Dress Barn Inc. (DBRN)
Q1 2009 Earnings Call Transcript
November 19, 2008 4:30 p.m. ET

Executives

David R. Jaffe – President, Chief Executive Officer
Armand Correia – Senior Vice President, Chief Financial Officer
Keith Fulsher – Chief Merchandising Officer of Dress Barn
Lisa Rhodes – Chief Merchandising Officer of Maurice''s

Analysts

Christopher Kim – J.P. Morgan
Gary Giblen – Goldsmith & Harris
Samantha Panella – Raymond James
Robin Murchison – Sun Trust Robinson Humphrey
Greg Margolis – Visium Capital
Jeffrey Gunter – Beverly Capital Management

Presentation

Operator

Good afternoon ladies and gentlemen and welcome to the Dress Barn Incorporated Fiscal first quarter conference call. (Operator Instructions) At this time all participants are in a listen-in-only mode. Later the company will hold a question-and-answer session and instructions will follow at that time. As a reminder this conference call is being recorded and will be available for replay later today. Information on how to access the replay is available in the earnings press release issued earlier today. I would like to remind participants that remarks made by management during the course of this call, may contain forward-looking statements within the meaning of the federal securities laws and Private Securities Litigation Reform Act of 1995. These remarks are based on management''s current expectations, estimates, and projections and are subject to a number of factors and uncertainties that could cause actual results to differ materially. A detailed discussion of these risk factors and cautionary statements are contained in the Company''s filings with the SEC.

I will now turn the call over to our host, Mr. David Jaffe, President and CEO.

David Jaffe – Chief Executive Officer

Good afternoon. Thank you for joining us today to review our first quarter fiscal 2009 results. Joining me are Armand Correia, CFO, Keith Fulsher and Lisa Rhodes, Chief Merchandising Officers for Dress Barn Stores and Maurice’s stores. First, I''d like to start off with an overview. Dress Barn, Inc.''s comp sales dropped of 1% for the first quarter, flat at Dress Barn division and minus 3% for Maurice’s was a reflection of the difficult retail environment this fall. While the more seasonable weather this year helped business, economic concerns reduced our traffic and transaction counts across the board. This performance, while below our initial plan was offset by strong inventory and cost control that enabled us to increase our earnings 5% over last year for an EPS of $0.32 versus $0.30 LY.

The tone of business has been of particular concern in the two and a half weeks since the quarter ended. Certainly the Election, a Friday Halloween, and an Indian summer were partially to blame but the tenor of business is very weak. For this time period, comps were down high single digits at Dress Barn and off mid single digits at Maurice’s. In response, we have moved quickly and aggressively to control our inventory and put incremental promotions in place to help drive traffic. Our outlook for the spring is cloudy at best and given the current environment, we have taken an appropriately defensive stance. During these difficult times, until both of our divisions are very well positioned, our fashion focus allows higher end customers to trade down without sacrificing style, while our value prices and impactful promotions enable cash-strapped shoppers to stay within their budget. We will be refining our marketing and in-store displays to emphasize these two messages in the coming months.

I''ll now turn it over to Armand for review of our financial performance.

Armand Correia -- Senior Vice President, Chief Financial Officer

Thank you, David. Reviewing our financial results for our first quarter of fiscal 2009, net earnings increased to $20.5 million or $0.32 per share, compared to $19.6 million or $0.30 per share for the same quarter last year. This performance exceeded our expectations given the 1% decrease in comp store sales. The year-over-year increase in quarterly earnings was primarily driven by increases in gross profit related to merchandise margin improvement from our Dress Barn stores. Quarterly net sales increased 3% to $376.4 million versus the year ago quarter. The increase reflected the overall net store growth of 5%, combining both Dress Barn stores and Maurice’s growth, offset by a quarterly comp store sales decline of 1%. By division, Dress Barn stores quarterly sales increased 2% to $232.8 million versus last year, while comp store sales were flat. Dress Barn stores were up against easier comparisons from the prior year.

