Christopher & Banks Corp (NYSE: CBK) Q2 2020 earnings call dated Sep. 11, 2020
Corporate Participants:
Jean Fontana — ICR, Inc. — Analyst
Keri L. Jones — President & Chief Executive Officer
Richard Bundy — Senior Vice President & Chief Financial Officer
Analysts:
Eric Beder — SCC Research — Analyst
Presentation:
Operator
Greetings, and welcome to the Christopher & Banks Corporation Fiscal Second Quarter 2020 Results Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Ms. Jean Fontana with ICR. Thank you. You may begin.
Jean Fontana — ICR, Inc. — Analyst
Thank you, Melissa. Good morning and thank you for joining us for the Christopher & Banks Second 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 descriptions, limitations and rationale for each measure, which can be found in the press release including in supplemental financial tables. Today’s earnings 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 it over to Keri Jones.
Keri L. Jones — President & Chief Executive Officer
Thank you Jean. Good morning and thank you for joining the Christopher & Banks second quarter earnings call. Our top priorities continue to be the health and safety of our associates and customers as well as the sustainability of our business. I am extremely grateful to our associates across the organization for their continued hard work, resiliency and loyalty to our brand. Their efforts significantly contributed to our ability to navigate an unprecedented situation brought about by COVID-19. Prior to the pandemic, we were on our path to recovery through the execution of our strategic initiatives, which included elevating her shopping experience, enhancing our marketing strategy with new and existing customers, expanding our omnichannel capabilities and reducing our expense structure.
We were exceptionally pleased with the progress we had made across all areas of our business. We remain confident that these are the right strategies for the business and that we will ultimately regain the momentum we were building prior to the COVID outbreak. In the meantime while we continue to evolve these strategies, we are acutely focused on driving sales, managing inventory, minimizing expenses and preserving our cash.
For the second quarter, we saw sequential improvement in total revenue, which declined approximately 30% versus the 50% decline in Q1. With stores open for 36% fewer days in the previous year, we remained focused on driving sales and monetizing inventory through our e-commerce channel. This is reflected in the accelerated growth in our e-commerce business to a 71% increase, with stores fulfilling roughly half of our online orders. As we mentioned last quarter with — while receipts were down significantly, we had a large amount of seasonal inventory in transit that we needed to sell through, which resulted in merchandise margin pressure. Based on our current inventory position and our planned shipments per fall, we expect merchandise margin to be significantly less pressured in Q3.
On the expense side, the team has done an incredible job cutting costs, enabling us to achieve 20 basis points of leverage despite a 30% decline in sales. We also improved our cash position as a result of cost-cutting actions, working with partners on payment terms as well as securing a $10 million PPP loans.
We continue to work with our landlords on rent concessions and/or reductions. We are approximately halfway through these negotiations and we are pleased with our progress. We expect that this important work will be completed over the next 30 to 60 days.
Turning to our business operations. Leveraging the strong foundation that we built in the strategic plan we advanced over the course of the last two years, we were able to move quickly to adapt to the challenges brought on by the COVID-19 pandemic. This is most evident in the strong growth in our e-commerce business resulting from enhancements to our website and our expanded omni-channel capabilities. Within the past few weeks, we launched Buy online pickup in store at the item level. The significance of this change is that she can now see the purchase option earlier in her shopping journey, which drives her to select this choice more frequently. In a very short amount of time, we have seen BOPUS grow as a percentage of online orders and we believe that we’re just scratching the surface on the potential of this option. As a refresher, this allows our customers shop online and pickup in store where we can help her add-on to her purchase or meet her at the door or a curb side if that’s what she prefers.
Notably, we saw an increase in store customer shopping online for the first time. This number was higher than in our first quarter despite our store re-opening. As we said on our last earnings call, this is especially encouraging as we know that omni-channel customers tend to spend more over time than single-channel shoppers.
In addition, we also experienced dramatic growth in new online customers supported by our strategic investments in digital media. These trends bode well for the future as we expect the accelerated trends in digital shop — shopping will continue well past COVID.
