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Elizabeth Arden Inc (NASDAQ:RDEN)

F2Q13 Earnings Call

January 31, 2013 9:30 am ET

Executives

Allison Malkin – Integrated Corporate Relations

E. Scott Beattie – Chairman, President and Chief Executive Officer

Kathy Widmer – Executive Vice President and Chief Marketing Officer

Joel B. Ronkin – Executive Vice President and General Manager, North America

Stephen J. Smith – Executive Vice President and Chief Financial Officer

Analysts

Arnold Ursaner – CJS Securities

William Chappell – SunTrust Robinson Humphrey

Jason Gere – RBC Capital Markets

Joseph Altobello – Oppenheimer & Co

Connie Maneaty – BMO Capital Markets

Timothy Condor – Wells Fargo

Linda Bolton Weiser – R. Riley & Co.

Operator

Greetings and welcome to the Elizabeth Arden Second Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you Ms. Malkin, you may begin.

Allison Malkin

Thank you, good morning. Thank you for joining us. Before we begin, I’d like to remind you that some of the comments made on this call as either prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden’s most recent Annual Report on Form 10-K filed with the SEC. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.

I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden. Scott, please go ahead.

E. Scott Beattie

Thank you, Allison and welcome everyone to our Q2 conference call. Joining me here today is Joel Ronkin, out Executive Vice President in North American Business, Kathy Widmer, our Executive Vice President and Chief Marketing Officer, Steve Smith our Executive Vice President and CFO and Marcey Becker our Senior VP of Finance.

In terms of the outline of the agenda today, I will begin by providing an overview of our Q2 results and the first half fiscal 2013 business performance, including a review of our most important corporate initiatives included with Arden brand repositioning and the development of our European fragrance business. Included in my overview will be a detailed review of our international business.

Finally, I’ll also provide an outlook for the remainder of fiscal 2013. I’ll then turn the call over to Kathy, who will follow my comments who will provide a detailed review of the Elizabeth Arden repositioning project including the performance to-date of our flagship doors and key Elizabeth Arden’s brand initiatives for skincare, color and fragrance. Kathy will also provide a review of our key strategic fragrance innovations and review first half fragrance brand performance.

Following Kathy, Joe will provide a detailed discussion of our North American business for the second quarter and year-to-date, which includes both our mass business, our prestige fragrance business. Our Elizabeth Arden prestige distribution business and the Canadian and Puerto Rico business, as well as our direct-to-consumer business.

And finally, Steve will provide a detailed review of our key financial metrics for Q2 and for the first half and our revenue and earnings guidance for the remainder of fiscal 2013.

So in terms of an overview of Q2 in our first half, as I stated in the two most recent earnings calls, one in August and one in November, fiscal 2013 is a year of transition for us at Elizabeth Arden. The combination of the Elizabeth Arden brand repositioning project, the integration of two acquisitions and the volatile and uncertain economic environment globally has resulted in strong revenue growth, but also anomalies across channels of distribution, some brands and some geographies.

Despite this, we were able to report our 14th consecutive quarter if the year-over-year improvement in revenue growth, gross margin growth and EBITDA margin growth. We are obviously disappointed in the revenue shortfall for Q2, and the result in increasing inventory, but we are extremely pleased with the retail sell-through of our fragrance portfolio globally and the momentum of our Elizabeth Arden brand repositioning.

As Joe and Kathy will discuss in greater detail, our new fragrance brand launches were amongst the most successful launches for the first half in Christmas season, resulting in an increased U.S. fragrance market share in both our department store business, as well as our mass retail business.

In international, where retail sell-through data is less available, we experienced a 14% increase in our fragrance business for the first half led by the European fragrance business that grew 18%. These growth rates are well and excess of the beauty category and the fragrance category growth rates.

In terms of the EA brand repositioning, the flagship doors were for the most part we said North America by early October and if shown a 24% increase to-date from that reset. The number of doors is obviously insignificant to the overall performance of the Elizabeth Arden brand in North America. But we have a detailed plan to expand the learnings of these flagship doors in North America and Kathy and Joe will go into more detail about this.

In international, the flagships reset have been staggered more in consistently throughout the Q2 with many of our travel retail doors not reset yet. As a result of more complicated inventory transition and construction schedules of new counters. The international flagships as we stated in the press release are up 9% since the reset, but that represents far fewer weeks since reset compared to the North American business, but these doors have consistently improved week by week, and are now tracking in the most recent weeks at between 20% and 25% very similar to the North American doors. This performance particularly given that the color, cosmetic products and many of our best most important skincare innovation is waited to the second half of 2013 gives us tremendous excitement that the repositioning is gaining traction and will result in consistent growth in new Elizabeth Arden brand globally.

Kathy will discuss our other learnings and the future plans to scale the rollout to more doors. Despite these positives there were two primary factors that resulted in us, not meeting our revenue targets, and lowering our financial guidance for the rest of the year, our forward guidance for the rest of the year.

One, our retail plans, which we develop in partnership with our retail partners were in retrospect to optimistic. Despite a very strong Thanks Giving selling season, the lingering effects of Hurricane Sandy, the fiscal cliff debate and all these had, all had an impact in it, and a lagging impact particularly in North America, but also in globally on retail performance during December. We saw this same phenomenon affect most of our retail partners.

Consumer takeaway was weaker and replenishment was weaker and occurred later in December than what he have planned, this was particularly a problem at one of our large U.S. mass accounts. This was not just the U.S. issue however, despite above category growth of our fragrance brands in the international. The fragrances category didn’t perform particularly strongly during the Christmas season, particularly in some of our strong markets like the UK and Germany. And therefore, replenishment was weak

The second factor, which is somewhat less important, and really more of a failure of ours in our budget process to fully appreciate in our phasing, but was certainly a factor on the Elizabeth Arden brand performance was we did not properly budget the timing of the travel retail inventory sell-through in the travel retail Elizabeth Arden product reset in this very important travel retail channel.

A large percentage of our Elizabeth Arden branded travel retail business is represented an exclusive programs for travel retail, these programs, the existing inventory was being sold through during the first half, so we had very low replenishment and the reset of the new products is just beginning now in February, the timing of this we didn’t properly reflect for it, so as a result our shipments in travel retail in the Arden business were dramatically down from what we had planned, this resulted in below budget performance and a very important and profitable channel, this will be corrected in the second half.

And then the final issue was that we saw weakness in our China business including Hong Kong and Taiwan and that was below budget. Given the retail trends and that we were too optimistic in Q2 we have cautiously reduced our revenue and earnings guidance for the second half to reflect continuation of these trends [enter in]. Now I would like to go through a more detailed review of our international performance.

Total revenues for international accelerated during this second quarter to 11%, Europe led the growth with 14.5% growth, Asia Pacific was up 8.4%, our distributor markets and travel retail were at 9.3% but that was really driven by the distributor markets in particularly our fragrance business. Our very important European fragrance initiative continues to gain traction and fiscal year-to-date is up, our European fragrance business is up 20%. The EA brand in international grew at 10.3% during the second quarter led by Europe that was up 18.6%. These growth rates were all despite rather weak consumer confidence and weak beauty category growth. This is very encouraging that we are building market share much faster than the category and we’re gaining the confidence as a strong beauty vendor in the very important European and Asia-Pacific markets.

I would now like to introduce Kathy Widmer, our Chief Marketing Officer to discuss in more detail the EA brand repositioning and the fragrance portfolio performance.

Kathy Widmer

Good morning. I am pleased to provide an update on our Arden brand repositioning initiative followed by quarterly results across Arden, as well as our key fragrance brands. We launched our repositioning of the Arden brand in most of our key global flagship doors over the past four months.

As a reminder the flagship doors are fully converted with upgraded counter design, product assortment, packaging, upgraded product formulation and communication. The intent of the flagship door approach is to apply and quickly learn from a relatively small but important set of global doors, so that we are able to focus on our efforts in investment on the right growth drivers across a broader array of doors.

Sharing our performing to-date among the flagship doors, I will begin with North America. Flagship counters in the U.S. and Canada were converted earlier this fall with all door conversions complete by the end of October. Among the U.S. doors retail sales are up 24%, these doors are traditional department store beauty counter formats staffed by beauty advisors. This growth far exceeds the growth index of the beauty category in the U.S. which grew 5% for the quarter. Flagship counters in Canada delivered retail sales growth of 30% since conversion. Most of the Canada flagship doors are Shoppers Drug Mart doors comprised of unstaffed back wall type beauty installations, quite different from those in the U.S. This impressive growth is already prompted Shoppers Drug Mart to accelerate the rollout of reposition doors.

These results give us confidence as this self-serve format is predominant across our global business. Moving on to international, retail sales growth among the flagship doors are up 9% since conversion, this growth lower in comparison to North America is driven by a staggered conversion schedule which is extending into February.

Travel retail doors in particular among our highest volume doors globally will not be fully converted until February. Where conversions have been executed across international results has been impressive. Across our flagship doors in Boots, UK for example an important strategic retail partner. Sales have grown between 15% and 34% and 12% across the entire retail chain. This compares favorably to the beauty category in the UK which grew 5%.

As more doors have converted sales growth in international has approached the rate of North America with most recent week’s growth achieving 23%, compared to last year. We’ve quantitatively analyzed the key factors driving growth across all flagship doors and their various formats and are underway with a plan to transfer success and replicate growth drivers over meaningfully large number of global doors approximately 200.

For example, our successful approach in Shoppers Drug Mart in Canada is being transferred to our account team in the U.K to deploy against our Boots doors which have similar unstaffed back wall installations. Execution within this next set of focus doors extend through the balance of the fiscal year.

Looking forward to the second half of the year, we will be installing new color merchandising units at counters has continuing improvement in the shopability of our color products.

We are also in progress in the launch and commercial execution of several key Arden innovations including PREVAGE Clinical Lash and Brow Serum, PREVAGE Intensive Anti-aging Serum and a rollout of our reformulated and repackaged [fund drawn] foundation line.

Overall, we are very encouraged by the performance of our flagship doors have a good handle on the drivers through success and our focus now on driving similar success across more doors.

Moving onto our fragrance portfolio, we delivered overall growth of 12% for the second quarter and 18% for the first half of the year. This growth was driven by recently acquired brand, strength within our key existing fragrance brands and our Western European fragrance expansion initiative offset by softness in a few fragrance brands.

Growth was driven by our acquired brands including Justin Bieber, Nicki Minaj BCBG and Ed Hardy, while delivering growth, the Ed Hardy and BCBG fragrances as Joe will discuss undelivered versus our retail plan.

In the U.S. Justin Bieber's Girlfriend fragrance ranked number three among new launches for calendar year 2012, and number one among celebrity launches. Nicki Minaj’s first fragrance called Pink Friday ranked number six among new launches for 2012, despite launching late in the year and ranked number four of all launches in U.S. department stores for the month of December.

Both Justin Bieber and Nicki Minaj fragrance brands have been broadly accepted in international markets where demand and sell-through has been strong. Upside potential for these brands is high in fragrance markets such as Germany and Brazil.

BCBG fragrance has grew 13% in retail sales for the fall season driven by the launch of Bon Chic. We’re enthusiastic about the potential of this designer brand, as the apparel brand is rapidly expanding into international markets.

Growth in fragrance for the quarter was also driven by strong performances of some key existing fragrance brands, especially, Taylor Swift and Juicy Couture. Net sales for Taylor Swift were up 38% for the second quarter as distribution is expanded in the U.S. and the brand is proven to have strong international demand. The help of Juicy Couture grew 21% behind our pillar fragment strategy focused on Viva La Juicy.

Viva La Juicy successfully grew its U.S. ranking from number nine to number eight for calendar year 2012. Our John Varvatos brand grew 41% for the second quarter by its strongest international demand particularly within travel retail, Europe and Asia. Growth among our existing portfolio was offset by softness in Britney Spears and Mariah Carey.

Britney Spears fragrances were down 13% for the quarter as we worked to reduce the complexity of SKU assortment and continue to focus on the Pillar Fantasy and Midnight Fantasy fragrances, declines in a variety of small Flanker SKUs is offsetting the underlying strength of Fantasy, which grew 20% for the second quarter.

Likewise, we experienced declines in Mariah Carey driven by fragmentation of the brand and the lack of the key pillar fragrance. We are currently executing against the pillar strategy for Mariah, which launches this spring also focused on establishing a foundational fragrance for the long-term.

Finally, growth in fragrance was also driven by continued success in our Western European fragrance expansion initiative, which delivered 20% growth in net sales for the quarter. All European markets except France delivered growth for the quarter with particular strength in Germany up 34%, European travel retail and distributor markets up 18% and 24% respectively, and the UK up 10%, despite fragrance category declines across most of Europe.

This concludes the marketing update I’ll now turn over to Joel.

Joel B. Ronkin

Thank you, Kathy. I’m going to comment on the performance of our North America business including the discussion of our sales performance, our retail sales trends as well as that of the category.

The North America business comprised about two thirds of total company net sales and includes all sales of our products in the prestige and mass channels in North America as well as our outlet stores and our global e-commerce business.

We are pleased to report the net sales of the North America business increased 8% in the second quarter. Together with a very strong Q1 net sales growth of 20%, net sales for the first half increased 13%. While most of the sales growth was driven by our department store fragrance business as a result of new launches and acquisitions. We also grew our mass business and our direct-to-consumer business.

Now, despite the positive year-over-year comparisons our aggregate sales was somewhat sort of our overall plan as we expected even greater growth in our department store fragrance business relating to our newly acquired designer brands and at one of our key mass retailers during the holiday season.

Turning now first to our Prestige business, net sales increased 29% in Q2 and an even 35% for the first half. This strong growth in net sales led to market share gains at the fragrance counter of 215 basis points for the first half of the fiscal year.

Now on a relative basis, we performed well with strong sales, market share growth and brand rankings. We planned even greater growth in the Prestige channel. More specifically, we grew retail sales 54%, but missed our plans by 20%. This shortfall to plan was largely related to lower than planned sales of the newly acquired brands including Ed Hardy, BCBG and True Religion.

At our Arden counters in North America retail sales were relatively flat in total. That being said as Kathy mentioned the repositioned Arden flagship doors are performing extremely well, with retail sales growth of 24% in the U.S. and 30% in Canada, since the reset.

Our opportunity now is to look to ways to take these lines from the repositioned doors in the U.S. and Canada, and scale it to more doors in North America and abroad.

To that end, we are planning on expanding our repositioning efforts to more than a 100 additional doors in next six months. In our mass business, we delivered net sales growth of 2% for the quarter, and 6% for the half. This sales growth coupled with the low single-digit decline in the Prestige fragrance category led to us gaining 210 basis points of market share in the mass channel, while we gain share and grew our sales, we plan for some of greater sales growth in the mass channel.

Specifically, our retail sales grew 4% in the first half versus a plan of 7% growth.

This mix was the result of a shortfall versus plan at one of our key mass retail accounts. We actually experienced more than double-digit retail sales growth at a number of our key mass accounts including Target, Kohl's, Sears and Myers. I also want to touch this for a moment on our rapidly developing direct-to-consumer business.

We opened three new outlets this fall, our e-commerce side has been completed re-launched in connection with the Arden repositioning. At the same time, we launched repositioned international site in 12 countries. For the half sales for our direct-to-consumer business increased 22%, driven by strong comp store growth of 17% in our existing company stores.

And with that, I would like to now turn the call over to Steve Smith, our Chief Financial Officer.

Stephen J. Smith

Thank you, Joel. I will discuss our second quarter financial results, working capital and balance sheet metrics. I will also provide comments regarding our outlook for the second half of fiscal 2013.

Gross margins after adjusting for the acquisition and non-recurring Elizabeth Arden repositioning costs increased by 120 basis points for the quarter and by 70 basis points on a year-to-date basis.

Gross margins reflect a larger proportion of sales of owned and licensed fragrances in Elizabeth Arden branded products as compared to distributed fragrances which carry a lower margin. For fiscal 2013, we now expect an additional 75 to 100 basis points of improvement in adjusted gross margins over 2012 due to sales mix related to both fragrance versus skincare and color products as well as basic versus promotional sales and reduced leverage from lower sales volumes.

For the quarter recurring SG&A expenses increased by 9.7% or $14.4 million as compared to last year due to higher advertising and sales expenses to support all the acquired brands in the fragrance launch activity and marketing costs related to the Elizabeth Arden brand repositioning.

As a percentage of net sales, recurring overhead expenses were low as compared to prior year. Overhead expenses decreased by 2.8% or $1.6 million and as a result, as a percentage of net sales it was 11.9% as compared to 13.4% in the prior year and we’re able to achieve this due to operating leverage on a higher sales base, lower compensation cost and last year we also incurred currency losses on balance sheet revaluation that we didn’t have this year.

The increase in depreciation and amortization and interest expense for the quarter and year-to-date versus the prior year periods is due to the incremental amortization expense and higher borrowings for the acquisitions we completed in the fourth quarter of last year.

Turning to the balance sheet and cash flow metrics, we ended the quarter with inventory of $323 million, the increase versus the prior year is due to investment in the new fragrance brands and inventory build up for the Elizabeth Arden brand repositioning. We also carrying an additional $20 million or $30 million of inventory above our expectations primarily for the sales shortfall. And we expect this will normalize over the remainder of this fiscal year.

Accounts receivable increased 33% versus the end of the second quarter of fiscal 2012 reflecting the sales increases, timing of sales within the quarter and customer mix in our international business. DSO increased to 79 days and as a result cash used in operations was $11 million for the quarter. We can now expect operating cash flow to be in the $70 million to $80 million range for the full fiscal year.

Short-term debt net of cash was $57.5 million at quarter end, the increase in the credit line balance versus last year’s due to the acquisitions and our priorities for cash continue to remain to be for working capital, investment behind the Arden brand repositioning, acquisitions and share repurchases.

Capital expenditures totaled $19 million through the second quarter. The increase versus the prior years primarily for increased investment in the Elizabeth Arden brand repositioning. We also expanded $6.3 million excluding transaction cost so far this year towards the $8.4 million total minority interest in the Red Door salons that we announced in September. We expect to invest remaining amount for that investment late in fiscal 2013 or early fiscal 2014.

Based on the current retail sales trends, we’re updating our guidance for the remainder of the year. For the full year of fiscal 2013, we now expect net sales to increase between 9% to 11% over fiscal 2012 at GAAP rates with currency expected to have a negative impact of sales growth by about 50 basis points.

EPS is expected to be in the range of 230 to 250 a share and that’s before non-recurring expenses related to the EA the Arden brand repositioning and acquisitions.

For the third fiscal quarter ending in March of 2013 guidance for net sales for a range of $255 million to $270 million or an increase of 6.6% to 12.8% at GAAP rates. The negative impact from currency translation is expected to be about 20 basis points based upon January rates.

And the guidance for EPS is a range of breakeven to $0.04 a share. The nonrecurring Elizabeth Arden brand repositioning costs relate to product cutover activity, converting from the old product assortment to the new product assortment, and include logistics and handling costs, markdowns, and returns of inventory from certain retailers with replacement of new inventory.

These charges were $7.4 million on a pretax year-to-date basis and we expect them kind of remaining of these expenses of $3.6 million in pretax during the second half of fiscal 2013. The increase in costs relate to additional freight charges. The acquisition expenses are transition costs and high cost inventory charges. The high cost inventory charges represent the difference between the cost of inventory we purchased prior to the closing of the acquisition as a distributor and that as a brand owner.

Total amount incurred was $13.5 million of which $6.4 million was non-cash and were also primarily recorded in cost of goods. The incremental nonrecurring acquisition costs are largely related to freight charges for the launches and cost associated with supplier transitions. There is a small tail of about $700,000 of costs that is expected to be incurred in the second half of this fiscal year. And with that I will turn it back to Scott.

E. Scott Beattie

Thank you very much, Steve. Operator we will be happy to answer any questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Arnie Ursaner with CJS Securities. Please proceed with your question.

Arnold Ursaner – CJS Securities

Hi, good morning. My first question relates to the timing, you mentioned shipments and traveling related were impacted by the timing as well as later replenishment, but yet your guidance for the current quarter is relatively weak versus consensus and others expectations, can you kind of walk us through the timing issue and how it would affect Q1?

E. Scott Beattie

You mean our Q3 quarter?

Arnold Ursaner – CJS Securities

Yes, calendar Q1 sorry.

E. Scott Beattie

Well, I think what we’ve done Arnie is, we’ve looked at all of the factors, the saving factors of the repositioning as well as our retail trends for, our all of our business both here in North America and international and have incorporated that into the guidance for the remainder of the year. I think the bottom-line is that we were probably too optimistic on our retail plans, across the board particularly in the fragrance side and we’ve based on the performance to-date and then relatively weak second half in terms of fragrances, the seasonality weakness is that we’ve brought down those retail plans down to I think more conservative levels.

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Okay. And then my second question relates to the Elizabeth Arden brand itself, obviously, there is some very positive things like the counters that you had, that have been very successful, but yet the overall branded products were down 6% for the quarter. And it sounds like you are still getting back some of the older inventory, can you kind of walk us through the success you had and then how much of this old inventory, is that all covered in the charges and will it basically be completed by Q1 months, the calendar of Q1?

E. Scott Beattie

Well, first of all in Q2 the Elizabeth Arden brand was down 6% in North America, but on a global basis it was up approximately 4%. So, it’s positive and there is pretty positive growth on the brand in addition to the flagship growth in international and remember the Arden business is approximately two thirds of the total business is in our international markets.

