Jones Apparel Group, Inc. Q4 2008 Earnings Call Transcript

Jones Apparel Group, Inc. (JNY)

Q4 2008 Earnings Call

February 11, 2009 8:30 am ET

Executives

Wesley Card – President & CEO

John McClain – CFO

Analysts

Robert Drbul – Barclays Capital

Chi Lee – Morgan Stanley

Robert Ohmes – Banc of America

Todd Slater – Lazard Capital Markets

David Glick – Buckingham Research

Ben Rowbotham – Goldman Sachs

Jennifer Black - Jennifer Black & Associates

Omar Saad – Credit Suisse

Dana Telsey – Telsey Advisory Group

Emily Shanks – Barclays Capital

Presentation

Operator

Welcome to the Jones Apparel Group 2008 fourth quarter and full year earnings conference call. (Operator Instructions) 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.

These statements are based on current expectations of 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, 2007 including but not limited to the statement regarding forward-looking disclosure and item 1A Risk Factors therein and to its other filings with the Securities and Exchange Commission. The company does not undertake to publically 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 supplemental slides are available on the company’s website for download. I will now like to turn the conference over to Wesley Card, President, and CEO; please go ahead sir.

Wesley Card

Good morning everybody, welcome to this morning’s conference call to review fourth quarter 2008 results and the current outlook. Also on the call today will be John McClain, the company’s CFO.

Results we reported this morning were generally in line with the revised guidance that we issued several weeks ago and as you know the overriding issues that faced us last quarter were the overall economic climate and the resulting high promotional levels throughout most retail channels.

The consumer remains very cautious which is reflective of the historic low level of consumer confidence and holiday sales levels were down as a result. Virtually all retailers concentrated on promoting and moving inventory and we did the same thing in our own chain of retail stores.

On the positive side its evident that unit sell throughs were up significantly. But this is a good thing as you would understand and its essential that inventories are cleared and remain under control in this environment. Just to refresh your memory on the industry perspective for holiday, same store sales for retailers overall were down about 2.2%, the discount channel was up and as you know that was driven by a positive comp from Wal-Mart who were up 2.4% in the holiday period.

Department stores dropped by about 6.8% and of course as widely reported the luxury segment took the biggest hit with same store sales dropping by 17.4%. Keeping in mind that January is typically a weak month, and highly promotional as a clearance period, comps reported last week showed a similar pattern with the discount channel up 0.9% again supported by Wal-Mart who were up 2.1% and department stores overall were down 11.1% on a comp basis.

We look at our own vertical chain of retail stores, we registered a 6.1% decline in same store sales for the fourth quarter, and we were down 6.4% for January, 2009. Its also interesting just to point out for the full year we were down 4.3% in our own chain which I think compares pretty favorably to many of our competitors operating these type doors.

We’ll go through more detail on the concepts later in the call. The overall promotional levels across wholesale and retail resulted in increased markdown support both for our wholesale customers and we had a drop in quarter over quarter gross margin in our retail segment of 220 basis points.

All things considered, we were pretty satisfied that we came in with results very close to the initial quarterly guidance that we had given last October. Although from a balance sheet perspective we were more then pleased with the year-end results. We exceeded the cash on hand targets by about $35 million as well as last year’s balance, we lowered our inventory, we had a more current aging of goods at the end of the year, and John’s going to go through more details on that later in his section.

Before I turn it over to John, let me just address a few of the actions we’ve taken to protect our stakeholders and ensure that we have the financial flexibility to operate in this environment. First our dividend, the Board considered our dividend long and hard. We determined that continuing to pay a dividend at the previous level would reduce our flexibility. We need to manage through these tough times and in setting the rate, the new dividend rate, the Board considered just those factors, the economic climate, its impact on us in particular, the current equity valuation of the company and the industry and basically brought our dividend in line with prevailing dividend policy.

Second at the tail end of the year and John will go through the details, we completed the $600 million amended and restated bank credit facility. This gave and gives us some breathing room and our operations continue to generate positive cash flow. As noted we ended the quarter with a healthy cash position and no drawings under this new revised facility.

