New York and Company, Inc. (NWY)

Q3 2008 Earnings Call Transcript

November 20, 2008, 8:00 am ET

Executives

Allison Malkin – IR, Integrated Corporate Relations

Richard Crystal – Chairman & CEO

Sheamus Toal – CFO

Leslie Goldman – Chief Merchant

Analysts

Neely Tamminga – Piper Jaffray

Robin Murchison – SunTrust Robinson Humphrey

Barbara Wyckoff – Buckingham Research

Eric Beder – Brean Murray

Sam Panella – Raymond James

Presentation

Operator

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the New York & Company Q3 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions). Thank you.

I would now like to turn the call over to Ms. Allison Malkin of ICR. Please go ahead, ma'am.

Allison Malkin

Thank you. Good morning. Before we begin, I would like to remind you that some of the comments made on today's call, either as part of our prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provision in the Private Securities and Litigation Reform Act of 1995. Actual results may differ from those projected in such forward-looking statements. Such forward-looking statements are subject to risks and uncertainties as described in the Company's documents filed with the SEC, including the Company's fiscal year 2007 Form 10-K. Unless otherwise noted the results of operations discussed are for the Company's continuing operations, only the New York & Company brand.

With that I'd like to turn the call over to New York & Company's Chairman and CEO, Richard Crystal.

Richard Crystal

Thank you, Allison. Good morning. Thank you for joining us to discuss the Company's third quarter results. On the call with me today are Executive Vice President and Chief Financial Officer, Sheamus Toal, and our Chief Merchant, Leslie Goldman.

Following my opening remarks, Sheamus will review our financial highlights and then I will provide closing comments and then turn the call over to the operator to conduct a question-and-answer portion of this call.

During the quarter, we continued to manage to the key priorities we set as we began the year, focusing on delivering strong assortments, outstanding marketing, and great value to our customers while reducing costs and inventory.

While we made progress on our key initiatives, our third quarter sales and profitability were negatively impacted by the financial crisis in the weakening and global economies, which reduced consumer confidence and spending beginning in the key month of September and continuing throughout the quarter.

In total, third quarter net sales were $249 million reflecting a 14% decline in comparable store sales. These sales results include the shift of a key promotional program from the last week of third quarter into early November.

Gross profit margin declined 440 basis points as we deleverage buying and occupancy costs while merchandise margins declined slightly.

We were, however, able to hold expenses relatively flat with last year excluding the charge of $2.5 million relating to the recent management change. That said, we were very disappointed to report third quarter loss of $0.13 inclusive of a $0.03 loss related to the previously mentioned charge.

Some important highlights for the third quarter include the following

During the quarter, we continue to see positive results within our accessory business which has been a focus for us this year. However, our pants and casual businesses were particularly weak.

Our e-Commerce business continued its positive momentum as sales almost doubled for the period. Our customers have embraced the online shopping experience and we are hopeful that these trends will continue during the holiday season.

We are also pleased with our new marketing program which we believe is assisting us to strengthen the emotional connection of our customers to our brand.

As we begin the fourth quarter, while our November sales trend has significantly improved with the movement of City Cash and the introduction of our holiday floor set, we are still cautious as we begin the holiday season and we are preparing for highly promotional environment.

As a result, we will continue to manage our business for turbulent times by focusing on maximizing cash flow and maintaining our financial strength so that we are well-positioned for growth when the environment improves.

We remain confident in our long-term strategies. And said, we are operating in unprecedented times and given the lack of visibility and difficulty in forecasting the level of consumer spending, we believe it is prudent to conserve cash and maintain clean inventories.

Regarding our store expansion, during the quarter, we opened five stores and remodeled seven locations while closing one store, ending the period with 600 New York & Company locations.

During the fourth quarter, our plans are remodel one location and close 12 stores, ending the year with 588 stores. For fiscal year 2009, we will be extremely selective in the opening of new stores and focused on improving the productivity of our existing locations.

We currently expect fiscal year 2009 capital expenditures to approximate $15 million which is down more than $35 million from our fiscal year 2008 capital expenditures forecast of $50 million.

Finally, we ended the quarter with a strengthened balance sheet. Cash on hand rose by $26.3 million to $41.2 million and inventory declined by 10.5% on an average store basis. We plan to end the fourth quarter with significant cash and no borrowings under our revolving credit facility.

As we look ahead, we are prepared for highly promotional holiday season. Our priorities are to continue to maximize sales and profitability while preserving cash. We are focused on reducing cost and ending the fiscal year with clean inventory in order to position us for success in 2009.

Now I would like to turn the call over to Sheamus, who is to review our financial performance for the first time as CFO.

Sheamus Toal

Thank you, Richard. Good morning, everyone. First, I would like to mention that the results being discussed today are for our continuing operations, the New York & Company brand.

Net sales for the third quarter of fiscal year 2008 were $249 million as compared to $276.4 million for the third quarter of last year. Comparable store sales decreased 14% for the quarter. This decrease, which includes the effect of a shift in a key promotion into the fourth quarter, was partially offset by an increase in non-comparable store sales driven by net sales from new store openings. In the comparable store sales base for the quarter, ADS decreased 3.9% and transactions per average store decreased 10.6%.

Gross profit for the third quarter of fiscal year 2008 was $62.9 million or 25.3% of net sales as compared to $82.1 million or 29.7% of net sales in last year's third quarter. The 440 basis point decrease in gross profit as a percentage of net sales is primarily the result of a 410 basis point increase in buying and occupancy costs reflecting the impact of negative comparable store sales combined with an increase in real estate costs for new and remodeled stores.

Selling, general & administrative expenses for the quarter increased by 3.1% to $76.1 million or 30.6% of net sales as compared to $73.8 million or 26.7% of net sales during last year's third quarter. The 390 basis point increase in selling, general and administrative expenses as a percentage of net sales was largely due to the lack of leverage from the decline in the comparable store sales combined with the effect of an increase in store expenses necessary to support 32 additional stores in operation.

On an average store basis, selling, general and administrative expenses declined by approximately 2.9% versus the prior year reflecting the impact of our expense control efforts.

Net loss from continuing operations for the third quarter of fiscal 2008 amounted to approximately $8 million or $0.13 per diluted share inclusive of a pre-tax charge of $2.5 million or $0.03 per diluted share related to the recent management changes. This compares to net income from continuing operations of $5.3 million or $0.09 per diluted share for the third quarter last year. The primary driver and the earnings decline include the charges related to the management change and a significant decrease in comparable store sales and the resulting deleveraging of expenses.

Moving to our quarter-end balance sheet, inventory at cost was $158 million, which is down approximately 10.5% on an average store basis as compared to $167 million as of the prior year third quarter. This reduction reflects the Company's planned optimization of inventory flow and establishes inventory support at the proper level for expected sales.

We were also pleased to further strengthen our quarter end balance sheet with $41.2 million in cash, and working capital of $87.2 million as compared to $14.9 million in cash and $82.6 million in working capital in the prior year.

Capital spending for the first nine months of 2008 was $40.3 million as compared to $56 million last year. The current year spending was primarily related to our store opening program, remodeling program, and IT development. During the quarter we successfully completed the implementation of our new POS system chain wide.

We currently believe that the economic environment will remain challenging and expect promotional activity to accelerate throughout the key holiday selling period. As we look ahead, we expect to end the year with significant cash and no borrowings under our credit facility. Our comparable store sales outlook for the fourth quarter, which includes the positive effects of the promotional shift from the third quarter, reflects comparable store sales in the high negative single-digit range.

Our current outlook for earnings reflects a loss per diluted share in the range of $0.05 to $0.20. This compares to actual fourth quarter of fiscal year 2007 earnings per diluted share of $0.18. For the full fiscal year 2008, we currently anticipate the comparable store sales will be in the high negative single-digit range.

And earnings per diluted share will be in the range of income of $0.07 to a loss of $0.08. Capital expenditures are currently estimated to be approximately $50 million in fiscal year 2008 versus $75.5 million in fiscal year 2007. Depreciation expense for the year is estimated at $44 million.

And now I'd like to turn the call back to Richard for closing remarks.

Richard Crystal

Thank you, Sheamus. In summary, we believe we are implementing the right strategies as we navigate through a turbulent holiday season. We will remain focused on serving our customers with compelling assortments and value and have adjusted our expense structure and inventory plans to coincide with this difficult environment.

Now I would like to turn the call over to the Operator to begin the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator instructions). The first question is from Neely Tamminga of Piper Jaffray.

Neely Tamminga - Piper Jaffray

Good morning. I just have a couple questions for you guys, if I may. First, just on the guidance in Q4. It seems to me that in some ways you're looking for a comp acceleration or an improvement relative to what you just reported yet the loss is ranging down to a loss of $0.20. Can you help reconcile that a little bit? I understand Richard what you're saying about it's going to be excessively promotional this season and we completely agree, but I'm just wondering how should we be looking then at merchandise margins or the mark down rates or gross margins in view of that?

Richard Crystal

Well, you have to look at the movement of City Cash so the trend is probably similar that we are projecting at this point because City Cash has an impact on our trend and as we stated earlier, to November to-date has significantly improved in trend with the movement of City Cash.

