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Edited Transcript of JILL.N earnings conference call or presentation 4-Mar-20 1:00pm GMT

Q4 2019 J.Jill Inc Earnings Call

QUINCY Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of J.Jill Inc earnings conference call or presentation Wednesday, March 4, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James S. Scully

J.Jill, Inc. - Director & Interim CEO

* Mark W. Webb

J.Jill, Inc. - Executive VP & CFO

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Conference Call Participants

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* Daniel Lupo;Jefferies;Leveraged Credit Research Associate

* Krisztina Katai

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. My name is Jack, and I'll be your conference operator today. At this time, I would like to welcome everyone to the J.Jill Fourth 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 as 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.

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James S. Scully, J.Jill, Inc. - Director & Interim CEO [2]

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Thank you, and good morning, everyone. As you saw in our press release this morning, we delivered fourth quarter performance above our revised expectations and made progress against our initiatives, including ending the year with a lower inventory balance and more importantly, with enhanced disciplines in place to continue to actively manage our in-season and preseason inventory levels.

While our January same-store sales were solid, it's much too early to call this a new trend in the business. Mark will review our results in more detail in a moment. But before he does that, I would like to take you through my thoughts on the quarter and what we are doing to position J.Jill for future success.

First, with regards to performance, 2019 was a challenging year for J.Jill, and we are disappointed with our results. With that said, it's clear that there are opportunities that continue to lie ahead for the brand once the business has stabilized. The key tenants that have made J.Jill's success are in place and, in most cases, remain strong. We service a remarkable, growing and yet underserved demographic. We have a rightsized store fleet, great penetration of online and a loyal customer who values both channels as ways to interact with brand.

It is also clear to me, since taking the Interim CEO role, that the foundational support that was needed to bring the brand forward to its next stage of growth was not fully implemented. That is the work that Mark and the team began when he joined, instilling greater discipline around inventory management. I am also working with the teams to improve cross-functional decision-making within the organization to position the brand to truly reap the benefits of our great assets, most importantly, our customer. Included in his work is the refining and strengthening of the guardrails we are putting in place around inventory disciplines, not just focused on the absolute levels, but getting the breadth and depth of the assortment aligned through communications between our design, merchandising and planning and allocation teams.

As we instill more of this institutionalized discipline within the brand, we are also building a culture with a greater degree of accountability and appreciation for what needs to be done in order to regain the success this brand has enjoyed and to realize its full potential. We are certainly excited to have our new design team's product in place, and we look forward to receiving feedback from our customers. And from what I've seen, Elliot has adopted a heightened focus on who our customer is and what she's telling us she wants from J.Jill.

Looking ahead, we've entered fiscal 2020 on stronger footing. And our focus for this year will be to manage our expectations from a top line perspective and ensure that we are driving improved gross profit performance. We want to position the business with a healthier foundation and the ability to scale from this point.

With that said, as Mark will discuss, our outlook for the year remains cautious as we are continuing to stabilize the business as well as contend with ongoing macro uncertainties.

Having been in retail for many years, I know that the fundamental situation we're in is one that we can improve significantly. And most importantly, once the foundation has been fully established, a new leader could easily leverage this work in order to return this brand to attractive profitable growth.

Before I wrap up, I want to thank all of our teams for their hard work and dedication to J.Jill. We are at an important inflection point for the brand, and we remain committed to delivering on our goals and realizing the full potential of this brand.

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [3]

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Thank you, Jim, and good morning, everyone. As Jim mentioned, the fourth quarter overall was challenging, but we continue to make progress stabilizing the business. We have improved operating practices around the planning and management of inventory, instilling greater discipline into preseason buy decisions and adjusting the metrics and meetings around in-season inventory management discussions.

Earlier this year, we took action on overhead costs, including payroll, general operating expenses and occupancy, which continued to generate savings in the fourth quarter. We believe there is still more operational efficiency to be realized in this business over time.

As it relates to fourth quarter performance, December performed better than November, while our late January performance exceeded expectations. In terms of unit inventory buys, the January and February floor sets, which arrived later in the quarter, were the first preseason buy quantities we were able to better align with demand. But November, December and earlier floor sets were bought too deep. While overall inventories are in a better position as we enter 2020, we will continue to work down these older season markdowns in Q1 as we mix to more appropriately sized new full price floor sets going forward. Getting inventory buys right is a first and critical step to stabilizing the business, and we are making good progress.

Let me now turn to our results. My discussion today will include adjusted non-GAAP metrics, which exclude costs associated with the CEO transition and additional noncash goodwill and intangible asset impairment charges of $36 million taken in the fourth quarter. Please see today's press release for more details on our Q4 and full year financial performance, including reconciliations of our non-GAAP to GAAP metrics.

For the fourth quarter, total net sales were $168 million, down 1.7% versus last year's $171 million. Total company comparable sales decreased 2.8%. Total direct sales increased 2.9% year-over-year, up 200 basis points to 47.3% of total sales for the quarter.

