Vince Holding Corp.

Good day and thank you for standing by and welcome to the Vince Q3 2021 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'll need to press star 1 on your telephone. If you should require any further assistance, please press star 0. I'd now like to hand the conference over to your speaker for today, Jean Fontana. Thank you. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to Vince Holding Corporation's third quarter fiscal 2021 results conference call. Hosting the call today is Jax Russell, Chief Executive Officer, and Dave Sepko, Chief Financial Officer. Before we begin, let me remind you that certain statements made on this call may constitute broad-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. After prepared remarks, management will be available to take your questions for as long as time permits. With that, I will turn the call over to Jack.

Thank you, Jane, and thank you, everyone, for joining us this afternoon for a discussion of our third quarter performance. We are encouraged with the trends in our business given the many macro challenges facing the industry. We are pleased to see the momentum in our e-commerce business within our Vince brand. Our customers continue to love our sophisticated, high-quality women's and men's assortments. Our men's business has shown particular strength in the quarter, improving against both 2020 and 2019 levels. At Rebecca Taylor, we feel confident in the progress made on our brand turnaround and remain focused on driving key strategies. I will begin with a review of the performance of our Vince brand. Direct-to-consumer revenue sales have recovered to slightly above fiscal 2019 results, partially offset by sales pressure in the challenged wholesale channel. In spite of our current headwinds impacting the industry, the demand for the Vince brand remains strong and we remain confident in our ability to continue to drive further market share gains within the contemporary luxury category. Our business in the third quarter was fueled by dressier items as people returned to the office and social activities. We continue to see a strong response to dresses, particularly versatile styles that can be dressed up or dressed down based on the occasion. Our latest collections have shifted to an emphasis of gifting and family-themed messaging, including product for both comfortable gatherings and dressed-up events during the holidays. We have also seen a pickup in sweaters and outerwear as our customers are focused on buy-now, wear-now products. In direct-to-consumer, the continued momentum in our e-commerce business, which was up double-digit to 2019 levels, was partially offset by softer-than-expected results in our retail stores. Looking at our store performance by region, we are seeing locations in urban markets outfacing the store base, which we attribute to the return to workwear. During the third quarter, we opened four full-price Vint stores in Roosevelt Field, New York, Pentagon City, Virginia, Cherry Creek in the Denver market, and Knox Street in Dallas. We are very pleased with the strong early results and will continue to focus new store openings in highly favorable locations, all with short-term renewable leases. Our store openings in new markets, Charlotte and Denver, for example, have performed well and have fueled a significant increase in regional traffic to the website as well. In wholesale, supply chain disruptions and delays moving product through distribution centers and into stores remains a challenge that we believe will continue to impact our business further in the fourth quarter. Overall, we remain pleased with the sell-through at retail, which continues to demonstrate the demand for Vince as we remain a leading contemporary brand for our partners. As mentioned on last quarter's call, we launched a Vince-crafted collection for Nordstrom on October 14th. This included an offering of six hand-knitted exclusive styles, which created a unique experience for customers. This collection was a huge success and generated a lot of press, including Elle magazine, naming it one of the best fashion campaigns for fall 2021. We are excited to announce that the Vince Crafted collection is now available in five of our own retail stores, Melrose Avenue and Pacific Palisades in the Los Angeles market. Dallas, Palo Alto, and Mercer Street here in New York. Building on our offering, we launched family cashmere themes for the holidays during the quarter for Nordstrom's as well as for our own stores. The reception of our brand at Bloomingdale's also continues to be very strong, which we attribute to high demand for the brand and customers returning to stores. We see an opportunity to grow the relationship over time and will look to do so in a way that complements our existing wholesale footprint. In men's, we are extremely pleased with the momentum of our business in the wholesale channel and in our own stores. We are seeing a strong response to sweaters, knits, and especially outerwear. Given the impressive performance in the men's category this quarter, we are even more confident of the strength of our positioning within the contemporary men's category. We believe that men's is a significant growth opportunity for the men's brand and will remain a key strategic focus. We will continue to work closely with our wholesale partners to navigate the supply chain headwinds, which we will speak to shortly. Importantly, we believe that these challenges are transitory and that wholesale distribution will remain a meaningful part of our growth strategy as it enables us to broaden our customer reach. From a brand perspective, we are focused on progressing our marketing and digital initiatives to accelerate our brand presence at both Vince and Rebecca Tower. We have been focusing on further driving our analytics and data capabilities, which are paying substantial dividends in our paid search channels and our email and SMS programs. These programs drive over 60% of our e-commerce traffic. In advance of the holiday shopping period, we launched gifting pages on our websites for both Vince and Rebecca Taylor on November 2nd. For