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Edited Transcript of CBK earnings conference call or presentation 10-Sep-19 12:30pm GMT

Q2 2019 Christopher & Banks Corp Earnings Call

PLYMOUTH Sep 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Christopher & Banks Corp earnings conference call or presentation Tuesday, September 10, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Keri L. Jones

Christopher & Banks Corporation - CEO, President & Director

* Richard Bundy

Christopher & Banks Corporation - Senior VP & CFO

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Conference Call Participants

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* Jean Fontana

ICR, LLC - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Christopher & Banks' Fiscal Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Jean Fontana with ICR. Thank you. You may begin.

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Jean Fontana, ICR, LLC - MD [2]

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Thank you. Good morning, everyone. Thank you for joining us today for Christopher & Banks Corporation Second Quarter Fiscal 2019 Earnings Conference Call.

Presenting on today's call will be Keri Jones, President and Chief Executive Officer; and Richard Bundy, Chief Financial Officer.

This morning's conference call is in conjunction with the earnings press release that the company issued this morning. During our call today, we will reference certain non-GAAP financial measures, including adjusted items, reconciliations of GAAP to non-GAAP measures as well as the descriptions, limitations and rationale for each -- using each measure can be found in the press release, including in supplemental financial tables.

Today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the company's expectations regarding its future performance, including, but not limited to, the financial condition, results of operations, business initiatives, growth plans and prospects and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to today's earnings release and the company's SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

With that, I will turn the call over to Keri Jones.

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Keri L. Jones, Christopher & Banks Corporation - CEO, President & Director [3]

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Thank you, Jean. Good morning, everyone. Our second quarter results reflect meaningful progress in our initiatives to drive improved bottom line performance while our top line strategies are taking a little longer to take hold. However, we are pleased to see positive comparable sales growth in the third quarter thus far.

The improvement in our adjusted EBITDA reflects a combination of higher gross margin and lower SG&A as we continue to drive merchandise margin expansion and advance our real estate optimization strategies and benefit from our cost-reduction initiatives.

Regarding our top line initiatives. We remain confident that we are on the right path to delivering improved comparable sales performance based on several proof points we've seen throughout the quarter as well as our more recent sales comp trends, which are trending up in the mid-single digits thus far in the third quarter.

First and foremost, we are excited to see evidence that the initiatives around improving her shopping experience are beginning to take hold. In fact, our comparable store sales in our base stores turned slightly positive in the month of July and that momentum has continued thus far the third quarter. We attribute this largely to our dramatically enhanced product assortment, improved visual merchandising and refined selling techniques, which we believe are driving continued improvement in our conversion rates.

In addition, improved product content contributed to merchandise margin expansion of 148 basis points, representing the third consecutive quarter of higher year-over-year merchandise margin rate.

Furthermore, we grew new customers by 3% and reactivated by 4%, indicating that our repositioned assortment is being positively received. Acquiring new and reactivating last customers back to Christopher & Banks continues to be a key priority in our turnaround, and we look forward to building on this progress.

Briefly turning to our second quarter financial highlights. Comparable sales declined 4%, with improved base store performance, offset by a 1% decline in our eCommerce business. The softer eCommerce performance was the result of some execution issues related to the team transition, which we believe we have largely worked through. In fact, Q3 digital sales have returned positive. And we continue to believe that we have an opportunity to further grow our digital channel.

Gross margin in the second quarter increased 88 basis points driven by higher merchandise margin and occupancy cost savings, partially offset by deleverage. Our SG&A rate decreased 69 basis points as a result of our continued cost-reduction efforts. These factors led to a $1.4 million improvement in adjusted EBITDA.

Turning to our strategic plan. We continue to make strides on our initiatives to enhance our shopping experience, improve our marketing and promotional effectiveness, expand our omnichannel capabilities and reduce our costs. Our efforts to create a well-curated, relevant and an inspiring assortment and shopping experience is yielding results as evidenced by continued increase of conversion rate as the product and store experience is resonating with our customers.

We remain focused on delivering compelling trend-right fashion stories to create excitement while buying deeper into our basic assortment to ensure we meet her everyday lifestyle needs. We've enhanced the visual appeal in our merchandise presentation to better tell these fashion stories and make it easier for her to purchase outfits. This, combined with our improved selling techniques, is resonating with customers and encouraging increased purchases of outfit.

We continue to refine our assortment to ensure that we are aligned with our customers' lifestyle needs. For example, based on our customer research, we recognized a gap in our pants offering and added a new fit option to our assortment. We launched this in July, and we are pleased with the early result. We believe that our efforts around improving her shopping experience will continue to drive higher conversion rates and lead to improved traffic.

