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VNCE Vince Holding

Participants
Amy Levy VP, IR
Jack Schwefel CEO
David Stefko CFO
Dana Telsey Telsey Advisory Group
Call transcript
Operator

Ladies and gentlemen, thank you for standing by and welcome to the Vince Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Amy Levy, Vice President of Investor Relations. Please go ahead.

Amy Levy

Thank you and good afternoon, everyone. Welcome to Vince Holding Corp's second quarter fiscal 2021 results conference call. Hosting the call today is Jack Schwefel, Chief Executive Officer and David Stefko, 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. After the prepared remarks, management will be available to take your questions for as long as time permits.

Now, I'll turn the call over to Jack.

Jack Schwefel

Great. Thank you, Amy and thank you everyone for joining us this afternoon and thank you everyone for joining us this afternoon for a discussion of our second quarter performance. Overall, our results reflect the continued recovery of our business as we emerge from the COVID pandemic.

We are pleased to see the momentum in our Vince brand approach pre-pandemic levels. This performance reflects the strength of a sophisticated high quality women's assortment and continued momentum in our men's business. At Rebecca Taylor, we are in the early stages of our brand turnaround and remain focused on driving key strategies.

Turning to the performance of our Vince brand, we delivered strong direct-to-consumer revenue growth compared to fiscal 2019 offset by lower sales in our wholesale channel.

We are seeing growing demand for the brand as we continue to deliver beautifully designed collections of high-quality fabrications that have fueled market share gains within the contemporary luxury category for the last four years.

Our latest collections have shifted away from home and lounge themes with current emphasis on vacations and a casual wear to work esthetic.

We have seen strong response to versatile printed silk dresses that can be dressed up for events or paired with a stylish blazer for the office.

We have also seen a pickup in bottoms in the versatile knit dresses as customers seek more away from home styling. In our direct-to-consumer business, the majority of our retail stores have reached pre-pandemic productivity levels.

We continue to view stores as an important part of our strategy to build brand awareness and drive customer engagement.

New store performance has been highly encouraging, particularly our East Hampton New York store, which is a perfect location to showcase our sophisticated casual aesthetic.

During the second quarter, we open one full price store in South Park, North Carolina and three out locations all operating in lines with expectations. Since the end of the second quarter, we have opened Cherry Creek, Denver and Roosevelt Field, New York with strong early results.

We continue to focus new store openings in highly favorable locations, all of the short-term renewable leases. In wholesale, while this channel remains challenged, our wholesale distribution enables us to broaden our consumer reach and will remain part of our longer term distribution strategy.

We are extremely pleased with the performance in both women's and men's at the Annual Nordstrom Anniversary Sale.

We will be launching a Vince crafted collection for Nordstrom and a Family Cashmere theme for the holidays.

We have also been very pleased with the reception of our brand at Bloomingdale's and see opportunity to grow the relationship over time.

As we look ahead, we remain confident that we will build this business back to pre-pandemic levels given the strong consumer demand for the Vince brand. In men's we are exceedingly pleased with the momentum of our business.

We are seeing strong response to our fashion knits, polos, and linen shirts in addition to our shirt jackets. We believe that we are extremely well-positioned within the contemporary men's category from a style and quality perspective as consumers switch from traditional suits to business casual with the return to office.

We also do not see a clear brand leader that has excelled in this category giving us an opportunity to meaningfully gain market share.

As many of you know, loyalty among men tends to be very strong once they have a positive experience with a brand. We plan to continue to expand our assortment, particularly in the outerwear and bottoms categories, to provide a more comprehensive product offering.

