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Kohl's Q1'16 Earnings Conference Call: Full Transcript

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Operator:

Ladies and gentlemen, thank you for standing by. Welcome to <b>Kohl’s Corporation</b> (NYSE: KSS) Q1 2016 Earnings Release Conference Call. Certain statements made on this call, including projected financial results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl’s intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans, or similar expressions, to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause Kohl’s actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Item 1-A in Kohl’s most recent Annual Report on Form 10-K and as may be supplemented from time-to-time in Kohl’s earlier filings with the SEC, all of which are expressly incorporated herein by reference.

Also please note that replays of this recording will now be updated, so if you are listening after May 12, 2016, it is possible that the information discussed is no longer current. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. If you wish to ask a question, please press star then one on your touchtone phone. You’ll hear a tone indicating you have been placed in the queue. These instructions will be repeated when we are ready to begin the question-and-answer session. Should you require any assistance during our call today please, press star then zero. A specialist will assist you offline. As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Mr. Wes McDonald, Chief Financial Officer of Kohl’s Department Stores. Please go ahead.

 

Wesley McDonald:Chief Financial Officer:

Thank you. Good morning. With me today is Kevin Mansell our Chairman, CEO, and President. I’ll start today’s call by walking through our operational results. Kevin will then provide more details on our greatness agenda initiatives and then we’ll take some of your questions.

Comp sales decreased 3.9% for the quarter. Transactions per store were down 4.8% for the quarter. Average transaction value increased 90 basis points, comprised of 190 basis point increase in units per transaction and 100 basis points decrease in average unit retail. From a line of business perspective, Men’s and Women’s were the strongest categories and Home was the weakest. On a regional basis, the Northeast, Mid-Atlantic, Southeast, and Mid-West were the strongest. The West and South-central were the most difficult regions.

Gross margin decreased approximately 140 basis points for the quarter, about 10 basis points better than we got it to last quarter. Most of the margin decrease was due to clearance mark downs, taking the clear excess merchandise. Our SG&A expenses decreased $8 million to $1 billion for the quarter. We effectively manage discretionary spending but we are not able to leverage expenses on a sales decrease. As a percentage of sales, SG&A deleveraged 75 basis points. Store payroll dollars were slightly higher than last year as we pulled back on staffing to align with sales but did not leverage. Marketing deleveraged on higher spending associated with our Academy Awards sponsorship and higher digital spending. IT expenses also deleveraged.

Partially offsetting these increases were higher credit income and lower corporate expenses. By credit share sales was 58.8%, up 81 basis points from last year. Logistics expenses were also less from last year.

Depreciation expense was $234 million, the $7 million increase over last year is primarily due to higher IT amortization. Interest expense decreased $5 million to $79 million for the quarter. The decrease is due to favorable interest rates achieved during a $1.1 billion debt refinancing last summer.

Our income tax rate was 37.6%. The tax rate increased approximately 230 basis points as last year’s first quarter included some favorable state tax audit settlements that we didn’t have this year. Net income on a reported GAAP basis for the quarter was $17 million and diluted earnings per share were $0.09.

For the quarter, we reported $64 million of expenses related to the store closures and corporate restructuring that we announced early this year. The charge includes $53 million of impairment charges on the 18 stores which we closed later this year. The remaining $11 million is primarily termination benefits for employees impacted by the closures and the restructuring. We expect to incur an additional $105 million to $110 million next quarter which is slightly higher than our original estimates as we have more store associates than expected choose termination packages over relocation to another stores.

Substantially all of next quarter’s charge will be to record lease related liabilities for stores we are closing prior to lease termination. Excluding the store closures and restructuring charges, net income was $58 million and diluted earnings per share was $0.31 per share. We opened three new stores during the quarter including our first two smaller 35,000 square foot format pilot store. We currently operate 1167 stores. Gross square footage is 100.6 million square feet and selling square footage is 83.9 million square feet. We also opened two Off-Aisle stores in Milwaukee market.

We ended the quarter with $423 million of cash and cash equivalents, a decrease of $772 million from last year. Inventory dollars per store were 2% lower than the first quarter of 2015, consistent with our guidance of down low single-digits despite the challenging sales environment. Units per store were essentially flat as increases in the national brands were more than offset by decreases in private and exclusive brands. AP as a percent of inventory decreased 650 basis points to 32.9%.

All of the decrease is due to lower receipts. We also received some benefit in Q1 and Q2 of last year due to early arrive and receipts related to conservative planning after the port disruptions in fall 2014 and spring 2015. Receipt flow year-over-year should be normalized by the third quarter of 2016.

Capital expenditures were $177 million for the quarter consistent with the first quarter of last year. Weighted average diluted shares were 184 million for the quarter. During the quarter we repurchased 2.8 million shares of our stock. We end of the quarter with 185 million shares of stock outstanding.

On Wednesday our Board declared a quarterly cash dividend of $0.50 per share. The dividend is payable on June 2 to shareholders of record on June 8.

I’ll now turn it over to Kevin who will provide additional insights on our results

 

Kevin Mansell:Chairman, Chief Executive Officer and President:

Thanks Wes. The first quarter was well below our expectations and sales line as a very strong start to the quarter in February was overcome by softer than expected pre-Easter business and then a further deterioration in April versus our plans. Our seasonal businesses followed a similar trajectory as the total company sales trend.

A little more color on our sales, Men’s and Women’s were better than the company with strength in active across both of those categories. Basic and Dress Clothing were relatively strong in Men’s, while Juniors and Intimate were better in Women’s. Kids, Accessories, and Shoes were similar to the company with relative strength in Boys and Girls, Udi and Fine Jewelry as well as Kids Shoes. Home was below the company with Bedding, Luggage, and Seasonal being outperformers with the balance being more difficult.

