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Kenneth Cole Productions, Inc. (NYSE:KCP)

Q3 2008 Earnings Call

November 4, 2008 4:30 pm ET

Executives

James R. Palczynski – Principal of Integrated Corporate Relations

Kenneth D. Cole – Chairman of the Board & Chief Creative Officer

Jill Granoff – Chief Executive Officer

David P. Edelman – Chief Financial Officer

Analysts

Jeff Van Sinderen – B. Riley & Company, Inc.

Scott Krasik – C. L. King & Associates, Inc.

Heather Boksen – Sidoti & Company

Kenneth Stumphauzer – Sterne, Agee & Leach

[Paul Strickler – Espalande]

Operator

Welcome to the third quarter 2008 Kenneth Cole earnings conference call. My name is Francis and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I will not turn the presentation over to your host for today’s call James Palczynski.

James R. Palczynski

Before we get underway I’d just to remind you of the company’s Safe Harbor language. 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 Q2 results might differ materially from those projected in such statements due to a number of risks and uncertainties including but not limited to demand and competition for the company’s products, the ability to enter in to new product license agreements or to renew or replace existing product license agreements, changes in consumer preferences or fashion trends, delays in anticipated store openings and changes in the company’s relationships with retailers, licensees, vendors and other resources.

Forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the company’s reports and registration statements filed with the Securities & Exchange Commission. With that out of the way I’d like to turn the call over to Kenneth Cole, Chairman and Chief Creative Officer.

Kenneth D. Cole

Thank you for joining us to review our third quarter ’08 results. With me on this call today are Joe Granoff our Chief Executive Officer and David Edelman, our Chief Financial Officer. [Inaudible] the third quarter, we achieved our sales targets [inaudible] profitability and we are generally pleased with these results considering the environment especially since this is our third consecutive quarter of positive [inaudible] sales.

Unfortunately, as everyone knows, the environment has changed dramatically and over the past six weeks we are now preparing the business for a very tough holiday retail season [inaudible]. We believe that the best tasks through an environment like this one which we assume will last for some time is to capitalize on our strength and competitive advantages such as our strong balance sheet and strong brands while we continue to focus [inaudible].

We will do all of this while staying focused on the long term opportunities that lay ahead. We have recently completed our strategic plan to achieve increased growth and profitability. Jill will share the details with you in a few minutes. An essential part of making the strategy work is to leverage the power of our brands as well as the need to do whatever is necessary to [inaudible] market. [Inaudible] apparel and accessories [inaudible] affordable and desirable for men, woman and children who want to live a modern, [inaudible] lifestyle.

I’m excited that I am now better able to work to concentrate my efforts on [inaudible] as well as energizing the company [inaudible] creative process. In addition, [inaudible] products our marketing [inaudible] has always set us apart. We are a fashion brand with a unique social voice which has resonated with the loyal consumer. Today is Election Day, whatever the outcome tonight it will be an unprecedented event that will trigger an unprecedented appetite for change and reinvention in our country.

We’re tapping in to that sentiment with a new initiative entitled awareness which will include a book, a blog and a website. We will be launching the book next week which is a collection of essays about service and volunteerism along with suggestions for how people can make a difference. This initiative should generate some excitement for our brand and we also expect it to drive additional traffic to our stores this holiday.

There is a wealth of talent and capability across every department [inaudible] and inspired and motivated management [inaudible] looking forward to the opportunities and [inaudible] and confidence and [inaudible] transition of the business model and I am delighted with the partnership [inaudible]. Going forward I will not be participating on future earnings calls and will be focusing my attention on [inaudible] of the products [inaudible] marketing.

I’d like to now turn the call over to Jill so she can tell you more about our [inaudible].

Jill Granoff

I’m very fortunate to have the opportunity to lead such a great company with a terrific partner like Kenneth. I’d like to reinforce that we are generally pleased with our Q3 performance. The key highlights are as follows: revenues increased 1.4% to $132 million; consumer direct comps were up 2.1%, our third executive quarter of positive comp store sales; expenses were down by almost $2 million and by 200 basis points as a percentage of revenues; and excluding a non-operating impairment charge we achieved the high end of our Q3 guidance of $0.09 per share.

As Kenneth just mentioned, our business was steadily improving to mid September and we were seeing some very positive trends. Sales were increasing, we were driving down costs, we were controlling our inventory and making progress in our product assortment. In addition, we were anticipating strong holiday performance as a result of our first comprehensive gifting program and the media attention we expect to receive around Kenneth’s new book launch.