With reference to the earnings in the markdowns we have included and anticipated number one, that it's going to be a very promotional season, so we have tried to put everything into that to be able to respond to that so that we remain competitive, that we try and maintain our market share as much as we can, and also that we insure on February 1 that we have totally clean inventories as we anticipate the environment could remain difficult as we move into the Spring season. So we are allowing for all of that in our projections.

Neely Tamminga - Piper Jaffray

Okay. That's helpful. And I guess staying on the topic here of Christmas and Spring and maybe this is (inaudible) Leslie, but it seems to me gift cards are expected widely to be down year-over-year, just given what's going on in the economy either in amount or units. And I'm just wondering how that then changes or does it change the week after Christmas cadence? Is the week after Christmas now much more about super duper clearance activity and less about new product for gift card redemption? Has that changed at all in terms of how you guys are flowing in product and maybe to that could Leslie just speak about, is there any help for fashion in Spring? Could you help us out, please?

Leslie Goldman

Well, as far as the hope for fashion for Spring, we really want to get through the fourth quarter first. We'll be happy to talk to you about Spring on the next call. With regards to the floor set, we do expect that post-Christmas will be a very clearance driven time as it frankly always is. We will have some new product introduction to help with whatever gift card activity is there, but again, we are anticipating a very promotional environment at this time.

Neely Tamminga - Piper Jaffray

Okay. Great. Thanks, guys and good luck. Okay.

Richard Crystal

Thank you, Neely.

Operator

Your next question is from Robin Murchison of SunTrust.

Robin Murchison - SunTrust Robinson Humphrey

Hi, good morning. Let me just piggyback off of Neely's question, Spring, if you can comment, Leslie, I think Spring is supposed to be colorful and feminine. Is that directionally right?

Leslie Goldman

Well, yes, it's not only directionally right, but it is what we believe is true to our brand. You go into the store right now, you'll see what we think is representative of our holiday offering which is very brand right and that is happy, feminine, colorful assortment. So we look forward to that continuing.

Robin Murchison - SunTrust Robinson Humphrey

Okay. And also can you comment on what's going on with product cost?

Sheamus Toal

Yes. We are seeing some declines as of regionally and cost structure as we move through the -- end of the first quarter to the second quarter there's lots of flexibility in Asia, people who just made a trip, we intend making another trip early in February, so we're seeing loosening up of costs as we move into the second quarter.

Robin Murchison - SunTrust Robinson Humphrey

Okay. Richard, also in your comments you called out positive accessory, pants and casual were weak and e-Commerce have doubled. What about wear-to-work?

Leslie Goldman

Well, our wear-to-work business actually continues to be the stable consistent business that we have in the Company, and under the circumstances and the economy we're very pleased with it. In fact while pants overall was weak, our wear-to-work pants business was quite healthy relative to the rest of the business, so we see that the consumer where she is spending her money is spending her money on clothes that she can wear-to-work five days a week.

Robin Murchison - SunTrust Robinson Humphrey

Okay. Also, any -- when you get into December, any hint of Spring in any part of the December floor set be it before Christmas or right after Christmas? And what are you going to do there?

Leslie Goldman

Well, we do believe our customer is more wear now than ever, so we don't see accelerating this Spring business into Q4, because we believe she is really just buying clothes to time of need. We have within our warm weather stores, we will certainly provide the warm weather climate with temperature appropriate clothes for them and then we as you know, we're very test driven so we will be conducting some tests in the fourth quarter that will help us drive to some of our Q2 key item flows.

Robin Murchison - SunTrust Robinson Humphrey

Okay. And then last part of the inquisition here. You say you moved City Cash from October to beginning of November and you expect it to be promotional holiday season. What I'm wondering is are we looking at just sort of accelerating momentum of existing promotions or do you have anything new, any new types of promotion even if you don't want to be specific about it?

Richard Crystal

Well, we're very aggressive, we think, for Thanksgiving obviously, perhaps more aggressive than we've been in the past. We move City Cash because of the calendar, as we look back a year ago and we saw the calendar and the shift of Thanksgiving from week three to week four, we knew November was going to be a more difficult month. We certainly didn't anticipate how weak third quarter was going to be. So we think it was a positive movement for us to put City Cash in the fourth quarter and we are prepared for lots of different contingencies and I said earlier and Neely's question, we have put a lot of contingencies into our plans and our projections so that we can react accordingly so that we can protect our market share, react to competition, if necessary, and again, insure that we are squeaky clean when it comes to February 1.

