FGX International Q3 2008 (Qtr End 10/04/08) Earnings Call Transcript

FGX International (FGXI)

Q3 2008 Earnings Call

November 13, 2008 8:30 am ET

Executives

Alec Taylor – CEO

Anthony DiPaola – EVP & CFO

Jack Flynn - President

Analysts

Mark Miller - William Blair

Bill Chappell - SunTrust

Doug Lane - Jeffries & Company

Sam Panella – Raymond James

Liam Burke - Janney Montgomery Scott

David Wells - Avondale Partners

Presentation

Operator

Good morning and welcome to the FGX International third quarter 2008 conference call. Presenting today from FGX International are Alec Taylor, CEO and Anthony Di Paola, Executive Vice President and CFO.

I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. The same language applies to the forward-looking statements that management will make during today's call.

We encourage you to read the company's SEC filing and earnings release, which discuss important factors that could cause actual results different from those made in any forward-looking statement.

A replay of the conference call will be available until Thursday, November 20, 2008. To access the replay by phone, the domestic dial-in number is 1-888-286-8010, or the international dial-in is 1-617-801-6888. The access code for the replay is 83037080. To access the replay via webcast, please visit www.fgxi.com under the tab Investors.

Now, I would like to hand it over to Mr. Taylor; please proceed sir.

Alec Taylor

Good morning everyone. This is our third quarter 2008 and first nine months of 2008 earnings call and we appreciate your joining us.

With me today are Jack Flynn, our President and Anthony DiPaola, our CFO. As is our custom I will open with some overview comments, following which Anthony will give a more in depth financial review, thereafter Jack, Anthony, and I will answer appropriate questions.

Starting with the third quarter it was another outstanding quarter for FGX International. In one of the worst retail environments experienced in the United States ever, revenues grew to $59.1 million, an increase of $5.2 million or 10% ahead of the corresponding year-ago quarter.

Earnings per share were $0.18 versus break-even for Q3 2007 while EBITDA was $12.2 million which was $1 million or 9% ahead of the same period last year.

All of these results were once again at the upper end of or exceeded our earlier guidance. Gross margin is a significant measure of success at our company and for the quarter it was 56.2% ahead of guidance and over 200 basis points ahead of Q3 2007.

We also once again showed improvement in our working capital metrics with day sales outstanding and days on hand of inventory improving nicely from the corresponding year-ago quarter. Effectively managing working capital is an important initiative at FGX and the improvements we’ve been able to deliver contributed to our reduced borrowing cost during the quarter.

By segment our sales of non-prescription reading glasses and sunglasses were once again very strong during the third quarter. Revenues from reading glasses were up nearly $6 million or 18% from Q3 2007.

The strength of this segment both in sales and gross margin continues to be impressive as we gain market share and assert ourselves as the leaders in this dynamic category. Our sunglasses business also posted strong results in the quarter with sales up nearly $2 million or 20% over the third quarter of 2007.

The third quarter is seasonally our lowest sales quarter for sunglasses but we showed good results and continued to enjoy strong sales late into the summer. We also saw some evidence of consumers trading down to the iconic Foster Grant brand for the more expensive department store and designer labels.

Our Foster Grant brand sunglasses gives price cuts as consumers a fashionable design and a high quality product. We have become the sunglasses of choice in the under $30 segment as consumers have been forced to stretch their paychecks further then ever.

We believe this trend will continue.

Our international sales were down slightly for the quarter with another strong quarter from Canada being offset by a disappointing performance for the UK. We are working to improve our operations in the UK and we have recently made a management change there and are also reducing the size of our workforce.

More importantly we are dedicating more of our US resources to the UK business and are working aggressively to improve that business as we continue to believe this is a good market for us to be in.

Costume jewelry sales were down nearly $2 million or 24% in the third quarter which was again disappointing. We are continuing our strategic review of this business and will decide what the proper direction of this segment should be by the time we enter 2009.

