Christopher & Banks Corporation (NYSE:CBK) Q4 2018 Earnings Conference Call March 13, 2019 8:30 AM ET
Jean Fontana – IR, ICR
Keri L. Jones – President and CEO
Richard Bundy – SVP and CFO
Conference Call Participants
Jeremy Hamblin – Dougherty & Company
Greetings and welcome to the Christopher & Banks Corporation Fourth Quarter and Full Fiscal 2018 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jean Fontana with ICR. Thank you, you may begin.
Thank you, Melissa. Good morning, everyone. Thank you for joining us today for Christopher & Banks Corporation’s fourth quarter and full year fiscal 2018 earnings conference call. Presenting on today’s call will be Keri Jones, President and Chief Executive Officer; and Richard Bundy, Chief Financial Officer.
This morning’s conference call is in conjunction with the earnings press release that the Company issued this morning. During our call today we will reference certain non-GAAP financial measures including adjusted items. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale using each measure can be found in this press release including in the supplements of financial tables. Today’s earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the Company’s expectations regarding its future performance, including but not limited to, financial conditions, results of operations, business initiatives, growth plans and prospects, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
Please refer to today’s earnings release and the Company’s SEC filings for more information on these risks and uncertainties. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. With that, I’ll turn the call over to Keri Jones.
Keri L. Jones
Thank you Jean and thank you for joining us on today’s call. Our financial performance in the fourth quarter reflects progress on the strategic initiatives we laid out for fiscal 2018. In our press release in January we noted that comparable sales were up 3% in the 10 weeks through the post holiday season and we had expected comps to increase in the low single-digits for the fourth quarter. Absent the frigid temperatures in January that hampered our momentum we believe that we would have achieved our low single-digit expectations. That said our flat comp sales performance in the fourth quarter was on top of a 5.7% increase last year and reflects a significant improvement compared to the 7% comparable sales decline in the third quarter.
As new inventory arrived in stores we saw our customers respond favorably to our enhanced product assortment, visual merchandising, and marketing efforts. We were particularly pleased with the strong momentum in our e-commerce business with our comparable sales growing 26% more, more than doubling the increase in our third quarter as we further advanced our omnichannel capability. Our merchandise margin also showed significant improvement with the expansion of 225 basis points resulting primarily from lower product costs. We ended the quarter with on hand inventory down approximately 12% excluding in transit and we are well positioned heading into spring with a fresher, more balanced, and relevant assortment.
Briefly highlighting our fourth quarter financial results net sales decreased 8.6% to $84.3 million. Excluding the $5 million from the 53rd week last year, on a shifted basis net sales would have decreased 1.6%. As I stated earlier comparable sales were flat. Gross margin increased 30 basis point with the increase in merchandise margin partially offset by a higher penetration of e-commerce sales. Adjusted EBITDA was a negative 7.2 million compared to a negative 6.3 million in the same period last year. Excluding the 53rd week contribution last year and shifting for like for like weeks adjusted EBITDA would have been flat to last year.
During the fourth quarter we remain focused on the execution of our strategic initiatives including enhancing our shopping experience, developing more impactful promotions, expanding our omnichannel capabilities, and reducing our costs. We made further progress on these initiatives and we believe we have established a solid foundation to drive improved financial performance for our company.
Beginning with our first initiative, enhancing and simplifying her shopping experience. We have made strides in providing a well curated and relevant product assortment presented in a way that is easier for our customers to shop. We saw strength across several categories including relax restyle and sweaters as well as our holiday motif assortment. In addition we delivered much improved results in our accessories business which carries a higher merchandised margin rate and serves as a potential average dollar sale builder as we help her complete her outfit with a great accent piece. Looking ahead we remain focused on driving growth in key categories with relevant product and deeper buys, improved inventory flow, and compelling visual presentation.
We have also taken additional steps to elevate our customer shopping experience. As we said in the past our store associates strong connection to our customers has been a key competitive advantage for Christopher & Banks. We believe that there is an opportunity to more fully leverage this to generate even greater loyalty and importantly drive more sales. We have just completed the launch of a new style and selling model. This simplified training program equips our associates with the skills to better style and outfit our customers. Additionally we have new performance metrics that will allow associates to evaluate their progress and drive higher sales productivity. The pilot stores that instituted these programs outperform the chain average which gives us the confidence that we can more fully leverage our team to deepen customer loyalty and drive improved sales productivity.
Our second initiative is delivering compelling promotion. Our goal was to strike the right balance in offering promotions that are compelling to our customers while delivering appropriate merchandise margins for the company. Our promotions during the fourth quarter were consistent with the competitive environment and largely in line with last year. We benefited from starting holiday promotions earlier in the season which we believe helped us gain additional sales. In addition the promotions we delivered over Black Friday and Cyber Monday as well as our end of the season semiannual sale effectively drove traffic and met our margin rate goals. We will continue to offer more targeted promotions designed to drive traffic and generate higher margin rates for our company.
