Vince Holding Corp. (NYSE:VNCE) Q3 2022 Earnings Call Transcript December 13, 2022
Operator: Ladies and gentlemen, thank you for all joining. I would like to welcome you to the Vince Q3 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. I will now turn the conference over to your host Amy Levy. Please go ahead, when you are ready, Amy.
Amy Lev: Thank you and good morning, everyone. Welcome to Vince Holding Corp’s third quarter fiscal 2022 results conference call. Hosting the call today is Jack Schwefel, Chief Executive Officer, and Dave 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. Following today’s remarks, there will be no question-and-answer session. Now, I’ll turn the call over to Jack.
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Jack Schwefel: Thank you, Amy, and thank you everyone for joining us this morning. I will begin with an overview of our third quarter performance focusing on our Vince business as we have continued to execute the wind down of our Rebecca Taylor business that we announced in our Q2 call. Similar to others, the third quarter was challenged by macro-related headwinds as our consumer continued to contend, resulting in inflationary pressures and higher interest rates. And the retail sector increased its promotional activity as many, including ourselves, took aggressive actions to reduce inventory balances. With our strategic decision to exit the Rebecca Taylor business, we have realigned our research to focus on the current scale of our business, and are continuing to evaluate our processes and cost to drive further efficiencies and enhance disciplines across our organization.
We believe through the actions we are taking today, we will be better positioned for long-term profitable growth. Now turning to our Q3 results more specifically, our top line performance headwinds was driven by our wholesale channel where we saw nice reception across our men’s and women’s assortment, particularly as we transition into the cooler fall season. The performance offsets a slight decline in our direct-to-consumer results, which continue to be impacted by the normalization of e-commerce traffic trend. In Q3, we launched our new pass program for men’s, expanding our assortment beyond lounge and stretch, setting the foundation for continued growth with our men’s business. In addition, in men’s, we saw strength in (ph) pieces with items such as our shirt jacket and long sleeved nets.
In both men’s and women’s, we saw strength in our sweaters, particularly as the quarter progressed and customers focused on buying out win our products. In addition, we have seen positive initial response to our cold weather accessories for both men and women with our new licensing partner at Amica. With respect to our wholesale performance, as part of Vince’s 20th anniversary celebration, we introduced special capsule collections, which was showcased at select wholesale partners, who celebrated in our #ILoveVince campaign. We were thrilled with the results we saw, which we believe are a testament to the strength of the Vince brand. In fact, our collection was the best contemporary center stage acquisition to-date in sales for Nordstrom and we had our highest volume month at Nordstrom’s New York City location since it opened in 2019.
Turning to our stores. In Q3, our retail stores experienced an increase in foot traffic over 2021. There was notable strength in Washington D.C. and Boston locations, as well as Hawaii and Las Vegas, primarily attributable to traffic increases. We are pleased with our new store in the Seaport neighborhood in Boston, as well as a newly relocated store in Merrick Park and Coral Gables Park. In Q3, we also completed the successful relaunch of the Vince website, as well as our new customer data platform or CDP. Our new website is faster and enhances the customer mobile experience. We have been encouraged by the initial improvement we have seen with mobile conversion following the relaunch and look forward to benefiting from the capabilities the site provides, including its applications for enhanced personalization, particularly alongside the CDP.
CDP allows us to capture detailed customer data across a variety of systems and provides an understanding of our customer at scale enabling us to better predict how they will shop with us in the future. With the improved capabilities, we will be able to enhance our marketing and better target and engage with both new and existing customers. We recently ran a small pilot leveraging CDP to target loyal customers, who had not engaged with Vince in the past 60-days. Through this campaign, we were able to provide our sales associates with valuable data and the ability to drive sales within a key customer cohort. This is just one small example of how we plan to leverage personalization, to enhance the relationship between our store associates and customers to drive increased frequency and spend over time.
In addition, this proprietary first-party data is more efficient from a cost perspective and enables us to interact with our increasingly omnichannel customers and better understand their preferences to create a more personalized dialogue with them as they shop the brand. Turning to international. During Q3, we opened our first pilot store in China in late September. While early, we are pleased with the initial response we have seen. South Korea continues to be very strong and we are especially pleased with the reception of our 20th anniversary pop up in Seoul, Shinsegae. Also encouraging is our business in the United Kingdom, both in our wholly-owned retail store on Draycott Street, as well as our growing businesses in Harrods, Selfridges and Harvey Nichols.
