U.S. Markets closed

Edited Transcript of NWY earnings conference call or presentation 23-Aug-18 8:30pm GMT

Q2 2018 New York & Company Inc Earnings Call

New York Aug 31, 2018 (Thomson StreetEvents) -- Edited Transcript of New York & Company Inc earnings conference call or presentation Thursday, August 23, 2018 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Allison C. Malkin

ICR, LLC - Senior MD

* Gregory J. Scott

New York & Company, Inc. - CEO & Director

* John M. Worthington

New York & Company, Inc. - President & COO

* Sheamus G. Toal

New York & Company, Inc. - Executive VP & CFO

================================================================================

Conference Call Participants

================================================================================

* David Kanen

* David Michael King

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to New York & Company's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Allison Malkin.

--------------------------------------------------------------------------------

Allison C. Malkin, ICR, LLC - Senior MD [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon, everyone. Before we begin, I would like to remind you that some of the comments made on today's call, either as part of our prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the safe harbor provisions in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the company's documents filed with the SEC, including the company's fiscal year '17 Form 10-K.

As a supplement to today's presentation, we have made slides available, which you can view under the Investor Relations section at newyorkandcompany.com.

And now I would like to turn the call over to Greg Scott, CEO.

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you. Good afternoon, and thank you for joining us today to review our second quarter fiscal 2018 results. With me today are John Worthington, our President and COO; and Sheamus Toal, our Executive Vice President and Chief Financial Officer. I'll begin the call by reviewing our performance for the spring season and second quarter, highlighting the key areas of focus we have in place to sustain and accelerate our momentum throughout the year.

To recap our spring season results, our non-GAAP operating profit of $7.8 million was well ahead of the prior year's profit of $1.2 million and our previously issued guidance of $5 million and $6 million in profit. We improved adjusted EBITDA to $19 million for the spring season, a $6 million increase to last year. These results were supported with top line comp growth of nearly 2% and gross profit margin expansion of 140 basis points, reflecting the combined strength of our lifestyle multibrand platforms and operating discipline.

Consistent with the spring season results, our second quarter non-GAAP operating profit of $3.5 million was well above our guidance of $1.7 million. We delivered top line comp at nearly 1% and bottom line gross profit margin increase of 150 basis points.

Importantly, we drove profit increases through 160 basis point improvement in merchandise margins, reflecting the success of our outlet integration and our pricing and promotion initiative, which delivered increases in IMU and decreases in markdowns.

While our top line comp performance moderated from our Q1 incoming trend, we delivered more profitable sales growth and significant improvement in our merchandise margins by reducing promotional impressions as part of our ongoing pricing and promotions initiative. Importantly, we extracted 7 days of a margin-eroding 50 off no exclusions event. Finally, we ended the quarter with $95 million in cash on hand, $1.43 per share and no debt.

Turning to our second quarter results. I'd like to spend a few moments discussing our progress against our 2018 Keys to Success, which contributed to the positive comp and margin dollar performance in the quarter.

First, we continue to lever our celebrity collaborations and sub-brands as market differentiators that our customers can only find at New York & Company. Yesterday, we announced our multiyear partnership with Kate Hudson as part of our strategic effort to expand our casual lifestyle projection through Kate as the face of our $200 million Soho Jeans sub-brand and, importantly, the launch of a Kate Hudson collection in spring 2019.

Together, with our successful partnerships with Eva Mendes and Gabrielle Union, which grew at a double-digit pace in the quarter, we anticipate growing our celebrity lifestyle brands to well over 15% share of the New York & Company business.

Eva and Gabrielle have been phenomenal partners to New York & Company, and we look forward to having Kate and her influence to further advance our multibrand lifestyle platform.

In addition, I'd like to share a few second quarter highlights regarding our core New York & Company categories and sub-brands. Our dress assortments delivered strong comp performance during the quarter, representing nearly 20% of the business during this category's peak seasonality. We also delivered significant margin rate improvements, reflecting improved customer response to our assortments.

In our largest sub-brand, 7th Avenue, we delivered a positive comp supported by comp growth in jackets and pants, with pants a critical component of this sub-brand's success. This sub-brand is an area of competitive strength for New York & Company and the strong driver of customer loyalty.

Importantly, we were one of the first retailers to carry sizes 00 to 20, including petite and tall, and see extended sizes in our pant business as critical to building loyalty.

In addition, with Gabrielle Union as 7th Avenue's ambassador, we continue to see the translation of celebrity and the associated halo as elevating this sub-brand's performance. 7th Avenue is an incredibly important sub-brand to New York & Company, and we're excited about the growth we saw in the quarter.

In Soho Street, our streetwear-influenced and large lifestyle sub-brand, we continue to deliver positive momentum as we distorted investments where we see its greatest potential to enhance this area's on-trend, comfortable and effortless lifestyles.

Our performance in Soho Jeans was softer than anticipated in the quarter. In Q3, we relaunched this area and with denim with new fabrics and the latest technologies that we anticipate will drive growth. Most importantly, our multiyear partnership with Kate Hudson as our Soho Jeans ambassador will allow us to further amplify our casual lifestyle projection.

Beginning September week 1, Kate will be introduced as the face of Soho Jeans in stores and online, and we look forward to improving the momentum in this $200 million sub-brand.

