Vince Holding Corp. (VNCE) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Vince Holding Corp. Q2 2020 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Amy Levy, Vice President, FD&A and Investor Relations. Thank you. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp.'s Second Quarter Fiscal 2020 Results Conference Call. Hosting the call today is Dave Stefko, Interim Chief Executive Officer and 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 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 Dave.

Thank you, Amy. Good afternoon, everyone, and thanks for joining us today. I am very excited to be stepping into the role of interim CEO as we continue our path forward. Over the past five years, I have worked closely with Brendon as we rejuvenated the Vince brand, and I remain excited about the opportunities in front of us for both Vince and Rebecca Taylor. We have a team of highly talented individuals across the business that remain committed to working together to advance the strategies we have set in place for both brands. Near term, our priority remains to navigate our business through the challenges presented by COVID-19, including driving sales, controlling expenses, protecting cash, and maximizing liquidity. Looking back on the second quarter, as expected, we saw slow rebuild of momentum from the initial results of the pandemic as consumers buying shifted to e-commerce and as stores reopened. At the start of the crisis, we reduced merchandise purchase orders to prepare for unpredictable changes in customer purchasing behavior. We also maintained promotional and markdown activity above our normal cadence throughout the quarter to move seasonal inventory, which pressured gross margin. We continued to carefully manage costs and protect cash through furloughs, salary reductions, lower marketing investments, and disciplined expense management. I will speak to our financial results shortly. Looking at the business for Vince, we have reprioritized our growth strategies to adapt to the changing environment. In our direct business, we have reopened the majority of our stores with fewer hours and reduced staffing to respond to our lower traffic levels, while focusing on driving continued momentum in our e-commerce business. In wholesale, we're working closely with our wholesale partners to rebuild pre-COVID momentum and believe that our relative performance and market share gains within the contemporary space set us up well for the future. Despite the unprecedented events that have unfolded, the Vince brand aesthetic continues to fit well with our customers' desire for effortless luxury combined with elegant casual comfort, which is the epitome of the Vince brand. There has been a clear appetite for casual luxury across categories that are well suited for a stay-at-home lifestyle. In sweaters and certain other knit classifications, we have been able to chase business to support the strong demand for these styles. For fall, we are continuing to emphasize casual luxury and will leverage our replenishment capabilities to continue to chase product based on customer demand. We will also be launching extended sizes on vince.com at the end of September. We see this as an untapped opportunity as we believe this is an underserved market, and there is an appetite for casual luxury based on feedback from our wholesale partners. We believe that our brands are steady within the contemporary luxury space, gives us a distinct competitive advantage as demonstrated by the over 60% growth we saw in vince.com as well as market share gains we saw at our wholesale partners. Vince was a top-performing women's and men's contemporary brand and volume for the August Nordstrom anniversary sale with best ever sell-throughs. We are excited about the signal these results send as it relates to demand for our brand at Nordstrom. We are also excited to share that this fall, we expanded our wholesale presence with the launch of our collection on bloomingdales.com as well as indoors at select locations. Bloomingdale's represents another great partnership opportunity for events, given how their customer base aligns with our brand’s demographics. We will continue to evaluate potential partnerships with both brick-and-mortar and e-commerce sites that are brand appropriate. Our marketing efforts will support our offering with a continued emphasis on the stay-at-home lifestyle. We will host digital events, including a test of a new virtual collection walk through service, which allows us to showcase product currently in stores while adhering to social distancing guidelines. Influencer collaborations remain an important component of our marketing strategy as we seek partners that have a large following. We will also work with our wholesale partners to increase our reach through product and personalized marketing. For holiday, our focus will be on a lifestyle in or around the home, as we plan to host or attend small gatherings during the holiday season. As we plan our strategy for the holiday season, we are evaluating the right balance of promotional and brand messaging, factoring in the expectation for a highly promotional environment. On the international front, we are also showing encouraging progress. The momentum in our business pre-pandemic has fostered great relationship with our partners, which includes several regional partners and over 300 specialty accounts. We have continued to desire our product as they reopen their stores. In Asia, we are encouraged with the trends we're seeing in Mainland China and Korea. Similarly in Europe, we are pleased to see early signs of recovery as stores reopen. In London, we're excited to see improving department store sales volume. We also have efforts in place to drive traffic to our London store by hosting virtual sales and small in-store events. We continue to build partnerships with London-based influencer, including paid social media post and branding events. During the second quarter, we focused on the advancement in our e-commerce initiatives. By systematically combining our multiple warehouse inventory into a single location, we have increased efficiencies by creating a greater access to inventory in high demand SKUs, and at the same time reduce cost. This consolidation of our inventory will now better enable us to capitalize on the accelerated shift to e-commerce shopping. Our retail stores also remain an important channel to connect with customers in person and to drive brand awareness. We will strategically take advantage of opportunistic premier relocations for both full price and outlet stores that may become available due to the disruption in the retail landscape. Our