Reviewing sales performance by region, the Northeast and the Midwest had the better results while the West Coast and the Southeast, specifically Florida, had the weaker results. Customers in these areas were more affected by the housing market crisis and its impact on the local economy. Reviewing some key Dress Barn stores sales components versus last year, Dress Barn stores do not monitor store traffic but sales transactions decreased 1% to last year. Average dollar sales increased 2% to $68.35 reflecting lower markdowns, while average unit retail also increased 2% to $21.98. Units per transaction increased 1% to 3.1. Maurice’s quarterly sales increased 6% to $143.6 million versus last year. The increase was driven by net store growth of approximately 11.5%, offset by a comp store sales decrease of 3%. This year''s comp sales decrease compares to a strong increase of 8% last year for the same quarter. Reviewing sales performance by region for our Maurice’s stores, the Midwest and Mid-Atlantic had the better performances while the Northwest and Southeast the weaker.

Maurice’s stores key sales components versus last year include traffic decline of 5% during the quarter. Average dollar sales increased 1% to $50.64, which included a 1% increase in average unit retail to $18.17. Units per transaction were flat at 2.8. Our traffic conversion rate improved 2% versus last year and helped offset some of the traffic decline. Moving on to gross profit, we were pleased with our performance, which was driven primarily from tight inventory control. Total company gross profit dollars grew by 5% to $147.2 million versus last year. Gross profit percentage increased 70 basis points to 39.1% versus 38.4% last year. The year-over-year increase was primarily in merchandise margins from our Dress Barn stores. By division, gross profit percent for Dress Barn stores was 38.3%, an increase of 230 basis points versus last year''s 36%. This year''s increase was merchandise margin-driven primarily from lower markdowns.

Gross profit percent from Maurice’s stores was 40.4%, a decrease of 190 basis points versus last year''s very strong 42.3%. The decrease was primarily from higher markdowns and occupancy costs deleverage. Total SG&A expenses for the quarter increased 6% to $102.7 million or 27.3% of sales versus $96.7 million or 26.6% of sales last year. The 70 basis points increase was primarily due to the impact of deleveraging from the decrease in comp store sales. More specifically, there were increases in marketing spend during the quarter versus last year. That accounted for approximately 30 of the basis points and store impairment charge, primarily related to Dress Barn stores, which accounted for approximately 40 basis points.

So therefore, excluding store impairment charge, the SG&A as a percent of sales over last year, would have increased 30 basis points instead of the 70 basis points. Total quarterly operating income dollars grew by 3.5%, in line to the sales increase versus last year coming in at $32.3 million or 8.6% of sales. This compares to last year''s $31.2 million and 8.6% of sales. By division, operating income percent for Dress Barn stores improved 240 basis points to 7.8% compared to 5.4% last year. Again, the increase was merchandise margin related from decreases in markdowns. Maurice’s store''s operating income percent was 9.9% during the quarter compared to a very strong 14% last year. Last year''s percent was driven by comp sales increases of 8% during the quarter as well as strong merchandise margin performance. Maurice’s operating income decreased 410 basis points this year to last year, which came from, 190 basis points of this amount was a decrease in gross profit from increased markdowns, occupancy cost deleverage and the remaining 220 basis point increase was SG&A expenses from deleveraging and increases in marketing spend.

Our quarterly effective tax rate was 38.9%, slightly above last year''s 38.5%. Our quarterly weighted average diluted shares outstanding were 64.9 million, a decrease to last year''s 65.9 million shares. This year''s decrease of approximately 1 million shares was due to less dilution from our 2.5% convertible senior note as a result of a lower average stock price compared to last year. This year''s average stock price during the quarter was $14.53 versus last year''s average price, of $16.92. Moving on to our balance sheet, it continues to strengthen and remains highly liquid. We ended the quarter with cash and marketable securities of nearly $300 million or approximately $5 per average share. This compares to $198 million to the year ago quarter. Our marketable securities also include another line caption on the balance sheet of approximately $52 million, which are auction rate securities, either student loan obligation notes, which are 100% backed by the U.S. government. The issue with these investments is not risk, but liquidity. However, we are encouraged by recent developments on the redemption of these securities and have been notified on approximately $20 million of this amount for redemption. These settlements are expected to be at par.