Number three, growing our omnichannel business. We remain committed to optimizing our customer experience giving her options that allow her to shop wherever, whenever, and however she wants. Our e-commerce sales grew 26% in the fourth quarter as we continued to build and expand our omnichannel capabilities. Ship from store accounted for slightly over 4 million in revenue and represented 17% of our online demand in the fourth quarter reflecting the potential of this initiative. While these sales generated a lower margin rate in the quarter, importantly they drove incremental profit dollars. Looking ahead we plan to mitigate some of the gross margin pressure as we optimize our ship from store model allowing us to improve the margin flow through.
As we discussed last quarter we offer ship from store in a 170 locations and we will continue to evaluate the future opportunity of this initiative. We are on track to launch buy online pickup in store in the first quarter. This provides an opportunity for us to reduce our shipping costs and drive traffic into our stores. In nearly 25% of ship to store business we have seen the customer purchase at least one additional item. We are excited to leverage our new selling program to drive these metrics even higher. We believe this initiative will help us to continue to drive meaningful e-commerce growth as well as higher store productivity in our retail footprint.
Number four, building loyalty and growing our customer file. As part of our efforts to drive higher store productivity we are on a goal to increase transactions. We have an opportunity to achieve this by increasing the lifetime value of existing customers, reengaging last customers, and attracting new customers to our brand. As discussed in the past our customer loyalty initiatives have been focused around our private label credit card program and tender share. Our fourth quarter results reflect progress on this front with new PLCC accounts up 40% and our tender share at 37% which was a 300 basis point improvement over the same period last year.
Now that we have enhanced our product offering, visual presentation, and shopping experience we are inviting her back to see more of what she loves about Christopher & Banks. We’re ramping up our efforts to grow our buyer file by winning back our last customers and drawing a new one. One way we discuss growing our customer file is by capitalizing on the market disruption from competitor bankruptcies to acquire new customers. The 55 stores that overlapped with Bon-Ton closures continued to generate comparable sales results of nearly 400 basis points above the chain average.
In terms of the direct mail efforts around the acquired mailing list we discussed last quarter, we were pleased to see the redemption rate in line with our expectations. We will use the insights from these mailings to help inform future customer acquisition strategies. Additionally, we will be shifting more of our marketing dollars towards new customer acquisitions. While we recognize that some of these initiatives are longer-term and will take time to yield results. We believe we are on the right path to expanding our customer base.
Number five, reducing our cost structure. Last quarter we had stated that we renegotiated 2.4 million in annualized cost savings across non-merchandise expenses. We have identified an additional $600,000 in expense savings opportunities for fiscal 2019. In addition we still plan to realize additional rent reductions as we renegotiate leases.
In conclusion we remain confident that the foundation we have established and the strategic initiatives we have underway position us to drive improved financial performance. While we have seen sales pressure quarter-to-date largely related to weather, we believe that our initiatives position us to drive improved financial performance in fiscal 2019 and therefore we are maintaining our guidance. Our team remains energized and I want to thank everyone at Christopher & Banks for their hard work and dedication in helping us to realize the full potential of our brand. With that I’ll turn the call over to Richard to discuss our fourth quarter results and our outlook for fiscal 2019.
Thank you Keri. Good morning everyone and thank you for joining us today. Beginning with our results for the fourth quarter net sales decreased 8.6% to $84.3 million compared to $92.3 million in last year’s fourth quarter. Excluding sales attributed to the 53rd week last year and on a shifted basis aligning like for like week net sales would have decreased 1.6%. We operated in average of 2.1% fewer stores and comparable sales were essentially flat in the quarter.
For the quarter average dollar sale was down 4.3% reflecting a 1% decrease in the average unit retail due to product mix and a 3.3% decline in units per transaction. Total transaction volume for the quarter increased 3.2% with higher conversion partially offset by lower traffic as compared to the same period last year. The momentum in our e-commerce business remained strong with comps up 26% as we continued to invest in our omnichannel capabilities.
Gross margin increased 30 basis points to 27.5% of net sales. The increase was due to a 225 basis point increase in merchandised margin primarily due to lower product cost partially offset by higher penetration of e-commerce sales and fulfillment costs associated with ship from stores. Going forward we expect to further optimize the ship from store process which should result in lower fulfillment cost due to a lower percentage of split shipments as compared to the fourth quarter.
Selling, general, and administrative expenses were 30.5 million compared to 31.4 million in last year’s fourth quarter. The decrease was primarily due to SG&A associated with the 53rd week last year partially offset by higher professional fees and medical expenses. As a percentage of net sales SG&A increased approximately 200 basis points to 36.1% due to deleverage on lower sales volume as a result of the 53rd week last year.
