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Edited Transcript of SSI earnings conference call or presentation 20-Nov-18 1:30pm GMT

Q3 2018 Stage Stores Inc Earnings Call - Pre-recorded

Houston Dec 26, 2018 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Tuesday, November 20, 2018 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. - 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 Third 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'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 on today's call and happy Thanksgiving week to all. I will begin by discussing our third quarter results and sharing our plans for the all-important fourth quarter. Then Jason will follow with the financial details.

For the third quarter, total company comparable sales decreased 2.8% due to lower traffic in our department stores. As you saw in our press release, our third quarter comp sales results are better by about 130 basis points on a shifted basis.

In our Gordmans off-price stores, the positive momentum that we saw in the second quarter continued with a 10% comp increase in the third quarter, and that does not include a new Gordmans store and the 8 additional department stores that we converted during the third quarter. The sales results for those stores have been sensational, greatly exceeding our expectations.

In our department stores, third quarter comparable sales decreased about 5%. E-commerce, on the other hand, again had double-digit sales growth, and in fact, had one of the strongest increases we have ever seen.

As we've discussed all year, nonapparel categories outperformed apparel in both off-price and department stores. In our Gordmans off-price stores, home continues to be a top-performing category. And in apparel, we saw great momentum in men's and children's during the third quarter. In department stores, home, footwear and beauty were the best performing areas. In all of our stores, we remain focused on trending categories and brands and are very happy with results in active and outdoor.

Turning to margin and inventory. Merchandise margin in the third quarter was down 50 basis points to last year due to higher freight costs. We're pleased with the inventory content and newness heading into the holidays. For the third quarter, total inventory was up 4% compared to last year. This was primarily due to the early Thanksgiving and planned increases in off-price versus the suppressed levels from last year. Department store clearance inventory was down 11%, continuing the trend we have seen all year.

Regarding the critical fourth quarter, Gordmans off-price stores will emphasize our seasonal home decor and gifts business. We will also focus on active and team apparel. Additionally, we are prepared to capitalize on the exit of competitors such as Toys"R"Us, Babies R Us and Bon-Ton by offering a fantastic assortment of toys, baby gear and popular brands this holiday season.

Looking forward, we're continuing to build the foundation for long-term off-price growth. We have now converted 9 of our department stores to off-price, and as I said, we are thrilled with the results. In fact, we are seeing the largest sales lifts in our smallest markets with some of our lower-volume stores now projected to more than double their sales after conversion.

Additionally, we have developed a conversion prototype, which allows us to convert stores for a capital spend of approximately $125,000 per store. Coupled with the fact that we have more than 400 department stores with sales volumes less than $1.5 million, we are tremendously excited about conversion opportunities in 2019 and beyond.

In our department stores, we have a great strategy in place to win with our guests this season. Our goal is to give her the selections and value she wants, not just for Black Friday, but throughout the holiday season. Our outstanding track record with gifts will set the stage for us to be her holiday destination when shopping for the whole family.

This year, we have added gourmet food to go along with our women's, men's, beauty and toy power centers. We've also expanded our successful partnership with FAO Schwarz by rolling out the brand to all department stores and expanding our FAO shops to 100 stores versus just 15 last year.

From a marketing perspective, our focus on digital marketing and personalization this year will allow us to more efficiently communicate all those amazing deals. And as always, our stores are focused on providing our guests an outstanding experience in stores. Now even more locations offer front-end checkout, and all our department stores are ready to drive online sales in store through our endless aisle and buy online ship-to-store programs.

Additionally, we're excited about the recent introduction of thredUP resale clothing and LXR vintage luxury handbags to a select group of both our off-price and department stores. These initiatives will allow our guests to shop great specialty and designer brands at absolutely amazing price points.

We are thrilled to partner with thredUP to offer today's hottest fashion brands in our stores and reach a younger demographic. Together, we're promoting these shops on social media to drive guests into stores to shop curated collections that arrive weekly. This relationship will provide a treasure hunt experience for our guests this holiday season and also a terrific foundation for future growth and creative partnerships.

Finally, we are excited about further building upon the synergies between our off-price and department stores. For example, based on the strength of our Gordmans off-price business, we recently launched greatly expanded home assortments in a couple of our department stores, and we look forward to rolling this out to all department stores in 2019. These initiatives give us confidence that we will have a successful holiday season.

For the fourth quarter, we expect comparable sales to be between minus 1% and plus 2%, EBIT to improve to between $24 million and $29 million and EBITDA to improve to between $37 million and $42 million.

Jason will be providing the updated annual guidance, which incorporates these fourth quarter expectations.

Before I turn it over to Jason, I want to mention a couple of things. It is an understatement to say that these are interesting times in the retail industry. We certainly, like other retailers, have our challenges, but we feel great about our prospects and look forward to many successful years in the future. While the department store side remains under pressure, we are elevating our guest experience by offering her more of the nonapparel merchandise that she wants, making it easier for her to shop through omnichannel initiatives and creating a unique treasure hunt with our pop-up shops.

