numerous editorial placements including Vogue, Elle France, Sunday Times Style and The Observer in the U.K. In conclusion we remain pleased with the overall performance of our business. Our collections continue to resonate with customers and we are making progress in attracting new customers to the brand. We remain focused on making further refinements to our product offering, honing our marketing investments to those programs that provide the highest response, strategically expanding our retail presence and building our international penetration. We look forward to building on our strategic initiatives to drive long term profitable growth. And with that, I'll turn it to Dave to review our financial results.

Thank you, Brendan. We are pleased to have delivered another quarter strong financial results. We achieved sales growth of 5.6%, while operating income grew 68.9% for the third quarter. Third quarter net sales increased 5.6% to $83.5 million, compared to $79.1 million in the same prior year period. As expected, our wholesale channel sales were flat at $53 million as shipment declines related to the exit of certain wholesale partners were offset by lower sales allowances. The reduction in allowances were related to two factors. First, we anniversary a higher level of allowances in last year's third quarter associated with the partners we existed, and second we saw reduced allowances with existing partners due to their strong sell-through. Our Direct-To-Consumer segment sales increased 17.1 % to $30.5 million in the third quarter, while comparable sales including ecommerce increased 14.1%, reflecting an increase in the number of transactions, partially offset by a lower average unit retail related to product mix. Gross profit in the third quarter was $40.8 million or 48.9% of net sales. This compares to $36.7 million or 46.4% of net sales in the third quarter last year, a 250 basis point increase. The 250 basis point increase in gross margin rate was due to the decrease in the rate of sales allowances previously discussed. Non-recurring costs incurred last year related to the exit of certain wholesale partners and lower product and supply chain costs, partially offset by an unfavorable impact from year-over-year adjustments to inventory reserves. Selling, general and administrative expenses in the quarter were $31.9 million or 38.2% of net sales as compared to $31.4 million or 39.7% of net sales for the third quarter of last year. Operating income was $9 million in the third quarter as compared to operating income of $5.3 million for the third quarter of fiscal 2017. Net income for the third quarter was $6.8 million or $0.57 per diluted share, compared to net income of $3.5 million or $0.41 per diluted share in the third quarter of last year. Year-to-date net sales increased 1.6% despite the exit of certain wholesale partners. We delivered operating income of $2.2 million year-to-date, reflecting a nearly $14 million improvement over the same period of last year. This clearly illustrates the progress we have made throughout fiscal 2018. Moving to the balance sheet, net inventory at the end of the third quarter was $61.5 million compared to $51.4 million at the end of the third quarter last year. The increase in inventory was primarily due to the planned product returns in the first half of the year from the exit of wholesale partners and the growth of our replenishment program as we expanded the assortment. We ended the third quarter with $1 million of cash and equivalents and with $63 million of borrowings under our debt agreements. On August 21 of this year we refinanced the 2013 revolving credit facility and the 2013 term loan facility by entering into a new 2018 revolving credit facility and a new 2018 term loan facility. All outstanding amounts under the 2013 credit facilities totaling $69.8 million, including interests will be paid in full. We decreased overall borrowings under our debt agreements by $5.1 million since the same period last year. This was primarily a result of $8.5 million of net repayments to the term loan facilities, partially offset by an increase in net borrowings under our revolving credit facilities to fund working capital needs. Capital expenditures for the quarter totaled $1.3 million, primarily attributable to new stores. As of the end of the quarter, we operated 59 stores in the U.S. including 45 full priced stores and 14 outlet stores. This reflects a net increase of four full priced stores over the prior year period. Turning to our outlook, given our operating results in the third quarter and fourth quarter to-date, we are raising a low end of our full year outlook for both net sales and operating income. For fiscal 2018 we now expect net sales to be in the range of $277 million to $280 million and operating income to be in the range of $5 million to $7 million, excluding any potential non-cash asset impairment charges. We are extremely pleased with the momentum in our business as we continue to execute our strategic plan. We believe the work we have done over the last two years has us positioned to achieve long term profitable growth and increase shareholder value. This concludes my comments regarding our third quarter financial performance. We will now take your questions. Operator.

We have no questions in queue. I’ll turn the call back to Brendan Hoffman for closing remarks.

Great. Well thank you everyone for your continued interest in Vince and we look forward to updating you in our Q4 and year end results on our call in April.