JJill Inc (JILL) 2019 Q3 法說會逐字稿

Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the J Jill's Third Quarter 2019 Conference Call. On today's call are Jim Scully, Interim CEO of J.Jill Inc.; and Mark Webb, Executive Vice President and CFO. (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 the 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 that of the date of this call, and we do not undertake any obligation to update any 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 Jim.

Thank you, and good morning, everyone. As I am sure you saw in today's press release, I am stepping into the role as the company's interim CEO. On behalf of the Board, I want to thank Linda for her dedication and commitment to J.Jill over the past 2.5 years, including the past 1.5 years as CEO. I joined the Board 2 years ago, know the brand well, have great respect for our teams, and I'm looking forward to leading the company to a smooth transition.

Turning to our performance. Our third quarter results fell short of our expectations with total comparable sales declining 7% as the assortment did not resonate as strongly with our customers as originally planned, particularly in our store channel. These results were offset by an improvement in our direct channel, which grew to 43% of total sales versus 39.8% last year. Although our store channel is one to be admired in retail with the economics we produce, its performance has slowed, and we need to better align our 2 channels to fully capitalize on and build our omnichannel customer segment.

Before I turn the call over to Mark to review the financial results in more detail, I would like to spend a moment to discuss what I will be focused on initially with our teams. Clearly, the first priority is to stabilize the business. We, as a team, need to focus on our customer, marketing, product, operating fundamentals and financial discipline. In addition, the team has been working on go-forward strategies to simplify our processes, drive inventory discipline, improve quality and improve lead times while making sure we spend every dollar as effectively as possible.

As Mark will discuss, we have made progress with inventory management and are working to improve our disciplines around both in-season inventory and future buys. We need to build more flexibility into our inventory management and have better reaction to flex areas of our assortment up and down, depending on how they are resonating with our customers.

With better guardrails in place around inventory planning, we believe we will be in a much better position to capitalize on the benefits we have at the foundation of our business. As you've heard us say before, J.Jill is a remarkable brand with an extremely loyal and yet underserved customer. I and the team believe in the opportunities that lay ahead for J.Jill. Starting today, I will be focused on working with the teams to instill an improved discipline around our operations to once again be in a position to unlock these opportunities and capitalize on the great potential we have in this marketplace.

While there is much work to be done, I look forward to working with our teams to help position J.Jill for successful growth ahead. Our brand has a loyal following, our stores are a great asset and are admired in the industry and our direct business is sizable, all of which gives us confidence that we can once again begin creating value for our shareholders.

With that, I will turn the call over to Mark, who will discuss our third quarter results and guidance in more detail.

Thank you, Jim, and good morning, everyone. As Jim mentioned, the third quarter was challenging and we are committed to and focused on stabilizing the business. Our top priority is improving assortments to consistently deliver customers the quality and style they expect from J.Jill. We disappointed her in Q3, and though she is still engaged with the brand both online and in-store, she is spending less per transaction. We see pockets of strength around key collections and items in the assortment but have opportunity to be more consistent in our execution of quality and fabrication, primarily in the Pure Jill and Wearever sub-brands. We know this from sales patterns as well as direct customer feedback. We are actively listening and the teams are focused on correcting these issues in the coming floor sets.

We also must continue to transform our operating practices around the management of inventory. We have made progress instilling greater discipline to in-season inventory management and the sizing of future buys, but we have more work to do. As product collections transition into those designed and purchased by the current creative teams, we will position unit inventory conservatively and work to remain as flexible as possible and ready to react and chase as warranted. We remain focused on bringing down costs to further improve the flexibility of the P&L and its challenging top line performance. We have begun to see some benefit in Q3 from cost savings actions taken in Q2 and continue to have opportunity to optimize our cost structure.

Now for an overview of third quarter performance. Total net sales were $166 million, down 4.6% versus last year's $174 million. Total company comparable sales decreased 7%. Total direct sales increased 3% year-over-year, up 320 basis points to 43% of total sales for the quarter. Gross profit was $107 million versus $116 million last year, and gross margin was 64.4% compared to 66.3% last year. The year-over-year reduction in rate was due to softer-than-expected product margins, which were partially offset by approximately 120 basis points of benefit from better-than-expected recoveries on liquidated inventory during the quarter.

