Vince Holding (VNCE) Q3 2020 Earnings Call Transcript

Vince Holding (VNCE -10.80%)
Q3 2020 Earnings Call
Dec 21, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Vince Holding Corporation's third-quarter 2020 earnings conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Ms. Amy Levy, vice president, FD&A and investor relations.

Thank you. Please go ahead.

Amy Levy -- Vice President, FD&A and Investor Relations

Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp.'s third-quarter fiscal 2020 results conference call. Hosting the call today is Dave Stefko, interim chief executive officer and chief financial officer. Before we begin, let me remind you that certain statements made on this call may constitute forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ from those that the company expect.

Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an unadjusted basis. The fiscal 2019 adjusted results that the company presents today are non-GAAP measures.

Discussion of these non-GAAP measures and information on reconciliations of them to their most comparable GAAP me -- measures are included in today's press release and related schedules, which are available in the investor section of the company's website at investors.vince.com. After the prepared remarks, management will be available to take your questions for as long as time permit. After the prepared remarks, management -- now, I'll turn the call over to Dave.

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

Thank you, Amy. Good afternoon, everyone, and thanks for joining us today. As we announced with our preliminary -- preliminary results last week, we saw sequential improvement in our sales trends and delivered an operating profit, even excluding the benefit of rent concessions, through prudent cost management for the third quarter. With the Vince DTC business, sales and gross margin recovery extending into the fourth quarter as we enter the holiday season, demonstrating the strength of the Vince brand.

Although the current environment remains difficult, we continue to see cu -- customer demand for the comfort casual luxury that Vince offers. Vince remains a top-performing brand in the contemporary luxury segment within our existing wholesale partners. At Rebecca Taylor, we're also pleased to see the positive reaction to the brand refresh and merchandising initiatives taking place. Our proven ability to reestablish the brand leadership position for Vince, combined with the advances we are making to restore the DNA of Rebecca Taylor, are generating excitement internally and with our wholesale partners.

As we continue to navigate the near-term headwinds resulting from COVID, we have also taken steps to enhance our li -- liquidity position to support the continued execution of our strategies. The actions resulted in $42.3 million in excess availability under revolving credit facility, which I will discuss in more detail shortly. Overall, we believe we are well-positioned to advance our growth strategies to our respect -- through our respective brands as we emerge from this crisis in the back half of 2021. That said, with the recent rise in COVID cases and the new -- newly imposed restrictions across the globe, the health and safety of our customers and team members remains our No.

1 priority. I want to thank our team members across the organization for their hard work and commitment to supporting our brand expansion efforts and serving our customers throughout this period. Looking at the Vince brand. The sophisticated casual aesthetic of the Vince brand continues to resonate with consumers around the world as efforts -- effortless luxury aligns with the stay-at-home lifestyle.

Sweaters and tops particularly have performed exceptionally well throughout the quarter. We're -- we were excited to expand our reach for the Vince brand by extending our size offering to 24 on both vince.com and nordstrom.com. This is an important step in developing a more inclusive line and a more inclusive community as we offer this customer a level of quality and luxury she deserves. Initial performance exceeded our expectations, and we will continue to communicate this offering through various marketing initiatives in upcoming seasons as we expand this category.

In wholesale, we continue to outperform and gain market share within the contemporary space. Our online business and our wholesale partners remain strong while in-store traffic continues to be challenged. Our product continues to resonate with -- with consumers season after season. During the quarter, we launched the Vince collection in Bloomingdale's and we've been pleased with the initial response.

We look forward to building up on our partnership with Bloomingdale's as we expand the reach of the brand. In our direct business, our e-commerce channel delivered mid-teen's clothes, including Vince Unfold. However, store traffic remains under pressure due to decrease in in-person shopping and lack of tourist traffic with the resur -- resurgence of COVID. Given that many of our stores are located in malls in major cities, as expected, negative traffic trends have continued into the fourth quarter.

