JJill Inc (JILL) 2018 Q1 法說會逐字稿

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the J.Jill First Quarter 2018 Conference Call. On today's call are Linda Heasley, CEO of J.Jill Inc.; and Dave Biese, Executive Vice President and Chief Financial Operating Officer. (Operator Instructions).

Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and J.Jill's SEC filings. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update our forward-looking statements. Finally, we may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in our press release issued today. If you do not have a copy of today's press release, you may obtain one by visiting the Investor Relations page of our website at jjill.com. I will now turn the call over to Linda.

Thank you, and good morning, everyone. I'm honored to be on this call today and to provide my initial insights since joining J.Jill 8 weeks ago. Dave will walk you through the quarter and our outlook in a moment. But as this is my first time speaking with you, I wanted to provide a little context as to who I am and why I am excited to be here to bring J.Jill to its next phase of growth.

I have long admired the J.Jill brand as a fellow retailer, as a woman, a board member and as a customer. I thank Paula Bennett for her dedication to the brand over the past decade and the foundation she had built here. Because I have been a member of the J.Jill Board of Directors, I have an understanding of the company's strengths and of its opportunities. I also have a deep understanding of the retail and consumer business, having previously served as CEO of The Honey Baked Ham Company, and prior to that in women's retail apparel as CEO of Lane Bryant; Ascena's Plus Segment; and the Limited, and before that, I held leadership positions at L Brands and CVS.

I know why J.Jill has been successful, and I know where we can improve. I think there is tremendous opportunity for growth in the coming years.

The first quarter results are indicative of where we find ourselves. We saw continued strength from our retail stores and improved results from our e-commerce channel. We are also seeing momentum in the growth of our customer file this quarter, which speaks to the loyalty of our existing customers as well as our ability to attract and retain new customers to the brand. We have more work to do to get us to a level of performance that we know we should be delivering. As I mentioned, this week marks my eighth week at J.Jill. As you would expect, I have been spending significant time with our teams. We have a deep connection with our customer that is unique and admirable. And while it's necessary and important to have a solid base, it alone is not sufficient.

There is opportunity for us to be more for our customers than we have been to date, to embrace more women while concurrently strengthening the connection we have with our existing customer base. I'm currently assessing every aspect of our business, and I'm looking across our platforms to find the areas, in which we can unlock our potential. We have some changes in investments to make to accelerate our growth. I am excited by what lies ahead.

Now I will turn it over to Dave to review our first quarter results and outlook. Dave?

Thank you, Linda. As expected, our first quarter sales trend decelerated from the fourth quarter, but not to the degree we originally anticipated. The deceleration was largely driven by our weaker February performance as our January promotions in the fourth quarter pulled demand forward from February. Our trends improved as we moved through the quarter, and we had a stronger-than-expected finish for the period.

Our store performance continued to drive our sales result. We had both channels exceeded expectations. During the quarter, our teams implemented e-commerce upgrades that improved the shopping experience in the channel. We will continue to roll out further developments to our website into the fall, including enhanced my account and fitting features as well as offering alternative payment options. Further, we made positive progress to clear inventory and are on track to meet our objective to better align the level and mix of inventory to customer demand by the fall.

I will now review our financial results in more detail. First, some housekeeping. As a reminder, 2018 is back to a 52-week year, and we do experience an impact from the related calendar shift. As it relates to reporting comparable sales, we use the NRS restated 2017 calendar to calculate our comparable sales growth, providing a more apples-to-apples view of our performance.

Unlike others, we have adopted the new revenue recognition accounting standard. However, this does not have a material impact on our results, and as such, we are not adjusting our historical reporting of results.

For the quarter, total net sales were $181.5 million, an increase of 9.3% versus last year's $166.1 million. Total company comparable sales increased 2.3%, driven by our stores and better-than-expected selling of sale product in the quarter. As a result of the calendar shift I noted earlier, our first quarter sales benefited from a low-volume week in February being replaced by a much larger volume week from May. This was contemplated in our first quarter guidance. Excluding this shift, the spread between total company comparable sales and total net sales would've been more in line with our historical results.

Gross profit was $120.3 million versus $115.6 million last year, and gross margin was 66.3% compared to last year's 69.6%. The rate reduction was slightly more than our prior guidance given the better-than-expected selling of sale product. SG&A expenses were $98.7 million versus $93.4 million last year, excluding nonrecurring and certain onetime expenses of $1.6 million and $3.6 million, respectively. Nonrecurring costs this year are related to our CEO transition, while last year, they were related to the IPO in March 2017. As a percentage of total net sales, SG&A expense, excluding nonrecurring and onetime expenses, was 54.4% versus 56.3% for the first quarter of 2017. The SG&A leverage was driven by the sales impact of the calendar shift as well as our comparable sales growth.

