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Edited Transcript of SSI earnings conference call or presentation 21-Nov-19 1:30pm GMT

Q3 2019 Stage Stores Inc Earnings Call - Pre-recorded

Houston Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Thursday, November 21, 2019 at 1:30:00pm 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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Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Stage Stores Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Alysha Tawney, Senior Manager of Strategy and Investor Relations.

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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 are 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, adjusted net loss and adjusted diluted loss per share 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 within the meaning of the Private Securities Litigation Reform Act of 1995. And such statements are intended to qualify for the protection of the safe harbor provided by the act, which reflects the company's current view of future events and financial performance. Words such as expect, forecast, plan, anticipate, estimate, may, will, should and similar expressions identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that 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 and our other filings with the SEC.

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, and thank you for joining us for our third quarter earnings call. I'll begin by reviewing our third quarter results, and then Jason will provide additional financial details.

I have been looking forward to this day because I want to share with you the incredible excitement that is going on here at Stage Stores. We are absolutely thrilled with our third quarter results. On nearly every key financial metric, the third quarter of 2019 was record setting. I could go on and on about our third quarter achievements. Sales were the highest for any third quarter ever in our history. Comp sales were positive every month and sequentially grew each month. Merchandise margins improved by over 100 basis points. We leveraged expenses by 380 basis points. And the inventory levels are actually down more than 3% versus a year ago. Most importantly, our adjusted EBITDA of $15 million is our first positive third quarter EBITDA since 2015 and represents an improvement of nearly $30 million versus last year. As a result, our end of the third quarter excess availability under our credit facility was over $100 million and the increase of approximately $35 million compared to the second quarter and our highest quarter end level in almost 2 years.

Our comp store increase of 17% demonstrates that our strategic initiatives are clearly working. While there were multiple drivers of our outstanding sales performance, the most important for our future is the sales lift we are delivering in the stores converted from department stores to off-price. During 2019, we converted 37 stores in the first quarter, 35 in the second quarter and 17 in the third quarter. In the third quarter, these 89 Gordmans stores had a sales increase of almost 40% compared to their department store sales in the third quarter of 2018. The 40% increase was attributable to both former department store guests seeking great values as well as new and younger guests who just love off-price.

Additionally, our home and gift businesses continued their strong momentum. As you may recall, we invested $5 million in capital to roll out high-capacity home fixturing in about 700 department stores in the first quarter. This investment, combined with our expanded and upgraded home assortment, led to a 180% increase in comparable store home sales in these locations in the third quarter. The importance of the gift business obviously grows in the fourth quarter. And we are looking forward to this strong momentum building to an even larger impact on total company sales during the holidays.

While home and gifts are our fastest-growing department, I want to point out the results in our women's business, which remains our largest single category. The women's business has been challenging for many years, but in the second quarter we began to gain traction. In the third quarter, thanks to our refined assortment and the appeal of an off-price buying experience, women's also delivered strong positive comparable sales. Within women's apparel, sportswear was our most improved business as we better connected with our core guests. Our strongest categories overall in women's apparel, were active, seasonal, contemporary, intimates and sleepwear.

While we are excited for our future in off-price, we are proud of our department store heritage and how much the names, Stage, Peebles, Palais Royal, Goody’s and Bealls mean in the small towns we have been honored to serve for so many years.

We have developed many long-term relationships with our guests. And while they are excited about our conversion to off-price, some will miss their department store. As a result, our sales and events have a special meaning this year because there is no next year as a department store. For example, our last Halloween sale ever was very well received. And we are even more excited to see the results of our Last Black Friday Sale Ever and Last Christmas Sale Ever promotions.

We are highly optimistic about the fourth quarter and beyond as we begin to convert the full company to off-price in 2020. Approximately 550 of these store conversions to off-price will occur next year, beginning with the first group of 45 stores opening in February. With the experience of converting nearly 100 stores in 2018 and 2019, we feel confident in our ability to execute an aggressive conversion time line that will culminate by the beginning of the third quarter next year.

Equally important, only about $40,000 of capital is required to convert each store. This results in a total fiscal year 2020 capital spend of $30 million, which is about the same as we have spent on capital expenditures the last couple of years. In addition, the lower inventory levels in off-price will allow us to reduce our inventory investment by more than $30 million in 2020.

Another very exciting move for us this year was the launch of Amazon counter in our off-price and department stores. This service provides Amazon shoppers with convenient pickup locations at our friendly stores. During the third quarter, many of our loyal guests took advantage of the Amazon counter service, but we also welcomed many new faces into our stores. Amazon counter is now available in approximately 700 of our stores, just in time for the holiday season.

In summary, our pivot to off-price has made great progress. There are many who doubted our ability to truly transition from our department store culture. Nevertheless, we are well on our way, and we will not be denied. We want to win and our Stage team, along with our suppliers, landlords and other key partners, are energized to make it happen. I said last quarter, we are rapidly becoming the best story in retail, and our third quarter results are proof of that statement.