Finally, with respect to holiday, this year you again see a strong gifting focus in key areas of our assortment, including accessories as well as mix and cashmere. In light of the evolving competitive and consumer landscape we have observed, we made the strategic decision to pull forward a few key promotional events into October and launched our gifting assortment on the website two weeks earlier as well. While the environment has remained promotional through the start of the holiday season, we are pleased with the demand we are continuing to drive for the Vince brand. As we look ahead, while we expect to continue to navigate a challenging environment, we will remain agile and descipline, while focused on increasing efficiencies across our organization to position Vince for the long-term profitable growth.
I want to thank all of our team members for their dedication and hard work as we enter a new chapter for Vince, fully and intently focused on capitalizing on the strength of the Vince brand. With that, I will turn it over to Dave.
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David Stefko: Thanks Jack. As Jack discussed our third quarter financial results were impacted by the wind down of the Rebecca Taylor business, as well as aggressive actions we have taken to reduce our events inventory levels, especially in light of the continued challenging macro environment. With respect to Rebecca Taylor, the business contributed $8.9 million in net sales for the quarter and we incurred charges of $11.1 million, related to the wind down activity, including the write-down of inventory, as well as accelerated operating lease amortization, accelerated depreciation and amortization, severance and other costs. We expect the wind down of Rebecca Taylor to be completed by the end of our fourth quarter. Turning now to our results in more detail.
Total company net sales for the third quarter increased 12.7% to $98.6 million, compared to $87.5 million in the third quarter of fiscal 2021. The year-over-year increase was driven entirely by the Vince brand, which delivered third quarter consolidated net sales of $89.7 million, compared to $78.4 million in the same prior year period. The 14.4% increase was driven by our wholesale segment, which saw net sales increased 29.1%, exceeding our third quarter 2019 sales levels and offset the 3% decrease in our Vince direct-to-consumer segment sales as the continued normalization of e-commerce trends offset growth in our retail stores. Gross profit in the third quarter was $29.8 million or 30.2% of net sales, this compares to $42.1 million or 48.2% of net sales in the third quarter of last year.
The decrease in the gross margin rate was primarily driven by the wind down of Rebecca Taylor business, which negatively impacted third quarter 2022 gross margin rate by 800 basis points. Also contributing to the decline in gross margin rate, as well was an unfavorable year-over-year adjustment to inventory reserves and an increase in promotional activity in the direct-to-consumer channel. Partially offset by favorable leveraging of distribution and other overhead costs. Selling, general and administrative expenses in the quarter was $39.2 million or 39.8% of net sales, as compared to $39 million or 44.6% of net sales for the third quarter of last year. The increase in SG&A dollars was driven by $4.4 million in expenses related to the wind down of the Rebecca Taylor business, which offset lower rent expense, lower consulting and other third-party costs, as well as lower marketing and lower incentive compensation expenses during the period.
Operating loss for the third quarter, which includes the $11.1 million in costs associated with the wind down of the Rebecca Taylor business was $9.4 million, compared to operating income of $3.1 million in the same period last year. Income tax benefit for the third quarter was $6.6 million, as compared to $2.1 million in the same period last year. The non-cash tax benefit was a result of an annual non-cash deferred tax expense created by the amortization of indefinite-lived goodwill and intangible assets for tax, but not for book purposes. And the impact in the quarter of a change in the company’s annual estimated effective tax rate thereon. A full-year non-cash tax expense is still expected for 2022. Net loss for the third quarter, which includes the impact of the charges associated with the wind down of the Rebecca Taylor business was $5.2 million or $0.43 loss per share, compared to a net income of $2.2 million or an $0.18 per share in the third quarter last year.
Moving now to the balance sheet. Borrowings under our debt agreements totaled $125.5 million. We ended the quarter with availability of $26.8 million under our revolving credit facility. Moving to inventory, net inventory was $116.4 million at the end of the third quarter, as compared to $82 million at the end of the third quarter last year. The growth in inventory was driven by the increase of carryover pre-fall and fall assortments, compared to last year, as well as a higher investment in replenishment products, and higher product costs related to transportation and raw materials inflation. Despite actions taken, including increased promotional activity in Q3, we are entering Q4 with higher than normal inventory levels. We are actively reviewing our plans for fiscal 2023 and have reduced our inventory buys appropriately throughout the seasons of fiscal 2023, which we believe will better enable us to return to more normalized inventory levels in the second half of next year.
We are laser focused on driving further efficiencies across our organization to enter fiscal 2023 in a healthier position enabling us to drive long-term profitable growth. This concludes our remarks. Thank you for joining us this morning. We look forward to speaking to you again on our fourth quarter call.
Operator: Thank you all for joining. That does conclude today’s call. Please have a lovely day, and you may now disconnect your line.
End of Q&A:
