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The Jones Group Inc. (NYSE:JNY)

Q4 2012 Earnings Conference Call

February 13, 2013, 08:30 AM ET

Executives

Wesley R. Card - CEO

Richard Dickson - President & CEO-Branded Businesses

John T. McClain - CFO

Analysts

David Glick - Buckingham Research Group

Robert Drbul - Barclays Capital

Jennifer Black - Jennifer Black & Associates

Janet Kloppenburg - JJK Research

Omar Saad - ISI Group Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to The Jones Group Fourth Quarter 2012 and Full-Year Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today, the 13th day of February 2013.

On this conference call, the Company will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 about its business. Statements are based on current expectations or future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

For a detailed discussion of these risks and uncertainties and other important factors that could cause actual results to differ materially from the Company’s expectations, the Company directs your attention to its Annual Report on Form 10-K for the fiscal year ended December 31, 2011, including but not limited to the statement regarding forward-looking disclosure and Item 1A risk factors therein, its other filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements as a result of new information, future events, or otherwise.

Before we begin, the Company would like to point out that once again this quarter’s supplemental slides are available on the Company’s website for download.

I’ll now turn the conference call over to Wesley Card, Chief Executive Officer. Card, please go ahead.

Wesley R. Card

Good morning everyone. Earlier this morning, we reported our fourth quarter results for 2012. Total revenues were $972 billion, an increase of 9% over last year and within our guidance. Operating income increased to $31 million from the $16 million we reported last year and the operating margin improved to 3.2% for the quarter, exceeding the 1.8% we reported last year. Adjusted earnings per share was $0.14, which was higher than our expectations and higher than the $0.10 we reported last year. And keep in mind last year included $0.07 of tax benefit. So the actual increase from operating results as compared to last year was a $0.11.

Looking back on the fourth quarter holiday sales period, I think as been widely reported you all know holiday sales were strong on the surface. However, shoppers did remain price conscious. This benefited the value in discount retailers, particularly; department stores were generally more promotional to drive business. The January trend as reported last week was also very strong driven by gift card redemptions, promotional activities and of course cold weather in the month, which helped the clearance of seasonal merchandise.

When we look at our performance in that environment for the quarter, largest domestic segment, Domestic Wholesale Footwear and Accessories, which includes footwear, custom jewelry, and handbags registered the largest improvement in operating results, as these categories were resilient in the fourth quarter and throughout the year. We feel each categories will continue to perform well as we move into 2013. Our next largest segment, Domestic Wholesale Jeanswear, also showed significantly improved results in the fourth quarter. Advanced products in execution were evident in our results throughout the year and we rebounded from a very difficult year in 2011, with good momentum going into 2013.

Our international wholesale and retail segments also posted an increase in the fourth quarter and as they represent primarily footwear and accessories, this business mirrored the domestic strength in these categories. We are encouraged with the international results and we look for further improvement in 2013.

Domestic Wholesale Sportswear results continued to be challenging and results reflect a difficult category in general. While we made significant changes and progress to address these market challenges, more is yet to be done. And Richard Dickson will address this further on in the call.

Finally, our Domestic Direct Retail segment had a difficult quarter. This is somewhat reflective of the overall promotional environment. However, we did identify some assortment issues and focused on clearing problem stocks quickly. Results were also impacted by the start ups of Kurt Geiger and Brian Atwood retail in the U.S.

As we reported last year, we replaced our previous management team in retail and put a seasoned retail executive in charge of the business. It’s been a lot accomplished in this past six months, including addressing the assortment issues I noted above as well as many organizational customer experience, systems and planning initiatives. As we move through 2013, we should see the results of these efforts and should gain momentum as we move into the second half. I’m confident we’re approaching the turning point for this business.

In general, our overall conservative approach to planning in the current economic and political environment has continued to pay dividends and we remain conservative as it’s not clear how business will develop in 2013. And we can certainly react quickly if the environment continues to improve.

At this point, I’m going to turn the call over to John for his financial review. John?

John T. McClain

Thanks, Wes and good morning, everybody. I’m just getting out – over the tail end of a cold here, so hopefully I will get through without making too much noise here. This morning we reported results for the fourth quarter of 2012 and on a GAAP basis we had net loss of $80 million and a loss per share of $1.06 as compared with the net loss of $21 million and a loss per share of $0.27 last year.

2012 fourth quarter includes pre-tax charges of $75 million related to impairment of goodwill and other intangibles in the Kurt Geiger European retail business, the trademarks used primarily in the Jeanswear business and an increase in liabilities of $41 million related to the acquisition of Stuart Weitzman. Our 2011 quarter included similar Jeanswear related trademark impairment charges of $32 million.

Remainder of my discussion will focus on the comparative financial performance of our businesses for the periods discussed, and therefore, all income statement related references or net results are on an adjusted basis. Adjusted results exclude the impact of cost and other items we do not consider relevant for period-over-period comparisons. On this basis, adjusted EPS was $0.14 for the fourth quarter 2012 as compared with $0.10 per share in the prior-year.

And as Wes mentioned, the 2011 fourth quarter include a tax benefits relating to the settlement of certain audits and tax rate true ups totaling $0.07 per share. So excluding these benefits adjusted EPS would have been $0.03.

Before discussing the results, I just like to point out two additional slides we’ve added to our regular slide deck. On slide 7, we have net revenues by brand for 2011 and 2012 for our 10 largest brands. These 10 brands represent 83% of our total revenue and I will have a few comments on this slide later in my discussion. And on slide 8, we now show two years of net revenue by brand classification.

For the fourth quarter 2012, total Company net revenues were $972 million compared with $894 million last year, a 9% increase and within the range of guidance previously provided. For the quarter, our Jeanswear and Domestic Wholesale Footwear business including Stuart Weitzman and the jewelry and handbag businesses were the standout performers for the quarter. International wholesale, international retail businesses were also up double-digits. In our other businesses, the results were flat to down, largely driven by strategic changes made by us to reduce distribution and improve profitability with certain of our large customers, product performance in certain categories and a continued highly promotional retail environment.

The gross margin was 34.6% compared with 35.7% and was below our estimate for the quarter. Margin decline from the prior-year of 110 basis points was due primarily to the impact of the mix of business and increased promotions on our retail stores, partially offset by better results in the off-price channel. We remain very focused on our gross margin and believe we will continue to favorably impact margins through tight inventory control, continues review of sourcing strategies, and other initiatives.

