Retail Value Inc.
Q4 2007 Earnings Call Transcript

Published:

  • Operator:
    Welcome to the fourth quarter and year end operating results conference call for Retail Ventures, Incorporated. (Operator Instructions) At this time I’d like to turn the call over to Heywood Wilansky.
  • Heywood Wilansky:
    Today’s call will review the fourth quarter and year-end operating results for Retail Ventures. The earnings release went out earlier today and the way the format will work today is we’re going to have Jim McGrady review the results and then I believe we’ll just take questions at that point and time from the audience. So, without further ado I’d to introduce Jim McGrady our Chief Financial Officer to review the results for fourth quarter and the year-end.
  • James A. McGrady:
    I’d like to restate for you the company’s policy with respect to forward-looking information pursuant to the Private Securities Litigation Reform Act of 1995. Statements made in the course of this call that are not truly historical such as statements regarding the company’s or management’s intentions, expectations or projections of the future are forward-looking statements. Actual results could materially differ from those forward-looking statements. Again, factors that could cause or contributed to such differences include but are not limited to the factors and the risks that are discussed in the company’s Form 10-K for the period ended February 3, 2007 and the soon to be filed fiscal 2008 Form 10-K plus the other reports filed from time-to-time by the company with the Securities & Exchange Commission. Forward-looking statements made during this call are based upon information presently available to the company and the company assumes no obligation to update any such forward-looking statements. I think, as everybody’s probably aware, on January 23 we announced that we had disposed of 81% of our ownership interest in the Value City Department Store operation to BCHI Acquisitions. Just as a reminder to everybody the results of the operations for Value City Department Stores during the period was controlled by RVI, are reported as discontinued operations in our financial statements along with the loss on the transaction which is about $90 million. Today we announced our fourth quarter net loss of $125.7 million or about $2.59 per share on a diluted basis. This compares to a net loss of $35.9 million or $0.76 per share on a diluted basis for the prior year’s quarter. The loss from continuing operations for the quarter was $9 million or $0.19 again on a diluted basis compared to a loss from continuing operations of $40.6 million or $0.86 per share on a diluted basis last year. For the fiscal year we are reporting a net income of $51.4 million or $0.91 per share on a diluted basis compared to the prior year’s net loss of $150.9 million or $3.35 on a diluted basis. The income from continuing operations for the year ended February 2, 2008 was $202.1 million or $3.56 a share on a diluted basis. The loss from continuing operations of $128.6 million or $2.85 per share diluted was reported in the prior year. For the fourth quarter and year-to-date periods we recognized again, as we have in the past year and the past couple of years a non-cash reduction of expense related to the changes in the current value of the conversion warrants, term loan warrants and the conversions feature of those [inaudible] which is the debt that we issued about a little over a year ago. The expense was about $19.5 million and $248.2 million for the quarter and for the year this year. In the press release we had provided a reconciliation of the non-GAAP income from continuing operations so you can see what the effect of those adjustments for the warrant and everything was. I won’t go through that at this point in time but it is available in the press release. Total sales for the fourth quarter decreased $6.9 million or about 1.5% to $452 million from $458.9 million last year. The comparable store sales for the quarter decreased about 0.1% and by segment that quarterly decrease was DSW was -1.7 and Filene’s Basement was a positive 4.8. On a year-to-date we were -.8 and DSW and 3.6 positive at Filene’s Basement for an overall .3 positive. Again, these numbers are also included in today’s press release. DSW sales were about $332.5 million overall which is a one point increase in the quarter and that included a net increase of 36 new stores plus 12 non-affiliated leased show departments and six Filene’s Basements shoe departments. The merchandise categories of men’s, women’s and athletics had comparable sales decreases of .7%, 2.6% and 9.7% respectively while our accessories division at DSW had an increase of 5.7%. The Filene’s Basement sales decreased 8% in the quarter to $119.5 million and that includes a net increase of five new stores. The merchandise categories of home, jewelry and children’s had comparable sales decreases of 3.6%, 24.5 and 1.6% respectively. The men’s and accessories categories had comparable sales increases of 8.9% and 19.1% respectively. Noting that the decrease in jewelry department as you may know that earlier in the year we did transfer most of the operations of the jewelry to a lease department with an affiliated third party and most of that is now recognized through lease department