As part of our efforts to improve our website experience, we launched a new digital outfitting capability called Stylitics in mid-2June. This enables us to provide outfitting and style recommendations based on what the customer is viewing and purchasing on the website. Early indicators are positive. Not only are we receiving positive feedback directly from our customers, we have seen the strongest sales on categories that are most featured. The best example of this is our accessories category, which truly allows her to complete her outfit. Accessories have delivered double the growth rate of the total direct business. By showing our customer ways to wear, we believe not only will we drive higher sales, but we can drive satisfaction rates that mirror the great service scores that we receive in store where she interact with their CMB stylist.
While brick and mortar traffic remains down, we do not want to understate the importance of our stores. For those of you have followed our brand and shop at our stores, you know that our store associates her CMB stylist is the heart of our brand. Our customers enjoy visiting us in person and engaging with our associates, many of whom they have maintained relationships with over a number of years.
During the quarter, we successfully re-opened our entire store fleet beginning in May, taking the necessary health and safety precautions as well as offering appointments during or outside of store hours at the request of our customers. And I’m proud to share that over 95% of our amazing store managers chose to return to work. My heartfelt thanks goes out to them as they helped us to welcome back our customers in a safe environment.
Our assortments remains focused on casual comfort and great value. The work we’ve done to enhance our assortments in-store visuals have created a cohesive easy to shop experience for our customer, both in-stores and online. Our customer loves our modernized assortment that is designed exclusively for her. Our emphasis on casual has been an advantage in this environment, and we saw the strongest results in easy casual top, including those from our relaxed restyled collection.
In addition, recognizing the opportunity in women’s and petite business, we expanded our offering in these assortments and we are pleased with the traction we are seeing. Looking ahead, we are building on the progress we made across our strategic initiatives, starting with: we will continue to deepen our connection with our customer through our e-commerce site, digital and social media. Just last month we piloted Facebook pages for individual stores and we just completed the rollout. As I said our CMB style is sort of heartbeat of our brand and by giving each store the ability to connect with their customers, we further deepen their already strong loyalty.
We are also re-imagining our big events for fall. For example, our September style event is being expanded to more days to allow her to book small style parties with her friends that enables social distancing versus the large fashion shows that we previously held. Our marketing strategies remains focused on new and existing customers. The market disruption taking place presents an ideal opportunity to attract new customers to the Christopher & Banks brand and we are focusing our strategies on outreach and messaging to these customers. If we look across our fleet, 38% of our stores are located in shopping centers where one or more competitors closed or plan to close stores. We will also continue to evolve our omni-channel business to drive more sales in our e-commerce channel.This has always been a priority for us and it’s simply becomes more important in today’s environment. We will continue to enhance our shopping experience online to improve site functionality and presentation.
As we transition into fall with new product consistently flowing, we will continue to emphasize similar casual comfort trends for the season that performed well in the spring and summer. We are leaning into sweaters, knit tops and relaxed restyled as our most represented categories.Soft cozy fabrics and easy silhouettes make these products versatile and appealing, especially for customers that are working or staying at home.We also expect continued strength in accessories, which includes our expansion of sleepwear and face masks.
As we look to the back half of the year, we are forecasting and planning for improving trends. We planned our fall receipts down mid-single digits. We believe that this strikes the right balance between protecting from excess markdowns and setting ourselves up to win in a fall season that will see fewer retail outlets as a result of competitor closures. Given COVID-related supply chain disruptions, our fall season will kick off two to three weeks later than last year, but we feel great about our assortments and we appreciate the partnership of our key vendors to minimize the impact of COVID supply chain related issues. While we know that the retail landscape is changing, we remain confident that we are well positioned for the future for several reasons. First, we have a highly loyal customer base, which we were growing prior to COVID. Second, we have a great value proposition with an average out the door retail price of less than $20 and an exceptional specialty store service; we are uniquely positioned to gain share. Third, our product offering of casual comfort matches our customers’ lifestyle. And four, our expanded omni-channel capabilities give her choices in how she wants to engage with and shop our brand. We have the right management team, the right market positioning and infrastructure and the right strategic plans to drive long-term profitable growth in the new environment.
With that, I’ll turn over the call to Richard to review the financials. Richard?