And finally we took some pretty strong cost reduction actions. Last month we announced additional actions to align our structure with current demand levels. We took $33 million out of expenses, lowered our capital spending by about $30 million down to a level of $40 million to $45 million and we closed several small and underperforming labels. John is going to go through some more detail on that as well.

We continue to closely monitor the requirements of our business and surgically and very deliberately are adjusting spending levels further as we go through the year. Before we get to the financial section I really would like to add that we’ve got many valued and hard working associates around this company and they come into work every day, they work very hard and the decision to reduce our staff and take other actions impacting on them, really was not easy.

This has been a very difficult time for the industry and I am extremely gratified with the way and manner in which the employees have maintained their positive attitudes. They continue to be committed to delivering quality product with outstanding execution. With that overview, I’ll turn the call over to John now to go through the financial details.

John McClain

Thanks Wes, good morning everybody. You’ll see in today’s press release the description of the large and unusual items effecting this quarter’s GAAP results. I’ll address this first and I’ll also discuss the impact of our cost saving initiatives.

On a GAAP basis for the fourth quarter we reported a net loss from continuing operations of $823 million and a loss per share of $10.08 as compared with a net loss from continuing operations of $90 million and a loss per share of $1.06 last year.

The 2008 fourth quarter results include pre-tax noncash impairment charges of $813 million related to the impairment of goodwill reported in the company’s footwear and accessory segment, $25 million related to the impairment of certain trademarks also tied to that business. With this impairment charge we faced an issue similar to that of many other companies regarding impairment charges.

Market compression being what it is many companies that have acquired businesses are being required to record these noncash impairment charges. Though large in amount this charge has had little impact on the ongoing operations of the company and has no impact on our debt or on our revolving credit agreements.

The 2007 results include pre-tax noncash impairment charges of $78 million related to the impairment of goodwill recorded in the company’s jeanswear segment and that write-off was related to the Moderate business that largely exited by the end of 2007. We also recorded $8 million of impairment charges relating to other trademarks.

Throughout the remainder of my discussion all amounts relate to adjusted results from continuing operations unless otherwise noted. Adjusted results exclude the impact of the aforementioned impairment charges and other items not considered part of our ongoing operations.

Excluding these items adjusted EPS from continuing operations was a loss of $0.04 per share for the fourth quarter compared with per share earnings of $0.09 in the prior year. We’ve all been hearing for months now about the current state of the economy and the impact it has had on retail spending. Slowing economy combined with consumer confidence at an all time low, unemployment at levels not seen for almost 16 years, and a lack of stable and consistent credit availability is understandably had a profound impact on the retail environment during the fourth quarter, for our department store and specialty store customers and for our own chain of retail stores.

In response retailers have been tightening their inventory buys, and relying on promotional efforts to move goods. As you would expect our results for the quarter have also been impacted by these factors. For the fourth quarter total company net revenues were $848 million flat compared with the prior year’s level. It should be noted that the comparable 2007 quarter includes revenue related to the Moderate sportswear lines we were exiting during that period.

This impacts year-over-year comparison by approximately $28 million and excluding those lines revenues increased 3.5%. Total company operating income was $2 million versus $12 million last year and the operating margin was 0.2% compared with 1.4%. Extraordinary level of markdowns required to move product through the wholesale channel, the high level of promotional efforts required at our own stores were the major items impacting operating income and operating margins.

Additionally the quarter was impacted by approximately $1 million related to customer bankruptcies. Before I discuss the segment results I’ll highlight some of the balance sheet and cash flow items. Accounts receivable were $370 million at the end of the fourth quarter versus $337 million in the prior year, an increase of 10%. This increase is being driven largely by our expanded relationship with Wal-Mart and the timing of shipments to them.

Accounts receivable turn was 7.2x for the year which was consistent with last quarter and compared with 7.4x last year. We continue to monitor our receivables closely and our portfolio remains very healthy from an aging perspective.

Inventory was $509 million at the end of the quarter versus $524 million in the prior year, a $15 million decrease, or 2.9%. As we have been mentioning for some time now we remain focused on maintaining clean inventories and at year-end the quality of our inventories are much improved from the prior year.