Finally, our outlet channel delivered positive momentum, reflecting a strategic shift to a shared assortment, which further contributed strong margin gains during the quarter. Number two, the positive halo of our celebrity partnerships and sub-brands also supports our second strategic priority: to increase brand awareness and customer engagement.

To update you on a few initiatives supporting this strategic priority. Regarding traffic, we continue to leverage our celebrity partnerships in order to build awareness. Our PR impressions for the quarter increased nearly 88% over the prior year, and our traffic and engagement across social channels continues to increase. Celebrities are a critical driver of brand awareness and affinity, and we are pleased to see this strategy elevate the New York & Company brand.

Regarding our customer file, our transition to a new CRM database vendor has enhanced our data analytics and personalization capabilities in driving higher frequency among current loyalty customers while reengaging lapsed customers.

In Q2, for example, we are leveraging new-customer data models and delivering higher productivity per name mailed. Further, we now have visibility to which categories drive loyalty and which sub-brands drive increased frequency and spend, which allows us to communicate to our customer segments based on spend, offer and category affinities.

Regarding digital marketing. To further amplify our brand reach, we continue to adjust our digital marketing investments across platforms. The power of our celebrity social presence provides additional vehicles driving interest and visits as when we now have the opportunity to reach a combined 20 million followers across Eva, Gabrielle and Kate's social channels.

Our third strategic priority focuses on driving digital and omni. For Q2 2018, we continue to grow our e-commerce channel as a leader within the specialty women's apparel industry, increasing 100 basis points in mix over the prior year to over 25%, which is seasonally our quarter in terms of mix to business. The growth in the digital business is driven by the increase in site traffic, which reflects increased awareness and power of the New York & Company brand and our celebrity collaborations.

In addition, our exclusive merchandise, which allows us to expand our fashion projection through new styles and categories, delivered double-digit comp performance in the quarter.

Our exclusive assortments are also size inclusive as we offered sizes 00 through 20 in nearly all styles, including our celebrity collections. We offer a fit for everyone.

Next, I would like to discuss our operational priorities and highlight the progress we have made against being a leaner, faster, more efficient and more responsive organization.

Regarding our real estate portfolio, we experienced continued leverage of our store expenses, with store closures and ongoing landlord rent concessions contributing to the decrease in buying and occupancy costs. We also benefit from a highly flexible real estate portfolio, with nearly 70% of our existing store base on 2-year-or-less terms. John will elaborate further on the steps we are taking to rationalize and optimize our store fleet.

Next Project Excellence. We remain committed to looking at every cost to improve efficiencies and deliver a more profitable operating model and have seen the benefits to the business as a result of several initiatives.

First, organization. As we have discussed previously, we have streamlined our organization. Last fall, we consolidated our New York & Company and outlet organization to improve sales and profit while driving efficiencies across channels.

In February, we further streamlined our corporate office support functions. The combined impact of the outlet integration and corporate office rationalization will reduce annualized payroll-related costs by approximately $7 million in 2018.

Regarding our outlet integration, we are seeing the benefit of combined organization flow-through to this channel's performance. We now have a shared assortment between channels and are achieving improved sell-throughs and margins as a result of the coordination among our merchandising, planning, allocation and stores organization. The improved results across assortment performance, increased signed use and margins to continue to benefit our top line comp and bottom line profitability throughout the year.

Next pricing and promotions. As I have shared previously, we are driving higher sales and margin through leveraging data analytics and insights while reducing underproductive promotions. For Q2, we increased our merchandise margins by 160 basis points. Contributing to this improvement was a reduction in our promotional impressions. We eliminated over 7 days of a highly promotional 50-off no-exclusion event. We have reinvented our City Cash promotion, and we eliminated multiple in-store coupon events. We expect continued benefits from this initiative throughout 2018.

Finally, we realized savings and rate leverage within our e-commerce shipping expenses. These savings reflected the benefit of improved logic and reduced ship-from-store fulfillment as well as shipping efficiencies derived from our SurePost initiative.

Our final strategic priority focused on growth initiatives. We expanded our multibrand portfolio with the relaunch of Fashion to Figure in mid-February. As previously announced, this acquisition enabled us to enter the $21 billion-plus market and accretive growth to the New York & Company portfolio. We'll be announcing a celebrity partner who will be joining Fashion to Figure for the fall season as a celebrity curator. While we are in the process of developing our long-term strategic plan for Fashion to Figure, we are excited about the potential of this brand.

In addition, I've shared previously that we've launched a subscription box service, New York & Company Closet, [at the outlet] newyorkandcompanycloset.com. I'm pleased to share that we have built a profitable operating model and continue the growth of subscriber base through a combination of new-customer acquisition and expanded share of wallet for existing customers.

The strength of our balance sheet, with $95 million in cash on hand and $1.43 per share and no debt, is a competitive advantage, which will allow us to evaluate further opportunities for growth that are accretive to the company.

Looking forward to Q3, we are pleased to welcome Kate Hudson to further amplify our brand presence and emotional connection with customers. Together, our celebrity partners, Eva, Gabrielle and Kate, along with our family of sub-brands, are critical to unlocking the potential of New York & Company's differentiated market position.

Our positive comp guidance in the low single-digit range reflects our expectations as the positive momentum we experienced in the spring season will carryforward throughout Q3 and Q4, reflecting the strength of our celebrity collaborations, the introduction of Kate Hudson as the ambassador for Soho Jeans sub-brand and the continued growth of our digital business.