In terms of the inventory and so on this is part of it, the challenge for us obviously in providing guidance and growth rates for the Arden brand and a real reason why we followed this whole flagship model. There is a lot of moving parts here in terms of discontinuing inventory and items within the product line, selling through items and skin care and color have different sell-through rate, so takes longer to sell-through some of the color items. And then there was some inventory as Steve who went through that they were taking back and repositioning. So, we tried our best to kind of face that properly and project it properly but we’re in thousands of doors around the world and then periodically you make mistakes on this.

I think the most important thing to take away here and the thing that I think as a management team we’re thrilled with. And so our retail partners frankly is that they see that the reposition brand when it’s completely retrofitted in those doors is showing consistent accelerated growth in the momentum of improvement week-to-week is growing, that’s a real positive for us, it gives us a lot of confidences, I think Kathy mentioned that, not only are we seeing growth in self-serve environment like Shoppers Drug Mart in Boots and so on.

But we’re also seeing that same kind of improvement in the beauty counter business, with beauty advisors. So, and we’re seeing pretty consistent growth in skin care particularly, now that the color business is being faced mostly in again as Kathy went through in now and into the second half. So that should provide additional growth for us as we look into the second half and beyond.

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Thank you.

Operator

Our next question comes from the line of Bill Chappell with SunTrust. Please proceed with your question.

William Chappell – SunTrust Robinson Humphrey

Thanks, good morning. I guess first question looking into the celebrity fragrance side and is there a bigger picture where you’re seeing when you look at this trends for Britney and for Bieber and Swift I mean are we starting to hear the ceiling whether it is some cannibalization with some of these new fragrances are just taking share from some of your other celebrity fragrances that are out there?

E. Scott Beattie

I don’t like Kathy and Joel comment on this. I think it depends in terms of what markets we’re talking about. In Europe, one of the real strengths now of having Justin Bieber and Taylor Swift and Britney Spears is that we have three really dominant global celebrities in which to develop programs around for retailers that we have relatively small fragrance market shares with.

In terms of North America where we’ve got pretty dominant market shares both in Mass and Prestige particularly in the celebrity category, clearly where we’re focused on is gaining share from our competitors, but Joel maybe you want to comment on any cannibalization of our existing celebrities.

Joel B. Ronkin

Bill I think it’s possible if there maybe a little bit in terms of Britney, but for the most part we don’t really think it’s related to cannibalization. There is really strong growth in general and celebrity and we actually exceeded our plans for in terms of the mass business with our celebrities Bieber and Wonderstruck both performed exceptionally well when we moved into mass this fall.

So the celebrity category I think in general is healthy and certainly on a relative basis, we really dominated in the fall when you compare our performance against one of our key competitors. I think Britney we’ve done some good things, we have some excitement in terms of what we’ve done with Fantasy here in the States which would pay dividends as we roll it out from Kohl’s where we did where we actually have a new one called Fantasy

Twist and we now hopefully move it on to other retailers in the future.

William Chappell – SunTrust Robinson Humphrey

I think the, if you look at what’s driving the decline on both Britney as well as Mariah Carey it’s more driven by the complexity of the SKU assortment within both of those brands. And where we are in both of those brands is establishing a pillar fragrance strategy similar to what we did for Juicy Couture, but even when we established that strategy for Juicy Couture, we endured about two quarters of clean up of the proliferation of SKUs that were draining the brand versus the one that we needed to focus on and we’re at that stage on both Britney and Mariah, but if you look underneath of Britney franchise the pillar fragrance of Fantasy and Midnight Fantasy is up 20% and it’s just about us maintaining that strategic focus and it’s more about the fragmentation than it is about the relevancy of Britney Spears.

E. Scott Beattie

Yeah, the one last point I would make on this, I don’t think that any of the shortfall in revenues in our quarter had to do with brand issues. What we’ve really tried to focus on in our presentation is the strength of our retail sell-through the rankings, the market share increases that consistent across all channels and frankly globally.

The real issue is that the category and the store performance of many of our U.S. retailers and particularly those mass retailer has been a dominant mass retailer that has more of a income challenge customer had very anemic performance for the holidays in our category as Joe mentioned, it was, we are planning it up the category was down, our business was up, we gained great market share at the expense of our competitors in that channel, but you’re not going to get the inventory replenishment, you’re not going to get the performance of our business, if the overall category is down and that’s really what we experienced. I’m very satisfied with how we’ve executed our brand related strategy, so I don’t see it at all as a brand issue.

I think our, both our celebrity and Lifestyle and designer fragrance brands had performed extremely well globally. Our Arden brand strategy it’s in the early innings obviously here because we’re just launching it in flagship but it’s performing as we expected, but there is no question and I think you’ll see it across categories, across channels of distribution, when the retailers report all of their numbers that December was a very anemic retail period for just about all categories and as a result our retailers were very conservative in terms of inventory.

William Chappell – SunTrust Robinson Humphrey

Okay. And just to kind of quantify on the Arden restage, I think will 200 doors incremental, I mean what stage do we get to where it kind of offset the trend or where we can see that high 20 or the 20s year-to-date growth start to reflect in your actual numbers. I mean are we, you need to be 500 stores, is it a 1,000 doors, is it several quarters away, I mean is there anyway to kind of look out on the horizon to see that?

Kathy Widmer

We’ve done the work to quantitatively assess the number of doors at this next stage that we need to focus on that would drive some meaningful change in our increasing growth for the overall Arden brand. And we are at the moment continually working on the number of doors for International, we have nailed it down to the 100 doors that Joe mentioned for U.S. and we’re currently working through international. And we think it’s approximately 100 doors, it’s more complex there in terms of the number of geographies in retail environments that we have a little more homework to do on it. But we have very specifically taken that approach that we want this next phase to hit enough doors that is meaningful across the entire Arden brand and the execution of that next phase of doors will happen over the next couple of quarters.