Turning to the first nine months of the year, we similarly enjoyed excellent financial results highlighted by the performance or our sunglasses and reading glasses businesses which were up 20% and 10% respectively during the period.

With respect to readers we were again up against the Walgreen’s rollout in the year-ago period that was not repeated this year, making the 10% in the first nine months even more impressive.

Sunglasses sales were up 20% in the first nine months for the same reasons highlighted for the third quarter. I should add that sales of this segment were particularly strong at the mass merchandise and dollar store retailers demonstrating the trade-down effects that benefited this category.

The international segment was down 3% in the first nine months due to largely to a major rollout in the UK of all new reader styles in the first quarter of 2007 that was not anniversaried in 2008. As we noted last quarter our Canadian business continues to turn in a steady performance in a retail environment dominated by a handful of key players.

Jewelry sales for the first nine months of the year were down 28% for the same reasons mentioned in reference to the third quarter. We had budgeted jewelry to be essentially flat in 2008 but through the third quarter it is down nearly $5 million when compared to the same period in 2007.

While that alone is very disappointing I think it highlights the strength of our reader and sunglasses businesses as they have more then picked up the slack.

Turning to key accounts we had a major account win from Hudson News in the third quarter. This is the dominant airport gift shop purveyor with over 400 outlets mostly in larger airports. This is a sunglasses and reader program that began shipping in Q4 and should contribute approximately $3 million to $4 million of [add] annual revenue in 2009.

We have several other major national retailers we are pursuing for new sunglass and reader business and expect to continue to have exciting new account news to bring to you in the coming quarters.

Turning to acquisitions we have spoken in the past about acquisitions and I would ask you to just stay tuned as we continue to work on opportunities in the optical space.

With our strong free cash flow, over $1.00 a share, and flexible credit facility we believe we are in a good position to grow the business with accretive deals that leverage our core strength in sourcing, supply chain, field service, and branding.

Given the difficulty experienced by the capital markets since we last spoke we wanted to say a word about our liquidity and capital resources. Through the efforts of our CFO, Anthony DiPaola, at the end of 2007, we put together an excellent bank facility led by three institutions who have not been troubled by the issues of some other banks.

We had nearly $65 million of credit availability at the end of the quarter and as I mentioned earlier generated substantial free cash flow from our business.

We think we are in good shape to operate our business in this difficult environment including making acquisitions. I wanted to say a word about our advertising plans for 2009.

Rick Kornhauser who came on board as our Chief Marketing Officer earlier this year has been busy formulating an outstanding plan for advertising our Magnivision and Foster Grant brands next year. In January we will launch reading glass ads for both brands that we think will bring real awareness to this category for the first time.

The reading glass category is approximately $650 million at retail and we think the opportunity exists to grow this significantly by informing the consumer at their ability to self-medicate for a few dollars where they were formerly spending hundreds of dollars for a prescription.

A Magnivision ad is on our website now, it went up there yesterday, and the Foster Grant ad will be up in December.

And one final word, the Foster Grant ad will bring back the iconic “Whose that behind those Foster Grant” tagline and utilize a recognizable celebrity from the 1970s campaign. So be prepared as advertising is about to make a difference at FGXI in 2009.

Turning to guidance for the fourth quarter we see revenues in the $66 million to $68 million range, EBITDA between $18 million to $20 million, and EPS from $0.29 to $0.31.

This is consistent with the guidance we provided in December, 2007 and would bring the full year in at $256 million to $258 million of revenue, EPS between $0.77 and $0.79, and EBITDA at $54 million to $56 million.

If achieved this would be in our minds an excellent performance for 2008 given all the bad economic news and the poor performance that we are hearing about every day for retail sales in general.

Regarding 2009 we have decided to wait and provide guidance in our fourth quarter earnings release and call which should take place in early February. By waiting a couple of months we believe we will have a better opportunity to judge retail performance through the holidays and into January, 2009.

This should give us much better visibility into 2009 then we currently have. I want to close by complimenting our employees for once again delivering an outstanding quarter of financial performance.