SG&A increased less than $2 million in the quarter to $305 million, $15 million below the low end of our guidance, tightly controlled expenses in all aspects of our business, which was the large part of this difference. Additionally, we had a shift in the timing of some costs in the 2013 and a reduction in variable related expenses. Year-over-year SG&A increased about $2 million, which is essentially the addition of the Brian Atwood business. SG&A spending remains well controlled. As a result, total fourth Company operating income was $31 million versus $60 million last year with operating margins of 3.2% versus 1.8%.

On income taxes, the full-year 2012 effective rate was slightly higher than I had estimated, negatively impacting the fourth quarter adjusted EPS by about a penny. In that 2011 fourth quarter, the income taxes were lower due to favorable tax settlements and true-ups and a larger impact of the foreign tax differentials, total which resulted in a $0.07 favorable impact on EPS for the 2011 fourth quarter, so better comparison is that $0.14 versus $0.03 last year.

Accounts receivable were $381 million at the end of the fourth quarter versus $340 million in the prior-year, up 12% as reflective of the higher level of sales in our wholesale businesses. Accounts receivable turn on an annualized basis was 8 times compared with 7.5 times last year. The portfolio remains very healthy from an aging perspective.

Inventory was $487 million at the end of the quarter versus $491 million in the prior-year, down about 1%. We continue to respond to the evolving sales trends and ordered conservatively and liquidate any slower turning goods. Inventory turn on an annualized basis was 5 times compared with 4.9 times last year. For the year we generated $207 million of adjusted operating cash flow compared with $277 million last year. We invested in working capital this year, paid more in interest and taxes and had lower earnings. We continue to closely monitor our cash flow results and focus on maintaining a strong balance sheet.

In the fourth quarter, we repurchased approximately 867,000 of our shares for about $10 million, representing an average price of $11.55 per share. Year-to-date we repurchased about 4.2 million shares for $44 million, an average price of $10.45. Total debt was $958 million, and our revolver was undrawn. We ended the quarter with approximately $150 million of cash, which is after we made the final Weitzman payments relating to the 45% of Stuart Weitzman that we did not own and payment was approximately $235 million and a ratio of debt-to-total capitalization net of cash was 44.5%.

Now I’ll discuss the fourth quarter results for each of our business segments and this information can be found in the slides we posted to our website. In Domestic Wholesale Sportswear, which includes our suits and dress businesses, fourth quarter revenues were $165 million compared with $177 million last year. Sportswear the planned reduction in – reduced shipments of Jones New York and the change in the retail strategy made by JC Penney represented the majority of the decline, while Rachel Roy lines had solid increases. The challenging environment in both suits and dress businesses continued and both were slightly down year-over-year.

Segment operating profit margin for the fourth quarter was negative 3.2% compared with negative 2.5% in the prior-year. Gross margins were down 90 basis points resulting from higher allowances due in large part to product performance which Richard will discuss. Additionally, we reduced expenses by about $4 million.

In Domestic Wholesale Jeanswear, we continue to experience a significant turnaround in this business from last year, with fourth quarter revenues of $209 million compared with $162 million last year, an increase of 28%. Majority of the increase was in l.e.i., Gloria Vanderbilt, and Jessica Simpson.

Segment operating profit margin for the fourth quarter was 7% this year compared with 1% last year. The improvement in margin can be attributed to 310 basis point improvement in gross margin, due largely to product performance and inventory control and the impact of the increase in volume on a base of fixed cost.

We also had a very strong quarter in Domestic Wholesale Footwear and Accessories, which includes our domestic footwear, jewelry, and handbag businesses. Fourth quarter revenues were $209 million this year versus $175 million last year, an increase of 20%. Revenues increased in each of the footwear, handbag, and jewelry businesses. In the footwear business, Easy Spirit, Nine West, Enzo Angiolini, Rachel Roy, Brian Atwood and Stuart Weitzman were the best performers. Segment operating profit margin for the fourth quarter was 6.1% compared with negative 1.1% last year. Product performance was the main driver in the improved operating margin. Profit margins were up in each of the nine legacy footwear businesses and in jewelry and handbags.

In international wholesale, which includes all international shipments of sportswear, footwear and accessories, fourth quarter revenues were $87 million this year versus $74 million last year, an increase of 17%. Nine West international business increased $10 million. This increase was due in part to the timing of some shipments between the third and the fourth quarter in 2011. Quarter also benefit by the presence of the newly acquired Brian Atwood business, which contributed about $2 million in sales for the quarter. Despite difficult global economic conditions, all but one of the recurring businesses in the segment were slightly up for the quarter.

Segment operating profit margin for the fourth quarter was 11.5% compared with 7.5% last year. The profit margin improved in all but one of the recurring businesses. Domestic Retail, which includes our U.S. footwear both full price and outlet, our ready-to-wear outlets on our e-commerce sites, fourth quarter revenues were $166 million compared with $179 million last year. Results reflect approximately 90 less Jones stores this quarter than last year and a same-store sales decrease of 5.41%.

Same-store sales in footwear were down 4.4%, a result of a 7.2% decrease in malls and a 2.6% decrease in outlets. In apparel, same-store sales were down 14%, while on our e-com business comp sales increased 2%. Segment operating margin was negative 6% versus negative 1% last year.

There is several different businesses in the segment to discuss. We have some small start-up losses as expected in the new stores for Kurt Geiger, Anne Klein and Brian Atwood with a total of about $3 million this year. We saw improvement in the Stuart Weitzman stores and in the Easy Spirit full price stores, while we experienced declines in operating performance in the Jones New York outlets and in the Nine West full price stores. All other concepts were roughly flat to very slightly down. Operating results declined in the Nine West full price stores due to product mix and performance and Jones New York outlets, primarily due to product performance, and all concepts were focused on ending year with very clean inventory, which we did.

We continue to closely monitor our retail store locations and closed 18 locations during the quarter, bringing the total year-to-date to 103. Closed about 500 doors since we began this process four years ago, and we continue to review each location carefully as leases come up for renewal. Anticipate closing about another 50 locations in 2013.