We continue to be excited about these developments and our long term business potential but then, like virtually all other retailers, we experienced a dramatic change in our trend due primarily to traffic declines. Rest assured we are taking the appropriate steps to respond to these economic realities. I will share some of these actions later in the call. At the same time we are retaining our focus on building our business for the long term.

During our last conference call we discussed our comprehensive evaluation of our business including an in depth look at our brand’s positioning, product offerings, marketing and distribution. As you may remember, we analyzed how our brands are viewed by consumers, our retail customers, our licensee partners and through our own lens. We also shared our key learnings. As a reminder, these were as follows: Kenneth Cole is a well recognized contemporary brand that is underpenetrated on a global basis. The brand has opportunity to grow by gender, category, geography and distribution channels.

Second, our operations can become significantly more profitable by capturing economies of scale, streamlining our infrastructure and improving margins. Third, our balance sheet is strong and provides us with the flexibility to pursue any strategic path we deem appropriate. Today we would like to provide you with an overview of our long term strategy to capitalize on our strengths and to realize the opportunities we identified.

We have always said that the brand is bigger than the business. After evaluating our business and opportunities in the market, we believe that Kenneth Cole Productions can double its size and achieve $1 billion in reported revenues with double digit operating margins. Over the next several years we will pursue the following six initiatives in order to realize its potential: one, energize the brand; two, create compelling product; three, grow our retail business; four, revitalize our wholesale business; five, lay the foundations for international growth; and six, reinforce our winning culture.

Our first priority is to energize the Kenneth Cole brand. This means positioning Kenneth Cole as a leading iconic dual gender fashion brand with great product, a unique voice and a memorable in store experience. We will use our marketing to more clearly define the modern metropolitan lifestyle we represent and strengthen our emotional connection to the consumer. Our goal is to communicate this lifestyle with an image building product focus aspirational campaign that builds our fashion credibility while retaining our unique voice and important social heritage.

Our marketing efforts will concentrate on the Kenneth Cole New York brand. As part of that we think that there is a great opportunity to really showcase Kenneth and his passion for both fashion and social awareness. It is his metropolitan lifestyle that is so aspirational and that differentiates our brands from all others. We’ll utilize expanded media and enhanced online presence and progressive public relations activities to get our message out. We will also focus on driving traffic, particularly in an environment like this.

We’ll do this through direct mail, clienteling, in store events and strategic coop programs with our wholesale partners. In addition we will seek to convey a unified message and brand experience through our company owned stores and website with increased attention placed on store design, fixturing, window displays and customer service to ensure the in store experience is consistent, engaging and memorable. The second strategic initiative is to create compelling product. This means offering balanced assortment with great product design, quality, fit and price value relationships.

With Kenneth refocusing his efforts on the creative side of the brand, we are highly confident that we will be able to offer a cohesive engaging collections across all product categories. We intend to regain our leadership in our core footwear business, realize the full potential of sportswear and handbags and fill some significant product voids for categories like denim. Our assortment is already moving in the right direction. This is particularly true in men’s sportswear which has been heavy on fashion but not well supported by a base, a core and replenishment driven items.

Going forward fashion product will be roughly 25% of the mix. This past spring in some categories it was as high as 80% of the mix. While this can make a statement, it misses volume and margin opportunities. In addition to product design we will bolster our product development efforts by enhancing our sourcing capabilities and better harnessing our buying power. We are in the process of developing a sourcing strategy and building a more robust supply chain organization both in the United States and in China.

Kenneth just returned from a two week trip to China to meet with our factories and agents, solidify our overseas partnerships and build our talent and capabilities. We strongly believe that margins can be improved by having a dedicated sourcing organization that can meet the design vision while achieving necessary price points and profitability goals. I know this may sound overly simple but significant comparable stores sales improvements will come from better product assorted to address core wardrobing needs produced at price and quality levels that support sustainable margin rates.

This organization clearly has the talent to do all of these things. Our third and one of our most important initiatives is to accelerate growth in our consumer direct business. We have recently completed an exhaustive store-by-store review and are going to optimize our current full price store base as quickly as possible. We expect to close up to four underperforming stores, relocate six stores, right size another six stores in place and remodel five stores, all by fall of next year. We know this will enable us to improve productivity and profitability since we are addressing half of our full price store base.