When we went public a little over a year ago, I stressed to our people the importance of delivering consistent and predictable financial results. They have done this for four straight quarters now and deserve the praise and appreciation of our shareholders for this performance.

We are fortunate that we have both an excellent management team at FGXI and employees throughout the organization dedicated to ensuring that we profitably grow the business and build shareholder value.

And with that I will turn it over to Anthony for a more in depth financial review.

Anthony DiPaola

Thanks Alec and good morning everyone. As Alec has covered the highlights of our results I’m going to review a few more P&L items, provide some additional financial highlights, and review our liquidity and access to capital.

We are pleased to have delivered another strong quarter in a challenging consumer environment. Revenue increased 10%, EBITDA grew 9%, and our gross margins improved over 200 basis points. During the quarter as Alec mentioned, we also continued to improve our working capital metrics.

For the quarter overall gross margins improved to 56.2% compared to 54.1% for the same period a year ago. Improvement was driven by gross margin growth in the reader, sun, and international segments, offset by the jewelry segment where margins remain under pressure.

On a year-to-date basis gross margins improved nicely to 54.1% in 2008 from 53.4% in 2007. Margins in our reading glass segment improved slightly this quarter versus the same period a year ago. By leveraging our buying power and negotiating better pricing we have been able to overcome cost pressures we were seeing from suppliers.

In the sunglass segment margins also improved slightly from the same period a year ago primarily due to more favorable product mix. We continue to see margin pressure in our jewelry business due to increased freight cost, lack of [abandoned] product, and lack of purchasing power with our existing supplier base.

Again as Alec mentioned earlier this segment of our business is under review. In the international segment our margins improved during the third quarter of 2008 compared to the year ago period primarily as a result in product shift mix to a more profitable reading glass line.

The fourth quarter should see margins in a similar range and as expected gross margins will be in the mid 50 range for the full year. We continue to be successful in holding the line on cost of goods and are very pleased with our year-to-date results.

Now for some comments on operating expense, for the quarter operating expense as a percentage of net sales increased to 43.4% compared to 42.1% in the same period last year and on a year-to-date basis as reported operating expenses as a percentage of net sales increased to 42.9% in 2008 compared to 41.8% in 2007.

The increase for both the quarter and year-to-date is primarily due to incremental costs with being a public company, stock compensation expense, and higher fixture depreciation charges. As we look to 2009 we should begin to see some leveraging effects from our operating infrastructure as higher revenues and a reduction in some one-time public company costs, principally [inaudible] implementation.

From a tax perspective our reported tax rate for the quarter was 32.3%. The rate was lower then our previous guidance of 37% to 38% and was primarily due to several discrete items that expired during the quarter. Again based on our current planning the effective rate for the balance of the year is expected to be in the 37% to 38% range.

Developing strategies to lower the tax rate will be another initiative to focus on in the upcoming year.

Now for some comments on the balance sheet and cash flows, accounts receivable at the end of the quarter were $37.8 million, which is down $15.2 million compared to the end of 2007. The decrease is due to the seasonality of our sunglass business and overall improved collection efforts.

Accordingly on a year-to-date our DSOs improved to 67 days compared to 79 days for the same year-ago period. Inventories of $34.5 million increased slightly at the end of the third quarter compared to the end of 2007 however we were able to reduce our days on hand to 109 days from 116 days in 2007.

The reduction in days on hand was the result of better overall inventory management.

We continue to focus our efforts on better management and continue the improvement of working capital metrics and again are pleased with the results we have been able to achieve during the current year.

Free cash flow, which we define as EBITDA less CapEx, was $8.6 million for the third quarter compared to $7.9 million for the same period in 2007. The increase in free cash flow for the quarter compared to the previous year is again principally the result of the improved profitability of our business.

We expect full year free cash flow to be in the $37 million to $38 million range for 2008. Future uses of our strong free cash flow primarily will be used to fund accretive acquisitions, pay down debt, and fund our stock buyback program.