Before I turn the call over to John, I want to thank the entire organization for their continued hard work, dedication and commitment to our customers.

With that, I'll turn the call over to John.

--------------------------------------------------------------------------------

John M. Worthington, New York & Company, Inc. - President & COO [4]

--------------------------------------------------------------------------------

Thanks, Greg. Our strong second quarter performance drove first half results that surpassed our expectations with the spring season seeing positive comp sales, expansion in gross margin to 32%, representing our best gross margin rate in 13 years and EBITDA of $18.7 million, representing the best spring season EBITDA for New York & Company in more than a decade.

The comp results continue the positive momentum in our business for the last 4 quarters, driven by the successful execution of our entire team to our key priorities.

As you are aware, when we provided guidance on our call in May for comp purposes, we focused investors on the spring season, combining Q1 and Q2 versus quarterly performance given the 53rd week last year that shifted key selling weeks versus prior year quarters.

For the spring season in total, we delivered comp sales growth of 1.7% as well as a 140-basis-point increase in gross margin, which combined led to diluted earnings per share of $0.09, up significantly from $0.01 per share last year. From a regional sales performance, we saw our strongest New York & Company comp sales come out of the Southeast and South Central. We also saw positive outlet comp sales in every region throughout the country, with the highest comps coming out of the West and Midwest for outlet.

In addition to positive comp sales and margin growth in the quarter, we also delivered growth across key operating metrics, including leverage in SG&A.

Indeed, our strategies that focus on providing our customers with exclusive celebrity and sub-brands supported by a highly effective omnichannel experience, a highly productive private-label credit card loyalty base and efficiency initiatives and Project Excellence are working to give us consistent top and bottom line growth.

Now let me touch on some of the highlights from Q2. In Q2, we expanded gross margin in the quarter by 150 basis points to 32.1% as we benefit from sourcing efficiencies, rent reductions and royalty associated with our private-label credit card agreement. We also continued to have tight control over SG&A expenses as part of our Project Excellence initiative and are very pleased with the consistent positive performance we've seen.

Our store team continued to do a terrific job, utilizing the technology we have introduced across the entire store base to drive many of these Project Excellence efficiencies. Overall, this technology, as well as other process changes in our stores, had improved our overall store payroll performance. Combined, all of these initiatives helped to deliver operating income of $3.1 million in Q2, significantly ahead of our expectations.

Turning now to an update on our key initiatives. I'll begin with our credit loyalty program, RUNWAYREWARDS, then turn to our real estate strategies, including rent improvement, lease term, conversion stores and opening new takeover stores. In addition, I'll update you on our omnichannel, IT initiatives, e-commerce and close with Project Excellence, which, as I mentioned, continues to be a strong contributor to our top and bottom line performance.

Starting with our RUNWAYREWARDS credit card. We continue to see strong response to this program, which drives long-term loyalty and comp sales. This year's second quarter represented a big hurdle as we went up against the reissue of our PLCC program. Even with this significant launch last year, we maintained our Q2 PLCC sales penetration for the first quarter at over 42%. As we've said before, our goal is to increase PLCC penetration to approximately 50%. We'll do this both by continuing to acquire new customers, grow the spend of our current customer base and focus our efforts to spend -- to send targeted emails to existing customers to drive response.

Now let me turn to real estate. Throughout the first 6 months of the year, we opened 1 New York & Company store, 1 outlet store, 8 Fashion to Figure stores, and converted 3 existing New York & Company stores to outlet stores, ending the quarter with 426 stores, including 120 outlet stores. We'll continue to selectively open takeover locations in highly productive malls when we can quickly take over a current location that is move-in ready on favorable lease terms.

During the spring season, we opened 2 new takeover locations in Atlanta and Christiana Mall, as well as relocated our Sherman Oaks, California store to an expanded location. We remain on track to open an additional 2 New York & Company stores this fall, in Fort Lauderdale and the other on State Street in downtown Chicago. We are also on track to open 2 to 3 Fashion to Figure stores this fall. These additional takeover stores, along with the others we've opened, continue to produce strong sales.

Turning now to outlet. As I mentioned, outlet in every region of the country delivered positive comp sales. Our outlet conversion stores also continued their strong performance in Q2, with sales far outpacing our expectations. As we mentioned last quarter, we started to include some New York & Company clearance into our outlet conversion stores at the start of the year. This has enabled us to continue to drive strong traffic and profit at these outlet locations. In fact, in the second quarter, we saw a double-digit comp increase in our outlet conversion stores. Importantly, we continue to see a balanced basket among customers in these outlet stores in both clearance and outlet-only product.

We are focused on continuing to optimize our entire retail fleet, ensuring that we have flexible lease terms and are benefiting from the recent rent concessions. During the spring season, we closed 16 locations and plan to close an additional 22 throughout the remainder of the year.

As I mentioned, we ended the second quarter with 426 stores, including 120 outlets and with 2.1 million selling square feet in operation. Importantly, our store portfolio remains very flexible, with nearly 70% of our locations on 2-year or less leases.

Combined, our real estate strategies of outlet conversion, takeover stores and fleet optimization in New York & Company and Fashion to Figure position us well for the remainder of 2018 and beyond.

