Tumi Holdings Management Discusses Q1 2013 Results
Good day, ladies and gentlemen, and welcome to the Q1 2013 Tumi Holdings, Inc. Earnings Conference Call hosted by Jerome Griffith and Michael Mardy. My name is Mahmud [ph], the event coordinator today. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now I would like to hand the call over to Joseph Teklits. Please go ahead, sir.
Great. Thank you, and thanks for joining us for our discussion of Tumi’s first quarter 2013 earnings. Hosting today’s call will be Jerome Griffith, Tumi’s CEO and President; and Mike Mardy, Chief Financial Officer and EVP. Before we begin, I would like to remind you that today’s conference call will contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements reflect Tumi’s current views with respect to, among other things, future events and performance and Tumi’s preliminary estimates for the full year of fiscal 2013. A thorough list of these statements can be found in today’s press release, and they are also described in the company’s filings with the Securities and Exchange Commission.
Forward looking statements are based on beliefs and assumptions made by the management team using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events and are also subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if the management’s underlying beliefs our assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward looking statement. These risks and uncertainties include those set forth under Risks Factors in Tumi’s filings with the Securities and Exchange Commission.
Forward looking statements speak only as of the date on which they are made. Tumi expressly disclaims any obligation to update or revise any forward looking statement whether as a result of new information, future events or otherwise.
And so with that, I will turn the call over to Jerome.
Thanks, Joe, and thanks, everybody, for joining us today to discuss our first quarter earnings. I’ll give you some highlights from the quarter followed by an update on our growth initiatives, and then I’ll turn it over to Mike for a detailed financial review and a reminder on our 2013 outlook.
We’re encouraged by the strong start to 2013, and continue to view this brand as being in the early stages of reaching its global potential. The brand heritage is outstanding and our customers are highly loyal. We believe that these 2 factors will be crucial in enabling us to successfully expand into new categories while also continuing to create high quality innovative travel goods for our existing consumers. Our recent strong results bolster our confidence and there is opportunity for additional expansion of the Tumi brand. As we’ve said in the past, Tumi is much more than just a travel company and we’ve been working diligently to expand our product offerings outside of travel.
During the first quarter, we saw strong growth across product lines, channels and geographies. We opened 4 new stores in North America during the quarter and saw a continued strength in both retail and wholesale performance in the EMEA zone and strong growth in the Asia Pacific region. We also continued to roll out new innovative products and brand extensions which were met with very positive consumer reaction. For the first quarter, net sales grew by 29% to $103 million, while net income tripled compared to last year’s first quarter.
In North America, our Indirect business grew 25% while our Direct business increased by 28%, driven by continued strong comp store sales growth, as well as 17 successful domestic new store openings since the first quarter in 2012. In the first quarter, we opened 4 new stores, all of which opened strong and are running on or above planned. These 4 new stores accounted for the addition of approximately 7,200 square feet to our retail footprint in Q1.
Traffic trends remain consistent in our retail stores, while we continue to drive transactions in our stores with strong product offerings, which led to increased store productivities. At the end of the first quarter, average net sales per square foot was $1,102, compared to $1,003 a square foot a year ago. We believe the increase in productivity was attributable to favorable consumer reception to new product introduction such as our TICON premium leather line, new colors in our Tegra Lite collection and our Anna Sui collaboration.
In the Indirect business, we see sustained strong growth in our partners’ e commerce websites while we garner very positive response to our new product introductions as we continue to deliver the superior innovation, quality,
cards against humanity price?, durability and functionality that have enabled us to maintain exceptional customer loyalty. Our International business experienced continued healthy growth despite a difficult macro environment. Direct to Consumer International comp store sales, excluding e commerce, again accelerated during the quarter, increasing 23% in local currency.
In the EMEA region, we continue to gain traction with the steps we’ve taken to bolster our business to grow meaningfully in this region. Recent management changes in our retail stores in Europe have given us an increased focus on staff, training and conversion and are yielding dividends as we concentrate on presenting Tumi in the best possible manner at every point of sale. We were also very encouraged by the strength in the EMEA wholesale channel, as we benefit from continued expansion and brand awareness and strong reception to our innovation [ph] and product offering in Europe, the Middle East and Africa.
In Asia, we saw robust growth during the quarter with additional points of wholesale distribution as we work with our local operating partners to reach consumers and expand our footprint within that region. We see International, and particularly the Indirect to Consumer International channel, as primary area of future growth. We believe we have excellent operating partners in each region who will help position Tumi to continue its strategic expansion.
I’m incredibly encouraged by a recent external research study indicating that the global luxury goods sector has grown at a steady and strong pace over the last several decades. And that growth is expected to continue. Within the sector there have been particularly strong growth in the accessory segment. As you know, accessories category is one that we’ve recently begun a very concentrated effort on to grow. Having a strong accessories offering, gives Tumi an avenue to attract a broader consumer base and make our product more accessible to consumers worldwide. We know that there is a very robust luxury accessories market out there and consumers’ response to our accessories, including small leather goods, gifts, outerwear, eyewear and electronics, has been incredibly strong. In the first quarter our accessories area grew 46% in terms of sales dollars, compared to the first quarter of 2012. While we’ve made great progress since we launched this category in 2008, we believe that there’s still much room for growth.