SG&A expenses were $98 million versus $102 million last year. The year-over-year decrease was driven by savings in corporate overhead resulting from actions taken earlier this year as well as a reduction in marketing expenses compared to Q3 last year. As a percent of sales, SG&A deleveraged 70 basis points versus last year.

GAAP operating income was $9 million or 5.4% of sales versus $13.9 million or 8% of sales last year. Adjusted EBITDA for the quarter was $19.6 million compared to $24.2 million last year. As a percentage of sales, adjusted EBITDA was 11.8% versus 13.9% last year. A reconciliation of adjusted EBITDA to net income is included in our press release.

Interest expense for the quarter was $4.8 million versus $4.7 million last year. Tax expense for the quarter was $1.8 million versus $2.5 million last year, and the effective tax rate was 42.5% compared to 27.1% in the third quarter of 2018. The elevated tax rate in the quarter is due to the impact of permanent tax-to-book differences, which arise in the normal course of business.

GAAP net income for the period was $2.4 million or $0.05 per diluted share compared to $6.7 million or $0.15 per diluted share last year.

Turning to the balance sheet. We ended the quarter with $17 million in cash. Inventory at the end of the quarter was up 3.3% to $81.4 million versus $78.8 million last year. This level of inventory is still too high but does represent a sequential improvement compared to end of second quarter. Looking forward, through efforts taken earlier this year, we were able to impact the preseason buys related to receipts landing late in the fourth quarter. This is a critical step toward rightsizing inventory levels as we enter 2020.

Regarding real estate, we opened 4 stores during the third quarter, bringing total store count to 290. Finally, capital expenditures were $5.6 million.

Now to our outlook for fourth quarter and rest of year. We have made progress this year, streamlining costs and addressing elevated inventories, which we believe will pay off in the long term. But given the performance of product assortments during a challenging third quarter and a belief that fourth quarter will continue to be highly promotional, we must be realistic in our outlook for the remainder of the year. We are, therefore, revising guidance, all of which excludes the impact of CEO transition costs as follows. For the fourth quarter, we expect total comparable sales to decrease between 8% and 10%, total net sales will decrease between 5% and 7%, gross margin will decrease about 400 basis points year-over-year, interest expense for the quarter will be approximately $4.5 million, net EPS is expected to be a loss of between $0.14 and $0.16 compared to earnings of $0.05 in the fourth quarter of fiscal 2018. And lastly, we expect to open 1 and close 4 stores, ending the quarter with 287 stores.

And for the full year, we now expect total comparable sales to decrease 5% to 6%, total net sales to decrease 3% to 4%, gross margin to decrease about 350 basis points year-over-year and interest expense to be about flat to fiscal 2018 levels. The effective tax rate for the year is expected to be about 2% due to the permanent tax-to-book difference related to the impairment of goodwill recorded in the second quarter, partially offset by the items impacting the third quarter tax rate mentioned earlier.

Full year earnings per share, which includes the impairment taken in second quarter, is expected to be in the range of a loss of $2.18 to $2.20 per share. Adjusted diluted earnings per share is now expected to be a loss of $0.02 to $0.04 compared to prior adjusted diluted earnings per share guidance of $0.20 to $0.24. We continue to refine and prioritize capital investments and now expect capital expenditures of between $15 million and $18 million for full year 2019.

In summary, while we are disappointed in current performance, we are optimistic about the future and potential of this business. We remain focused on stabilizing operations and strengthening core operating principles that will enable J.Jill to meet and exceed the needs of an incredible growing target customer base.

That concludes my prepared remarks. I will now turn the call back to the operator for questions.

(Operator Instructions) Our first question today comes from Paul Trussell from Deutsche Bank.

