LOS ANGELES (
has seen its share price nearly triple even as the company moves out of its comfort zone of premium denim products and works to open a handful of new retail stores.
said net sales increased 41% to $23.2 million in the first quarter, with nearly 20% of those sales coming from non-denim product category. The company's stock has rocketed from $1.50 in October to $3.60 in April, the highest level in nearly five years.
Joe's Jeans CEO Marc Crossman sat down for a conversation with
shortly after the company reported first-quarter results to discuss the company's recent history, the challenges of launching its new non-denim products in a very competitive market, and excitement over new retail stores opening soon.
TheStreet: What's your general take on Joe's Jeans business and your view of the industry?
Crossman: As you know, we've historically been in the premium denim business, defined by our group as over $120. So you're talking about
, 7 Jeans, Rock & Republic. The business as we see it is good, although it's not in that explosive category that it used to be. Look at True Religion. They were doubling the size of their company every 12 months just on the wholesale side of the business.
The days of floor space being expanded and sell-through of 25% per week and those astronomical numbers are gone. But it's still a very attractive, very profitable business, talking from the department store standpoint. For our retailers, it's a very profitable business. It's not a business that is highly trend-specific, if you will. You're not in and out and constantly rotating. The core basic denim styles can be run for up to a year. There is such a good, healthy core component to it.
For us, the business grows anywhere from 10% to 15%. It varies from quarter to quarter due to seasonality, but I would say that's probably a good approximation of what the business is doing. I know we're taking market share. I can't tell if the business overall is growing at that healthy of a clip, but it's certainly not declining now.
TheStreet: In the last quarter, sales increased 41% from last year to $23.2 million, which was well above the lone analyst estimate...
Crossman: Well, we've been able to manage something that pretty much no other denim company has been able to accomplish on the wholesale side, which is get into other categories. For the longest time, we'd beat our head up against the wall trying to get into the "collection" and the "lifestyle brand." We don't hold that power. Retailers would say the same thing over and over. "Unless you come up with something really special, we're not going to put it into our stores." After three years of hearing the same thing, we now have our tops division or microbrand, as we call it.
We had to approach it a different way with the retailers. We showed up to our first show with 70 different patterns, so everyone was able to find five or six woven shirts to put together a nice capsule in their stores on a monthly basis. That shows that when you really attack it as its own separate entity, it's not an afterthought. That's how we gained our success with these microbrands. We've done that not only with our woven shirts, but with our knit tops and non-denim bottoms, which should be really successful.
When you look at the logos, we're not trying to drive the Joe's component of it, but instead its own brand with its own identity. The evidence, or the proof, is in the pudding based on 20% of our sales in the last quarter coming from that in the wholesale channel.
TheStreet: Right. So in the last quarter, 20% of sales came from non-denim products. To me, that sounds like the biggest growth potential for the company going forward. Is there a higher margin for these non-denim products?
Crossman: We should easily be able to get those margins up to where the denim is, but we're not at that point yet. The problem is that we're putting these microbrands together in Los Angeles. Price sourcing is probably the best way to put it. You really have to develop relationships with factories overseas. Even with our knit tops we're doing a lot of production in Los Angeles, and the margins are lower. As we grow the size of the business, we're definitely going to bring that in a bigger way over to China, developing relationships with factories. It's an opportunity, but right now they're carrying slightly lower margins. I think I've said in the past that it's five to seven points lower. But we'll easily be able to make that up as we make that transition.
We've shown this before when we did all our denim in Los Angeles. At that point, we had 35% gross margin and you can see the progression since. We generated an extra fifteen points by moving down to Mexico and over to Morocco. We just hired a new head of import production, which will bring a lot of factories and relationships into the fold. The only thing I would caution is that anything you do in the apparel business takes a good nine months before you see the effects.
TheStreet: Joe's Jeans announced the opening of more retail stores for later this year. Can you talk a bit about that, as well as the scalability you're seeing in the business?