In international retail, which includes all retail stores outside of the U.S. and includes Kurt Geiger, Stuart Weitzman, Jones Canada and Jones Spain. Fourth quarter revenues were $124 million compared with $111 million last year, with an increase of 11%. This increase was driven part to the Kurt Geiger business where comp sales, improvement and luxury and in the internet and an increase in the number of concession were the primary drivers. Segment operating margin was 5% versus 5.3%, and we’re pleased with this performance considering the challenging economic environment we face.

Before I discuss the guidance for 2011, I wanted to make a few points regarding the initial line on revenue by brand, again that’s slide 7. I want to make a few points regarding brands with significant year-over-year change in revenues. In the Kurt Geiger business which includes both our own brands and the external brands sold by Geiger, there’s an increase from $200 million to $305 million reflecting the acquisition of the Kurt Geiger business in June, 2011. Jones New York declined from $725 million to $643 million due to the plant pullback and unprofitable distribution; change in retail strategy made by JC Penney, closing of 13 Jones outlets and product performance. And finally l.e.i’s. decline for the year was in mid-tops, but l.e.i has reversed that trend and had a very strong increase in both the third and fourth quarters. We plan on including brand information on future quarterly calls.

So our guidance for 2011, we continue to focus on the indicators of performance that we consider somewhat predictable. Based on our current view of business, we believe the total Company net revenue will be in the range of $3.9 billion to $4.1 billion. We see potential revenue growth in each segment with the largest percentages being in the International Retail, International Wholesale, and the Jeanswear segments. Full-year revenue guidance on each of the segments, please see the slides we posted to the website. For the first quarter we expect consolidated revenue to be in the range of $995 million to $1.025 billion.

Our gross margins, our goal and the corresponding plan we put in place for 2013 is to improve full-year gross margins, and anticipate that the highly promotional environment that exists in 2012 will continue into 2013, and we’ll continue to work hard to achieve our goal. For the first quarter we estimate margins to be within 120 basis points of the prior-year. We’re forecasting SG&A expenses for 2013 in the range of $1.22 billion to $1.27 billion, and for the first quarter we estimate the SG&A will range from $305 million to $320 million.

We’ve included additional information regarding our projections for the year in the slides that we posted to the website. And finally, for 2013 our target for adjusted operating cash flow is about $150 million. We expect to end 2013 with over $125 million in cash, nothing drawn on our revolver and no other debt coming due until November 2014. That concludes my comments, and I’ll turn the call over to Richard. Richard?

Richard Dickson

Thanks, John. The 2012 was both a challenging and rewarding year. There were breakthroughs, turnarounds and innovations, gratifying positive change and momentum. But there was also the pain that comes with the calculated risks inevitable to ambitious change and high expectations. Today I’ll provide some perspective on both our progress and our short comings in the fourth quarter and some specific steps that we’re taking as a result. So, let’s begin with our core brands.

First, our largest brand Nine West. Consumers experienced more and more of the refresh Nine West brand for the fall. As the product continues to become more relevant stores became increasingly experiential and marketing became more innovative. Importantly all the components of the brand revitalization are becoming increasingly integrated, with the brands merchandising, marketing, media and retail working together to drive engagement, demand and traffic across all channels.

In wholesale Nine West overall unit sales to date grew slightly on good momentum at Bon-ton up double digits versus a year ago, and DSW and Lord & Taylor are each up as well. The brands saw major gains in online sales year-over-year driven by increases of 30% at Zappos and 22% each at Amazon and at macy.com.

Despite a challenging year for the Nine West retail group there were noteworthy positive signs in the fourth quarter including better than expected performance at our new prototype Nine West flagship store in Manhattan. This laboratory for new products and merchandising outperformed the previous footwear concept we had at this location by 72% this quarter.

Nine West outlets struggled with fourth quarter traffic with the exception of the Black Friday period which delivered record sales over the Thanksgiving weekend up almost 30% versus a year ago, and we were pleased to see the first two rollouts of the new outlet concept remodels in Las Vegas and San Francisco Bay Area outperform fourth quarter expectations by 30% to 50%. In general, we saw core pumps and casual categories do well at outlets throughout the quarter.

A key initiative to grow the brand beyond footwear, Nine West handbags continue to perform very well. Addressing our destination product strategy, the Can’t Stop Shopper Bag significantly increased unit sales in the fourth quarter and now represents 17% of regularly priced retail handbag sales. And even faster growing component of the brand jewelry, so our revenue increased 59% versus last year and as a result we’re growing the number of doors for Nine West jewelry by 50 including an April launch of Bon-ton.

I’ve discussed the Nine West marketing initiatives in some dept on previous calls, so I’ll be brief in my remarks on that today. Nine West is already experiencing the impact on a more strategic approach to marketing with a more targeted and integrated program including engaging Nine in the gang and we do shoe advertising. Marky fashion entertainment sponsorships and our own first in category interactive online network Channel 9.

Leading the shoe conversation for an ever growing and enthusiastic consumer audience from teens to moms and celebrities, Channel 9’s extensive and original digital programming profile shoe lovers, reports from key red-carpet events and features in engaging library of, how to videos. Less than a year into launch, we are very pleased to see 4.5 million views across the network and in the coming year we will implement strategies including a refresh of the Nine West online store to leverage this new audience and drive Nine West ecommerce.

Channel 9 has been an incredibly exciting venture for Nine West that is not only shaping a nice dynamic digital future for the brand, it is elevating the importance of a strategic digital marketing across the portfolio. Nine West is our most developed brand revitalization to date and it has been very encouraging to see the evolution progress. We are very confident in this brand with much more to come in 2013.

Let’s move on and take a look at Jones New York. Fourth quarter concluded both a difficult quarter and a difficult year for the brand. Four specific issues drove significant volume loss in 2012, these were our strategic exit of the Jones realign from J.C. Penney, underperforming Jones New York retail stores a critical designments in dresses and collection where we over estimated receptivity to fashion and felt the pinch of aggressive competitor pricing in the fourth quarter. These were big problems, but they were also isolated and specific. And our research shows that consumer interest in and value of the brand remains high.

