Vince Holding Corp. (VNCE) Q2 2024 Earnings Call Transcript

Good afternoon. Thank you for joining the Vince Second Quarter 2024 Earnings Conference Call. My name is Victoria and I will be your moderator today. All lines will be muted during the presentation, with a chance for questions and answers at the end. I would now like to hand the conference over to your host, Akiko Okuma. Thank you. You may proceed, Akiko.

Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp. second quarter fiscal 2024 results conference call. Hosting the call today is Dave Stefko, Interim Chief Executive Officer, and John Szczepanski, 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 expects. Those risks and uncertainties are described in today's press release and in the company's SEC filings, which are available on the company's website. Investors should not assume that statements made during the call will remain operative at a later time, and the company undertakes no obligation to update any information discussed on the call. In addition, in today's discussion, the company is presenting its financial results in conformity with GAAP and on an adjusted basis. The adjusted results that the company presents today are non-GAAP measures. Discussions of these non-GAAP measures and information on reconciliations of them to their most comparable GAAP measures are included in today's press release and related schedules, which are available in the Investors section of the company's website at investors.vince.com. Now, I'll turn the call over to Dave.

Thank you, Akiko, and thank you, everyone, for joining us this afternoon. I will begin with a review of highlights from our second quarter performance before turning the call over to John to discuss our financial results and outlook in more detail. Overall, we are pleased with our second quarter results. We delivered sales growth of nearly 7%, and adjusted operating margin of 1.5%, driven by 80 basis points of gross margin expansion and ongoing disciplined expense management. These results exceeded our guidance as we benefited from the timing of wholesale orders, which shipped earlier than expected. That said, excluding the benefit from these earlier shipments, our underlying wholesale business was solid and performed in line with our expectations as we have now normalized our off-price business and are seeing strong demand across our key partners. The strength in our wholesale business helped to offset softer performance in our direct-to-consumer business, which continued to be impacted by our pull-back in promotional activity across our store and e-commerce channels, as well as a lower mix of markdown units due to tight inventory management and fewer stores compared to the prior year. This was particularly felt in the latter part of the quarter, which is a typical sale period across retail and customers are less inclined to pay full price per product, especially ahead of the fall season. So, despite seeing healthier traffic trends in the quarter, our focus on maintaining a strong full-price assortment weighed on conversion during the period. However, taking into account these dynamics, we are pleased to continue to drive a year-over-year mid-single-digit growth rate in our full-price customer file in the quarter. During the quarter, we saw strength across both our women's and men's businesses. In women's, customers gravitated toward our sweaters and our knit tops and bottoms. In addition, our men's customer continued to respond well to our linen program as well as our knit t-shirts as he shops with a much more 'buy now, wear now' mindset. We are looking forward to continuing to expand our men's business and, in the fall season, we are excited for our newly launched enhanced bottoms program, which highlights an elevated product offering a broader range of fits with superior Italian fabrics at a competitive retail price. This was the first quarter for Vince where we had men's in all Nordstrom doors. We are excited by the good response to both our men's and women's products during the annual anniversary sale, which drove record results for us this year. Once again, Vince was mentioned by Nordstrom's on its latest earnings call as one of its strong brands in women's apparel this past quarter. Nordstrom continues to be a strong partner, and together, we're working closely on initiatives to enhance the Vince experience in their stores. Along with our relationship with Nordstrom, we are continuing to see solid demand across other key wholesale partners and are pleased to be in a healthier inventory position to better fulfill demand and capitalize on replenishment orders in season. As we enter the fall season, we lean into key franchise categories for Vince that we had highlighted in our Future Heritage campaign, which was recently highlighted in Women's Wear Daily and Forbes. The campaign features leathers and cashmere, as well as suede, tweed, and plaid patterns. Through this campaign, we are continuing to invest into more top-of-funnel marketing as we look to amplify our brand awareness. In addition to our brand marketing investments, as we head into the second half of the year, we are working to drive customer acquisition via new traffic-driving and targeted-audience campaigns. We have plans to continue to enhance our customer acquisition efforts through initiatives focused on increasing lifetime value across our customer base, especially across our top 10% of customers who represent nearly 40% of demand across full-price direct-to-consumer. The teams are finalizing the plans this month with respect to this initiative, so we're well-positioned to launch ahead of the holiday quarter. As we have moved into fall, we're also seeing a greater engagement with our customers across key marketing channels. Our fall launch teaser was our top-performing social media post for August. Our email highlighting our fall lookbook outperformed last year's message, and our fall direct mail significantly outperformed last year's mailing as the fall collection is resonating with customers. As we look ahead beyond this fall, we continue to see a long runway for growth for Vince through ongoing customer acquisition, growth of our men's business, new store openings, and international expansion. With respect to our international business, we're seeing solid sales growth from our first London store and are evaluating potential opportunities to expand in that region over time. We continue to see opportunities within Europe to expand our presence, but we will be taking a more measured approach to the rest of the world as we navigate a dynamic environment, particularly in China. We have recently made the decision along with our operating partner to pause our operations in China and focus on efforts in regions that have greater productivity and profitability opportunity at the moment. This decision does not have a material impact on our financial results or outlook, and we expect the two test stores will be closed before the end of the fiscal year. Our focus today is to position Vince for long-term sustainable growth, and we believe through the actions and strategies we are executing, we are delivering on this objective. A key element to this progress is our transformation plan. And through our team's efforts, at the end of the second quarter, we are ahead of our mid-year fiscal 2024 target. In addition to our work, we're also maintaining a strong relationship with Authentic through our strategic partnership in ABG Vince. ABG Vince recently launched its Peerless Men's Suiting Collection under the Vince label in select wholesale partners and expects to launch its Centric Brands collection of handbags, belts and small leather goods under the Vince label beginning in 2025. In closing, we are pleased with our first-half results and the progress we are making across our businesses. While we have seen some improvement in trends in our direct-to-consumer channel into September, we believe it is prudent to update our sales guidance for the year to reflect a more cautious top line outlook given the increasingly uncertain environment with respect to consumer spending and the potential impact from the shorter holiday shopping season as well as the upcoming November election. That said, our wholesale business continued to remain on track with our expectations and we are very pleased to raise our profitability outlook despite the change in our overall top line expectations. I want to thank all of our teams as they continue to execute and deliver on our objectives while maintaining a strong focus on strengthening our relationships with our customers and wholesale partners. We have strong confidence in the future for Vince and are committed to continuing to position Vince for long-term success. Our Board recently approved a stock repurchase program and, as John will review, we intend to continue to be disciplined stewards of capital with a strong focus on investing in our business, executing on our operating model, and delivering value to all our stakeholders. I'll now turn it over to John to discuss our financial results and outlook in more detail.