Crossman: With the retail stores, we have a two-prong strategy. On the outlet side, it's very easy to open stores quickly. You go to one place to do deals with, and that's
Simon Property Group
. You could sign 30 leases all at once if they have the spaces available. From our perspective, I'd rather have our merchandise in our own outlet stores than other outlet stores. There are a few non-Joe's-branded outlet stores that we want to be in, like a
Off Fifth, which have a great image and following. But ultimately, we want to run a vast majority of our off-price through our own branded retail stores. They're just as nice as our full-price stores. We don't treat them as gray carpet, exposed ceiling stores.
TheStreet: What challenges have you seen as you've expanded more?
Crossman: The challenges we're seeing is headcount. The person running our retail business can get our stores open very quickly. The evidence is that we're opening seven new stores in just a couple of months. Our corporate team here is extremely lean. There are four people here at corporate. We're going to be at a minimum of 16 stores by the end of the year. The question is when you have to bring on and add staff. We're going to do that in very measured steps.
TheStreet: There are a lot of positives in your last earnings release, but at the same time there also appear to be some risks...
Crossman: Let's hash them out!
TheStreet: The one obvious thing is the year-over-year increase in selling, general and administrative expenses, which was attributed to added headcount. SG&A was $9.7 million in the first quarter, compared to $7.1 million a year ago. Can you talk about how you view expenses and what investors should expect?
Crossman: I can't say what people are expecting, but after looking a few numbers floating around, people are looking too much at a year-over-year comparison. I don't think people expected our level of sales, but when they looked at our SG&A, they expected it to be up a little from that. Really, we have a fixed-cost SG&A base, whether it's rent or distribution. Employee costs are the number one expense far and away, so you're not going to see a lot of varying with that. About 8% of sales is variable, so when you see a big jump in sales, that SG&A is going to be driven by that change. The only thing that's really discretionary is advertising, which you can turn on and off.
TheStreet: You said on the last earnings call that you're going to see some expenses come down by the end of the second quarter.
Crossman: Yes and no. We're not doing that level of advertising and we're not moving our corporate headquarters again. But on the other hand, as we add stores, we're hiring more people. It's hard to say where it's going to shake out.
TheStreet: On the positive side, Joe's Jeans is carrying no long-term debt and it has a cash level that has really jumped over the last year. You've said before that you plan to fund any business initiatives out of cash flow rather than dilute the shareholder base, which is positive. In the last quarter, the company did burn through about $2.5 million in cash, though. Is that due to seasonality?
Crossman: All through 2009, we were generating a ton of operating cash. Lately, we've had a big inventory build up. The two big buildups are due to the business going into the fall, and the inventory for stores given we're opening so many at once. So you're going to see that in the first quarter and to some degree in the second quarter. In the back half of the year, we'll flip that. We'll be generating a ton of cash in the back half of the year because we built up the inventory to feed those stores we've opened up. We'll manage our cash a little better.
TheStreet: Moving on, I noticed in a few regulatory filings that insiders have done a lot of share sales in the last few months. Investors prefer insider buying rather than selling, obviously. Should investors be concerned at the amount of selling by insiders, especially with the rapid share price appreciation?
Crossman: That's tough. From my perspective, I've been involved with the company since 1999 and I haven't done anything with a single share except to purchase stock or to loan the company half a million when it was in trouble a long time back. So for me, I just wanted to taste the reason why I'm working here. That was impetus from my standpoint. Would I read into that? No.
TheStreet: I think a lot of concern stems from founder Joe Dahan selling shares. He still owns more than 13 million shares, but there were quite a few transactions on his part and I suppose the fear is that he would cash out altogether.
Crossman: Joe has a number in his head and it's a huge number. With 13 million shares, he could retire and never have to work again. At some point, he'll diversify. But right now, he's just putting some cash in his pocket. It's not a major divestiture.
TheStreet: I know Roth Capital covers the company's stock, but it appears they're the only firm. Is the hope that with recent momentum in share price that there will be more Wall Street coverage?
