Christopher & Banks Corporation (CBKCQ) Earnings Call Transcript & Summary

Greetings, and welcome to Christopher & Banks Corporation Fiscal Third Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, the conference is being recorded. I would now like to turn this conference over to your host, Ms. Jean Fontana from ICR. Thank you. You may begin.

Thank you, Laura. Good morning, and thank you for joining us for the Christopher & Banks Third Quarter Fiscal 2020 Earnings Conference Call. Presenting on today's call will be Keri Jones, President and Chief Executive Officer; and Richard Bundy, Chief Financial Officer. This morning's conference call is in conjunction with the earnings release that the company issued this morning. During our call today, we will reference certain non-GAAP financial measures, including adjusted items, reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for each measure, which can be found in the press release, including the supplemental finance table. Today's earnings release and conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the company's expectations regarding its future performance, including, but not limited to, the financial condition, results of operations, business initiatives, growth plans and prospects and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to today's earnings release or the company's SEC filings for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. And with that, I will turn the call over to Keri Jones.

Thank you, Jean. Good morning, and thank you for joining the Christopher & Banks' third quarter earnings call. While we made every effort to navigate our business through the challenges presented by COVID-19, we did not see the recovery we had anticipated in the third quarter. Sales decreased 23% compared to the third quarter last year, following a 30% year-over-year decline in the second quarter. We believe that COVID has had an outsized impact on our customer demographics as her shopping behavior is more pragmatic with limited demand for new outfits in the absence of social engagements. In the fourth quarter-to-date, sales trends have remained consistent with the third quarter decline. Given the reality that the pandemic is likely to pressure sales over the next several months, we made the decision to engage external advisers as we work to refinance our debt and explore other strategic alternatives. At the outset of the pandemic, we reacted quickly with dramatic cash preservation tactics such as furloughs, salary and wage reductions and payment deferrals and reductions with our vendors and our landlords. We implemented health and safety measures in our distribution centers as well as in our stores as they reopened. And we obtained a $10 million PPP loan, which improved our cash position and enabled us to get back up to more normalized staffing levels and begin executing our fall and holiday plans. Throughout this period, we also worked aggressively to leverage the investments we made to expand and enhance our omnichannel shopping experience. We also focused on maintaining engagement with our customers and found new ways to communicate with her such as our behind-the-brand e-mail series and individual store Facebook pages. We believe that we took the right actions to protect our business. And I want to thank our incredible team for their agility, hard work and commitment to our brand and to our customers. During the third quarter, we controlled the controllable and remained intently focused on executing our fall and holiday strategies. We made the decision early on to drive aggressive promotions throughout the entire quarter to give our customer confidence that no matter where and when she chooses to shop, she knows that she'll be getting a great value. We reinvented our in-store style events through virtual style shows and we offered her personalized appointments. However, we believe that our customers are not shopping in-store largely due to the resurgence of COVID. And these events did not generate nearly the participation rates that store events have in the past. Illustrating the impact of these annual events as well as big shopping days such as Black Friday, we saw a marked decline in sales during these high-volume days. The Christopher & Banks customer is a practical, middle-aged Midwestern woman, who largely buys apparel for specific events, whether it be going to the movies, out to dinner, holiday parties or other social gatherings. In the absence of these types of social engagements during COVID, her demand for outfitting is simply lower. While we are seeing lower demand for apparel, we do believe that our assortments are hitting the mark. Our assortments feature the holiday thematics that she loves, along with lots of soft, cozy fabrics in our sweaters and in our Relaxed. Restyled. collection. We've been particularly pleased with the response to our recently expanded sleepwear category as well as with our face mask sales. We continue to connect with our customers through e-mail, direct mail and social media. An added layer this holiday is our You've Been Elfed campaign. This campaign shows her creative ways to pay it forward with gifts from Christopher & Banks. Importantly, we continue to leverage our omnichannel capabilities such as Buy Online, Pick-up in Store. We saw an accelerated use of Buy Online, Pick-up in Store with close to 40% of our customers adding to their order when they pick up in store. One of the attributes that drove me to Christopher & Banks was the incredible customer loyalty for this brand. Prior to the pandemic, we had reached great milestones on our path to recovery as a result of the execution of our strategic initiatives. We were outpacing industry sales trends, delivering better margins and driving significant improvement in profitability. Our formula was working. For this reason, we believe that once we enter the post-pandemic world, she will return to her trusted resource for fashion, quality, value and service. If given adequate financial runway, we continue to believe that this brand has potential based on our strong following and the sizable and underserved market we continue to serve. One of my top priorities since I joined the company was to drive new customers to our brand. We knew that she was out there and we could capture her with an enhanced product assortment, more impactful marketing strategies, elevated customer service and delivery of a full omnichannel shopping experience. My belief in our long-term potential is in large part due to the number of new customers we drew to the brand as well as the deeper engagement we experienced with existing customers prior to the pandemic. Therefore, we are aggressively pursuing options that would allow us to continue this turnaround. Now I will turn the call over to Richard to discuss the third quarter performance in more detail. Richard?