Capital spending for the quarter was $3.6 million which was less then our expectations that we discussed on our last call of $5 million to $7 million. This is due simply to the timing of shipments to our customers and that spending is expected to be realized in Q4.

We now expect full year 2008 capital spending to be in the $16 million to $17 million range. As Alec briefly mentioned from a liquidity perspective we had approximately $65 million of borrowing capacity at the end of the third quarter.

As of today, we have borrowing capacity in excess of $70 million under our existing credit facility with the syndicate of leading banks that we were able to establish at the end of 2007. We believe that this facility together with our strong free cash flows will provide us adequate liquidity to meet our operating needs on a perspective basis.

A quick comment on currency, from a currency perspective as everyone knows the US dollar has recently strengthened against most foreign currencies. The vast majority of our international sales are in the UK and Canada.

As a result included in our fourth quarter guidance is a negative revenue impact of approximately $1 million due to this unfavorable FX.

In summary we have enjoyed a very good quarter and are pleased with our year-to-date results. Our operating margins, cash flows, and working capital metrics all showed significant improvement during the period and we are looking forward to finishing the year on a positive note.

And with that we are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Miller - William Blair

Mark Miller - William Blair

As you’re working with your suppliers for next year, can you share with us the puts and takes that you see on the cost of goods. I understand the mix and the readers growing faster, that obviously helps, but what are the other impacts as we might see it in 2009 on gross margin?

Alec Taylor

I was in Asia last week and Bob [Grow] who handles a good bit of our sourcing in the optical area is just back this morning. I checked with him again before this call, because I said what I heard last week when I was with the suppliers was they were happy to have the business and the pressures that we had seen for price increases were subsiding fairly quickly.

Bob confirmed, he spent time at factories last week after I parted company with him, and said, no that’s exactly what he’s hearing so I think we’re in better shape then we were a year ago as far as the pressure on margins and cost of goods in particular. I would expect that 2009 that I’m not ready to make a call of improving gross margins, but I certainly feel comfortable in saying that we should be able to hold gross margin, fuel cost coming down, freight is a big piece of the component in margin.

I think I spoke in the last call and talked about how they’ve been one of the real challenges this year as our cost per piece had gone up, shipping cost per piece from about $0.04 per piece to $0.05 per piece.

I’m hoping that maybe next year if fuel rates continue to moderate maybe we can bring that back down. So I would say that net net we are feeling pretty good, fairly bullish about cost of goods for 2009 with respect to our principal product lines.

Mark Miller - William Blair

Can you remind us how FX plays into that equation, from what I recall on the gross margin side it may not be that big of an impact, but can you confirm that and then also should we think about an FX impact on 2009 relative to where we were before as being approximately $3 million year-to-year or taking same impact you see for the fourth quarter rolling it through the next three quarters of 2009 then?

Anthony DiPaola

Yes, the impact on the gross margin should be negligible. Our foreign subs do source in the US dollar so there is some impact on that but again that won’t be significant. In terms of translating the sales of those entities, again in the UK and Canada, the impact this quarter was, in Q4 should be a little over $1 million.

You can try to annualize that number, it won’t be exact, but there’s been a 20% movement against the dollar in both the pound and the Canadian dollar so that impact will translate itself. Probably $3 million to $4 million next year.

Mark Miller - William Blair

Is there any way for us to annualize the impact of new business that you’ve acquired through this year net of the sell-in in 2008. In other words, if you held onto all your existing contracts, tell us your confidence in that, but yet you were able to pick up full year sales of new business and then including Longs Drug if you think that the ship in there is likely, is there any way to think about what kind of net add that might represent in 2009. I realize its complicated with all those parts, but if you can provide any help we’d appreciate it.

Jack Flynn

We feel going into 2009, we feel really solid about our customer base. We’ve re-uped all our contracts. We have all our shipping in line for sunglass rollouts in our core program so overall we feel pretty good.