In addition, we are making merchandise improvements across our fleet to make our store even easier to shop. We are also proceeding with an eight store test to create a more profitable and replicable store model. We expect this test to demonstrate how the revitalized assortment we’re planning works, what size real estate is most effective and how to adjust our assortment geographically and seasonally. We are looking for some very specific performance metrics from these stores including higher sales and margins per store, increased productivity per square foot and solid double digit four wall contribution margins.

Assuming we achieve our performance targets, we can resume our full price store roll out and believe that we can have at least 150 full priced stores in the United States, triple the amount that we have today. Now, shifting to our company store business, we continue to be pleased with our outlet locations. We are exceeding mall averages for productivity per square foot and generating double digit four wall contributions. We have a model that works very well and our staying the course with our growth plans especially in light of the possibility of an extended period of economic malaise which is driving the consumer to focus even more on price value relationships.

We plan to open at least 10 new outlet stores next year and over the next few years we believe that we can double our outlet base to approximately 100 stores. Our final major consumer direct opportunity is with ecommerce. This business should continue to grow rapidly for us and we believe it can come to represent 10% of our total consumer direct sales. Our new partnership with GSI which commenced in July ’08 has improved site navigation and customer care resulting in improved customer satisfaction scores. We believe there is significant potential to grow this business segment.

Our fourth initiative is to revitalize our wholesale business. Our efforts in infrastructure will primarily be devoted to the Kenneth Cole brand. In footwear we are creating a customer driven assortment matrix that will offer a better balance of fashion and core product. We are improving the price value relationship, enhancing quality and fit and Kenneth is really evolving our design aesthetics.

In sportswear our transition to an appropriately heavy mix of basics is already having an impact. For fall core products exceed 50% of the mix from 20% in spring and sell through rates have begun to climb significantly as should maintained margins. In handbags we are focused on top accounts, utilizing marketing to drive this key category and refining our distribution and merchandising strategy to maximize sales. With respect to the entire wholesale business, our intent is to get our profitability where it should be both for us and for our customers and to maintain our volume level.

We are going through a detailed door-by-door review of our current account list and plan to work with our partners to either improve profitability or exit underperforming doors. At the same time we’re going to enhance our better doors with improved assortments, more effective merchandising programs and service and with an even higher level of coordination between our business and those of our licenses. Finally, over time we expect to reduce our off price distribution most likely with fewer accounts.

Fifth on our list of initiatives is to lay the foundation for international growth. As you may recall, our international business accounts were roughly 10% of our total sales. We are in the process of developing a detailed strategy to increase penetration in existing markets while selectively adding new markets. We have identified some key countries and regions for expansion and are exploring various distribution options. In the meantime we are leveraging our wholesale infrastructure to increase our business with select retailers around the world. We believe this approach will seed the market, generate more interest in the brand and help us to attract the best partners for further expansion.

Chief among our selection criteria are that the partners are well capitalized, understand the local market, recognize the importance of consistent brand messaging and invest in impactful marketing. I’m convinced that with a cohesive strategy and with the right partners and business structure we can unlock our potential in Europe, Asia and other important regions. Our last initiative is to enhance our organizational culture. We have to find the right structure to support our go forward business model and we are clearly defining roles and responsibilities.

Our next step is to leverage our talent and strengthen our team in areas where new skills and capabilities may be beneficial. We are also working to create an environment that better rewards performance and fosters increased accountability. I am passionate about building a winning consumer driven culture. This spirit is what gets an organization through transition and through the kinds of adverse market conditions we are working in. Mission, team work, moral, creativity, incentive and recognition, our employees are an incredible asset and together we can achieve new heights.

We have a lot of work to do to implement this plan but Kenneth and I, the rest of the management team as well as our board of directors believe it is the right path and the right time. I’d now like to turn the call over to David to go through the numbers for the third quarter and our trends going in to holiday. With that as a back drop I’ll reserve some comments, particularly those about the current environment before we go to Q&A.

David P. Edelman

I would like to start off with the income statement for the third quarter. Consolidated net revenues for the third quarter were $132.1 million, up 1.4% compared to $130.3 million in the year ago quarter. Wholesale sales for the quarter were $77.6 million, a slight decline versus $78.8 million in the year ago period. Growth in some areas of wholesale including sportswear was more than offset by declines in the wholesale footwear business with both Kenneth Cole and Reaction showing the effects of the tough environments primarily in our department store business.