As I mentioned in my third quarter update, we are carefully deconstructing what's working and not in order to bring Jones New York back to full strength. We are fully committed to rejuvenating the Jones New York brand, but we are also realistic about the challenges, understanding that meaningful improvement in the brand performance will take some time. These sub-brands make up Jones New York each evolving to address more distinctive consumer needs and identify new opportunities. So, let’s just take a look at those.

Jones New York collection represents just under 20% of our full-year sportswear wholesale sale’s with the focus on career wear include Easy Care and Platinum suiting. In the last quarter I mentioned that we overshot fashion in this line when we dialed-up the fashion quotient and our consumers simply didn’t buy it. In the fourth quarter Jones New York collection continue to feel the impact of that mess, and as a result net sales for collection were down sharply in the fourth quarter and for the year.

Deep diagnostic research into the misstep also identified that competitive pricing was a factor, negatively impacting collections price value ratio. We are working diligently to fix these issues, rebalancing the mix of offerings in collection to bolster key items and focus fashion on fewer layering pieces, and we are resolving the competitive pricing issues, both we see as important steps to building greater predictability and profitability into the business.

For upcoming spring and fall 2013 lines already in the pipeline we’ve adjusted product and pricing based on proprietary and retailer consumer research, and as well as extensive retail feedback. We feel good about the work we’re doing to course correct on collection and we have confidence in the potential of the collection overall.

There’s a lot that’s working in Jones New York collection, strategic replenishment items like Easy Care and Platinum suiting have been a hit with consumers and retailers alike and continue to perform well in the fourth quarter. Replenishment items will form the bedrock of collection going forward, extending into a whole system of quintessential go to Career dressing that we anticipate will with great relevance redefine Jones New York for the modern women.

Signature is the largest component of Jones New York in the brands most casual offering. Momentum for Signature denim is building to help bolster the brand lead by Jones New York jeans with secret slimming features, an innovative destination product line that is both contemporizing and opening a new way into the brand. It's already 15% in the business and we plan to further capitalize on denim with new styles and skews in 2013 including a curvy silhouette to attract new customers as well as new twill bottoms featuring the slimming technology.

Jones New York sport is a gateway to the brand compromised of moderately priced active wear. And while sales were down slightly quarter to date on an annual basis this segment has continued to perform at levels that match and in some cases exceed last year. Like Signature we saw strength in denim in the fourth quarter and replenishment also performed well nearly doubling from 8% to 15% of sales. Building on the success we’ve seen in active, we expect this business will stabilize and grow with the introduction of a capsule collection of S-leisure items for fall 2013, potentially debuting in 400 doors.

In our own retail well comps were down overall, Platinum continued to perform well and our Orlando store is comping ahead of the previous year post remodel. The Orlando stores proved good learning as we elevate our retail offering for Jones New York and weigh additional remodels in the coming year. Anne Klein ended 2012 up nearly 6%, this brand is rich in IP and is carefully reinventing itself strategically diversifying and introducing new product in sportswear to help address continuing issues in that segment.

It's important to note that Anne Klein dresses continue to post strong momentum into the fourth quarter with both wholesale and retail sales up triple-digits. Updated designs which draw strongly from the branded D&A are driving traffic, sales and brand image, and we expect continued positive results with a strategic intensification of the Anne Klein, Leo Legacy collection this spring. Anne Klein footwear sales were also up in the fourth quarter, a strong indication of potential. And as a result Anne Klein footwear will expand from 131 to 180 doors about this spring.

Anne Klein handbag performance in the fourth quarter continue to provide important momentum and new distribution, demonstrating in stronger momentum, Anne Klein fourth quarter jewelry revenue more than doubled versus last year. Building upon it we will be expanding branded jewelry at Nordstroms, Belk and Bon-ton in 2013. In licensing Anne Klein watches is our largest and longest held domestic license and fourth quarter performance was very strong up 9% versus a year ago driven by the new design flourishes like crystal, ceramics and color supported by a focused marketing effort for the holidays.

The value of Anne Klein brand IP is also being realized on a global scale, including a significant increase in the international footwear sales in the fourth quarter and look for our highly anticipated worldwide eyewear license Marchon to launch in March. There’s still much work to do on the Anne Klein brand, but we see our progress to date and our consumer acceptance of our strategies to infuse the brand with new relevance and potential are very encouraging signs.

Easy Spirit’s focus on innovation particularly in product design and styling has made the brand newly relevant attracting new consumers and effectively broadening target appeal. The brand realized a turnaround in 2012 including fourth quarter retail gains across the board in wholesale, retain and international. As wholesale in fourth quarter Easy Spirit shipments were up 48% overall with corresponding sales of double-digit versus a year ago. At retail Easy Spirit athletic shoes were up significantly for the quarter driven by the e360 line. And internationally brand sales were up 45% versus last years particularly important new momentum for the brand as Europe and Asia are target geographies for an Easy Spirit rollout via Kurt Geiger.

Looking ahead to 2013, we’re outlining an investment strategy for marketing Easy Spirit with new branding being planned in test at select stores now, we believe that 2012 has demonstrated that this research and brand is ready to engage a wider audience and we feel confident that a strategic marketing program can speed it's growing popularity. Our turquoise denim brands also continued remarkable comeback stories in the fourth quarter. And my thanks to that team for truly impressive work last year to redirect these brands for growth. The glory of Anne Klein brand in 2012 made all the right moves investing in significant product improvements and scoring solid new distributions to stem the loss of distribution at JC Penney. In addition to outperforming the competition in every retailer we sell Gloria Vanderbilt became the number one brand in moderate to Belk.

In the fourth quarter the brand grew both sales and margin, net sales of 12% and gross margin expanding from 16% to more than 21% year-over-year. There’s no question that having to overcome product and distribution hurdles has rejuvenated the Gloria Vanderbilt brand. In this spring we will initiate an important expansion of the brand with the launch of Gloria Vanderbilt active and we’ll update more with you on that in the future.

l.e.i. is now fully engaged in a renewed partnership with Wal-Mart that is elevating the brand through product improvement, design and strategic partnership at Wal-Mart marketing. The brand grew net sales more than 60% in the fourth quarter building on strong third quarter momentum from basic replenishment programs in both junior’s and girl’s as well as high velocity items including junior sweaters and girls puffer jackets. We’re very excited about the potential of our unique partnership with Wal-Mart and anticipate continued growth and consumer enthusiasm for l.e.i. going forward.