The amount of prior season goods has decreased by over $35 million this year-end compared to last year-end. We have cleared all the merchandise relating to the exit in the Moderate lines and have made a concerted effort to sell off any excess goods earlier. Inventories did rise in our jeanswear businesses as we built spring inventories for shipment to Wal-Mart.

Inventory turn for the year improved slightly to 4.9x compared with 4.8x last year demonstrating our progress in this area. We generated $176 million of cash from continuing operations for the year which is a $56 million improvement over the prior year’s period where generated $120 million of cash.

This improvement was primarily due to better working capital management, the receipt of a tax refund and the absence of the final payment related to a transition service agreement with Polo Jeans Company in 2007 partially offset by lower earnings. There were no share repurchases during the quarter.

Total debt was $782 million which is flat with the prior year and our revolver remains undrawn. As we reported in December we amended our facility since our last earnings call. Under the amendment we reduced capacity to $600 million reflecting current business needs and amended covenants to provide us with greater operating flexibility.

We ended the quarter with approximately $338 million of cash. We forecasted to have approximately $300 million of cash at year-end and we were able to exceed that amount through focused working capital management.

While we are comfortable with where we are from a balance sheet and operations perspective we have taken actions to align our cost structure with anticipated demand levels and to preserve our financial flexibility. These actions are now complete and we expect that they will yield $33 million in annual SG&A savings focused on three areas each of which represents roughly a third of the savings.

Personnel reductions representing approximately 185 positions, or 4% of the wholesale and corporate full time workforce, elimination of certain unprofitable divisions none of which are significant divisions, and include [Hold], Jeanstar, [Grain Girl], Code of Ethics, and the high end Anne Klein footwear business Anne Klein New York, which represents just a small portion of the overall Anne Klein footwear business, and a reduction in discretionary spending.

In addition to these actions which I mentioned with save approximately $33 million annually, the company has eliminated merit increases for the year which will avoid approximately $17 million of expense increases.

All of these initiatives were executed in a thoughtful way so as not to significantly effect any of our brands or the distribution channels through which we sell. We continue as we always have to look for other opportunities to become more cost efficient and will always seize those opportunities. We have remained focused on anticipated business volumes and will again if necessary align our cost structure with that demand level.

Also as a part of our budgeting process we have carefully reviewed our capital spending plans for 2009 and are limiting projects to those with high levels of return on investment for those projects that are essential. We estimate capital expenditures for such projects to be in the range of $40 to $45 million which is down from approximately $71 million in 2008.

The amount of $40 to $45 million in 2009 is split among technology, retail stores which includes both new retail outlet stores and remodels of existing retail stores and all other which includes distribution center, showrooms, and office space. Over the past few years we have invested heavily in technology and in updating and remodeling our retail stores which gives us the flexibility to reduce our spending at this time.

In addition at its meeting yesterday the Board approved the quarterly dividend of $0.05 per share and this level of quarterly dividend will conserve approximately $30 million of cash annually. Now I’d like to discuss the fourth quarter 2008 results for each of our segments and this information is included in the slides we posted to our website today.

For the quarter wholesale better apparel revenues were $258 million compared with $241 million last year. Sportswear revenues for Jones New York Signature and Jones Sport increased versus last year were somewhat offset by decreases at Nine West and Jones Collection. Suits and dresses revenue performance met our expectations with continued increases in both Evan-Picone suits and dresses.

Segment operating profit margin was 2.8% this year compared with 0.2% last year. The improved results were driven by an increase in revenue volumes with better operating leverage and mix of goods shipped. In wholesale jeanwear, jeanswear revenues were $203 million compared with $188 million last year. As mentioned in my overview the year-over-year comparison is impacted by our exit of the Moderate sportswear lines and excluding this impact of approximately $28 million revenue increased 27% which was primarily due to increases in our l.e.i. brand through the Wal-Mart initiative.

Segment operating profit margin was 2.5% this year compared with a loss of 2.7% last year. The 2008 result also includes about $1 million in charges related to bankruptcy filings. Excluding those bankruptcy charges operating profit margin was 3% compared with that loss of 2.7% last year, a significant improvement.