Consumer direct sales rose 6.9% to $42.6 million versus $39.9 million in the year ago quarter. Comparable stores sales for the quarter were up 2.1%, our third consecutive quarter of positive same stores sales. While we were pleased with this, trends in our comp store sales began to come under pressure in mid September as a result of a decline in the overall environment. In October comps trended down in the low double digits driven almost entirely by declines in traffic.

Licensing revenue grew 2.4% to $11.9 million versus $11.7 million last year. We saw stability in much of the business but we do anticipate that the environment will also affect licensee sales rate this holiday. We did see good performance from outwear, women’s sportswear and watches and continued to make gains at JC Penny with La’Tigra. I would remind you that a difficult comparison was created by $1.2 million of licensing income in the year ago period from men’s sportswear which is now part of wholesale and done in house.

Gross profit margin in the third quarter was 41.1% versus 44.4% in the year ago quarter. Our performance is the result of heavier than planned markdown activity in our wholesale footwear segment and inventory reserves and consumer direct and response to tough market conditions. While we expect the market to remain promotional through holiday and continued gross margin pressure we are actively pursuing margin improvement for 2009 through the assortment planning initiative that Jill discussed earlier.

We are planning heavier allegations of core and seasonless merchandise which should increase sell throughs and create better maintained margins. Longer term, we have an excellent opportunity to improve our sourcing to create several points of gross margin benefit. We are pleased with our expense management in the quarter, total expenses were $51.9 million versus $53.8 million last year. SG&A as a percentage of revenues declined to 39.3% versus 41.3% last year.

This improvement came despite an increase in marketing spend versus the prior year quarter. We have reduced our total year headcount, discretionary spending and non-cash compensation costs. We are continuing to work to create efficiency and we believe we can continue to push cost down as we go forward and over time we also expect to see economies of scale develop in our consumer direct business.

Interest income during the quarter was $.4 million versus the year ago level of $1.5 million driven by lower interest rates on lower average cash balances due primarily to our stock buyback program. In addition, we incurred an impairment charge of $3.2 million to reflect the other than temporary decline in our investment in [Chous] stocks. We have no intent of selling this position in the near term and note that [Chous] is performing especially well among our licenses.

The net loss for the quarter under GAAP was $1.6 million or $0.09 per share. Keep in mind however that excluding the $3.2 million non-operating impairment charge we achieved our operating plan at the high end of our guidance of [inaudible]. Turning to the balance sheet, cash and cash equivalents at the end of the quarter totaled $51 million versus $88 million at the end of the same quarter last year. This reflects our utilization of the balance sheet to drive value in to the business.

We used approximately $38 million to buy back approximately 2.3 million shares of common stock since the year ago quarter. Additionally, we used approximately $15 million for the purchase of the La’Trigra business which we expect to be accretive beginning next year and we also used $8.8 million to flow dividend payments to our shareholders. Note that during the third quarter we repurchased 337,000 shares for $4.4 million.

We’ve kept our inventory position relatively clean [inaudible] in the quarter were $56.5 million up slightly from $56.2 million at the close the year ago quarter. Wholesale inventory was down 6.8% consistent with the business trend. Offsetting this was a higher level of consumer direct inventory which was up 8.7% reflecting our need to support new stores and plan sales. Receivables were in good shape, appropriately reserved. While we ordinarily provide one quarter of rolling guidance, severity and volatility of the current environment and what impact it will have on holiday sales is very difficult to judge.

It is clear to us that it will cause us difficulty with both sales and margins versus our original plan as the range of potential outcomes is wide. I mentioned a moment ago that consumer direct was comping down in the double digits during October following three quarters of comp store increases. At this time assuming the current trends continue, we believe that we will lose money in the fourth quarter. At this time I will turn the call back to Jill.

Jill Granoff

We are in unprecedented times and it is difficult for anyone to predict when economic conditions will stabilize. The current trend is erratic and consumers in general are being very conservative right now. We believe we are well positioned as an affordable luxury brand. We will continue to look at all options to drive sales, reduce expenses and preserve profitability in the short term while we build our brand for the longer term. It is our goal to provide you with as much transparency as possible and we will do so when market conditions stabilize.

We are not naïve about what the current economic environment means for our near term outlook and we are taking the appropriate action steps to address what is happening in the market right now. We are tightening up our supply chain to keep inventories down. We are rationalizing our real estate portfolio. We are reducing expenses. We are managing our balance sheet wisely to preserve our flexibility and we are working with our customers and our partners to keep the business as healthy as possible every day in every door.

