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Edited Transcript of SSI earnings conference call or presentation 23-May-19 12:30pm GMT

Q1 2019 Stage Stores Inc Earnings Call - Pre-recorded

Houston Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Stage Stores Inc earnings conference call or presentation Thursday, May 23, 2019 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. - 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 Q1 2019 Stage Stores Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Ms. Alysha Tawney, Senior Manager, 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 is Michael Glazer, President and Chief Executive Officer; and Jason Curtis, Chief Financial Officer. Supplemental materials regarding our business are available in our 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 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 for today's call. I'll begin by reviewing our first quarter 2019 results, and then Jason will provide additional financial details.

During the first quarter, we achieved 2 critical objectives in our long-term strategy. Most importantly, we converted 37 department stores to off-price in March, and we are converting another 50 during the rest of the year.

As a reminder, our goal is to have at least 300 off-price stores by mid-2020, representing approximately 50% of total company sales. In addition, we completed the rollout of high-capacity home fixtures to all our department stores. We are extremely pleased with our results for these initiatives, and I will be providing additional detail about them momentarily.

Turning to our total company results. First quarter comparable sales decreased 3.1%. As expected, the disruption associated with the rollout of our strategic initiatives negatively impacted the first part of the quarter, while sales later in the quarter benefited from their implementation.

Conversion to off-price impacted the beginning of the quarter as department store inventory was sold down in advance of the store closings, and the stores were subsequently closed for 10 days in preparation for the grand openings.

Our department store home expansion also hurt sales in the beginning of the quarter as store layouts were reconfigured to relocate home to a more prominent position. As a result of these necessary disruptions, comps in February were down double digits. In the combined March and April period, comp sales rebounded and were flat.

Predictively, nonapparel continued to outperform apparel. Our home area in department stores was up more than 100%, thanks to our expanded assortments and our major emphasis in that business.

Our most challenging business in department stores continues to be women sportswear, which was down double digits. In Gordmans, children's and beauty were outperforming categories. In both off-price and department stores, active was our best apparel category. We once again delivered another consecutive quarter of double-digit sales growth in e-commerce.

Our retail sales margins were down 50 basis points in the first quarter with a deterioration in department stores, offset by improvements in off-price stores due to less clearance and faster turns.

We were pleased with inventory levels and content at the end of the first quarter with total inventory down 1%. In department stores, inventory was down due to store conversions and closures of underperforming stores. Off-price inventory was up due to increased store count and greater use of pack and hold. This pack-and-hold merchandise represents some fantastic seasonal purchases that will help us deliver strong, compelling values to our guests as the year progresses.

As mentioned in today's press release, the off-price conversions are off to a fabulous start in 2019, with comparable sales in the small markets, which make up the majority of our conversions, increasing more than 120% in the first quarter. Importantly, the 6 small market conversions we completed in 2018 are included in these results and show no signs of slowing down, even as some approach -- even as some of them approach their 1-year anniversary.

As Jason will discuss later, EBITDA in these conversion stores has grown dramatically versus their performance as department stores.

For the 37 conversions completed in March, we reduced the closure time frame from 6 weeks to 10 days. With the 35 stores we are preparing to convert this June, we plan to reduce the closing time to only 8 days and further minimize the potential sales disruption.

We will continue to test and learn as we convert more stores to off-price, including being able to reduce the average capital required per store below the current $125,000.

Turning to our department store home expansion strategy. We are very excited about the results delivered so far. In most of our department stores, we moved the home department to the front of the store, along with putting high-capacity fixtures in all of the stores. The good news is that these fixtures will fit perfectly if these stores convert to off-price. Where we reflowed stores to move the home department to the front and transition the men's department to the back, we saw no deterioration in men's sales.

It is important to note that home sales as they percent to total sales increases in penetration throughout the year. That should be a nice benefit for us as they peak in the key fourth quarter holiday gift period.

In addition to our conversion and home expansion efforts, we have several 2019 initiatives related to our loyalty program and private label credit card. In March, we rebranded our loyalty program in Gordmans and integrated it with our existing department stores' loyalty program, which is called Style Circle Rewards. Under this unified program, our guests can use their private label credit card and redeem rewards in Gordmans' off-price stores and our department stores. Additionally, we are working with our partners at Alliance Data to reissue our existing credit cards as a combined off-price and department store-branded credit card to more than 2 million cardholders. This will occur at the end of the second quarter.

In summary, we feel great about the progress we have made to reinvent our company. We are pivoting from a department store that was overly dependent on apparel to a retailer that provides our guests with greater value, a broader assortment of merchandise categories and the shopping experience that she is seeking.

With this transition comes distractions and disruptions that are challenging, especially for a public company. Having said that, we are confident in our ability to deliver sequential improvement during the remainder of the year with the full benefit of our investments realized for the 2019 holiday season. The continued momentum from off-price conversions and home expansions will significantly improve our fiscal 2019 results and allow us to meet our guidance for the year.

I'd now like to turn the call over to Jason, who will provide additional details on our financial results. Jason?