With fantastic third quarter numbers and with the momentum we are already seeing in the fourth quarter, we are raising our guidance for the full year. We now expect full year comparable sales for the total company to be between a positive 7% and 9%. Adjusted EBITDA is projected to be between $35 million and $40 million. With the inventory reductions associated with conversions to off-price, we also forecast positive cash flow for the full year of more than $35 million.

Before I turn it over to Jason, I want to say a very special thank you to our thousands of dedicated associates who never waiver, believe in our strategy and on a daily basis, exceed all expectations with their phenomenal performances.

With that, I will now pass it over to Jason for more details on the financial results. Jason?

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

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Thanks, Michael. We are very proud of our accomplishments during the third quarter, so I'm excited to dive right into the financial details. Net sales for the third quarter were a record high $399 million, an increase of $52 million compared to the third quarter of last year. Comparable sales increased 17.4% in the third quarter. The key drivers of this comparable sales increase were the following: one, a sales increase of nearly 40% in the 89 off-price conversions completed during 2019; two, the first quarter rollout of the Gordmans home assortment to department stores, which contributed to a third quarter increase of more than 180% in department store home and gift sales; three, continued momentum in the women's business, our largest single category; four, strong customer reception to our pre-conversion promotional activities in stores that will become off-price in 2020.

For the quarter, both average transaction value and comparable store transactions increased. As a result of increased penetration of home and gifts, units per transaction increased, partially offset by lower average unit retail. Each month of the third quarter delivered positive comparable sales and improved sequentially versus the prior month.

Credit income for the third quarter was $16 million, an increase of 18% compared to the third quarter last year. Total credit sales increased during the quarter with Gordmans off-price credit penetration increasing 410 basis points compared to the third quarter 2018.

Cost of sales and related buying, occupancy and distribution expenses were 79.0% for the third quarter, an improvement of 130 basis points compared to last year. This improvement was driven by lower markdowns and sales leverage on fixed costs, partially offset by increased freight.

SG&A was 27.8% in the third quarter, an improvement of 380 basis points compared to last year. This improvement was due to sales leverage on fixed costs as well as reduction in advertising and store payroll associated with the transition to off-price.

Adjusted EBITDA in the third quarter was $15 million, an improvement of $28 million compared to the third quarter last year.

Net loss for the quarter was $16 million, an improvement of $15 million compared to the third quarter 2018. Adjusted net loss for the quarter was $4 million, an improvement of $26 million compared to the third quarter last year. Adjustments to net income are mainly associated with our conversion to off-price, including impairments of long-lived assets, severance, preopening expenses and store closing services.

Turning to the balance sheet. Inventory was $581 million at the end of the third quarter, a decrease of 3.5% compared to last year. Inventory levels reflect both our expectation of continued double-digit comparable sales increase in the fourth quarter and the impact of the lower inventory investments in the off-price model. End of third quarter accounts payable was $176 million, which represents approximately 31% of end-of-quarter merchandise inventories. Our end of quarter's payables balance is indicative of the continued level of trade support the company receives.

Debt at the end of the quarter was $365 million, and cash and cash equivalents at the end of the quarter were $26 million. Third quarter excess availability under the credit facility was $101 million, reflecting a $34 million increase versus second quarter 2019 and a $5 million increase versus the third quarter of 2018. This was the company's highest excess availability since 2017.

Capital spend during the third quarter was $7 million, including 17 stores converted to off-price in September. Additionally, 11 department stores were permanently closed during the third quarter. On a year-to-date basis, the company has converted 89 stores to off-price, opened 1 new off-price store and permanently closed 22 department stores. As of November 21, 2019, the company is operating 772 stores, including 158 Gordmans off-price locations.

As a result of strong third quarter results and with the expectation of continued momentum in the fourth quarter, selected fiscal 2019 guidance is as follows. Net sales of $1.640 billion to $1.670 billion, an increase of $85 million compared to prior guidance. Comparable sales of plus 7% to plus 9% compared to prior guidance of plus 1% to plus 3%. Adjusted EBITDA of $35 million to $40 million, an increase of $15 million compared to prior guidance and an improvement at the midpoint of $35 million compared to 2018. Adjusted net loss of $40 million to $35 million, including a tax rate of approximately 0%, an improvement at the midpoint of $31 million compared to last year, 89 off-price conversions, 1 new store, 60 store closures and $30 million in capital with a focus on off-price conversions. At the end of fiscal 2019, store count is expected to be approximately 740 stores, including 158 Gordmans stores. As a result of improved sales and profitability guidance and with a significant year-to-date cash flow improvement versus last year, full year 2019 cash flow is expected to be positive in excess of $35 million with a commensurate reduction in company debt.

Finally, as previously announced, the entire company will be converting to off-price in 2020. End of 2020 store count is expected to be 700 stores, including 40 store closures during the course of the year. Total capital for fiscal 2020, including all off-price conversions, will be $30 million, in line with 2019 capital spend. As a result of faster terms in the off-price model, 2020 inventory is expected to be reduced by more than $30 million.

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, and thank you again to our team here at Stage, who make it happen every single day. Also, a special thank you to our shareholders, vendors and guests for your ongoing continued support. We wish all of you a very happy, healthy and safe holiday season. We look forward to speaking with you again after the holidays.

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Operator [6]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.