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Edited Transcript of SSI earnings conference call or presentation 23-Aug-18 12:30pm GMT

Q2 2018 Stage Stores Inc Earnings Call - Pre-recorded

Houston Sep 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Thursday, August 23, 2018 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. - Interim 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 Second Quarter 2018 Stage Stores Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Ms. Alysha Tawney, Manager of Strategy and Investor Relations. Ma'am, 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, Interim 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 EBIT and 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. 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.

I will 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 Second Quarter Earnings Call.

Before we discuss our results and outlook, I'd like to thank Oded Shein for his 7 years of service as our CFO. He built an incredibly strong finance team.

We are very excited to have Jason Curtis from that team step in as our Interim CFO and Treasurer. Jason brings years of experience, including 7 years at Stage and several key financial roles at Belk and May company. Though we have full confidence in Jason and the depth of talent in our existing finance department, we are doing a search for a permanent CFO that includes both internal and external candidates.

Now let's discuss our second quarter results.

Comp sales for the second quarter were flat to last year, a 260 basis point improvement compared to the first quarter. Department store comp sales for the second quarter were down 2%. While Mother's Day and the first few weeks of May were fantastic, sales were soft in June and early July then turned positive again with the start of back-to-school. Our e-commerce business remained strong, with sales up double digits in the second quarter. We are extremely pleased with the performance of our Gordmans off-price business with comp sales growth of 11% for the second quarter. In fact, Gordmans delivered positive comp sales results each month in the quarter. And we were very excited about our back-to-school business illustrating the strong progress that we've been making.

In our department stores, once again, nonapparel outpaced apparel, driven by our leading category home as well as a strong showing in shoes and handbags. In apparel, active, outdoor and denim performed well, as we continue to emphasize these trending categories with top brands like Nike, adidas, PUMA, Columbia and Realtree. Merchandise margin was pressured as we increased promotional markdowns to drive traffic and sales. Additionally, increasing industry-wide freight costs were a headwind to margin.

Inventory content and levels remain in great shape. We ended the second quarter with department store inventory down 1%, with clearance inventory down more than 20%. Total inventory was up 4% year-over-year, as Gordmans has now achieved normalized levels with everyday fresh assortments.

Turning to our 2018 priorities. We are thrilled with the achievements of Gordmans as we continue to execute our strategy to build our off-price business. In fact, our suburban Houston location in Rosenberg, Texas which we converted to off price in March is projected to deliver an annual sales increase of more than 25% compared to its volume as a department store. Additionally, we grand opened 4 more converted Gordmans stores in Midwest markets last week, with sensational early results. We are slated to convert another 4 stores just in time for the holidays. In all, we are testing conversions in new metro markets similar to Rosenberg as well as conversions in smaller Midwestern markets with varying degrees of investments. In fact, the capital spend for the conversion is less than $100,000 at a couple of these stores. We expect to leverage what we learn from these tests to accelerate our off-price store conversion process in 2019.

We've also continued to make great strides in improving our guest shopping experience through expansion of categories that generate excitement. In department stores, our Beauty Bar concept has been rolled out to nearly 500 locations, which represent approximately 80% of our total department store sales. The installation of a beauty bar delivers a nice sales lift for the entire store and helps us attract a younger customer. Another exciting addition is the introduction of vintage luxury handbags at amazing prices in select department stores and Gordmans.

As we noted, home has become our top-performing category in department stores. This performance is due in part to leveraging the expertise of our off-price business and applying it to our department stores. We will continue to use that knowledge to make our department stores the hometown gift headquarters this holiday and further increase home growth in 2019. We're also looking for opportunities to gain market share by distorting our assortments to capitalize on competitors exiting our markets. In Gordmans, for instance, we have initiatives in place to drive our toy, baby apparel and baby gear businesses to take advantage of the departure of Toys"R"Us and Babies R Us.

Guest acquisition and retention is another 2018 priority. In both department stores and Gordmans, we view our loyalty programs as an integral part of the value proposition for our guests, with nearly 10 million members. Spend and retention rates for guests enrolled in those programs are significantly higher than nonmembers. As a result, we have increased our digital marketing efforts to communicate value to our members and acquire new guests. The messages are often unique and fun. As examples, we have promoted events for our guests to bring their pets to shop with us at Gordmans. And we have offered special discounts in our department stores when the hometown team wins. A key component of further growing our loyalty program is expanding our private label credit card usage as a percentage of total sales. Department store penetration is up 30 basis points year-to-date, and we expect to achieve our goal of 50% for 2018. At Gordmans, PLCC penetration is off to a great start, and we continue to believe we can attain penetration of 15% for 2018 and 25% longer term.