Thank you, Dave, and good afternoon, everyone. As Dave discussed, we're pleased with our overall second quarter results as we delivered sales and adjusted operating margin above our guidance expectations, driven by earlier-than-expected shipments in our wholesale channel, as well as ongoing execution of an improved full-price business, disciplined expense management, and execution of our transformation plan objectives. Turning now to our results in more detail. Total company net sales for the second quarter increased 6.8% to $74.2 million compared to $69.4 million in the second quarter of fiscal 2023, which included an immaterial amount of sales from the Rebecca Taylor and Parker segment, which has been wound down. The year-over-year increase in total company net sales was driven by a 29.6% increase in our wholesale segment as we capitalized on our inventory availability to meet demand resulting in earlier-than-expected shipments at the end of the quarter. Excluding the benefit from these earlier shipments, our total sales results would have been more in line with the lower end of our guidance expectations, as our underlying wholesale channel performed in line with our expectations, as Dave reviewed. This performance was partially offset by an 18.1% decline in our direct-to-consumer segment, which was impacted by the closure of two full-price stores and three outlet stores, as well as the temporary closure of one of our full-price stores due to renovations. Store closures negatively impacted direct-to-consumer sales by 440 basis points in the period, and the remainder of the year-over-year decline was primarily attributed to lower markdown sales given our ongoing efforts to pull back on promotions despite being a typical sale period for the industry, particularly in the later part of the quarter. Excluding the impact from store closures, we continue to see stores outperform e-commerce and attribute some of this to a greater impact from the pullback on promotions on the online business compared to stores. As Dave noted, we're pleased with the full-price business we are driving. Gross profit in the second quarter was $35.1 million or 47.4% of net sales. This compares to $32.3 million or 46.6% of net sales in the second quarter of last year. The increase in gross margin rate was driven by approximately 510 basis points related to lower promotional activity, lower discounting, higher pricing, and lower freight costs, driven in part by actions related to our transformation plan. These factors were partially offset by a 220 basis points unfavorable impact from channel mix and royalty expenses of 180 basis points associated with the licensing agreement with Authentic Brands Group. Selling, general and administrative expenses in the quarter were $34 million or 45.8% of net sales as compared to $31.5 million or 45.4% of net sales for the second quarter of last year. The increase in SG&A dollars was primarily driven by a $2 million increase in rent and occupancy costs, mainly due to lease adjustments in the prior year. In addition, during the quarter, we incurred $1.8 million in severance and incentive compensation expenses that we did not incur in the prior-year period. These costs were partially offset by $2 million of expense favorability compared to the prior year due to transaction-related expenses related to the ABG deal. Given the complex year-over-year dynamics with the timing of the ABG transaction, the wind down of the Rebecca Taylor business, the severance expenses incurred this year, and the reestablishment of our incentive compensation program, it is worth noting that excluding these impacts, we leveraged our core operating cost structure in Q2 due to our ongoing disciplined expense management. Operating income for the second quarter was $1.1 million compared to an operating income of $32.9 million in the same period last year. Following the completion of the sale of 75% of the Vince brand IP to Authentic Brands Group in the second quarter of fiscal 2023, the company realized a gain of $32 million and incurred transaction-related expenses of $2 million. Excluding these one-time items, adjusted operating income was $2.8 million. Adjusted operating margin declined approximately 260 basis points compared to the prior year, driven primarily by the favorability from lease adjustments in the prior-year period of about 280 basis points, as well as a 240 basis point impact from severance expenses related to actions taken to streamline our leadership structure and increases in reestablishing our incentive compensation program. In addition, our adjusted operating margin benefited from gross margin expansion despite incurring 170 basis points related to royalty expenses. This performance exceeded our expectations as we diligently managed expenses during the period. Net interest expense for the second quarter decreased to $1.7 million compared to $4.1 million the prior year. The decrease was primarily driven by expenses related to refinancing transactions in