As I mentioned, the off-price business continues to grow and has incredible upside potential, especially with the lower volume stores more than doubling their sales after conversion.

Our Board of Directors shares our excitement and enthusiasm for off-price conversions, and as such, our board will be reviewing capital allocations for 2019, which we will announce in our annual earnings update.

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, Michael, and good morning, everyone. I'm pleased to join you again today to walk through our third quarter results.

Sales for the third quarter this year were $347 million compared to $357 million last year, a decrease of 2.8%. Third quarter comparable sales increased 9.9% in Gordmans off-price stores, decreased 5.5% in department stores and decreased 2.8% for the total company. On a shifted basis, which compares the 13 weeks ending November 3, 2018 and November 4, 2017, comparable sales increased 10.3% in Gordmans off-price stores, decreased 4.1% in department stores and decreased 1.5% for the total company.

The comparable sales increase in off-price was driven by a higher in-store conversion rate and a 6% increase in average transaction value. The increased average transaction value was driven by a 10% increase in units per transaction, partially offset by a 4% decrease in averaging at retail.

The third quarter AUR performance represents a meaningful improvement versus the spring trend, and we expect continued improvement in the fourth quarter as we bring in higher ticket and better brand goods.

The third quarter comparable sales decrease in department stores was due entirely to in-store traffic, partially offset by increased conversion. Average unit retail, units per transaction and average transaction value were all approximately flat to the third quarter 2017. Conversely, business through stage.com were up during the third quarter, and we delivered one of our biggest increase ever for e-commerce sales.

Geographically, there were no meaningful call-outs, as all regions of the country performed in line with company averages. In fact, the convergence of performance in our oil and gas states with the balance in chain, which began in the second quarter continued into the third quarter. In our key South Central region, we benefited from a nonrecurring 2017 negative impact of Hurricane Harvey, which unfortunately was offset by continued sales weakness on the Mexico border.

Private label credit card penetration at third quarter was 14% in Gordmans off-price stores and 50% in department stores. We expect full year 2018 penetration to be between 14% and 15% in our off-price stores and 48% and 49% in department stores.

Credit revenue for the quarter was $13.3 million compared to $13.7 million last year due to increased write-offs.

Cost of goods sold increased as a rate to sales by 40 basis points due to ongoing industry-wide supply chain cost increases. SG&A rate improved 20 basis points due to lower store payroll and reduced store advertising, as we flexed expense to the lower sales base.

EBIT for the third quarter improved to minus $28 million compared to minus $28.3 million last year, a meaningful improvement, as the prior year third quarter benefited by approximately $4.2 million associated with the acquisition of the initial Gordmans inventory. EBITDA was minus $14 million compared to minus $12 million last year.

Interest expense was $3.4 million this year compared to $2 million last year due to increased borrowings and interest rates. Tax as a rate to pretax income was approximately 0 this year compared to 41.6% last year. Share count was 28.3 million this year compared to 27.6 million last year.

Third quarter net loss was $31.4 million this year compared to a net loss of $17.7 million last year. Loss per share was $1.11 compared to a loss per share of $0.64 last year.

With improving EBIT offset by the increase in interest expense, the year-over-year deterioration in third quarter net loss and loss per share was almost entirely driven by the change in tax rate.

Turning to the balance sheet. Total merchandise inventories were $602 million, a 4.4% increase, as Gordmans inventories reached normalized levels compared to last year. Department store inventory was up 1.7% due to the earlier Thanksgiving, with clearance ownership down 11%.

Accounts payable is $190 million, a decrease compared to last year due to timing of payments. Total debt was $349 million, comprised mainly of borrowings under our credit facility. Cash and cash equivalents were $26 million. Excess availability at the end of the third quarter was consistent with the end of the second quarter at $95 million.

Capital expenditures during the quarter were $9 million, as we opened one new Gordmans off-price store, converted 8 department stores to off-price and relocated 1 department store. Additionally, we permanently closed 6 department stores.

Turning to 2018 annual guidance. We are making the following updates: net sales between $1,590,000,000 and $1,605,000,000; comp sales of minus 1.5% to minus 0.5%; net loss between $59 million and $54 million; loss per diluted share between $2.10 and $1.90; EBIT between minus $47 million and minus $42 million; EBITDA between $10 million and $15 million; a tax rate of 0%, which when compared to 2017 is expected to negatively impact 2018 loss per share by $0.51 to $0.56 per share or net loss by $14 million to $16 million; open 1 new Gordmans off-price store; convert 9 department stores to Gordmans off-price stores; and close 35 to 40 department stores.

Additionally, we are reaffirming our capital expenditures guidance of $30 million to $35 million. Even with this lower annual guidance, we expect fourth quarter excess availability under our credit facility to be approximately $95 million, in line with second and third quarter excess availability.

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 to all our associates, shareholders, vendors and guests for your continued support and dedication. We wish you all a happy, healthy and safe holiday season, and we look forward to speaking with you again after the conclusion of the holidays.

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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.