Apex Global Brands Inc
Q2 2015 Earnings Call Transcript

Published: 12 Sep 2014

[Operator:]

Greetings and welcome to the Cherokee Global Brands Second Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. I would now like to turn the conference over to your host Kimberly Esterkin, Investor Relations. Thank you ma’am, you may begin.

[Kimberly Esterkin:]

Thank you. Speaking today will be the Company's Chief Executive Officer, Henry Stupp; and Chief Financial Officer, Jason Boling. You can also find accompanying slides for today's call on Cherokee's Investor Relations Web site. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. Certain statements contained herein may contain forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act of 1995. When used, the words anticipates, believes, expects, may, should and similar expressions are intended to identify such forward-looking statements. Forward-looking statements included in this conference call can involve known and unknown risks and uncertainties that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. A further list and description of these risks, uncertainties and other matters can be found in the Company's Annual Report on Form 10-K for the fiscal year 2014. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results. The Company disclaims any intent or obligation to update any of the forward-looking statements contained herein to reflect future events and developments. Earnings releases posted on the Company’s Web site at www.cherokeeglobalbrands.com. And with that, I'll hand the call over to Cherokee's Chief Financial Officer, Jason Boling.

[Jason Boling:]

Thank you Kim. Good afternoon and thank you for joining us today. We’re happy to report that revenues for the second quarter increased 17% to $8.8 million, compared to $7.5 million in the prior year period. This growth in revenue was driven by our Tony Hawk brand and our strong global organic growth of the Cherokee brand. On a year-to-date basis revenues were up roughly 20% totaling $18.7 million for the first six months of fiscal 2015. Selling, general and administrative expenses increased by 19% during the second quarter to $5.1 million or 58% of sales as compared to $4.2 million or 57% of sales in the same period last year. The increase in SG&A was due to the planned additional marketing and development expenses related to the recent acquisition of the Tony Hawk brand and the timing around additional marketing expenses used to support our other brands. Operating income improved 14% for the second quarter totaling $3.7 million versus $3.3 million in the same period last year. As discussed on prior calls we managed our expenses, the annual financial targets and while our operating margin and EBITDA percentages during the quarter decreased nominally from the same period last year by 1% and 4% respectively due to timing in our marketing. Our results for the six months continue to demonstrate the strength of our turnkey model with operating margins hitting 47% and our EBITDA margin topping 51%. We ended the second quarter with net income of $2.3 million or $0.27 per diluted share, an increase of 16% when compared with $1.9 million or $0.23 per diluted share in the prior year period. On a year-to-date basis net income totaled $5.8 million or $0.69 per diluted share an increase of 64% when compared to $3.6 million or 42% per diluted share in the first half of fiscal 2014. As a side note, we achieved $0.72 per diluted share for the full 12 months of fiscal 2014. For the quarter ended August 2, 2014, we recorded a tax provision of $1.2 million which equates to an effective tax rate of 35.7% compared to $1.2 million on effective rate of 38.4% in the prior year period. Turning to our balance sheet and related metrics, total cash and cash equivalents as of August 2, 2014 were $4.1 million compared with $3.6 million at February 1, 2014. Our balance sheet remains very strong with increased cash and decreased debt. Cash flow from operations was $4.6 million for the quarter compared to $3.5 million for the prior year period. We remain in a strong financial position as we actively explore additional strategic brand acquisitions while meeting our existing cash requirements which will primarily be for business operations and better service. Thank you all for your time. I will now turn the call over to Henry.

[Henry Stupp:]

