Vince Holding Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Vince Holding Corporation's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 in your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Amy Levy, Vice President, FP&A, and Investor Relations. Thank you. Please go ahead.

Amy Levy Thank you, and good afternoon, everyone. Welcome to Vince Holding Corp.'s third quarter fiscal 2020 results conference call. Hosting the call today is Dave Stepko, Interim Chief Executive Officer and 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 fiscal 2019 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.mint.com. After the prepared remarks, management will be available to take your questions for as long as time permits. After the prepared remarks, now I'll turn the call over to Dave.

Thank you, Amy. Good afternoon, everyone. Thanks for joining us today. As we announced with our preliminary results last week, we saw sequential improvement in our sales trends and delivered an operating profit, even excluding the benefit of rent concessions. through prudent cost management for the third quarter. For the Vince DTC business, sales and gross margin recovery extended into the fourth quarter as we entered the holiday season, demonstrating the strength of the Vince brand. Although the current environment remains difficult, we continue to see customer demand for the comfort casual luxury Vince offers. Vince remains a top performing brand in the contemporary luxury segment within our existing wholesale partners. and Rebecca Taylor, we're also pleased to see the positive reaction to the brand refresh and merchandising initiatives taking place. Our proven ability to reestablish the brand leadership position for Vince, combined with the advancements we are making to restore the DNA of Rebecca Taylor by generating excitement internally and with our wholesale partners. As we continue to navigate the near-term headwinds resulting from COVID, we have also taken steps to enhance our liquidity position to support the continued execution of our strategies. The actions resulted in 42.3 million in excess availability under revolving credit facility, which I will discuss in more detail shortly. Overall, we believe we are well positioned to advance our growth strategies for our respective brands as we emerge from this crisis in the back half of 2021. That said, With the recent rise in COVID cases and the newly imposed restrictions across the globe, the health and safety of our customers and team members remains our number one priority. I want to thank our team members across the organization for their hard work and commitment to supporting our brand expansion efforts and serving our customers throughout this period. Looking at the Vince brand. The sophisticated casual aesthetic of the Vince brand continues to resonate with consumers around the world as effortless luxury aligns with the stay-at-home lifestyle. Sweaters and tops particularly have performed exceptionally well throughout the quarter. We were excited to expand our reach for the Vince brand by extending our size offering to 24 on both Vince.com and Norsham.com. This is an important step in developing a more inclusive line and a more inclusive community as we offer this customer a level of quality and luxury she deserves. Initial performance exceeded our expectations and we will continue to communicate this offering through various marketing initiatives in upcoming seasons as we expand this category. In wholesale, we continue to outperform and gain market share within the contemporary space. Our online business and our wholesale partners remain strong while in-store traffic continues to be challenged. Our product continues to resonate with consumers season after season. During the quarter, we launched the Vince Collection in Bloomingdale's, and we have been pleased with the initial response. We look forward to building upon our partnership with Bloomingdale's as we expand the reach of the brand. In our direct business, our e-commerce channel delivered mid-teens growth, including Vince Unfold. However, store traffic remained under pressure due to the decrease in in-person shopping and lack of tourist traffic with the resurgence of COVID. Given that many of our stores are located in malls and major cities, as expected, negative traffic trends have continued into the fourth quarter. That said, we've seen a significant improvement in conversion as shoppers are shopping with great intent, either for themselves or for holiday gifting needs. While the brick-and-mortar side of the business has been soft, we continue to see strong online demand on both our own website and our wholesale partners' e-commerce sites, demonstrating the clear appetite for the Vince brand. The market disruption created by COVID in the retail landscape is also leading to some highly attractive real estate opportunities. We continue to strategically and selectively evaluate opportunities to secure premium locations with short-term favorable leases. During the third quarter, we opened two Rebecca