We are also excited to share that we have recently added a men's selection to Vince UNFOLD following the success we've had in our women's business. From our brand perspective, we are focused on accelerating our global presence at both Vince and Rebecca Taylor. We recently hired a new global Chief Marketing and Digital Officer, Adrian Stevens to lead this effort. Adrian brings over 30 years of brand experience with iconic companies like Marks & Spencer, also including 10 plus years at LVMH in various roles, most notably at Sephora.com [ph], where he was responsible for online marketing and merchandising. More recently, he spearheaded the move into digital at the specialty retailer World Market as the Chief Marketing Officer and Head of e-commerce and Digital Strategy. Adrian will oversee all marketing and digital initiatives across the brands, including the overall responsibility for our e-commerce channel. He will ensure that our overarching brand strategies are aligned with our individual channel strategies across e-commerce, omni-channel, and social. He has hit the ground running by implementing a disciplined approach to analytics and data, which is already starting to pay dividends in our paid search channels and our email and SMS programs which drives over 60% of our e-commerce traffic.

As part of this focus on analytics, we are now closely evaluating our mobile business and how to make it work harder in revenue terms.

Our email program is already showing an improved trajectory in July and August from previous months, notably on mobile where we have seen the 30% plus increase in conversion. The team is also starting to test new concepts outside of our current strategies. The teams are planning a major campaign for this holiday where the Vince brand is a logical destination for thoughtful gifting, particularly in the cashmere ranges. At the brand level, we are already working on two overarching brand themes, more of which we will talk about nearer to 2022.

As we resume our growth strategies for Vince, we plan to continue to ramp our marketing investments throughout the remainder of the year, emphasizing those areas where we can directly drive quality traffic into our e-commerce business and measure the return on those efforts.

We also remain on track to implement our point-of-sale systems, which will better enable targeted marketing and personalization capabilities.

In addition, we spoke about the expansion of our omni-channel capabilities such as shift from store and buy online and pick up in store, which we continue to expect to complete prior to the -- our fiscal year end. In the international businesses, the effects of the pandemic continue to limit our progress.

Our U.K. store has reopened and we are encouraged by the London stores' welcoming consumers.

We are preparing our third shop-in-shop in Spain in October at Castellana in Madrid's [indiscernible]. We look for bigger and better results in Europe and Asia as COVID-19 is contained. Overall, I am pleased with the momentum in the Vince brand and even more excited about our future. We see significant growth opportunities ahead as we build out our e-commerce capabilities, develop marketing strategies to help amplify brand awareness and drive greater customer engagement and continue to build on the momentum in men's to accelerate growth in this category.

While our international strategy continues to wonderful, I remain highly confident in our ability to expand our presence globally.

Turning to Rebecca Taylor, I continue to see the potential for this brand as we execute a similar strategic plan to what drove the success we achieved at Vince. We believe the brand targets an attractive niche with no clear leader providing us with an excellent opportunity to build market share. We were pleased with the Spring 2021 relaunch of the brand themed Romanticism Redefined, which represented a small collection with emphasis on feminine colorful styles, skewed towards opening price points as we focused on driving full price selling. Extending on the relaunch in Spring 2021, our fall assortment will reflect an expanded collection with an assortment of item categories such as tees and blouses to address more of her lifestyle needs. To support the fall collection, we will be employing a top of funnel marketing campaign focused on paid digital, social media, expanding our influencer strategy, and hosting brand events with creative director Steven Cateron. We already have in works 15 and 32nd messaging from Stephen which will center around the distinct unique themes, which underpin the seasons collection, which go out to across Instagram, Facebook, and our own website. This combined with Rebecca and friends will be an important social content initiative, which will introduce the brand to a new wider generation of clients.

During the second quarter, we opened three outlet stores with encouraging initial results and since the end of the second quarter, we opened one full price location and Roosevelt Field, New York.

While we are still in the early stages of this turnaround, we are optimistic with the early progress in redefining our merchandise assortment, enhancing our brand messaging, and optimizing our channel distribution.

Before turning the call over to Dave, I would like to address the supply chain issues we are experiencing.

While we have brought shipments in early, we continue to see challenges in production with certain factories temporarily shut down due to the COVID, ongoing port congestion and higher freight cost pressures.

We will continue to take steps to mitigate the impact in the short-term while looking at diversifying our sourcing channel long-term. Dave will speak to some of the measures we are currently taking to help offset these pressure stop shortly. In conclusion, we remain focused on advancing the strategies of our distinct fashion brands while maintaining discipline in how we operate the business for the long-term profitable growth. With that, I will turn it over to Dave.