We did do good job of managing our inventory, gross margin, and expenses during the quarter. Our gross margin rate dropped 140 basis points versus our projection of 150 basis points of a drop due to better than planned promotional mark downs. Our inventory per store is now down 2% in line with our expectations at the beginning of the year.

We continue to expect to make progress on inventory throughout this year and we are targeting end of second quarter levels of down mid-single digits on a per store basis.

On the SG&A line, every area of the company was able to pull back on their planned expenses to allow us to spend slightly less than last year in dollars versus our expectations originally of a 3% to 4% planned increase. The team has shown agility to be able of pull back on expense in a difficult sales environment.

Now I’d like to take a few minutes to update on you some of the initiatives within the Greatness Agenda and our focus on product initiatives. On national brands in the first quarter, we launched Stride Rite in Kids Shoes and relaunched new balance in Active area. Launch of Strive Rite helped Kids Shoes to outperform and new balance achieved 19% comp in the quarter.

Our national brands in total were slightly positive on comp basis with Active and Wellness leading the way to the mid-single digit comp. Nike continues to be very strong achieving a mid-teens comp in the quarter. National brand penetration increased approximately 200 basis points in the quarter. We relaunched SONOMA in the first quarter and have been happy with the results from both Men’s and Women’s as they have seen improvements versus their prior trend.

During the quarter we also launched Reed from Reed Krakoff in handbags as improving our Accessories assortment has been a goal for us and it’s off to a very good start.

Our localization efforts are proving out and 2016 will be the year that all of our planning efforts for unique assortments by store will come to life in 90% of our store fleet. As we enter the second quarter, approximately 70% of the assortment is now localized. We saw might slipped in quarter one but would expect the effect of this to improve as we gain more experience and enter key transitional periods by second and the third quarter where localized assortments should make a bigger impact.

In our focus around Omnichannel initiatives, we continue to see strong results in digital demand with online generated demand achieving a mid teens increase as expected. We continue to invest in technology and training in our stores to allow us to ship-from-store and provide buy online, pick up in store capabilities providing faster shipping times and more convenience for our customer.

In the first quarter, ship-from-store was 15% of our online demand and buying online, pick up-in-store was 3%. We believe we have a big opportunity there and we’ll continue to test marketing data option throughout the year to make it top of mind in our customers for holiday. Our Kohl’s app was used by more than 12 million customers and growing and in the quarter, we added the capability to use Apple Pay with our Kohl’s Charge Card and our Yes2You Rewards Loyalty Program, becoming the first retailer to integrate its private label charge card and loyalty program within Apple Pay.

On the store update front, we opened two small format stores during the quarter and have a lot of learnings are ready that we will incorporate into our fall planned openings.

Big learning was a need to be flexible on our offerings as each trade area is unique due to the relatively small size of the trade areas and our smaller store size as well. Mobilization we believe will be critical for our success in this initiative. We are also opened to Off-Aisle stores in the Milwaukee area, one is off price center and one in strip center. We are pleased with the initial results and are monitoring effects on cannibalization which we would expect to be very small and in late May, we will open 12 feeder stores to gauze the possibilities in the outlet space.

Moving on to expenses; I mentioned in the yearend call that we are beginning an effort to reduce our leverage point on expenses from a 2% comparable sales increase to 1.5% comparable sales increase. Despite the fact we are experiencing significant wage pressure in our stores and intend to continue to invest in our Omnichannel initiatives, we feel more confident that we will be able to achieve that goal. I think you can see that given our ability to manage expenses in the first quarter. We expect to find additional savings throughout the year and it allows us to achieve our expense goals.

In conclusion it was definitely a difficult start to 2016. It’s hard to gauge how much of the sales shortfall is related to macroeconomic factors and how much is related to the company-specific factors. We’re definitely focused on improving our sales but especially our traffic to brick-and-mortar stores. We are re-looking at it all our marketing vehicle to see where we drive more business to the stores as well as ensuring our value message is particularly strong.

Definitely not satisfied with the results so far and we will take action to remain top of the mind with the families that we serve.

And with that, we’ll be happy to take your questions.

 

Question & Answer

 

 

Operator:

And ladies and gentlemen, if your wish to ask a question please press star then one on your touchtone phone. You will hear a tone indicating you have been placed in the queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time and one moment please for our first question.

And first, we have the line of Matthew Boss with JPMorgan. Please go ahead.

 

Matthew Boss:JPMorgan:

Hey, good morning guys. So what are you guys seeing from a promotional standpoint at the mid tier out there particularly how did your private label perform and while your inventories are in line, do you see any need to be aggressive with price to drive traffic?

 

Kevin Mansell:

Well pricing I mean is definitely an element of our review in the comments that I made around market math. Our private brands underperformed our national brands, national brand penetration went up almost 200 basis points again. The trend line on some of the private brands particularly SONOMA definitely improved when we re-launched it. Pricing is always a big factor.

I don’t know that we would call out any particularly noticeable promotional effort by other retailers that I see having a major effect on how we are going to go to market but when we think about improving the trend line from the disappointment in the first quarter to an improved number in second quarter, we are definitely looking at pricing, we’re definitely looking at marketing vehicles and the level of marketing we need to spend to get traction particularly in our traffic in brick-and-mortar stories.

 

Wesley McDonald:

Yes I mean I think it’s less about pricing the prior brands and more about product. We have some private brands that are doing very well like so in Juniors area. Juniors continued its strength carried over from last fall where other private brands are a little tougher. So I think it’s just a combination of both.

 

Matthew Boss:

Got it and then on the follow up, on capital allocation, Wes, what’s the minimum cash balance you are comfortable with on the balance sheet and then just the best way to evaluate share repurchase versus almost a 5% dividend yield going forward?