store expansion will remain highly selective in terms of both location and short-term low investment lease agreements for Vince and Rebecca Taylor. Turning to Rebecca Taylor. We are pleased to see the enthusiasm among our wholesale partners regarding our relaunch as we reposition the brand back to its feminine routes, the aesthetic embodies romantic essence with delicate embroideries and prints. The new line will offer greater versatility, enabling customers to wear Rebecca Taylor, both at home or outlet trends. Multiple use dresses and tops have already shown success with our customers, as these products drove an increase in [indiscernible] through the Nordstrom's anniversary sale. Our brand message for Rebecca Taylor will now consist of one singular strong voice as we eliminated the sub-brands that Rebecca Taylor had morphed into over the past few years. In addition, the integration into Vince's systems is on track to be completed before the end of the year, and we expect to achieve greater-than-anticipated cost savings. We look forward to our four relaunch of the collection plans for spring 2021 and continue to believe we can successfully execute the Vince playbook for the Rebecca Taylor brand. Turning to our financial results. Total company net sales for the quarter decreased 59.9% to $37 million compared to $92.2 million in the second quarter of fiscal 2019. This reflects the closure of all Vince and Rebecca Taylor stores as of March 17 as well as a reduction in orders following the temporary closure of wholesale partner doors. This was partially offset by a more than 60% increase in our Vince e-commerce business. For the Vince brand, second quarter consolidated net sales decreased 54.9% to $32.2 million compared to $71.4 million in the same prior year period. Our Vince direct-to-consumer segment sales decreased 46.2% and to $15.1 million in the second quarter, reflecting the previously mentioned store closures and reduced traffic levels and reopen stores, partially offset by the strong growth in our e-commerce business. Our Vince wholesale channel sales decreased 60.5% to $17.2 million as a result of the delay in cancellation of order receipts due to the closure of wholesale partner doors. Similar to performance in our direct business, online sales of Vince product on partner e-commerce sites were strong in the second quarter. The accelerated performance on both our branded website as well as the e-commerce sites of our wholesale partners, illustrates the continued strength of the Vince brand. Rebecca Taylor and Parker combined net sales decreased 76.9% to $4.8 million as compared to the same period last year. As we mentioned on last quarter's call, we have paused the development of new product for our Parker business for now to focus resources on the operations of our Vince and Rebecca Taylor brands post the COVID crisis. Gross profit in the second quarter was $13.3 million or 36% of net sales. This compares to $43.4 million or 47% of net sales in the second quarter last year. The decrease in gross margin rate was primarily due to increased promotional activity, year-over-year adjustments to inventory reserves, channel mix and the deleveraging of supply chain costs, partially offset by lower sales allowances. Selling, general and administrative expenses, excluding the noncash impact of goodwill and intangible asset impairment charges, long-lived asset or other finite lift intangible asset impairment charges in the quarter were $27.3 million or 73.9% of net sales as compared to $41.6 million or 45.1% of net sales for the second quarter of last year. As a result of the actions taken to reduce costs at the onset of the COVID pandemic, we decreased SG&A dollars by $14.3 million. This decrease was primarily a result of lower payroll and compensation expense as well as reduced spending on marketing, lower depreciation and amortization costs due to store impairments, taken in the first quarter as a result of COVID-19 and the streamlining of other expenses. Operating loss for our second quarter was $14 million compared to a loss of $18.4 million in the same period last year, which included $20.1 million in noncash asset impairment charges. Moving to the balance sheet. Borrowings under our debt agreements totaled $76 million. We ended the quarter with availability of $34.7 million under our revolving credit facility. We continue to take steps to manage our liquidity and maintain financial flexibility, and we believe have adequate funds to effectively operate our business through the crisis. We continue to work with our suppliers on extending payment terms and are managing inventory flow. In addition, we are pleased with the progress we are making in our negotiations with our landlords, which are nearly complete. Moving to inventory. Net inventory was $92.1 million at the end of the second quarter as compared to $74.9 million at the end of the second quarter last year. As we mentioned last quarter, we're expecting to receive shipments of product at the onset of the pandemic that we are unable to cancel. Therefore, due to order cancellations in the wholesale channel and temporary store closures, we saw an increase in seasonal inventory levels in the second quarter. We plan to move through the remainder of excess inventory through our outlet channel and off-price partners in addition to promotional activities. Further, we believe that our merchandise assortment remain relevant in future seasons, and therefore, a portion of carryover. Overall, we are comfortable with this strategy and believe we will move through the excess inventory and get back to more normalized levels over time. As stated in our press release published this afternoon due to the uncertainty related to the impact of COVID-19, we will not be providing guidance at this time. In conclusion, first and foremost, we have a great team of dedicated leaders and individuals who have a clear vision for the future events in Rebecca Taylor and the opportunities that lie ahead. We believe the market-leading position of the Vince brand in the fashion contemporary luxury space and the resiliency to expand this leading positioning during the COVID pandemic further support our ability to take advantage of opportunities post-COVID. In addition, we believe Rebecca Taylor is poised to replicate the Vince recovery and growth playbook. Although there is currently a lot of uncertainty surrounding the retail environment, we remain confident that our portfolio of brands are well positioned to deliver long-term sustainable growth for our shareholders. This concludes my comments regarding our second quarter. We will now take your questions. Operator?