income so we would expect to see a sales decline of about that on a comparable basis. As we take a look at our margin, total gross margin for the fourth quarter decreased $14.7 million to $170 million. In the fourth quarter gross profit as a percentage of sales decreased 260 basis points to 37.6% from the previous year’s 40.2%. The decrease in gross profit is comprised of a decline at DSW of $8.5 million and at Filene’s Basement of $6.2 million. For the quarter gross profit as a percent of sales was 38.7% at DSW and 34.7% at Filene’s Basement. DSW’s gross profit for the quarter as a percent of sales decreased from 41.7% to 38.7 as I noted earlier. The decrease is attributable to increased markdowns partially offset by an additional higher markup on some of the goods. Filene’s Basement’s gross profit for the quarter as a percentage of net sales decreased from 36.7% to 34.7% and is attributable to increased markdowns due in part to clearance merchandise that we were selling at the downtown Boston store but again, we did have improvement in the initial markup for that operating unit. For the year-to-date period total gross profit increased $42.1 million to $751 million and as a percentage of sales decreased 140 basis points to 40.1%. Our total selling, general and administrative expenses for the quarter increased by $11.6 million to $172.6 million and as a percentage of sales was 38.2%. For the year-to-date period SG&A increased $80.1 million to $694.1 million or 37.1% of sales. As we take a look at our operating profit by the operating segments for the quarter DSW was $972,000 positive, Filene’s Basement was a negative of about $1.9 million. There’s a $19.5 million profit at what we call the corporate division which is primarily the warrants, the change in fair value of the warrants and the converts and features like that and that is $18.6 million. If we adjust for those derivatives that come out of there we would have an overall operating loss of about $900,000. Again if we take a look at the prior year quarter that would have been somewhere around $26.2 million. As we take a look at our interest expense we see that it was $1.9 million for the fourth quarter compared to $300,000 worth of income for the quarter last year. For the year, net interest expense was $3.1 million. This was about a $900,000 increase from the prior year. The increase was primarily due to the increased average borrowings during fiscal 2007. As an offset interest income rose $3.2 million to $10.5 million and this is primarily due to the investments that are held at the DSW segment. Our cash raises is somewhat unusual for the quarter and I think it’s probably better just to look at it for the year. Again, the derivatives, that valuation adjustment that’s in there has had a very, very significant impact on the rate as well as the valuation allowances that we’ve taken on some state and local deferred taxes. As we turn to our balance sheet our total inventory was $339 million compared to $328.6 million last year which is about a 3.3% increase which really kind of keeps pace with the store growth that we have out there. Our net working capital was $295.9 million and this compares to $274.4 for the prior year. The current ratios were 1.98 and 1.45 respectively and if we were to adjust for taking in the value derivatives and everything like that the working capital would have been $338.1 million with a current ratio of 2.3. This is kind of a valuation that you might want to take a look at. Net cash use for capital expenditures was approximately $118.9 million during the year a lot being that depreciation and amortization totaled about $40.8 million compared with about $33.1 million last year. During fiscal ‘07 we spent our money on about $52.4 million in new store capital expenditures, $9.4 million for improvements to existing stores, $15.9 million for office and warehousing and $6.3 million related to the start up of the DSW ecommerce channel. We also had about $14.9 million that we expended for IT equipment upgrades and new systems. Our EBITDA from continuing operations is $4.9 million versus a -$31.5 for last year. Again, as always adjusting for the warrant expense and income that’s run through the statements for each of those years it would have been $12.4 million and a positive $33.7 for the prior year. As you can see those adjustments are pretty significant as we go through the year. The availability under our secured revolving credit facilities was $161.3 million that’s for both DSW and the Filene’s Basement facility combined. On a consolidated basis the outstanding lines of credit totaled approximately $3.4 million and about $15.7 million for DSW. Our current consolidated availability is $162 million which is comprised of $22 million of availability under the Filene’s Basement revolver and $140 million for the DSW revolver. That concludes the historical review of operations for the quarter and some of the highlights for the year. Again, a lot of these comparisons are in the press release and at this time we are not going to provide fiscal 2008 outlook and we’re going to have to wait until we can get some guidance from DSW and work through some of the Value City shared service expenses that we’re going to allocate to them. At this time I think Eric we will open up the lines for questions.