GAAP operating income was $20 million or 11% of sales. Operating income, excluding nonrecurring expenses, was $21.6 million or 11.9% of sales versus $22.2 million or 13.3% of sales last year.

Adjusted EBITDA for the quarter was $31.5 million as compared to $31 million last year. As a percentage of sales, adjusted EBITDA was 17.4% versus 18.7% last year. A reconciliation of EBITDA to net income is included in our press release.

Interest expense for the quarter was $4.8 million versus $4.9 million last year, reflecting the voluntary prepayments made in fiscal 2017, and this benefit was partially offset by higher interest rates this year.

Tax expense for the quarter was $4 million versus $5.6 million, and the effective tax rate was 26.1% compared to 41.1% in the first quarter of 2017.

And as noted in our last call, the U.S. Tax Cuts and Jobs Act significantly reduced our federal income tax rate. GAAP net income for the period was $11.3 million or $0.26 per diluted share versus $8 million or $0.18 per diluted share last year. The first quarter included a $0.03 benefit from the calendar shift and a $0.05 benefit from the lower 2018 tax rate.

Finally, adjusted net income, which excludes nonrecurring expenses was $12.4 million or $0.29 per diluted share versus $10.3 million or $0.24 per diluted share last year. Adjusted diluted earnings per share uses 26% and 40% tax rate assumptions in fiscal 2018 and 2017, respectively.

Turning to the balance sheet. We ended the quarter with $28.7 million in cash and $38.4 million in availability under our revolving credit facility.

Our inventory at the end of the quarter was $77.5 million compared to $73.6 million at the end of the first quarter in 2017. During the quarter, we closed 3 stores and ended the quarter with 273 stores. Finally, capital expenditures were $2.2 million.

Turning now to our outlook. As noted in our previous call, we are providing guidance 1 quarter out giving us the flexibility to continue to diagnose our trends and make adjustments to the business as the year progresses. For the second quarter of 2018, we expect total comparable sales to be flat to positive 2%. We expect total net sales to decrease low single digits as a result of the shift in 2018 calendar. The benefit we had to sales in the first quarter due to the calendar shift is a headwind in the second quarter.

Our inventory clearance efforts will continue in the second quarter, and as a result, we expect gross margin to decline approximately 200 basis points year-over-year. These continued clearance efforts, coupled with our reduction and receipts for the second half, puts us on track to better align inventory with customer demand in the fall season.

We expect SG&A as a percentage of sales to deleverage approximately 150 basis points, primarily due to the sales headwind as a result of the calendar shift.

Interest for the quarter will be approximately flat to last year as the benefit from last year's prepayments is offset by higher rates.

Diluted earnings per share are expected to be in the range of $0.22 to $0.24, including a $0.04 benefit from a lower tax rate and a $0.03 negative impact related to the calendar shift. This compares to $0.28 in the second quarter of fiscal 2017.

Adjusted diluted earnings per share for the second quarter of 2017 were $0.29, which excluded a negative $0.01 impact from nonrecurring expenses related to the company's IPO.

Also for the second quarter, we expect to open 3 stores and to close 2 and end the quarter with 274 stores.

For the full year of 2018, we now expect to open 13 new stores and continue to expect to close 7 to 8 stores.

And finally, we expect capital expenditures for the year to be in the range of $30 million to $32 million.

And with that, I will turn the call back to the operator to take questions.

(Operator Instructions) And our first question comes from the line of Lorraine Hutchinson from Bank of America.

I was just hoping for an update on the e-commerce on the website replatforming. Where are you in terms of capabilities and when do you think you will have the complete offering as you want it throughout the year?