Our next focus is on omnichannel and IT initiatives. We continue to leverage our investments that we have made to elevate our capabilities and make our business more efficient. As I mentioned, we continue to see improved efficiency in our store productivity. Our associates have become even more efficient with our mobile handheld scanners and tablets, and customers also appreciate the additional flexibility that we've given them through our omnichannel fulfillment options such as ship from store and buy online, pick up in store.

We expect to continue to leverage this technology and other omni features to drive further increases in our omnichannel business as well as efficiencies and productivity in our stores.

Now let me turn to e-com. Our e-commerce business continues to see growth. In Q2, e-com represented over 25% penetration of our overall Q2 total sales, up from last year. This important channel serves as a platform to grow both our customer file and PLCC base quickly throughout the country. We are pleased with the strong foundation that we have built for our e-commerce business, which has helped us to continue our multichannel growth. We are focused on continuing to aggressively expand this important channel as we go forward.

Finally, turning to Project Excellence, which is now in its fourth year. We have realized over $50 million in savings on an annual basis from this initiative and continue to see improvements. This past year, we have focused efficiencies on integrating our New York & Company and outlet stores organization and process with solid results. These results are being driven as the New York & Company and outlet teams operate as one organization. We are creating efficiencies across product, visuals, merchandising, allocation and our field operations. In addition, we had enhanced our outlet offering with proven assortments and strong sub-brands that resonate with our customers and leverage learnings from both channels. Importantly, this integration has enabled us to lower costs across the business as we leverage our sourcing capabilities in both channels.

In terms of our sourcing strategies, we continue to work to build stronger partnerships with our key agents and factories, which we expect will help us to further improve speed to market and reduce cost. We are now realizing approximately $10 million in benefits annually from these sourcing strategies.

Overall, we are pleased with the results that we are seeing from Project Excellence in real estate, private-label credit card, sourcing, omni and our overall organizational structure.

We are positioned to continue to drive our efforts to reduce expenses, improve efficiencies and productivity and, of course, drive profit to the bottom line.

In closing, we are very pleased with the strong results and momentum in Q2 and the entire spring season that has carried on from our solid results in 2017. We are excited about the progress that we have made throughout the organization and look forward to continuing this progress for the remainder of 2018 and beyond.

With that, I'd like to turn the call over to Sheamus to review our second quarter results as well as our outlook in greater detail.

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Thank you, John. Good afternoon, everyone.

Net sales were $216.4 million as compared to $224.1 million in the prior year. The decrease in net sales reflects a reduced store count and the shift of an important pre-Mother's Day week into the first quarter, which resulted from a shifted retail calendar due to the 53rd week in fiscal year 2017 and was partially offset by increased sales from the addition of the Fashion to Figure business.

Comparable store sales increased 0.6% as compared to the same period last year, representing a fourth consecutive quarter of positive comparable store sales, which was led by growth in the company's e-commerce business. In the comparable store sales base, average dollar sale per transaction increased by 8.2% while the number of transactions per average store increased by 7%.

Gross profit as a percentage of net sales increased 150 basis points to 32.1% versus fiscal year 2017 second quarter gross profit percentage of 30.6%, reflecting the highest gross margin rate achieved in the second quarter since 2005. The increase during the quarter reflects a 160-basis-point increase in merchandise margin, reflecting reduced product costs, decreased promotional activity and shipping efficiencies, partially offset by a 10-basis-point decrease in the leverage of buying and occupancy costs due to lower gross sales resulting from the shift in calendar.

Selling, general and administrative expenses were $66.3 million or 30.7% of net sales as compared to $63.4 million or 28.3% of net sales in the prior year period. The current year's results included $0.4 million of nonoperating charges, primarily related to an ongoing trademark infringement matter, and the class action lawsuit. The prior year included a benefit of $1.7 million related to these matters.

On a comparable basis, non-GAAP selling, general and administrative expenses were $65.9 million as compared to $65.1 million in the prior year. The increase reflects increases in variable compensation accruals, which are based upon improvements in operating income, partially offset by reductions in marketing expenses and decreases in both store and home office payroll, resulting from our Project Excellence work earlier this year.

GAAP operating income was $3.1 million as compared to $5.2 million in the prior year. However, as we previously noted, the prior year included a nonoperating benefit of $1.7 million as compared to the current year, which included a charge of $0.4 million.

Excluding these nonoperating amounts, non-GAAP operating income was flat at $3.5 million despite a significant shift of sales and related margin into the first quarter due to the shift in calendar, resulting from the 53rd week.

GAAP net income for the second quarter of fiscal year 2018 was $3.1 million or $0.05 per diluted share as compared to $4.8 million or $0.08 per diluted share in the prior year. Excluding the nonoperating amounts, non-GAAP net income was $3.5 million, increasing from $3.1 million in the prior year.

Total quarter end inventory decreased 0.8%, reflecting decreases in in-store inventory due to lower store count, partially offset by a slight increase in inventory to support the growing e-commerce business.

Capital spending for the second quarter of 2018 was $1.4 million as compared to $2.6 million in the prior year period. We ended the quarter with $95 million of cash on hand and no outstanding borrowings under our credit facility and no long-term debt.

Regarding expectations for fiscal year 2018, we continue to focus on improving our operating results to drive increases in both operating income and EBITDA. As previously disclosed, fiscal year 2017 included an extra week in the traditional retail calendar, which resulted in $12 million in sales and contributed positively to our operating results in the prior year.

