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Edited Transcript of SSI earnings conference call or presentation 22-Aug-19 12:30pm GMT

Q2 2019 Stage Stores Inc Earnings Call - Pre-recorded

Houston Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Thursday, August 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alysha Tawney

Stage Stores, Inc. - Manager of Strategy & IR

* Jason T. Curtis

Stage Stores, Inc. - Executive VP, CFO & Treasurer

* Michael L. Glazer

Stage Stores, Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Stage Stores' Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Alysha Tawney, Senior Manager, Strategy and Investor Relations. Ms. Tawney, you may begin.

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Alysha Tawney, Stage Stores, Inc. - Manager of Strategy & IR [2]

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Thank you, operator. Good morning. With us on the call is Michael Glazer, President and Chief Executive Officer; and Jason Curtis, Chief Financial Officer.

Supplemental materials regarding our business are available in a presentation posted in the Investor Relations section of our website at corporate.stage.com. Management will not be speaking to directed slides. These slides are meant to facilitate your view of the company's results and should be used as a post-call reference. Our comments this morning include adjusted EBITDA results, which are not derived in accordance with GAAP. Reconciliations of GAAP results to non-GAAP results are included in this morning's earnings release, which is available in the Investor Relations section of our website.

Our remarks this morning will also include forward-looking statements. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Various factors may cause our actual results to differ materially from those projected in the forward-looking statements. For more information, please refer to the Risk Factors discussed in our most recent Form 10-K, our other filings with the SEC and this morning's earnings release.

Forward-looking statements speak only as of today's date, and we undertake no obligation to update those statements because of new information, future developments or otherwise.

I'll now turn the call over to Michael.

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Michael L. Glazer, Stage Stores, Inc. - CEO, President & Director [3]

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Thanks, Alysha. Good morning, everyone. Thank you for joining us for our second quarter earnings call. I'll start by discussing our second quarter results, then Jason will follow with the financial details.

Our strategic pivot to off-price began in 2017 with the Gordmans acquisition. It came further into focus with the conversion of 9 department stores to off-price in 2018 and accelerated in 2019 with 89 additional off-price conversions. This multiyear effort reached an important inflection point in the second quarter. The conversion stores contributed 150 basis points to second quarter comparable sales, and that's even with 35 of them each being closed about 10 days during the quarter.

Overall, our comp sales increase was 1.8% for the second quarter. Notably, our comp sales were flat or positive each month, with comp increases in both transaction count and average transaction value. As expected, our home business continued to deliver outstanding results in the second quarter. The catalyst for the home growth has been the investment that we've made in high-capacity fixture and an expanded selection, which allowed us to bring the Gordmans home assortment and pricing into all our department stores. Our Gordmans guests love our home product. In particular, home decor, which we merchandise by various seasonal and lifestyle themes. Replicating the Gordmans home offering in department stores has resonated strongly with our guests, and we have more than doubled the home sales.

The stabilization of our women's business was also a key contributor to positive second quarter comps. While home is a differentiator for us, women's is our most important single category, and it was our top performer in off-price for the second quarter.

In department stores, women's apparel delivered a significantly improved sales trend versus first quarter as we refocused our assortments around our core classic guest. In fact, department store comps were positive in several women's apparel categories, including intimates, sleepwear, active, bottoms, missy dresses and petite.

We continue to be pleased with our thredUP relationship as we now offer it in 44 stores. You will recall that we were thredUP's first brick-and-mortar partner when we piloted a test in the fall of 2018 with 12 stores. thredUP brings a fun treasure hunt experience into our stores and allows us to offer an expanded assortment of brands.

Turning to our private label credit card. In July, we completed a re-issue to over 2 million cardholders. Our credit card allows our guests to shop and earn rewards in both Gordmans and department stores. We continue to increase our credit card share of wallet in off-price. In the second quarter, our Gordmans credit sales penetration was 18% compared to 15% in the second quarter last year. Thanks to our strong partnership with Alliance Data, we are confident that we can achieve credit penetration of at least 25% in Gordmans over the next year or 2.

While second quarter cost of goods sold were impacted by higher distribution costs experienced industry-wide, we are very pleased with current inventory levels and content. Total company inventory ended 5% higher for the second quarter. We strategically accelerated third quarter receipts into July to avoid peak shipping charges and mitigate potential tariff risks. Importantly, while tariffs are a consideration for us, their overall impact to Stage is not material at this time. As many of you know, we sourced most of our merchandise through domestic suppliers, and we are not highly penetrated in private brands.

Now at the midpoint of the year, we are extremely pleased with the progress we have made on our 2019 and long-term strategies. Positive second quarter comparable sales signal that our efforts have gained substantial traction. That momentum has continued through the start of the third quarter, and we look forward to accelerating growth in the back half of the year.

In June, we completed an additional 35 store conversions and continued to see significant sales lifts across our entire portfolio of conversions. We will convert another 17 stores in September, bringing our 2019 conversions to a total of 89. Our off-price stores are already approaching 25% of our total sales. We have significantly reduced the cost of conversions by value engineering our capital expenditures and are testing lower cost $40,000 conversions in September 2019. Additionally, we have benefited by partnering with landlords who are very excited to have a new Gordmans in their center and are willing to offer financial incentives. This has allowed us to accelerate our conversion plans in 2020. As a result, we recently announced our decision to expand our off-price conversion strategy in 2020 to complete 250 store conversions, giving us more than 400 off-price stores by this time next year. In 2020, we expect off-price sales to represent approximately 60% of our total sales volume.