  • Operator:
    (Operator Instructions) Your first question comes from Adam Camora - EnTrust Capital.
  • Adam Camora:
    A couple of quick questions, the first is on the balance sheet what it looks like post the Value City transaction. I’m trying to understand just looking at these discontinued liabilities and that sort of thing. So, to get started, on the cash side it looks like there is $100 million on the balance sheet at RVI corporate. If I take out the $130 or so at DSW it seems like RVI corporate ex DSW had something like $40 to $50 million in cash.
  • James A. McGrady:
    That’s right. Actually, at this point in time I think it’s about $44 million.
  • Adam Camora:
    Now, if I look at the liabilities at RVI now that Value City has gone away it looks like on the balance sheet here there’s approximately $150 million or so of debt and I assume the PIES are – okay it looks like there is $158 million of debt, is that all the debt that’s left at RVI corporate and included in that is something like $135 million of PIES?
  • James A. McGrady:
    Actually the PIES amount is $143,000,750 and the balance of the debt that is out there is related to the revolving credit facility of Filene’s Basement plus a very, very, very small piece of debt that is related to the term loan facility, it’s about $250,000.
  • Adam Camora:
    So, all of the other debt is basically gone so the next time we see a balance sheet which will have the Value City affected transaction in it, we should see something like $40 million in the cash and $15 to $20 million of debt ex the PIES which I guess given the current stock price of DSW can be satisfied with the 5.5 million shares at your discretion.
  • James A. McGrady:
    Well, on the [FIs] you mean, yes. Yes. It is at our discretion and it is about 5.5 million shares. That actually doesn’t come due until 2011, July or August of 2011.
  • Operator:
    Your next question is from Sam Kidston - North & Webster.
  • Samuel A. Kidston:
    What were the cash taxes for the year?
  • James A. McGrady:
    Cash taxes paid.
  • Samuel A. Kidston:
    Yes.
  • James A. McGrady:
    I’m going to have to look that one up here really quick.
  • Operator:
    Your next question is from David Mann - Johnson Rice & Company
  • Heywood Wilansky:
    I couldn’t hear Sam and I’m not sure you heard me respond that cash taxes paid were $35.5 million in fiscal 2007. I apologize for interrupting there David.
  • David Mann:
    Congratulations on the exit from Value City. I know you all worked hard on that. Along those lines, are you able to give us any color on, or at least put together somewhat Value City looks like now since you still have at least some ownership there and it does impact you and DSW in terms of the shared services. How many stores are they operating? How is business going there? What are the prospects?
  • James A. McGrady:
    I can give you some of the operating details. I think that’s a fair assessment to say that they are in the process of going through a very hard and deep evaluation of each and every one of the stores to find out its potential and exactly how it’s going to fit into their marketing mold and their merchandise presentation. To date I think that they have actually closed eight stores. They do have an expectation to close some more but really most of the stores that they’re going to close were part of that Burlington transaction that was previously announced. So with that, at this point time, the continue to operate somewhere in the area of about 90 stores, maybe even 92 stores. As far as what their sales are and everything like that, I’m not going to comment on that. But they got off to what I’ll consider to be a slow start as far as being able to re-merchandise the stores and establish relationships with some of the vendors that we had previously used in the Value City operations, but it certainly appears like as though they have picked up the pace, merchandise is starting to flow through into the stores. They have reduced significantly the inventory levels in the stores and I think that they have done that with a mind for a new merchandising concept that perhaps they’re going to establish in their stores.
  • David Mann:
    In terms of the shared services can you give us some sort of timetable and at least a quick overview of what’s going on there so we can assess how that will impact you and DSW?
