Vince Holding Corp (VNCE) 2015 Q4 法說會逐字稿

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Vince Holding Corp. Q4 2015 earnings results conference call.

(Operator Instructions)

I will now turn the call over to Jennifer Pohland, VP of Finance. You may begin your conference.

Thank you, Mike, and good afternoon, everyone. Welcome to our fourth-quarter and full-year FY15 earnings conference call. I am Jennifer Pohland, Vice President of Finance. Joining me today is Brendan Hoffman, our Chairman and Chief Executive Officer, and Dave Stefko, our Chief Financial Officer, who will be your speakers for today's call.

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 we expect. 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, we are presenting our financial results in conformity with GAAP, and on an adjusted basis. The adjusted results that we present today 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 in the investor section of our website at investors.Vince.com. After our prepared comments, we will be available to take your questions, for as long as time permits. Now, I will turn the call over to Brendan.

Thank you, Jen, and thanks, everyone, for joining us today. I have been at Vince for five months now, and one of my primary goals was to build a strong foundation and position the Company to succeed over the long term. Everything we have done since that point has been moving us toward that goal.

I am pleased with the progress we have made, and proud of the work that we have done thus far. We are making great strides with our product our top priority, as we work to create everyday casual luxury essentials with modern, effortless style. As you know, our founders, Rea Laccone and Christopher LaPolice, recently returned to Vince as consultants, to oversee our product and merchandising.

In addition, we've added a new artistic director, overseeing all categories, along with new leads in both product development and production, all three of whom previously worked with Rea and Christopher to build Vince. Last month was the first market that featured products from them and our design team, and we're very encouraged by the response that we have received.

Our wholesale partners were thrilled to see that we've recaptured the brand DNA that had made us so successful in years past. And we were pleased to see that the very emotional connection that our partners had towards the brand has been restored. The team has done a fantastic job creating a collection that embodies the brand, with fashion that is both fresh and relevant to multiple generations.

Vince remains a leading brand with our department store partners, and we believe we have an opportunity to further strengthen our market share position, based on the positive reaction we received to the new collection. I'm confident that we are on the right path. However, given the timing of Rea and Christopher's return, we decided to focus on fall deliveries, which are primarily received in Q3, and dramatically reduce the pre-fall product that was already in the pipeline for Q2.

Therefore, it will not be until our holiday delivery in the fourth quarter that you will see the on-floor assortment fully represent the look and feel of the brand. In addition, despite the very positive feedback, given the tough retail environment, our partners are remaining conservative with their buys, and taking a wait-and-see approach. This is not unexpected from our standpoint, and has been built into the guidance.

We are working on some initiatives that will enable us to quickly chase business and capture incremental sales, if performance exceeds presentations, while remaining prudent in the way we manage inventory levels. Quite frankly, at this juncture we would much rather have demand outweigh supply and potentially miss a few sales, than to build inventory too quickly and risk excessive markdown events. Overall, we are focused on doing what's right for the business over the long term, and in some instances, this may mean we may have to take a step or two back, in order to move forward again in the right direction.

To that end, we have also hit the pause button in our handbag business. We felt that the product did not accurately reflect the Vince brand, and we have begun the process to find a designer to lead that business going forward. We fully believe that this is a great opportunity for us, but again, we want to make sure that everything we're doing is right for the brand, so we will be strategic and methodical as we work to reset this piece of the business, and we will keep you updated.

In terms of our direct to consumer business, we are bringing more depth and focus to the merchandise assortment, which we believe will drive more full-price business. We also re-working a small selection of stores to ensure that they reflect the go-forward DNA of the brand and serve as a road map for all locations. In addition, we continue to be pleased with our e-commerce business, and will be migrating to a new platform that will enable us to increase the functionality of the site. This will be followed by a creative overhaul to ensure that the site is more reflective of the Vince brand, as we want consumers to have a consistent experience across channels.

Lastly, we're taking steps to reduce overall discounts and promotions. We eliminated the nearly four-week tiered promotional event that we had last year in our stores and online during Q1, as these types of promotions train the customer to wait for sales and handcuff our wholesale partners. While we expect these efforts to impact our sales in the short term, which is already reflected in our guidance, we believe this is the right course of action to protect the long-term health of the Vince brand.