Robin Murchison - SunTrust Robinson Humphrey

Lastly, if I can just ask you one last question.

Richard Crystal

Sure.

Robin Murchison - SunTrust Robinson Humphrey

Are we going to see pant suits at New York & Company?

Richard Crystal

Pant suits?

Robin Murchison - SunTrust Robinson Humphrey

Not pant suits, the jumpers, the all-in-one.

Leslie Goldman

Well, jump suits, yes, at New York & Company we like to represent the trends of the season that are appropriate for us so we will absolutely have some jump suits.

Robin Murchison - SunTrust Robinson Humphrey

Oh my. Okay. Thank you very much. Good luck guys.

Richard Crystal

Thanks Robin.

Operator

The next question is from Barbara Wyckoff of Buckingham.

Barbara Wyckoff - Buckingham Research

Could you talk about the online business, how much business do you expect to do via the web and 2008 and plans for 2009, could you tell us how you were driving customers to the web? I know you have an e-mail campaign, but using other media to get customers there, and then could you update us on your loyalty program and then last question is could you talk about what's happening in accessories?

Richard Crystal

Okay. I'll start off with the web. As I said earlier we continue to double our business in the web, so we're trending in the mid-to-high $40 million versus $22 about a year ago. We are using different marketing to attract customers to the web as well as our own e-mail plans. We seem to have a very good customer base. We have negligible returns because a lot of those returns come back to the store so it's a very profitable avenue for us. We continue to spend in adding infrastructure to the web as well as continuing to spend on marketing to drive more share. We're also testing some in-store programs using kiosks with computers to tie back to the web as well as some telephone stations and we'll report on that after Christmas. In terms of the loyalty program, I'll let Sheamus take about that and Leslie talk about accessories.

Sheamus Toal

Our loyalty program is doing very well, currently. We have about 3.5 million members, of which about 1.5 million are private label credit card holders. As we mentioned in the call, we successfully completed our POS implementation during the quarter in all of our stores. That will, one of the many benefits of that system is it will enable us to gather better customer data and hopefully build that customer loyalty program and enable us to market towards those specific customers. So as of right now it's doing very well and we hope with the new POS system to improve upon that.

Leslie Goldman

And Barbara, as far as accessories, yes, our accessories business is very strong. Our jewelry business is excellent. We actually comp positive in this difficult environment, and the good news with jewelry is that it's a chasable business so we can really leverage it to its fullest. The scarf business is also excellent so clearly we are benefiting from this trend this season.

Barbara Wyckoff - Buckingham Research

Great. Just one last question. Are you doing your round fulfillment in the web channel?

Richard Crystal

No. We use third-party.

Barbara Wyckoff - Buckingham Research

Okay. Thanks. Good luck.

Richard Crystal

Thank you.

Operator

The next question is from Eric Beder of Brean Murray.

Eric Beder - Brean Murray

Good morning.

Richard Crystal

Good morning.

Eric Beder - Brean Murray

Could you talk a little bit about I know you guys are experimenting with the New York & Company collection, what's your thoughts on that given the current environment?

Leslie Goldman

Yes, we are, we definitely are experimenting with that, it's not in a lot of stores which allows us the flexibility to continue to experiment and we're looking at different ways that we can leverage this trade down business and when we're ready to roll it out further we will, we're not ready yet.

Richard Crystal

But we've got enough good indication that we want to continue testing the program, Eric.

Eric Beder - Brean Murray

Okay. In terms of expansion or other pieces what are you seeing now in terms of rents when you go back to landlords now it starts to the -- in terms of looking at rents right now?

Richard Crystal

Well, we're always in discussion with all of our partners regarding those kind of things. We really don't want to reveal where we are at this point in time. We're opening very few stores next year so it's not an issue of opening new stores so we are always in discussions with our landlords as we have renewals, et cetera.

Eric Beder - Brean Murray

And in terms of inventory, I know, historically, you have talked before about how year-to-year, end of January last year, you were pretty much up (inaudible) as you wanted to be. If you get to where you want to be in February are we going to see continued declines in inventory into Q4, at the end of Q4 or is it going to be more in between the periods as you talk about before?

Richard Crystal

Well, we expect to go into February with lower inventories than a year ago, Eric, probably close to the double-digit range.

Eric Beder - Brean Murray

And is there a new look into '09, is there more inventory gains to be done here? If you hit the down double-digit, you've been fairly strong on inventories for a while now.

Richard Crystal

Yes, I think it will continue to go down at that point as much as in the past. I think the advantage now is we've seen some softening up in prices in Asia, I think it gives us more ability to chase than we have in the past as air freight has come down, et cetera. So I think that we can be a little more careful about our inventory and be able to chase to any upside if there is any upside so I think we want to be cautious about the inventory, continue to be cautious. I don't know that we're going to see the big decreases that we had in the past, but we still will be very careful about monitoring inventory and basically provide inventory for what we think the appropriate sales level is going to be.

Eric Beder - Brean Murray

Okay. Great. Good luck.

Richard Crystal

Thank you.

Operator

Your next question is from Sam Panella of Raymond James.

Sam Panella - Raymond James

Hi, everyone. In terms of CapEx for this year, the $50 million, can you break that out between new stores and remodels?

Richard Crystal

Did you say 15?

Sam Panella - Raymond James

No, $50 million, I thought you said for fiscal '08?

Richard Crystal

Yes. Okay.

Sheamus Toal

Yes, the breakdown -- the split between new stores and remodels is basically about most of it is our total real estate spend is about 50% of the capital. This year we did have new systems that were implemented. So that was part of our capital spending for the year. New stores certainly represents more of the real estate spend than remodels. That splits probably about -- we spend about $16 million on new stores and about $12 million on remodels during the year.

Sam Panella - Raymond James

Okay. And then looking at next year, I understand that you're not looking to open too many stores. What about in terms of closures what could we expect for next year?

Richard Crystal

Well, we're in the process of reviewing every store in our store base in the next month. We want to see what happens during Christmas. So it would be premature for us to have a discussion at this point in time. Right now our plans are to close 12 stores by the end of this year and if there are further closures we will get to that in January.

Sam Panella - Raymond James

Okay. Thank you and good luck.

Richard Crystal

Thank you.

Operator

(Operator instructions). The next question is a follow-up question from Neely Tamminga.

Neely Tamminga - Piper Jaffray

Just two very different questions. First, on the pants issue again, I think what Robin and I might be getting at here is you guys have quite a bit of pants as a percentage and clearly, women are deferring on this purchase overall. I'm just wondering to what extent Spring might change either the mix or the composition or the proclivity to purchase some casual pants so I think that's what we're looking at a little bit here for Spring. Can you help us out?

Leslie Goldman

Sure. Maybe hopefully this will help. Certainly, pants are a large part of our business and women are still wearing pants overall. Fortunately, because we have such a large business in this category, even though it's not trending quite as strong as it was in the past, we do have the ability to drive significant volume in this category through multiple promotions, et cetera. So going forward into Spring, we still believe that pants are going to be a big part of our business. We're going to continue to improve on the strength of our wear-to-work categories and we have a little work to do in casual to be sure and we're working to improve our product offerings in casual and hopefully, we'll see some improvement in the category go forward there. Does that help you out, Neely?

Neely Tamminga - Piper Jaffray

Yes, I think it does. I guess the million dollar question is whether or not she shows up and purchases. And I think deferring on buying a pair of denim or black pants makes sense to me right now this Fall, but I'm just wondering from your perspective as a merchant and you've seen cycles maybe nothing like this, but you have seen cycles, it would seem to me with Spring you have the opportunity to really change her mind either in color and/or silhouette.

Leslie Goldman

Well, it's quite true and your first point was actually quite true as well that we have to deal first with the traffic challenge of getting her into the stores early Spring, but there are other new trends on the horizon, when she is coming in and she is looking to spend money on her new wardrobe, new apparel, there are a couple of things she is looking at. One is in the bottom half of her body she is buying pants, she can also be buying skirts. We believe that the skirts and dress categories have potential for growth going into Q1 and we also believe specifically within the casual end use that we are experiencing some trade-off into our comfort wear product which is also pants driven, keep in mind that is our yoga pants, our lounge pants, things of that nature so, we are seeing some trade-off into that business and that is a relatively strong category for us right now.

Neely Tamminga - Piper Jaffray

That's actually very helpful, Leslie, thanks. And then just for Sheamus or for Richard, in terms of the store base, I understand doing a store review and we're in the middle of the time when you're generating your cash flow for these stores, but any quantification as to where the 580 plus stores sit right now in terms of being four wall cash flow positive? Are they all or just a handful that aren't?

Richard Crystal

Yes, we have a few that aren't at this point and again, Neely, we're going to review that as we go through the holiday season. Most of our stores are cash flow positive, but --

Neely Tamminga - Piper Jaffray

That's very helpful, Richard. Okay. Thank you.

Richard Crystal

Thank you.

Operator

At this time there are no further questions. I would like to hand over the call back to management for closing remarks.

Richard Crystal

Thank you, again for joining us. We look forward to speaking to you when we report fourth quarter results in March if not sooner. Thank you again.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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