This improvement is primarily due to the absence of the lower margin Moderate sportswear lines, higher margins on the mix of goods shipped and few goods requiring liquidation. In wholesale footwear and accessories revenues were $219 million versus $243 million last year reflecting decreases in footwear and in jewelry that were partially offset by increases in the sale of handbags, and in sales to our international licensees.

Segment operating profit margin was 0.4% this year compared with 7.1% last year driven primarily by reduced volumes, the highly promotional environment in the wholesale footwear channel, the impact of inventory liquidations as we continued to keep our inventory very clean, and the impact of rising costs.

In our chain of retail stores, revenues were $201 million compared with $212 million last year. Same store sales in our footwear locations decreased 4%, same store sales in apparel decreased 11.3% resulting in an overall 6.1% decline.

Our sales in October and November weakened as the economic news continued to get worse and consumer confidence levels continued to drop. In response to these conditions we were very aggressive with promotions in December and saw a comparable sales decline by less then 1% in December but obviously the cost of the margin.

Segment operating margin for the quarter was negative 6.7% versus negative 1.5% last year reflecting the overall highly promotional retail environment I just mentioned. On a positive note our ecommerce businesses that were revamped and expanded during the year generated improved results quarter over quarter.

Total online sales were approximately $12 million for the quarter compared with approximately $6.5 million last year and totaled $32 million for the year versus $21 million last year. We continue to see the value we are creating with our investment in the ecommerce websites for our brands.

At this time each year we typically provide you with our EPS guidance for the current year, however with the distress in the markets and the impact its having on the consumer and retailers, we believe it would be very difficult to predict with precision what will take place over the next year and therefore any prediction would have limited value.

With this being the case we believe it is prudent for us to forego EPS guidance at this time but rather to focus on certain indicators of performance that should be somewhat more predictable even during these times. Based on the markets we’ve been in so far and our current forecast we believe the total company net revenue should range from $3.3 to approximately $3.55 billion and on a segment basis we forecast revenue in the following ranges.

On wholesale better apparel of $1.05 billion to $1.125 billion, jeanswear of $750 to $800 million, footwear and accessories of $975 million to $1.05 billion, and retail of $675 million to $725 million reflecting projected comparable store sales for 2009 in the range of negative 5% flat compared with the 2008 results of negative 4%.

As you are well aware these comparable store sales numbers are extremely difficult to forecast. Considering the deteriorating economic conditions that took place in the back half of 2008 we expect the first half comparisons to be substantially more difficult then those of the second half. First quarter will be especially challenging with revenues expected to be down by between 11% to 14%.

Additionally for the full year 2009 we are forecasting interest expense of approximately $51 million, depreciation and amortization expense of approximately $93 million, effective tax rate of approximately 35%, and weighted average shares outstanding for the full year of approximately 84 million.

From a cash perspective our target for operating cash flow is to match the 2008 level of approximately $175 million. Operating earnings are difficult to forecast but we will work hard to conserve cash and tight inventory and spending controls. Factoring in capital expenditures of $40 to $45 million and quarterly dividends of $0.05 per share which totals $17 million for the year the resulting free cash for the year is in excess of $100 million.

This free cash plus the cash on hand from year end will enable us to repay the $250 million of debt that comes due in November and to do so without the use of our bank lines. That concludes my comments and I’ll turn the call back over to Wesley.

Wesley Card

Thanks John, I guess despite the weak environment I am very pleased with the progress we’ve made in focusing back on the core of our businesses. And even now we continue to push forward and invest in select projects to expand on that core although we’re moving at a much more conservative pace until we see the beginnings of a recovery.

As I go through the various segments I’ll try to highlight and emphasize some of those actions and initiatives that we currently have in the works. First I’m going to start with wholesale apparel, and as widely reported women’s sportswear was one of the most challenging businesses throughout 2008.

As I noted last fall consumers are very much in a buy now wear now mode and more then ever buying only items they truly need. Its clear that the sportswear area is becoming increasingly item driven as a result and of course especially during the holiday gift giving period. As a result we have been very focused on adjusting the merchandise assortments to reflect this trend and believe that tighter and more closely edited assortments will prevail in 2009.