[Operator Instructions]. Our first question is from Dana Telsey with Telsey Advisory Group.

Dave, as you think about the inventory levels at the end of the second quarter, how much of that would be pack and hold maybe for the spring season or future seasons? How much of it and how do you see inventory progressing throughout the balance of the year? And then also, I've seen the Bloomingdale's partnership that now you're looking at, how do you see that impacting the wholesale business level of promotions being the same? How many stores will you be in? And are there other partners you're looking to expand with?

Okay. Thanks, Dana. Hope you're doing well. From an inventory perspective, a lot of the increase in the inventory is we set a seasonal inventory, obviously, it comes from the spring, summer, and pre-fall seasons. We do believe that the product, because of the cutbacks in the department stores has not had the exposure in the marketplace, and so we'll be viewed to some degree as newness next year. And there are some items that would be -- applicable to the fall season that we're able to move into fall production and reduce our development in some of those seasons. So from that level, we see our ability to work through that. As we get into our ordering of product for pre-spring and as you probably know, our spring market just started last week for Vince and this week for Rebecca Taylor, we are able, obviously, to match our buying more closely to the order patterns that we are seeing. And with the performance of the brand, for instance, the Nordstrom’s anniversary event, how we've been doing from an e-com perspective, in our wholesale partners, we believe as they've been managing through their inventories to get them back in line, they will now be opening up their open-to-buy dollars, and that we've proven that we deserve our fair share of those dollars. So that's why we believe, over time, we're comfortable that we can work through these inventory levels. As far as Blooming Dales, we just launched bloomingdales.com in a select few stores. It's new. Everything is going well. We don't see any change in the promotionality because we're in Bloomingdale's, more so driven by the needs in the marketplace and how the consumer is responding. So, we're very comfortable with the Blooming Dale’s relationship so far. We are in the process of getting on drop ship with them. Drop ship in this environment is a key driver for everyone, and we do have drop ship capabilities at other wholesale partners, and we're in the process of establishing that with Blooming Dales also. And as far as your last question, I mean a comment on other partners, we're open to distribution to other partners. We will, at that time, look at the environment, not just how they sit; the Vince brand, but also how they would impact our existing wholesale partners. So, anyone we would expand with, we would consider the current environment of both the customers and the impact on that.