 

Wesley McDonald:

Well I think the number one priority for cash is to fund our growth so we’ll continue to invest in digital technologies and to drive that business or our CapEx for this year is $825 million that remains the case. We are committed to growing the dividend about 10% and the remainder of that would be leftover for share repurchase so we’re still targeting $600 million for the year. We were a little later that this quarter, we’ll take a look at our grid and put in a new grid and target the same $150 million for this quarter. For the end of the year, where we ended last I think was around $700 million.

That’s about where we want to be. So I don’t see any particular reason to go lower or higher than that so given in our projections, we would still be able to buy back $600 million this year.

 

Matthew Boss:

Great. Best of luck.

 

Wesley McDonald:

Thanks.

 

Operator:

Our next question’s from Mark Altschwager with Robert W Baird. Please go ahead.

 

Mark Altschwager:Robert W Baird:

Good morning and thanks for taking the question. Just on the inventory, you did a nice job hitting your plans. However, given the much weaker than expected sales environment it is still running a bit ahead of comps. So I guess how much flexibility do you have to take further step down on those receipts for the back half for the year and then how should we think about that inventory progression?

 

Wesley McDonald:

I think the back half of the year is consistent with the second quarter, we would expect our inventories to be down mid single-digits on a per store basis. So, further reduction from where we are today and that’s really going to be a function of buying less receipts which we’ve planned and work with our vendors on so I suspect, absent any kind of change further downward, we should be able to hit those end of quarter at both.

 

Kevin Mansell:

I mean at the other think I would add Mark is just, there wasn’t a lot to get very excited about it in their first quarter performance but one thing that I think the team did well and I think we are going to be well positioned regardless of where the business goes remaining of the year is we -- inventory and we are down to last year. We are going to be down further than that as we go into the third quarter and demonstrated that I think the ability to be agile and bring on receipts as necessary. So that I think is a little bit of a bright spot.

 

Mark Altschwager:

Thank you and then a quick follow up on SG&A, you addressed the longer-term leverage point but how sustainable is this can a down 1% run rate should the negative comp environment continue over the next couple of quarters, just talk about the puts and takes there. Thank you.

 

Wesley McDonald:

Well I think our SG&A guide like you so was to leverage at a 1.5 comp. I expect us, I think that translated into like 1% to 2% dollars for the year if I recall it correctly. We are going to have to be lower than the 1% and I think we showed that we could do that this quarter. It wasn’t just related to any one thing as Kevin mentioned.

Every area of the company participated in bringing down their expenses. We have a lot things underway to further reduce expenses that allowed us to get to that point and that will continue to that come to fruition throughout the year but my expectations for SG&A for the year would be somewhere between flat to up one so I think we can take it down a level from where we are today.

 

Mark Altschwager:

That’s great. Thank you.

 

Operator:

And next go to Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

 

Lorraine Hutchinson:Bank of America Merrill Lynch:

Thanks. Good morning. You had previously guided to a 0% to 1% comp for the year, is that still on the table and can you just discuss the biggest drivers to try to turn that trend around over the next few quarters?

 

Kevin Mansell:

Sure. I mean I think our annual guidance whether it was on the top line which was...

 

Wesley McDonald:

Plus or minus half a million...

 

Kevin Mansell:

Exactly.

 

Wesley McDonald:

That was essentially flat to one...

 

Kevin Mansell:

...which as Wes said was essentially flat total and a modest increase on a comp basis and also EPS. The first quarters you know remains a really small percentage of the total year both on a sales basis but in particular on a EPS basis. I think the first quarter our expected earnings per share was probably around $0.40 which would be less than 10% of the annual expectation that we gave. So we are really just barely into the year, for us to look forward and make some forecast change based on a really sharp percentage of the year and a very small percentage of that total I think it just be wrong.

We are obviously making plans for being more defensive around things as Wes said like inventory. I like expenses to be prepared to bring down but we still feel good that the sales churn will improve in the second quarter and we definitely feel like it will own improve further as we go into the back half.

 

Lorraine Hutchinson:

And what are the reasons behind the good feelings around comp improving?

 

Kevin Mansell:

Well I think on a comp basis, we have articulated them in the beginning of the year guidance. One of the big things that you know hurt us in the third and the fourth quarter last year was a build-up in inventory that really took away all of our flexibility to adjust receipts into categories that were outperforming other areas. And so one of the big things I think Wes and I both feel really good about is our inventory position puts us in a space where we can feed the businesses that are performing. We do have some businesses that are outperforming other businesses in spite of lower traffic levels, particularly lower traffic levels in March and April.

We have categories that are actually doing well. We talked about some of those and so we wanted to be in row where we can feed those. Do you want to add anything, Wes?

 

Wesley McDonald:

Yeah, I mean I think our expectations for the rest of the year would be flat to one for the remaining quarter so that when you do the math, you guys are smart, that probably puts you toward the lower end of the top range just maybe even a little bit below which is why we think we need to take our expenses down so achieve the earnings guidance that we gave. As Kevin mentioned, it’s less than 10% of our expectations for the earnings for the year so we feel like there is a lot off room in front of it that we can do different things to try to make that earnings.

 

Lorraine Hutchinson:

Great and then is there any wriggle room on the CapEx that are places that you could potentially cartel to improve the cash-flow that way?

 

Wesley McDonald:

No I think I’d be more likely to try to put the screws to them and to a little bit more, we have to invest for the long-term. Much like Macy’s reported yesterday we had a very strong February with the first positive comps since 2011 then saw a pretty dramatic drop off the same timing that they mentioned. So, we’ll have to see if that drop off is a macro induced thing if its company specific, we’ll know a lot more as more companies report later this week. But it will get warm. We have shorts the sell and we’re in a good inventory position. So I think at some point people will need those clothes and will come buy them.