Richard Bundy — Senior Vice President & Chief Financial Officer
Thank you, Keri. Good morning everyone and thank you for joining us today. Our top priorities remain the health and safety of our associates and sustainability of our business as we continue to maintain disciplined cost controls and optimize our liquidity through this uncertain environment. As Keri mentioned, we saw sequential improvement in the second quarter, accelerated growth in our e-commerce business and the reopening of our stores. Net sales decreased 29.9% to $58.5 million compared to $83.4 million in last year’s second quarter. Sales were impacted by 36% fewer selling days due to temporary store closures related to COVID-19 partially offset by a 71% increase in our e-commerce business for the quarter. The net sales decrease was comprised of a 16.2% decrease in the number of transactions due to temporary store closures and continued depressed traffic, partially offset by an increase in transactions from e-commerce growth and split shipments due to higher store fulfillment.
We saw a 2.3% decline in units per transaction due to split shipments. Excluding those splits shipments, UPT’s were up 22%, which is more reflective of the actual demand for products. Average unit retail was down 14% as a result of deeper promotions to move the seasonal product and to drive sales and traffic, both online and in re-opened stores. The increased promotions drove significant improvements in conversion rates across all channels and helped us work through excess seasonal inventory.
Gross margin rate decreased to 10.9% from 29.3% in the same period last year. This decrease was due primarily to three factors: lower merchandise margin, increased fulfillment expenses and occupancy cost deleverage. Merchandise margin rate declined significantly due to markdowns on seasonal product as a result of temporary store closures and traffic pressure resulting from COIVD-19. We also realized higher shipping costs associated with the increase in the e-commerce sales and the higher percent of those orders that were shipped from stores, which led to a significant amount of split shipments. Lastly, occupancy cost deleverage. Despite the $2.2 million dollars in rent savings related to negotiations in 2019, we booked occupancy at full contract rent, and therefore our gross profit does not reflect rent concessions or deferrals related to COVID.
Looking ahead to the third quarter, we expect less merchandise margin pressure related to promotions and markdowns. In addition, we expect to see less deleverage on occupancy costs and a smaller increase in shipping costs related to split shipments. As a percentage of sales SG&A levered 20 basis points to 33.1% as compared to 33.3% last year. Despite the 30% decline in sales.Through ongoing cost reductions as well as expense discipline SG&A expense decreased 30% $19.4 million from $27.8 million in the prior-year period. Of the $8.4 million decline, more than three-quarters was due to lower store and corporate compensation expense related to furloughs and salary reduction, with the remainder of the decrease primarily due to reduced marketing expense and lower cost related to medical benefits, professional services and store operations.
Depreciation and amortization was $1.9 million compared to $2.2 million in last year’s second quarter. The $300,000 decrease was primarily due to a decline in the average number of stores, as well as reduced capital spending. We delivered second quarter net loss of $15.1 million or $0.40 per share compared to a net loss for the prior-period of $5.9 million or $0.16 per share.
Adjusted EBITDA, a non-GAAP measure, decreased to negative $12.8 million, compared to negative $5.9 million for the same period last year.
Now turning to the balance sheet. Cash and cash equivalents totaled $2.8 million with $4.6 million in short-term borrowings and net availability of $5.9 million under the credit facility as of the end of the second quarter. As we discussed last quarter, we qualified for a $10 million PPP loan. We are applying these loan proceeds towards the payment of qualified payroll expenses in accordance with the conditions of the loan agreement and believe that the loan principal will be forgiven under the CARES Act. We also delivered a substantial improvement in cash flows in the second quarter compared to the first quarter.Due to the benefits of our expense reduction, inventory actions and cash management activities, we generated $5.1 million in cash from operations during the second quarter. This compares to $24 million in net cash used from operations in the first quarter.
The cash flow from operations, combined with the PPP loan proceeds enable us to improve our liquidity position as we reduced the outstanding borrowings under our credit facility by $12.2 million and ended the quarter with $2.8 million in cash. Total inventory was $36 million at the end of the second quarter of 2020, down 26% compared to $48.7 million at the end of the same period last year. This compares to a 21% increase in the same period last year as we pulled forward product to mitigate higher tariff cost imposed during 2019.
In addition, our end — our in-transit inventory declined $6.5 million to last year due to a large portion of fall receipts shifting out approximately three weeks due to COVID-related impacts to our supply chain. We are pleased to have worked through a large portion of our spring-summer seasonal merchandise and believe that we have the right level and balance of inventory to drive sales and mitigate markdown pressure in the back half of the year.