Depreciation and amortization was $2.4 million compared to $3.2 million in last year’s fourth quarter due to lower store depreciation as well as the sale and lease back of our corporate facility that we completed in Q1. We recorded a non-cash store impairment charge of 1.4 million related to underperforming stores.
Our fourth quarter net loss was $11.3 million or $0.30 per share compared to a net loss for the prior year period of $8.8 million or $0.23 per share. Excluding the impairment costs of $0.04 per share related to long live assets, adjusted loss, a non-GAAP measure was $0.26 per share in the fourth quarter this year. The fourth quarter of fiscal 2017 included a net loss of approximately $300,000 or $0.01 per share for the 14th week. Adjusted EBITDA a non-GAAP measure was a negative $7.2 million compared to a negative $6.3 million in the same period last year. Excluding the 53rd week contribution last year and shifting to like for like weeks, adjusted EBITDA would have been flat to last year.
now turning to the balance sheet, we ended the fourth quarter with approximately $10.2 million of cash and cash equivalents compared to approximately 23.1 million at the end of the fourth quarter a year ago. The decrease in cash was primarily due to the timing of inventory receipt flow and the related payment obligation. As you recall in Q3 we said that we expect the delayed inventory shipments to push some payments into the fourth quarter. We had no debt and no outstanding borrowings under our revolving credit facility for the fourth quarter and sufficient availability under our ABL for 2019.
Total inventory was $41 million at the end of the fourth quarter of 2018 as compared to $41.4 million at the end of the same period last year. As Keri stated we ended the quarter with on hand inventory down approximately 12% excluding in transit and we are comfortable with both the level and freshness of our inventory. Capital expenditures for the fourth quarter of 2018 were $1.5 million compared to $700,000 in last year’s fourth quarter. $900,000 of this was related to improvements associated with our sale and leaseback agreement of our corporate facility.
Turning to our outlook, while quarter-to-date results were soft due in large part to weather, strategically we believe we are moving in the right direction and we expect improved performance as we progress through the year. As such we are reaffirming our fiscal 2019 guidance. For fiscal 2019 we expect sales growth of 2% to 3% to be a driven by expanding our omnichannel capabilities, enhancing the overall product assortment in our stores, and implementing more meaningful, impactful marketing promotions to drive customer file growth. E-commerce sales plan to increase in the double-digit range as a result of our continued omnichannel initiative. Ship from store launched in the fourth quarter and buy online pickup in store scheduled to launch in the first quarter are expected to be a meaningful contributor to the low single-digit total comp growth plan for 2019.
We expect gross margin expansion of 300 to 350 basis points in fiscal 2019 as a result of improved inventory management including supply chain and omnichannel initiatives, greater disciplines around our promotions, and the continued reduction of occupancy cost. We are expecting two thirds of the improvement to come from improved merchandise margin range and the remaining one third to come from occupancy cost reductions. We plan to close 30 to 40 stores over the next two years with store closings starting at the end of 2019 as leases expire. We also plan to open 5 to 10 new stores per year.
We have been making considerable progress on our expense reduction initiatives. We expect to benefit from more than $3 million in annualized cost savings across both cost of goods sold and SG&A. Coupled with planned leverage from sales growth we expect to achieve 150 to 200 basis points in SG&A leverage in fiscal 2019. Now we will turn the call over to the operator to begin the Q&A session.
[Operator Instructions]. Our first question comes from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.
Good morning. I wanted to see if you could provide a little bit more color on what you’re seeing in quarter-to-date trends just in terms of magnitude I think it would be helpful if you could clarify or provide some color on that you’re running below plan, you’re clearly seeing some impact from the colder than average weather. But I wanted to see if one, you could give me an overall quarter-to-date number? And then secondly what you’re seeing from an e-commerce perspective because obviously in Q4 you saw a very strong e-commerce of 26% even though you saw significant deceleration over the last three weeks of the quarter?
Keri L. Jones
Yes, so I will take that one Jeremy. I would characterize the spring season to date in line with what we saw towards the mid to late January timeframe. What gives us confidence to maintain that outlook for the year as February represents a small percentage of the quarter and certainly a smaller — really small percent of the year, we believe that the sales trend is largely weather related. As she comes into our store our conversion rates are up and so she’s buying when she’s in store. Our e-com rate while not up at the 26% of growth, obviously fourth quarter is a strong e-com quarter, it’s just slightly under the double-digit number that we ran through Q3 last year. And so we believe that we have the right inventory in the store, we’re seeing conversion rates up, and we believe that the sales will return to closer to plan once the weather breaks.
Okay, so just for the e-commerce, I think you were up by 10.7% in Q3 and you’re saying you’re running just under that, so like high single-digit quarter-to-date?