We don’t know exactly when the Longs piece will come on board; it may be Q2, it may be Q3, we just don’t know yet. The Hudson piece will be a net add for next year as will the Walgreen’s additional sunglass rollout that will take place starting in January.

What the overall effect is, we’re still waiting to see. I would imagine that that new business would typically give us 3% lift in our overall business. Again, we’re waiting to see what the core business and the comp business does for next year in terms of store, store [closings], new store openings, how far down they’re going to be going into next year but typically the new business gives us about a 3% lift and we feel pretty good about that going into next year.

Operator

Your next question comes from the line of Bill Chappell - SunTrust

Bill Chappell - SunTrust

Just wanted to follow-up on the Wal-Mart issue, I guess this is the first quarter where they had pulled some of the business, have you seen any follow through with that. Do you feel like you’ve fully accounted for that on a go forward basis and any other news from other customers on that level?

Jack Flynn

They’ve done what they said they were going to do. They have made no other changes in terms of adding to the direct import portion of their business and we don’t foresee that happening. They’ve told us that and at this point in time we believe that to be true.

As far as additional direct import, it continues to be a non-issue in our core categories of sunglasses and reading glasses, and as you know that’s been somewhat of a reversal because the sunglass piece we’re rolling out for 2009 with Walgreen’s was a DI program that is now going to a domestic program.

But from the other customers, domestic and from the UK the DI issue is really right now continues to be a non-issue.

Bill Chappell - SunTrust

On the new customer front is there any reason why you wouldn’t move into Longs Drugs via CVS going into 2009?

Jack Flynn

Obviously every time CVS goes through this expansion we are their vendor of choice. We fully believe we will be their vendor of choice going into the Longs piece. We have a long-term relationship with them. Our performance has been stellar with them. We provide I think top service to their stores.

I’m pretty confident we’re going to have that business. Nothing is carved in stone in retail today but we feel obviously pretty confident that we will be their vendor in the reading glass category for sure and who knows what else.

Alec Taylor

We’re hopeful that maybe there’s even more there. Every indication has been that that will be our business. I think its really a question of time and ability. If you look back at their prior acquisitions whether its Osco Savon stores or even before that the piece of the Eckhart’s that they took, we have always followed that.

Its very much in keeping with the CVS tradition that we know at this company, that I’ve known in the past that when they make an acquisition they roll their existing vendors into their programs. Really right now hopefully its just a question of timing and knowing exactly when that Longs conversion will occur.

We don’t have clarity on that yet.

Bill Chappell - SunTrust

Are there a fair amount of decent sized contracts that are coming up due which you are in negotiations now or are the next big ones as we move through 2009?

Jack Flynn

We’re clean mostly through 2009. Some more major contracts come up in 2010 but right now 2009 does not have a lot of major contracts coming up.

Bill Chappell - SunTrust

Is there any way you can give more color on the comment that you’re seeing some consumer trade-down. Did you see kind of an acceleration of growth intra-quarter and maybe talk about did you see any [bill] changes as we moved to October and early November?

Alec Taylor

Yes, I think in the sun area we definitely saw the trade-down. It looked like to us that we had a really strong, we look at SONO, get daily data from Wal-Mart and our sunglass sales, a bit up, high single to low double-digits all through the September, October timeframe and really through to today. It was up against some pretty strong comps, so we just have got to believe that that is trade-down effect in that category but we have not seen, interestingly, where there is no really trade-down in reader because people buy their readers at mass and drug.

The price points have remained really pretty consistent with little if any trade-down.

Jack Flynn

We took a look at the average selling in sunglasses and in reading glasses matching up the first six months of the year with the third quarter and amazingly the average sell has stayed almost exactly the same. I think our sunglass business has always been good. We think there is a trade-down from some of the other glasses that trade into mass and that’s been helping our business.

We also think we performed really well in Q1 and Q2 which kept our product on the floor longer. If they were going to make some cuts on inventory or in some facings, they did it with the other vendors so we had a strong presence going into Q3. I think that helped our business.