That said, we've seen a significant improvement in conversion as shoppers are shopping with great intent either for themselves or for holiday gift -- gifting needs. While the brick and mortar side of the business has been soft, we continue to see strong online demand on both our own website and our wholesale partners' e-commerce sites, demonstrating the clear appetite for the Vince brand. The market disruption created by COVID in the retail landscape is also leading to some highly attractive real estate opportunities. We continue to strategically and selectively evaluate opportunities to secure prem -- premium locations with short-term favorable leases.

During the third quarter, we open two Rebecca Taylor outlet stores and premiere centers. Since the end of the quarter, we open one outlet for each Rebecca Taylor and Vince, as well -- as well as one full-price store for Rebecca Taylor. Based on the increase in customers moving to the Hamptons, we signed a short-term lease for an East Hamps --Hampton Vince store, scheduled to open in February, 2021. Pre-COVID, we were very pleased with the sales and profitability of our new stores, and we continue to view our retail presence as an integral part of expanding brand recognition.

On the international front, we have been encouraged by the progress in our wholesale business as these regions are outpacing the recovery in the U.S. International sales in the third quarter were considerably less negative than in the U.S. Marketing efforts during the -- the third quarter continue to em -- emphasize the stay-at-home lifestyle. As we mentioned on last quarter's call, we pivoted to hosting digital events, including our new virtual collection walkthrough service, which showcases product currently in stores.

Influencer collaborations and personalized marketing have also helped us maintain a strong connection with consumers while simultaneously increasing our reach. For holiday, we've been emphasizing our gifting assortment with the launch of our gift guide two weeks earlier -- earlier this year. Gifting items are focused on home, apothecary, dog sweaters, and baby, which are being presented in table displays in our top stores and highlighted in the gift section on our website. Over the Black Friday, Cyber Monday promotional period, we saw increased momentum in our e-commerce business and a deceleration in negative trends in our retail stores.

We have hosted numerous virtual events for the holiday season to maintain customer engagement. These include an event hosted by our creative director, Caroline Belhumeur, to discuss an intimate virtual guide to holiday dressing with select clients, as well as a candle-making class, co-hosted by Caroline and Bloomingdale's fashion director, Marissa Frank. In addition, we held an Auction for Equality, benefiting the ACLU, by donating money for each face mask purchase, as well as a Vince hospital worker give away in early December. Turning now to Rebecca Taylor, we're very pleased with the progress we have made and our strategies to refresh the brand and enhan -- enhance the merchandise assortment.

The aesthetic personifies romanticism, redefined by combi -- combining delicate embroideries and prints with ironic fabric technique that create newness. The relaunch of the Rebecca Taylor brand with the spring 2021 collection, we've seen strong reception by Vogue, sparking new interest across international and Asia markets, with po -- positive reception to the alignment of one cohesive collection. The collection will be available in February and supported by relaunch marketing efforts, focus on digital, with a heavy emphasis on influencer strategy. The continued enthusiasm from our wholesale partners regarding the relaunch of Rebecca Taylor has been highly encouraging.

We are developing our collections with what we believe is the right balance of price and high quality while tightly managing SKU count. While we -- while we are returning the brand back to its family roots, our team is focused on an expanded offering of tops, as well as a focus on versatility in the product offering. While we are encouraged by the enthusiasm for the relaunch, this is just the first stage and we'll continue to refine our collections each season as we monitor consumer response and incorporate feedback. Two weeks ago during market, we launched our 2021 summer pre-fall collection, reflecting the influence of Steven Cateron and his design team.

We, again, we're very pleased with the broad-based positive response to Steven's second collection. We are realigning our strategy to better dust distribution with our reset timing in 2021 focused on full-price selling to drive healthier business partnerships with less promotional activity. The spring collection will be launched at select Nordstrom stores and Neiman Marcus, as well as Saks and Bloomingdale's, where we believe the collection is well-suited for the femininity of their customer base and an attractive opening price point. While we continue to make advancements in evolving Rebecca Taylor, there are still many growth opportunities ahead.