As such, the fall season in 2018 includes 1 less week of sales than the prior year period. As we enter the fall season, the combined effects of 1 less week, in addition to shifts in the calendar from the 53rd week in 2017 and new revenue recognition accounting standards, will have an impact on the overall seasonal results as well as the individual quarterly results. And as such, we will provide commentary on the overall fall season, which combines the third and fourth quarters in addition to a more detailed commentary on third quarter metrics.

For the fall season, we expect GAAP operating income to be in the range of $5.5 million to $7.5 million, which includes more than $2 million of incremental costs to launch our new celebrity collaborations and incremental costs to develop certain new businesses as compared to the prior year GAAP operating income of $5.6 million, which included the benefit of 1 additional week of sales and margin due to the 53rd week in 2017.

For the third quarter, we are expecting GAAP operating income of $1 million to $2 million as compared to GAAP operating income of $0.6 million in the prior year period.

The third quarter guidance reflects the following: net sales are expected to increase in the low single-digit percentage range, reflecting the combined effect of the calendar shift due to the 53rd week and growth in e-commerce sales, partially offset by reduced store count.

Comparable store sales, which are shifted to compare like calendar weeks, are expected to increase in the low single-digit percentage range.

Gross margin is expected to increase by 50 basis points to 150 basis points, reflecting continued improvements in merchandise margins, resulting from decreased product costs and reduced promotional activity combined with leverage of reduced buying and occupancy costs due to our continued expense control efforts.

Selling, general and administrative expenses are expected to increase by up to $2 million versus the prior year's third quarter. This reflects increases in selling expenses driven by additional e-commerce variable costs and increases in marketing spending due to our new celebrity collaborations, partially offset by reduced home office costs.

Total inventory at the end of the third quarter is expected to increase in the low to mid-single-digit percentage range as compared to the prior year, reflecting the shift in calendar.

Capital expenditures for the third quarter of fiscal year 2018 are projected to be approximately $4 million to $6 million as compared to $3.1 million in capital expenditures in the prior year, reflecting our continued investment in our information technology and omnichannel infrastructure and real estate remodel and refresh activity. Capital expenditures for the full year are expected to be in the range of $10 million to $11 million as compared to $12.5 million last year. Depreciation expense for the third quarter is estimated at $5 million.

With that, I would like to turn the call over to the operator to begin the question-and-answer portion of the call.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Oliver Chen from Cowen.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [2]

--------------------------------------------------------------------------------

The merchandise margin was very impressive. What are your thoughts on the ongoing opportunity on merchandise margin and how you'll balance that against the traffic trends you're seeing? Also, we were just curious in Soho Jeans and what you see as the major opportunity there in terms of how you should execute and what customers were like for the next phase of Soho Jeans.

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

So as we talked about, merchandise margins hit some record highs in the quarter. This continues the progress that we made in Q1 as well. A couple of things that are happening there. They're all 3 good, and I think they'll continue as we move throughout the quarter -- I'm sorry, throughout the season. First is IMU continues to improve, and a lot of that has to do with, one, our sourcing opportunity with outlet in New York & Company. Meaning, to date, we are now buying outlet and New York & Company shared. But prior, we weren't. So we're starting to see real benefit in the outlet IMU having shared product with New York & Company. So we're going to see that benefit probably for the next 2 to 3 quarters, so that's helping us. I will say there are obviously some headwinds in costs, both with what's happening in terms of factory space in China, what's happening with raw materials and, really, what's happening with

(technical difficulty)

However, that said, I think our country migration has allowed us to continue to benefit to improve AUCs. So we're going to continue to work hard at that, and I think there'll be progress as we move forward. We made really strong progress on our markdowns in the quarter. About a year ago, we engaged Ellie Kai on a pricing and promotion strategy. We're starting to really see the benefits of that as we continue to this year. And I think we'll continue that as we move for the next 2 to 3 quarters. What we saw there is, as we've said, we removed over 7 50-off promos in the quarter. We just didn't need to do them, and it really helped our margin and our markdowns. At the same time, we removed coupons that we saw were dilutive, meaning they really weren't incremental. So we're just getting a lot smarter on how to drive our business. We know our customer loves a deal. But we, in the past, were probably giving out coupons where they really weren't additive and they weren't really incremental. And then lastly, because you're talking about merchandise margins, I think was the one of the first times we saw real benefits in our shipping, and that we'll continue to see as we move forward over the next 3 to 4 quarters, I believe. A couple of things are happening there. I think the most important is our ship-from-store sales were down significantly as we learn to buy more by channel correctly and allocate more by channel correctly. Ship-from-store, which is a little more costly than our direct ship, especially if we do 2 to 3 shipments per order, we saw some big savings in that in the quarter, and that'll continue. And then we started a new shipping method called share post that we believe we saw benefit for like about 2 -- about a month in the quarter. That'll continue for the next year. So from a merchandise margin perspective, I think I will say that we believe we have initiatives to continue that improvement as we move through the balance of the year and even into the early part of next year. Soho Jeans, as I will say, Soho Street, which is our lounge portion, continues to be strong. Soho Jeans in the quarter was weaker than planned, I believe and we believe, and that's really why -- and we went out with Kate Hudson and really wanted to establish that partnership. She will be a catalyst for increased growth in Soho Jeans as Gabrielle Union was for 7th Avenue. Kate will launch in all of our stores the first week of September as the ambassador of Soho Jeans. At the same time in Soho Jeans, I think one of the things we're seeing is denim silhouettes are changing. As we innovate it with fabric and technology, I think that'll continue to improve. But as the leg shapes continue to change and the customer evolves to a new leg shape, I think that'll give us catalyst for growth probably more so in the Q4, Q1 period of next year. I think Kate Hudson probably is the -- is what will drive the most benefit in Soho Jeans as we look to Q3 and Q4.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [4]