However, regardless of what the environment is like, we believe we are making the right moves in the context of our strategic plan to succeed over the long term. I am proud of the work our team has done to develop our strategic plan and drive our business forward. We now have clear direction and focus. We are setting our eyes on becoming a company with $1 billion in reported revenues which translates to over $2 billion in retail sales and double digit operating margins. While we will certainly tailor the pace of our growth based on the economic environment, we believe these are realistic targets for the business.

We have a great brand, a talented management team and we now have a clear road map for achieving profitable sales growth. We also have a strong balance sheet which will enable us to execute our strategies. We have cash, no debt and access to credit facilities. Our management team is dedicated to creating value for the organization, for the consumer and for our shareholders. If anything, I believe that this environment will create opportunity and for us it will underline the urgency with which we need to seize it.

As Kenneth has always said, and I could not agree more, we sincerely appreciate the hard work and continued dedication of our employees. They are the foundation of the business. We also want to thank our customers for their loyalty and our shareholders for their ongoing support. We will now open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Van Sinderen – B. Riley & Company, Inc.

Jeff Van Sinderen – B. Riley & Company, Inc.

I wonder if you can talk a little bit more about how mark down pressures is manifesting in your wholesale business? In other words, are retailers asking for discounts up front or on reorders? And, I guess how are you handling cancelations and returns and any other color there would be helpful?

David P. Edelman

Our backlog has been pretty firm. We haven’t really received a lot of cancellations. I think there has been an increased ask for assistance and charge back and we’ve actually had some of that in the third quarter which puts margin pressures on us and we’ve also planned for that going forward in to Q4.

Jeff Van Sinderen – B. Riley & Company, Inc.

I guess can you give us – you mentioned inventory is up for your retail stores, I guess if you could just give us a sense of what that looks like on a per square foot basis? I know it’s up on a dollar basis, anything you can give us there on a per square foot, is that up is it down? And, by how much?

David P. Edelman

We’ve had a little bit of a change in our base. A year ago we had 10 less outlets and six more retail stores and its flipped around. In general, our outlet stores are a little bit larger and a little bit more dense with inventory so it’s a tough comparison and we don’t break this all out we kind of report segment basis [inaudible] direct total so while it’s up 8.6% we have 10 more outlet stores and we’re planning for four new opening stores in the fourth quarter although we had not planned for a double digit comps decline in October so we are looking to get rid of some of that a little bit through additional promotional activities.

Jeff Van Sinderen – B. Riley & Company, Inc.

Then I guess any more granularity you can give us in terms of the trends you saw in your retail stores maybe by segment? I know you mentioned comps being down double digits in October was that for both full price and for the outlets? And, I guess how are you planning your promotional cadence for holiday? Any color on that would be helpful.

Jill Granoff

Well, you know we don’t break out comps by sector but what I would say is that consumers are certainly searching for value and that our outlet stores are weathering the storm better. We do look at traffic now that we have traffic counters. We are seeing significant declines as we mentioned in our full price stores. We are not seeing as significant declines in our outlet stores. In addition to that we recently opened a couple of new outlets that are actually exceeding our plan so I guess as you try to understand the differences by sector I would say overall the outlets are performing better.

Operator

Our next question comes from Scott Krasik – C. L. King & Associates, Inc.

Scott Krasik – C. L. King & Associates, Inc.

First question David, your wholesale number that you reported you said that the 1.6% decline includes sportswear sales that you didn’t have last year. So excluding the new sportswear sales what’s sort of in the trend line, the sales trend in your core footwear and handbag business in wholesale?

David P. Edelman

No, I said it on my scripted remarks. We had some issues in the department store footwear channel so our Kenneth Cole and Reaction footwear has been under pressure. Hand bags has kind of maintained fairly stable.

Scott Krasik – C. L. King & Associates, Inc.

And is footwear down 5%, down 10%? Can you give us a sense?

David P. Edelman

We don’t break down the components of our wholesales.

Jill Granoff

What I would like to say Scott is that obviously our footwear is primarily a wholesale business and we are certainly seeing some challenges in the department store sector but that said, we really are taking aggressive steps to improve our trend. First, I think it’s important to note that we are adjusting our assortment to carry a heavier mix of core and seasonless product. Second is we really are placing a lot of attention on improving the design with Kenneth’s increased involvement in our core footwear business.

