Q2 2014 Birks Group Inc Earnings Conference Call

Nov 14, 2013 AM EST
BGI - Birks Group Inc
Q2 2014 Birks Group Inc Earnings Conference Call
Nov 14, 2013 / 09:45PM GMT 

Corporate Participants
   *  Mike Rabinovich
      Birks Group Inc. - SVP & CFO
   *  Jean-Cristophe Bedos
      Birks Group Inc. - President and CEO

Conference Call Participants
   *  Justin Cohen
      TD Waterhouse - Analyst

Operator   [1]
 Good day, ladies and gentlemen, and welcome to the Birks Group fiscal 2014 midyear financial results conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mike Rabinovich, of Birks Group. Please go ahead, Sir.

 Mike Rabinovich,  Birks Group Inc. - SVP & CFO   [2]
 Good afternoon, everyone. I hope each of you received a copy of our earnings release. If for any reason you didn't, you can download it from our website at www.birksgroup.com by clicking on investor relations on the homepage index, and then on financial news releases.

 Before we begin, I would like to remind you of the Company's Safe Harbor language. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties, all of which are described in the Company's annual report filed on Form 20-F and other SEC filings.

 And now I would like to turn the call over to Jean-Christophe Bedos, President and Chief Executive Officer of Birks Group.

 Jean-Cristophe Bedos,  Birks Group Inc. - President and CEO   [3]
 Good afternoon. This afternoon, we will discuss the Birks Group midyear results for fiscal 2014. I would like to thank Mike Rabinovich, our Chief Financial Officer, for joining me today on this call.

 As an introduction to our discussion today on our recent performance, I would like to briefly review the significant progress we have made on the key initiatives and strategies I outlined during our conference call in June related to improving our business and raising our profitability to the levels expected by our shareholders and our management team.

 One of those key strategies is to enhance our customers' in-store experience. In August, we opened the first two Maison Birks Monogram stores in Ontario and Quebec. These new stores introduce a new and exciting store design with several visual branding elements with a view to providing our store with a refreshing appearance and a modern look that will provide a more inviting in-store experience, increase the productivity of the store and allow us to reach a younger consumer.

 We plan to continue rolling out this new store concept across most stores over the next few years. In the US, we are also continuing the upgrade of our in-store experience by remodeling three additional major stores to create shop-in-shops and to provide our clients with an engaging brand experience.

 On the merchandising side in Canada, we successfully launched 10 new collections under the Birks brand during the first half of the year. We continued the progress of upgrading our timepiece and fine jewelry offering by introducing new brands to our stores. We also extended the offering of our new, most successful timepiece brand and strategically phased out phase out other brands and product lines that were less profitable or less desirable to our clients.

 Provide the initial funding of our strategies, we successfully raised new debt and new equity during the summer. This provided the Company with the additional liquidity to pursue our growth and rebranding strategies. In addition, during the first half of the fiscal year, we revisited our our vision and mission to introduce our new retail brand name and logo, Maison Birks. Although we expect that some of these initiatives will take some time before having a significant impact on our financial results, early evidence of the Company's success can be already seen through the growth of our comparable store sales of 10% during the first half of the year.

 Now I'd like to turn the call over to our CFO, Mike Rabinovich, to review our financial results with you in more detail.

 Mike Rabinovich,  Birks Group Inc. - SVP & CFO   [4]
 Thank you, Jean-Christophe. Before I begin my financial review, I would like to remind all business that our results are reported in US dollars and are prepared in accordance with US GAAP.

 I'd like to begin my discussion with a review of the income statement. Our revenues in the first half of the year increased $2.5 million over the prior year. This increase was primarily driven by a 10% increase in comparable store sales which was strong enough to offset $2.9 million of lower sales related to six less stores, $1.9 million of lower sales related to translating our Canadian sales into US dollars due to the weaker Canadian dollar, and $3.7 million of decreased revenues relating to non-retail activities, such as refining, corporate sales and Internet.

 The growth in our comparable store sales occurred in both the US and Canada, with a 4% increase in Canada and a 17% increase in the United States. The sales growth in both regions was primarily related to an increase in average sales. The sales increase in Canada was primarily driven by our fine jewelry and timepiece business, with the increase in timepieces stemming mostly from the result of upgrades we've made to our timepiece offerings.

 The sales increase in Canada was somewhat muted by lower sales as we transition away from certain brands and product lines that we have strategically decided to no longer offer. In the US, which experienced a much more dramatic increase, the strong growth was directly related to the continuation of our timepiece strategy.

 Despite our $2.5 million increase in revenues, our gross profit decreased $1.8 million year over year, or approximately $1 million if you exclude $800,000 of lower gross profit related translating the gross profit of the Canadian operations to US dollars with the weaker Canadian dollar. The decrease we experienced in the first half of the year was primarily the result of $2.1 million of lower gross profit related to non-retail activities and 200-basis-point decrease in retail gross margin.

 The decrease in the retail gross margin was primarily a product mix issue as a higher percentage of our overall retail sales in the first half of the current fiscal year was from the sale of higher-priced products which tend to have a lower margin rate.

