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Edited Transcript of FRAN earnings conference call or presentation 13-Jun-19 12:30pm GMT

Q1 2019 Francesca's Holdings Corp Earnings Call

HOUSTON Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Francesca's Holdings Corp earnings conference call or presentation Thursday, June 13, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kelly M. Dilts

Francesca's Holdings Corporation - Executive VP & CFO

* Michael D. Prendergast

Francesca's Holdings Corporation - Interim CEO

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Presentation

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Operator [1]

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Greetings. Welcome to Francesca's Holdings Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions)

I will now turn the conference over to Kelly Dilts. Thank you. You may now begin.

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Kelly M. Dilts, Francesca's Holdings Corporation - Executive VP & CFO [2]

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Thanks, and good morning, everyone. We appreciate your participation this morning in francesca's first quarter fiscal year 2019 conference call. Earlier this morning, we issued a press release outlining our financial and operating results for the first quarter ended May 4, 2019.

Please note, the following discussion includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts included in today's discussion that address activities, events or developments that the company expects, believes, targets or anticipates will or may occur in the future are forward-looking statements. The company's actual results may differ materially from those projected in the forward-looking statements as a result of certain risks or other factors, including those risk factors set forth in the company's 10-K and quarterly reports on form 10-Q filed with the Securities and Exchange Commission. All such statements speak only as of the date made and, except as required by law, the company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

As usual, a replay of today's conference call will be posted on our corporate website.

We will begin today's call with comments from Interim CEO, Michael Prendergast. Michael?

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Michael D. Prendergast, Francesca's Holdings Corporation - Interim CEO [3]

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Thank you, Kelly. Good morning, and thank you for joining us on the call today.

While it has been just a few weeks since our last call, I'm very pleased with the progress we have made in implementing and executing our previously highlighted strategic turnaround plan. While it is still early in the process, and we have a long road to success, we have made significant strides in the key areas of the plan.

Before discussing the details of the turnaround plan progress in more detail, I'd like to briefly highlight our financial results for the first quarter.

Net sales decreased 13% to $87.1 million, reflecting a 13% decrease in comparable sales, which was in line with our total comp expectation. Boutique and outlet store results were better than expected, while our e-commerce business underperformed expectations. This underperformance was driven by higher-than-expected markdowns taken to clear through poor performing legacy product and lower-than-expected sales and inventory levels in regular priced merchandise. I will discuss in further detail the initiatives and activities that are underway to improve the e-commerce business later in the call.

Turning now to an update on our turnaround plan initiatives in progress. As stated in our prior call, there are 5 main pillars of the plan. We continue to focus the entire organization on execution and delivering results in these key areas.

First, enhancing our buying, merchandising and planning activities. As discussed previously, francesca's must operate a nimble demand-based business model to be successful. We made substantial progress from simplifying our processes to create a more nimble approach to buying. We have also successfully implemented fast fashion planning and buying principles across 100% of the organization. We continue to leverage our robust analytics, looking at current sales trends as well as historical sales drivers to develop greater insight into what drives our customers to react. Through a rigorous weekly process, the teams are identifying opportunities in assortment to chase into and, at the same time, identifying underperforming products for accelerated markdowns and/or adjustment of future on order. To enable us to react swiftly and nimbly to this data, we have increased the flexibility of our planning, such that a greater portion of our merchandise will be open to buy in season with 50% available to chase current fashion trends.

Finally, we have been working very closely with our vendors to learn from their insights as well as to meaningfully shorten lead times. I am pleased to see that our vendor partners have been highly supportive of our efforts and continue to provide us with great product and shorter turnaround times than initially anticipated.

Second, aligning our product offering with customer demand. As previously stated, we identified that part of our previous performance at retail was caused by our product offering, which had become misaligned with customer demand. We have undertaken multiple initiatives to improve our product offering and ensure that this is aligned with customer demand from a category, item, price point and fashion standpoint. I'm happy to share with you that our teams have diligently used robust customer data and analytics to identify areas in which the product assortment should be focused. They have also immersed themselves in the markets, trade shows, trend services and vendor community to research and understand consumer trends that are currently underway. We have been able to identify and swiftly react to changing trends. These activities have begun to pay off for the company in a small but meaningful way.

Given that apparel has been our most challenged category, and a large share of our total sales, this is our first primary area of focus. Within apparel, the merchant teams identified areas of focus to test our new buying and planning processes to align with customer demand. Although small as a percent of total inventory in the quarter, the sales results were fantastic. There were 3 programs: a fashion capsule called NEW + NOW; a short shop; and the return of the flawless dress.