In summary, we are very pleased with our second quarter results and are excited about the back half of the year, including the all-important holiday season. As Jason will discuss in more detail, we are raising our full year adjusted EBITDA guidance to $20 million to $25 million compared to $10 million to $15 million previously. This includes revised comparable sales guidance of plus 1% to plus 3%, which reflects the actualization of the spring season. Additionally, we continue to expect to deliver positive cash flow in 2019 and have made great progress towards this goal year-to-date. In fact, our excess availability under our credit facility has improved more than $10 million versus the end of the first quarter.

The future is bright for Stage Stores, and there is tremendous excitement in the air. Our strategies are clearly working. Comparable store sales in the first 2 weeks of the third quarter were positive mid-single digits. Our management team, field leadership and thousands of associates are thrilled to be part of our transformation into an off-price retailer. We believe that this transition is rapidly becoming the best story in retail today.

With that, I'll turn it over to Jason. Jason?

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Jason T. Curtis, Stage Stores, Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Michael. While upfront investments and the implementation of our strategy continued in the second quarter, top line results are beginning to reflect a critical mass of stores converted to off-price.

Net sales for the quarter were $368 million compared to $369 million a year ago, with off-price sales representing 22% of total sales. Comparable sales for the second quarter were 1.8%, including 150 basis points of benefit from off-price conversions. Notably, the drivers of the comparable sales increase were broad-based. One, every month of the quarter delivered flat or positive comps. Two, transaction count, which reflects both in-store traffic and our ability to convert guest traffic into a sale, was positive. Three, average transaction value was positive with the growth of our home business driving increased units per transaction, partially offset with lower average unit retail.

Credit income for the second quarter was $14 million compared to $14 million last year. Private label credit card growth is a key pillar of off-price success, and we are pleased to deliver 18% credit penetration in Gordmans in the second quarter, a 270 basis point increase versus last year. This includes 19% penetration in the month of July. Cost of goods sold were 80.2% in the second quarter, 250 basis points higher than last year. While retail margins are comparable between our off-price and department stores, higher off-price distribution costs negatively impact cost of goods sold as we convert.

Conversely, marketing costs and other store-level expenses are reduced as we convert to off-price. As a result, second quarter SG&A was 28.9%, 110 basis points lower than last year. Included in second quarter SG&A are preopening costs associated with off-price conversions, store closing services and severance, which cumulatively totaled $4 million or approximately 100 basis points. For the second quarter, adjusted EBITDA was a loss of $0.1 million compared to positive $2.0 million last year. Interest expense was $4 million compared to $3 million last year and net loss was $24 million compared to $17 million last year.

Turning to the balance sheet. Merchandise inventory was $499 million, a 5% increase versus the second quarter last year. In an effort to reduce peak period shipping costs and mitigate potential tariff risk, a portion of third quarter receipts were accelerated into July. Accounts payable is $156 million, 31% of merchandise inventories. Our payables level reflects both the continued support we are receiving from our vendor partners and the timing of second quarter receipts.

End of second quarter debt was $324 million and end of second quarter cash was $25 million. Excess availability under our credit facility was $66 million at the end of the second quarter, an increase of more than $10 million compared to the first quarter 2019. On a year-to-date 2019 basis, cash flows from operating and investing activities were $20 million better when compared to [the rest of the] department stores.

During the second quarter, the company opened 1 new off-price store, converted 35 department stores to off-price and closed 5 department stores. As of the end of the second quarter, the company operated 645 department stores, 141 off-price stores and 786 total stores. For the full year 2019, we expect to convert 89 stores to off-price, open 1 new off-price location and close 55 to 60 stores. Total store count at the end of 2019 will be approximately 740 stores, including 158 off-price locations.

As previously announced, we plan to convert an additional 250 stores to off-price in the first half of 2020. At the end of 2020, we expect to have more than 400 off-price stores, representing approximately 60% of total sales.

Turning back to 2019 and our full year guidance. Including both year-to-date performance and trends and SG&A benefits associated with the conversion of off-price, which are realized more quickly than originally anticipated, revised guidance is as follows: net sales between $1.555 billion and $1.585 billion, comp sales percent change between plus 1% and plus 3%, adjusted EBITDA between $20 million and $25 million, net loss between $65 million and $60 million, loss per share between $2.25 and $2.10, 89 off-price conversions, 1 new off-price store, 55 to 60 store closures and capital of approximately $30 million.

In summary, we are pleased with second quarter results, which included positive comparable sales and an excess availability improvement of more than $10 million compared to the first quarter. Additionally, our year-to-date cash flow improvement of $20 million helps validate our expectation of positive cash flow for the full year 2019.

That concludes my remarks. I will now return the call to Michael.

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Michael L. Glazer, Stage Stores, Inc. - CEO, President & Director [5]

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Thank you, Jason. We are grateful for the continued support of our shareholders, vendors and guests, and we look forward to updating you again after the conclusion of our third quarter.

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Operator [6]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.