Thanks Jason and thank you everyone for joining us today in our second quarter call. As you could see from Jason’s opening remarks, Cherokee remains very profitable with 20% growth in revenues and 64% growth in diluted EPS for the first six months of the year. We’re very pleased with our progress to date, particularly our global organic revenue growth. Through our turnkey proprietary 360 degree approach, we have built a global platform for organic sustainable growth for our current customers, partners and shareholders. I also want to take this opportunity to thank our team, particularly our product development and production staff for their efforts in ensuring great product execution for each of our brands. We continue to generate significant value through our international business. International royalty revenues in the percentage of total revenue on a comparative basis grew 38% of our royalties, up from 31% in the year ago time period. This comparative excludes additional U.S. based Kohl’s Tony Hawk revenues. And we’re particularly pleased with our continued growth in Asia, Latin America and Canada. I’ve just returned from the trip to China where I met with our exclusive retail partner for the Cherokee brand RT-Mart. Retail sales at RT-Mart in the second quarter increased nearly 42% year-over-year. And last month, Cherokee launched the cash [ph] project with five new shop-in-shop concept stores within RT-Mart. RT-Mart shop-in-shop’s were tremendous and are being very well received by the Chinese consumer. We believe that the early success will lead to additional locations further category expansion and improved shopping experience and increased sales of the Cherokee brand in China. I am so proud of our team’s execution in launching this project. We also saw remarkable success this past quarter in Japan where retail sales at Nishimatsuya grew approximately 70% year-over-year. We continue to expand our in store shop concept stream in the second quarter. And we have now rolled out a total of 27 shop-in-shops with Comercial Mexicana within their 154 locations. Retail sales at Comercial Mexicana grew 15% over the second quarter of fiscal ’14. Throughout Latin America, we continue to make strides with revenue growth at Tottus Peru and Chile where retail sales climbed approximately 15% and 27% respectively. And revenues in the Middle East remain in an upward trajectory with sales of Landmark’s Max Stores at United Arab Emirates, Saudi Arabia and Kuwait, which grew significantly during the first half fiscal ‘15. And in Europe we are continuing to explore avenues for 2015 of a long term growth in the region. Neither Tesco nor Cherokee satisfy with our progress to-date. And this is not a surprise considering the overwhelming challenges Tesco continues to encounter in its core market. Turning to the U.S. and Canada, Target U.S. continues to experience some lingering effects of the data breach that occurred during December of 2013. While store traffic is improving, it has not yet returned to prior levels. And as a result, during the second quarter, we saw Target U.S. retail sales decrease by 6.8% over the prior year quarter. That said, we are pleased with the early back to school results. Target Canada on the other hand with its 130 stores continues to make strong progress with second quarter retail sales improving just over 48%. As I am sure you all know, Target welcomed a new CEO, Brian Cornell this past August. Under Cornell’s leadership, Target has outlined number of steps to improve their Canadian operation including lowering prices, reworking inventory systems and expanding Maternity and back to school selection which bodes well for the Cherokee and Liz Lange brands which are marketed exclusively in Canada by Target. We will continue to strategically partner with Target Canada as they transition their new leadership team. Target in the United States has reiterated their focus on rapidly growing their online business. And as you know, Cherokee adults launched this past premium Target.com. We think this is a significant opportunity for our company as we continue to take full advantage of our infrastructure and work with the Target.com team to expand the Cherokee product offering. Also in the U.S., Q2 marked the second full quarter revenues from Kohl’s for the Tony Hawk brand. Revenue for Tony Hawk brand stood at $1.2 million for the second quarter and we are still working closely with Kohl’s to ensure successful expanded product and marketing launch in spring of 2015. We shall continue to focus our efforts on working closely with our current licensees with particular emphasis on assisting these retailers to strategically and effectively drive organic revenue growth. We remain energized about our current portfolio brand as well as the strength of our balance sheet and cash flow. We know that we are well positioned to continue to execute on our strategic plan and grow organically with each of our brands, Liz Lange, ále by Alessandra Ambrosio and more recently Tony Hawk are perfect examples of brands that were recently added to our portfolio that brought strong potential for retail global expansion. As we look toward the second half of fiscal ‘15, we will continue to introduce more categories, improve product offerings of course and expanding number of territories for each of our brands. Lastly, we believe with both our organic and acquisition growth, Cherokee is fully transformed into a growth company and therefore the board has decided following our upcoming September 15th dividend payment to discontinue paying cash dividend. Instead, company plans in reinvesting the funds from operations for their growth strategy, rapidly pay down debt and acquire additional brands. Thank you again for your time today. We look forward to speaking on next quarter’s call and I hope to see many of you at the upcoming Wedbush Consumer Conference on September 23rd, New York City. Operator, you may now open up the call to questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Jeff Van Sinderen B. Riley.

[Jeff Van Sinderen:]

Good afternoon. Let me first say congratulations on the strong growth you’re experiencing.

[Henry Stupp:]

Thank you Jeff.

[Jason Boling:]

Thanks Jeff

[Jeff Van Sinderen:]

So let me ask you this, with the new CEO on place, maybe you can give us your latest thoughts on how you believe Target is thinking about their apparel business or maybe it’s too early to get a read I don’t know but maybe any thoughts on how you think they might try to evolve it. And then any additional color you can give us on what you’re seeing in the Cherokee brand, domestic brick and mortar. I know you’ve mentioned back to school, you felt pretty good about. So was the trend improving there? And then also maybe if you could touch on the kids business, how that’s tracking and school uniform business for back to school this year.