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

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Thanks, Michael. Total sales for the first quarter were $328 million compared to $344 million in the first quarter of 2018.

Total company comparable sales in the first quarter decreased 3.1%, including a 240 basis point benefit from stores converted to off-price.

Prior to providing additional detail around the first quarter, I want to take a moment to summarize our off-price conversions efforts, which, as Michael mentioned, are delivering strong results. In 2018, we converted 9 department stores to off-price: 1 in March, 4 in August and 4 in November.

In March 2019, we completed an additional 37 off-price conversions. We plan to convert approximately 50 additional stores to off-price in 2019 with the majority occurring in June and the balance converting in September.

At the end of 2019, we expect to have more than 150 off-price stores representing approximately 25% of total company sales. Our 2020 plans include converting another 150 stores to off-price in the first half of the year bringing our total off-price store count to more than 300 with off-price sales representing approximately 50% of total company sales.

Approximately 90% of the conversions completed thus far have been in smaller Midwest markets. Sales in these stores increased more than 120% in the first quarter compared to their sales as department store in the prior year.

Six of the 2018 conversions were in small Midwest markets, with 4 now approaching the 1-year anniversary of their reopening as off-price. First quarter sales in these stores were aligned with the results from the March 2019 conversions.

Given that our off-price in department stores have similar gross margin and total variable expense rate, the sales increases in the 6 2018 small Midwest market conversions have delivered significant improvement in EBITDA compared to their already positive EBITDA as a department store.

Turning back to the first quarter. Average transaction value was negative with lower average unit retail partially offset by increased units per transaction. Traffic continues to be challenged, while the percent of in-store guests making a purchase was approximately flat to last year.

First quarter sales in the beginning of the quarter impacted by the conversion of 37 stores to off-price, including 10 days where the stores were closed to guests in advance of grand reopening. Additionally, department store sales were disrupted as the new high-capacity home fixtures were assembled and merchandised and stores were reflowed to move home to a more prominent position.

Comp sales in the combined March and April period, which includes the Easter shift, were flat as the impact of these initiatives began to take hold.

Credit income in the first quarter was $13 million, $2 million lower than last year. Conversions to off-price negatively impact credit income as off-price credit sales underpenetrate compared to department store credit sales. On a positive note, credit penetration of our growing off-price business increased by 170 basis points in the first quarter.

Cost of goods sold as a percent of sales increased 290 basis points in the first quarter as supply chain costs continued to increase. SG&A as percent of sales increased 130 basis points due to conversion grand open costs and sales deleverage.

EBITDA adjusted for impairments in the first quarter was a loss of $27 million compared to a loss of $14 million last year. As previously noted, EBITDA improvement in 2019 will be back-loaded as strategic investments build an impact during the first 3 quarters driving improvements later in the year.

First quarter interest expense was $4 million compared to $2 million last year due to increased interest rates and higher borrowings. Income tax, like last year, was approximately $0.

Net loss in the first quarter was $47 million compared to a loss of $32 million last year. First quarter loss per share was $1.67 compared to loss per share $1.14 last year.

Turning to the balance sheet. As Michael noted, first quarter inventory decreased 1% compared to the first quarter last year. Compared to the end of 2018, first quarter inventory increased 11%, while first quarter accounts payable increased 14%.

Additionally, in the first quarter, the company adopted ASU 842, the new standard of lease accounting, the impact of which is reflected in our financials.

First quarter debt was $312 million with cash and cash equivalents of $23 million. Excess availability under credit facility was $56 million, an anticipated reduction due to first quarter capital spends and other investments associated with the implementation of our strategies.

Notably, despite these investments, first quarter cash flows from operating and investing activities improved by $25 million compared to first quarter 2018. Capital net of landlord allowances during the quarter was $12 million comprised mainly of costs associated with converting stores to off-price and the rollout of the high-capacity home fixtures.

First quarter capital represent approximately 40% of the $30 million to $35 million in capital the company plans to spend in 2019. 6 department stores were closed during the quarter, and we continue to expect to close 40 to 60 department stores during 2019. Inclusive of our conversion and store closing activities, we should end 2019 with approximately 750 stores, including more than 150 off-price locations.

Our 2019 guidance is unchanged, with total sales between $1.590 billion and $1.620 billion, and comp sales between plus 3% and plus 5%. EBITDA adjusted for impairments is expected to be between $10 million and $15 million with net loss between $65 million and $60 million, and loss per share between $2.25 and $2.10.

We expect to deliver positive cash flow in 2019, and we are encouraged by a $25 million improvement versus last year in first quarter cash flow. 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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Thanks, Jason. Our team is eagerly looking ahead to driving positive sales and momentum for the summer business, back to school and then the all-important fourth quarter. Thank you, again, for joining us on today's conference call. We look forward to speaking with you again after the conclusion of our second quarter.

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Operator [6]

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Thank you. Ladies and gentlemen, thank you for your participation on today's conference call. This does conclude our program, and we may all disconnect. Everyone, have a wonderful day.