 

Kevin Mansell:

I mean the area, I think Wes and I both agree, the area that are probably getting more scrutiny, and don’t know they didn’t necessarily impacts this year’s actual capital expenditure but looking how this year through you are doing your three forward are probably CapEx around technology plus it’s definitely getting more scrutiny from us as we look at whether or not the investments we are making are giving us the return that we expected to get from them and the second thing is definitely capital that’s dedicated towards fulfillment of our online generated demand regarding sort of that capitals in our stores, or that capital is in technology, or that capital is in a fulfillment center either existing or future to come. Those two are probably risen to the top in terms of areas we are looking at.

 

Wesley McDonald:

Yep.

 

Lorraine Hutchinson:

Great. Thank you.

 

Kevin Mansell:

Thanks.

 

Operator:

Our next question’s from Paul Trussell with Deutsche Bank. Please go ahead.

 

Paul Trussell:Deutsche Bank:

Hey, good morning. Just wanted to discuss a little bit further the composition in cadence of the comp. I believe in the fourth quarter and generally through 2015, transactions per store were roughly flattish and still given that the down 4.8 this quarter and the solid start in February, is it fair to assume that you are exiting the quarter those last four or five weeks kind of down 8%, 9%, 10%. And if so, maybe you can give a little bit more detail on the seasonal goods’ performance specifically, Wes I know you mentioned weather that that shorts warm selling.

So maybe you can give us a little bit more of the handle on what kind of bounce back you might expect if the weather does warm up. And then lastly on the comp, AUR was down 100 basis points. Wes do you expect that to be just unique to the first quarter given the aggressive promotions?

 

Wesley McDonald:

Yes. Those are a lot of questions for one but I’ll try to answer most of them. The AUR is down mostly for clearance side. I would expect that to be a one-time phenomenon in the first quarter.

Your math on the comp for the balance of the quarter was incorrect but it would directionally correct if you are positive in the first month, you got to be negative in the last two. From a seasonal perspective, our season were good in February, poor in March and April, kind of consistent with the comps. They were worse than the company by a couple of hundred basis points. It’s a fairly significant part of the business but as we mentioned, Home was the worst category which wouldn’t have as much seasonality to it.

We got to improve traffic. That’s somewhat of the marketing issue that we’ve got to resolve. It also relates to products. Once we get them in the store, our conversion rates are actually improved, we just have got them into the store.

 

Kevin Mansell:

And you know Paul just to be clear on one thing, as we look at drivers of comp whether they periods of positive comp we have or periods of negative comps like first quarter, we try to prioritize in our minds what the drivers are so we can attack those. Things like seasonal category performance which weather often drives that, we don’t think is at the top of the priority list in terms of things that were a driver of negative comp in the first quarter. Our seasonal categories underperformed for sure but they didn’t significantly underperformed. So high, I don’t think Wes does either, put them at the very top.

 

Wesley McDonald:

Yes.

 

Kevin Mansell:

We put things at the top I think we mentioned there seems to be some more macro issue given performances of both ourselves and competition. There seems to be some change in consumer behavior in terms of traffic coming into our stores may be because of that. We definitely have opportunity in our marketing area to improve our effectiveness as we moved in our medium mix from a more traditional whole medium mix to a much more future state. We’re finding things that haven’t worked as well that are probably going to have to be course corrected in the near term to get a better result and then eventually yeah, you get down to seasonal categories and we look at it and say yeah you know the seasonal categories which are very significant percent of our total business, under-perform and if they performed as normal we would have done a lot better but I don’t put it at the top.

 

Paul Trussell:

That’s very helpful color. Lastly for me you stated that the comp guidance remains flat to one for the balance of the year. You modestly adjusted SG&A dollar growth I think to now kind of more flat to up one for the balance of the year. Just on the gross margins Wes flat to up 20, is that still attainable in your view, and if so, should we may be push a little bit more towards the third and fourth quarter as opposed to 2Q just given the channel’s still seeing some traffic weakness but just help out on the gross margins. Thanks.

 

Kevin Mansell:

I mean before Wes mentions anything himself, I would just tell you Paul and just to be clear. We are not updating anything. We are updating our sales, we’re not updating our margin, we’re not updating our SG&A, we are definitely not updating our earnings. The first quarter is the small percentage of the year and there is not enough information we see to put us in a position where we feel that we could now relatively tell you some type of update.

We are just sort of targeting you to areas in which we are going to put more and naturally if you have a disappointment at the beginning of the year in sales, one area that is going to bubble up and we are going to put a lot more effort, around is expense control and bringing down our ability to bring down expenses. Another area naturally is inventory and ensuring that we not only can meet the lower levels of inventory we had planned going in to the second and third quarter, but actually give ourselves ability to even bring it down further.

So I realize that to some extent maybe its nuance but I think it’s an important distinction. So we are trying to be transparent and these are the things we are doing in response to overseeing but there is no update to anything.

 

Wesley McDonald:

And in terms of margin, I mean I think we said in the beginning of the year, we have more opportunity in the back half for gross margin improvement, just given by our poor performance in the fourth quarter that remains the same

 

Paul Trussell:

Fair enough. Thanks guys.

 

Operator:

Our next question’s from Oliver Chen with Cowen and Company. Please go ahead.

 

Oliver Chen:Cowen and Company:

Hi. Thank you. Just as you do look back to this quarter, could you brief us on any things you might have done differently if that was possible and then does this tweak in terms of how you think about the boarder Greatness Agenda, just as you think about your strategic plans? Also on the traffic situation and regarding the softer pre-Easter and then the April what -- did you have any sense of if it was the different, it was a specific demographic? Was there something going on with a younger generation versus all there in terms of thinking about where you were more sensitive and losing traffic? Thanks.