Lorraine, this is Dave. So if you backtrack a little bit to the history of this, we implemented the new site more or less at the beginning of this fiscal year. We discussed then where we saw opportunities, I'll say, to improve something that were more foundational to the site in terms of the experience. We also talked about the impact that some of the inventory position that we had, particularly in the mix of inventory and some of the challenges that presented to the site. So -- and then there were just more or less the general adoption. So as we sit here right now, I feel like we've made some good progress against all of that. You would expect over time that the customer becomes more acclimated. We think that will continue to go for some period of time, but anecdotally, we'd say that improved. In terms of the inventory, I think, we've made good progress against clearing out not just the overall level, but also cleaning up the mix of inventory such that we can merchandise the site a little bit better. But at the same time, there's still opportunity to improve there. On the fixed front, if you want to call it that, some of things more foundational. I feel like we've made good progress against that. We're going to continue to do some of that, but I would say some of the stuff that falls into that foundational category becomes less significant in terms of the experience because we're making progress against it. And then, we're going to this fall at some point, which we noted, My Account features, Fit, some additional payment options, that will be completed this fall. I don't have exact spot on that other than, say obviously, well in advance holiday. So I would say that by the time we go into holiday this year, we're going to be feeling good about our website. We feel good about it right now. I would say, from there though, we look forward to really making progress and leveraging it in a more fulsome way across the business and really using it in a more digital platform basis as we look to the future. So we're excited about the real upside. We've made progress. But this fall, we feel like we'll have gotten to a place where it's more readily -- it's been adopted, and we put something that we're feeling good about in front of the customer.

Our next question comes from the line of Randy Konik from Jefferies.

Linda, welcome. I just wanted to get some of your -- just expand upon your initial impressions on areas of improvement. Are there any 1 or 2 particular areas where you want to see additional improvements and what about those areas you see needing to be switched around or changing process, procedures or something like that, just curious?

Thank you, Randy. It's great to be here. I spent the 8 weeks since I've been here learning as much about the brand and its people as I can. And as you can imagine, I've been spending a lot of time with the teams. I've been in a lot of meetings. I've been in a lot of one-on-one sessions. I've had the privilege of getting to meet most of our leadership, our field leadership team, spending time in the stores. And I'm still assessing. So it will be my intent, in short -- in the very near future to be able to come back with an articulated framework around my assessments as well as some of the decisions to move forward. There's a lot more right than wrong, I will tell you, which has been very exciting. But I'm still neck deep learning as much about the brand and its people as I can. Thank you.

Yes, I understand. And Dave, I guess, the inventory seems like it's in a decent position. Just curious on the clearing process. Did you change the clearing procedures with the inventory in the last quarter -- reported quarter in a sense of, I think in the past, you do most of the clearing through the website versus the stores. Give us some perspective on the clearing procedures, how they changed, if any, and how they will change or not change going forward? And then just if you can give us like a time line of when you think e-comm can sort of act like the stores channel or stores channel act like e-comm together. Is it 2 quarters out, is it 3 quarters out? Just trying to get some perspective on when you think we get more to a normalization period back in the business?

Well, generally as it relates to inventory, I'll use your word, decent shape, right now. We're certainly on track for our plans, which was again to get the mix and the absolute level more right sized to demand and more appealing to the customer by this fall. So we feel good about that. We are -- on a shift adjusted basis, we came out of last year about plus 8% on inventory year-over-year. We just finished the quarter about plus 5%. So we're making progress, and we will be better than that as we go into the fall. So I'm feeling good about that. As far as the process that we use, at this point, I would say, it is the same process and will continue to be the same process going forward for the foreseeable future. We are talking about some things that we think could improve some of the channels we use, but that is more, I would say, for the future. But for the foreseeable future, it's going to be the same model, which we think works pretty well, except there right now, we're relying too heavily on the direct business to clear product in a more price promotional way, which is, as you know, now from our conversations, which is a large part of what it is we're trying to correct. As far as getting e-comm and retail, operating in the same way, frankly, I don't have a point of view on that yet. One of the reasons we're guiding 1 quarter out is for precisely that reason, so that we can continue to understand our business very well, make those adjustments and have a better view of the future. So what I would say about that as we continue to appreciate your patience on that, we're 1 quarter out, we do look very much forward though to the future and being able to talk more fulsome about all of that.

Great. And Dave, I have one more little follow-up. That's really helpful. Just in terms of how you're thinking about financial visibility and variability in the business right now versus let's say, a quarter or a couple of quarters ago? Do you feel like that's starting to return and you're getting a little bit more visibility and stability in the business? Just curious.

With some passage of time now, I would say, yes. When I reflect back on the first quarter, how much business got pulled forward from February because of our January promotion, in hindsight now, I would say, that was kind of a learning there because obviously and as we've communicated, the business improved from there and I would say, is operating in a more stable basis at this point. And that is also what reflects on our guidance as well in terms of really trying to be more contemplative of what I'll say our run rate is right now. What I will reinforce though is given our inventories and given the way we continue to promote through the second quarter, we will not hit that run rate state until at least the third quarter. So there is a lot to learn yet.

Our next question comes from the line of Paul Trussell from Deutsche Bank.