William Chappell – SunTrust Robinson Humphrey

Okay, thanks.

Operator

Our next question comes from the line of Jason Gere with RBC Capital Markets. Please proceed with your question.

Jason Gere – RBC Capital Markets

Okay, thanks, good morning. I guess just kind of following up on the last question and thinking about, I think you called 2013 was transition year, but the Western European rollout initiative seems to be unplanned, and obviously, you’re getting good traction with the EA brand repositioning. Can you really just talk more about the macro environment how much that’s really weighing down on your outlook and where do you see that kind of, I guess either through your innovation or through what efforts are there that the category can, on the fragrance side can actually start to improve that you can see that reacceleration back, that I guess these retailers growth are looking to do that’s just the first question?

E. Scott Beattie

Well, I’ll just repeat what I said a second ago Jason. This is in term a product innovation or marketing or a brand issue in my opinion. And again, if you look at the rankings in market share, the success of the product launches that we have, the quality of the brand execution that’s not the issue, the issue is that particularly in December, we saw a weak Christmas season and as a result weak replenishment and we saw it through most of our markets and most of our channels of distribution, whether that was contributed through the fall out of Sandy and fiscal cliff or just overall sort of economic uncertainty, it was weaker than it’s certainly declined significantly from our performance at the Thanksgiving in the U.S., but we also saw a deceleration in the UK and in the European countries.

And you can see that through IRI and Euromonitor and MPD data when you look at the category performance. At the end of the day particularly in our, in the North American business where we have really strong dominant market shares, while we’ll move the needle and accelerate the growth will be an improvement in that mass customer, the income that they have and their propensity to buy a broader basket of items when they shop in mass retail, and rather than sort of continue at the retail plans that we had for the first half, we feel that it, we should course-correct our guidance to reflect the retail trends that we’re seeing now and then we saw it through Christmas. And given the cheer size of the Christmas season for us it only makes sense to do that.

Jason Gere – RBC Capital Markets

Okay. And then just with the one large U.S. account that you talked about the weaker holiday plans. Can you talk about their commitment to the category, any talks that you had post the holiday, that led you encourage about the partnership there?

Joel B. Ronkin

Yeah, this is Joel, I think in terms of commitment to the category continues to be strong. We continued to be the dominant player for that retailer in fragrance, even at that retailer, they saw some improved performance at the very end. And so, I think overall it has no impact, I think it’s more of a larger issue potentially for that consumer in that particular retailer, because remember as I stressed in my results, the other retailers, we actually saw very strong growth in many of our key accounts, and that their consumers tend to have a bit more income and Target is a great example, Kohl's these are important retailers to us they are just, we have one issue at one particular retailer and as I said, our growth was 4% of retail, not 7%, it’s not a huge amount of dollars but it’s not unimportant either.

Jason Gere – RBC Capital Markets

Okay, and then just a last question little over a year ago, you guys kind of laid out the whole EA brand repositioning, talking about doubling the potential sales of the brand, I think within the four years, are you still committed to that long-term targets, just given where the environment is right now, but is there anything that would lead you to think that, hey, maybe I’ll take it little bit longer to achieve that goal?

Joel B. Ronkin

Well, first of all, it’s five years and I don’t think that based on one quarter of reporting on our flagships, which I think is extremely strong performance on those flagships, and accelerating that, I will be at all negative in terms of the direction we’re going and the progress that we‘ll making. I mean, this is a, in an environment where most of our retailers are showing low single-digit kind of comp store sales growth, when you look at and in the beauty category globally we’re well in excess of that, so our retailers are really encouraged and so are we, so I don’t, I wouldn’t see any kind of negative in it at all, if we can maintain these levels of performance and scale it will be a home extraordinary success for us.

Jason Gere – RBC Capital Markets

Okay. Great, thank you.

Operator

Our next question comes from the line of Joe Altobello with Oppenheimer. Please proceed with your question.

Joseph Altobello – Oppenheimer & Co

Hey, thanks. Good morning. And just first question in terms of the weakness that you saw, you mentioned (inaudible) a weakness, but the below expectations performance of Ed Hardy, BCBG through the Legend, how much of that was macro related, how much of that was maybe that these brands may not resonate as well with consumers, as well as you thought when you first purchase them?

Joel B. Ronkin

I think this is Joel, again I think in terms of these are not macro factors in terms of the brands or what’s going on in the department store environment, what I think has happened is we just, we took over five brands, and we launched five brands as part of that business those three, those one with Ed Hardy, one with BCBG, one with True Religion, Justin Bieber Girlfriend and Nicki Minaj Pink Friday has a lot of launches at once and all of you know we had 54% retail growth, we didn’t get it exactly right at how much of the sales would be. So yeah, I think there is some of the brands, it was somewhat below expectations.

But overall, real good growth in general, now we sold an awful lot for example of Ed Hardy fragrances in the first half, just not quite as much as we expected. So I wouldn’t go as far as say weakness as far as the brands, those brands are still resonating very well, and remember, we have a big business in some of those brands at mass, which on in many cases performed very well.

E. Scott Beattie

Again, Joe I would just reemphasize this issue, it’s not really a brand driven issue as it is, I think we were just as Joel just mentioned just below too optimistic in terms of their retail plans vis-à-vis the actual results, and we do those plans in partnership with our retailers, it’s not done in isolation, we go through at a very detailed way with the various promotions and launches and new innovation and develop a retail plans with those partners, but when we go through some of the things that we particularly in the North East we had 100s of doors that were out for a couple of weeks across Wal-Mart, CVS, Target and Macy’s and one of the most affluent regions of the U.S. And then the fall out of the economic impact of that which I think inevitably or even be more important and just the shutdown of the stores for a week or so.

