CHRS: Fourth Quarter Conference Call Notes

CHRS reported fourth quarter revenues of $539 million and a share loss of $0.10. The expectations were for sales of $558 million and a share loss of $0.13.

Sales and Comp Breakdown:

Fourth-quarter revenue declined $93 million, or 15%. The decline reflected 152 net store closings over the last 12 months, a comparable store sales decline of 12%, and a 10% increase in e-commerce sales. Comp store sales were negative 13% in the third quarter, and improved only modestly to negative 12% in the fourth quarter. The fourth quarter had similar issues as in the third quarter. Primarily a lack of focus on its core customer and a failure to provide her with a strong core tops and bottoms assortment.

Comps through the first eight weeks of the first quarter were down around 4%.

By Brand:
Lane Bryant: -5.0%
Fashion Bug: -4.0%
Catherine’s: -1.0%
Total: -4.0%

The improvement was aided by both an offensive assortment positioning and at least a temporal improvement in the consumer environment, somewhat offset by bad weather in February. The internet business was up 35% in that same period, benefiting from the August launch of new websites, as well as the February launch of a universal shopping cart, linking all four apparel websites.

LB’s revenue. declined 15% on a comparable-store basis, compared to a 14% comp decline in the third quarter. Outlet stores represented 12% of the brand's revenue in the quarter. The EBITDA margin declined by 120 basis points to 3% due to the negative leverage on comp sales decreases. Assortment issues were consistent with those in the third quarter. The problems were poor understanding of the customer and her need for fit and value, sufficient depth in sizing and lengths, and lack of a strong core tops and bottoms assortment.

Fashion Bug delivered $161 million of revenue. Revenues declined 8% on a comparable store basis, an improving trend compared to our 14% decline in the third quarter. Assortment issues were consistent with the third quarter. Accessories, intimate apparel, and footwear worked, while core tops and pants assortments didn’t.

Catherine's delivered $66 million of revenue. Revenues declined 6% on a comparable store basis, compared to a 5% comp decline in the third quarter. Sweaters, knit tops, active, and cold weather accessories did well. Intimate apparel, coats, dresses, and swimwear did not.

The Figi's segment delivered $105 million of revenue. Revenues were comparable to the prior year period.

Internet revenue across the three brands for the quarter was $27.8 million, reflecting a 10% increase versus last year. Internet revenue trends improved to an increase of 35% in the first quarter to date. During August, they launched completely rebuilt websites, to make it easier for customers to shop online. Last month, a single checkout linking all four apparel websites, lanebryant.com, cacique.com, fashionbug.com and catherines.com was added. Additionally, free shipping is available for customers who choose to pick up their packages at any of the Company's 2100 store locations. The feature is driving increased store visits and opportunities for further upsell.

Comparable store sales declined 12%. For the quarter, average inventory decreased 6% on a same-store basis, while inventory increased 1% on a same-store basis at the end of the period. Same-store inventories represent increased receipt of Spring product, while Fall and holiday inventory levels declined year-over-year. By brand, comp sales declined by 15% at Lane Bryant, and comp inventory increased 2%. At Fashion Bug, comp sales declined 8%, while comp inventory increased 3%. At Catherines, comp store sales declined by 6%, and comp inventory was down 4%.

Quarter to date comps through eight weeks were approximately – 4.0%. While still lousy compared to the rest of the market, it improved across all brands from fourth quarter comps and management believes they are making progress with spring assortments. The improvement is due to assortment positioning and at least a temporal improvement in the consumer environment, somewhat offset by the poor weather experienced in February. The company is beginning to see strength in recent launches of core apparel programs.

Margin Discussion:

Gross profit was $235 million in the quarter, a decrease of $29 million, or 11%. The gross margin improved by 190 basis points to 43.7% of sales compared to 41.8% of sales for the year-ago period. The increase was driven by improved gross margin in the Company's direct to consumer segment, following the close of the Lane Bryant woman catalog in the first half of the year, and lower average inventories resulting in reduced markdowns on seasonal merchandise at Lane Bryant, somewhat offset by increased markdowns on seasonal merchandise at the Fashion Bug and Catherines brands.

Total operating expenses excluding restructuring and one-time charges decreased $36 million, or 12%. Occupancy and buying expense decreased $16 million, or 15% related to the operation of fewer stores and rent reductions related to lease renegotiations. SG&A expense decreased $17 million, or 10%, to $156 million in the fourth quarter compared to $173 million in the same quarter last year, primarily related to the lack of leverage on a declining sale base. Total operating expenses for the year, excluding certain items, were down $162 million or 13%. They surpassed their initial cost reduction program and approximately $136 million of the total expense reductions are associated with the Company's previously announced cost reduction program of 129 -- $125 million for the 2009 fiscal year.

Capital and Liquidity:

They believe their balance sheet remains strong and with total liquidity of $328 million at the end of the quarter. Liquidity includes $187 million in cash, and $141 million available on the revolving line of credit. During the fourth quarter, they repurchased $16.1 million of convertible notes for a cash purchase price of $11.3 million, or 70% of par. As of the end of the quarter, the principal amount of the notes was $190 million, which represents the original $275 million issuance, less the $85 million face value for an aggregate purchase price of $51 million, which was repurchased from the beginning of the year through the end of the fourth quarter.

In October, they sold their credit card business to Alliance Data. As a result of these actions, they ended the year with a cash position of $187 million compared to $100 million in the prior and net debt of $33 million compared to $212 million in the previous year.

The major components of the increase in the cash position include an increase of $136 million related to the sale of the credit program, an increase of approximately $29 million related to income tax refunds, offset by a net loss for the year, a decrease of $51 million related to the repurchases of our convertible debt, and a decrease of $33 million related to capital expenditures. Gross capital expenditures were approximately $23 million last year, down 59% year over year. Capital expenditures for this fiscal will be about $50 million, mostly for the opening of six to eight new stores, remodels and refurbishments to existing stores.

Store Closings and Openings:

The company closed 152 stores (net) during the year. Eight previously committed stores were opened while 160 stores were closed.

Store Closings By Format:

Fashion Bug: 97
Lane Bryant: 39
Petite Sophisticate: 16
Catherine’s: 8

These closures and downsizings amounted to about 7% of the store base.

On the call, management announced that they will be closing around 100 to 120 underperforming stores this year. The cost to execute the store closing program will be about $7 million to $9 million. Nearly half of these closings (60) will be Fashion Bug stores.