Vince Holding Corp. (VNCE) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to Vince Q4 2018 Earnings Conference Call. [Operator Instructions] Amy Levy, Vice President, Investor Relations, you may begin the conference.

Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp.'s Fourth Quarter and Annual 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 website. Investors should not assume that 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. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. In addition, the company is presenting an estimated impact to earnings per share related to certain asset impairment charges as well as the tax receivables agreement adjustment. Certain components included in the calculation of such impact are non-GAAP measures. Discussions of these non-GAAP measures and reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available on the Investor section of the company's website at investors.vince.com. 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 good afternoon, everyone. 2018 marked a year of great progress for the Vince brand. We streamlined our wholesale business to focus on key partners where we achieved strong growth and market share gain. We opened 6 new stores and closed 2 stores as we optimized and expanded our store base; drove double-digit growth in our e-commerce sales in every quarter; and successfully launched the subscription program Vince UNFOLD. Importantly, our women's collections have met with a highly favorable response in every season of 2018 across both our direct-to-consumer and wholesale channels. We have worked diligently to rejuvenate and stabilize the Vince brand and built a strong foundation to support long-term profitable growth. With this solid platform in place, we have recently engaged a strategic consulting firm to help us develop a multiyear growth strategy, which I look forward to sharing in the coming quarters. That said, we will continue to execute a number of growth initiatives in 2019, which I will discuss following some highlights on our financial results. Looking back to our fourth quarter financial performance, we delivered on our expectations, which enabled us to achieve our annual guidance excluding impairment charges. We grew sales 4.2%. Fiscal 2017 included $1.6 million in incremental sales associated with the 14th week of Q4. Comparable store sales for the 13-week period grew 3.1%, driven by continued strength in our e-commerce business. Adjusted operating income was $3.6 million in the fourth quarter of fiscal 2018 as compared to adjusted operating loss of $1.5 million in the fourth quarter of fiscal 2017. For the year, sales grew 2.3%, including the extra week last year, and adjusted operating income grew $19 million and reached $5.8 million as compared to adjusted operating loss of $13.2 million in fiscal 2017. Similar to other retailers, we had a slow start to our first quarter in February, but we have seen business improved, with favorable response to our spring deliveries, and we are excited about our growth prospects for fiscal 2019. Dave will provide more details on our guidance. Looking ahead for 2019, we are focused on growing our direct-to-consumer business, increasing our international presence, testing new product categories and elevating our marketing efforts. Beginning with our direct-to-consumer business, we continue to expand our presence by opening new retail stories and leveraging our e-commerce channel. I am excited about the opening of our new home store in Malibu. This pop-up store will enable us to test this new store concept in a location that represents the essence of the Vince brand. Last week, we opened a new full-line location at the upscale Aventura Mall, and we are on track to open our 609 Fifth Avenue store this fall. In addition, we have signed a lease for a Santana Row store in San Jose, California and expect to sign leases for an additional 1 to 2 locations for the balance of the year. We will also be expanding our Prince Street store in NoHo this summer, which will allow us to better showcase our assortment and elevate the customer experience. In e-commerce, we will continue to evolve our website as our online flagship store. Our initiatives are designed to reinforce the brand as well as drive sales across all channels. We are making enhancements to our website to enable higher conversion rates with optimization programs. In addition, we are creating a more pronounced point of view in our merchandising with increased editorial content, while maintaining a focus on buy-now wear items that create more immediacy in purchasing behavior. We are also upgrading our mobile app for better response rate and usability. We launched our app in Q3 of 2017, and it has already reached approximately 5% of our online sales in 2018. As we make further enhancements and as customers are increasingly shopping on their smartphones, we expect sales in our mobile app to continue to generate strong growth. Turning to international. We have been extremely pleased with the strong acceptance of the Vince brand as we continue to gain traction in both Europe and Asia. Our sophisticated, easy-to-wear style resonates with the European consumer, who appreciates luxurious quality and comfortable style. We recently opened a 500 square-foot shop-in-shop in London with Selfridges, which has resulted in a 4x increase in weekly sales. We are also finalizing plans to open our own retail store in London as we invite customers to interact directly with the brand and enable us to fully showcase the essence of our California roots. Turning to Asia, the Vince brand has performed well across numerous regions, including Japan and South Korea. Longer term, we will look to meaningfully expand our footprint to capitalize on the significant growth potential given the strong acceptance of luxury brands in this market. Our global e-commerce platform will further help us to expand internationally, and we will be ramping up investment in paid social and search in key international markets. As part of this, we are creating influencer strategies in key regions to increase visibility with a focus on the U.K. and Paris. Turning to our product assortment. We are further exploring new categories that are appropriate for the Vince brand and represent a natural extension that addresses the lifestyle needs of our customers. As I mentioned earlier, we are currently testing our home retail concept with a pop-up store in Malibu, which opened in February. We also introduced our licensed fragrance business, which debuted with 3 signature scents inspired by our California roots. Our relaunched capsule handbag collection is brand-appropriate in terms of style and price points, and we will continue to refine our assortments based on our learnings. Turning to marketing. We will continue to build upon effective marketing strategies, targeting priority walkaway markets to increase brand awareness and drive traffic to Vince stores. We look to achieve high visibility in priority walkaway markets, combining impactful digital marketing with more traditional campaigns, including bus shelters and exterior ads and billboards in gateway markets. We will communicate our cohesive California strategy, which is sensed in stores, expressed in imagery and presented online so we have a consistent brand message across all touch points. We created our first short brand film to support spring 2019, and we'll identify strategic partners to create custom content for online and offline channels and in advertising to ensure we are communicating our brand voice. We added a number of new engaging programs and events with a focus on Pacific Palisades that communicate our California lifestyle, including yoga and meditation and hosting conversations and experiential moments. We plan to partner with relevant brands, media outlets, influencers, artists to create buzzworthy experiences, keeping Vince top of mind across fashion, lifestyle, home and travel. While Vince has historically been a quiet brand, I'm excited to see the exposure we are getting with celebrity spottings, and we are expanding our influencer presence at both the macro and micro level to help spread the Vince story. In terms of direct engagement, we will continue to maximize the level of digital marketing across all seasons and all channels to increase the level of qualified traffic. As we continue to grow our e-mail distribution list and increase segmentation, we'll provide more meaningful and relevant messaging to the various segments. We are in the process of building out our CRM/CEM capabilities, and we'll focus on acquisition and retention goals through becoming a customer-focused, direct-to-consumer, omnichannel organization. This will tie into our efforts to build behaviorally triggered e-mail communication. Overall, our marketing strategy is focused on driving brand awareness to draw new customers to the Vince brand and deepening the engagement with our existing customers. Our most recent endeavor, Vince UNFOLD, has been an exciting opportunity for us to expand our brand awareness and address the millennial market that was adapted to the subscription-based model. We are very pleased with the initial membership sign-ups and the extensive press coverage it has received. We are enthusiastic about the potential of this business as it provides an opportunity to reach new customers. We will continue to monitor this channel and evaluate additional opportunities. In conclusion, we believe we have successfully stabilized and revamped the business, and we are now focused on exploring multiple growth opportunities. In collaboration with our strategic consultants, we are evaluating these opportunities as we develop our long-term plan. I'm extremely excited to be entering this next phase to fully capitalize on our long-term potential. With that, I'll turn it to Dave to review our financial results.