And the Jessica Simpson brand, a consistently strong performer delivered a fourth quarter net sales increase of 56% versus a year-ago. Key drivers were color five-pocket bottoms and Jeanswear an expansion into tween and plus sizes. The plus size business will roll out to an additional 90 doors for spring 2013. Investment strategies for our key designer brands also showed significant impact in the fourth quarter. Most notably Stuart Weitzman has been on an exceptional growth trajectory since joining our portfolio with fourth quarter being its strongest quarter of the year.

Last quarter the brand achieved record revenues across all channels. A direct-to-consumer result’s from company owned Stuart Weitzman stores and our online store grew an impressive 31.5% a significant achievement and clear signal that Stuart Weitzman has strategically evolved into an important global gateway to luxury brand. Sophisticated marketing has been a critical component of Stuart Weitzman and the brand expansion engaging new consumer audiences and helping to drive the brands successful ecommerce business.

In the fourth quarter the brand launched its first international ecommerce site, an online regional strategy to launch ecommerce throughout Europe. The site is accessible through the brands global domain stuartweitzman.com and its EU and U.K. extensions. Now shoppers in more than 50 countries can experience a tailored selection of Stuart Weitzman styles that parallel the brands European stores in their language of choice, including English, French, Italian, Spanish and German. Marketing and PR activity is also supported at the local level in relevant languages. This has been a very important strategic initiative that makes Stuart Weitzman brand experience and styles even more accessible to an ever growing global audience.

Stuart Weitzman’s global retail presence will continue to expand in 2013 with at least eight international store openings currently planned through sub-licenses in China, India and Canada and a much anticipated Company owned flagship on Milan's famed Sant'Andrea. The Milan flagship will be a culturally and architecturally significant space designed by world renowned architect Zaha Hadid an incredible collaboration that reinforces the brands unique vision and energy.

Continuing to drive awareness and relevance is the brands much talked about global advertising campaign thoughtfully envisioned by creative director David Littman and then developed in conjunction with Mario Testino. While maintaining brand consistency the campaign refreshes seasonally generating strong word-of-mouth and online buzz that reached a whole new level with the recent announcement that Kate Moss is the new face of the brand. Creative will run in the U.S, Canada, Italy, France, Germany, Dubai and strategically throughout Asia.

Before we move on, I just want to mention that Stuart was honored in November with a prestigious Lifetime Achievement Award from Footwear News. He’s only the second person even to receive this award. Stuart was applauded for his vision and ability to bring brilliant design to women the world over these past 26 years. Congratulation’s to Stuart on those incredible honor. Kurt Geiger despite the economic challenges in Europe finished 2012 with fourth quarter revenue up 9% including a gain in the U.K. retail and a double digit gain in non-U.K. EU retail.

Fourth quarter development highlights abroad included the November launch of the newly expanded Selfridges men’s department which will soon be followed by the EU introduction of the Vince Camuto and Jessica Simpson lines in February, as well as new Geiger concessions at Karstadt, in Germany. State side we were very pleased last month to open Geiger’s third U.S. store on Bleecker St. here in New York City. The team has done a terrific job translating Bond St. to Bleecker St. just in time for New York Fashion Week.

And I encourage all of you to visit the store and look forward to updating you on performance in future calls. Looking ahead to 2013, we are working to extend our current Jones Group portfolio through the Kurt Geiger network. Notably Nine West and Easy Spirit as I mentioned earlier, and we are solidifying a U.S. wholesale expansion plan details of which I'll share with you in future updates.

Rachel Roy continues to grow in importance as a global media figure and tastemaker demonstrating increasingly influenced and important growth segments from use to luxury. While still in development mode we continue to be encouraged by what we see as this business expands. Fourth quarter the Rachel Roy brand grew in nearly every segment from sportswear to handbags, jewelry to footwear. This spring we’ll add 46 more doors for Rachel Roy handbags and we will expand doors for Rachel Roy designer footwear at Bloomingdales and SAKS Fifth Avenue.

Brian Atwood more than tripled the size of its business in 2012. In the fourth quarter B Brian Atwood continued strong momentum with sales up 50% versus last year due in part to a strategic expansion plan that added doors at Nordstrom, Neiman Marcus for the fourth quarter. The brands first jewelry collection debut for holiday 2012 and featured distinctive cuffs, bracelets and choker’s a promising new expansion opportunity that we plan to explore with subsequent collections.

Looking ahead to spring, handbags will be an important new addition in 2013, already available this month at Brian Atwood stores and online with wholesale to ship August 25. And Brain’s first collection of espadrilles for spring 2013 is showing strong early indicators including double-digit sell-through. All the positive indicators on this brand represent just the sort of momentum we want to take into the international launch of the brand later this year, a move we are enthusiastically supporting and I’m looking forward to updating you on progress in future calls.

Last quarter almost every facet of our corporate transformation was on view, including successes and challenges. To be sure there will be continued challenges moving into 2013, issues we are working tirelessly to counteract and overcome, and at the same time our determination and ability to remain focused on our growth strategy is being demonstrated with greater results every day. And as we effectively leverage our business model and drive positive change across the portfolio. Back to you, Wes.

Wesley R. Card

Well, thank you gentlemen. I’m pleased with our performance and the significant progress we made in the fourth quarter. As I noted earlier our strongest segments Footwear and Accessories and Jeanswear as well as our international businesses are on track for continued improvements in 2013. I believe the strategies that we discussed in sportswear and direct retail is sound and we would begin to see improvement as we move through the year especially in the back half. I continue to have great confidence that we’ll ultimately succeed in achieving our mission and in generating, improving operating results.

With that operator, we’ll now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from David Glick with Buckingham Research.

David Glick - Buckingham Research Group

John, just some clarification’s on your outlook. Q1, you said the gross margin within 120 basis points of last year. I presume that means down 120? I just wanted to clarify that, and then I have a second question.

John T. McClain

Yes, David down there is – the two big factors driving it is mix. As we have the increases in the volume and some of the lower margin businesses and the net. We think we’ll see a net increase in cost over ability to raise prices two times when it is in the first quarter.