From an average selling price point the business has held up really well and quite frankly the sunglass business has actually gotten stronger as the year has gone on and that business remains very healthy.

Operator

Your next question comes from the line of Doug Lane - Jeffries & Company

Doug Lane - Jeffries & Company

Can you give us what the advertising and promotion spending was in the quarter this year versus last year and what’s its been year-to-date this year versus last year?

Anthony DiPaola

This year in the quarter it was up about 400 compared to Q3 2007.

Alec Taylor

I think we’ve continue, we continue to say that we would advertise in sort of a 3% to 5% rate, of net sales rate and obviously it started to tick up with the arrival of Rick and what he will do, but even in 2009 I think you should expect us to see that in 2009. It might be at the higher end of that 3% to 5% range while this year I think its been running right around 3.5% on a percentage basis, but we’re I think a difference maker.

I am sure a difference maker in 2009 will be advertising and advertising the reading glass segment which we think is way under penetrated and so we’re excited about that and think the spend there, the little tick up in spend you’ll see on a percentage basis will be well worth the investment.

Anthony DiPaola

The actual spend this quarter was just a little over $1.5 million and then year-to-date its right around $7.3 million which is around 3.8% of total sales.

Doug Lane - Jeffries & Company

And so we have been looking for this kind of an increase and based on recent developments, the new ads for Magnivision and for Foster Grant, you’re still comfortable with where the budget is going to be next year or do you think we’ll be moving that number up as these ads roll out and the year progresses?

Anthony DiPaola

I think from a budgeting perspective we’ll go into it with the same absolute dollars. Of course if, as we believe, if the advertising kicks in and drives sales then we’ll continue to advertise more heavily as we roll into 2009.

Doug Lane - Jeffries & Company

You mentioned cost inflation, can you talk broadly about sourcing in China and what’s going on there. I know that other companies have complained about inflation as well as actually having some factories go bankrupt over there. Are you comfortable with your sourcing in China, what is the outlook there just in general?

Alec Taylor

It’s a very dynamic situation. Its sort of crazy, you literally can say something that was true two weeks ago and it changes. I think it’s a little bit of the flip of, it doesn’t relate to the sourcing in Asia as it relates to currency but as currency has suddenly gone kind of against us with Canada and the UK, sourcing in China which there were a lot of inflationary pressures, a lot pressed back against us, but boy I saw these guys as with all of our key vendors last week, I don’t think any of them are about to go out of business.

I think all of them though are very happy to have our business. It has created a very competitive environment again where the worm hasn’t totally turned but I think a supplier of our size who buys as many optical products as we do, the millions and millions of pieces that we have to source, we are getting very favorable pricing.

No one vendor has more then 15% of what we do. Our strongest vendor has actually just built a series of new factories and is very modern and it would look like any western factory with QC and all the appropriate functions.

I didn’t sense any supplier that it was in financial difficulties and again we’ve got that business spread pretty good. I think that favorability, that the leverage points are perhaps turning back given the recessionary environment. I think the leverage points are perhaps turning back in favor of people like us who are sourcing a lot of volume and can do so and have the ability to do so with no real change in quality across multiple suppliers.

I’m feeling pretty good about that part of our business right now.

Operator

Your next question comes from the line of Sam Panella – Raymond James

Sam Panella – Raymond James

Are you hearing anything from your retail partners in terms of any pull back in inventory, obviously given the dismal environment and also how are the higher price point at Family Dollar reading glasses doing?

Jack Flynn

On the inventory front I think inventory is going to be a big issue next year. No question about it. It was really a big issue this year for most of us and our retail partners. I think as we talked about in the last call, our inventory at store level or in DC are in very, very good shape. We came into this year feeling that our inventory levels were appropriate and are planning for next year, where we feel we’re going to be under some increased pressure to improve our turn.

We’ve made those plans during the year this year in terms of our shipping so inventory is going to be a huge issue. Turn is going to be a huge issue but again I think we’re in front of it. We’re in good shape going into the year and I think we’ll be able to work our way through most of the inventory issues that will come up.