 

Kevin Mansell:

I can probably try to take a whack Oliver to first part and Wes can talk to you about the traffic drivers. On the essentially I think what you are asking is, are there different actions you would have made had you known what was coming in terms of traffic into your stores and I kind of view that in the short term and the long-term.

On a long term, right now, we actually feel pretty confident that the things we’re working on are the right things and they remain the right things. Clearly, speed to get to where we want to be in our plan on those actions needs to be accelerated. We got to get there faster. There is no question about that.

Emphasis might change so we typically mid-year kind of review on a long-term plan and our moves underneath the Greatness Agenda and we might emphasize more one move versus another based on what we are seeing. But I think fundamentally we still feel very confident about the plan, that the plan is a right plan and our actions are the right actions.

In the short term I think Wes and I both say, hey I think we wish that some of our event, handles and effort were better if we had known that looking on there was only macro-traffic issue and in particular I would say in April and had we known that some of the results of the change in our mini mix was going to have the effect it did and again mostly I’d say April, we would have done things differently and obviously informed by that, we are making changes to our June and July plans to accommodate.

 

Wesley McDonald:

Yeah, I mean you got four or five data points out there from people that have already -- it. I would be shocked if not everybody has some kind of down-step change from fourth quarter, first quarter the absolute value of which depends on the relative strength of the sector that they’re in from a retail perspective but I think one of the things, we’re in the process of looking at is we have made a pretty dramatic shift from print and direct mail onto digital. That’s definitely helped drive the digital business very well. We may need to reap that mix to reach some more of our traditional customers that get their information from print.

 

Oliver Chen:

Okay and on the economic front, you gave a lot of helpful details but we are struggling a little bit because the middle class has rising minimum wages, lower gas and somewhat good unemployment. So how do you help us reconcile, just very puzzling in terms of those trends versus what we’re seeing in retail at large.

 

Kevin Mansell:

They’re not buying apparel. I mean that’s a simple answer. I think they are spending money on, I read some of your notes. I agree with them.

They are spending money on restaurants and experiences until we get some more excitement in apparel, it’s going to be remain in my opinion a replenishment market.

 

Oliver Chen:

Thanks for all the transparency. Best regards.

 

Kevin Mansell:

Thanks.

 

Operator:

And, next we’ll move to Neely Tamminga with Piper Jaffray. Please go ahead.

 

Neely Tamminga:Piper Jaffray:

Great. Good morning. I was wondering if you could talk a little bit more about the Home category. It seems like there were some things that are winning but some things that are not and it seem dramatic that they’re working. Are they product cycle related? You know you’ve heard from -- just kind of called out neutral bullet and some other product cycles seem to be towards the end so curious what’s going on there for you guys? And then last on the assortment planning initiatives which you think are a little, the whole effort makes a lot of sense for you guys, wondering if could share any sort of wins around the metrics whether it’d be top-end or kind of margin improvements that you are seeing from those efforts? Thank you.

 

Kevin Mansell:

Sure, I think from a localization perspective, we have seen a slight sales lift. Certainly given our comps, it’s not enough to drive the business and I suspect that spring we’ll see a much improved margin in those categories. I think we mentioned in the call we are up like 70% entering the quarter. The margin benefit since about 30% were just brought on board in the first quarter probably want to occur it to the fall so I think that will be back half loaded but hopefully we can get some sales benefits as we move throughout the year. The Home business was difficult in areas like kitchen electrics, I think was a different category in electronics...

 

Wesley McDonald:

Neely, what I’d say on the Home thing is, the few things we always look at in Home are always of course you called the one out which is product category performance and typically in normal cases what we will see is Home sort of moves together and hard home or soft home might be weaker or stronger but it sort of moves together. This quarter there were definitely category outperformances underperformances to a greater degree than normal so we are still sort of going through all that and trying to better why that would be. I don’t know that it’s so much lifecycle related.

There’s certainly cases how that perhaps you calling out may be the juicer category might be one that that’s true of but I think product cycle but more importantly category performance we always take a really critical look at and then the second one is Home is more impacted than any other category we sell by marketing and so when our marketing is not as effective it needs to be, or our event strategy or our medium mix strategy is not as effective as it need to be, Home dramatically will distort that you will see it in the performances of the business which basically means we are not reaching the core customer in the way that we need to reach them. So I don’t know that we have decided one is more critical in terms of our underperformance in the first quarter than the other but I think that they both play a factor but I think that frankly the event handles and pricing strategies probably play a bigger factor in the first quarter.

 

Neely Tamminga:

Thank you.

 

Operator:

Our next question’s from Paul Lejuez with Citi. Please go ahead

 

Paul Lejuez:Citi:

Hey. Thanks guys. It sounds like you guys are leaving a door open that there may be some sort of a bigger picture macro issue going on so just curious if that it is the case if that is acceleration, why the assumption that comps improved from what we saw in the first quarter and I guess additionally I am just trying to tie that still together with you know as inventories come down, it seems like it’d be a little bit more of a challenge to drive comps. So just trying to tie that together, I think you guys have had some examples where you’ve been able to turn faster. If you could may be just share those with us and help connect those dots. Thanks.

 

Kevin Mansell:

Well I’ll let Wes talk about the last part of it...

 

Wesley McDonald:

Yes that’s a good question.

 

Kevin Mansell:

We just really want the stake -- on the, you know, one of the things we try to make clear in our call to be honest with you Paul is that right now I think we are having a hard time determining how much of our underperformance was more related to macro factors which you are right would have more implication on future performance and how much is related more to our company specific factors which could have do with inventory, carryover, could have to do with marketing and effectiveness particularly on events that critical times could have to do with the transition because of weather particularly in the Northeast and Mid-West. I think we are still grappling a little bit with that. So we are definitely not in a position that we’ll stake, putting a stake in the ground and saying, hey, this one is the big driver and therefore that means this for the rest of the year. I think we just saying, hey, in total transparency these are all the things we see.