This is Krisztina Katai on for Paul Trussell. I was wondering if you could dig in a little bit further around the trends that you were seeing in the store channel versus the direct. And on the store side, where the positive comps during the quarter driven by both transactions and AUR's. And may be if you could just talk some of the -- talk about some of the actions that you took to get back to positive comp growth like what really worked during the quarter and what are some of the learnings?

I would say for the quarter, what we saw is, obviously, a nice improved, and frankly, outside of our expectations as we move through late March and into April. So some positive results and in both channels. Both traffic and conversion for both channels were positive as we ended the quarter. And I think, a lot of that, I mean, it's reflective of different things. One of it is simply we do believe that the receptivity to product has improved and as far as the offer in the stores and how we are merchandising has improved, and we feel like that is something that provided a benefit. As it relates to the stores, I would say, the stores have done pretty solid for a while. So we feel from strength there as opposed to having, I'll say, really focused on something that we had felt like we needed to turn in a dramatic way. We feel like that's a foundational strength right now. Direct for all the reasons we talked about, with more of a focus, and again, gaining some confidence there, and they also had positive traffic and conversion in the first quarter. So -- but retail, obviously, if you're doing the math based on the percentage of businesses that the 2 channels represented was very strong in the quarter.

Great. And then, just a follow-up would be on the expectations to gross margin and 2Q is still to be down meaningfully. So just wondering how much of the inventory is carryover from 1Q versus fresh 2Q inventory?

You know, I guess, it's -- I don't have a perspective necessarily or a number to share on exactly how much. It's the nature of how our business operates and flows. You always have some product that carries over and it's a lot to do with just how we architect the assortment and the like. So there isn't a precise answer to that. In terms of the off price inventory, in that bucket of inventory that we really felt like we had to move on, we've made good progress there. The fact that we sold through on that better than we expected in the first quarter that influenced the margin down in the quarter -- in the first quarter, but it's also the reason that sequentially in year-over-year, the decline in margin is less. We've left ourselves in allowance. In margin though to see that we absolutely have the powder we need to have our inventories in a good place by the second half.

Our next question comes from the line of Ike Boruchow from Wells Fargo.

This is Nancy on for Ike. So could you just actually give us a little bit more detail. Obviously, Q1 ended a lot stronger than you started off. Can you just talk about, maybe, the quarterly cadence that you saw like throughout the quarter and how you think about getting into Q2, where that quarter to date is looking?

Yes. So backtracking a little bit through what you know, but just to set the stage is, February was a challenge, and we talked about that when we guided the first quarter. March improved nicely. It was really as we moved through the middle and end of March and then ultimately the April was very strong. Because of the Easter shift, if you take the 2 months together, March and April, together, they were quite -- they were much better than we had expected. So we're very pleased of that strength. But I would say, April and particularly in our stores was the thing that really drove the beat. In terms of -- so we just finished the quarter at 2.3% comp. We've guided 0% to 2%. Obviously, the quarterly results and where we stand after May have a lot of influence on that. As we sit here in May, we haven't necessarily seen a deceleration in the business by any means. But we are again, I'll say, cautious yet, in terms of having that run rate in a period of time where we've been operating in a more of a steady state before I think we're going to be ultimately again confident in terms of talking further out. But right now, so far in May, I would say, we have not seen a deceleration and it's obviously informed in our guidance.

Okay, great. And then could you just -- just as a follow-up. Could you just tell us are there any calendar shifts that we should consider? Obviously, Q2 sort of an offset to Q1, but anything in Q3? And then are there any SG&A expenses shifting or is that just from the 53rd week into Q2?

Well, we will have a similar shift of business from the fourth quarter to the third quarter given the calendar shift, and it's going to be a lot like what we're seeing here now on the second to the first quarter. So -- and as far as SG&A is concerned, I don't see that as -- there's going to be an influence on the SG&A rate because of that shift, again third and fourth quarters. But it's not going to necessarily change or shift a great deal of expense from 1 quarter to another. We don't see that necessarily.

Our next question comes from the line of Oliver Chen from Cowen and Company.

From an e-commerce perspective, what factors do you continue to monitor and are you feeling like the My Account and the Fitting options are options that you've tested and thought about in terms of the consumer reception of the process and how the navigation will work? And then secondly, we are just curious about the broader question of fashion and product risk and your thoughts around ensuring that you have guardrails and procedures and how that looks on a longer-term basis just to maintain a certain degree of customer centricity and balancing of the art and science of merchandise and planning?