This is actually Krisztina Katai on for Paul. Welcome, Jim. So I wanted to get your initial impressions on areas that need specific improvement. What are the areas that need, in your view, immediate attention? And how do you plan on attacking these? And then lastly, I just wanted to get your view, like with all the changes that you have made over the last 2 years, do you think that there is a risk that you might have alienated your once core customer? And how do you think you can successfully reengaged with them?

Great. I think first, I want to start by saying that we have a great business, a great brand. I think we have a loyal customer in an attractive segment. And I think we just need to focus and execute better. I think if you think about some of the specific areas, it is obviously an improving inventory. We need to drive gross margin improvement while at the same time positioning the company for future growth. We are clearly disappointed in the results and how the year is shaping up, but the focus in the interim -- for me in the interim will be on execution and operating discipline.

And I'll just -- I'll add in on the customer. As Jim said, the customer is very loyal. The customer accounts are actually still positive year-to-date. The reality is she is spending less. And I think that's back to some of the points that Jim was making in terms of rightsizing the inventory buy, the resulting impact that has on the promotional level within the brand are all things that will continue to help us actually satisfy the customer. So we don't think we've alienated her, but I would put yet on that. The product, the assortment needs to improve and that's where the focus is.

That's helpful. And obviously, like your sales performance missed the guidance that you have provided. So as we look to the final quarter, what are the main things that have changed versus your prior expectations that really resulted in that 8% to 10% decline in same-store sales? And you mentioned that you will be course correcting with upcoming floor sets. So just in your view, like when should we start seeing improvements in the top line and a stabilization in your gross margins?

Sure. So the -- when we entered the third quarter, we had said at that time that we were cautiously optimistic and that we were basing our projections on a continuation of the trends we saw in the second quarter. The reality is, in the third quarter, those trends fell off. And really in the month of September, with the September floor set, which is sets late August and into September, we had some challenges. So the forecast or the guidance now that we're providing, we would call it realistic. And it's based on a continuation of the Q3 trends as we exited the third quarter. With really the discussion around the inventory and the rightsizing of those buys, I would say that the receipts that start to come in late in the quarter are much more in line with where we want them to be. Now I wouldn't say that, that is a driver of top line growth initially. What we are looking to do is stabilize on the profit line, the gross profit initially and really start to sort of stabilize around those key profit metrics. Now that said, as you rightsize your inventories and the assortment comes together, which -- the assortments and I'm talking about that have the rightsized inventory, are not yet the assortments that are designed by the current creative team. That's later in the first quarter of 2020. But as you stabilize the inventory and the assortments improve, then your AUR, which has been a challenge this year in Q3 in particular, that can contribute in time to sales growth. But the initial view is stabilizing the business, rightsizing the inventory, stabilizing on the gross profit line.

Our next question comes from the line of Kimberly Greenberger from Morgan Stanley.

This is Cynthia Campo on for Kimberly Greenberger. I was wondering if you could speak about the specific challenges that you saw, if there were specific products that you saw issues or if it's more of a broad-based general issues across different products or specific colors, specific lines that there were challenges this quarter.

Sure. I'll do my best to give you some color. The reality is, within the assortments, we had pockets of strength that we saw, but we also had overriding challenges. The strengths that we saw on the assortment were in areas where we've sort of pushed the assortment into some of the more fashion areas of leopard print and full suedes. By their very virtue, those are smaller buys. We had some great items like cable sweater in the quarter and quilted jackets that did very well. But I think overall, the opportunities we had were in the Pure Jill and Wearever collections within the store. We have an opportunity and are focused on further differentiating those sub-brands within the store to their end use. We had some quality and color challenges within the assortment, primarily in -- a little bit in late August and then in September, the weather didn't help us. The September drop went more towards layering and a bit more heavier sweaters. We don't like to cite weather. Honestly, unseasonably warm is that becoming seasonably warm in the summer. Not sure, but we need to really work through the assortments and work on the Pure Jill and Wearever part of the assortment primarily.

Our next question comes from the line of Janine Stichter from Jefferies.