Keri L. Jones
High single to very close to double, right in that margin, so strong.
Okay, and what about — what does this translate into in terms of product margin, I think you had said they were up over 200 bps in the fourth quarter despite the flat comp, can you give us a sense of how that’s translating here quarter-to-date on product margins side?
Keri L. Jones
Well, I think it’s too soon to call the product margin side but we’re seeing upside in cost so we mentioned that the fourth quarter was driven by increased improved profit from lower merchandise cost. So we continue to see that and I would say our promo rates are largely in line with last year. We’re watching the business very closely and obviously our goal is to ensure that our inventories stay fresh and so we’re feeling the best we can with the challenging weather situation. And like I said she’s gravitating to our product both online and then when she’s in the store our conversion rates are up.
Okay, let’s move then to you know kind of the rest of the quarter and thinking about you have Easter that’s I think April 21st this year versus the end of March last year. What is that going to do for your promotional calendar here in Q1 and into Q2, what does it mean for friends and family and so of the other forms of promotions in Q1?
Keri L. Jones
Yes, so say our promotional calendar is aligned with last year which means friends and family will be pre-Easter and we think that’s going to be a big advantage for us. We’ve augmented our support for friends and family, we’ve expanded the mailer to show all the great new products that we have coming so we are excited about that. And like I said our inventory levels are cleaner, we’re going to have fresher products. So in addition to that we’ve talked in the past about minimizing the stacking of promotions so that we can use our promotions to really promote a product that is highly desirable. So we’re excited about the lineup for this spring and like you said friends and family is a big event and we’re putting more muscle behind it this year.
Okay, I wanted to — at the end of December you had a couple of interesting developments, you announced a share buyback plan that was driven I think post conversations with the FD [ph] Generation on acquiring the company. One, I wanted to speak, has any of that share buyback plan been deployed at this point in time and if so how much?
Yes, Jeremy we have been active on the share repurchase. We’ll report in our 10-K the amount that we purchased but we have been making purchases as of the end of December and then we’re in still through the end of this quarter.
Okay, can you share with us how much you have repurchased so far?
It’s been just over $100,000.
And then have you had any follow-up conversations if the FD [ph] dropped their pursuit, is this something there’s been additional conversations?
Keri L. Jones
We had no additional conversations.
Okay, and then I wanted to come back to the commentary you had around your cost structure and I think you had identified 2.4 million, looks like you’ve identified another 600,000 of savings. What — are there more opportunities to go on this front or do you think that at this point really sales and driving sales is really going to be key because at some point it’s hard to cut a lot more, you know, are there additional opportunities do you think that as you continue to scour that you can cut out of the cost structure?
Yes Jeremy. We believe that there are still some additional cost reductions that we’re going after. Some of the things when contracts come up we’re not able to go after them right away but we believe there is still some additional opportunity and that coupled with the sales increases is where we’re really going to see the SG&A leverage.
Keri L. Jones
I just want to emphasize too that much of the cost saving was not in a consumer facing way so much of the money we save was on non-merchandise procurement. In addition to that as we look at our marketing spend we’ve put a lot of things and tools in place to understand how to spend more effectively. And so I just wanted to reemphasize that it’s not consumer facing, it doesn’t impact our ability to drive the business. But we do see additional opportunity for savings.
Okay, and then I have to ask about in terms of your capital structure and where your cash finished up the year, I know that there was some year-over-year changes in the timing of that, but in terms of thinking about if you needed to access capital, what’s the general path of carrying Richard that you would take — would you use your line of credit first, how are you thinking about daily cash usage and need and the typical flow that you would see and seasonality where you tend to have a drawdown during the year and recover some of that cash as you close out Q4, how should we be thinking about how you might view the need for cash or the sources of cash and the capital structure in 2019?
Sure Jeremy, we feel that with our ABL which is our line that we will be accessing when we need capital is sufficient to get us throughout the year and that’s what we’re planning to utilize. I would say that we’re watching and managing our cash on a daily basis and making sure that we’re driving every improvement that we can. And it would follow kind of our typical quarterly build and draw downs as you talked about, where we’ll see that build back up towards the end of the year and should return at or above the same levels that we ended this year at.
Great, thanks, good luck guys.
Keri L. Jones
Thank you. Ladies and gentlemen I’ll now turn the floor back to Keri Jones for any closing comments.
Keri L. Jones
Thank you for joining our call today. We’ve come a long way in terms of developing and making progress on our strategic initiatives. We expect the execution of our initiatives will create a platform for sustained profitable growth. Our team remains energized and I want to thank everyone at Christopher & Banks for their hard work and dedication in helping us to realize the full potential of this brand. We look forward to updating you on our next call. Thank you very much.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.