David Glick - Buckingham Research Group

Okay, thanks. And then just in terms of your annual outlook, if you look at where you were a year ago and how you ended-up performing, it looks like – roughly speaking, you came in at the low-end of revenues and gross margin. But did an outstanding job managing the expense line coming in below your guidance by – I think it was like $35 million, $40 million. As you look at how you're planning to – your budgets for 2013, I mean, how much flexibility do you have on that line since you managed it so tightly in 2012? Are you stepping up marketing? Are you making some commitments that are not quite as easy to pull back on in 2013 as they were in 2012?

John T. McClain

Well, I think as you start the year, the first half of the year you’re more committed obviously than you are on the back half of the year, and certain of the SG&A items you adjust as you go on based upon how you’re doing top line, right? So, there may be certain investments that you would make later in the year if things are strong as you go through the year. So, when we make the estimate of SG&A we take into account; there’s a relationship between the top-end and the bottom of the P&L. So, if things were to contract as you go through the year then we would of course look for opportunities to pull back, change maybe defer expenses in the later half of the year.

David Glick - Buckingham Research Group

Okay. And can you be specific in terms of your marketing spend this year versus last, either in dollars or percent of sales?

John T. McClain

Yeah, I think the thing that we did this year that we concentrated on was while we’re probably up a little bit, we really looked at how we were spending the money. And I think that, that’s going to continue this year if the top-line comes through as we forecast we would be up a little bit in marketing, but we're really going to be very careful in terms of how we spend that money and make sure we’re getting the biggest bang for our buck.

David Glick - Buckingham Research Group

Okay, great. And then last question, the gross margin obviously the compares in the first half tougher. Should we think -- if you’re goal is to exceed last year, obviously that implies more of a second half waiting. Is that how we should think about it, perhaps down in the first half, up in the second half?

John T. McClain

Yeah, the first half last year, the margins were pretty strong in a first couple of quarters and then we had some challenges in the back and I think it's the converse this year. So, as we look and we go through in order for us to get to that level of flattish that yeah we would expect to see increases in the back half against challenges in the first.

David Glick - Buckingham Research Group

Great. Thank you very much and good luck.

John T. McClain

Thanks.

Operator

Thank you. The next question comes from Bob Drbul from Barclays.

Robert Drbul - Barclays Capital

Hi, good morning.

John T. McClain

Hi, Bob.

Wesley R. Card

Good morning, Bob.

Robert Drbul - Barclays Capital

Hi, John. The first question I have is, on the retail segment, when you look at sort of the ‘12 performance, I think you talked about 50 store closings for ’13. Wes, can you just give us your updated thoughts on the path to breakeven EBIT for the segment and sort of, is it attainable or are there any options for this business at all for you?

Wesley R. Card

We definitely think they’re attainable. It's taken longer than we had expected. There’s no question about that. But I think the work that’s been done now particularly on the assortments gives us a lot of hope that we’ll get much better productivity out of these doors. When we look at the mix, the Nine West outlets are profitable in good shape. The Jones outlets were also reflective with the same product issues that we had as we came through the back half where we dialed-up the fashion too much. We’ve got a really good plan to re-assort those doors. And then Easy Spirit outlet is showing some good progress.

So, we remain focused on it. We keep cutting down doors. We’re transitioning doors with appropriate to new concepts such as Kurt Geiger, Stuart Weitzman. We’ve had some good success there and we just continue to work a way at this. We’re getting it down to a manageable number as well. So, if we ever decide that a concept is not valid in the long-term, I think we’re at a manageable spot to take some more aggressive action. But I think we’ll see -- we’ll hopefully as we move through this year, start to see some progress each quarter in the operating results from this business. Scott Bowman who came in to run this business is a very seasoned retail executive. And I think we’re really pleased with the work that he has been done, we’re obviously all very much actively involved in it.

And the other thing that’s a real bright star within that is the internet business where we’re really emphasizing that and seen some great results as we entered this year with opening up the stock levels to all aspects of our business so that we have systems that connect retail stores with the internet stock with our wholesale stock, and we’ve seen some really good results from – really greasing those avenues to get to use the inventory to it's best use. So it’s a long – turning a retail chain is not easy. It’s longer than I thought it was going to take us, but I feel like we’re on a better track now as we enter the year.

Robert Drbul - Barclays Capital

Okay, great. And I just have a few questions for Mr. McClain. One the share repurchase, now the Weitzman payments are complete, would you guys be more willing to get more aggressive at the share repurchase program at current prices and then the other two question I have is, can you elaborate a little bit on the increase and the expectations for D&A and CapEx sort of help us understand what's happening on those two segments – line items?

John T. McClain

Sure. On D&A, Bob I think if you look at the financial statements, one of the thing you see the, when I quote D&A, I include the two items which are in the cash flow start-up with amortization and restricted stock and depreciation of the amortization. So, in 2012 that’s roughly $110 million. I think I estimated it somewhere around $105 million for 2013, so it's actually down a little bit. But you got to put those two items together, that’s how I estimate that number.

And then on CapEx we did about $77 million this year, I said somewhere between $90 million to $100 million in 2013. What's kind of happened at the beginning of the year when we have our plans and expectations, we’ve been – my guidance has been a little higher and it seemed to have come down throughout the course of the year, each of the last couple of years as we continue to review projects and make decisions sometimes we push out. So, I tend to be a little higher at the initial estimate as it works down, but the things that we see are some potential spend in systems especially in the retail division as we look to this year would be the main year-over-year increase.

And then on shares, we don’t comment on the amount of share repurchase. We have said that, we believe that’s the best use of our free cash. We bought $44 million this year, about $78 million last year. If we hit the goal of operating cash flow about $150 million and if we spend somewhere in that 90-ish or so of CapEx that leaves about $60 million and we have about $15 million or $16 million or so in dividend. So, that would be the free cash flow and right now we believe that’s a good use for our funds.

Robert Drbul - Barclays Capital

Great. Thank you very much.

Richard Dickson

Thank you, Robert.

Operator

Thank you. And the next question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning. I have a couple of questions. I want to know what – if you could be or give a little more detail on what you're doing to rejuvenate the Jones Signature business? And provide, I guess, a little bit more of a sexy factor to both the merchandise and the marketing, kind of – I know you can’t go overly from a sexy perspective, but it just seems like the merchandise still has a dowdy feel to it. And then, I also wondered, could denim become 20% to 25% of that business? Is that too high? And are you seeing a change in your tops business with the strong denims business? And then I have a follow-up.