Sportswear, suit and dress sales were impacted by the heavy promotions and although the comps were down inventories remained in line and we entered the year 2009 in relatively good shape at retail. Next month we open fall 2009 to our customers, we’ll get a first read on back half business at that time and we believe the assortments and styling are very strong in our key brands, Jones New York, Anne Klein and Nine West which has recently been newly rejuvenated under [Fred Allard’s] direction, this is the first full line that he’s done that we’ll be showing to customers.

We also believe we are very well positioned in suits and dresses. Those are important businesses and particularly in this climate we’ve seen some strength in the suit business which is typical in recessionary times. The Jones New York ecommerce site came up live last September, we’re very pleased with the sales momentum to date as that builds.

Lloyd Boston our fashion consultant introduces this site to visitors and we recently added on to the site a very creative style miles program. I really encourage you to look at that on jny.com, it’s a very innovative program. We also use Lloyd in store many events as part of our marketing program.

Finally in sportswear we’re close to announcing new initiatives for Rachel Roy which will bring her outstanding sense of style and the modern designs to a much broader audience across multiple categories. We expect to be launching a line for sales as early as fall 2009. No extra details to report today but stay tuned on this.

As in women’s sportswear, footwear and accessories were also very promotionally driven in the fourth quarter as consumer spending slowed. Handbags and costume jewelry both experienced difficult selling seasons and it appears that the strong handbag cycle we’ve been in for the past several years has slowed, particularly at the higher end price points. So the business was very promotional as we came through fourth quarter.

Contrasting against the better and higher end handbag business we did achieve some excellent selling of handbags in the mid-tier channel in Q4. Boots which are obviously strong winter items carry higher price points were also impacted but yet we did a good job clearing boot inventory, sales were strong but they were really driven by price promotions and that coupled with the cold weather, boot inventories cleared very well but at lower average unit retail prices.

Next month we will be seeing the New Balance for Nine West fashion footwear in our top doors. This product can be seen at ninewest.com and the preorder shop is open. As you may recall this is a pretty unique arrangement between New Balance and Nine West to blend lifestyle fashion footwear with performance technology and I think if you look at these shoes you can see them online, really excellent product which will be hitting the stores.

We are also launching Nine West Vintage America, which is a collection of casual shoes, its very authentic American casual footwear and accessories. We also have a denim collection that’s going to be shown to customers in March. We introduced that last week in the third quarter footwear market, got very good response and we expect strong demand for that product and there are a few shots of some of the shoes on the webcast that we put with this presentation.

We are very enthusiastic about this and both of these initiatives are designed to broaden Nine West, the core of the business, into the casual arena. And that’s why we are really focused on both of these initiatives to broaden out that very strong brand name.

In international we continue to focus on international opportunities, sales to the international partners that come out of the wholesale footwear group increased by 16% this quarter and 20% for the year. We went over $200 million in international sales to partners for the first time. Although I need to point out that we’re starting to see a leveling off of orders internationally. As you know the world economy is also slowing and its impacting on our business so we expect that to level off this year as we work through the situation.

Also in international we continue to work very closely with our partner in Asia, GRI, we also own 10% of that business as you know. They run just an outstanding footwear and accessories chain of stores. I’d need to point again business in Asia is being somewhat challenged as our other partners are around the world. However we believe there’s going to be very significant door rollouts over time as economies come back, particularly in China and we’re currently partnering with them to grow an existing but small Nine West, Anne Klein, and Joan & David apparel business in China.

These are doors that are being operated by them currently we’re working with them on a redesign and refit designed specifically for the Asian market and we think as the economy improves this can be a very significant growth opportunity for the future.

Turning to jeanswear our brands continue to perform well. Gloria Vanderbilt is the backbone here, it was the number one performer in women’s jeans in its channel of moderately priced jeans. Generally achieved plan, had good performance in both replenishment and fashion basics in the fourth quarter but the brands under the Bandolino Blue and Nine West denim labels also performed well in the department stores and we think generally outperformed department averages.