 

Wesley McDonald:

Yes there are definitely some company-specific issues from a marketing perspective that we’re working on rectifying. So we know that that affected our first quarter but I mean I think as you see more people report, I’d be shocked if anybody said they had a great March April, we’ll see.

From an inventory perspective, I mean one of the things Michelle and the Merchant and the Product Development teams have been working on very hard as increasing the percentage of our receipts that are sourced faster. So one of the success stories has been our sale brand where we have moved a lot more of the production to the 12 to 14-week lead time from writing the order to getting in to the store. That’s moved up from a percentage basis quite a bit. They comped mid teens this quarter on a inventory reduction of a couple -- 2% same as the company.

So we are trying to move more of our private and exclusive brands to that. Over the next couple of years, we want to move from 20% of that being sourced within that timeframe to about 50% of our product. Some of the don’t make much sense that are very cost sensitive and don’t change a lot like Men’s cargo pants or a lot of kids clothes that you are looking for the absolute lowest price because that customer’s price sensitive but many of our Women’s brand both in private and exclusive need to move more quickly to that fast fashion type of model and Michelle and the PD guys are driving very hard and doing that so it’s really the first example that we’ll do more of that as we move throughout the year with brands like Simply Vera Vera Wang and Apartment 9 and move into next year.

 

Paul Lejuez:

Got you. And then just to follow up with the lower inventories coming, are we also to assume that tied to that would be a less promotional stance that you guys take you manage inventory down with singles for the second half.

 

Wesley McDonald:

I think we need to be aggressive on marketing because if you think about the possibility of just generally slower traffic in the sector than the important thing is to take share and so part of taking share has to do with certainly the amount of marketing you do and part of it has to do with selectively and thoughtfully applying good pricing strategy, value strategies.

I mean fundamentally Paul, in the short terms if you are running a business like ours, when you are faced with surprise because I think we really were surprised by the March, April underperformance. In the short term, you’ll lower inventory, you’ll lower expenses but you add marketing and drive value. That’s what you do to change the trend of our business proactively. You can’t wait and hope that things would get better and you have to sort of plan that things will continue this way and therefore this is a way to do it in the longer term then other things come in to play and you start thinking about capital allocation and how much money you’re spending but that’s a much longer term view.

So I we’re doing the first part.

 

Kevin Mansell:

Yeah. I think we are going to be aggressive on promotional markdowns. Where we are going to save the money is on the permanent markdowns. That’s what is getting us into trouble over the last couple of years from a gross margin perspective.

It’s not because we’ve had to promote more than normal as we’ve ended the season with too much inventory. So, we have plenty I know you and I are probably never going agree on this inventory thing but we have plenty of room to reduce our inventory of that affecting comp. We are so far from where we need to be and are going to do it measured over the next five years that I think it’s not going to affect our ability to drive a comp. Getting people on to the store, is what’s going to affect it if that were to succeed from a comp perspective.

 

Paul Lejuez:

Well, we’ll see. Thanks and good luck.

 

Operator:

Our next question’s from Brian Tunick with RBC Capital Markets. Please go ahead.

 

Brian Tunick:RBC Capital Markets:

Thanks. Good morning, guys.

 

Wesley McDonald:

Good morning.

 

Brian Tunick:

Two questions; one is on digital. I think you guys said that digital grew mid-teens. I think you’ve originally talked about a 20% growth rate so just curious on may be what was happening there? Was that just sort of a slowdown in the broader environment or is it a change in some marketing tapped and for a margin perspective in digital, how do you think about the profitability of your e-com business today versus the bricks-and-mortar business and then the second question on your store base, I guess the closing of these 18 stores may be what metrics will you be watching for as you think about what the right size of your store base should be I guess in this new world. Thanks very much.

 

Kevin Mansell:

You are pretty new to the story so I have been a early I guess realist on e-com versus brick-and-mortar. It’s not as profitable and I think everybody is coming around to that. Having said that, I think we missed our plans slightly in digital was only on a couple of days so I don’t think there is a material slow down and the same thing that affect traffic in the stores, if you don’t need shorts, you’re not going to buy them online just because it’s easier and can ship to your house for free, you’ll buy it when you need it. So I think that’s I’m not too worried about digital from that perspective.

We kind of guided to a 15% to 20% increase in our three year plan and we saw the biggest increase last year and the back half and I suspect that would be the case this year too as people find it more convenient in the fourth quarter to shop online. From a store base perspective, we closed every store really that had negative incremental free cash flow. That’s how we look at it. We even closed a few stores that were slightly positive.

We need to get, we needed to get a base of stores that were significant enough to see what happens to both online business and surrounding sister stores when we close stores as well as what happens when we close a couple of stores in one particular market. So we’ve only closed prior to this year probably five or six stores in my thirteen years here. So we didn’t really have enough data points. We’ll have to run the numbers that we move throughout the year know obviously if comps don’t improve in the stores there’ll be more stores that tip-over to negative cash flow and we’ll look at that on an annual basis.

But for the most part, we have stores that are very much generating cash flow. I don’t think you are going see us close a significant number of stores every year. I think 18 was sort of a starting plan and I think it would be a lot lower than that of we decided to close stores for this year for example.

 

Brian Tunick:

Super. Thanks very much. Good luck.

 

Operator:

Next we’re going to Dan Binder with Jefferies. Please go ahead.

 

Daniel Binder:Jefferies:

Thank you. My question is regarding your comments earlier about expecting improvement in Q2 and I was just wondering if that was in part based on what you were seeing in the last couple of weeks.