Richard Dickson

Okay, Jennifer. Hi, it's Richard.

Jennifer Black - Jennifer Black & Associates

Hi, Richard.

Richard Dickson

Hi. It's a great question and I think to some extent the balance of the overall transformation of Jones New York in general is to make sure as best as we can to maintain the loyal and great relationship that we have with our consumer base today, while we continue to outreach and introduce to a new customer tomorrow. That’s ultimately the sort of balancing act that we have. I think for the most part in Signature we were doing a really good job of that, in fact that segment performs relatively okay for the last year and we have continued anticipation that, that segment will trend well for this year; specifically because of the denim launch.

The denim launch was very successful; had a terrific sell-through, generated substantial retail sale. As I mentioned it’s going to be about 15% of our business. The messaging that we had in context of secret slimming features really spoke directly to the emotional connection that this consumer has with this particular category. And based on that success we’re introducing new styles, as again I mentioned curvy silhouette and we anticipate that, that penetration will actually increase to 20% of the business. It will in fact also as we merchandise it, be integrated with various different looks from our career collection so today a lot of people wear jeans on Fridays to work and places they go with those jeans. So part of our new merchandising methodology will be to feature those jeans as casual work wear as well as casual wear. As we look at investment spend in presentation, that’s utmost important to us going forward and we continue to delicately adjust our design, again making sure that we maintain a relationship with our current consumer base, while attracting a new one as well.

Jennifer Black - Jennifer Black & Associates

Okay, great. And then on Collection, I know your – the fashion had been too much for that customer and I wondered how you’re balancing that and with the customer who wants more simple styling yet you want a fashion customer there, its kind of – it seems like a difficult balance and if you could remind us who your target customer is and do you think real estate in the department store is holding you back or do you think its all merchandise issue?

Richard Dickson

Well, first just to reiterate the collection piece of our business is that career occasion dressing component and again we have had a very consistent replenishment business here with Easy Care and Platinum Suiting, which continue to perform well and represent a nice percentage of the business. Based on the success of Platinum Suiting and Easy Care, we plan on extending that concept into a broader based career wear system for dressing, moving into the fall and essentially lessening our dependence on the fashion piece of the historical business with collection.

So, to be more specific, whereas fashion was approximately 65% of the business of collection that will now go down to about 40% and replenishment and classic career components and suitings will represent 60% of the business. That is a big adjustment in the context of this piece of the business. We believe based on sell-through, retailer research and consumer research that this is the right direction for us and from a consumer target perspective, the audience in collection is really 45 plus. It’s the younger version or younger segment within The Jones New York world that really appeals to that career, American classic stylish woman who is looking for great wear to work options and a system of dressing.

We believe also some of the adjustments that we made in key classification will help broaden the business and also in fact represent possible expanded distribution opportunities for collection where collection has been limited to a certain group of department stores we believe the new approach that we’re taking will be a business that could be expanded through other points of distribution.

Jennifer Black - Jennifer Black & Associates

Okay, great. And I just have one more question and that is at some point I don’t know Wes, if this is for you, do you plan on breaking out margins and sales for each business, so that you can really show investors what the real potential of your Company is and how you’re going to unlock value for your shareholders?

Wesley R. Card

Yeah, the first step we took was to report the brand revenues today in the slides. I think at some point we can consider that the, there is a off a lot of allocations that go into reporting brand earnings, because in the businesses as we report them by segment are much clear and much more tied to the actual results of these business. So, something we’re looking at as we move forward and we will consider it as we get more clarity and comfort with being have numbers that we can report consistently and accurately.

Jennifer Black - Jennifer Black & Associates

Can you say, for example, what the operating margin for Stuart Weitzman is?

Wesley R. Card

We don’t report that separately. So, if you – it’s a component of various segments of our business.

Jennifer Black - Jennifer Black & Associates

No, I realize that. Okay, I was just hoping to get a little more color. Okay, thank you. Good luck.

Wesley R. Card

Thank you.

Operator

Thank you. Next question comes from Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

Hi, everybody.

Wesley R. Card

Good morning.

Richard Dickson

Good morning.

Janet Kloppenburg - JJK Research

I have a question for all of you. First of all John, if you could talk a little bit, I think you mentioned some expense shift out of fourth quarter into first quarter. If you could talk to us a little bit about that, I was curious on the share count John, because it looks like its – what’s going to be relatively flat yet, I think you still have an authorization program in place. So, maybe some comments there. Wes, I’d love for you to talk about what steps are being put in place on a retail side to stem the losses there? And if we – if you want us to model losses coming down there this year or if it sounds like you do because of merchandising repositioning, but if you could talk about that just a little bit and Richard maybe just some an elaboration more on The Jones line and the outlook for the business by quarter to firm. My sense is maybe the back half you will feel like the fashion missteps will be cleared up by the back half and that this balance between fashion and basics will be more in place at that time, but perhaps there is some timing differences that I’m not aware of? Thank you.

Wesley R. Card

Yeah, maybe we start with retail and then Richard could talk about Jones and John can come back to the share count. I think I went through that in a previous question, but we’re looking at all elements of the retail businesses, Richard talked about number of the initiatives in Nine West …

Janet Kloppenburg - JJK Research

Right.

Wesley R. Card

…. Including the reformatting of the store which we’re seeing some excellent results. The assortments in Nine West we examined very carefully in terms of mix and balance of seasonal items and going to narrow our SKU counts with more depth and styling, also intensifying on the handbag business we’re seeing some good initial results and I think as we go through the year we will get some better clarity on the assortments in the stores. Nine West outlets are doing fine and Jones is a reflection of the product and as quickly as we get into the new more – our customers are telling us, they’re looking for more basic items with enough fashion to compliment those that styling and we’ve been as Richard enumerated we’ve been really examining this Jones customer did a lot of research with consumers in the fourth quarter and focus groups and analyzing data from our department store customers, I think we got a really good handle on what that – what she is looking for, who she is and we’re going to be and we can see good results coming from those type items in the existing lines. I think we had a really aggressive and good track there to move on and it relates also to our outlets for us. So we’re in a tough turnaround here in these doors, but we’re making hopefully we’re going to make some slow but steady progress as we move through the year and in the back half it will be better than the first. I think John ….