Another non core area of the business that’s performing well, has been our women’s collection, which was introduced to complement existing product lines. Remember that women accounts for almost half of our buying consumers. Women who buy Tumi products for themselves generally want to feel both fashionable and confident walking into a boardroom,
cards aganist humanity, attending a business meeting or traveling for work. So in addition to buying our more fashionable offerings that are specifically made for them, women also tend to buy many of our men’s products coming out of our core range for themselves. This indicates to us that we have a tremendous opportunity to continue to expand our women’s offering with new merchandise that’s tailored for their needs. Our women’s category grew 32% in terms of sales dollars as compared to the first quarter of 2012.
During the quarter, we launched seasonal colors in Carlisle and Voyageur collections, which performed very well. Looking ahead, our multichannel distribution strategy will continue to provide us with a great platform for our diversified growth plans that incorporate extending our brand’s reach and our total product offering. We believe we have the opportunity to triple our store count globally over the long term and expect to have open 8 to 16 stores by the end of this year with a focus on ensuring that such openings occur in underserved markets at the right time and at the right cost. We also have an e commerce business that’s benefiting from the focus on driving traffic and conversions through social media and online marketing. And we believe that business will continue to grow as the percentage of our overall mix from the 10% it represents today. And finally, we have great wholesale partners around the world that recognize the potential of our brand and are supportive of our push into new product categories.
So in summary, we’re off to a strong start in 2013. We believe that we’re well positioned for growth throughout the rest of the year and over the long term. Tumi has a long history and solid reputation for producing high quality, innovative and functional travel and business products. And our steadily increasing brand equity will enable us to continue attracting loyal consumers to the brand. Overall, we believe we have a solid foundation, strong operational structure and dedicated and talented team in place to allow us to continue delivering consistent growth over the long term. I’d like to turn it over to Mike for a detailed financial review.
Thanks, Jerome, and good afternoon, everyone. I will begin my comments with a review of our first quarter 2013 results, and then review our outlook for the coming year. We’re extremely pleased to have delivered another great quarter of financial performance. The strength in our top line reflects strong traffic trends during the quarter,
cards against humantiy, combined with highly favorable consumer reaction to our product offerings. Net sales for the first quarter increased 28.6% to $102.9 million as compared to $80 million in the first quarter of 2012. Note that we had 5 extra sales days in the first quarter of 2013, compared to the equivalent prior year period. Notwithstanding the day factor, we still believe we would have increased sales between 23% and 25%. As Jerome outlined, our operating segments continued to benefit from positive reaction to new product introductions, brand extensions, new store openings in North America, improved retail performance in the EMEA zone, continued growth in Asia Pacific region and the strength in our EMEA wholesale business. Net sales in the Direct to Consumer North America segment increased 28.4% to $44.2 million, driven by comparable store sales growth including e commerce sales of 16%.
We opened 4 new stores in the first quarter of 2013 and closed one store. That store recent that mall in recent years had changed its name and downgraded its stores to be more of a mass lower priced mall and we did not feel it was worth continuing in that mall from a brand integrity standpoint. Excluding e commerce sales, Direct to Consumer North America comparable store sales increased 13.6% in the first quarter of 2013.
Net sales in our Direct to Consumer International segment increased 32.4% to $4.3 million in the first quarter, compared to the same period last year. dollars, comparable store sales rose 20.8% including e commerce sales. Excluding e commerce,
card game humanity, comparable store sales increased 23.9%. In local currency, comparable store sales including e commerce increased 19.7%, that local currency is principally the euro. Excluding e commerce, comparable store sales were up 22.8%.
The Tumi brand continues to resonate well with our European customer. In addition, the upgrade in management in our European stores also contributed to the strong comp performance. European e commerce sales were impacted negatively by selective stock outages of certain bestsellers that were allocated to brick and mortar stores.
Net sales in the quarter, in our Indirect to Consumer North America segment, rose 25.3% to $21.4 million. Sales were driven by strong growth in the wholesale and third party e commerce business, as well as positive reaction to new products. Finally, net sales in our Indirect to Consumer International segment rose 30.7% to $33 million in the quarter, reflecting a strong performance in Asia where we expanded our wholesale doors and in the EMEA region where we saw positive reaction to new product introductions.
Moving to gross profit performance for the first quarter. Gross profit increased 27.8% to $58 million. While in line with our expectations, gross margin percent declined slightly in the first quarter to 56.4% when compared to the first quarter of 2012 due to wholesale channel mix I mean, by that, the mix within wholesale. Strong sales in our Indirect to Consumer International business, particularly in Asia, which has slightly lower gross margins, and the success of the Invest in Quality promotion in March 23 in March 2013. We additionally had off priced sales. We made specifically product for one of the off priced sellers and had a big increase in off priced sales. When I say big increase, we increased off priced sales for that specifically made product for that off priced dealer. Total operating expenses were $40 million for the first $40.4 million for the first quarter of 2013, compared to $32.1 million in the first quarter of 2012. The increase was due primarily to new store openings and the one time costs incurred in connection with the secondary common stock offering, completed in April of 2013, of approximately $477,000.