And the stores that you've reopened so far, how are you doing on your sales recapture rate? What is that looking like? And the 60% increase in e-commerce sales was, obviously, an acceleration from the 30% increase in the first quarter. How much of that is your own sight? How much of that is wholesale partner sites?

Well, the 60% I referenced is just vince.com. So that's our own site. So obviously, even with the Nordstrom anniversary sale, a greater percentage of that business comes through e-commerce and drop ship. From a store perspective, traffic, as we open stores, was anemic at best. We have seen traffic in our stores getting more below the 60% down level. And we are seeing improvements week-over-week over the last 4 to 6 weeks, but we are seeing conversion. Conversion is more than double what conversion was before. So obviously, the person who is coming to shop is a buyer and looking to spend. So, the trends are good, and we expect the trends to continue.

Got it. And can you give any update on the health of the balance sheet and how you're thinking of the balance sheet now? And also an update on the inventory reserves and any adjustments there?

Yes. I mean, like every business now, we're evaluating our ability to move through seasons. As you know, as we all entered into COVID, we had older inventory to sell to the off-price channel, which didn't move. So, at that time -- so again we're evaluating – we’re in the cycle, everything will fall. So, we have increased inventory reserves like most. As far as the balance sheet goes, we believe we have adequate liquidity and availability. We also continue to work on a daily basis with our vendors, with our inventory inflow. We're very pleased with the work we've done with our landlords and everybody in that case understanding that we have to get through this together. We have a great relationship with our banks, and we are very diligent on how we're managing our spending day-to-day. And so, all those levers continue to be available to us and we continue to manage them. So, hope that answers your question.

And perspective on holiday and how you're planning holiday?

Well, so we look to holiday. Like May, we all understand there's going to be maybe -- one of the pressure points is going to be the Fedexes and UPS’ of the world from a delivery perspective. So, we like many are looking at do this holiday need to start sooner and are we going to have to entice the consumer to shop early. We’re having discussions with our wholesale partners around their plans and expectations from us, so we can make sure that we can service them, and we're working through our own plans, too. I mean we would expect that this will be a more promotional and earlier holiday season.

And then just lastly, marketing spend, given the events that you're doing. How you're thinking of marketing spend going forward? And does the additional sizes, how much does that add to inventory?

See, from a marketing spend perspective, majority, not almost all of our marketing spend is being used to support driving the e-commerce business, and so that's measurable. We can see results from it. And so, we're committing our dollars there, other general type of marketing. We're managing that from an investment perspective and a liquidity perspective. So, we're targeting and spending the dollars where we believe it should be spent. From an extended sizes point of view, it's a launch on our own e-commerce site, vince.com, so it is not a large investment. And so, with this first season, we want to get a read on it, and we will share that with our wholesale partners. And then we'll make further investments as we look into spring as we see the results and the distribution beyond that.

This does conclude the Q&A period. Now I'll turn the call back over to Dave for any closing remarks.

Okay. Thank you. So, this concludes today's call. We look forward to updating you on our third quarter earnings call in early December. Please stay safe, everyone, and thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.