In jeanswear average out the door selling prices were pretty stable and consistent with last year. Inventories ended up in line which was also a positive. In juniors l.e.i. continues to be a standout at Wal-Mart. Just anecdotally we collaborated with Wal-Mart on a blitz program for Black Friday and they sold 1.6 million units in five hours. We are penetrated as you know in about 3500 doors, 1200 hotspots, we were able to retain the hotspots that we had for last fall again for spring so new product is now hitting those doors and we’re off to an excellent start.

The l.e.i. knit tops that go with it continue to do well. We’re now delivering the sundresses that Taylor Swift designed and received some pretty good national media focus last week on Accent Hollywood I believe where she was interviewed and several other shows and she talked about the sundresses being introduced. Footwear is now hitting the stores from Steve Madden.

I understand there are several styles off to an excellent start. We have intimate apparel in the doors now also doing well with another licensee who also has had a good history with Wal-Mart. So we’re very enthusiastic, Wal-Mart is extremely satisfied with our launch and we continue to fund and grow this business.

Turning to just one adjunct of our jeanswear Energie junior tops which is primarily distributed in mid-tier was a more challenging business this season. Knits were not very strong, actually down double-digits and we were more emphasized in woven items, something that the division is working on as we go into 2009.

Finally in jeanswear we have a strong private label component, last fall we introduced Style and Co. and Charter Club for Macy’s and Style and Co. had the best performance in Macy’s denims offerings last fall. They are very happy with the work we’ve done there and are continuing to grow that business. We also have a strong Sonoma business at Kohl’s, just my size at Wal-Mart, which also did very well and we’re really building a pretty sizable private label business here in designing and sourcing many, a variety of brands for specific customers.

Finally turning to our retail division the results here were disappointing especially after last year we had returned to profitability in the second quarter and I think as we went into back half clearly the consumer slowdown effected us. We can trace comps back to the days in October when some of the major financial institutions got in trouble and that slowdown just continued throughout the fourth quarter.

Having said that I really think we can do better even in these times, particularly in our ready to wear outlets. We ended the year with domestically in the US 984 doors, 370 mall locations, and 614 outlet locations which was down about 19 doors for the full year. We also ended with 33 doors primarily outlets in Canada. In the fourth quarter the mall based doors were down 13.5% comps, kind of consistent with department store average overall.

Disappointing but understandable given the low mall traffic and the high promotions that were experienced in that period. The outlet stores which first in footwear in the fourth quarter, were down 2.6%. The outlet channel continued to drive and draw consumer traffic in the fourth quarter as contrasted to the mall based business and the apparel outlets in that period were down 11.3% which is also in line with general trends but here we know we can improve.

Back at the regular priced footwear doors as you know we’re experimenting with a shoe woo concept and the one door that we had tested we were actually up comp against the previous Nine West store in that mall 12% in the fourth quarter. So if you consider we were down 13.5% in general mall locations, that’s a very good direction and sign for the viability of this concept and we were in the same location as the previous Nine West door.

So given overall traffic and the comp decline generally we were pretty pleased with that and we’re going to try a second test door in Washington’s Union Station in March and are contemplating a street door in Manhattan later on in the year.

We think this could be a key rollout and particularly against the challenging, the difficulties you have in operating single concept small, mall locations. In general our store renovation program that we started over the past 18 months has updated most of the key footwear doors, we have a few more to go for this year. Our product assortments in footwear and accessories are right on in both the regular and the mall and outlet doors and I think while the promotional level and consumer tightening has impacted us we’re going to bounce back particularly in the footwear doors strongly as the economy improves.

In ready to wear we really need to dedicate ourselves to improving the appearance and assortments and the overall customer experience. We need to focus on tighter more item driven merchandise assortments and the same thing we’re doing in wholesale we need to apply that approach to retail. We’re very focused on this and confident because of the strength of the brands, primarily Jones New York and Anne Klein, we can significantly enhance this performance.

So we’re very focused on that and think that can rebound quickly particularly as outlet stores fit into today’s consumer mindset of value. Next month we have a loyalty program coming on for the first time in Nine West which is called Nine Loves, its an in store and online customer loyalty program, that’s going to be up and running. We think this is something we’ve been missing. We had to get broadband technology in all of our stores which we are not substantially complete on. This program is now ready to go. We think this is going to be a key builder of business for the future.