the Vince brand, we have seen double-digit conversion gains for both 2020 and 2019 levels. Further, the Vince gift pages are driving over 10% of total e-commerce sales, and customers visiting these pages convert at nearly double the rate of those who do not. As a result, we will remain focused on driving more online traffic to these pages. Looking ahead to 2022, we are already planning a holiday campaign where gifting will be a major feature, along with holiday dressing. We see this as a meaningful opportunity, particularly in our Knits and Cashmere lines, as these items make perfect gifts. As part of this concentration on gifting, a key focus for both brands has been an introduction of considered social campaigns. We are currently working with over 100 influencers, all of whom will be posting gifting and omnichannel content onto our social channels through the end of the year. The reach of these influencers offers the opportunity to be seen by upwards of 70 million U.S. consumers, driving additional consumers to each brand. We executed press days in the autumn, which included outreach to key social influencers, garnering publicity for both brands. Another enhanced initiative was the Vince gift card promotion, where we gifted our top customers with a $150 invitation to shop full price during the early part of November. We planned for the holiday selling season to begin earlier this year, and by moving up the timing of this promotion, we were able to capture those sales. We will deploy different offers in December to offset last year's offers. We also completed the base implementation of our point of sale system for the Vince brand, further enhancing our targeted marketing and personalization capabilities. We have ship-from-store capability for e-commerce up and running, making more efficient use of our omnichannel inventories. Through the Black Friday Cyber Monday weekend, the ship-from-store component yielded a significant contribution to our total e-commerce sales, which was entirely incremental as this product was not available at our e-commerce distribution center. Looking at our international businesses, we are cautiously optimistic with our retail store momentum in London, as well as with our partners throughout Western Europe, and we believe this momentum will carry into 2022 and beyond. We are exceeding 2020 sales in all international wholesale markets and showing strength in mainland Europe, the Middle East, as well as all international web channels. We are also excited to announce that we have restarted conversations with our joint venture partner to launch our brands in China. This is an incredible opportunity for us to further enhance our presence and brand positioning, given many of our competitors already have a meaningful footprint in mainland China. As these conversations progress, we look forward to providing you with an update on future calls. Overall, I am pleased with the performance of the Vince brand, and we continue to be extremely excited about the future. We see ample opportunities to grow this brand both domestically and internationally as we built out our e-commerce capabilities, develop new marketing strategies, and accelerate growth in our men's business. Turning to Rebecca Taylor, with the reset now complete, the growing potential for this brand is exciting as the brand equity remains strong. We saw a positive response to our spring market results, and this will be set on the floor for February and March next year. we are focusing on full price selling as we establish margin healthy strategies to grow this business over time. Extending the spring 2021 relaunch and our recent fall assortment, we will continue to reflect a collection of categories that address more of her lifestyle needs, with a particular focus on building out occasion-based items that can be dressed up or down to adjust to her changing needs. During the third quarter, We opened one full-price store and two outlet stores for Rebecca Taylor, all of which are showing encouraging initial results. In early November, we opened our last store of the year in Beverly Hills at the Bev Center, our first Rebecca store in the Los Angeles market. As we have increased our marketing efforts, we are seeing results. Our social engagement rate in the third quarter increased materially with product engagement as well. In November, we saw our biggest gains in engagement and growth of our Rebecca audience since we acquired the brand. Overall, we remain focused on utilizing a similar strategic plan to what drove the success we achieved at Vince to redefine our merchandise assortment, enhance our brand messaging, and optimize our channel distribution. Our performance during the third quarter reflects the strength of our brands, and we are excited about the future growth we see for the company. Heading into holiday, We move up our promotions to begin in early November, and the results have been encouraging with margin positive and up compared to 2019 levels. Before turning the call over to Dave, I would like to provide an update on the supply chain issues we are experiencing. Similar to most of the industry, we continue to see challenges with ongoing port congestion and higher freight cost pressures. While we expect these supply chain disruptions to continue through at least the first half of next year, we will keep taking precautionary steps to mitigate the impact, including by leveraging our impressive pricing power, which results from our strong brand loyalty. In conclusion, we are very excited about the future of our distinct fashion brands. We will continue to use a disciplined approach while executing the strategies in place to fuel long-term profitable growth for our shareholders. Since joining Vince Holdings nine months ago, we have navigated unprecedented industry challenges and at the same time continue to execute our strategies while establishing an even stronger foundation for the future growth. Coming out of fiscal 2021, we are finalizing our three-year plan and look forward to updating you on our long-term targets at the ICR conference in January. With that, I will turn it over to Dave.