First, NEW + NOW is a small fashion capsule that offered approximately 25 to 30 styles that were identified in classifications and fashion ideas that are trending in the market. NEW + NOW included apparel, jewelry and accessories categories. Our teams worked with our vendor partners to procure product on these items for 200 of our top stores. The vendors reacted quickly and shipped us the product within 7 to 10 days from placing a purchase order. We aligned all social media digital marketing activities behind the NEW + NOW launch. We also set the NEW + NOW product at the front of each of the 200 boutiques that the product launched in. The product was offered at more historically appropriate priced tickets in the $38 to $44 retail range, and the sell-throughs were amazing. NEW + NOW sold on average 4x to 6x as fast as legacy product with higher-than-chain average merchandise margins as well. The NEW + NOW capsule will be rolled out to all stores throughout the second half of this year.

Second, the short shop. The buying teams identified that soft shorts were trending both in the market and in our boutiques with higher-than-average sell-through. After detailed analysis, the teams identified a large opportunity in the classification. The teams worked with our vendor partners to chase over 70,000 units of shorts, which hit our stores 3 weeks ago. A short shop was set up in boutiques on our first able position and highlighted on the e-commerce site. In addition, it was highly supported through digital marketing on all social media channels. The sell-throughs and gross margins have been terrific and well above boutique averages. Again, this product is presented at more historical MSRP pricing in the $38 to $44 price range.

Third, the team executed an initiative to bring back one of our most powerful items called the flawless dress. Once again, based on detailed data analysis, the team identified a large sales and margin opportunity in a key item that the previous merchant teams have discontinued. This style had been a consistent winner season after season. However, the style was abandoned. The current teams brought it back and diversified fabrications, colors and lengths, and we are getting an enormous customer response. Approximately 4 weeks ago, we delivered our first shot of 25,000 units of the flawless dress and, to date, have sold almost 20,000 units. The style will continue to flow into all of our stores over the course of the next 6 weeks and beyond.

While we are extremely pleased with these successes, we will need to take aggressive steps to liquidate old product and get new product fully in place by the end of July. Some of the more legacy products sold through well after first markdown, but there was still a substantial amount where we needed to take to a deeper markdown to move it. While this will create short-term margin pressure, we will more quickly be in a position to have a fully revamped assortment. By the second half of this year, both our merchandising, buying and planning will continue to execute and excel at operating a demand-based fast fashion model, which will position us to drive both improved conversion and traffic. We are executing these strategies, operating within a category and subcategory hierarchy focused on fashion, seasonal and core product to ensure that our merchandise offerings are balanced and relevant to our customer.

Third, reducing corporate expenses. Again, while only a few weeks since we last spoke, we are making headway in rightsizing the expense structure. We continue to expect to achieve annualized savings of $8 million in corporate overhead and third-party costs. We have additionally instituted strict corporate expense control processes for the entire organization. We have also created an expense task force to target additional expense optimizations across the entire organization.

Fourth, reducing store operation and labor expenses. As previously mentioned, we have taken measures to improve our boutique productivity by adjusting our labor models and actively looking to reduce in-store expenses. These activities are expected to yield approximately $7 million in annualized savings. We adjusted the coverage models in the store starting in February of 2019. We've been closely monitoring the by-door performance to read and react to the needs of the stores.

Fifth, optimizing our real estate portfolio. On the real estate front, we remain focused on working with our landlords to optimize our lease expense and have been pleased with the receptivity and partnership. As a reminder, we are focused on optimizing the lease expense structure for existing boutiques with an emphasis towards calibrating occupancy cost with sales levels. We are negotiating with our landlord partners for early lease terminations or rent concessions for underperforming boutiques. Finally, we are working with the landlords to obtain early lease extensions for our best-performing stores.

I would like to now share some details with you regarding the initiatives we began to employ in our e-commerce business. We believe that the e-commerce channel represents the quickest opportunity for turnaround, as we offer the right assortment in the right quantities to our customers. We have restructured the internal team with e-commerce and digital marketing working together to drive success. This month, we relaunched a completely refreshed customer user interface on the e-commerce site, and it looks amazing. Initial performance metrics show that the customer is responding to the new look evidenced by improved traffic and conversion performance. We have fully renovated our presentation to the customer across all digital and social media platforms. We have reinvigorated our Ambassador Programs and will be implementing traffic-driving initiatives in boutiques throughout the second half of the year. We expect these improvements to lead to improved conversion as new product becomes a much more significant portion of the total assortment on the website.

In summary, we are extremely pleased with the proof points we are seeing as we transform the merchandising strategy. We are working diligently to move through legacy product and transform the entire boutique fleet and e-commerce channel to reflect these instituted merchandising principles. We believe that the steps we are taking will lead to stabilization of our comparable sales as well as higher merchandise margin. Combined with our efforts to reduce cost and optimize our real estate portfolio, we believe that we can return this business to profitability and set a foundation for sustainable long-term growth.

In conclusion, before I turn it over to Kelly, I wanted to share that I will be working with the Board of Directors of francesca's for an extended period of time on an interim basis to ensure we fully implement the turnaround. I will also provide guidance on assembling the new leadership team to the Board as well as integrating them into the new business to ensure there's a seamless transition.