the prior year as well as the year-over-year reduction in debt. Income tax benefit for the second quarter was $0.8 million due to the reversal of the $0.8 million of ordinary tax expense recorded during the first quarter of fiscal 2024 as the company has year-to-date ordinary pre-tax losses for the interim period and is anticipating annual ordinary pre-tax income for the year. The company has determined that it is more likely than not that the tax benefit of the year-to-date loss will not be realized in the current or future years, and as such, the company should not recognize tax provisions for the interim periods until the company has year-to-date ordinary pre-tax income. The tax benefit in the second quarter of fiscal 2024 compares to an income tax benefit of $0.6 million in the same period last year. Net income for the second quarter was $0.6 million or earnings per share of $0.05 compared to net income of $29.5 million or earnings per share of $2.36 in the second quarter last year. The prior-year period includes one-time items related to the Vince IP sale gain and transaction expenses. Excluding these items, adjusted net loss in the second quarter of fiscal 2023 was $0.5 million or a loss per share of $0.04. Moving to the balance sheet. Net inventory was $66.3 million at the end of the second quarter as compared to $85 million at the end of the second quarter last year. As we're continuing to take a disciplined approach to investing back into inventory to help support the growth we are seeing in our wholesale channel, we now expect inventory for fiscal 2024 to be up low-single-digits to fiscal 2023 as we expect increased demand for our products for the spring 2025 selling season based on the success we have seen to date with our wholesale partners. With a healthier balance sheet in place, we are committed to continuing to execute our operating model while investing in our growth and delivering value to shareholders. The Board has authorized a stock repurchase program for up to $1 million of common stock that is expected to be funded through existing cash and future free cash flow. The timing, manner, price, and amount of any repurchases are dependent on many factors and will be made in the best interest of the company as detailed in our release. Turning now to our outlook for the balance of the year. As a reminder, starting with the third quarter of fiscal 2024, we will have anniversary periods of non-comparable royalty expenses and non-comparable expense favorability due to the wind down of Rebecca Taylor, and therefore, Q3 will be our first full quarter in which we are comparing a more like-for-like business model. In addition, we're in a much healthier position from a liquidity perspective this year and we're able to invest into inventory in a much more balanced approach for the fall season this year. For Q3 fiscal 2024, we expect total net sales to be flat to down low-single-digits relative to the prior year. This expectation takes into account the earlier-than-expected timing of wholesale shipments, which benefited Q2, as well as the expected ongoing impact of more disciplined promotional activity in our DTC channel. As we have said, while these actions have near-term impacts on top-line, we believe they better support the long-term health of our business. With respect to the operating margin, we expect Q3 fiscal 2024 operating margin to increase approximately 350 basis points to 450 basis points compared to last year's adjusted operating margin of 3.7%. We expect improved full-price penetration, disciplined promotions, and the impact of our transformation initiatives to be the primary drivers of the operating margin increase, somewhat offset by SG&A deleverage from incentive compensation. With respect to our full-year fiscal 2024 outlook, which, as a reminder, is a 52-week fiscal year, we now expect total net sales to decline in the low-single-digit range compared to the 53-week fiscal 2023. While our guidance for our wholesale channel has not changed, we have revised the embedded expectation for our DTC channel. While we have seen an improvement in trends heading into September, we believe it prudent, given the increased uncertainty around the consumer environment heading into the second half, to take a more conservative approach to our outlook, as Dave reviewed. Despite the revision in our sales outlook, we now expect adjusted operating margin to increase 25 basis points to 50 basis points compared to fiscal 2023 adjusted operating margin. We expect the impact of royalty fees through May 2024, which were not incurred in the comparable fiscal 2023 period, to impact operating margin performance by approximately 140 basis points and expect to offset this headwind through ongoing gross margin expansion and disciplined expense management, driven in part by our transformation efforts. As we look beyond this year, we continue to believe in the opportunity we see in front of us and are confident in our plans to deliver long-term profitable growth.

