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Edited Transcript of SSI earnings conference call or presentation 7-Mar-19 1:30pm GMT

Q4 2018 Stage Stores Inc Earnings Call - Pre-recorded

Houston Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Thursday, March 7, 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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Good day, ladies and gentlemen, and welcome to the Fourth 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, Senior 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, 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. 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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Thank you, Alysha. Good morning, everyone, and thank you for joining us today. I'll begin today by reviewing our fourth quarter results and then our exciting plans for 2019 and beyond. Jason will then provide additional financial details for the quarter as well as guidance for 2019.

Fiscal 2018 was a pivotal year for our company as we meaningfully expanded our presence in the off-price channel, including the shift in Gordmans merchandising strategy to a true off-price model.

We also converted 9 department stores to the off-price format and formulated a multiyear off-price conversion strategy, which we announced in January.

In our department stores, we emphasized categories representing our largest opportunities, including home, and our guests responded favorably. In addition, we once again drove double-digit e-commerce sales growth in every quarter of the year.

Turning to the fourth quarter. Total company comp sales were up 0.6% on a shifted basis. In our conversion stores, we continue to see amazing results with sales in the 9 2018 conversions increasing more than 50%. More importantly, for our future growth plans, the sales in our 6 smaller Midwest conversions were up more than 150% in the fourth quarter.

We are highly encouraged by these results as the majority of our more than 70 conversions in 2019 will occur in similar markets. In both existing and converted locations, off-price categories that outperformed were home, toys, gifts and active apparel. In department stores, shifted comp sales were up 0.5% in the fourth quarter.

We are very pleased with these results given we were up against some difficult comparisons from 2017 because of the reissue of our private label credit card, the Astros World Series win and the Hurricane Harvey rebound sales.

Categories that outperformed in department stores were active apparel, footwear, and most importantly, for our 2019 strategy, a more than 30% shifted comp sales increase in home and gifts.

Merchandise margin in the fourth quarter was pressured by increased promotional activities to drive traffic and increasing supply chain costs.

Looking to 2019. We are leveraging our off-price expertise to deliver more value in department stores, and we have engaged a consultant to help identify cost savings in our supply chain.

Inventory levels and content are in great shape with our total year-end inventories lower than last year. Department store inventories are down. But in Gordmans, year-end inventory was higher as we built receipts for the 2019 conversions and took increased advantage of opportunistic off-season buys. In stores that have been branded Gordmans for more than 12 months, inventories are lower as we emphasized the scarcity that is so important to the off-price model.

Looking ahead to 2019. Our comp sales guidance of plus 3% to plus 5% represents a significant positive change when compared to our prior year comp sales. Nevertheless, we are confident with that guidance because we are planning our conversion stores very conservatively compared to the actual results we saw in 2018.

In addition, we believe that our increased home penetration in department stores should contribute approximately 300 basis points to the total company comp. These initiatives, when combined with our efforts to increase merchandised margin and control supply chain cost, support a meaningful EBITDA improvement that Jason will discuss later.

We are excited to accelerate our off-price conversion strategy. For the last few years, the off-price sector has seen tremendous growth, despite the challenges that have faced traditional retailers. These results in off-price were the catalyst for us to invest in Gordmans when the opportunity presented itself in 2017, and we have since transformed these stores into a true off-price concept that represents significant growth potential.

The 2018 conversions have delivered fantastic results, illustrating the appetite in our smaller markets for off-price stores. In fact, 19 conversion stores will be grand opening later today and 18 more conversions will open 2 weeks from now. Later this spring, we plan to convert an additional 30 to 40 stores, just in time for back-to-school.

As previously announced, by midyear 2020, we are projecting our off-price store count to be around 300 and expect off-price sales to make up approximately 50% of our total volume.

Importantly, we can convert stores to off-price for around $125,000 per store. As such, we can comfortably fund all our 2019 conversion activities within our historical $30 million to $35 million capital spend.

Turning to department stores. We are dramatically expanding our home category, where 2018 penetration to total sales reached 6%, thanks to a more than 25% increase in comp sales for the year. Our 2019 penetration target is 10%. To support this growth, our 2019 capital budget includes approximately $5 million to install high-capacity home fixturing in all our department stores. We expect to have the new home assortments and fixturing fully rolled out to our department stores by the end of this month.

Also, in both department stores and off-price, we plan to drive growth in trending categories, such as beauty, active and outdoor, with a continued emphasis on value. In addition to great deals on our traditional assortment, strategic relationships with thredUP and LXR, which offers vintage luxury handbags, provide exciting fun finds at amazing price points.

Finally, while I could talk about sales all day, there are other initiatives that we are undertaking that should deliver a significant increase in EBITDA in 2019 and generate positive cash flow. In addition to our objectives to improve gross margin and control supply chain cost, we plan to exit 40 to 60 underperforming department stores. Not only will closing these stores improve our profitability, it will also provide a source of cash to reduced working capital. As we have mentioned in the past, converting stores to off-price not only drives increased sales, but also reduces working capital through lower inventories. For the 9 stores we converted in 2018, average inventory is down double digits versus their inventory levels as a department store.

