Vince Holding Corp. (NYSE: VNCE) Q3 2020 earnings call dated Dec. 21, 2020
Corporate Participants:
Amy Levy — Vice President, FD&A, and Investor Relations
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Analysts:
Dana Telsey — Telsey Advisory Group — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Vince Holding Corporation’s Third Quarter 2020 Earnings Conference Call. [Operator Instructions] After the speakers’ presentation, there will be a question-and-answer session.
[Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Ms. Amy Levy, Vice President, FD&A, and Investor Relations. Thank you. Please go ahead.
Amy Levy — Vice President, FD&A, and Investor Relations
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 Stefko, 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 the 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.vince.com. After the prepared remarks, management will be available to take your questions for as long as time permits. After the prepared remarks management — now I’ll turn the call over to Dave.
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
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. With the Vince D2C business, sales and gross margin recovery extending into the fourth quarter as we enter 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 against losses. Vince remains a top performing brand in the contemporary luxury segments within our existing wholesale partners. 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 are generating excitement internally and with our wholesale partners. As we continue to navigate the near term headwinds resulting from COVID, we’ve also taken steps to enhance our liquidity position to support the continued execution of our strategies. These actions resulted in $42.3 million in excess availability under our revolving credit facility, which I will discuss in more detail shortly.
Overall, we believe we are well positioned to advance our growth strategies to our respect — to 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 in serving our customers throughout this period.
Looking at the Vince brand, the sophisticated, casual study of the Vince brand continues to resonate with consumers around the world as efforts — 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 nordstrom.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 exceeding our expectations and we will continue to communicate this offering to 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 at our wholesale partners remain strong, for 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’ve 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 end person shopping and lack of tourist traffic with the resurgence of COVID. Given that many of our stores are located in malls in major cities as expected, major traffic trends have continued in the fourth quarter. That said, we’ve seen a significant improvement in conversion as shoppers are shopping with great intent 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 — premier 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 the East Hampton Vince store scheduled to open in February 2021.
Pre-COVID, we are 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 US. International sales in the third quarter were considerably less negative than in the US. Marketing efforts during the third quarter continue to add to emphasize to 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 that showcases product currently stores, influencer collaborations and personalized marketing have also helped us maintain the 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 and [indecipherable] dog sweaters and baby, which were being presented in displays in our top stores and highlighted in the gift section on our website.
Over the Black Friday side for Monday promotional period, we saw increased momentum in our eCommerce 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 internet 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 facemask purchase as well as a Vince hospital worker give-away in early December.
Turning now to Rebecca Taylor, we’re very pleased with the progress we’ve made in our strategies to refresh the brand and enhance the merchandise assortment. And the stake personifies romanticism redefined by combining delicate embroideries and prints with dynamic fabric technique that new lines. The relaunch of Rebecca Taylor brand with the Spring 2021 collection, we’re seeing strong reception by both sparking new interest across international and Asia markets with positive reception for the alignment of one cohesive collection.
The question will be available on February and supported by relaunch marketing efforts focused on digital with a heavy emphasis on influencer strategy. The continued enthusiasm from our wholesale partners regarding the relaunch of Rebecca Taylor has been highly encouraging. We are developing our collections with what we believe is the right balance of price and high quality with a tightly managed SKU count. While we are returning our brand back to its feminine routes, our team is focused on an expanded offering of products as well as a focus on versatility and the product offering. While we are encouraged by the enthusiasm for the relaunch, this is just the first stage we will continue to refine our collections each season as we monitor consumer response and corporate feedback.
Two weeks ago during market, we launched our 2021 Summer pre-Fall collection reflecting the influence of Steven Cateron and his design team. We, again, we’re very pleased with the broad-based positive response to Steven’s second collection. We are realigning our strategy to better distribution with our recent timing in 2021 focused on full price selling to drive healthier business partnerships with less promotional activity. The strong collection will be launched at select Nordstrom stores and new markets, as well as Bloomingdale’s where we believe the collection is well suited for the entity of their customer base at an attractive opening price point.
While we continue to make advancements in evolving Rebecca Taylor, there are still many growth opportunities ahead. As we remain focused on successfully executing events playbook to 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 increased 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%, to $61.6 million compared to $86.4 million in the same prior year period. Our Vince 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 freight shipments.
In our direct-to-consumer segment, the 35.4% decline in sales reflected reduced sales in our retail stores due to 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 positive development of new products for our target 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. So Rebecca Taylor as a plan was largely in the wholesale channel as we reset the brand and did not offer a holiday 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 in the third quarter of last year. The decrease in gross margin rate was primarily due to increased promotional activity and channel mix, partially offset by a decrease in sales allowances of our wholesale partners. Selling, general and administrative expenses in the quarter were $25.4 million and 36.8% of net sales as compared to $43.4 million or 41.6% of net sales for the third quarter of last year.
As a result of the actions taken to reduce cost 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, 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 of $6.3 million compared to $7.6 million in the same period last year, which included a $0.7 million costs associated with the acquisition of Rebecca Taylor and Parker. Net income for the third quarter was $5 million or $0.42 per diluted share compared to $6 million or $0.50 per share in the third quarter last year. 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 11 of this year, we had excess availability of $42.3 million under our revolving credit facility.
In addition, on December 11, we entered into amendments to our existing revolving credit facility and our existing term loan credit facility. The amendments among others extended to period during which the testing under our financial covenants 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 believe it was important to proactively enhance our liquidity now, providing the ability to continue to invest in our brands. We are very appreciative and continue to 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 channel. In addition, due to the aesthetic of certain products, we’re able to seamlessly incorporate portion of our inventory in to 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 liquidity 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 had a multi-pronged growth strategy in place and we look forward to advancing our strategic initiatives, as well as — as we emerge the pandemic.