As we look at our outlet and off-price business, our primary goal was to see that the surplus of inventory was moved out, and that we are more thoughtful about managing the flow of merchandise into this channel. This remains a viable business for the brand, however, there needs to be better controls in terms of what product and how much flows through this channel. As we employ greater diligence, we believe that the profitability in our off-price business should improve, as well.

Internationally, we're also seeing great response to our new product. We're confident that the assortments the design team is creating will work equally well, both internationally and domestically. We continue to grow with our international partners, and see significant opportunity for growth in these markets.

As we look at 2016, we expect that the business will remain challenged throughout much of the year. We're working through our spring product, and looking forward to debuting our fall collection from our new team. Moreover, we are very excited about what you will see on the floors in the back half of the year, and believe that we will start to see an inflection in our performance during the holiday season.

We know that this is not going to be an overnight fix. It will take time for us to return to growth, but we are taking the necessary steps to get there, and doing what's right for the long-term health of the brand. In some instances, as I mentioned earlier, this means taking a step back, or foregoing some short-term top line gains, in order to build the brand back in a way it is sustainable. We are also focused on making the necessary investments in the business to support our long-term growth objectives, and taking steps to put us in the financial position to do so, with our recently announced rights offering, which we commenced today.

Overall, I am very proud of the work that the team has done thus far. We believe that we are on track to achieve improved results for holiday 2016 and into 2017, and look forward to continuing on this path to deliver consistent sales and earnings growth over the long term. Now, I will turn it over to Dave to review our financial performance. Dave?

Thank you, Brendan. For the fourth quarter, net sales decreased 13.6% to $81.8 million, versus $94.7 million in the prior-year period. Our wholesale channel sales were down 30.2% to $48.1 million, due primarily to a decline in our US wholesale segment, and to a lesser extent, declines in our international and licensing businesses.

Our direct to consumer segment sales increased 30.5% to $33.7 million in the fourth quarter, driven by the addition of 11 new stores since the fourth quarter of last year, as well as a 10.7% increase in comparable store sales, including e-commerce. The increase in comparable store sales was driven mainly by an increase in the number of transactions.

Moving on to profitability, gross profit in the fourth quarter was $41 million, or 50.1% of net sales, which includes a $2.2 million benefit from the recovery on inventory write downs taken in the second quarter. Excluding this benefit, gross profit was $38.8 million, or 47.5% of net sales.

This compares to $45.8 million, or 48.3% of sales in the fourth quarter of last year. The adjusted gross margin decline was due primarily to increased discounts and markdowns, partially offset by a channel mix shift to the retail channel, and an increased mix of full-price channel sales.

Selling, general, and administrative expenses in the quarter were $36.2 million, or 44.2% of sales. This includes a $300,000 favorable adjustment to management transition costs taken in the second quarter. Excluding this favorable impact, selling, general and administrative costs were $36.5 million, or 44.6% of net sales in the quarter. This compares to $25.5 million, or 26.9% of sales for the fourth quarter of last year.

The increase in SG&A was largely driven by store labor and occupancy costs associated with 11 new store openings since the end of FY14, as well as expenses related to the new management team, and other corporate related costs. The increase in SG&A as a percent of sales was attributable mainly to the deleverage on lower wholesale sales.

The resulting operating income for the quarter was $4.8 million. This compares to operating income of $20.3 million in the fourth quarter of last year. Excluding the benefit from the recovery on the inventory write down, and favorable adjustment to management transition costs, operating income for the fourth quarter of FY15 was $2.3 million.

Net income for the fourth quarter was $1.8 million, or $0.05 per diluted share, compared to net income of $10.5 million, or $0.28 per share in the fourth quarter of last year. Excluding the benefit from the recovery on the inventory write down and favorable adjustment to management transition costs, net income for the fourth quarter of FY15 was $0.3 million, or $0.01 per diluted share.

In looking at our annual results, net sales for FY15 were $302.5 million, a decrease of 11.1%, compared to FY14. This was the result of a 22.4% decrease in wholesale segment sales, and a 25.1% increase in our direct to consumer segment sales. Our comparable store sales, including e-commerce for FY15, increased 4.2%. The comparable sales growth was driven primarily by an increase in transactions, partially offset by a decline in transaction size.

On a GAAP basis for FY15, the Company reported net income of $5.1 million or $0.14 per diluted share, which includes a $6.1 million, or $0.16 per share net charge associated with the write down of excess inventory and aged product to expected net realizable value incurred in the second quarter, and the subsequent recovery of inventory in each the third and fourth quarters, and a $1.6 million, or $0.04 per share in net management transition costs. This compares to net income of $35.7 million, or $0.93 per diluted share in FY14, including the impact of secondary offering costs. Adjusted net income was $12.8 million, or $0.34 per share in FY15, compared to adjusted net income of $36.1 million, or $0.94 per diluted share in FY14.