--------------------------------------------------------------------------------

Okay. Congrats on Kate Hudson. Would love your thoughts on what you're thinking in terms of the type of customer this will attract and how it fits into your overall portfolio of celebrity in terms of where it fits in the matrix and what you see as innovation going forward with the strategy.

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Sure. So as we've said -- and we're super excited, very happy. As we've said, this was really kind of a new historic partnership that we've established with Kate Hudson. One, as a partner with Kate, we will be creating her own collection, as we did for Eva Mendes and Gabrielle Union. What's unique about the collection for Kate Hudson is that we will also be creating her own digital site that will be her own collection, which is very different than what we've done with the other 2 collaborations. It will also be sold in New York & Company both on our sites and our stores. But 1 day, we hope that this could be so strong that it can even be something that we wholesale. We think that this collection with Kate won't be necessarily linked to New York & Company, so we think it has really big momentum as we go forward. Kate Hudson for Soho Jeans, really, is going to really speak to our casual business. We see in the market there's big opportunity in casual, in jeans, in Ts. Kate really is going to fill that need and really speak to that product category in our store as Eva Mendes really speaks to dresses and Gabrielle Union really speaks to chic sportswear and suiting, Kate is really going to speak to jeans and the casual aesthetic. So I think with the 3, we have a really well-rounded group of people that we're working with. We're super excited. I can just say that I'm super fortunate that I get to work with all 3 of them. They're amazing, and they're great partners to deal with.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Dave King from Roth Capital.

--------------------------------------------------------------------------------

David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

--------------------------------------------------------------------------------

I guess, first, digging into the video delevered somewhat, obviously, the pre-Mother's Day shifts had an impact. But I guess as an offset to that, I'm just curious how much were rents down in the quarter. And then if you can, how much of that rent decline was from fewer stores versus just further progress in terms of on the lease front from conversations with landlords?

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Dave, it's Sheamus. So, yes, we definitely feel we continue to benefit from our rent reduction efforts. During the quarter, we had approximately $300 million of reduced rents. Some of that is related to, as you said, closed stores, but we did have additional rent reductions in some of our existing locations, which are certainly helping us. As we commented during the call and disclosed in the release, the deleveraging of our buying and occupancy was really driven by the reduced sales levels, which were directly the result of shifting that important week into the first quarter. If we were to look at the buying and occupancy expenses on a seasonal basis, we had over 100 basis point improvement in leverage of buying and occupancy. So if you look back to Q1, we had a very significant leveraging of occupancy costs, and it was the exact reverse effect as we shifted that important week into Q1. We saw those expenses leverage significantly. So as you averages it out over the 2 quarters, we had, I think, it's about 110 basis point improvement in the leverage of occupancy -- leverage of buying and occupancy on a seasonal basis.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [9]

--------------------------------------------------------------------------------

Okay. Great. That's good color. And then sort of a multipart question. As you think about it, as you established the low single-digit comp guidance for the third quarter, I'm just curious, how does that compare with August so far? And then perhaps more importantly, what's sort of benefit are you expecting from the Kate Hudson partnership, both from that quarter and then as we -- fourth quarter as well? And then just more broadly, how should we be thinking about sizing up the overall Kate Hudson opportunity, particularly as you look to turnaround Soho, et cetera?

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

Thanks. I'll take that and I'll let Sheamus add on anything to I kind of miss hear. Obviously, our guidance is low single-digit comp. I think our current business is implied inside of that guidance. That said, I think if we see amazing performance with Kate Hudson and amazing traffic with launching that, we hope to continue to improve our comps. I would say that with Gabrielle Union and 7th Avenue, we really saw a turnaround in our 7th Avenue business. I think that is implied in our comp guidance for Q3 with Kate Hudson. That said, there could be a responses that's above that. But I will say that, overall, I think our comp guidance -- our comp business is implied in that. I think for the total Kate Hudson business, there's a couple of things. So obviously, for the New York & Company business, her biggest effect immediately will be affecting the $200 million to $220 million Soho Jeans business. If we can really improve that trend, that will really affect the business in a probably significant way. Secondly, the Kate Hudson collection, I think, right now we would say the sky's the limit. We're going to launch it in March of spring of '19 -- sorry, spring of '19 in March. And it's going to be part overall the whole Kate Hudson brand. I think this business could be a sizable business. And I think we haven't given guidance on that, but I would say that it will be in line or bigger than the Eva Mendes business. So I think just overall, I think what we've learned here, having someone be the ambassador for a large sub-brand like Soho and then having their own collection is probably the best way to maximize the partnership.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [11]

--------------------------------------------------------------------------------

Okay. That's great. And then I guess one last one for me real quick. So cash now approaching $100 million, $1.50 a share. So I guess understanding the buybacks aren't necessarily on the table currently, I guess, what are the thoughts about the dividend? And then maybe if you could, any -- have you given any thoughts to a potential -- any special dividend to that at any point?