 Our selling, general, and administration expenses remained relatively consistent with the prior year as the $900,000 decrease in expenses related to foreign currency translation and the $1 million of lower expenses primarily related to operating six less stores were offset by $1.3 million of higher marketing costs and $200,000 of higher costs related to our planned expansion into China. The increase in our marketing expense is consistent with our strategy to relaunch Birks retail brand as Maison Birks.

 Depreciation expense grew year-over-year primarily to the higher capital of expenditures invested by the Company over the past year in remodeling our retail stores and opening our two new monobrand stores. Interest expense decreased slightly compared to the prior year due to a lower level of average debt during the first half of the year and lower borrowing costs related to the amendment of our senior secured term loan during the summer.

 As a result of the factors I just outlined, we ended our first half of the fiscal year with a net loss of $7.7 million, or $0.50 per diluted share, or approximately $2.1 million or $0.03 per diluted share of higher net loss than the same period prior -- same period last year.

 I would like now to turn to the balance sheet. Our inventory levels increased $4.3 million at the end of September compared to September at the prior year. If you exclude the impact of $3.9 million of lower inventory related to foreign currency translation, the increase in inventory was approximately $8.2 million. The growth in the level of our inventory is directly related to the initial buildup of new inventory related to new brands and expansion of other brands being offered in our stores as we upgrade our timepieces and fine jewelry businesses at the same time we continue to work down and out of the remaining existing inventory of brands and product lines which we have made the decision to no longer carry.

 Interest-bearing debt, which includes our senior secured revolving line of credit, increased by $5.6 million compared to the end of September last year. The increase in interest-bearing debt is directly related to the inventory increase I just mentioned, as well as an increased investment in capital expenditures related to our store remodeling and rebranding projects. Despite the increase in interest-bearing debt, our excess borrowing capacity under our revolving credit facility was $21.6 million at the end of September 2013 compared to $16.8 million at the end of September 2012 and reflects our successful efforts during the first half of the fiscal year to raise capital and improve funding resources.

 The new debt and equity raised during the first half of the current fiscal year amounted to approximately $20 million increase borrowing availability fund our growth strategies with the impact of the financial benefits planned for later this year and next.

 In conclusion, while the overall financial results of the Company were below the same period last year, we believe that the impact of the implementation of our current strategies will result in long-term growth and significantly higher profit levels over the remainder of the current fiscal year and the years to follow.

 And now, I'd like to turn the call back over to Jean-Christophe.

 Jean-Cristophe Bedos,  Birks Group Inc. - President and CEO   [5]
 Thank you, Mike. As Mike reviewed with you in more detail, during the first half of fiscal 2014, we continue to implement our key initiatives and strategies to improve our business in order to raise our profitability to the levels expected by our shareholders and by our management team.

 In this respect, we will continue to concentrate our efforts on delivering our strategy. We will keep investing in transforming our stores. We will continue to introduce several new collections, enhancing our Birks product brand. We will keep partnering with our key third-party luxury brands that are not only profitable, but also highly desirable to our clients.

 In addition, during the first six months of our fiscal year, we continued our efforts to establish Maison Birks as an international luxury brand. This also includes plans to open our first Maison Birks monobrand stores in China. While we initially announced that we plan to open at the Xanadu Plaza in the central business district in Beijing, we are now actively reviewing alternative locations in either Beijing or Shanghai where we plan to open our first Maison Birks monobrand store during the 2014 calendar year.

 I would now like to turn the call over to the operator to conduct the question-and-answer portion of the call.

Questions and Answers
Operator   [1]
 (Operator Instructions) Justin Cohen, T.D. Waterhouse.

 Justin Cohen,  TD Waterhouse - Analyst   [2]
 Yes, hi, thank you guys for the info. I just have a couple of quick questions regarding the margins that you are talking about. You said that the lower margins were driven by some of the timepiece strategy. I would assume that some of the new Birks stores because they are all more proprietary are going to be higher margin. So you feel that the margin issue is going to continue or going to reverse?

 Mike Rabinovich,  Birks Group Inc. - SVP & CFO   [3]
 Thank you for asking the question, and let me answer it in two parts. First, when we talked about the margin decrease, we didn't necessarily attribute it to the timepiece strategy. We attributed it to the more significant level of higher end sales that with them carry a lower margin. That can relate to timepiece, but in many cases that has been occurring with fine jewelry. So I just wanted to clarify that it wasn't just timepieces. It's more about sales over a certain level, and we've been enjoying some great success in that area.

 The second answer is with the introduction of the new Maison Birks stores, they only contributed in the fiscal quarter for five weeks of business. So leading answer there that, over time, given that the proprietary brand will carry a much higher gross margin that is central to the Company's strategy of investing in the product brand.

 Justin Cohen,  TD Waterhouse - Analyst   [4]
 Great. Thank you.

Operator   [5]
 It appears we have no further questions at this time.

 Jean-Cristophe Bedos,  Birks Group Inc. - President and CEO   [6]
 Thank you very much for joining us today. We look forward to speaking to you when we report our full-year results next summer.

Operator   [7]
 Thank you. Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.

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