In summary, we are very excited for 2019. Our capital investments in off-price conversions and home growth and department stores are proven winners that drive top line sales, while fitting within our historical capital spend. In addition, our efforts to improve profitability and reduce inventory will improve cash flow.

I will now pass the call over to Jason to discuss the financial details and guidance. Jason?

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

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Thanks, Michael, and good morning, everyone. Today, I will be providing additional color around our fourth quarter results as well as details on our 2019 guidance.

Net sales for the 13-week fourth quarter were $520 million, a 5.4% decrease versus the 14-week prior year with cost sales minus 2.4%. On a shifted basis, which compares the 13 weeks ending February 2, 2019 to the 13 weeks ending February 3, 2018, total company comp sales increased 0.6%. Notably, shifted comp sales improved sequentially each quarter during 2018.

Gordmans fourth quarter shifted comp sales increased 0.8% with December plus 5.4%. However, November was impacted by the 2017 marketing launch investment, which was not anniversaried in 2018. And January was impacted by the polar vortex in the Midwest. For the fiscal quarter, Gordmans sales results were driven by a 3% increase in units per transaction. While Gordmans average unit retail was down 1%, fourth quarter AUR represented the best quarter of the year, and we expect continued improvement in 2019. Store traffic was lower than 2017, while store conversion rate improved versus last year.

Fourth quarter department store shifted comp sales increased 0.5%. For the fiscal quarter, units per transaction increased 7%, partially offset by a 4% decrease in average unit retail. In-store traffic continues to be challenged, while the conversion rate was approximately flat to the fourth quarter 2017. E-commerce sales once again increased double digits in the fourth quarter and for the full year.

Credit income was $18 million in the fourth quarter compared to $19 million last year. For the full year, department store credit penetration was 48% compared to 49% last year, as 2017 benefited from a credit card reissue. Gordmans full year credit penetration was 14%, an increase versus 2017, and we expect to continue to grow the Gordmans program in 2019.

Cost of goods sold increased 250 basis points in the fourth quarter due to increased promotional activity and higher supply chain cost. SG&A was 110 basis points better in the fourth quarter due to reduced store expenses in response to the top line sales trend.

Additionally, a $14.9 million noncash tradename impairment was occurred in Q4. This impairment is associated with the Peebles tradename and was taken as a result of our plans to convert Peebles' department stores to Gordmans off-price stores.

EBITDA adjusted for impairments was $27 million compared to $37 million in the fourth quarter 2017.

Fourth quarter interest expense was $3 million compared to $2 million last year due to increased borrowings and rising interest rates. Due to the impact of the full valuation allowance, tax was approximately 0 in the fourth quarter 2018.

Fourth quarter net income, including the noncash Peebles tradename impairment and the impact of the tax valuation allowance, was a loss of $8 million this year compared to income of $6 million last year. Loss per share was $0.28 in 2018 compared to earnings per share of $0.19 in 2017.

Turning to the balance sheet. Merchandise inventories were $425 million, 3% lower than 2017. Department store inventories were 6% lower, while Gordmans inventories were 18% higher. As Michael mentioned, the Gordmans inventory increase was driven by inventory build associated with the 2019 conversions and by increased use of advantageous off-season buys, which are stored in our distribution centers for future allocation. For stores branded Gordmans more than 12 months, inventories were lower as we emphasize scarcity at the store level.

Accounts payable was $107 million, a significant reduction compared to 2017, as inventories were lower and days payable outstanding returned to historical norms compared to the elevated levels at the end of last year. Debt was $255 million this year compared to $183 million at the end of 2017. Excess availability under the credit facility at the end of the year was $82 million. Capital spend for the full year was $30 million, including cost associated with converting 9 department stores to Gordmans, opening 1 new Gordmans store and relocating 1 department store.

Additionally, 41 department stores were closed during 2018. The store count at the end of the year was 795, including 727 department stores and 68 Gordmans off-price stores.

Turning to the fiscal 2019 guidance. Total sales are expected to be between $1,590,000,000 and $1,620,000,000 with comp sales between plus 3% and plus 5%. As Michael discussed, the Gordmans conversion and home initiatives will deliver a combined comp sales lift of approximately 500 basis points.

EBITDA is expected to be between $10 million and $15 million as a result of improved gross margins and SG&A leverage on comp sales, including improved profitability in our off-price stores.

Net loss is expected to be between $65 million and $60 million with loss per share between $2.25 and $2.10. Tax rate in 2019 is once again expected to be approximately 0.

While we do not provide quarterly guidance, the expected 2019 comp sales and EBIT improvement will be backloaded as investments in off-price conversions and the home initiative in the first half of the year will fully impact results by the fourth quarter.

We expect to deliver full year positive cash flow across the guidance range in 2019. From a store count perspective, we expect to convert 70 to 80 stores to off-price and close 40 to 60 department stores. 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. I want to remind everyone that if you would like to review our 2019 strategies, our supplemental presentation can be found in the Investor Relations section at stage.com.

Also, I'd like to take a moment to thank our shareholders, vendors, and certainly, our incredibly dedicated associates for their continued support. I look forward to updating you on our progress after the conclusion of our first quarter.

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Operator [6]

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