We are pleasantly surprised and as we note for the first time we raised our retail prices with Family Dollar on sunglasses and reading glasses and we had tested this and so we felt good about the test but we had tested it earlier in the year and we rolled it out in Q3. Looking at the numbers over the last four weeks we are really, really pleased not so much that the customer has bought the same amount and we’re getting a nice 20% increase, our unit sales since we rolled out the new price point in readers, sunglasses are just going out now, but in the reader piece our unit sales are running up about 18%.

I think the consumer there, their business is robust in Family Dollar. Their traffic is decent and looking at our program the consumers seem to find the good value. They’re continuing to buy and fortunately at a higher unit sales so that is our number one performance that counts right now.

Sam Panella – Raymond James

Could you just remind us for next year the fall off in depreciation expense?

Anthony DiPaola

I think next year it should roll off at about $0.18 to $0.20 a share the impact $6 million to $7 million. And again that’s the result of the sequencing of our fixturing. For those that don’t know the story, we amortize our store fixtures over a two-year life. They’ll typically have a three or four year life. The way its been sequenced the last couple of years, we’ve had a ramp up in CapEx so we anticipate that roll off again next year to be in the $0.18 to $0.20 range.

Operator

Your next question comes from the line of Liam Burke - Janney Montgomery Scott

Liam Burke - Janney Montgomery Scott

You mentioned in the release that the reading glass business grew as a function of just organic growth but the contribution of new programs, in terms of new programs have certain ones done better or worse then expected?

Jack Flynn

I would say we were really pleased with our, which we rolled out this year here, Parody’s, the airport gift shop business. We were pleasantly surprised by that business. We knew it was going to be a good reading glass business but it turned out to be a terrific reading glass and sunglass business so both of those programs were ahead of our expectations.

[Borders] which we rolled out finally has been a huge surprise, because again we weren’t sure, that’s a tough industry right now but our business in [Borders] has been more then robust. We’re running some pretty dynamic 30% plus increases week in and week out in the Borders chain. So we were particularly pleased with both those pieces of business.

For the rest of the accounts, chain drug has been good except for the [Riteaid] business which has been somewhat soft. Wal-Mart business good. Some of the regional mass merchandisers a little bit soft. BJ Wholesale has been another extraordinary performance in reading glasses and as you know we had sunglasses in last year and it went way beyond our expectations in terms of performance.

We’re pretty much where we thought we’d be this year, not with the accounts we had originally planned so we have some real solid winners out there and some extraordinary performances which have covered us on some of the ones that weren’t as robust.

Liam Burke - Janney Montgomery Scott

On the working capital improvement, inventory ratio got a little better, is that more a function of jewelry or is it across the board into the product lines?

Anthony DiPaola

Its been across the board in the product lines but this has been a challenge that we put before ourselves at the beginning of the year. We knew there was opportunities to manage those assets better on our balance sheet both the inventories and the DSOs and I think the inventory we’re especially proud of, again given the fact that our retailers are managing their inventories better so we’ve done just a better job of blocking and tackling and making sure that we get orders in timely and that our factories are producing timely so that it all works.

Operator

Your next question comes from the line of David Wells - Avondale Partners

David Wells - Avondale Partners

Just given the number of bankruptcies and just overall changes in the retail landscape what impact does that have on your thinking as you look into 2009 and if we were to see one of your customers go out of business, what sort of, would there be inventory that gets put back to you or how would that look?

Alec Taylor

First of all, all of our major accounts have credit insurance so we don’t have anybody that we have any material exposure to that we’re not insured against that particular account. I think if anybody went out of business, I think what happens I think a bankruptcy trustee probably liquidates inventory. We don’t have anybody we take we’re obliged to take inventory back from so I think there might be a [inaudible] of inventory on the market but I think for a short period of time, but I think that’s just something that the marketplace would handle and it would be liquidated so I don’t think we feel particularly exposed to that area.