 

Kevin Mansell:

We look at performance over time Dan. It’s really fundamentally driven by actions that we take. So we always assume that whatever the underlying trend is, it’s not going to change in unless we do something to make it change. So we would never give you a forecast for the quarter or for the year based on some performance we had over the last ten days beginning of the quarter. It’s always driven by a look back into underperformance or sometimes overperformance and then actions we take so that they’re usually tied together.

 

Daniel Binder:

That said, has there been some sequential improvement in the last couple of weeks?

 

Kevin Mansell:

We never talk about performance inside the quarter, Dan.

 

Daniel Binder:

I thought I’d try. My second question is with regard to just market share. I know, we’ve talked about Wes Amazon I guess showing up in the top 10 on apparel now or maybe towards the bottom of the list. I am just curious as you look at market share data, they are recognizing that you and others were soft. How does your individual market share data looked for different categories that you are selling?

 

Kevin Mansell:

I think we’ll be a lot little better on that Dan and probably about a month that should Data is -- not as tightly timed to the end of reporting periods but we’ll have a little better insight. I mean I don’t think there is going to be any big news in there. I suspect companies who are given up more share in particular categories will continue to give up more share. We have been able to hold our share but not gain in that share and I am not going to be surprised if that wasn’t more of the same in the first quarter because generally you’ve heard some big retailers who have a large share in our categories report and they have had underperformance as well. So I don’t think there is going to be any big news in there I really don’t.

 

Daniel Binder:

And my last question if I could just on product, you talked about the importance to that. You’ve obviously had some activity this quarter with some brand launches and relaunches. Can you give us a sense as to whether or not there are new international brands, even if you can’t talk about specifics, if there are more that you expect to announce this year and what other product relaunches you may expect over the balance of the year as well?

 

Kevin Mansell:

I definitely would expect to continue to be able to talk about new brands coming in to the store over the year. You kind of know well the life time cycle on brand and projections and it is next to impossible to be able to share with you a new brand that would actually launch in the same year. So any news we have on brand launches coming and I do expect that there will be some, will really impact our 2017 performance.

 

Daniel Binder:

Okay. Thank you.

 

Kevin Mansell:

Yep.

 

Operator:

Our next question’s from Stephen Grambling with Goldman Sachs. Please go ahead.

 

Stephen Grambling:Goldman Sachs:

Hey. Good morning. Thanks for taking the questions. I have two follow ups I guess on Brian’s questions earlier.

First what amount of sales recapture from the closed stores are you factoring in your guidance.

 

Kevin Mansell:

Factored zero in it.

 

Stephen Grambling:

Alright and then second, you highlight these macro concerns impacting traffic but there are certainly some secular undercurrents around online. If the re-traffic at your stores and perhaps across the group is to persists, how would you evaluate the potential need or even the potential benefits from consolidation as a strategic alternative?

 

Kevin Mansell:

Well I mean you know as a regular matter of business and our regular discussions at the Board level, we’re always looking at every single option that we have looking forward Stephen. So there’s nothing that’s currently happened in my mind would accelerate that discussion and at the same time there is nothing that’s currently happened that would decelerate it and it gets always under table. We generally have had a view that share in categories that we operate is really important so having scale is an important factor to long term success and so right now the plan that we’ve described to you gets us the scale by driving essentially our business organically. We certainly have these new tasks which I think have the possibility of paying off and things like high-yield concept or outlook concept first one is with fewer brands and I still think that the small 35 case store is going to be a meaningful contributor to our long-term performance.

I don’t know that that particular store size will add a lot of growth but I think it would address what we both is a really key factor right now which is, there is too much retail square footage and so as some of our largest stores come up, we’ll definitely would be looking at our smaller store footprints as ways to continue to keep presence in the trade area but do it more productively. Hopefully that answers your question but there is nothing, there is nothing that’s happening right now that we would share with you specifically around consolidation.

 

Stephen Grambling:

That’s very helpful but are there kind of real synergies that could be captured in consolidation from rationalizing the supply chains in store base and e-commerce platforms?

 

Kevin Mansell:

Well usually what you find on that we’re probably kind of moving out of the discussion around our business into more strategic stuff. I don’t want to spend a lot of time but I think generally what we think on these things is given a over-stored environment and thinking about possibilities to grow that are additive on the top line, we probably are going to put more focus on the cost lines. So as we look at businesses, certainly if there is businesses we think can really improve our competencies in a particular category, we might consider it but otherwise if we are looking at scale, we are looking at places where we could take a lot of cost out of the business because I think that’s just the right thing to do.

 

Stephen Grambling:

That’s very helpful, thanks so much. Best of luck in the back half.

 

Kevin Mansell:

Thanks.

 

Operator:

Our next question’s from the Richard Jaffe with Stifel. Please go ahead.

 

Richard Jaffe:Stifel:

Thanks very much guys and just a follow on question. Regarding the content of the inventory, obviously dollars are down. Are you guys convinced the balance is correct, national brands to private label, and that the seasonality is also where it should be given it’s already May and then just a follow on question regarding marketing. Thanks.

 

Kevin Mansell:

National versus private I think we’re pretty well...

 

Wesley McDonald:

Yeah. National was up when the other two are down and that mirrors their comps so I feel good about that.

 

Kevin Mansell:

It always helps to sell more seasonal goods earlier in the season than it does selling later. You know that I am sure really well. So having a little less seasonal goods is always a good thing. But we actually do have less seasonal goods than last year.

So I think we are positioned well but I get it, there is no other answer than to say, hey if you’ve had a tough seasonal performance in the first quarter, isn’t it nice to have a lot of less going in the second quarter, yes, of course it is. But we just have to deal with what we have right now. It’s not a date factor, I think Wes probably knows it...