Thank you, Brendan. We are pleased to have delivered solid fourth quarter performance, in line with our guidance for the year. Fourth quarter net sales increased 4.2% to $77.8 million, compared to $74.6 million in the same prior year period. The fourth quarter of fiscal 2017 included $1.6 million of incremental sales in our direct-to-consumer segment from an extra 14th week. Our wholesale channel sales were up 4.8% to $40.3 million due to lower sales allowances as compared to the same period last year, partially offset by an expected decline in shipments related to the exit of certain wholesale partners as well as lower off-price channel sales. Our direct-to-consumer segment sales increased 3.6% to $37.5 million in the fourth quarter, while comparable sales, including e-commerce, increased 3.1% on a 13-week basis, reflecting an increase in transactions, partially offset by a lower average unit retail related to product mix. Gross profit in the fourth quarter was $36.7 million or 47.1% of net sales. This compares to $34 million or 45.5% of net sales in the fourth quarter last year. The 160 basis point increase in gross margin rate was due to a favorable impact from year-over-year adjustments to inventory reserves, partially offset by higher upfront discounts in the off-price wholesale channel. Selling, general and administrative expenses in the quarter declined 14.4% to $34.7 million or 44.6% of net sales as compared to $40.5 million or 54.3% of net sales for the fourth quarter of last year. For each Q4 of 2018 and 2017, we recorded noncash asset impairment charges related to certain retail stores of $1.7 million and $5.1 million, respectively. Including these charges, operating income was $2 million for the fourth quarter of 2018 as compared to an operating loss of $6.6 million for the fourth quarter of fiscal 2017. Excluding the aforementioned noncash asset impairment charges, adjusted operating income was $3.6 million for the fourth quarter of fiscal 2018 as compared to an adjusted operating loss of $1.5 million in the fourth quarter of fiscal 2017. The fourth quarter of 2017 includes an $82 million noncash other income item representing a tax receivable agreement adjustment related to the lower federal tax rates from the new Tax Cuts and Jobs Act and the impact of updated 5-year projections. Net income for the fourth quarter was $0.7 million or $0.06 per diluted share, compared to net income of $74.5 million or $6.41 per diluted share in the fourth quarter of last year. Excluding the aforementioned noncash charges, adjusted net income for the fourth quarter of fiscal 2018 was $2.4 million or $0.20 per share as compared to an adjusted net loss of $2.4 million or a $0.20 loss per share in the same period last year. Moving to the balance sheet. Net inventory at the end of the fourth quarter was a $53.3 million compared to $48.9 million at the end of the fourth quarter of last year. The increase in inventory was primarily due to the growth of our replenishment program and the earlier timing of spring receipts. We ended the fourth quarter with $46.5 million of borrowings under our debt agreements. From the fourth quarter last year, we decreased overall borrowings under our debt agreements by $3.4 million. This was primarily the result of $5.5 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. We ended the year with $36.9 million in availability under our current credit facility. Cash flow from operations for the year was $3.6 million. Capital expenditures for the quarter totaled $0.8 million, primarily attributable to new stores. As of the end of the quarter, we operated 59 stores in the U.S., reflecting a net increase of 4 full-price stores over the prior year period. Turning now to our outlook. For fiscal 2019, we expect net sales to be in the range of $290 million to $300 million, reflecting mid-single digit sales growth at the midpoint of our range. Operating income is expected to be between $7 million and $9 million, reflecting a nearly 40% growth from adjusted operating income in 2018 at the midpoint of the range. Our 2019 operating income outlook includes an estimated $1.5 million from strategic consulting costs that will be recorded in the first quarter. As we solidify our long-term strategic growth plan with our consultants, we may update our expectations for strategic consulting costs and operating income accordingly. For the year, we expect operating margin to be driven by gross margin expansion, partially offset by SG&A deleverage, in part due to the strategic consulting fees as well as continued investments in the business. Interest expense for the year is expected to approximate $4 million. While we are not providing quarterly guidance, I want to offer some color as you think about the first quarter. Beginning with our sales expectations, as Brendan mentioned, and similar to others, we expect -- we experienced softness in our direct-to-consumer business during the month of February, although we were pleased to see improved trends in March. In addition, we expect a shift in the timing of seasonal wholesale shipments. As a result of these factors, we expect sales to be roughly flat in Q1. Given the multiple growth initiatives we have in place, we believe we will see improved year-over-year sales and earnings performance throughout the remainder of the year. We currently expect capital expenditures to be between $4 million to $4.5 million in 2019. As with our strategic consulting cost, our capital expenditure plans may change as we solidify of our long-term strategic growth plan with our consultants. Based on our recent debt refinancing, we have the availability and flexibility to support our long-term growth objectives. We remain excited about the traction we are gaining across our multiple strategic initiatives, and we remain committed to returning shareholder value. We look forward to sharing more detail on our strategic plan in the coming quarters. This concludes my comments regarding our fourth quarter financial performance. We'll now take your questions. Operator?