Janet Kloppenburg - JJK Research

Okay, great. That’s what I wanted to just get an idea of the timing you wanted us to be focused on Wes.

Wesley R. Card

I think John has put out the guidance on that segment. Richard you want to – on Jones I think the same applies on Jones. We have reacted somewhat to spring, in the early more towards the backend of the first quarter and into the second quarter and made some really quick adjustments off what we saw happening in fall, so we’re hopeful that some of the initiatives including adjusting prices, we were just competitively off on prices. There is just no doubt about it at this point and we had to make those adjustments, we’re working diligently in the backend of the business to try to protect margin in as best we can with the sourcing issues, fabric selections, but we made those adjustments seeing some very early, but good results out of that in terms of pricing. So a lot we’re hopeful as we move through the year and little bit end of first quarter, second quarter and then fourth – third and fourth quarters we introduced – really strong basics element. And I would invite any analysts that want to come and see it, we will it in the showroom for customers, we’ve already been previewing and discussing at length with customers. So we think we’re on it and really understand what this woman is looking for and the niche that we need to fill. John you want to …

Janet Kloppenburg - JJK Research

Okay, great. Thank you. John, just two questions on expense shift and the share count, yeah.

John T. McClain

Yeah, the expense shift was small. What I had said in the comments was the tight control on expenses and all of businesses was the big part of the difference. There was a couple of million of shift from ’12 into ’13 and a small reduction in variable related expenses. And on the shares, as we look out, we do not project any share repurchases, so the reason you’re not seeing any movement in the share count is because of that.

Janet Kloppenburg - JJK Research

And John just – can you reiterate your gross margin guidance for the year, please?

John T. McClain

I said we’re hoping to stay flat …

Janet Kloppenburg - JJK Research

To stay flat, okay.

John T. McClain

… which we’re going to work towards.

Janet Kloppenburg - JJK Research

Thanks very much and good luck.

Wesley R. Card

Okay. Thank you. We had time for one more question.

Operator

Okay, Wes. Thank you. And that comes from Omar Saad with ISI Group.

Wesley R. Card

Hi, Omar.

Omar Saad - ISI Group Inc.

Hi. Thanks. Good morning. I appreciate all the information and color. It’s really helpful. Wanted to focus a little bit on the Stuart Weitzman business, that’s kind of we look at it over the last couple of years and how you’re talking about on this call, its really kind of emerging as I don’t know Crown jewel is the right word, but with the opening of flagship in Europe, can you kind of talk about how you’re thinking about this brand from bigger picture categories and maybe it has the license with consumers to go into obviously there is – you see a more of a global opportunity here. Just trying to get a sense for where – how this brand could look in a few years or kind of what your hopes and dreams are for it?

Richard Dickson

This is Richard. Thank you for the comment on Stuart. We are very excited about the growth trajectory of Stuart’s business and frankly what we’re really doing is concentrating on doing what Stuart does best. At this point improving some of the looks of our stores to keep the momentum going, expanding doors throughout international, key flagship locations in the Company owned state and then through great partnerships throughout the world. We have been quietly introducing handbag collections within our own stores to try and start that category momentum. And we’ve had some great success there and we continue to anticipate the handbag business could be a great opportunity for Stuart. And we’re also going to be launching in our own stores some jewelry collections, which is another extension of the Stuart Weitzman brand. Our intension is also to make sure that as we launch these new categories, we do them strategically and carefully within our own four walls. Test and roll and make sure that we have the success and momentum that would then give us the encouragement and conviction to take it into a wholesale strategy. And once we do feel like we’ve got the right look and the right item, then of course we will have a rollout plan of those categories. But all in all we’re treating Stuart as our jewel, if you will, and really carefully managing that brand expansion throughout the world, increasing our marketing efforts to maintain and grow its relevance and we anticipate some great future updates on the Stuart brand.

Omar Saad - ISI Group Inc.

Understood, yeah. Thank you. That’s helpful, Richard. And then, there is some comments made in the prepared remarks kind of the some aggressive, more aggressive competitive pricing going on in the marketplace, kind of what your baseline assumptions for the competitive landscape? Do you think its kind of stays at this level, longer term and just this is – build that into your operating assumptions and really try to invest in the brands and compete on that level or do you see some shakeout happening potentially in the alleviation of kind of the pricing, competitive pricing landscape at some point?

Richard Dickson

I think as Wes mentioned in the beginning of this call, it’s a promotional state of mind that the consumers entrusted in, prices matter, price value equation matters and to some extend depending on the category in the brand we either were priced right or we were over priced and in the case of Jones we’ve isolated that issue and we’re adjusting our prices to be more competitive. I don’t think that the promotional landscape and/or the consumer perception of value is going to change certainly in the short-term. So, it’s ever important that we carefully look at every category and every item to make sure its priced right. Ultimately we know if the product is the right product and designed right with the right price itself. And that’s really the equation that we look at everyday. We always look to the left and right in terms of the competitive landscape, but ultimately making sure that we keep the integrity of our attributes of every brand and price them right to sell is the name of the game, and we will continue to do that.

Wesley R. Card

Yeah, I think Omar, the only – the major area for price reduction where we were overpriced competitively is in Jones New York specifically. I think our footwear brands, our Jeanswear and the other brands were not – were right in the right zone. I think we really got caught in Jones with competitors coming in lower and it hurt us. So we could see that in the results. So, I think we’re – that’s the one area to adjust. There is other areas where prices can come up and Stuart Weitzman has great value and we look – they priced their lines really based on value and what they perceive they can get for the brand, especially with the new marketing. So, I think its really more in Jones, I think – but we know the consumer is focused on value and I think as we go through the year, we’re going to continue to see that and the strength that you see in the value players really validates that. But we appreciate the question.

Omar Saad - ISI Group Inc.

Okay. Again, appreciate all the info. Thank you.

Wesley R. Card

Okay. Operator, we’re going to conclude at this point.

Operator

Okay.

Wesley R. Card

Okay. Well, thank you all for your interest and we look forward to continuing to update you as we move through 2013. Thank you.

Operator

Thank you. The conference is now concluded. Thanks for attending today’s presentation. You may disconnect your lines. Have a nice day.

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