The fallout in consumer behavior as people try to rebuild their lives and there is estimates that this could have cost upwards of $100 billion in rebuilding cost. So, those kind of things have an impact on consumer behavior and in terms of disposable income and prepare us to really go in and shop our category and many other categories.

Frankly it’s we’ve reviewed our retailers performance across categories as part of our assessment of this Christmas season and we’ve seen weakness in lot of other categories in the overall store performances is well. And so as big part of why we’re comfortable that this isn’t a brand related issue or an execution issue per se.

Joseph Altobello – Oppenheimer & Co

Okay, okay. And just secondly you mentioned obviously the weakness at one key mass retailer in the U.S. Was Sandy behind us with the fiscal cliff discussion behind us relatively speaking obviously this is much was important now post holiday than it was month and a half or so ago. But are you still seeing sort of a challenged consumer in that category, was that consumer slowly coming back all of it?

E. Scott Beattie

No that’s still a challenge, challenge consumer and I think with the payroll tax (inaudible) that customer that’s a big deal too. These are customers that are letting paycheck to paycheck many of them reliant on government subsidy, in food stamps and unemployment insurance and other kind of government subsidies and you see it. And so, that customer I think with the payroll tax likely isn’t showing significant improvement yet and we don’t see it in the trends yet and until we do and I think we should be very cautious about improvement.

Joseph Altobello – Oppenheimer & Co

Okay. All right, thanks guys.

Operator

Our next question comes from the line of Connie Maneaty with BMO Capital Markets; please proceed with your question.

Connie Maneaty – BMO Capital Markets

Good morning. I have to step away, so I’m not sure if you went over that or not, but what was the pipeline fill amount for Visible Difference?

E. Scott Beattie

Well, we did most of that launch last fiscal year Connie, so that was mostly done in the fourth quarter last year. The performance of Visible Difference has been very strong in our international businesses and one of the reasons why the Arden brand has performed so well in the first half of this year in international is it they done the Visible Difference execution and performance has been done.

It’s been done at a lower margin in say PREVAGE and Ceramide, so and Steve went through the margin and what we see for the year that’s had an impact in sort of the overall margin the success of that, but it’s going well. In North America, I think it’s a bit more spotty in terms of their performance of Visible Difference, but we’ve had some learnings on Visible Difference in international that Joel and his team in North America are executing. And we see some really strong performance in PREVAGE in North America which some of the international people are executing. So, I think that was the purpose originally of doing these flagships is to get all this right and apply the learnings appropriately.

Connie Maneaty – BMO Capital Markets

Okay. The press release says that there are elements of the store reset that you’re going to deploy across the next 200 stores, what does that mean the elements. Does it mean the whole thing, does it?

E. Scott Beattie

No, it is, what Kathy went through it’s really taking the selective learnings that have really leveraged performance. We’ve seen it in a self-serve environment, we’ve seen it in our full service beauty counter environment, we’ll gradually start to see it more in the travel retail environment and what we’re trying to do is and what we’re doing is we’re doing a complete diagnosis or analysis of what works in each of these flagships, what we can learn from, how much is being driven by product mix, the staffing levels, the merchandizing strategy, the event strategy, the sampling strategy and I think we’re getting very good of understanding the key variables.

And then we take what those key variables are and apply them to the next wave of stores, so that we can scale that thing in a way that accelerates the growth.

Kathy Widmer

And Connie, what we found too is that and looking at that analysis and understanding what the drivers are. We also find things that just don’t work. And so, those elements that we put in place in the first round of flagship doors they don’t work, we stop investment and it allows us to invest those funds in the areas that we know, do work and just quickly shift our focus.

Connie Maneaty – BMO Capital Markets

Okay. So, on the next 200 stores who is picking up the cost for sort of the physical display reset?

E. Scott Beattie

Well that will be a combination of ourselves and our retail partners. And again that’s one of the consideration in terms of what those 200, what retailers and what geographies those 200 doors will be in. For example, at Shoppers Drug Mart, which is a really key strategic retailer for us where we’ve seen tremendous lift and ranking improvement. We’re now ranked four or five, I think Joe in the Arden brand, which is really, really extraordinarily good. There is a joint support on that.

And so, we’re going to rollout probably of significant amount of the doors in that particular retailer. I think Boots we’re also seeing really strong traction in improvement at there as a retailer. And frankly, the capital cost in those doors because they’re not full-blown beauty counters are a lot more modest per door. So that’s how we’re sort of allocating the capital, which retailers are growing the most rapidly, where can we get the best return on capital and how can we scale it most quickly and most effectively.

Connie Maneaty – BMO Capital Markets

What percentage of sales does China represents and how much did it decline in the quarter and why do you think?

E. Scott Beattie

Well let me add to Steve and Marcey can get the percentages for me. But, in terms of the decline it was more, the here Steve got me the numbers. So China, greater China, which is Hong Kong, Taiwan and China is about 4% of our business. Year-to-date, it’s up 3.2% and then for the quarter it’s up…

Kathy Widmer

Down 3.2.