That said we’re not going to call any names, but everybody kind of knows the guys who are stronger and those who are not and we watch this very carefully. We’re rooting for all of them, but you have to be given the environment nervous about a couple of them.

Anthony DiPaola

From a balance sheet exposure you said it just right, the inventory is not on our books its on obviously at the retailers. We get that sell-through. We would have perhaps some inventory on hand for various customers but we would be able to retag fairly easily and be able to redeploy that. I think the credit insurance as we mentioned, all of our major customers are under credit insurance so we wouldn’t have any, we would have very little exposure on the receivable side.

Jack Flynn

And if the customer went down, if it was a liquidation I do feel we are covered. There is no reason for that product to come back here. There’s no agreement that says that it should and ultimately if they get a chance to reorganize, and we just continue our business moving forward. That’s what our experience has been in the past.

David Wells - Avondale Partners

Thinking about the sunglass business, I know earlier perhaps in the second quarter, there was some pallet business that you did at Wal-Mart that it sounded like you had to give up some margin to get that business, was there any of that in the third quarter?

Anthony DiPaola

There was a little of that that rolled through in the third quarter but again I think our margins in the sunglass year-over-year are up slightly. So there was some pull-through on the overall year margin but for the quarter it was a little accretive.

David Wells - Avondale Partners

If you could just remind us again what your depreciation expectations are for this full year FY08?

Anthony DiPaola

It should be right in, the depreciation and amortization is $16 million to $18 million for the year.

David Wells - Avondale Partners

If you could give any additional color obviously since you’re rolling our the Magnivision advertising after the first of the year, your tests must have gone well, but didn’t know if you could give any color about what you saw as you went through that process.

Alec Taylor

All of our tests, that would be internet testing, but it was good. I urge everybody to go to the Magnivision website, www.magnivision.com and look at it. There’s a 10 second version and a 15 second version up, but I think its really good, hard hitting. Those of you who knew Rick and me from our prior place of employment, I think you’ll recognize the sort of a problem solution theme of the way the thing rolls out.

So it scored very well and I am, as you can probably tell, pretty excited about it. We think we’re going to put some real strong weight on it. We’re going to go on nationally in mid-January. We think it’s a great time to be on after the holidays. I think a lot of people given the economy are going to be home watching TV, not going to movies. People will be watching the inauguration and things such as that and we’ll be on by then. We’re going to go real hard, go a four on, three off type of program starting with 15s, we’ll layer some 10 seconds in there. I can tell very little difference between the 15 and 10 but it plays back very well and we’re going to go into production with the Foster Grant reader version of that.

We’ll produce that ad in early December, do a little testing on it. I can’t tell you everything yet other then to say, bringing back the iconic “Whose that behind those Foster Grants” I think is great and if we land, we’re working with a couple of celebrity names from the 70s campaigns that would be really cool to introduce them back into a reading glass ad for Foster Grant, you can almost imagine what the storyboards would look like there.

So we’re, I think we’re rightfully excited about what that could bring to the table. Its time, Rick has been here a year. He’s learned the business. He’s certainly made an impact with the sunglass ad for 2008, with the [FSI] and some other things we’ve done, but now is the time to be the difference maker and we expect advertising in the reading glass segment to be a big driver of sales for 2009.

Operator

Your next question is a follow-up from the line of Mark Miller - William Blair

Mark Miller - William Blair

I was just hoping you could clarify your comment on depreciation and amortization, I wasn’t sure what you might have been referring to in $16 to $18 million.

Anthony DiPaola

Yes, that’s the depreciation number that should be in that range. The amortization is a little over $5 million.

Mark Miller - William Blair

Okay so add $5 million to that for D&A in total.

Anthony DiPaola

For D&A in total, yes.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Alec Taylor

Thank everybody for joining us. It was a good call. I hope you have better visibility for our business going forward now and again a good Q3. We’re excited to hopefully follow that up with a good Q4 and finish out the year. We appreciate you joining us; thanks.

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