Good afternoon. Congratulations on the progress.

Thanks, Eric.

Thank you.

Let's discuss some aspects of your guidance. Regarding the wholesale aspect, it appears that items expected to ship in Q3 were actually shipped in Q2. What are your thoughts on potential reorders or other factors that could support the wholesale business? Additionally, with the current inventory, are you equipped to meet any increased demand from wholesale that may arise, particularly if the shipments from Q2 encourage a more aggressive approach to early shipments this year?

Eric, that's a great question. We believe having product available on the floor is always beneficial as it boosts our reorder business and is essential to our operating model. We are confident that our inventory levels are appropriate, especially now that we've been able to reinvest due to our liquidity position. We feel we have the right inventory balance not only for our wholesale channel but also for our direct-to-consumer channel to effectively meet demand in the second half of the year.

Okay. What should we consider regarding the store closures in Asia with your partner and the potential to expand in London or Europe? Can you share insights about the domestic business? You mentioned a net decrease of five stores in Q2. What opportunities should we be aware of, and if there are opportunities, when do you anticipate being able to grow the owned store network in the US?

Yes, Eric, we are exploring opportunities in the US right now. As you know, there is quite a bit of untapped potential here. We are primarily focused in cities like New York, Los Angeles, and Miami, but we have less presence in places like Chicago, Denver, Houston, Dallas, and growing markets such as Nashville, where we currently have no stores at all. We are actively seeking opportunities, and as we identify ones that align with our model and return on investment, we will proceed with future investments.