E. Scott Beattie

Down 3.2

Joel B. Ronkin

Well, that’s on the GAAP basis not at constant basis, and I was, just constant currency

Kathy Widmer

It’s the same and it sounds…

Joel B. Ronkin

Okay, but in Q2 it’s up 7%, so, it’s not so much a matter of the business being down, but we expected it to be up more than it was. Part of that, again it sounds like a little bit of a feeble (inaudible) but as we didn’t fully appreciate the timing difference of the Chinese New Year, it’s moved from January this year to February and that’s a big, big part of the performance of the beauty counters. And so, that was a bit of a facing issue for us. But it’s also growing less quickly than what we had budgeted and not just in China, but in Hong Kong as well.

Connie Maneaty – BMO Capital Markets

So, just because you are discussing that the year-to-date sales down 3.2 in the second quarter were up 7 in dollars or…

Joel B. Ronkin

Yes, constant dollars, yes

Connie Maneaty – BMO Capital Markets

Okay, great. Thanks.

Operator

Our next question comes from the line of Tim Condor with Wells Fargo. Please proceed with your question.

Timothy Condor – Wells Fargo

Thank you, just a couple here. Scott, I guess if you had to summarize the issues that you face here. Would it be fair to say that the travel retail was maybe the key execution shortfall on behalf of the company and the rest was more SKU towards that single mass retailer, would that be a fair characterization?

E. Scott Beattie

I think that maybe a little bit simplistic, certainly the travel retail, the timing and sell-through of the Arden business and then the re-launch of the flagships and the pipelining of the new, that was a budgeting and executional shortfall from out point of view and it’s an important channel and it’s a very profitable channel for us. So that there is no question that was an oversight from us.

In terms of, I wouldn’t want to lay all of the accountability on the revenue shortfall to one mass retailer there is shortfall in retail plans. As Joe mentioned in the department store business and the mass business, but fundamentally with that one retailer, and then in international we had really strong performance of our brands and we had good percentage growth, but we were expecting a little bit stronger replenishment based on the performance of our business.

So I would say generally our retail plans for the fourth quarter, our second quarter and the December quarter we’re just too optimistic based on the all the variables and backdrops that we’re challenging the consumer and challenging the retailers.

Operator

Ladies and gentlemen due to time constraints our final question will come from the line of Linda Bolton Weiser with R. Riley. Please proceed with your question.

Linda Bolton Weiser – R. Riley & Co.

Yes, hi thanks, so I’m just trying to compare what you’ve said your shipments are to what the retail sell-through is, where you’ve mentioned the different numbers and for Elizabeth Arden brand sales in North America or the U.S. I guess you said, your sales were down 6%, but the retail sell-through was flat if I’ve got that right?

E. Scott Beattie

Yeah.

Linda Bolton Weiser – R. Riley & Co.

Yeah, so I mean so obviously, there is still work through of the old inventory retail, I mean is that still going on. Is that correct? And if so, when is that going to end because it seems like this has been an issue now, I mean definitely was an issue last quarter, so I guess that’s my first question and then my second question is a little on the same lines for Elizabeth Arden brand sales internationally, you said up 10% in the quarter your shipments, but retail sell-through, you didn’t say it might be hard to have a number, but you know right your renovated calendar was up 9.

So maybe overall it was around 9, or 8 or 11 or something, so it seems almost like your shipments in were almost too high, if you renovate accounts did little better than all counters, then all counters maybe this sell-through was only up seven or eight.

E. Scott Beattie

Well, first of all let’s deal with the second issue in international here, there is sort of logic of your analysis there is flawed, you can’t sort of jump and say well, retail sell through is X percent. We just don’t have retail sell-through for most of the market in international.

I can tell you what our flagship, the performance since retail was up 9, but we’re now tracking well in excess of that, they said it on the most recent weeks where anywhere between 20% and 25%, some doors and some larger doors higher than that, so those, the retail sell-through on the doors that we’re tracking right that, that we have the information are doing quite well, so that would be my first point there.

In terms of North America, there is a couple of variables again and these are anomalies we had an extremely strong Red Door relaunch last year in North America where that brand is very strong, and we didn’t have a fragrance program to anniversary that, we had a small fragrance program, Red Door Aura that didn’t anniversary completely. So that is the big part of the shortfall, when I look at the overall Arden brand in North America, skincare is up by I think 4%, 6%.

The fragrance business is I think down a little bit, and color we’re transitioning at the door. So, I again it’s part of what my opening remarks were here, I don’t think, when we’re resetting a brand it does goes to a $1 billion of retail sales and 1000s of doors around the world, and we’re doing that, it’s going to take a few quarters to do it, and I think, to think otherwise is just not understanding that the executional challenge of doing this. What we’ve done is, we’ve focused on the flagship doors because it gives us as Kathy said, very clear learnings, it allows our retailers to have benchmarks to understand, what’s working and what isn’t and the power of the relaunch.

But in terms of going through this transition, we’ve never presented, there is anything other than a long-term strategy that takes multiple quarters and it’s going to continue to do that. But at 24% growth at these flagships that we’re excited and so our retailers frankly, so it’s going to be something that we continue to track as we talked about quarter-to-quarter, and as it get gains more traction across more doors, we’ll start to see an accelerating growth in the Arden brand, and we’ll reaccelerate our gross margins, they will start to grow more quickly because this is very high margin business that we are doing, and we’ll get back on to sort of a cadence that we think, we can in terms of revenue, gross margin and earnings growth.

Linda Bolton Weiser – R. Riley & Co.

Okay, thanks.

Operator

Mr. Beattie, we have reached the end of the question and answer session. I would now like to turn the floor back over to you for closing comments.

E. Scott Beattie

Thank you very much everyone for joining us for the call today. And we look forward to reconvening in our Q3 Call.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.

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