For Rebecca Taylor, based on the early feedback, we remain even more encouraged by opportunity to Rebecca — to replicate the eventual recovery and growth playbook. Similar to Vince, Rebecca Taylor has strong recognition within the contemporary luxury apparel space and we are excited about our future potential as we move past the pandemic.
This concludes my comments regarding our third quarter. We’ll now take your questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] And your first question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open.
Dana Telsey — Telsey Advisory Group — Analyst
Good morning, Dave.
Amy Levy — Vice President, FD&A, and Investor Relations
Good morning.
Dana Telsey — Telsey Advisory Group — Analyst
Good afternoon, Dave and Amy. Hi, how are you?
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Thank you.
Dana Telsey — Telsey Advisory Group — Analyst
Nice to see the sequential improvement in the sales results. And can you just talk a little bit about any particular category, DTC — what you saw in e-commerce and obviously stores and get the traffic, but in wholesale and how that wholesale business is progressing? Thank you. And then a couple of follow-up.
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Yeah, I mean obviously we’re seeing sweaters and tops performing well, as we’ve said. Consumer are same we’ve seen this on both sides, wholesale and in our own DTC business. The consumer has been responding to promotions obviously that the consumer has also been responding to newness. So as we see new product sets, as a season times there is certain is full-price buying going on from that perspective. And while looking forward to spring, the spring launch products at the end of January, early February from that perspective, the season back to more full price line.
Dana Telsey — Telsey Advisory Group — Analyst
Got it. And then on the expense leverage that you’re seeing, what stays, what comes back? How do you break out the buckets of expenses?
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Well, we published our 10-Q, trying to give you the rest, the largest we look at $18 million reduction, the largest reduction obviously came in, in payroll, it’s our largest expense and beyond the cost of product and so from a forward perspective, it is lowest across the company. We did, and for those towards the end of the third quarter, and unlike many, many companies from a permanent look forward as we went to a reduction in force. And yes we haven’t seen the results from the reduction in force, on the impact of that on the third quarter. We look at is complete from that perspective.
And then the rest of course, the benefit we talked about some lease negotiations, some of which will continue into this — into the fourth quarter and there will be other adjustments, as leases are signed, amendments are signed, things we have negotiated there will be a reflective pickup similar to customer dollars with centers and the type that you saw in the third quarter. And then we like, we again like many really trying to manage our marketing spending, I mean it’s easier to actually stores were closed and we invested more than income to help drive the e-com business. And so I say that’s representative in the third quarter and then we have and will continue to prudently manage every other spending category whether it be travel, when to make investments or not and we just will manage those prudently until we see a return on — in sales back to more normalized levels.
Dana Telsey — Telsey Advisory Group — Analyst
Got it. And then you had mentioned in terms of rents 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 the year and are you able to get more variable rent structures?
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
No, I would say — you know our strategy on a pre-COVID, no, we are doing short-term low rent, we have some percentage rent, some not percentage rent, low investment leases, and that strategy is very successful for us. Again, that’s what we have continued on with leases we’ve signed and that’s how we view opportunities as we go forward. And so you will see — you will see a combination. You will see low rent leases, but all will 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 is a similar mix to what we successfully have started two years ago prior to COVID. When you trying every opportunity we’re in, obviously, we’re able to see some rents that probably 12 months ago we obviously wouldn’t see as the landlords are looking to our occupancy also.
Dana Telsey — Telsey Advisory Group — Analyst
And two last things. First on the new credit facility. How does, how does your interest expense adjust and any updates on CEO search?
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
So from the new credit facility, it’s a timeline — so it’s obviously a third lien credit facility. So it would be the most expensive debt that we will carry. So they carry the highest interest cost from a rate perspective. But it’s not — so it will drive our interest expense higher. We did obviously use it to pay down the revolving credit facility, which is a cheapest facility. So we’ll see higher interest expense. But the flip side of it is the interest is our payroll in time. So it gets added to the debt. There is no cash outlay. So from a cash and interest costs we actually see a decline in our cash and interest cost and allow us to keep more money in the business. And that we’ll use for in investing in the brands.
And as for the CEO search it continues on, some committee 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 keep driving these brands.
Dana Telsey — Telsey Advisory Group — Analyst
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 wholesale or how do you, how do you think of it going forward.
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Yeah, so I mean, we’re not — we are not giving kind of like a go-forward view right now, obviously some of this again somewhat, where COVID wants to go from that perspective. What happens after holiday. We have commitments like many into next year, but we also understand the variability, the thing we do, we do feel really good about as our Vince has performed during COVID. We do believe that we’ve taken market share in many wholesale partners and the interest in our brands remains strong and our performance remains strong if not stronger. So we see Vince and they’re going believe over the less brands on the other side, both by brands are vulnerable to survive financially and just by the desire to the department stores of how many brands that might carry going forward.
So we work through 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 continue to make in our e-commerce platform which we will strategically do in 2020. We did 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 make — we will be making in 2021 to help our growth from an e-com perspective and then we look at the stores as we’ve talked about opportunistically continue to look at stores and invest in stores.
So now that gives you a flavor as how we view the future as we go forward. I know it doesn’t directly answer your question on the mix that we see in the business.
Dana Telsey — Telsey Advisory Group — Analyst
Got it. Thank you.
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Okay, thank you, Dana.
Operator
And this concludes our question-and-answer session. Mr. David Stefko, I’ll turn the call back over to you for some closing remarks.
Dave Stefko — Interim Chief Executive Officer and Chief Financial Officer
Okay. Well, thank you for joining us today. I hope you are having great holiday season. We look forward to updating you on fourth quarter and annual results in April. Have a happy New Year. Thank you.
Operator
[Operator Closing Remarks]