[Operator Instructions] Your first question comes from Dana Telsey with Telsey Advisory Group.

Certainly, it's been quite a year at Vince with the progress that you've made on the product. And we've heard from everyone about the first quarter and February and March weakness that has been there. As you think about the product extensions in your existing products, Brendan, what are you most excited about as we head into the balance of this year, both men's and women's? And what are you seeing in wholesale and your own DTC, were there any exclusive products and pricing?

Yes, Dana. Thank you. I'll try to answer all of it, but cover me if I forgot something. Yes, I mean, certainly, we're excited to see other businesses built after a soft February. Really, the business had been strong at department store -- at registers at department stores through the quarter, and they got the goods earlier than we actually did in our own stores for Q1. So we knew the product was going to be well received, and that's certainly come true as the weather has gotten warmer. And I think in terms of product extensions, as we start to dabble in things like home and fragrances and handbags, the brand just lends itself so well to these different product categories, and the customer seems to be responding favorably and giving us permission to enter these categories. So as I mentioned in my remarks, we've retained a strategic consultant to really help us figure out how we'll amplify this and really develop these new product categories into revenue streams and figure out what we do in-house and out-of-house. So we're really very excited with the potential to diversify and really take advantage of the brand equity that we have. While at the same time, I think to answer the last part of your question, we're not losing focus on our core business, which is, of course, women's and men's apparel. And I think the LA team has done a tremendous job really embracing this buy now, wear now moment that the customer is in, and that was a big change and pivot from Vince. But we're really being able to see the customers come in and react to the product and have that immediate gratification across both men's and women's. And I think as we continue to get information and experience in that, it will only allow us to better service the customer. And certainly, opening up some of these new stores in new markets and also expand in current markets is very exciting to expand our reach as well.

And David, as you think about CapEx, how do you think about the buckets of CapEx this year and the allocation?

Most of our CapEx in 2018 and in 2019 also go against our stores, both new stores and then the refreshing of existing locations. And that's a large majority of our CapEx spend.

[Operator Instructions] And this does conclude the Q&A portion of the call. I'll now turn things back over to Brendan Hoffman for any closing remarks.

Thank you, everyone, for participating today, and we look forward to updating you on our Q1 results in June. Thanks very much.

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