David Stefko

Thanks Jack.

We are pleased to see the accelerated pace of recovery in our business during the second quarter as we continue to progress on our strategies. Total company net sales for the second quarter increased 112.5% to $78.7 million compared to $37 million in the second quarter of fiscal 2020. This is a notable improvement to the 47.5% increase in the first quarter.

For the Vince brand, second quarter consolidated net sales increased 108.5% to $67.2 million compared to $32.2 million in the same prior year period.

Our events direct-to-consumer segment sales increased 112.5% to $32 million in the second quarter, reflecting improved traffic trends, including in our urban markets, which had been lagging non-urban market trends in prior quarters.

Importantly, this segment also increased double-digits as compared to the second quarter of 2019, with our e-commerce business growing at a rate greater than our stores. In our wholesale segment, net sales increased 105%. We remain confident in our market share position within this segment as Vince continues to outperform peers within the contemporary luxury category. Rebecca Taylor and Parker combined net sales increased 139.4% to $11.5 million as compared to the same period last year.

As we have shared in the past, with the COVID crisis, 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. At Rebecca Taylor, we're in the early stages of our turnaround strategy and have reduced our assortment and our refining our distribution, as we redefine the brand. Gross profit in the second quarter was $35.4 million or 45% of net sales. This compares to $13.3 million or 36% of net sales in the second quarter of last year. This increase in gross margin rate compared to the second quarter of fiscal 2020 was primarily due to channel mix, lower year-over-year adjustments to inventory reserves, and reduce depth and frequency of promotions in the direct-to-consumer channel. Selling, general, and administrative expenses of the quarter was $32.7 million or 41.6% of net sales, as compared to $27.3 million or 73.9% of net sales for the second quarter of last year. This $5.4 million increase in SG&A dollars was primarily the result of higher payroll and compensation expense, increased marketing investments, and higher consulting and other third-party costs. Operating income for the second quarter was $2.6 million compared to a loss of $14 million in the same period last year. Income tax expense for the first quarter was $1.3 million as a result of non-cash deferred tax expense created by the current period amortization of indefinite live goodwill and intangible assets for tax, but not for book purposes. Note that we expect to see a tax benefit in the second half of the year and the tax expense for tax benefit recognizing each quarter will be non-cash.

For the full year, we continue to expect this non-cash deferred tax liability to approximate $2.6 million. Net loss for the second quarter was $0.6 million or $0.05 loss per share compared to a net loss of $15.1 million or a $1.28 loss per share in the second quarter last year.

Moving now to the balance sheet. Borrowings under our debt agreements totaled $87.3 million. We ended the quarter with availability of $34.4 million under our revolving credit facility. Subsequent to the end of the quarter, on September 7, we entered into a new $35 million senior secured term loan credit facility, replacing our prior facility of approximately $25 million. This step further enhances our liquidity position by increasing our availability as well as reducing associated covenants. We concurrently entered into a restated and amended revolving credit facility, which reflects the terms of the new term loan credit facility.

As a result of the amendment to the revolving credit facility and new term loan credit facility, we've also reduced our margin rate to pre-pandemic levels, reducing our current cost of capital. Furthermore, we entered into an amendment to our third lien credit facility, which also reflects other applicable terms of the new term loan credit facility. The new term loan credit facility and amended revolving credit facility now mature in 2026 and the third lien credit facility now matures in 2027. More detail is provided in our 10-Q, which has been filed with the SEC.

Moving to inventory, net inventory was $74.3 million at the end of the second quarter, as compared to $92.1 million at the end of the second quarter last year.

As a reminder, we experienced an increase in seasonal inventory levels in the second quarter of fiscal 2020 due to order cancellations in the wholesale channel and temporary store closures.

As a result of the actions we have taken to work through prior seasonal product, our healthier inventory levels reflect a better balance of newness and we feel comfortable with the current inventory compensation. Like many other in the industry, we are experiencing challenges in our supply chain, including factory shutdowns, delayed shipments, and port congestion in addition to higher freight costs.