Capital expenditures for the second quarter of 2020 were $0.3 million compared to $0.4 million in last year’s second quarter. This primarily reflects the investments as we — reflect store investments as we paused non-essential capex for the remainder of the year.
We opened four stores during the second quarter, which were locations under construction prior to the pandemic. We continue to work aggressively to adapt to the current environment, protecting cash through cost savings and financing activities. While we are not providing guidance for the second half due to the low visibility related to COVID and other macro factors, we believe that the work we have done to reduce costs, protect cash and drive sales will leave us with sufficient liquidity as we navigate the back half of the year. While the environment continues to be challenging, we remain committed to managing our business through this crisis and setting ourselves up to regain the momentum we were driving prior to COVID.
Now we will turn the call over to the operator to bring in the Q&A session.
Questions and Answers:
Operator
Thank you at this time, we’ll be conducting a question-and-answer session. [Operator Instructions].Our first question comes from the line of Eric Beder with SCC Research. Please proceed with your question.
Eric Beder — SCC Research — Analyst
Good morning.
Keri L. Jones — President & Chief Executive Officer
Good morning Eric.
Eric Beder — SCC Research — Analyst
In terms of — congratulations on the quarter and doing what needs to be done here in this crazy environments. If you look at the customers that are coming on online, the new customers, what kind of — what are we looking at in terms of demographics? Are they kind of — what’s your core customers are and who are they migrating from?
Keri L. Jones — President & Chief Executive Officer
So we don’t have all the complete data on that. We do know that we’re tracking them through our digital marketing, primarily Facebook look alike marketing, and that they live within 20 miles of our stores. 8And so, that’s the information we have currently. But obviously, we’re digging into that to figure out where they’re coming from. The other interesting point is, of the new customers, there’s a slightly higher percentage in the women sizes than we typically see. So I think that’s interesting given the disruption that we’re seeing in those brands across the industry.
Eric Beder — SCC Research — Analyst
And when you look at the use of the credit card, I mean has that shifted around here or is that still — what is the penetration with the private label credit card right now?
Richard Bundy — Senior Vice President & Chief Financial Officer
Yeah, we haven’t seen any material changes in that. We’ve seen that kind of — as the sales have gone up and down, we’ve seen the same thing, but our percentage hasn’t changed significantly.
Eric Beder — SCC Research — Analyst
Okay. And could you talk a little bit — I know that you signed a new agreement with ALCC post last Q — post the quarter. Could you talk about what that’s going to enable you to do in terms of inventory flexibility, and in terms of how the business can be run better?
Richard Bundy — Senior Vice President & Chief Financial Officer
Yeah, certainly we can. The agreement was designed to help us better match the expense of our inventory with the times that we’re selling it. So historically, we’ve seen quarters where we’re paying for the inventory as we build up our seasonal goods and then we are paying for that and not selling that inventory yet. This program allows us to get better payment terms with ALCC and pay them as we’re selling the inventory versus on kind of our standard vendor terms. So really designed to help us keep the product flowing and align the payment of inventory to the sales.
Eric Beder — SCC Research — Analyst
Great. Last question. So you’re a little bit — COVID obviously messed up the flow of product a little bit. When do you believe that you will be on track where you want the inventory exactly to flow and how you originally planned that?
Keri L. Jones — President & Chief Executive Officer
So as we said, we’re about three to four weeks behind last year in terms of seasonal flow. I will tell you we have very large amounts of inventory that began hitting last week over the next several weeks. And so, one of the things and I referenced changing up our style event, we’ve extended that event and it’s just starting today as a matter of fact. So, we’re gearing up and we’re ready to go for fall season, but it is about three to four weeks later than last year.
Eric Beder — SCC Research — Analyst
And when do you think that’ll be caught up?
Keri L. Jones — President & Chief Executive Officer
I think we’ll be in really good shape towards the end of September.
Eric Beder — SCC Research — Analyst
Okay. Good luck for the falling holiday season.
Keri L. Jones — President & Chief Executive Officer
Thank you. We feel great about the products that’s coming in.
Eric Beder — SCC Research — Analyst
Thanks Keri.
Operator
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I’ll turn the floor back to Ms. Jones for any final comments.
Keri L. Jones — President & Chief Executive Officer
Thank you for joining us today and we look forward to updating you on our next call.
Operator
[Operator Closing Remarks]