 

Wesley McDonald:

Yeah. When we bought, we were season down 9% so I feel comfortable that we’ll be in a good inventory position at the end of the second quarter unless we see a step change down from where we ramp.

 

Richard Jaffe:

No. Don’t say that way.

 

Kevin Mansell:

Well.

 

Richard Jaffe:

Yeah and in marketing you mentioned that that’s be a source of more tension and I assume more expenditures. Can you talk about perhaps how much and also...

 

Kevin Mansell:

I don’t think it’s going to be more expenditures. I think it’s going to be looking at what we are doing and shifting weight within the various vehicles. I don’t it’s necessarily going to be more spending.

 

Richard Jaffe:

Okay. Any more specifics about direction or just wait and see?

 

Kevin Mansell:

We have a team of our best and brightest trying to investigate everything right now so at a high level I would think we’d be trying to test a little bit more weight into print and direct mail and maybe pull back from digital a little bit.

 

Richard Jaffe:

Great. Thank you very much.

 

Kevin Mansell:

Thanks Richard.

 

Operator:

Our next question’s from Bob Drbul with Nomura. Please go ahead.

 

Robert Drbul:Nomura Securities:

Hey. Good morning, guys.

 

Kevin Mansell:

Good morning.

 

Robert Drbul:

Kevin, can you talk a little bit about the launch of the Reed business? I guess what you’ve learned in stores versus online, the different categories handbags versus clothing, price points at this point so far?

 

Kevin Mansell:

I mean generally, I think we characterize it as a success for sure. I actually don’t know the specifics on the online versus brick and mortar. Wes probably does. I think generally and not probably surprising to you that handbags performance was really good and the apparel performance was a mix bag and so I think we’ve taken a look at that and trying to react accordingly.

But I would definitely call it a big success and people responded really well to the product fundamentally and the price points which as you know were more elevated, have not been a factor at all in its success. So it does say to you that new ideas that are on target, in spite of a general sales swamp, do well, they can do well.

 

Wesley McDonald:

Yes I think and we always do a little thing on the online business whether you get early access to launches and things like that. So there is always a pretty big spike on that but I don’t think there is any material difference between the two after you’ve had a shake out for a few months.

 

Robert Drbul:

Okay and then on the Women’s business, has it been largely strength in Women’s Active or has it been sort of broader and I was just wondering if fit and flair dresses are really driving at all any of the success that you’re seeing in Women’s?

 

Kevin Mansell:

I like the fact you’d have sense of humor Bob in a tough environment. Women’s Active is really good trying to put a more serious note on that. Women’s Active I think is really good and continues to be good just like Active in general is good. That category in Women’s I think that outperformed significantly, Wes can jump in but it is our Juniors business there was a big outperformance in Juniors in the first quarter and that business we didn’t want to get in to this on the call because this relatively a short period of time and a small percentage for our total Women’s business.

That business has implemented a new supply chain strategy to move much more quickly on product and I think it is definitely benefiting in a huge way and so that’s a learning that we’re incorporating into areas as well. I don’t know if you want to add anything in there Wes?

 

Wesley McDonald:

No. I think that’s that. Thanks Bob.

 

Robert Drbul:

Thanks very much.

 

Operator:

Then next go to Patrick Mckeever with MKM Partners. Please go ahead.

 

Patrick Mckeever:MKM Partners:

Thanks. Thank you. Just a couple, first on loyalty I think the last time you gave a number there was back in the fall, 34 million members if I am not mistaken. So just wondering where that number stands currently and what you are seeing in terms of the impact on the business from the loyalty program? And does that I mean I know you’ve talked about tweaking the marketing and tweaking the program, have you done much there and does that factor into the view that same-store sales will start to improve a bit from here through the balance of the year?

 

Wesley McDonald:

I think the loyalty numbers have definitely increased. I don’t have a up to date number in front of me but it’s probably pushing close to 40 million. Some of those are duplicate so not real unique people that we can measure because people like myself have multiple members on a card and they have different loyalty numbers associated with them. We’ve never looked for a year or two bump.

One of the things that we are looking for and didn’t plan that in our path to the 21 million that we had a couple years ago so we really didn’t build incrementality in to it past last year in the fourth quarter.

We are making a concerted effort in the back half after we rollout a new point of sales system to use the loyalty information if they’ve completed their profile, to do pre-screen on them for our credit card and try to get people to move along the value path from not have a loyalty card to having the rewards card and then hopefully getting them to sign up for our credit card. So we’ll have more to talk to about that probably at the end of the fourth quarter but the point of sales system isn’t rolling out till late in the third quarter so we won’t have a lot of data on that till after holiday.

 

Patrick Mckeever:

Okay and then just a second quick one on Beauty, just wondering there too if you have an update. Is that still driving, I think you had said 100 to 200 basis points of incremental comp at stores that had it.

 

Wesley McDonald:

We just completed the last store rollout of a couple of hundred stores in the first quarter. It was consistent throughout that they did not rollout until the end of April so I don’t have any numbers from them yet but I would suspect that would be consistent and Beauty continues to be one of the better performing areas of the company.

 

Patrick Mckeever:

Got it. Thank you, Wes.

 

Operator:

And that will conclude the question-and-answer session, any closing comments from our presenters?

 

Kevin Mansell:

No I think an hour is enough. Thanks a lot everybody.

 

Operator:

Thank you and ladies and gentlemen this conference will be available for replay after 11 AM Eastern Daylight Time today through June 12 at midnight Eastern Daylight Time. You may access the AT&T teleconference replay system at any time by dialing, 1800-475-6701 and entering the access code 386534. International participants please dial 320-365-3844. Those numbers again are, 1800-475-6701 and 320-365-3844, the access code 386534.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

Posted-In: Earnings News

 

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