We are monitoring these potential product delays on a style-by-style basis daily and reacting accordingly, including moving select shipments to air as well as splitting shipments as necessary. Despite delays, we believe our actions will result in product arriving during the appropriate product season. We're also working with our partners to allow for extended periods of full price selling, which should help to mitigate markdown risk. Though we did not see an impact from product delays in the second quarter as a result of our early decision to airfreight certain products, we expect to continue to face cost pressure in the short-term. Nevertheless, we'll continue to monitor the situation and react as necessary to get our product to customers in a timely manner and to mitigate higher costs. Similar to recent quarters, due to the low visibility and continued uncertainty related to the impact of COVID-19, especially given the recent spread of the Delta variant, we will not be providing formal guidance at this time.

For fiscal 2021, we continue to plan capital expenditures net of tenant allowances to be below that of 2020.

Our capital expenditure plans include new store openings, as well as, IT investments specifically related to our efforts to become fully omni-channel.

As we have done over the last two years, we will continue to pursue new short-term leases with attractive terms opportunistically. And finally, please note that today we filed a shelf registration statement for 3 million shares of common stock, including a preliminary prospectus supplement for an ATM program. The shelf registration statement has not yet been declared effective by the SEC. We believe it to be good corporate practice to have a shelf registration that could be used in the future for, among other things, general corporate purposes.

Looking ahead and considering the continued COVID environment, we remain optimistic about the balance of this fiscal year.

While there are continued supply chain pressures, we are taking steps to proactively manage these challenges, including being flexible in our selling strategies.

So, these supply chain challenges may result in cost pressure in the near-term, the underlying strength of our business remains intact. This, along with the actions we have taken to enhance liquidity by restructuring our debt, position us to execute strategies and respond to these macro challenges while continuing to invest in our business. This concludes my comments regarding our second quarter.

We will now take your questions. Operator?

Operator

Thank you. [Operator Instructions] First question comes from the line of Dana Telsey from Telsey Advisory Group.

Your line is open.

Dana Telsey

Good afternoon everyone and nice to see the progress. When you think about the topline and the Vince brand, particularly on the DTC side, basically exceeding 2Q 2019 levels this quarter, and frankly, the DTC operating income at $6.1 million, very impressive. Any way you can break apart the e-commerce in the stores? How did the-commerce business do? What are you seeing there? And how the margin profile of each is? And then just a couple follow-ups. Thank you.

David Stefko

Yes. Dana hi. Nice to hear from you. From a e-comm perspective, our e-comm business was the main driver of 2020 results, obviously. And what's been encouraging as we said in our remarks is that the e-comm business is still outperforming the store business, while the stores have returned -- many stores returned to 2019 levels. The e-comm business is his comping on last year's significant comps.

So, we're encouraged from that perspective. And then from a margin perspective, like many we've gone away from the promotional selling that we all carry through last year and as you recall, we still had some level of promotionality in the first quarter.

So, we were able to be less promotional in Q2 also.

Dana Telsey

Got it. And then it sounds like on the wholesale side, there's opportunity with Bloomingdale's to grow the relationship. The Nordstrom sounds like that's progressing well. What are you seeing there? And how do you see that going -- does it get back to pre-pandemic levels, both in sales and in margins in terms of what you're seeing there? Thank you.

Jack Schwefel

Hi Dana, this is Jack.

Dana Telsey

Hi.

Jack Schwefel

We're very excited about the business on both the DTC and see the potential on the wholesale side as well. Remember that from 2019 numbers, there are significantly less wholesale doors with a couple of our partners than they had in 2019. We're encouraged by the volume per stores. We think there's still significant room to go forward. We think that the wholesale inventory management, we're in a very, very good place now and in control of that and see upside, particularly on the men's side just because it's been a smaller business and we think there's lots of room to continue to grow that, especially in wholesale.

Dana Telsey

Got it. And then in the middle of the summer, I think -- or in July, I think you extended your rental services and launch Borrow, any update on UNFOLD, Rented, Borrow, and what you're seeing there, how that's progressing?