With that, I will turn the call back over to Kelly.

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Kelly M. Dilts, Francesca's Holdings Corporation - Executive VP & CFO [4]

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Thanks, Michael. Our discussion today will primarily focus on a review of our first quarter 2019 adjusted financial results. I encourage you all to refer to our press release for reconciliation of GAAP results to the adjusted results we will discuss today.

Net sales for the first quarter were in line with our expectations, decreasing 13% to $87.1 million compared to $100.4 million in the first quarter last year.

In total, comparable sales declined 13% primarily due to lower transactions and a low single-digit decline in average ticket.

Boutique transactions were lower due to a high single-digit decrease in boutique traffic and a mid-single-digit decline in boutique conversion. Both of these metrics showed improvement from the fourth quarter. We were pleased to see that the boutique comparable sales decline decelerated from where it had been over the last several quarters.

E-commerce sales were not as strong as expected and, in fact, boutique comps outperformed e-commerce as there was not enough new product penetration and the clearance product was too heavy. As Michael mentioned, we believe the e-commerce sales will improve quickly once the new product penetration increases.

Gross margin for the period was 34.8% versus 38.2% in the prior year. The 340 basis point decline was due to occupancy cost deleverage, resulting from the lower sales.

Merchandise margins were relatively flat to last year with a modest decline in product margin, getting offset by decreases in reserve-related expense as well as e-commerce shipping expense.

Adjusted SG&A decreased 11% to $38 million from $42.9 million in the prior year. This decrease was mostly due to the cost initiatives put in place as part of the turnaround plan. The specifics of the decreases are as follows: a $3.3 million decrease in boutique payroll and supplies; a $1 million decrease in corporate and field management payroll; and lower stock-based compensation, marketing expenses and freight expenses. These decreases were partially offset by $1.4 million in higher professional fees associated with the interim executive, higher audit fees and higher legal fees.

In the first quarter, we incurred a noncash charge of $2.1 million associated with the valuation allowance provided on our net deferred tax asset. We also recorded a valuation allowance at the end of fiscal 2018. Just as a reminder, a valuation allowance is recorded when it's concluded that it is more likely than not that the deferred tax assets will not be realized.

Excluding this noncash charge, our adjusted effective tax rate for the first quarter of 2019 was 17% versus 13.4% last year.

Our adjusted net loss for the quarter was $6.4 million or an $0.18 loss per share, which is favorable to our expectation and compares to a net loss of $3.9 million or an $0.11 loss per share in the prior year.

Now let's turn to the balance sheet. We ended the first quarter of 2019 with $17.5 million in cash compared to $21.8 million at the end of first quarter last year.

The company had $10 million in debt outstanding at the end of the quarter under our asset-based revolving credit facility. During the first quarter of 2019, we borrowed an additional $5 million, while we were waiting to receive our $8.5 million tax refund. When we received the refund on April 22, we repaid the $5 million, bringing our outstanding debt back down to $10 million. We had $15.2 million availability on our ABL, with the ability to borrow $9.2 million before any covenant.

Inventory per boutique increased 1% compared to last year due to higher product cost as we had added that quality to our clothing assortments in prior purchases. However, we have been unable to fully recover the increased cost in our average unit retail and are now purchasing to a more historically successful price point. On a unit basis, inventory per boutique decreased 8%.

Capital expenditures for the quarter totaled $2.6 million and were comprised of $1.4 million paid in the first quarter for fourth quarter accrued CapEx and $1.2 million spent primarily to complete new, remodeled and relocated boutiques that had begun in the fourth quarter. We have minimal planned CapEx for the remainder of fiscal 2019.

During the quarter, we opened 3 new boutiques and closed 8, bringing our total boutique count to 722. We plan to open 1 more boutique during the year that has already been built out. We now expect to close at least 30 boutiques in 2019 with a focus on negative contribution margin boutiques that are at kick-out period or lease end.

This concludes the financial review, and I'll now turn the call back over to Michael for his closing remarks.

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Michael D. Prendergast, Francesca's Holdings Corporation - Interim CEO [5]

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Thank you, Kelly. Before closing, I would like to touch on the strategic review process that we announced in January.

We continue to work with our retained advisers who are assisting us in the review of possible strategic alternatives. We have not set a time table for the completion of the review process, and we do not intend to comment on the process until a specific transaction or other alternative is approved by our Board of Directors, the process is concluded or it is otherwise determined that further disclosure is appropriate.

In conclusion, I would like to once again thank the senior leadership team and entire francesca's organization. There has been a tremendous amount of hard work done to implement our turnaround plan. Although early in the process, we are optimistic and energetically working towards the successful implementation of our initiatives. Thank you.

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Operator [6]

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