Operating expenses, as a percentage of net sales, was 39.3% in the first quarter of 2013, compared to 40.2% in the first quarter of 2012, as we continue to leverage our operating expenses on strong sales growth. The resulting operating income for the first quarter of 2013 was $17.6 million for a non operating income margin of 17.1%, compared to an operating income margin of 16.6% in the first quarter of 2012. Operating income increased 32.7% for the first quarter of 2013 versus the first quarter of 2012. Excluding the aforementioned one time expense incurred in conjunction with the secondary common stock offering completed in April of 2013, operating income would have been $18.1 million and operating income margin would’ve been 17.6% in the first quarter of 2013.
I will now take a look at operating income by segments. Operating income in the Direct to Consumer North America segment increased 27.9% to $11.8 million in the first quarter of 2013. As a percentage of net sales, operating income in this segment was 26.8%, compared to 26.9% in the same quarter last year. Operating income in our Direct to Consumer International segment was $0.1 million or $100,000 compared to an operating loss of $300,000 in the first quarter of 2012. This improvement resulted from strong sales, partially attributable to management changes in our Direct to Consumer International business in the first half of 2012. This is despite the difficult economic situation in Europe. Operating income in our Indirect to Consumer North America segment increased approximately 24.3% to $8.1 million and as a percentage of net sales, it was 37.8% in the first quarter of 2013, as compared to 38.1% in the same quarter last year. The difference in operating margin reflects channel mix as wholesale e commerce sales were strong. Off priced sales were higher than last year and as I previously mentioned. Finally, operating income in our Indirect to Consumer International segment increased approximately 29.2% to $10.5 million, reflecting good results across all regions. As a percentage of net sales, operating income was 31.6% in the first quarter, compared to 31.9% in the same quarter last year. The difference as a percent of net sales is principally related to geographic mix. Unallocated corporate expenses increased $2.6 million to $12.8 million in the first quarter of 2013, which reflects mainly public company costs incurred in 2013, which we did not have in the first quarter of 2012. In the first quarter, one time operating expenses, in conjunction with the secondary common stock offering completed in April 2013, were approximately $0.5 million. Other expenses were $622,000 in the first quarter of 2013, compared to $6.4 million in the first quarter of 2012. Total other expenses for the first quarter of 2012 included dividend expense on mandatory redeemable preferred stock and preferred equity interests, which is a noncash charge. The improvement this year was primarily attributable to the elimination of dividend expense due to the redemption of all of our mandatory renewable preferred stock and preferred equity interests in connection with our IPO in April of 2012. Excluding this dividend expense, other expense would have been $100,000 in the first quarter of 2012. The primary driver for the increase in other expenses from 2012 to 2013 was an increase of $600,000 in foreign exchange losses in the first quarter of 2013. Provision for income taxes for the first quarter of 2013 was $6.5 million, the effective tax rate was 38%. GAAP net income for the first quarter was $10.5 million or $0.16 per diluted share, based on 67.9 million weighted average shares outstanding. Adjusting for the one time secondary offering costs of $0.3 million after tax, net income in the first quarter would’ve been $10.8 million or $0.16 per diluted share. This compares to net income of $2.9 million or $0.06 per diluted share in the first quarter of 2012, based on 52.5 million diluted weighted average shares outstanding. In the first quarter of 2012, net income before the $6.3 million noncash dividend expense on mandatory renewable preferred stock and preferred equity interests would’ve been $9.2 million or $0.17 per diluted share. These EPS numbers are largely the result of a smaller share count base in 2012 as you can see.
Turning to the balance sheet. As of March 31, 2013, cash and cash equivalents were $27.8 million, compared to $36.7 million at the end of December 2012. Revolving credit facility at quarter end totaled $33 million, compared to $45 million at the end of December 2012 and a debt of $64 million as of the end of March 25, 2012. The company used $12 million of cash in the quarter to pay down borrowings under its revolving credit facility. Inventory balances of $70 million were reduced slightly, compared to the balances at the end of the fourth quarter. Inventory was approximately $7 million higher than the balances in March 25, 2012, which is consistent with the amount necessary to fund top line sales growth.
Before opening the call for questions, let me remind you of the outlook for fiscal 2013, which remains unchanged from the outlook we provided on the fourth quarter call. It might be with an abundance of caution but for 2013, net sales are expected to increase between 18% and 20%. The estimate assumes a comparable store sales growth for the Direct to Consumer North America segment in the mid to high single digit range and comparable store sales growth for the Direct to Consumer International segment in the mid single digit range. Net income is expected in 2013 to increase between 53% and 59%, diluted earnings per share expected to be in the range of $0.82 to $0.86 per diluted share. This estimate assumes diluted weighted average common shares outstanding of approximately 68.4 million shares at an average weighted GAAP tax rate of about 38%. Capital expenditures for 2013 are expected to be in the range of $21 million to $26 million. I also want to note that there will be 6 fewer sales days