  • James A. McGrady:
    Certain of the shared services processes have been transferred to DSW at this point in time and I think that they have announced that and service finance functions have been transferred. BTS was transferred, the IT function was transferred probably a little over a year ago, and it might have been a little bit longer than that actually. Human resources have been transferred to DSW at this point in time so the process is working. What we need to do is really be able to sit back and have the new Value City entity tell us exactly what services they’re going to need on a go forward basis so we can sit back and the make the adequate provisions to either provide the service or to make cuts where necessary if they’re not going to utilize the service that we believe that they’re going to take from us on a go forward basis. As far as the timing of this is concerned, I think the contract that we have with them is pretty specific on how the cost of this work and the longer period of time they wait, the more I’ll call the more significant the cost becomes to them on what they can expect to pay for the services that we are providing. We are presently talking with them. We being myself and some of the people at DSW that are now involved in the shared services and we’re going through the process of establishing a budget and shared services and actually helping them with some of the backroom processes where they might not need to have perhaps the level of service that they had historically received and I think that they’re willing to accept that occurring. All that being said, David, I actually think it’s probably going to be at least a couple more months before we have something that we can publicly announce and say we’ve come to an agreement with everybody on how this is going to be. I think internally between the two companies that we’ll be able to do that on a much quicker timetable. I actually probably hope to have at least an agreement of understanding sometime within the next 30 days.
  • David Mann:
    Within that agreement then, any of the costs that are affiliated with Value City at least you know what those costs will be, it’s just a matter that they may be subject for cuts in the future?
  • James A. McGrady:
    That is correct, yes.
  • David Mann:
    One last line of questions on filings [inaudible] it looks like the 2007 numbers that you might have had negative EBITDA, can you quantify what that number was and if it was negative, then how are you going to adjust that or how do you get that to where it’s not going to be a drain on your cash resources?
  • James A. McGrady:
    It was a negative EBITDA there at the Basement. I don’t have that right in here in front of me but what I can say is that the Basement if you remember we closed the downtown Boston store this year and we took some pretty significant markdowns on our inventory as we liquidated through there. We also took – excuse me while I think about this. We took that. We are receiving monthly income from that as we go forward here and I think with it we’re going to break even overall. As a matter of fact I’m certain that we’re going to break even overall on what we’re going to receive as far as a cash basis but unfortunately the way the accounting rules have worked out, we’re going to have to amortize that receipt over the remaining life of that lease. This is going to take us out through the 2020’s and it’s just one of those things. We also had some other adjustments there. We had a couple of stores that we actually took a charge on for the 144 valuations that haven’t performed to expectation. We took a store closing charge there for the downtown Boston store as well and we also had acceleration appreciation that went through there and these are pretty significant events that are income impacts that have affected Filene’s Basement. Those as a group are probably close to about $8 million. That affected the Basement that I’ll call that were unusual things that happened during a period of time not pleasant things but they were unusual. But I think each one of them is going to have a positive impact as we go forward. So that’s the bright side.
  • David Mann:
    In 2008 what is the cap ex you plan for the company and do you plan to open many stores or have you put that on hold?
  • Heywood Wilansky:
    In 2008, David, we are opening one store. It’ll be our first store in Florida at the Aventura area currently projected to open in October and we are expanding one store which is our downtown Washington, D.C. store on Connecticut Avenue and that expansion is expected to be in operation some time in June. We are starting to look at other things but we have no other commitments out there in 2008 and 2009 of course we have a large commitment to reopen the downtown store which we have stated would reopen in April of 2009 and we are comfortable that we will hit that date perhaps better than that but not worse than that. A lot of our efforts with that are really dedicated to opening Aventura and focusing on the reopening of downtown Boston which as you know is not a 15% store for us. It is a significant hurt to our company when it’s closed and the reopening is a big task for a company of our size and will require our attentions. We’re trying not to get too many other distractions going. Opening is a big task for a company of our size and will require our attention so we’re trying not to get too many other distractions going until we reopen that store in April of ‘09.
  • Operator:
    Your next question comes from Michael Rosenthal - QVT Financial.
  • Michael Rosenthal:
    Heywood, could you maybe talk a little bit about the performance of Filenes these days and –
  • Heywood Wilansky:
    Be careful what you say, Michael, because we haven’t reported since we’re reporting quarterly we can’t be specific on numbers, but I would chalk this outline for you in terms of my expectations. In 2007 we finished our [inaudible] consecutive year of comps in the 3% or better range. 2008 my anticipation is to be consistent with that track record of 2007. We took some margin hits on excess inventory and in 2008 I feel certainly quite comfortable that we will have comp store improvement over last year and margin percentage improvement over last year and I would say that when we report our first quarter which is going to happen I guess in about six weeks or so, seven weeks, that the first quarter should indicate that we’re on track for what we’ve outlined for the year.