Finally in retail the online business was our star performer in the quarter, ecommerce was up 88% in the quarter which compares to total online sales estimates for the industry as a whole of about a 3% drop. In January we’ve more then doubled our rate of sale then we experienced last year. But we’re very encouraged by that. We have Anne Klein coming on line in March. We think that is going to generate solid sales and we think that we’re going to develop a very substantial business here as we’ve improved the systems and the back end of it and the websites and we’re very positive about the online business.

So I guess in summary we continue to weather this current economic storm, we’re making the necessary decisions that position us for growth and improve profitability as the markets recover and we’re controlling what we can control. We’re managing our costs, our inventory, our execution. We’re closely monitoring consumer spending projections and believe our brands are well positioned in the current environment.

We offer well designed, good quality product at price points that fit today’s consumers’ mindset and today’s economy and we continue to push ourselves to constantly update that merchandise so when the consumer shops they look to us first and often. We are more efficient, we are more nimble, we have a diversified revenue stream, our management team is very strong and our associates are in good spirits with great commitment to our business.

I would say also coming into the year our relationships with our customers and our partners are excellent and we continue to focus on that. We will continue to look for opportunities and as we go through the year we’ll operate conservatively and cautious and mindful as well. So at this point we are ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robert Drbul – Barclay’s Capital

Robert Drbul – Barclay’s Capital

When you look forward I guess in the first quarter for the revenues that you’re discussing down 11 to down 14, can you elaborate a bit more in terms of where the big declines are and your expectations there.

Wesley Card

If you recall last spring was a very weak period, and I think probably the primary driver is in wholesale sportswear, we came off a very weak first quarter and orders were planned down when they bought last September. I think that we’ve got some plans that are performing well in that segment particularly Jones New York Signature and the Collection brand. But other orders were taken down so I think that’s probably the primary area.

Robert Drbul – Barclay’s Capital

On the SG&A plan for the year and sequentially on the quarters, with the $33 million are there any in terms of trends that we should think about in terms of the dollar impacts throughout the four quarters.

John McClain

I think its roughly an even dispersion across the quarters.

Robert Drbul – Barclay’s Capital

Can you talk about what you have learned with the l.e.i. business thus far with Wal-Mart and how big you think it can be in 2009.

Wesley Card

I think its going to continue to grow and we’re anniversarying against just the back half business and that’s obviously reflected in the guidance that we have indicated. I guess what we learned from it is Wal-Mart really has excellent and intense focus on the way they plan their businesses, very collaborative, lots of discussion, lots of really focused meetings and analysis that goes into the planning and once you lock in on that plan, its just execute all along the way and they know our business, they know a lot about every component of the cost of the product, and but when you get going into the season, they live up to their commitments.

Its been a great relationship.

Operator

Your next question comes from the line of Chi Lee – Morgan Stanley

Chi Lee – Morgan Stanley

As you walk into fall 2009 markets can you talk about how you’re looking at retail pricing, are you bringing them down even from levels that you thought you could command even just a few months ago.

Wesley Card

Generally prices are not coming down. We’re not taking major price reduction because there are assorted natural price points. We’re obviously merchandising within. One of the things that the group has been working very hard on is making sure that we’re hitting the right value points in the merchandise mix. Where we could have marketed a $49 sweater, if we think we really need to have a sweater at $39, we’re engineering into that.

And I think its more assortment. There is less price cost pressure on the other end for fall, raw material prices are down, labor costs are steady or there’s plenty of labor availability where our products are sources. Transportation is down so there’s less pressures, I don’t see though an absolute price reduction as we go into each category for the back half.

Chi Lee – Morgan Stanley

Would you care to quantify just how much you’re actually seeing those unit costs come down with all the things you mentioned, raw materials, and transportation.

Wesley Card

No, its really hard to generalize on that. There’s so many different businesses and components of product. And we’re also getting ready to market fall now so its not all even complete as we go through the negotiations. But the pressure has been relieved.

Chi Lee – Morgan Stanley

What do you see as your sustainable level of maintenance CapEx going forward.