In summary, we are focused on driving the business forward by generating positive momentum in department stores and accelerating the growth of Gordmans. We remain optimistic entering the second half of the year, especially the holiday season, for several reasons. One, there is tremendous excitement in our off-price business. Two, our e-commerce penetration is expected to increase, and sales have been growing double digits for several years. Three, our nonapparel categories, especially the home area, should continue its dramatic increases. And four, the active and outdoor lifestyle categories in apparel are exciting growth opportunities.

Before I turn this call over to Jason for additional details, I want to elaborate on our liquidity position. We ended the second quarter with excess availability of $95 million and expect to end the next 2 quarters above $100 million. This includes the impact of the recent amendment to our credit facility, a clear indication of the strong relationship we share with our bank partners.

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

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

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Thanks. And good morning, everyone.

As Michael mentioned, I joined Stage Stores 7 years ago, and I've been here through some great years as well as some more challenging years. We have an outstanding team in place, and I'm excited to help drive the great results we plan to deliver going forward. A top priority will be to focus on generating positive free cash flow as we grow our off-price business. With that said, I'd like to walk through our second quarter results.

Sales for the second quarter were $369 million, a 2.1% decrease compared to the second quarter last year. Comp sales were minus 0.2%, with department store comps minus 2.2% and Gordmans comps plus 11.4%. Department store comp sales were negatively impacted by traffic, partially offset by a higher conversion rate. Average unit retail was flat, and units per transaction were down 1.9%.

By line of business, nonapparel continued to outperform apparel and department stores. As Michael stated, home, shoes and handbags delivered strong results, while women's and accessories underperformed. In Gordmans, we were pleased with the results in children's, men's and footwear, while accessories lagged.

Geographically, our 4 oil and gas states once again outperformed the balance of the department store chain. However, this variance was less than in previous quarters due to weaker sales in our Mexican border stores. In both department stores and Gordmans, we were pleased with May sales, as weather normalized and spring seasonal apparel results improved. In June, sales were impacted as we were challenged to drive traffic in the absence of a strong natural sales catalyst. Both department stores and Gordmans closed the quarter on high note as back-to-school shopping ramped up.

Credit income for the quarter was $14.3 million, an 8.5% increase versus the second quarter last year. Department store private label credit card penetration was 30 basis points higher than last year on a year-to-date basis, as we work to achieve our 50% annual penetration goal. Gordmans' PLCC penetration exceed our annual goal of 15% in the second quarter, with July being the most highly penetrated month. Cost of goods sold increased as a rate to sales by 230 basis points due to increased promotional markdowns in department stores, higher supply chain costs and increased deferred revenue associated with our customer loyalty programs. Notably, shrink results during the first half of the year continued to improve, and we expect to reap the benefit of this momentum in future periods. The SG&A rate was 20 basis points lower than last year due to expense savings in department stores.

For the second quarter, EBIT was minus $14.1 million compared to minus $7.7 million last year. Interest expense was $2.7 million compared to $1.9 million last year due to increased borrowings under our credit facility and rising interest rates.

Tax as a rate to pretax income was less than 1% in Q2 this year compared to 35% last year.

Share count was 28.2 million compared to 27.5 million last year. Loss per share was $0.60 compared to a loss per share of $0.23 last year, including a $0.21 negative impact associated with the change in the tax rate.

Turning to the balance sheet.

Merchandise inventories were $477 million, a 4.1% increase as Gordmans inventory reached planned levels. Department store inventory was down 1%, driven by a reduction in clearance ownership.

Total debt was $272 million, comprised mainly of borrowings under our credit facility, including the new $25 million term loan. Excess availability in the quarter was $95 million.

Capital expenditures net of landlord reimbursements were $5.1 million during the quarter. And we opened no new stores, closed 4 department stores in preparation for their conversion to Gordmans and permanently closed 5 department stores.

Looking to our 2018 guidance.

We are reaffirming our comp sales guidance of flat to plus 2% and narrowing our EBIT guidance range to minus $29 million to minus $22 million. With depreciation and amortization between $55 million and $60 million, the midpoint of the EBITDA range is a positive $32 million, an increase of more than 30% compared to last year. Additionally, we expect to deliver positive free cash flow across the guidance range.

Finally, I wanted to highlight our full year 2018 store portfolio plans, as we expect to close 30 to 40 department stores, open 1 new Gordmans off-price store and convert 9 department stores to Gordmans. The new Gordmans stores and conversions are included in our total capital guidance of $30 million to $35 million.

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

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

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Thank you, Jason.

I will simply conclude by saying that we are grateful for the continued support of our shareholders, vendors and guests. And we very much look forward to updating everyone after the conclusion of our third quarter.

Thank you very much, everyone.

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Operator [6]

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