Crossman: That's always the hope. From my standpoint, it's about getting the story out to as many investors as possible. I also want to make sure existing investors know what's going on with the company. I'm still at the point where I will pick up the phone when an individual investor calls me. My job is to work for the shareholders. I'm not just saying this as a PR stunt. My view is this: I'm not trying to pump the stock up or down. It's about making sure as many people as possible have this stock on their screen. The whole idea is to create liquidity in the name. That's best for everybody.
TheStreet: Another investor concern has been over expenses related to current lease obligations. Do you feel as though that's a major risk, or is that something that's easily handled?
Crossman: I don't know the right way to answer that. It comes with being in the retail business and there's no way around it. That's the real estate business and part of getting into the retail business. You sign leases, and the vast majority are all 10-year leases. For us, it's about finding the right size square footage so we can manage the productivity of the store. If we run into trouble, we go back and work with the landlords.
TheStreet: You previously spent time on Wall Street as an analyst with JPMorgan and other firms. Has that Wall Street experience paid off as you transitioned into the role of CEO at Joe's Jeans?
Crossman: Well, one of the things I get slammed for is that I'm always deadpanning or sandbagging, or that my delivery sounds like my mother passed away. So I don't know if the Wall Street experience does me a disservice, but my natural inclination is not to give the fancy, super-hyped story. It's about giving a fair and balanced view of what challenges we're facing, what headwinds we're flying into and what tailwinds we have. It's about explaining the story through and through so people can make their decision.
For me, if the stock were to run up to $5 tomorrow and we had a $300 million market cap, that would create more anxiety for me today because I'd be looking at that valuation saying "That's a pretty rich valuation given where we are today." Are we going to get there? Absolutely. We're going to be a $5 stock. But I don't want to get a reputation of being a promoter you can't trust who hypes the stock. It's very important to me to maintain a good relationship with Wall Street, where I can say something and they believe me.
TheStreet: If you were presenting the story of Joe's Jeans, what are the biggest headwinds and tailwinds?
Crossman: The two biggest catalysts for us is having all of these retail stores in front of us that are going to open, and the other is the fact that they carry a higher
earnings before interest, tax, depreciation and amortization, or EBITDA margin than the overall company, so that should lift margins. We have all of these stores in place, and we feel very comfortable with the outlet strategy model. And these new microbrands that we're launching outside of our core denim business are gaining traction. Ultimately, it'd be great to have only half of our business come from denim, as that would add diversification to our business and significant revenue growth.
But if you turn it around, you find that your biggest upside is your biggest risk. If those are the two most important things driving the company, they're the most harmful. The denim is very well established and it's never going away. But those other business are very nascent, you have to be a lot more careful and you don't want to have missteps when building them. They're a real growth engine, but they definitely have to be treated with kid gloves.
With retail, it's high fixed costs. There are a lot of variable costs. It's hard to cut staff, because you can only cut so far when you run into issues. Rent and employee costs are the vast majority of your expenses. When it's working, it's a great model.
TheStreet: We just went through one of the worst recessions in history and yet your product held up despite the higher price tags. What's your takeaway from that?
Crossman: Our cheapest jeans are $138, and we have some that go to $240. The bulk of our business goes out between $158 and $179 at retail. We actually benefitted from the fact that we're one of the more affordable premium denim players. When you look some of the other companies, their average price points are $200 and above. Secondly, we have a really loyal customer base, so we were able to attract new customers based on the price points and then the base itself didn't flip flop, trying out different brands. A customer loyalty survey done a while ago ranked us number 2 behind Levi's. That's not size, but loyalty. Once a customer knows it fits and we have that consistency, we have that customer and that customer stays.
TheStreet: Certainly, having celebrities seen in your jeans can't hurt...
Crossman: That stuff is great. That stuff gets people interested and that's a way to drive a new customer. But once a customer gets here and finds a fit, they become pretty loyal. That's whether or not we have a celebrity wearing our jeans or not.
-- Written by Robert Holmes in Boston
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