Now moving on to the balance sheet. Our debt decreased by $17.9 million to $60 million during the quarter. Our debt to leverage ratio at the end of the fourth quarter of FY15 was 2.7 times on a reported basis, and 1.7 times on an adjusted basis. Our debt to leverage ratio at the end of the fourth quarter of FY14 was 1.2 times, on both a reported and an adjusted basis.

At the end of the fourth quarter, we had $28.1 million of availability remaining under our revolving credit facility. Inventory at the end of the quarter was $36.6 million, compared to $37.4 million at the end of last year's fourth quarter. The year-over-year decrease was primarily driven by the increase in inventory reserves, partially offset by the addition of 11 new retail stores since the fourth quarter of last year.

Capital expenditures for the quarter totaled $3.5 million, of which $2 million was attributable to new stores. Leases are signed for six stores that we expect to open in FY16. As of today, March 29, the Company has 49 stores in the US, including 35 full-price stores and 14 outlet stores.

Now turning to review of our outlook for FY16, which we introduced in our press release on March 7. Other than the impact of our current rights offering on diluted EPS, there is no change to the guidance we presented. We expect total sales for the year to be between $290 million and $305 million, including revenues from six new retail stores, and comparable sales growth, inclusive of e-commerce sales in the flat to low single-digit range.

Total sales guidance reflects an expected mid to high single-digit sales decrease for the first half of the year, and a low to mid single-digit sales increase in the second half of the year. While we don't provide quarterly guidance, please keep in mind that last year, spring product deliveries were moved forward into the fourth quarter of FY14 from the first quarter of FY15. The cadence of spring shipments this year have been reversed back to the first quarter of FY16, from the fourth quarter of FY15. In addition, the reduction of shipments in the pre-fall line collection is expected to impact our second-quarter sales, given that we reduced the size of this collection by approximately half.

We expect gross margin to be approximately 47% for the year, and expect SG&A to be between $132 million and $135 million. Diluted EPS is expected to be flat, to a gain of $0.06 per share. For the first half of the year, we expect a net loss per share in the mid-teens range, due to higher SG&A growth from continued store and strategic investments early in the year, as well as the annualization of store openings and strategic investments from the first half of last year.

Note that these EPS amounts do not -- do reflect additional 11.8 million shares outstanding, that would result from the completion of the $65 million rights offering. For 2016 we expect capital expenditures between $10 million and $12 million. Finally, we expect to receive the $65 million from the rights offering in mid-April, which will enable us to further pay down our debt. Importantly, as Brendan noted, this will provide us with the liquidity needed to make investments to support the long-term growth of the business.

This concludes my comments regarding our fourth quarter financial performance and outlook for 2016. We will now take your questions. Operator?

(Operator Instructions)

Ed Yruma, KeyBanc Capital Markets.

This is Jessica Schmidt on for Ed. Thanks for taking my question. So, I know inventory builds in the off-price channel had been a particular issue that you have been working to improve. How do you feel about levels in the channel now? Do you think that you have cleaned them up, or I guess, is there still more that you can work through?

We have still inventories that we need to move through, but we did get our off-price channel sales for the year closer in line. We've talked about a target of 20% to 25%. We made an improvement in that area, and we're targeting to be in that range for 2016, also.

Great. And then in terms of the pause on the handbag business, I guess, what do you think the handbag missed about the Vince brand? And specifically on pricing, where do you think the Vince handbags should fit? I know that it had moved from a sub-$1,000 price point to then well below $500, but what would be more appropriate?

I think that, that's what we're trying to establish, and in part, it will be dictated by the design talent that we can recruit. But I think that when I got here, it was a -- I was a little confused by the customer we were going after with our handbags, as it relates to our core ready-to-wear line, and shortly after, when Rea and Christopher came back and it was clear that the product offering was going to be elevated, the handbags just weren't congruent with what we want the brand to stand for.

So as I mentioned in my remarks, we look at this year as a time to reset the brand, and take some short-term hits to try and build a better foundation and a more profitable brand in the future. And so, we do believe that handbags and accessories are a big part of that.