Taylor outlet stores in Premier Centers. Since the end of the quarter, we opened one outlet for each Rebecca Taylor and Vince, as well as one full-price store for Rebecca Taylor. Based on the increase in customers moving to the Hamptons, we signed a short-term lease for an East Hampton Vince store scheduled to open in February 2021. Pre-COVID, we were very pleased with the sales and profitability of our new stores We continue to view our retail presence as an integral part of expanding brand recognition. On the international front, we have been encouraged by the progress in our wholesale business as these regions are outpacing the recovery in the U.S. International sales in the third quarter were considerably less negative than in the U.S. Marketing efforts during the third quarter continue to emphasize the stay-at-home lifestyle. As we mentioned on last quarter's call, we pivoted to hosting digital events, including our new virtual collection walk-through service, which showcases products currently in stores. Influencer collaborations and personalized marketing have also helped us maintain a strong connection with consumers while simultaneously increasing our reach. For holiday, we have been emphasizing our gifting assortment with the launch of our gift guide two weeks earlier this year. Gifting items are focused on home, apothecary, dog sweaters, and baby, which are being presented in table displays in our top stores and highlighted in the gift section on our website. Over the Black Friday, Cyber Monday promotional period, we saw increased momentum in our e-commerce business and a deceleration in negative trends in our retail stores. We have hosted numerous virtual events for the holiday season to maintain customer engagement. These include an event hosted by our creative director, Caroline Belhumeur, to discuss an intimate virtual guide to holiday dressing with select clients, as well as a candle-making class co-hosted by Caroline and Bloomingdale's fashion director, Marissa Frank. In addition, we held an auction for quality, benefiting the ACLU by donating money for each face mask purchase, as well as a Vince Hospital worker giveaway in early December. Turning now to Rebecca Taylor, we are very pleased with the progress we have made in our strategies to refresh the brand and enhance the merchandise assortment. The aesthetic personifies romanticism, redefined by combining delicate embroidery region prints with dynamic fabric techniques that create newness. The relaunch of the Rebecca Taylor brand with the Spring 2021 collection receives strong reception by Vogue, sparking new interest across international and Aja Marcus with positive reception to the alignment of one cohesive collection. The collection will be available in February and supported by relaunch marketing efforts focused on digital with a heavy emphasis on influencer strategy. The continuing enthusiasm from our wholesale partners regarding the relaunch of Rebecca Terry has been highly encouraging. We are developing our collections with what we believe is the right balance of price and high quality and a tightly managing SKU panel. While we are returning the brand back to its fenomenal roots, our team is focused on an expanded offering of tops as well as a focus on versatility in the product offering. While we are encouraged by the enthusiasm for the relaunch, this is just the first stage and we will continue to refine our collections each season as we monitor consumer response and incorporate feedback. Two weeks ago during market, We launched our 2021 summer pre-fall collection, reflecting the influence of Stephen Katerian and his design team. We again were very pleased with the broad-based positive response to Stephen's second collection. We are realigning our strategy to better desk distribution, with our reset timing in 2021 focused on full-price selling to drive healthier business partnerships with less promotional activity. The spring collection will be launched at select Nordstrom stores in Neiman Marcus, as well as Saks and Bloomingdale's, where we believe the collection is well-suited to the femininity of their customer base at an attractive opening price point. While we continue to make advancements in involving Rebecca Taylor, there are still many growth opportunities ahead. As we remain focused on successfully executing the Vince Playbook for the Rebecca Taylor brand, we feel confident about our long-term strategy and growth opportunities for both Vince and Rebecca Taylor. Turning to our financial results, total company net sales for the quarter decreased 34% to $69 million compared to $104.5 million in the third quarter of fiscal 2019. This is a significant improvement to the 59.9% decline in the second quarter. For the Vince brand, third quarter consolidated net sales decreased 28.7% and the rest. Our direct to consumer segment sales decreased 35.4% to $22.8 million in the third quarter. In our wholesale segment, the 24.2% sales decline was largely due to lower off-price shipments. In our direct consumer segment, the 35.4% decline in