A question for Mark. So I think you talked a bit about SG&A being reduced and still seeing some opportunity to further reduce SG&A. Could you talk a little about where that's coming from and potentially where you see more expense reductions? And then also how you balance making sure that you don't cut customer-facing or revenue-generating expense. I think you mentioned going back on marketing and how you balance reducing SG&A while still making sure that you're focused on driving revenue.

Sure, Janine. The -- so the expense opportunities that we continue to see are, at this point, more around refinements and efficiency, looking through all the spend areas within the P&L and a bit more of the traditional efficiency reviews. We mentioned on the Q3 call that both stores payroll and marketing we view as strategic differentiators for the brand, and that is true. In the third quarter, the reductions in marketing that we put through were primarily related to catalog circulation reductions. And within catalog circulation, there are different categories of customers that you are targeting. We -- might have cost a little bit of top line in the quarter, maybe earlier in the quarter. The team has been refining the mix across the marketing media, including catalog to try to focus on the highest returning investments, and have seen some successes there. And then within the catalog itself, circulation, they've been tweaking to make sure that we're targeting the most responsive customers, the existing customer, primarily with the catalog, and made some adjustments through the quarter to address that. That will continue. But we view even the strategic differentiators as opportunities to just continue to refine and become more efficient in those spends, and that's kind of the work that just continues within the business.

Okay, great. That's helpful. And then you talked a lot about improving inventory management, but it feels like a lot of the challenges you're having just kind of go back to the fact that I think your lead times are somewhat on the longer side. So how difficult is it for you to improve inventory management? And what needs to change structurally within the organization for you to become more flexible?

Yes. We've made progress on the inventory management despite long lead times. I mean there's both in-season aspects of inventory management and then there's the preseason aspect of it. Preseason, obviously, relates to the buy and making sure that we have the right forum and discussion set up to review the -- both the sales plans, the profitability plans and the inventory that we're putting against it. So that's something that I mentioned, we've been able to get in front of for the end of this quarter's receipts. The in-season management, the teams here have made good progress in terms of really diving deeper into some of the key metrics that we need to look at on a regular weekly if not more frequent basis around managing the yield of our product from the point that it hits the store through the point that it's sold through. And we've made great progress with initiating some new language into the business with putting some structure and meetings around those discussions on a regular basis. I'm not saying those meetings weren't happening before, but it's more of a refinement and making sure we're looking at the right metrics at the right time to make those discussions all the way through -- or to make decisions all the way through.

Our final question comes from Marni Shapiro from Retail Tracker.

I guess I have a couple of quick questions. First one, are you seeing a big difference between the customer who's online shopping and the way she's shopping in store? And then, I guess, the other one is, are you still getting new customers into the store or whether it's physical or digital? And would you, I don't want to say, slow down that effort until the product is righted? Or what's your thinking around sort of the marketing cadence to get new customers in until the product is righted?

That's good questions, Marni. The -- so look, digital, we've had a very strong digital business within J.Jill for some time. This quarter, we mentioned that it has ticked up to 43% of total sales. I think some of the learnings we have been having are that some of the capsule items that we've had, the collaborations that we've had are definitely helping to drive traffic and some new-to-brand traffic to the website, which is great. The stores in the third quarter were more challenged. And I think for us, as a business, it's really continuing to look at how to manage the entire ecosystem, the omni capabilities of the business across both digital and stores. And so our marketing efforts focus there as well. A lot of our mix has been moving into social and digital channels. That helps. The natural sort of industry-wide trend within digital traffic is that it's migrating more towards mobile versus desktop. And so lots of opportunities to focus on how to improve what has always been the lowest converting, which is mobile, and things are getting a lot better, and there's new technologies that we're always looking at there to help drive that. But yes, as a focus in the business, that's a big strength of ours is that penetration of digital and how we continue to maximize what we think is a big competitive advantage, which is the store base to support the whole ecosystem as we go forward.

All right. It's Jim, I want to say -- So it's Jim, I want to say thank you for joining us today. I also want to thank all of our teams for their continued hard work and dedication. And I hope everyone has a nice holiday season, and we look forward to updating you on our progress on our next call. Have great holidays.

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