But just felt it was better to, rather than trying to reposition the handbag line while we were continuing to market it, to just take a pause. We hope it's a short pause, and then come back stronger. And we will see about the price points. I think there will be a range of price points that, like with the apparel, will be a value, but a value is not necessarily the cheapest product out there.

Great, thank you.

Jeff Van Sinderen, B. Riley.

Maybe we could just start, if you give us any insight into the e-commerce versus brick-and-mortar comps. I was wondering also what drove transactions to be up? Was that driven by discounting? You mentioned you're still working through some inventory, although I wasn't totally clear if that was related to full price or just an issue of off-price, and then maybe if you could just touch on gross margin for wholesale and retail for Q4, if there is any color you can give us there? And then discounting and promotional levels by channel in Q4 versus last year? Thanks.

So that's a lot of questions. (Multiple speakers) We will try. We do not split out our brick-and-mortar stores from the e-commerce side. I would tell you that the growth in transactions is driven naturally from the growth that you have seen and just traffic overall, and frankly, we're happy with our e-commerce business, and we see similar gross in that area that other e-commerce platforms are seeing. So it's definitely not from discounting, as Brendan mentioned to you, we're going more away from discounting. We eliminated promotions in the back half of FY15, and as we've talked about, elimination of a [four E] promotion that we ran, that was run last year in the first quarter of 2016.

You will even see, next month we anniversary our friends and family event from last year. This year, we're going to be much quieter about how we market it. Last year we had decals on the stores, we actually had sandwich boards out there, lots of email blasts, lots of affiliate marketing.

This year it's really going to be, it's a by-invitation event, that's going to be to our customers. And so we think that it will reset the brand and be more reflective of the brand we are aspiring to be. And also as I mentioned in my remarks, be more cognizant of the fact that we have a big wholesale business, and when we promote within our own stores, that directly impacts our wholesale business, and in many cases, they will price match us which just exacerbates all the promotions that are going on out there.

Right, that's helpful. And maybe, you could give us a little more detail on what you're seeing in your wholesale order book. I know you gave some broad brush strokes there, but just wondering how much of the Fall book is in at this point, what are the relatively weakest and strongest areas? And I think you mentioned you see that evolving in the second half, maybe you can just give us a little more detail there? Just wondering if second-half order book for wholesale is expected to be down overall? That would be helpful.

Jeff, so I am not going to give you specifics, but I can give you a little bit more color. So we, in February, we had our Fall market, as I mentioned, which is end of July, August, September deliveries, three months of deliveries. I am talking specifically for women's wholesale apparel. This was the first collection that Rea and her team did, and Christopher oversaw the presentation and the marketing.

We were thrilled with the reaction we got. There was a standing ovation from one account that I won't mention, and tremendous enthusiasm across the board. The accounts are generally cautious, because business is -- it's a tough environment out there, which we were anticipating. So we know that the orders are much more, they are much more bullish than the path we have been on, and the trend in the business, but we also were anticipating having to earn our way back into major growth orders.

And so we think Fall is a great, great start. It gives us the platform and the assortment out there that we need, and as I mentioned in my remarks, we're happy to let demand outweigh the supply, because that hasn't happened here in a while. Fall, when it delivers, we'll sit with some of the summer deliveries that will still be on the floor, and start to be marked down, which is why I mentioned holiday as being when you will see the newest -- the assortment from the new team fully represented in both our wholesale partners and our own stores.

And I think as they come back from market in June to place holiday, or we call it pre-Spring, I think they will be able to come back hopefully with a little bit more confidence. Even though they won't have selling on the Fall merchandise, but having had some time to digest what they saw in terms of the elevated product, that they now can expect from Vince.

Okay, so I'm sorry, just to clarify, are you saying that the Fall order book is still down, but you are expecting it to be up for a holiday, is that --?

I didn't give you any specifics on that. I just said they came in line with what we had anticipated, which was reflective of the environment, and their enthusiasm for the line, balanced together. So we are very comfortable that the orders were placed to a level that will allow Vince to start to grow again, and then hopefully anticipate further growth in terms of the orders, as we move forward.

Okay, thanks very much. And best of luck for the rest of the quarter.

Matthew Boss, JPMorgan.

It's Christina on for Matt. In that roughly flat gross margin guidance, or down 20 basis points, how should we be thinking about the cadence throughout the years and the drivers there?

Well, I think it's, we really haven't gone down from the quarter standpoint. We [won't] give. We would expect the back half of the year, obviously to be a higher margin rate, based on our expectation of seeing better full-price selling. From that standpoint, we're still in the first half of the year, working through the Spring product that was inherited, and appropriately, we would anticipate a higher mark-down rate necessary there than we would in our Fall product.

We also, we want to support our wholesale partners, and make sure any liabilities we have in Spring are taken care of, so that we can clear the decks and give the new product every opportunity to perform, which we think we're in the process of doing. And the product, as I mentioned in my remarks, it's more depth and less breadth, and it is a much more edited collection as over the last couple of years, the assortment had gone way too wide. Now we're much more focused, which we think will allow us to stay in stock on bestsellers, chase the winners.

And really the goal as I continue to talk about internally and externally, is raising our regular-price selling. That's gotten away from us. We've become a very promotional brand over the last few years, both out of necessity, and because of steps we've taken in our own direct-to-consumer channels, and as we've discussed, we are working hard these last six months and the next few months to clean that up, in anticipation of the elevated product, and how it will connect with the consumer.

Thanks. And then, on your debt levels at this point, so with the rights offering you mentioned, you're going to pay down additional debt as the use of proceeds. Do you have a target leverage ratio that you are looking at, or a target amount of debt that you would be more comfortable with, and any time horizon behind that?

I guess [chance] not really. The company is sitting on $45 million of term, approximately. Two years ago it was $170 million. We will pay our revolver down completely with the rights offering, in addition to settling our TRA liability that we have sitting on our balance sheet, and then have cash available for operations and investment going forward, and have the full use of our revolver going forward. So we're comfortable with where the rights offering is going to position us.

Great, thanks.

(Operator Instructions)

Richard Jaffe, Stifel.

Thanks very much. If you could just comment on the store portfolio. You talked about, I guess, cleaning up or doing some work on some stores. Are there stores that are underperforming, that you would consider closing, editing the store portfolio down? And given the tremendous direct to consumer, without being specific, was it driven by the online business or the new retail stores, or is the brick-and-mortar business really growing as strongly as direct to consumer, or equally?

Well, sorry. So the remarks I made earlier were specific to the look and feel and ambience of the store, the store environment. So we are going to pick a couple, one store in the Los Angeles area, and one store here in the city, and just reset them, and hope that, that can be the benchmark and the window into how we want all of our customer touch points to look like. So that wasn't reflective of any numbers, or anything.

Certainly, we continue and we will continue to look at our store portfolio. We certainly expect to continue to grow our retail footprint. Do we have stores that are underperforming? Sure. The business has been so tough for us over the last year or so, that clearly our own stores are impacted by the product we've been delivering.

So as we talk about addressing the portfolio, we have to do it understanding that we have high expectations for how these stores will start to perform in the back half of the year and into 2017, and don't want to make any premature decisions, until we see what these stores can do with the Vince product of going forward. As we look for new locations, we just want to make sure that it's in environments and we are surrounded by where we believe our customer shops. And so, we're evaluating that now, to make sure that we make decisions appropriate for the way we have reset the brand.

That makes sense. Just a question on margins in stores. Did the full-line stores become or the full-price stores and the direct channel become a venue for a lot of the clearance activity? I'm just concerned about the margins going forward in stores, and that -- if you?

No, that -- coming from the department stores, the markup and margin environment is so different in the specialty store, even all the promotions, doesn't ding you too badly. That's why in my remarks I talked about handcuffing our wholesale partners with some of our promotions. So, and training our customers to buy on sale. So we liquidated a lot of the over merchandise, the overstocks through the off-price channels, both our own outlets and aggressively through third parties, that they have alluded to pulling back.

And one thing that's important to me and Rea and Christopher is making sure that product, whatever has the Vince label is reflective of the Vince brand. So that's one of the reasons why handbags is being re-launched. Same thing with what's in the outlet stores. We want what's in the outlet stores to be reflective of the Vince brand, because we think that customer in many ways showcases her label more than somebody who buys it at the full-price store. So we don't want somebody to be introduced to the brand and see inferior products. So we're working hard as I mentioned in my remarks, to make sure we're able to produce product for the off-price channels that is worthy of the Vince label.

That's great, thank you very much, and good luck this season.

There are no further questions at this time. I will turn the call back over to the presenters.

Okay, well thank you everyone. We look forward to getting back to you after our Q1 ends, sometime in late May. Thank you very much.

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