Jack Schwefel

Well, I think the historic results were good enough that we wanted to jump in with men's and see what that meant. And we're not really sure.

I think, we'll see if men will perform in Rent the same way women do. The Borrow pieces is brand new and honestly, the results are so small at this point. It's such a small period of time, I never really want to talk about that yet, but we will in the future.

Dana Telsey

Got it. And then on the supply chain, how much of your production comes from Vietnam? And what -- and when you think about airfreight, is there any hit to margins from the airfreight? We're hearing from everyone 30 to 50 basis point type of hit coming from the investment in airfreight. How do you look at it?

Jack Schwefel

Well, it's twofold.

First off, I'll say that one of the things that's really reassuring to me is how quickly our supply chain guys called it out as I entered the business of where the issues are going to be in the back half of the year. And we were able to take appropriate steps in terms of securing air early on -- far earlier than I think than most.

So. I love the fact that we were able to call that out and react as quickly as we did. Less than 5% of our of our deliveries come from Vietnam, so, that’s a -- it’s a minor problem. Its insignificant in total. I'll let Dave jump on the second half of your question.

David Stefko

Yes.

On the -- from a cost pressure, Dana, we historically have already aired I would say a fair majority of our product in the 40% to 60% range depending on the season.

So, air was a natural for us.

Now, we are airing more to respond to port congestions into factory shutdowns. It wasn't material in the first half of the year, the incremental costs that we incurred, but in the second half of the year, we would expect there is a potential for something in the kind of range that you talked about on the impact.

Dana Telsey

Got it. And the $74.3 million of inventory for this quarter, how do you see inventory dollars playing out for the balance of the year, Dave?

David Stefko

It's all -- it's so much for timing. I mean it's -- we are -- we bought a little tighter, obviously, part of it because of how the department stores have been managing, their buys, they're more sautés as you probably know.

If you have good sell-through, they're not necessarily replenishing, they're more focused on moving through what they have in the store.

So, there's some reaction to that. There is reaction to the off-price channel as it grows, it worked out the way we had hoped it would last year in COVID, as we held on to inventory from last year hoping to move through it this year at better margins than we were offered last year. We feel we were able to accomplish that.

And so we feel we're buying appropriately, but what you see in our quarterly reporting is going to be so much based on timing, and affected not just by when the wholesalers are willing to receive the product, but also how we're all dealing with the supply chain pressures.

Dana Telsey

Got it. And the investment in marketing that is increasing, are you shifting marketing dollars to the back half from the front half or what should we be looking for as we head to the holiday season?

Jack Schwefel

Yes, I mean, we did -- I think we thought of it that way all along. With Adrian's coming in, we're starting to test some things and obviously, we do it on a very disciplined way, where we really look at what the return on the ad spend is and in the world today, you can do that and you can push those levers on a moment-to-moment basis and you see where the return is coming and then turn up the amplification on that or back off of it if you don't see that the investment is going to be there.

So, we're doing that in real-time. We do expect to spend -- to incrementally spend above where we thought we would, but we also think that there's significant upside and higher sales with that as well.

Dana Telsey

Got it. And then on Rebecca Taylor, the loss of $1.06 million is best -- the lowest loss that you've had in quite some time, what were the drivers there and what are you seeing in that brand?

Jack Schwefel

Look we're encouraged with the early findings. We're starting to see unit velocities go to where we want them to go and we'll look to drive that even harder in the second half and into next year. We're sober to the fact that this was -- that we were recreating this brand and that doesn't happen overnight and huge opportunity this fall with the with a collection being expanded from where it's ever been. And really, really excited to really start to go after more customers in a more digital way than we ever have before to really drive them towards to the brand.

Dana Telsey

Thank you.

Operator

Thank you. And I'm showing no further question at this time. I would now like to turn the conference back to Jack for any closing remarks. Jack?

Jack Schwefel

Thank you all for your time today. We look to do our next call -- our next earnings release early December and we thank you all for the time and have a great afternoon. Thank you, operator.

Operator

Thank you, presenters. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you all for joining.

You can all disconnect.