Thank you, Keri. Good morning, everyone, and thank you for joining us today. Throughout the third quarter, we maintained the disciplined cost controls and optimized our liquidity while prioritizing the health and safety of our associates and customers. As Keri mentioned, while we saw a sequential improvement in third quarter sales trends, the challenges presented by COVID-19 continue to have a meaningful adverse impact on our performance. Net sales decreased 22.6% to $72.8 million compared to $94.1 million in last year's third quarter. Comparable sales declined 22.5%. Partially offsetting the decline in retail sales, eCommerce sales grew 32.4% for the quarter. The net sales decrease was comprised of a 17% decrease in average unit retail, a 5.8% decrease in the number of transactions and a 1% decline in the units per transaction. Average unit retail was down as a result of deeper promotions to move the seasonal product and to drive sales and traffic, both online and in stores. The increased promotions drove significant improvements in conversion rates across all channels and helped us work through excess seasonal inventory. Excluding split shipments, units per transaction were up 10.6%, which is more reflective of the actual demand for product. Gross margin rate decreased 930 basis points to 24.6% from 33.9% in the same period last year. This decrease reflected lower merchandise margin due to markdowns, higher shipping costs from increased eCommerce orders and split shipments related to ship-from-store orders and deleverage on lower revenue. We experienced longer-than-expected supply chain delays leaving us in a less-than-optimal inventory position. Specifically, our average inventory levels in Q3 were 21% lower than Q3 of last year. As a result, our assortment skewed toward older product versus fresh receipts. This mix of product put pressure on our top line sales as well as merchandise margins. Lastly, occupancy costs deleveraged approximately 30 basis points despite the $2.8 million reduction related primarily to savings from previous lease negotiations. We booked occupancy at full contract rents and so we have a fully signed amendment. And therefore, our gross profit does not fully reflect rent concessions or deferrals related to COVID. To date, we have negotiated rent abatements and deferrals at over 75% of our stores, with fiscal 2020 savings of over $7 million to date. SG&A expense declined $3 million or 10% from last year's third quarter primarily due to lower store and corporate compensation, marketing, professional services and store operations costs partially offset by an increase in medical insurance claims and online marketing costs. As a percentage of sales, SG&A expense delevered 500 basis points to 36.1%. Depreciation and amortization expense was flat to last year at $2 million. Net loss in the third quarter was $10.8 million or $0.29 per share compared to a net income for the prior period of $0.5 million or $0.01 per share. Adjusted EBITDA, a non-GAAP measure, decreased to negative $8.2 million compared to $2.8 million for the same period last year. Now turning to the balance sheet. Cash and cash equivalents totaled $1.2 million. As of October 31, 2020, bank borrowings under our credit facility totaled $10.1 million with $6.8 million of availability. We had $5 million of principal outstanding under our term loan facility. As we discussed last quarter, we qualified for a $10 million PPP loan. We applied those loan proceeds towards the payment of qualified payroll expenses in accordance with the conditions of the loan agreement and our loan forgiveness application was submitted to the Small Business Administration on October 27. The SBA has 90 days to review and issue a decision regarding forgiveness. We believe that the SBA will approve the PPP loan forgiveness application and the loan principal will be entirely forgiven under the CARES Act. Total inventory was $47.3 million at the end of the third quarter of 2020, slightly above the $46.4 million at the end of the same period last year. Our in-transit inventory increased $8.8 million to last year due to a large portion of fall receipts shifting out approximately 3 to 4 weeks due to COVID-related impacts in our supply chain. We continue to work aggressively to adapt to the current environment, protecting cash through cost savings and financing activities. We are not providing guidance for the fourth quarter due to the low visibility related to COVID and other macro factors. We have taken several steps to optimize liquidity. However, significant uncertainty surrounding the continuing impact of the COVID-19 pandemic on our business remains. As a result, revenues, results of operations and cash flows continue to be materially adversely impacted, which raises substantial doubt about our ability to continue as a going concern within 1 year after the date of our audited financial statements. Due to these uncertainties and the expectation of continued sales pressure throughout the coming months, as Keri mentioned, we have engaged strategic advisers, including B. Riley Securities, to assist with the evaluation of strategic alternatives. These may include, but are not limited to, lease concessions and deferrals; further reductions of operating and capital expenditures; raising additional capital, including seeking a refinancing of the company's debt, sale of the company or its assets and restructuring its debt and liabilities through a private restructuring or restructuring under the protection of applicable bankruptcy laws. We will provide updates on these measures and intend to disclose further developments once the Board of Directors has approved a specific transaction or otherwise determines that disclosure is appropriate. Now we will turn the call over to the operator to begin the Q&A session.

[Operator Instructions] Our first question comes from the line of Eric Beder with SCC Research.

Could you talk about when you see the inventory flows at least normalize in terms of newer product and getting it to the level where you want it to be? And obviously, online seems to be working. How is that working in terms of are you seeing a decreased demand from Buy Online, Pick-up in Store? And how is that working?

So I'll take your first question, Eric, on the inventory front. So as Richard mentioned, inventory levels were lighter than what we would have liked through third quarter. And we mentioned that we were running 3 to 4 weeks late on our last call. And that was not just at the beginning of the quarter, it ended up being throughout the whole quarter. We are caught up now as of the end of November into closer to planned inventory levels. And your question online, I'm not sure I got that exactly. Can you repeat that?

You've been much more aggressive in talking to your customer about buying online, pick-up in store. How has that been working?

Yes. So we're really pleased with that. The percent of customers that are selecting to go in store to pick up their purchases has been increasing as well as I referenced in the remarks that close to 40% of the time she's adding on to her purchase. So this is a strategy that we've been really excited about and I think that we'll continue to see that grow. And we expect that throughout the holiday season. As you know, shipping times are being extended across the industry. So we expect this to grow throughout the balance of the Christmas season.

And last question. So the results here, were there any kind of regional variations that you were seeing? Or was this pretty much throughout the entire chain?

Yes, Eric. When you look at it over the course of the quarter, it was pretty widespread. There was times where it was impacting certain areas more. A lot of that you could see in kind of almost mapped back to where the COVID increases and resurgence were happening. So it varied throughout the quarter. But overall, it was pretty similar impact across the board.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Ms. Keri Jones for closing remarks.

Thank you for joining us today, and we look forward to updating you on our next call. Happy holidays, everyone.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.