sales reflected reduced sales in our retail stores through the lower traffic trends, partially offset by mid-teens growth in our e-commerce business, which, as a reminder, includes Vince Unfold. Rebecca Taylor and Parker combined net sales decreased 58.9% to 7.5 million as compared to the same period last year. As we mentioned on last quarter's call, 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 post the COVID crisis. This contributed to a third of the sales decline. For Rebecca Taylor, the decline was largely in the wholesale channel as we reset the brand and did not offer a holiday pre-spring collection. Gross profit in the third quarter was $31.7 million or 45.9% of net sales. This compares to $51 million or 48.8% of net sales and the rest. The decrease in gross margin rate was primarily due to increased promotional activity and channel mix, partially offset by a decrease in sales allowances to wholesale partners. Selling general and administrative expenses in a quarter were $25.4 million or 36.8% net sales as compared to $43.4 million or 41.6% net sales for the third quarter of last year. As a result of the actions taken to reduce costs at the onset of the COVID pandemic, we decreased SG&A dollars by $18 million. This decrease was primarily a result of lower payroll and compensation expense, rent concessions, reduced marketing spend, and prudent expense management. Occupancy expense for the third quarter was positively impacted by rent abatements, rent deferrals, and rent reductions totaling $4.2 million resulting from negotiations with landlords. At the end of the third quarter, the majority of leases have been modified. We expect to see an additional benefit from remaining lease negotiations in the fourth quarter and possibly in the first quarter of 2021. Operating income for our third quarter was $6.3 million compared to $7.6 million in the same period last year, which included $0.7 million and other members of the Corp. Net income for the third quarter of fiscal 2020 reflects the $4.2 million or $0.36 per share benefit of the aforementioned rent concessions. Excluding the costs associated with the acquisition of Rebecca Taylor and Parker, adjusted net income for the third quarter of 2019 was $6.7 million, or $0.56 per diluted share. As I mentioned earlier, and as detailed in the press release, we took proactive steps to enhance our liquidity as we continue to navigate the pandemic. As part of this, we entered into a $20 million third lien credit facility with an affiliate of Sun Capital. Interest and fees under the third lien credit facility are payable in kind. After closing the third lien credit facility on December 11th of this year, we had excess availability of $42.3 million under our revolving credit facility. In addition, on December 11th, we entered into amendments to our existing revolving credit facility and our existing term loan credit facility. The amendments, among others, extended the period during which the testing under a financial covenant is suspended, lowered the fixed charge coverage ratio to be maintained thereafter, extended the applicability of certain revised eligibility criteria for trade receivables, and waived certain term loan amortization payments. As COVID has continued to grow around the world, we believed it was important to proactively enhance our liquidity now providing the ability to continue to invest in our brands. We are very appreciative for the continued support and partnership of both Sun Capital and our lending partners. Moving to inventory, net inventory was $88.6 million at the end of the third quarter as compared to $71.6 million at the end of the third quarter last year. We continue to work through our seasonal inventory through promotions, outlet stores, and the off-price channels. In addition, due to the aesthetic of certain products, we're able to seamlessly incorporate a portion of our inventory into future collections. Overall, we are comfortable with our inventory position as we work our way back to more normalized levels. As stated in our press release published this afternoon, due to the uncertainty related to the impact of COVID-19, we will not be providing guidance at this time. In conclusion, We believe that we have the equity in place to continue to navigate through the challenges presented by the COVID pandemic. Vince remains a leading brand within the fashion contemporary luxury space. We continue to see evidence that the brand resonates with consumers and is gaining further market share. We have a multi-pronged growth strategy in place, and we look forward to advancing our strategic initiatives as we emerge from the pandemic. For Rebecca Taylor, based on the early feedback, remain even more encouraged by the opportunity to replicate the Vince Recovery and Growth Playbook. Similar to Vince, Rebecca Terrell has strong recognition within the contemporary luxury apparel space, and we're excited about its future potential as we move past the pandemic. This concludes my comments regarding our third quarter. We'll now take your questions.