And as I said earlier, we are pleased with the momentum in our business and our strong start in the third quarter where we saw positive comps both online and in stores.

Turning to our marketing initiatives. Our efforts are threefold: maximizing productivity of our spend, driving loyalty in our PLCC card, and growing our total customer file.

We announced in June that Rachel Endrizzi joined Christopher & Banks as Chief Marketing Officer. This addition rounds out our management team with a seasoned marketing executive who brings extensive experience in brand positioning and development, CRM and loyalty as well as mobile and digital marketing.

Our marketing investments have been focused on driving near-term traffic and revenue. Now that our product assortment has been repositioned, we've begun to allocate a higher portion of our marketing dollars towards growing our customer file with the new and reactivated customers.

During the second quarter, we delivered an incremental direct mail piece in June and amped up our social media presence in terms of both frequency and quality.

Longer term, our marketing campaigns will combine traditional as well as digital and social programs that reach multiple touch points. In terms of new customer acquisition, we are testing a more holistic approach in select markets with a combination of digital media, direct mail, social media and radio.

As I stated earlier, we have seen increases in both new and reactivated customers. This was due in part to our enhanced shopping experience and a partial reallocation of marketing investments towards customer acquisition and brand-building efforts that expand our reach and communicate the Christopher & Banks value proposition.

We also continue to see a significant opportunity to benefit from market disruption. For example, we are targeting Dressbarn customers with digital advertising and with offers such as honoring her loyalty points as well as with direct mail handouts and mailings to invite her to shop Christopher & Banks.

We remain pleased with the strong performance of our PLCC card. In the second quarter, PLCC tender share continued to grow with 110 basis points increase in penetration to 38.4% of sales. As a reminder, our PLCC customer spends nearly 20% more per visit and is a customer that we retain at higher rates over time.

Turning to our omnichannel business. While eCommerce sales decreased 1% in the second quarter, we have seen a return to growth in the third quarter, and we believe that we have further opportunity to grow this channel. We continue to benefit from our ship from store initiative, which represented 17% of all orders shipped in the second quarter.

These stores that leverage inventory to operate its fulfillment centers achieved higher margin rates, and it also helped us to increase the overall productivity of our inventory. We remain very pleased with the results of this initiative and have expanded this capability to 50 additional stores in early August for a total of 220 locations.

Buy Online, Pick-Up in Store was initially launched at the end of the first quarter with the goal of driving trips into our stores and providing added convenience for our customers while increasing the productivity of our inventory and reducing our shipping costs. We are continuing to advance our technology around BOPIS with our next priority being to execute this capability at the item level so that we may fully leverage this omnichannel opportunity.

We are making excellent headway in reducing our cost structure. As we have commented in the past, we have achieved meaningful cost savings in nonmerchandise procurement and other areas, which puts us on track to achieve annualized savings of $3 million by the end of this fiscal year.

In addition to this, we will continue to focus on real estate optimization to reduce occupancy cost. And we are very pleased with the progress we are making in collaboration with our real estate partner.

We expect savings to reach an incremental $2 million this year and to reach $7 million on an annualized basis in fiscal 2020, reflecting a $5 million in incremental savings expected next year.

Lastly, a note on tariffs. We continue to actively manage this fluid situation through vendor negotiations as well as accelerated shipments of goods that are on List 4. We expect these actions to mitigate but not completely offset the cost pressure resulting from the 15% tariff increase.

In conclusion, we are pleased with the traction we are gaining on a number of initiatives that are benefiting our bottom line. We are encouraged to see the progress stemming from our initiatives related to driving improved top line performance, which we believe have contributed to the positive comps thus far in the third quarter.

As such, we are maintaining our sales, gross margin, SG&A guidance for the fiscal year despite the estimated tariff impact. Overall, we are confident we are on the right path and remain committed to advancing our strategic initiatives to drive consistent, long-term profitable growth.

Now I'll turn the call over to Richard to discuss our financial results and guidance in more detail. Richard?

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Richard Bundy, Christopher & Banks Corporation - Senior VP & CFO [4]

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Thank you, Keri. Good morning, everyone, and thank you for joining us today.

Beginning with our results for the second quarter. Net sales decreased 4.5% to $83.4 million compared to $87.4 million in last year's second quarter. The decline was due to operating an average of 1.3% fewer stores and a comparable sales decrease of 4.1%. As Keri stated, we saw improved performance in our base stores as the quarter progressed, with base stores turning positive in July.

Average dollar sale was down 6.4%, reflecting a 2.9% decrease in units per transaction and a 3.5% decrease in the average unit retail.

Total transaction volume for the quarter increased 2.1%, with higher conversion, partially offset by a decline in store traffic as compared to the same period last year. We were pleased to see the sequential improvement in store traffic trends as compared to the first quarter.

Our eCommerce business was down 1.3%. As Keri stated, we had some short-term execution challenges during the transition of our team. We have been pleased to see positive comp sales momentum resume more recently through the leadership of our new Chief Marketing Officer.

We closed 4 stores since the end of last quarter and opened 2 new stores. Gross margin increased to 88 basis points to 29.3% of net sales. The increase was due primarily to a 148 basis point improvement in merchandise margin rate and occupancy cost savings, partially offset by higher shipping costs related to our ship from store initiative and deleverage due to sales.

Selling, general and administrative expenses were $27.8 million compared to $29.7 million in last year's second quarter. The decrease was primarily due to lower expenses for compensation, medical benefits, professional services and eCommerce, and the sale of a claim regarding credit card interchange fees. As a percentage of net sales, SG&A decreased approximately 69 basis points to 33.3%.

Depreciation and amortization was $2.2 million compared to $2.5 million in last year's second quarter. The decrease was primarily due to reduction in average store count and lower depreciation related to impairment charges on store-related fixed assets taken in the third and fourth quarters of fiscal 2018.

Our second quarter net loss was $5.9 million or $0.16 per share compared to a net loss for the prior year period of $7.4 million or $0.20 per share. Excluding impairment charges related to long-lived assets and lease termination fees, adjusted loss per share, a non-GAAP measure, was $0.15.

Adjusted EBITDA, a non-GAAP measure, was a negative $3.1 million compared to a negative $4.5 million in the same period last year.

Now turning to the balance sheet. Cash and cash equivalents totaled $2.2 million with outstanding borrowings of $3.5 million and net availability of $21.8 million under our credit facility as of the end of the second quarter.

Total inventory was $48.7 million at the end of the second quarter of 2019, up 21.2% compared to $40.2 million at the end of the same period last year. The increase was related to a pull forward of merchandise to mitigate anticipated tariff increases and to support our expanded pant program. The composition of our inventory is healthy with aged inventory levels well below last year as we head into our peak selling season.

Capital expenditures for the second quarter of 2019 were $400,000 compared to $800,000 in last year's second quarter. This primarily reflects the expenditures to support new stores and investments in technology associated with our eCommerce initiatives and merchandising capabilities.

We repurchased approximately 142,000 shares for approximately $16,000 during the second quarter of fiscal 2019.

Before turning to guidance, I wanted to touch base on tariffs. As Keri said, we have worked to offset a portion of the tariff cost increases through vendor negotiations, accelerated shipments and other efforts. Currently, our guidance contemplates the estimated impact of the 15% tariff increase that began on September 1.

Turning to our outlook. Based on our sales performance in the third quarter to date, we continue to expect sales to be flat to up 2% in fiscal 2019. We expect the second half top line growth to result from continued expansion of our omnichannel capabilities, refinements to the overall product assortment in our stores and implementation of more meaningful, impactful marketing and promotions to drive customer file growth.

We continue to expect gross margin expansion of 100 to 200 basis points in fiscal 2019 as a result of improved inventory management, including supply chain and omnichannel initiatives, greater disciplines around our promotions and the continued reduction of occupancy costs. We are expecting approximately 1/2 of the improvement to come from improved merchandise margin rates and the remaining 1/2 to come from occupancy cost reductions.

Given the occupancy initiatives we have undertaken, we have achieved favorable negotiations and now expect to close 20 to 30 stores over the next 2 years as leases expire. We continue to plan on opening 5 to 10 new stores per year.

We expect to benefit from more than $3 million in annualized cost savings across both cost of goods sold and SG&A. Coupled with planned leverage from sales growth, we expect to achieve 100 to 150 basis points in SG&A leverage in fiscal 2019.

We continue to have more than adequate availability of cash resources and liquidity necessary to operate our business and expect to end the year with positive cash and no outstanding borrowings under our credit facility.

Thank you for joining us on the call today. And we look forward to updating on our third quarter conference call.

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Operator [5]

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(Operator Instructions) Ladies and gentlemen, I'll turn the floor back to Ms. Jones for any final comments at this time.

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Keri L. Jones, Christopher & Banks Corporation - CEO, President & Director [6]

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Thank you, everyone, for joining us on this call. We look forward to updating you on our continued progress on our third quarter conference call. Thank you.

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Operator [7]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.