Third, we are addressing sourcing opportunities to better leverage our factory relationships and price value for consumers so we do feel confident that the trend in footwear will improve as a result of these three initiatives.

Scott Krasik – C. L. King & Associates, Inc.

Jill, I’m glad you mentioned that, what we have seen some of our other companies that have struggled in the last year or so from declining traffic is that core product actually just leads you to a sort of markdown purgatory that if you’re narrow and deep and the customer isn’t responding it takes a long time to clear through that as opposed to fashion product that if you make a mistake it’s a one season issue. How do you balance that as you see 2009 most likely declining traffic?

Jill Granoff

We have had a heavier mix of fashion product as we’ve mentioned and obviously our sku assortment is broader in fashion but in terms of where our sales come from, that comes from core. But, what we’re really seeing today, if you think about the customer’s headset they are buying more core seasonless product that could last from season to season so they get more return over that investment. So, we’re not really concerned about that, we’re looking actually to build in to some of the voids in to our assortment and are not concerned about markdown pressure in core.

Scott Krasik – C. L. King & Associates, Inc.

David, I know you’re not giving guidance but just based on your sort of range of assumptions where do you see the cash balance being at the end of the year potentially?

David P. Edelman

I think our cash balance for the year will be a little bit higher. We plan on opening four additional outlet stores during the quarter, that’s really the extent of our cap ex and then we have an increasing in cash due to the retail store holiday season.

Operator

Our next question comes from Heather Boksen – Sidoti & Company.

Heather Boksen – Sidoti & Company

I know you won’t quantifyly break it out but if you could talk about maybe the men’s business versus the women’s and is one side weaker or stronger than the other? Anything going on in terms of that?

Jill Granoff

Well, I know you might be surprised to hear this but we’re actually seeing increases in both men’s and women’s apparel especially within in our retail stores and also in our department stores. The women’s business is particularly strong. David mentioned earlier the strength of [Chous] and we are actually seeing increases there both in the month and in the season so we’re very pleased with that and we are having significant increases in sales on lower increases in inventory. So, we do think that apparel is an opportunity for us.

In addition, on the men’s side we have invested in some new installations, you might want to check out Herald Square, we’re seeing a great trend there. As I mentioned earlier, we’ve also tailored our men’s sportswear assortment, more denim, we’re seeing increase penetration in denim with different merchandising and we’re seeing improvements there in our store as well. So, we do believe that apparel is a bit of a bright spot for us.

Heather Boksen – Sidoti & Company

What about footwear, men’s versus women’s? Is one holding up better than the other?

Jill Granoff

I think footwear is about the same.

Operator

Our next question comes from Kenneth Stumphauzer – Sterne, Agee & Leach.

Kenneth Stumphauzer – Sterne, Agee & Leach

I was just wondering if you could maybe flush out your comments on the sourcing initiatives what specifically that’s going to entail and maybe if you could put some kind of time framers around that?

Jill Granoff

We’re doing a number of things on the sourcing side. I mean one of the big opportunities that we see is to really harness our buying power across all of our channels so that is one initiative that we’re taking. We’re also looking to see where we may have opportunity to really leverage existing relationships with factories. I would say third, we are looking at our IMUs really designing in to opening price points. Again, there’s a common theme here, we’ve had a lot of fashion items but we think as we have core and we target those prices points if we design in to it we should see better IMUs as well as better maintained margins.

Kenneth Stumphauzer – Sterne, Agee & Leach

Then just generally speaking kind of around some of the longer term strategic goals you laid out there wasn’t a lot of dates or time parameters put around those as well including like the sales figure and the operating margins. Is that something you guys can speak to or clarify a little more?

Jill Granoff

Well, we knew someone was going to ask that. We think that we can probably double our size and achieve about $1 billion in reported revenues in roughly a five year time frame and we believe that we should be able to improve our operating margins actually in a shorter time frame than that.

Kenneth Stumphauzer – Sterne, Agee & Leach

Then as far as the brand initiatives if you could maybe give us a little more granularity as it pertains to the specific brands whether it be [inaudible] or Kenneth Cole New York, is there going to be – any more color that you can provide will be appreciated.

Jill Granoff

Right now as we said, Kenneth Cole is our focus, it’s the name on the door it is the umbrella brand and that is where our primary time and attention will be spent.