So to be honest to you, what do we monitor? It's a little bit tricky because we watch everything. And given where we've been, I would say, we've been even more keen to monitor a great deal of information that really reflects every point in the purchase funnel. That's the only way I can really describe it simply is to say, literally, monitoring that purchase path all the way from the top of the funnel when she has joined us on the site, where is she landing, what pages is she navigating, how is she interacting with the product on those pages, all the way through to the checkout and looking for those friction points. And that's probably a good way to describe just the things we continue to work on and fine tune in terms of putting improvements on to the site and continuing to do those implementations. So beyond that, it's the great deal of other things too just in terms of really understanding the merchandising and the like and really what's our experience there, what is she responding to when you merchandise in a certain way, et cetera. So it is fulsome in that sense. As far as the capabilities are concerned, I'll talk to Fit first. Fit is something we hear about regularly from our customer and her ability to really understand Fit on the website. In fact, we've done a great deal of, I'll call them, usability work lately and confirm that. So we see opportunities to do more of those. So really that Fit features I'm talking about is absolutely pointed at giving her a better way to understand how Fit works for her. And we also feel like we have ways to potentially improve the Fit too in certain size ranges that will help that cause. So we are excited about that. On My Account, I would say, in that case, it is going to be more information for our customer in terms of where she's been, what she's purchased in the past and the like. And it's going to be a more service oriented thing in that sense. So we feel strongly about that too as opposed to a test. We're going to obviously test all of that before we introduce it. But I think from a standpoint of, is it -- it's a good service feature as opposed to something that we think introduces an element of risk. But we test everything all the time so to speak. And as far as the fashion and the like, I'll go ahead and have Linda jump in on that. I always have a point of view, but...

I'm going to take that one, Oliver. We are -- I know we want to be cautious in terms of positioning ourselves overly as a fashion business, but we are in the apparel business, and we are going to have some misses. So I think one way to guard against that and to downsize the risk around fashion misses is to continue to test new silhouettes and ideas for our customer. I think we played it a little too safe as I look at the brand in the past 2 years. And I think one of the things we have done is we know our customers so well and wanted to lighter we actually repeated some silhouettes too much. And we didn't give her anything new. And we need to be giving her a reason to comeback on a regular basis. So your question really about the guardrails, I think, is a great one. I think we can leverage the website more to test new silhouettes and get a quick read on what's working and what's not working. And we can attach it very quickly to a specific demographic size, et cetera, which is sometimes harder to do in the bricks and mortar channel even though we have these wonderful sales associates, who give us a lot of feedback on Fit and what's working and what's not working. I think that -- again, I think there is lot of opportunities in test and learn relative to new silhouettes. I think we have to make certain that we're always giving her a reason to comeback, and we are showing her a relevant and current offering that will make her always feel appropriate wherever she might be going. And I'm staying very close to design and merchandising and the product teams to better understand the process. And I'm really excited about the things we were able to influence this year, but you'll see more influence and what we can change in the next 18 months -- 12 months to 18 months. So I'm a going to look for that question again in the near future. Did I answer your question, right?

Very helpful. Our last question is just about the online experience, the customers who did experience the friction points in the past. David, what are your thoughts about those customers and the opportunity to reengage them and the analysis that you have related to the friction points that they experienced and kind of that customer lifetime value, would love any thoughts there?

What I would say, generally, is we were pleased with the file as we exited the first quarter. So I characterize it this way. She's out there, she hasn't left us. To your point, we do need -- we do need to put it on us though to listen more and better and offer her a better experience and the like. We're very pleased with our file as it relates to the retail, but bringing it back to direct, which is where you're, we still -- we continue to grow our file in both channels. And again, she is with us. We have a very -- not just a great customer from a demographic standpoint, but she's incredibly loyal. So we're excited about that and to your point, we need to see that we reengage and give her every reason in the world to come back to us regularly where our conversions improved. That's very exciting. Now we need to get the engagement back with our customer and more from that standpoint. In fact, I'll just scroll that and as my final point, we were pleased with our new to brand growth in the first quarter. So there's a lot of strength here to grow this brand. And as we said e-commerce is a -- is the priority. And we think we continue to have a strong platform there. We need to execute better.

There are no further questions at this time. I will now turn the call back over to Linda for some closing remarks.

Thank you. I'm excited about the opportunities that we have in front of us, and I hope you got that from our comments today. We have a number of strengths, most notably a significant customer base and very loyal ones, who really loves us and stores that continue to perform well by engaging our customers each and every day. While we have incredible assets at our core, we have a lot of work to do before we can unlock our true potential, and we know we can be so much more to her. I look forward to sharing our evolution with you, and thank you for your interest in J.Jill.

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