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Dave, as Greg mentioned earlier, I think we view our strong balance sheet as a competitive advantage for us. I think it gives us great flexibility as we go forward. As you said, we certainly have a significant cash balance at this point. As we go forward, we're very interested in growth opportunities. I think Greg highlighted a number of them, whether it's additional celebrity collaborations, expanding into new business ventures, the expansion of our Fashion to Figure business and then just whitespace opportunities to potentially launch new businesses. I think as it stands as of right now, we believe that those opportunities are still ahead of us and will be accretive to investors and the company in terms of driving operating results. That being said, the board is continually evaluating our capital needs and that outlook for some of those growth initiatives. And I think as we went forward, if the cash balances were in excess of what we viewed as the potential opportunities out there for us, the board is always open to consider special dividends or other alternative uses of that cash. But as of now, we still believe that it's in our best interest to maintain that competitive advantage, that flexibility so that we can invest in some of those attractive growth opportunities and really deliver significant growth in terms of top line and bottom line as we go forward.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Dave Kanen from Kanen Wealth Management.

--------------------------------------------------------------------------------

David Kanen, [14]

--------------------------------------------------------------------------------

So the first question relates to Kate Hudson. We were reading a CNBC article that cited -- and perhaps it could be off a little bit, but cited her existing retail stores and combine with online for her Fabletics brand, her doing about $300 million a year in revenue. Now, of course, that's not confirmed, but it certainly makes us hopeful about the opportunity for you guys. So my question is, in the press release, you referenced that this brand potentially could go to other retailers. Would you be selling product in her retail outlets and on her website as well as your own retail?

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [15]

--------------------------------------------------------------------------------

So what I would say is a couple of things, Dave, is that, one, Fabletics, very different partnership, separate partnership, so no. Number two, I think what's different about this for us is we're going to be working with Kate on a real lifestyle apparel collection. And in that, we're going to have our own separate site that, that is where we're going to sell the apparel, plus at New York & Company's marketplace, plus in our stores. My goal would be -- or our goal together would be that the line is so great that there are other people or -- sorry, places that would like to sell the line and we're be able to wholesale the line elsewhere besides the New York & Company marketplace, New York & Company stores and our own site. I think ultimately, too, for us, if we hope that this could be its own stores as well. So I think we have big plans for the collection and the partnership. Obviously, it's early, but we think this is a great partnership. We know the power of Kate, and we think she will be an amazing partner. And she's super excited about this, so we are, too.

--------------------------------------------------------------------------------

David Kanen, [16]

--------------------------------------------------------------------------------

Okay. So let me just ask a follow-up on Kate Hudson. So right now, she has about 75 stores for Fabletics. In 1 to 2 -- we have over 400 stores, so I'm trying to size up the opportunity. So my question is, in 1 to 2 years, how many SKUs do you think you will have with her name on it, number one? And then this is sort of a Sheamus question in terms of the financial impact, how should you look at the incremental sales from Kate Hudson in terms of contribution margin? So let's say 2 years from now, she adds an incremental $50 million of revenue, okay, what kind of a contribution margin do you think approximately we should gain on that?

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [17]

--------------------------------------------------------------------------------

So I think I'm going to let Sheamus pick on as you said on the P&L aspect, but I will say that right now, as we look at the plan for her collection, there are going to be 4 different deliveries, the major seasons -- spring, summer, fall, winter holiday. They'll probably spread out by month or fast delivery because we really want to have more newness all the time for that. I think what I would just say is we're going to grow this as organically and as aggressively as the both of us feel that it's important. I mean, she has such a strong point of view what this collection should be. I feel positive about that, but I think it's early for me to tell you SKUs and styles. I can just tell you that we're going to have 4 major deliveries. It's going to have a name that is associated with Kate, and we believe it's going to attract our customer and new customers as well. And, Sheamus, from a P&L perspective?

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Yes. So from a P&L perspective, I think it's a little early for us to quote specific numbers in terms of flow-through percentages. However, that being said, one of the key advantages of this business and why we think it's such an opportunity for us is that we do plan to leverage our entire infrastructure in terms of the capabilities that we have at New York & Company as well as all of our back-office functions at New York & Company to really make this business as profitable as we can make it. So we think it's certainly an exciting opportunity for us, both in top line sales and the ability to flow through a significant percentage of those top line sales into bottom line operating profits growth is certainly there for us and part of our core plan with the business.

--------------------------------------------------------------------------------

David Kanen, [19]

--------------------------------------------------------------------------------

Okay. So I mean, what you did say earlier is that you expect her line to exceed or be the same or exceed Eva Mendes, which I believe is around $50 million. Is that correct?

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [20]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Kanen, [21]

--------------------------------------------------------------------------------

Okay. So we don't pay our store managers twice. We don't pay rent twice, et cetera. So if I were to use -- and I think I'm being conservative -- a 30% contribution margin, would I be safe on the incremental sales that flow through from her line?

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [22]

--------------------------------------------------------------------------------

So I think a couple of things to bear in mind with the business. First is it's not entirely store-based, so we do anticipate that a significant portion of it will be digital, both in terms of, as Greg said, a new site. So you will incur the normal variable cost that we incur in terms of our e-commerce business. So that's certainly additional incremental expenses, but your spot on in terms of the store-related expenses will not go up and should represent an opportunity to drive incremental profit margin.