Gross profit was $100 million versus $108 million last year and gross margin was 59.5% compared to 63.1% last year. The year-over-year reduction in rate was due to an increase in the promotional rate during the quarter as we work to clear the elevated inventories we entered the quarter with.

SG&A expenses adjusted for onetime costs previously mentioned were $98.4 million or 58.5% of sales versus $99.8 million or 58.4% of sales last year with the decrease driven by savings in corporate overhead resulting from actions taken earlier this year as well as a reduction in marketing expenses compared to Q4 last year.

We reported an adjusted operating income of $1.7 million or 1% of sales versus adjusted operating income of $8 million or 4.7% of sales last year. Adjusted EBITDA for the quarter was $11.8 million compared to $18.5 million last year. As a percentage of sales, adjusted EBITDA was 7% versus 10.8% last year. Interest expense for the quarter was $4.7 million versus $4.7 million last year. On January 31, we made a voluntary prepayment of $5 million, reducing the total amount of the term loan outstanding to $237 million. Tax benefit for the quarter was $3.2 million versus a tax expense of $1.2 million last year, and the effective tax rate was 7.6% compared to 37.1% in the fourth quarter of 2018. Adjusted net loss was $2.2 million or $0.05 per share.

Turning to the balance sheet. We ended the quarter with $21.5 million in cash. Inventory at the end of the quarter was down 6.1% to $72.6 million. We are comfortable with this level of inventory as we enter 2020 and the content and mix will continue to improve as we move forward.

Regarding real estate, we opened 1 and closed 4 stores during the fourth quarter, bringing total store count to 287.

Finally, net capital expenditures in the quarter were $2.1 million.

To summarize 2019, while a difficult year, we made progress addressing costs and strengthening the disciplines around inventory planning and management. We extended the term of our ABL and took advantage of the stronger finish to the fourth quarter by making a voluntary $5 million prepayment on the term loan before quarter end. We are looking forward to transitioning into product assortments designed by the current design team during the first quarter of 2020 and will maintain tight discipline around inventory as we do.

Turning now to our outlook for first quarter and full year 2020. 2020 is a year of stabilization and gross profit recovery for J.Jill. Rightsizing inventory purchases is one critical component in this recovery as deep promotions and jobber activity, required to move excess goods in 2019, should not need to be anniversaried to the same extent. This will be most pronounced in the second quarter.

In a year of recovery, the top priority is gross profit and generating cash flow. We will invest capital to maintain and improve the operations of the business and will continue to address the capital structure with excess cash generated.

While we believe in the long-term revenue growth potential of the J.Jill brand, we must recover profitability first and strengthen core operational foundations to profitably obtain that growth in future periods.

Before I review our expectations in more detail, there are 3 housekeeping items to address. First, in 2019, the full extent of our inventory issues was identified and actioned after the first quarter. As such, the first quarter of 2020 will, in effect, be up against a more difficult first quarter gross margin comparison. Our first half 2020 results should normalize out the quarterly volatility, but our first quarter guidance will reflect this more challenging comparison.

Second, as you will see in our press release, beginning in fiscal 2020, our comparable sales growth calculation will exclude shipping and handling revenue. We believe this change will provide investors better visibility to the underlying product performance in our comparable year-over-year sales. Please refer to our press release for a comprehensive restatement of total comparable sales for fiscal 2019 for your reference.

And third, to echo Jim's earlier comments, our guidance does include a certain level of caution, given our focus on continuing to stabilize the business as well as the uncertainty of the current macro environment, including the coronavirus. Our teams have done a great job minimizing the sourcing of finished goods from China. However, the global situation remains very fluid, and we are taking a cautious stance.

Now for the first quarter, we expect total comparable sales to decrease between 3% and 5%, total net sales will decrease between 2% and 4%, gross margin will be about flat year-over-year, interest expense for the quarter will be approximately $4.5 million, adjusted diluted EPS is expected to be between $0.06 and $0.08 compared to earnings of $0.10 in the first quarter of fiscal 2019. And lastly, we expect to close 1 store, ending the quarter with 286 stores.

And for the full year 2020, we expect total comparable sales to decrease 3% to 5%, total net sales to decrease 2% to 4%, gross margin to increase about 200 basis points year-over-year and interest expense to be about $18 million for the year. The effective tax rate for the year is expected to be 28% to 29%. Full year earnings per share is expected to be in the range of $0.10 to $0.14 per share. This guidance compares to fiscal year 2019 adjusted earnings per share of $0.06. We expect net capital expenditures of approximately $20 million for full year 2020, with about half of this amount going to stores and the other half focused on technology and operations investments. And finally, we expect to open 6 and close 6 stores this fiscal year, ending with 287 stores.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Paul Trussell with Deutsche Bank.

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Krisztina Katai, Deutsche Bank AG, Research Division - Research Associate [2]

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This is actually Krisztina Katai on for Paul. So congrats on the better results. You have delivered in the fourth quarter, but are guiding first quarter down in the same-store sales for 3% to 5% when the year ago comparison is admittedly easier than it was in the fourth quarter. And you said that January comp trends were solid. So I guess my question is, how should we think about the comp progression over the year? And what do you think it takes to see the top line stabilize and return to positive trends?