Thanks, Jack. we are pleased with the trends in our business as we remain focused on driving our key strategies. Total company net sales for the third quarter increased 26.7% to $87.5 million compared to $69 million in the third quarter of fiscal 2020. For the Vince brand, third quarter consolidated net sales increased 27.3% to $78.4 million compared to $61.6 million in the same prior year period. our events direct-to-consumer segment sales increased 56.5% to 35.7 million in the third quarter, reflecting improved traffic trends, particularly in locations in our urban markets, which outpaced the store base in the quarter. In our wholesale segment, net sales increased 10%. Despite supply chain challenges, which we expect to continue to impact the fourth quarter, we remain confident in our market share position within wholesale as Vince continues to outperform peers within the contemporary luxury category. Rebecca Taylor and Parker combined net sales increased 22.0% to 9.1 million as compared to the same period last year. We are encouraged for the progress we're making as we complete our first year of redefining the Rebecca brand. Gross profit in the third quarter was 42.1 million or 48.2% of net sales. This compares to 31.7 million or 45.9% of net sales in the third quarter of last year. The 230 basis point increase in gross margin rate compared to the third quarter of fiscal 2020 was primarily due to lower promotional activity in the direct-to-consumer channel and lower year-over-year adjustments to inventory reserves. partially offset by higher freight costs. In the wholesale off-price channel, we are driving healthier margins. Selling general and administrative expenses in the quarter was $39.0 million, or 44.6% of net sales, as compared to $25.4 million, or 36.8% of net sales in the third quarter of last year. The increase in SG&A dollars is a result of the many actions taken in the third quarter of 2020 as a result of COVID. This includes the $4.2 million we received in rent abatements and concessions that we are not lapping this year, and a return to more normalized payroll at the corporate and store level, as well as a resumption of marketing investments in 2021. Operating income for the third quarter was $3.1 million compared to an operating income of $6.3 million in the same period last year. Income tax benefit for the third quarter was $2.1 million as a result of an annual non-cash deferred tax expense created by the amortization of indefinite life, goodwill, and intangible assets for tax, not for both purposes, and the impact in the quarter of a decrease in the company's estimated effective tax rate for the full fiscal year. For the full year, we continue to expect this non-cash deferred tax liability to approximate 2.8 million. Net income for the third quarter was 2.2 million, or 18 cents per diluted share, compared to a net income of 5 million, or 42 cents per diluted share, in the third quarter last year. I would like to point out that net income for the third quarter reflects $1.5 million in deferred financing costs and a prepayment penalty, both associated with the termination of the 2018 term loan facility. Now moving to the balance sheet. Borrowings under our debt agreements total $95.9 million. We ended the quarter with availability of $49.1 million under our revolving credit facility. Moving to inventories, Met inventory was $82 million at the end of the third quarter as compared to $88.6 million at the end of the third quarter last year. As a reminder, inventories in 2020 were negatively impacted by wholesale customer order cancellations as a result of COVID. During the third quarter of fiscal 2021, we continued to work through the increase in seasonal inventory levels from prior quarters through promotions, outlet stores, and the off-price channel. As a result of the actions we have taken in 2021, our healthier inventory levels reflect a better balance of newness, and we feel comfortable with the current inventory composition. As Jack briefly mentioned, we continue to experience challenges in our supply chain, including poor congestion and higher freight costs, similar to the rest of the industry. While these headwinds are beyond our control, we remain focused on taking actions to mitigate the impact on our business. We plan to be targeted in our selling and pricing strategies to offset some of the cost pressure we are experiencing. Similar to recent quarters, due to the low visibility and uncertainty related to the impact of COVID, especially given the continued increase in supply chain challenges that are beyond our control, we will not be providing formal guidance at this time. However, I will provide some insight on our fourth quarter. For fiscal 2021, we continue to expect capital expenditures and net of tenant allowances to be below that of 2020. As Jack mentioned in his remarks, in November, we moved forward with Vince gift card promotion, allowing us to capture the earlier consumer-driven holiday season. The result of this action and the initial benefits of our new point of sale at Vince make us optimistic on fourth quarter sales growth. On a margin perspective, we will see the normal decline in fourth quarter versus third quarter margins due to the promotionality of the quarter. We will also see margin pressure from even higher freight costs due to demand placed on the freight industry in this quarter. Also, we do not anticipate the level of benefit that we experience in Q3 and lower year-over-year adjustments to inventory reserves to repeat. With SG&A in Q4 versus Q3, we'll spend greater in payroll, more importantly in marketing, as we drive our marketing and digital initiatives, both for the fourth quarter holiday season and the long-term benefits of our brands. As a reminder, in September we filed a shelf registration statement under which the company may sell up to approximately 1 million shares of its common stock at the market or ATM offerings. The shelf registration and ATM program remain in place as sources along with cash from operations and our current revolving credit facilities to fund our long-term growth initiatives. During the third quarter, there is no activity with ATM offerings. As Jack mentioned, we will be presenting our long-term strategies and targets for the business in January at the ICR conference. Looking ahead and considering the positive momentum in the fourth quarter, despite short-term cost pressures, the foundation of our business remains strong, and we will continue to focus on executing our key strategies to accelerate the growth of our business. This concludes my comments regarding our third quarter. We will now take your questions. Operator?