  • Michael Rosenthal:
    That sounds quite positive.
  • Heywood Wilansky:
    I keep hearing tough business around with comp increases and margin decreases that I think are worse than that around on average and I think that we’re performing at the better piece of the peer group at this point.
  • Michael Rosenthal:
    Can you just describe the positioning of the store and why it would be in a position to out perform in this environment?
  • Heywood Wilansky:
    First of all, if you look at the comp sales increases from the companies that have reported you see that some of the off price players have out performed what I call the traditional department store players pretty significantly. In the month of March, TJ’s had a positive comp and Ross Stores had a breakeven comp and then you look at the Penneys and Kohls of the world and you see some pretty dramatic decreases. While Federated didn’t report, they’re reporting their sales quarterly, we all hear the same things and my sense is that their performance was not very good as well on a comp store basis particularly in the Northeast division which is where we are headquartered. I think that there’s something to be said for the fact that when things are though people are more careful on how they spend their money. They may be shopping less but then they’re more selective in where they shop and that there may be some transference from the department store or what we’ll call the more typical full price stores into the off price channel. Within the off price channel I think we have position to sell somewhat uniquely as being the higher quality off price player which lets us stand a little bit apart from the other significant players in that area, that segment. So I think we’re able to continue to be differentiated from the other off price players and the department store customer I think is pretty comfortable shopping in our store environment with a merchandise presentation that’s more akin to a department store, but again with prices that are significantly different than department stores.
  • Operator:
    Your next question is from Adam Comora - Entrust Capital.
  • Adam Comora:
    Do you have a sense for whether or not we generated an NOL or there’s an NOL that resides now at RVI Corporate from all the Value City transactions?
  • James A. McGrady:
    Yes, there is.
  • Adam Comora:
    Any sense of the size of it?
  • James A. McGrady:
    It’s a little bit hard to tell with all the valuation I’ll have to put on it as we go through here but it’s around $100 million, it’s a little bit over that.
  • Adam Comora:
    Now that Value City is gone, basically we have a company that has net cash on the balance sheet to the tune of about $20 million, an NOL, 22.5 million shares of DSW if I adjust for the PIES and Filene’s Basement?
  • James A. McGrady:
    Correct.
  • Operator:
    Your next question is from Sam Kidston - North & Webster.
  • Samuel A. Kidston:
    Two quick other ones, one is in terms of the warrants outstanding is that still approximately $9.7 million total warrants?
  • James A. McGrady:
    The total warrants that are outstanding that are convertible into RVI are $12.7 million and it’s that $8.3 million of convertibles and about $4.4 million in term warrants.
  • Samuel A. Kidston:
    In the term. And those are all at 450?
  • James A. McGrady:
    Yes, they are.
  • Samuel A. Kidston:
    Follow up on the last questioner’s train of thought, any thoughts of simplifying the structure further now that Value City is out? Clearly the market doesn’t even give us the value of our DSW per RVI?
  • James A. McGrady:
    I agree with that and unfortunately I have to agree with it. But at this point in time we are looking and as Heywood stated really the objective right now is to focus upon the existing store base at Filene’s Basement. As far as simplifying the corporate structure further, if I want to read into your question what I think you might be asking, obviously we couldn’t answer a question like that if we knew. But at this point in time our focus right now is going to be on making the existing Filene’s Basement stores profitable and to take what actions are necessary there to get that to happen. Additionally at DSW we’re taking a hard look. You know, they’re opening up their e-commerce business. We’re pretty excited about then. Again, they’re planning to open up a pretty significant number of stores in the upcoming year and have got a lot of commitments in place already to do so. At this point, there is really no focus on what I want to call narrowing the corporate structure at this point in time. We are taking a real hard look again at expenses and working close with Value City in an effort to make sure that we can provide the services with a minimum number of people and expenditures that we have while at the same time making sure that we give a quality service to everybody, all of the operating businesses that we have.
  • Heywood Wilansky:
    We’re clearly looking at whatever eliminations or duplication or redundancies that can be achieved over the next few months as we go through this whole process.
  • Operator:
    There are no further questions at this time.
  • James A. McGrady:
    Thank everybody for listening and talk to you later.
  • Heywood Wilansky:
    Thank you everybody.