Okay. For my last question, you mentioned the expansion of men's pants in stores. I've noticed that the variety of colors has continued to grow, likely in response to inventory management. I recall you previously discussing the goal of reaching about 30% of men's products in the next three years. Is that target still in place? What can we expect in the latter half of the year regarding men's expansion? Thank you.

Thanks, Eric. So, yes, we have seen expansion in our men's business, where we sit today through the first six months versus the prior year, the men's pant program, obviously, is a new opportunity for us. Thank you for recognizing the breadth of the product that we've put out. We've just had our first quarter with Nordstrom's being an all men's store. We do speak with other wholesale partners about growth opportunities and we are making further investments as we see the results of the men's bottoms program and what opportunities that may lead to next. So, yes, we do feel we're on track for that three-year goal of 30%.

Great. Congratulations, and again, good luck in the holiday period.

Yeah. Thank you, Eric.

Thank you very much for taking my questions, and good quarter. Couple of things. Can you quantify the amount of sales that were pushed into the Q2? Was that over $5 million?

Hi, Mike. So, yeah, we definitely saw the benefit from having inventory available early in the quarter — earlier than expected in Q2 versus Q3. We did – essentially, the beat that we had to our guide represented the majority of that acceleration. So that's what sort of drove our cadence in terms of Q2 and what we expected in Q2 versus Q3.

Okay. And then, you mentioned about that. I'm sorry.

I was saying that we had seen a 440 basis point increase, right, John? Did you hear me, John, or no?

That was not 440 basis points, no.

I would like to clarify the timeline for expanding the men's line. I understand that you've introduced more colors, but I am curious about the addition of new products. Are you planning to add more men's product lines going forward? I'm trying to grasp the pace of product development and what will likely be introduced at Nordstrom, as well as when that will happen.

Yeah, we really haven't talked about anything, but with the launch of the men's bottoms program, it's not just more colors, it's a new fit. It's a better fabric. So, we're trying to see the results of that. Michael, we also are looking at with our new licensed partner in the men's suiting area ways that we could take advantage of that as we look forward. So, yes, there are other categories that we are looking at, but nothing other than potentially something with our licensed partner that we may launch in the near term.

Certainly. In terms of the consumer, many companies have noted a split between higher-income consumers who continue to spend and lower-income consumers who are facing challenges. I understand that previous promotions might have attracted more lower-income customers, and I'm curious if there's a possibility that you might need to increase marketing efforts—not just promotional spending—to appeal to higher-income consumers. I'd appreciate your insights on the current market environment, the positioning of your products, and your perspective on how the market might evolve.

Yes, as we enter the third quarter, we've observed trends in our business over the past six weeks since the beginning of Q3. Two key observations stand out. First, there has been a shift from July sales and markdowns as families prepare for back-to-school shopping, which creates excitement for fall shopping. We notice that our products are resonating well with consumers. Additionally, we continue to focus on our full-price customer base. It's true that we are seeing a drop in our discount customer base due to fewer promotional offers and markdowns. Looking ahead to 2025, we recognize the need to invest in marketing, especially to enhance brand awareness and top-of-funnel marketing. We were pleased with our record results during the Nordstrom anniversary sale, highlighting the strong traffic driven by Nordstrom customers who are familiar with the Vince brand. This performance is very encouraging, and we plan to invest in marketing to attract higher-income consumers as we move into 2025.

Terrific. Well, good job, and good luck on your upcoming season.

Thanks, Michael.

Thank you, Michael.

Thank you for your questions. There are no questions registered at this time. I would now like to pass the call back to Dave Stefko for closing remarks.

Thank you all for joining us today. We'll speak to you again in early December on our third quarter results. Have a great rest of your day. Thank you.

That concludes today's call. Thank you for your participation, and enjoy the rest of your day.