--------------------------------------------------------------------------------

David Kanen, [23]

--------------------------------------------------------------------------------

Okay. And then just a couple of questions about the financials in the latest quarter. Did we have the benefit from the consolidation of management for outlets and mall-based stores, number one? Do we have that benefit to SG&A? And then number two, I believe there was a onetime item related to legal for the patent infringement. What was the number -- can you tell me what was the number pro forma if I add back that extraordinary item? And then also clarify whether or not we have the benefit, which I believe we did, of the consolidation of outlets and mall-based stores.

--------------------------------------------------------------------------------

John M. Worthington, New York & Company, Inc. - President & COO [24]

--------------------------------------------------------------------------------

Yes, Dave. It's John. We quoted the benefit of the integration of about $7 million in payroll. So there's definitely that benefit, and that's happening. I think the other big benefit that we touched on, I think all of us touched on it, was the sourcing benefit that we're getting by blending both outlet and New York & Company, getting better leverage there. So that will continue. The integration for the most part started in late fall of '17, but we are really seeing the benefit -- we'll see the benefit for really all of 2018 and even into the spring of '19.

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [25]

--------------------------------------------------------------------------------

Yes. So the only thing I would add to that is while we certainly are receiving all of those benefits from the integration, I think, Dave, you were focusing on SG&A expenses. A significant portion of those benefits are actually within buying- and occupancy-related expenses in terms of our external financial statements. So it relates to buying-related costs, which flow up into cost of sales. So while they're 100% in our results, we -- you'll see some of those benefits within cost of sales. In terms of the comparison and the onetime charges, you're absolutely correct, we did have a onetime benefit last year from an ongoing patent infringement case, where last year in the second quarter, we significantly reduced the accrual that we have on the books related to that case. So we had a $1.7 million benefit last year. This year, we have in connection with that case and a class-action lawsuit, we have about $400,000 of expenses. So certainly, a significant differential year-over-year. If you back out those nonoperating-related charges, our SG&A expenses this year of $65.9 million versus last year of $65.1 million, so about an $800,000 increase. That increase is largely attributed to variable-based compensation accruals, and that's offset by reductions in marketing as well as reductions in both store payroll as well as our home office payroll.

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [26]

--------------------------------------------------------------------------------

The only thing I just want to add, David, I just want to add to you to know, that $7 million was not for the quarter. It's for annual. So I just wanted you to make that (inaudible)

--------------------------------------------------------------------------------

David Kanen, [27]

--------------------------------------------------------------------------------

Yes, absolutely. That was always understood. And just a final question, Sheamus, is, it looks like we generated very strong free cash flow for the quarter. Could you just tell me what was free cash flow for Q2? And then just I'm going to sort of tag along to Dave King's question/comment. It looks like we're in a position for the full year to generate $25 million plus in free cash flow, and it looks like it's sustainable going forward. The outlook is good with the incremental benefit from Kate Spade (sic) [Kate Hudson], et cetera. Maybe it's more of a message to the board, it would really be nice for some of that cash to be returned to shareholders, a balanced approach. I personally don't like the idea of the company investing all of it 100% in what you perceive as growth opportunity, some of which may not be successful, okay? But if you pay me a dividend or special dividend or you buy back stock, I know that goes to me. So more of a comment there and if you could just answer the free cash flow question, I'd appreciate that.

--------------------------------------------------------------------------------

Sheamus G. Toal, New York & Company, Inc. - Executive VP & CFO [28]

--------------------------------------------------------------------------------

Yes. So a couple of things. In terms of free cash flow, obviously, it was a strong quarter for us. I think in terms of operating cash improved by about $18 million during the quarter. So what I would point out is, obviously, we're entering a time period when we do start investing in inventories, so we would expect that, that cash balance will come down slightly as we go into Q3 quarter end and then build back up again by year-end. So there's some peaks and valleys in terms of cash flow throughout the year, so just bear that in mind. And secondarily, I think the question about a special dividend, as I said, the board is always considering that. I think I would just have one clarification. I didn't want to give you the impression that we intend on investing all of that cash, so I know you mentioned investing all of that cash in growth initiatives. I think we are certainly evaluating opportunities to invest some of that cash. I don't think we would ever invest all of it. I think having a strong cash balance gives us certain flexibility with vendors, certain flexibility in terms of avoiding LCs, extending payment terms with vendors. If the cash balance diminishes below a certain level, I think there are certain concerns with that, so we always want to maintain some level of cash. But I didn't want to give you the impression that we were investing all of that. And certainly, message received. The board is constantly evaluating that and reviewing with management in terms of the future initiatives and future opportunities. And I can assure you, if we get to a point where they believe and we believe that we have the excess capital, we would certainly consider a special dividend in terms of returning that capital.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Greg Scott for closing remarks.

--------------------------------------------------------------------------------

Gregory J. Scott, New York & Company, Inc. - CEO & Director [30]

--------------------------------------------------------------------------------

Thank you. I would continue to like to thank our shareholders and especially our customers and their continued support of New York & Company, and I'd like to thank everyone for joining us today. We look forward to sharing more with you regarding our growth plans at our Analyst Day scheduled for September 12. See you then. Thank you.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

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