Kenneth Stumphauzer – Sterne, Agee & Leach

Then just one last question, I know you guys animated that providing guidance at this juncture is probably not advisable but you probably have a little more visibility in to how you expect your expenses, your operating expenses to flush out in the fourth quarter. Is that something we should anticipate would be down year-over-year even with the new store openings? Would that be a good way to think about that?

David P. Edelman

We’re really pleased with our ongoing cost containment efforts. It resulted in not only growth spend being down in Q3 but also as a 200 basis point reduction as a percent of revenues and we expect that our expense level will be flat or down in Q4 compared to last year.

Kenneth D. Cole

Let me just add one thing, historically we also initially promoted [inaudible] brand, being the umbrella brand because it essentially served all of the [inaudible] Reaction by Kenneth Cole. [Inaudible] we believe will address all the businesses [inaudible].

Operator

Our next question is from the line of [Paul Strickler – Espalande].

[Paul Strickler – Espalande]

I was wondering if you could provide any color on buy back activity thus far in Q4?

David P. Edelman

Sure. We purchased two million shares back over the last 12 months and we still have three million shares authorized for buyback. We’re keenly aware of the current economic environment and we are kind of just looking at share repurchase opportunistically [inaudible]. At this point we’re only giving information and reporting on information through September 30th.

Operator

Our next question comes from Jeff Van Sinderen – B. Riley & Company, Inc.

Jeff Van Sinderen – B. Riley & Company, Inc.

How are you thinking about implanting your in season inventory with retailers generally wanting to buy less up front and try to do more, buy more at once. How are you thinking about that and planning that?

Jill Granoff

Actually, we have given thought to that and we’ve talked about this with our retail partners and we are reserving portion of our inventory for infusion so we really looked at our mix very carefully in terms of fashion and core and replenishment and we are reserving a portion of the open to buy for infusion based on sales trends so that will really help us ensure that we flow in base on demand and also improve our sell throughs.

Operator

Our next question comes from Scott Krasik – C. L. King & Associates, Inc.

Scott Krasik – C. L. King & Associates, Inc.

Jill, maybe going back to that comment about more core product, there’s a big price differential at retail between some of your basis product whether its $140, $150 and your fashion product. I’m thinking on the men’s side right now where fashion product could be $175, $195 and above $200. Where does that come out at the end of the day as you focus more on core product? Who do you view as your competitors at that point? Any comment there?

Jill Granoff

I think the key is that we do look at competitive pricing. We want to align ourselves with competitive pricing and we also look at the out the door pricing and we look at what consumers are spending so you might say that the fashion products have a higher price point but if they’re actually being sold at a lower price point and then you have more markdown pressure you’re not going to see as big a difference as you may think so we are really going to look to build product in to the opening price points and to be competitive by sector.

It’s hard for me to give you a list of competitors because it does vary very much by whether its men’s or women’s, shoes or apparel but I would say if you think about leading American designer fashion brand that would typically be the competitors that we’re up against.

Scott Krasik – C. L. King & Associates, Inc.

That’s my point, when you went sort of aspirational you went sort of let’s say above Calvin for example in men’s footwear. Do you see yourself then coming back in line or below that?

Jill Granoff

I’d say we are looking to be more in line with the competitive reality.

Kenneth D. Cole

One of these too by the way is just [inaudible] core and fashion are terms basically that help us manage inventory flow and in effect they’re not always that obviously different and a core product could be very much on trend but it’s a product that has been tested that we’re comfortable with that [inaudible] and we don’t see a lot of exposure and risk with it. And, we’re not going to [inaudible] brands essence and what we’ve said before but, we’re going to test better, we’re going to respond quicker and we’re going to become more efficient.

Scott Krasik – C. L. King & Associates, Inc.

Do you think the message is clear now between your licensees that have product in the department store channel and then combine that with the pricing on our sportswear and footwear? Is that consistent now and are you comfortable with that going in to 2009?

Kenneth D. Cole

It’s better than it’s been and it will get better still.

Operator

There are no other questions in the queue. I’d like to turn the call back over to management for closing remarks.

Jill Granoff

I just want to thank everyone again for participating on the call day especially during Election Day with everything going on in the world around us. And again, I just want to reiterate how much we appreciate the support and dedication of our employees, our customers and our shareholders. Thank you very much.

Operator

Ladies and gentlemen thank you all for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Source: Kenneth Cole Productions Inc. Q3 2008 (Qtr End 9/30/08) Earnings Call Transcript

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