[Henry Stupp:]

So in terms of the general sales, the Target messaging right now the new CEO announced on Tuesday and he’s got a large associate meeting yesterday where 15,000 Target associates were brought in and there’s been a lot of news today about how they’re going to focus more attention on clothing, baby, maternity, furniture and that bodes particularly well for all of our brands at Target. He specifically said that they’re not going to be turning Target into a more of a grocery store. They’ve also talked a lot about their transition into dot com and making the stores small in the future and will line more on the supplier base to bring new ideas new trends, new concepts to that. So the infrastructure that we’ve put into place I believe adequately addresses what Target is setting in the future. In terms of the first half of the U.S. sales, the second quarter was really in our estimation more of an inventory related issue as Target expected a softer Q2, the inventory levels will reduce, and we believe that was the material impact on our sales. As we’ve gone into Q3, inventory levels have started to rise and we’ve started to see more positive results, particularly back to school merchandise. Overall, we’re confident that Target is going to have a strong back half of the year. I think it made a lot of very good changes and they’re certainly very active in marketing our brands we see more weekly ads than we’ve seen in the first half of the year and we started to see more frequently. With respect to the dot com business as we plan next year our adult business order backlog has increased significantly. So that bodes well to the efforts and how we’re strategically aligned with Target in the future particularly at our adult assortment and we had an exceptional back to school in Cherokee uniforms particularly in the online side where we’ve had a high double-digit increase in online sales of Cherokee school uniforms. And that’s the combination of both an expanded product range and also our team working directly hand in hand with Target’s team in terms of improving search engine optimization and the awareness of Cherokee school uniforms being sold at target.com which was a specific goal that both Target and Cherokee had outlined, wanting to improve as we run in for this year’s back to school season. So I think I’ve answered all of your questions. Let me now know if I miss something?

[Jeff Van Sinderen:]

No I think that was great. Let me ask you as a follow up on the Cherokee adult business do you feel like you’re moving any closer or do you think, I know it’s still early. But do you think that maybe new management would be more open to getting the Cherokee adult product back into the brick and mortar?

[Henry Stupp:]

We don’t know if we’ve moved any closer or not, we know that they like the product assortment that we presented to them. I think what we embarked on this, this past two years ago our goal was really how do we get from dot com into the stores and that was singular focus on our part, let’s be close to dot com business and entry link in the stores. Given everything that Target has said in the past year and more recently, we believe dot com alone is going to be significant enough for the next few years that we see upside. So whether we get into decision, we certainly would love to be back in the brick and mortar. I believe now more than ever that dot com is going to be significant growth opportunity for our brands not only in adults but in other categories that we’re starting to explore with Target.

[Jeff Van Sinderen:]

Okay that’s great to hear. And then maybe you could give us a little more color on Hawk and what’s developing there? What’s new with Hawk?

[Henry Stupp:]

We’ll mostly we’d been working very closely with Kohl’s. It’s a relatively new relationship for us. They’re very excited by the Hawk brand. There were lot of changes that were made to the relationships between Hawk and Kohl’s when we acquired the brand from Quicksilver. For example; Tony, in the past, was promoting the Quicksilver brand not the Hawk brand domestically. And now as a result of our acquisition, we can now leverage his huge fan base directly with the Hawk brand by increasing its visibility and point of sale. He was very active and also [shared platform]. So we’re leveraging that throughout this year. And we’re moving towards a big re-launch or an expanded launch in spring of next year, which will incorporate in new in-store vastly expanded product assortment and a lot more marketing and knock it all, get ahead [indiscernible] by unveiling some other plans. But we have very full rate of activities planned for next year. And that’s fulfilled. I think what we’re also very excited about is the significant international interest. And then in the upcoming months I think I’ll be able to share lots of very positive news based on the negotiations that are currently underway in numerous markets for Tony Hawk.

[Jeff Van Sinderen:]

Okay, that’s great. And then one last one if I could just squeeze it in. Just to the extent if you can -- any update on what you’re seeing on the potential acquisition front?

[Henry Stupp:]

Well, we with new brands every week here we are looking to acquire additional brands that fit well in our portfolio. We want to remain very discerning, we’re not going to pronounce that we want to add little more brands, a few more brands this year, because that in terms of branding to a commodity which is something that we are opposed to. In our views, brands are living to humanity that require a certain amount of time and attention, to the moment to reinforce that emotional connection with the consumer. So we are looking at very specific line of brands. One can assume that our next rolling out activity will be probably larger in size as we continue to buy more brands and add to our portfolio. But that’s the general philosophy we’ve taken here.

[Operator:]

Thank you. Our next question comes from Dave King from ROTH Capital.