Operator? Thank you. As a reminder, to ask a question, you will need to press star 1 in your telephone. And your first question comes from a line of Dana Telsey from Telsey Advisory Group. Your line is open.

Good morning, Dave. Good morning. Good afternoon, Dave and Amy. Hi, how are you? Good, thanks.

Good.

Nice to see the sequential improvement in sales results. And can you just talk a little bit about any particular category, DTC, what you saw in e-commerce, and obviously stores didn't get the traffic, but in wholesale and how that wholesale business is progressing. Thank you. And then a couple follow-ups.

Yeah, I mean, obviously, you know, we're seeing, you know, sweaters and tops, you know, performing well, as we've said. You know, the consumer, obviously, and we've seen this on both sides, wholesale and in our own DTC business. You know, the consumer has been responding to promotions, obviously, but the consumer has also been responding to newness. So as we see new products hit as the season comes, there certainly is full price buying going on from that perspective. And we're all looking forward to the spring launch products at the end of January or early February from that perspective to see some back to more full price selling.

Got it. And then on the expense side, What stays, what comes back? How do you break out the buckets of expenses?

You look at the $18 million reduction, the largest reduction obviously came in payroll. It's our largest expense beyond the cost of product. From a payroll perspective, we went on furloughs across the company. We did and furloughs towards the end of the third quarter. And unlike many, many companies, from a permanent look forward, we went through a reduction in force. So you haven't seen the results from the reduction in force and the impact of that on the third quarter. But that is complete from that perspective. And then there is, of course, the benefit we talked about from lease negotiations, some of which will continue into the fourth quarter. There will be other adjustments as leases are signed, amendments are signed for things we have negotiated. There will be a reflective pickup, not similar in dollars, but similar to the type that you saw in the third quarter. and then we like we again like many really tried to manage our marketing spending you know I mean it was easier to do obviously when stores were closed and you know we invested more in econ to help drive the econ business and so I say that's representative representative representative in the third quarter and then we have and will continue to prudently manage every other spending category whether it be you know travel you know when to make investments or or not um We just will manage those prudently until we see a return in sales back to more normalized levels.

Got it. And then you had mentioned in terms of rent and abatements, deferrals, how much lower does occupancy costs go? And with new leases that you're signing, are they short-term in terms of a year, and are you able to get more variable rent structures?

I would say, you know our strategy, you know, on a pre-COVID. We were doing short-term, low rent, some percentage rent, some not percentage rent, low investment leases. And that strategy was very successful for us. Again, that's what we have continued on with leases we've signed. And that's how we'll view opportunities as we go forward. And so you will see You will see a combination. You will see low rent leases. They'll all be short-term in nature. There will be very low capital investment leases, and there will be some that will also be variable from that perspective. So it's a similar mix to what we successfully have started two years ago prior to COVID. And we're just going to be very opportunistic. Honestly, we're able to see some... some grants that probably 12 months ago we obviously wouldn't see because the landlords are looking for occupancy also.

And two last things. First on the new credit facility, how does your interest expense adjust and any updates on CEO search?

So from a new credit facility, so it's a $20 million facility. It's obviously a third lien credit facility. and many more. and many more outlay. So from a cash interest cost, we'll actually see a decline in our cash interest costs and allow us to keep more money in the business and that we use for investing in the brands. I'm asking the CEO search. It continues on. It's a subcommittee of our board is involved in it. Myself and the leadership team is 100% focused on running the business and making sure we stay on path and get through the pandemic and and keep driving these brands.

And then just on the department store channel, the wholesale channel, where do you expect that to go as a percentage of the business? Does it become a 50-50 split with Vince DTC and Vince Wholesaler? How do you think of it going forward?

Yeah, I mean, we're not given, you know, kind of like a go-forward view right now. Obviously, some of this, you know, Dana, you know, is somewhat... You know, where's COVID going to go from that perspective? You know, what happens after holiday? You know, we have commitments like many into next year, but we also understand the variability. You know, the thing we do, we do feel really good about is how events have performed during COVID. We do believe that we've taken market share in many wholesale partners. The interest in our brands remains strong and our performance remains strong, if not stronger. So we see Vince, and we believe there will be less brands on the other side, both by brands that have been able to survive financially and just by the desire to the department stores of how many brands they want to carry going forward. So we look for the and the department store side, the wholesale side, to be very strong and a significant growth opportunity going forward. But we also have investments that we can continue to make in our e-commerce platform, which we will strategically do in 2020. We didn't invest in combining our inventory, so we had one inventory, which some of the growth we've seen is due to that. And there are other investments that we'll be making in 2021. to help go from the econ perspective. And then we look at the stores, as we've talked about, and we're going to opportunistically continue to look at stores and invest in stores. So, you know, that gives you a little flavor of how we view the future as we go forward, but I know it doesn't directly answer your question on the mix that we see in the business.

Got it. Thank you.

Okay. Thank you, Daniel. And this concludes our question and answer session. Mr. David Stefko, I turn the call back over to you for some closing remarks. Okay.

Well, thank you for joining us today. I hope you're having a great holiday season. We look forward to updating you on our fourth quarter and annual results in April. Happy New Year. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Bye.

Thank you.