As we remain focused on success -- successfully executing the Vince playbook, the Rebecca Taylor brand, we feel confident by our long-term strategy and growth opportunities for both Vince and Rebecca Taylor. Turning to our financial results. Total company net sales for the quarter decreased 34% to $69 million, compared to $104.5 million in the third quarter of fiscal 2019. This is a significant improvement to the 59.9% decline in the second quarter.

For the brick -- for the Vince brand, third-quarter consolidated net sales decreased 28 point -- 28.7% to $61.6 million, compared to $86.4 million in the same prior-year period. Our Vince direct-to-consumer segment sales decreased 35.4% to 22 point -- $22.8 million in the third quarter. In our wholesale segment, the 24.2% sales decline was largely due to lower operation shipments. In our direct consumer segment, the 35.4% decline in sales reflected reduced sales in our retail stores due to lower traffic trends, part -- partially offset by mid-teen's growth in our e-commerce bus -- business, which, as a reminder, includes Vince Unfold.

Rebecca Taylor and Parker combined net sales decreased 58.9% to $7.5 million as compared to the same period of last year. As we mentioned on last quarter's call, we have paused the development of new product for our Parker business to focus resources on the operations of our Vince and Rebecca Taylor brands post to COVID crisis. This contributed to a third of the sales decline. For Rebecca Taylor, the decline was largely in the wholesale channel as we reset the brand and did not offer a holiday pre-spring collection.

Gross profit in the third quarter was $31.7 million, or 45.9% in net sales. This compares to $51 million, or 48.8% of net sales in the third quarter of last year. The decrease in gross margin rate was primarily due to increased promotional activity and channel mix, partially offset by a decrease in sales allowances to wholesale partners. Selling, general, and administrative expenses in our quarter were $25.4 million, or 36.8% of net sales, as compared to $43.4 million, or 41.6% net sales for the third quarter of last year.

As a result of the actions taken to reduce costs at the onset of the COVID pandemic, we decreased SG&A dollars by $18 million. This decrease was primarily a result of lower payroll and compensation expense, rent concessions, reduced marketing spend, and prudent expense management. Occu -- occupancy expense for the third quarter was positively impa -- impacted by rent abatements, rent deferrals, and rent reductions, totaling $4.2 million, resulting from negotiations with landlords. At the end of the third quarter, majority of leases had been modified.

We expect to see an additional benefit from remaining lease release negotiations in the fourth quarter and possibly in the first quarter of 2021. Operating income for our third quarter was $6.3 million, compared to $7.6 million in the same period last year, which included a $0.7 million cost associated with the acquisition of Rebecca Taylor and Parker. Net income for the third quarter was $5 million, or $0.42 per diluted share, compared to $6 million, or $0.50 per -- per diluted share in the third quarter of last year. Net income for the third-quarter fiscal 2020 reflects the $4.2 million, or $0.36 per share benefit of the aforementioned rent concessions.

Excluding the cost associated with the acquisition of Rebecca Taylor and Parker, adjusted net income for the third quarter of 2019 was $6.7 million, or $0.56 per diluted share. As I mentioned earlier and as detailed in the press release, we took proactive steps to enhance our liquidity as we continue to navigate the pandemic. As part of this, we entered into a $20 million third lien credit facility with an affiliate of Sun Capital. Interests and fees under the third lien credit facility are payable in kind.

After closing the third lien credit facility on December 11 of -- of this year, we had excess availability of $42.3 million under our revolving credit facility. In addition, on December 11, we entered into amendments to our existing revolving credit facility and our existing term loan credit facility. The amendments, among others, extended the period -- period during which the testing under our financial covenant is suspended, lowered the fixed charge coverage ratio to be main -- maintained thereafter, extended the applicability of certain revised eligibility criteria for trade receivables, and waived certain term loan am -- amortization payments. As COVID has continued to grow around the world, we believed it was important to proactively enhance our liquidity now, providing the ability to continue to invest in our brands.

And we're very appreciative for the continued su -- support and partnership of both Sun Capital and our lending partners. Moving to inventory. Net inventory was $88.6 million at the end of the third quarter, as compared to $71.6 million at the end of the third quarter last year. We continue to work through our seasonal inventory through promotions, outlet stores, and the off-price channel.

In addition, due to the aesthetic of certain products, we're able to seamlessly incorporate a portion of our in -- of our inventory into future collections. Overall, we are comfortable with our inventory position as we work our way back to more normalized levels. As stated in our press release published this afternoon, due to the uncertainty related to the impact of COVI19, we will not be providing guidance at this time. In conclusion, we believe that we have the -- the liquidity in place to continue to navigate through the challenges presented by the COVID pandemic.

Vince remains a leading brand within the fashion contemporary luxury space. We continue to see evidence that bra -- that the brand resonates with consumers and is gaining further market share. We have a multipronged growth strategy in place and we look forward to advancing our strategic initiatives as we -- as we emerge from the pandemic. For Rebecca Taylor, based on the early feedback, we remain even more encouraged by the opportunity to Rebec -- to replicate the Vince recovery and growth playbook.

Similar to Vince, Rebecca Taylor has strong recognition within the contemporary luxury apparel space, and we're excited about its future potential as we move past the pandemic. This concludes my comments regarding our third quarter. We'll now take your questions. Operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] And your first question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good morning, Dave. Good morning. Good afternoon, Dave and Amy. Hi, how are you?

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

Good. Thank you. Good.

Dana Telsey -- Telsey Advisory Group -- Analyst

Nice to see the sequential improvement in sales results. And can you just talk a little bit about any particular category, DTC, what you saw on e-commerce, and, obviously, stores didn't get the traffic, but in wholesale and how that wholesale business is progressing. Thank you. And then a couple of follow-up.

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

Yeah, I mean, we're, obviously, we're seeing sweaters and tops performing well as we've said in our consumer obviously. And we've seen this on both sides, wholesale and in our DTC business. The consumer has been responding to promotions, obviously, but the consumer's also been responding to new -- newness. So as we see new product set as the season comes, we're certainly as full-price buying going on from -- from that perspective.

And while I'm looking forward to spring -- the spring launch products at the end of January or early Feb -- February from that perspective to see some -- back to more full-price on.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it. And then on the expense leverage that you're seeing, what stays, what comes back? How do you break out the buckets of expenses?

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

If you -- when you -- we published our 10-Q what we kind of do with our -- with our loss, but the largest -- you look at the $18 million reduction, the largest reduction obviously came in -- in payroll. It's our -- it's our largest expense beyond the cost of -- of product. And so from a payroll perspective, we wound furloughs across -- across the company. Now, we did end furloughs toward the end of the third quarter.

And unlike many, many companies from a permanent [Inaudible], we -- we went through a reduction in -- in force. So we haven't seen the results from the reduction in -- in force and the impact of that on -- on the third quarter. But that is complete from that perspective. And then there is, of course, the benefit we talked about from lease negotiations, some of which will continue into this -- into the fourth quarter.

There will be other adjustments as -- as leases are signed, the amendments are signed for things we have negotiated will -- will -- they'll be a reflective pickup similar to what -- not similar in dollars, but similar to the type that you saw in the third quarter. And then we like -- we again like many, we try to manage our marketing spending. It's easier to do actually when stores were closed and we -- we invested more in e-com to help drive the e-com business, and so I say that's representative -- representing -- representative in the third quarter. And then we have and we'll continue to prudently manage every other spending category, whether it be travel, when to make investments or -- or not.

We just -- we'll manage those prudently until we see a return in sales back to more normalized levels.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it. And then you have mentioned in terms of rent and abatements, deferrals. How much lower does occupancy costs go? And with new leases that you're signing, are they short term in terms of the year and are you able to get more variable rent structures?

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

I would say our strategy on a pre-COVID, we were doing short term, low rent, some percentage rent, some not percentage, low investment leases. And that strategy is very successful for us. Again, we -- that's what we have continued on with leases we've signed, and that's how we'll view opportunities as we go forward. And so you will see -- you will see a combination.

You will see low rent leases. They'll all be short term in nature. There'll be very low capital in -- investment leases and there'll be some that will also be variable from that perspective. So it's a -- it's a similar mix to -- to what we successfully have started two -- two years ago prior to COVID.

And we'll spending the op -- the opportunity. We're -- obviously, we're able to see some -- some rents that probably 12 months ago we, obviously, wouldn't see because of the landlords are looking for o -- occupancy also.

Dana Telsey -- Telsey Advisory Group -- Analyst

And two last things. First on the new credit facility, how does -- how does your interest expense adjust? And any updates on CEO search.

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

So from a -- from new credit facility, so it's -- it's -- it's a [Inaudible]. So that's obviously a third lien credit facility. So it would be the most expensive debt that we would carry. So it'll carry the highest interest cost from a rate perspective, but it's not -- so we will drive our interest expense higher.

We did, obviously, use it to pay down the revolving credit facility, which is the cheapest facility. So we'll see higher interest expense. But the flipside of it is the interest is all payable in -- in kind. So it gets added to the debt.

There's no cash outlay. So from the cash interest costs, we'll actually see a decline in our cash interest cost and allow us to keep more money in the business, and then -- that we'll use for in-- in -- investing in the brands. And as for the CEO search, the team is on, it's a subcommittee of our board is involved in it. Myself and the leadership team is 100% focused on running the business and -- and -- and to making sure we stay on path and get through the pandemic, and -- and keep driving these -- these -- these -- these brands.

Dana Telsey -- Telsey Advisory Group -- Analyst

And then just on the department store channel, the wholesale channel. How big -- where do you expect that to go as the percentage of the business? Does it become a 50-50 split with Vince DTC and Vince wholesaler? How do you -- how do you think of it going forward?

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

Yeah, well, I mean we're not -- we're really not given kind of like your go forward view right now. Obviously, some of this getting a somewhat -- where is COVID going to go, from that perspective. What happens after holiday? I mean, are we -- we have commitments like --like many into next year, but we also understand the variability. The things we do, we -- we do feel really good about is how Vince has performed during COVID.

We do believe that we've taken market shares in many wholesale partners on the interest in our brands remains strong and our performance remains strong, if not stronger. So we see Vince and they're going to believe there'll be less brands on the other side, like -- like brands that have been able to survive financially and just by the desire to the department stores of homemade brands like carried on forward. So we -- we look through the department store side, the wholesale side to be very strong and a -- and a significant growth opportunity going forward. But we also have investments that we can continue to make in our e-commerce platform, which we will strategically do in 2020.

We did invest in combining our inventory. So we had one inventory, which some of the growth we've seen is due to that, and there are other investments that we'll make -- we'll be making in 2021 to help grow from e-com perspective, and then we look at the stores. As we've talked about, we're going to op -- to opportunistically continue to look at stores and invest in stores. So that gives you a little flavor of how we view the future as we go forward.

But I know it doesn't directly answer your question on -- on the mix that we see in the business.

Dana Telsey -- Telsey Advisory Group -- Analyst

Got it. Thank you.

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

OK. Thank you, Dana.

Operator

And this concludes our question-and-answer session. Mr. David Stefko, I turn the call back over to you for some closing remarks.

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

OK. Well, thank you joining us today. I hope you -- you're having great holiday season. We look forward to updating you on our fourth quarter and annual results in April.

Have a happy new year. Thank you.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Amy Levy -- Vice President, FD&A and Investor Relations

Dave Stefko -- Interim Chief Executive Officer and Chief Financial Officer

Dana Telsey -- Telsey Advisory Group -- Analyst

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