Joe's Jeans (JOEZ)

Q3 2011 Earnings Call

October 11, 2011 4:30 pm ET


Hamish S. Sandhu - Chief Financial Officer and Principal Accounting Officer

Marc B. Crossman - Chief Executive Officer, President and Executive Director

Lori Nembirkow -


David E. Griffith - Roth Capital Partners, LLC, Research Division

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division



Welcome to the Joe's Jeans Fiscal 2011 Third Quarter Earnings Conference Call. My name is Jeff, and I'll be conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would know like to turn the presentation over to your host for today's conference, Lori Nembirkow, General Counsel for the company. Please proceed.

Lori Nembirkow

Thanks, operator, and thanks to everyone for joining the call. Present on our call today to discuss our results are Marc Crossman, our President and CEO; and Hamish Sandhu, our CFO.

Before we start, let me review the company's Safe Harbor language. Today's call may contain forward-looking statements, which are statements of the company's or management's intentions, hopes, beliefs, expectations or predictions of the future. These statements are subject to risk and uncertainty that could cause our actual results to be materially different. You're cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. I also refer you to our reports that are filed with the SEC, which includes our 2011 quarterly report on Form 10-Q filed today. This report includes information that could also cause our actual results to be materially different from those contained in any projections which may be made during this conference call. By making any forward-looking statements, the company undertakes no obligation to update them for revisions or changes after today.

Finally, a copy of our earnings release and a recording of this call will be available on our website,, and a telephone replay will be available for 1 week from today. Now I'll turn the call over to Marc.

Marc B. Crossman

Thanks, Lori, and thanks to everyone for joining us today. I'll speak about the third quarter results and then I'll turn the call over to Hamish for a discussion of our financials. Finally, we will end with a Q&A session.

In the third quarter, our net sales were $24.2 million versus $25.5 million a year ago. During the third quarter, we generated an operating loss of $2.6 million due to a retail store impairment charge and an inventory write-down of the leggings and age collection items. These charges totaled $2.8 million. Excluding these charges, we would have generated positive operating income.

Also impacting our operating income is our decision to increase our spending on advertising and marketing to facilitate the improvement of our women's business. This past quarter, our women's and domestic wholesale business decreased several digits. However, we're starting to see the positive effects of delivering many new fashion styles and a revamped core program. While the previous quarter was marked by bringing our stock levels down to match our sales, this quarter, we are seeing that our sales are outpacing our stock levels. We're cautiously optimistic that this trend will continue through fall and into holiday, resulting in department stores bringing their inventory levels up and in line with our sales. Our domestic specialty boutique store business increased during the quarter. Deliveries of our fashion denim and collection drove growth in this distribution channel.

Looking forward, the positive response to the new fashion we started delivering at the end of the third quarter has been very encouraging. For example, we delivered the Joe's Wild Collection, which included pieces like the leopard print skinny jeans. We supported the Joe's Wild Collection with a cross-platform advertising campaign. As a result, our initial production run was sold out, and we generated numerous new orders. We will continue to identify our best fashion pieces or themes that represent the Joe's brand each season, price the product in all the best stores and support them with significant advertising campaigns.

Our domestic men's wholesale business continues to be a strong growth driver for us, as evidenced by a 40% year-over-year sales increase. Expanding our slim fit product offering during the quarter drove significant sales increases in existing doors. Be certain, we did experience store growth during the quarter and believe there is a sizable opportunity to further expand our men's distribution. In addition to denim, our men's collection continues to grow as we have expanded the number of specialty stores carrying our product offering. We expect our men's business to continue to grow in future quarters.

Our international business remains challenging. Our largest market, Japan, declined again during the quarter. However, this current quarter, we are seeing a pickup in the business as a result of our fashion offerings. The same holds true for the rest of our international business. Our order book for the fourth quarter is up year-over-year.

Our wholesale gross margin was 34.3% for the quarter compared to 44.5% in the prior year. Impacting this decline was a $1.62 million write-down of the jean leggings non-denim pants and age collection items. The largest component of the write-down was the jean leggings. The write-down reduced our gross margins by 7 percentage points.

Our SG&A declined this quarter on a year-over-year basis. Our wholesale SG&A was $3.6 million, down from $3.8 million in the prior year period. The decline is attributable to reduced sample costs and a decrease in our facilities and distribution expenses. Despite the decrease in our SG&A, our wholesale operating income decreased due to the inventory write-downs and reduced sales.

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