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [3]

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Krisztina, it's Mark. I'll jump in on that. First, I think it's most important to call attention to the total year strategy, which really is, for 2020, a focus on gross profit recovery first versus sales stabilization and growth. And I think that's an important distinction, given coming off of a year where we know we had challenges, a lot of which driven by quantities of inventory that we had receded. We are committed in 2020 to bringing inventories more in line, and you saw at the end of Q4 some evidence of progress on that. So really, the plan is to first stabilize gross profit. That's the plan for 2020. And I think as with respect to cadence through the year, and we mentioned it in the remarks, the second quarter of last year is where we really began to action and react to the inventory issues we had coming into that quarter and through the rest of the year.

So in terms of Q1 of last year, from a gross margin perspective, if you look at Q1 into Q2, the Q2 performance sort of speaks to the actions we took. And so that's why we mentioned that the first half should sort of normalize some of that volatility out.

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Krisztina Katai, Deutsche Bank AG, Research Division - Research Associate [4]

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Got it. That's really helpful. And again, my second question will be on gross margin. You're doing a lot of good things there to rightsize inventories, improve turns and just overall speed things up. And I think the 200 basis point expansion is really encouraging. So I guess I wanted to ask, what are some of the pressures that you are still seeing, whether it's tariffs, over a macro or mall promotions that could really continue to offset these initiatives?

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [5]

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Yes. So we have, as you mentioned, we guided to the 200 basis point improvement. Our overall guidance, and we did mention it in the remarks, has some level of caution baked into it relative to the initiatives that we have underway to stabilize the business, which entails migrating from a promotional environment to a less promotional environment, also migrating to new -- the designs of our new design team to the -- current design team, right, but those designs are now coming into the stores as well as the macro uncertainty that's out there relative to the coronavirus, et cetera. And what we've really tried to do is take a cautious stance, primarily in our guidance related to potential supply chain disruptions that may exist versus trying to quantify any consumer demand side risk that would be in that guidance.

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Krisztina Katai, Deutsche Bank AG, Research Division - Research Associate [6]

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Got it. And if I may follow up, you guys still have a big sourcing operation out of China. How do you gauge the current situation in terms of supply chain disruptions? And how quickly can you move some of those products to maybe other countries where you could source from?

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [7]

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Yes. So the interesting thing, the teams here have made great progress, minimizing the sourcing of finished goods out of China, to the extent where it's not really that much of an issue for us anymore in terms of finished goods. The reality is that components of the supply chain are still heavily dependent upon China originations, things like fabric, et cetera.

So I think that's where we're monitoring and watching to see how the overall supply chain, even goods that are finished in other countries, how the manufacturers are working with all the components of the production line to make sure that we manage to on-time deliveries. That is a fluid situation, one that our teams are all over and managing as best as they can in a dynamic environment. But overall, in terms of the specific China exposure, it's -- I mean it's -- we're below 5% now in the spring, in the first half of the year in terms of goods sourced from China.

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Operator [8]

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Daniel Lupo with Jefferies.

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Daniel Lupo;Jefferies;Leveraged Credit Research Associate, [9]

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How much is drawn on the revolver today? And do you expect to draw on that at all during the year?

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [10]

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Thanks for the question. We have 0 drawn on the revolver. We've actually never drawn on the revolver. We have no plans to draw on the revolver. As we mentioned in the remarks, we, at the end of the year, made a voluntary prepayments on the term loan for $5 million, which, again, we're pleased to be able to make that on utilizing the stronger finish to the quarter. And it's worth noting that while we're still finalizing our term loan certifications, at this point, we have no reason to believe that we have any issue with the covenant related to the term loan. So nothing drawn on the ABL and progress with respect to the term loan.

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Daniel Lupo;Jefferies;Leveraged Credit Research Associate, [11]

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That's good to hear. And then given that you just purchased back in term, have you thought about buying it back in the open market, kind of given the trading levels? And have you thought about addressing the '22 maturity?

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [12]

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Answer your second question, clearly, we're aware of the maturity coming up and as a responsible Board and management team are thinking about that. At this point, no specific comments on plans around the capital structure other than what we said in our remarks, which is, with excess cash, we'll continue to address it.

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Daniel Lupo;Jefferies;Leveraged Credit Research Associate, [13]

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Okay. And congrats on the quarter.

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Mark W. Webb, J.Jill, Inc. - Executive VP & CFO [14]

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Thank you.

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James S. Scully, J.Jill, Inc. - Director & Interim CEO [15]

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Thanks.

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Operator [16]

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There are no further questions at this time. I would like to turn the call back over to management for final remarks.

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James S. Scully, J.Jill, Inc. - Director & Interim CEO [17]

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Well, thanks, everyone, for joining today, and we look forward to updating you on our progress on our Q1 call in May. Thank you.

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Operator [18]

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This concludes today's conference call. We thank you for your participation. You may now disconnect.