Ladies and gentlemen, at this time, if you'd like to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Dana Telsey with Telsey Advisory Group.

Hi, good afternoon, everyone. Nice to hear about the progress in the fourth quarter. As we hear about supply chain dynamics from everyone lately and the headwinds there, how are you approaching it in terms of whether it's port congestion, containers, what are you seeing, how much are you using air freight? And as we go into the first half of 2022, what are you expecting on any of these changes? And in particular, on the wholesale side of the business, are the order cancellations where you need now and the order book is more real, or how do you think of that? Thank you.

Hey, Deanna, thank you. A couple thoughts here. We look at the spring, we look at the first six months of 2022 very similar to how we think about the back half of 2021, and we're planning for it that same way. We will continue to use air freight at exactly the same cadence we've been using it. I think on the longer term, we start to think about, you know, some changes in how we bring product to market. You know, we're looking at Europe and South America to be, you know, and looking to lean on that in a more significant way in the future. That doesn't happen overnight. We're just in the infancy of that. But we, you know, we're somewhat pessimistic and we're planning to be pessimistic on that. From a hostile perspective, you know, We're watching our partners who have been very, very slow to buy into inventory through 2021 begin to open that up a little bit and more front-loading of product. They went into this year with a buy light and chase, and we chased with them. And fortunately, in most cases, we were able to make accommodations. We are seeing them get a little bit more religion about owning inventory at the beginning of season, and as such, we think that will take a little bit of pressure off of us on a chase month.

Got it. And then when you think about the DTC business, you commented on the stores and the e-com. What are you seeing different in the stores and the e-com, and impressive that your urban stores are showing improvement?

So are we, and very, very excited about that. And I think some of that is very attributable to just people beginning to buy more workwear. Whether they're going back to the office a day or two days or three days a week, they're realizing they need to make more investment there. We're excited about what we're seeing in direct-to-consumer, and probably the biggest change or evolution we're seeing is just that customer who shops us online and in-store. We're very pleased with the initial results of our new POS, and it really is foundational for us in doing more omnichannel programs. The POS system that we've just completed allows us to capture customer information in a much more significant way than we were previously. We can build on that with, you know, and we will build on that with, you know, a customer data platform and loyalty programs in the future, which just give us more control of everything and not just have to buy stuff.

Got it. And then when you unpack the gross margin and the SG&A, how much of an improvement in full-price sales were there and how much was the freight cost? It sounds like the full-price sales helped offset the higher freight costs. And then on the SG&A side, the rent concessions from last year, how long does that continue through or do we see SG&A return to some former higher levels?

Yeah, I'll start with your last comment, Dana, on the So from the rent concessions, the way the accounting works in the rent concessions, you kind of get a catch-up adjustment when you sign an amendment. So as you look at those gains that you see in the quarter, they're kind of one-time gains. And plus, your rent costs are booked on a straight-line basis. So really, the SG&A that you've been seeing for the last couple of quarters is normalized costs. um you know rent expense it's really the prior year in the uh quarters that had the benefits as as we signed those amendments um from a on for a full price basis you know we we definitely have uh seen a greater percentage of our business at a full price you know level you know and even even more so as jack mentioned the the acceleration of of the you know the vince gift card that we moved up into early november You know, that's much more, you know, full-price selling, you know, with a gift card. You know, so a better margin sale than what a, you know, Black Friday, Cyber Monday type of sale would have been.

Got it. And then just on the Rebecca Taylor side, I noticed in the operating income breakout, so the sales improved, the loss increased. How do you all unpack that?

You know, again, A lot of that I would attribute to we're starting to pound the drum a little bit louder here. We weren't investing or spending previously on marketing, and we're starting to do that. And some of it's branding, which won't have an immediate cause effect with sales, but will have a longer-term effect. So the investments that we've had to make to make sure that people know about the brand and how relevant we think we are show through in some of that.

Got it.

Thank you.

Thank you. Thank you.

And there are no further questions. I'd like to turn the call back over to Jack.

Thank you, operator. With that, that will conclude today. We look forward to talking to you with Q4 earnings in April of 2022. Appreciate all of your time and attention on this and hope you all have a great holiday and New Year's and look forward to talking to you soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.