[Dave King:]

I guess first off lot of the question have been asked at this point but I guess first off maybe just on the expense front it sounds like there may have been due to timing of marketing spend and saw lot of that generally planned et cetera. It may have been -- they may have weighed I guess on the operating and EBITDA margins a little bit versus the year ago period. I guess how much of that would you say was due to timing and just more generally I guess what I am trying to get at is how should we’d be thinking about expenses moving forward and the outlook for EBITDA operating margins however you sort of characterize? Thanks.

[Jason Boling:]

Yes, so I would say it’s all due to timing. Realistically, marketing spends as we decided and decide the tackle certain marketing effort. We tackle it and it was in budget and exactly what we’ve spend on doing we didn’t do anything that wasn’t in our budget. So in that respect yes it was all timing. As far as going forward on the expense side, if you look at our first two quarters we were pretty consistent with our expenses. We called out specifically at the back that there was some marketing due to the fact that it was a little bit higher. So, if you take our first two quarters look at that I think that was going to be a good target. Like we said before, we don’t give guidance and we do manage the business on an annual basis, its where -- when we’re looking at the total we know that our marketing spend is still going to come in at what we’ve planned. We know the rest of this spend i.e. G&A is going to come in where we expected as well.

[Dave King:]

Great, okay, so that helps. And then maybe switching gears a bit, in terms of [tendering] out the dividends out of the way. I guess could you talk about just how you’re thinking about prioritizing some of that investment as we go forward between the growth initiatives whether that’s international or some of the other opportunities in versus paying down debt, potential acquisitions and savings some dry powder for that and then maybe even in buybacks. How should we think about these different ones? And what are the major kind of priorities we got first?

[Henry Stupp:]

Starting with our balance sheet right now we’re still fairly unlevered, so our ability to borrow and acquire more brands we have access to ample cash and on an as needed basis. So our ability to acquire brands using our existing EBITDA, balance sheet is there introduce significant transaction certainly with where we stand today and we have not -- we believe there is imparity massive amounts of debt we seeing company is historically getting into trouble I think Dave we might have talked about some of our [holding] materials in the past where we don’t want to over leverage and we certainly are going to get into the scenario where we’re paying the extremely high multiples for brand. So our choice is to identify the brands that we still meet our current criteria for global platform that could leverage our infrastructure. We see acquisitions we made we’re not quite [indiscernible] and specifically targeted by us as being opportunistic and we’ve acquired them based on what we felt a reasonable multiple. And certainly we prefer to pay down debt as rapidly as we can.

[Operator:]

(Operator Instructions) Our next question comes from Eric Beder from Wunderlich.

[Eric Beder:]

Good afternoon. Let me add my congratulations for the solid quarter. Could you just talk a little bit about the Liz Lange rollout in India and how that is shaping up and in addition you’ve spent a lot of capital and time expanding out the infrastructure. When you look at it how is that starting to kick in? And how are you seeing a difference when you go to your company and some thoughts about expansion because you have the infrastructure you’ve created down?

[Henry Stupp:]

In terms of India, we launched in June. It will take several seasons when we will start gaining traction and the attributes might be. We’re just starting, the preliminary results are good, and we’ve got a great partner there, they are planning doubling the size of their chain over the next two to three years. So when we look at the growth rates in India, when we look at who our partner is and we look at our ability to leverage the infrastructure and [indiscernible] with success down the road. But it’s still early and we are building that. I will say however with respect to Canada we have nearly majority of the competition in the Canadian markets and in United States, although we believe this line is probably been top selling fashion designer for maturity up in the United States, and we said it’s element of growth but in Canada, where a big issue is grocery being part of it and they’ve publically announced that they will be increasing their footprint in the Canadian marketplace. So there is a lot to go. In terms of our general infrastructure I believe we feel that the majority of it is in place we don’t see any major additions at this stage and we are starting some leverage on our supply chain, our technical team our product development staff and our marketing team. While we are expanding in our office in Minneapolis to include retail because it has been quite utilized I think we are benefitting new concepts, the new ideas at home and obviously the investments we’ve made in our in-store shop-in-shops really speak to the long-term view that many of our partners have taken to our brand and that’s something that I’m going to talk across about the balance of these significance of those added growth. And this new foray into China I think is going to be a game changer and have maturity brands fit in Chinese market. The impact on our stores is quite dramatic and immediate and we are on the underway in the room [ph] and I will see a significant part of the trade.

[Operator:]

Thank you. (Operator Instructions) We appear to have no questions at this time. So we do conclude this conference call. You may now disconnect your lines. Thank you for your participation.