John McClain

We break up the CapEx, its roughly like a third in a retail store as mentioned and a third in technology, so we want to make sure the retail stores stay in the shape that they’re in. We’re not going to be opening a big significant number of stores so we’ve invested in the technology but we haven’t really broken it out between a maintenance and stuff, but as we look forward I think that level is certainly a good level for the next few years.

Operator

Your next question comes from the line of Robert Ohmes – Banc of America

Robert Ohmes – Banc of America

Can you give us more insight into the size that l.e.i. hit for 2008, it sounds like it came in above your initial targets and maybe some help looking into 2009, a percentage type of growth on that and tie into that how significant and when the licensing income from some of the footwear initiative and intimate apparel etc. how significant those numbers could be. Is the Macy’s restructuring and the expansion of the My Macy’s program and if you could give us some insight into that and the expected impact on your business and about Bob Metler joining your Board.

Wesley Card

On the l.e.i. we don’t report on a detailed level. You recall we thought it was well over $200 business and certainly I think this year we’re going to track along those lines. The licensing is just starting to assemble now and I think we’ll start to see some reflection in the licensing income as we go forward. But again we don’t break that out by license. We’re still very comfortable its going to be a very large business and certainly much larger then we were doing historically. We’re going to maximize that and continue to work forward.

In terms of My Macy’s we obviously, the dust is clearing on that, we’ve got meeting with Macy’s coming up to learn more about it. I think the move is the right one if you’re moving towards centralization, I think they took the bold action and completed the move and that way you don’t have continued restructurings as you go forward. I think they took very strong action on that. I think what we’re doing and our strength is a great field organization and great merchandisers and I think that’s going to be very important as they go through this process and I think we’re going to be in a good position to support them as you centralize the buying decisions and we have excellent knowledge of the regional differences and are connecting already to the My Macy’s group in the field which is going to be enhanced as you know based on their announcement.

We’re very strong in that respect, we’ve already been working on collaborative projects to improve the Jones Signature label which we talked about last year and I think its going to help us as they move through their process. We need to be there to support them so that we both make sure things don’t drop through the crack, vis-a-vie, our businesses.

Bob Metler came on our Board, he was retired from Macy’s and he’s an outstanding, well respected merchant and we welcomed him on the Board. It wasn’t, obviously he knows a lot about Macy’s but he knows a lot about retail in general. I think he’s going to be a great addition to the Board and we certainly welcomed him. I’d like to comment on Margo [Georgiatis] again, an outstanding retail background. She was a lead partner for Mackenzie in the retail segment, loves and knows retail extremely well, has a marketing background just as well as general management and she’s also going to be an excellent addition to the Board. So we feel really good about how the Board is positioned as we move forward.

Robert Ohmes – Banc of America

The profitability of the l.e.i. business is it coming through as you would have expected and then also you mentioned the private label business that you’re growing, can you give us any help on how big that is and how profitable that business is for you.

Wesley Card

Yes, l.e.i. is generally coming through, the wholesale part that we’re doing is in mid single-digits and you’re going to start augmenting that with the licensing and royalty income and then as the scale builds up hopefully we can improve on that. That’s coming together well and the private label business is consistent with that as well and we’re developing enough scale there now that we can be more efficient in terms of the design and the sourcing and production because you’re designing unique product for various labels that has to be engineered into different price points so that, it can become very complex but we have a good structure there that we can build on to be more efficient and make this work and its interesting that retailers are coming to us more and more across all of our businesses for private label components because I think one of the things that happens in this environment, a lot of the small private label manufacturers or other brands are really getting squeezed or squeezed out of business so we’re in a spot where with the design capability that we have and it applies to footwear as well, and the amount of product we design and manufacture retailers are looking for us to shore up and really assist in the design and manufacture of their private label programs across the board, so you may hear more about some of these programs as we go through the year.

Operator

Your next question comes from the line of Todd Slater – Lazard Capital Markets

Todd Slater – Lazard Capital Markets

Is the reticence [inaudible] of guidance is that a permanent construct now or might you return to providing some of the metrics on the outlook at some point and what would need to happen for you to feel more comfortable doing that.

Wesley Card

I guess we’ll evaluate that as we go forward. I don’t think this is a permanent decision, it’s a decision we made given the volatile environment and one that you are seeing now is quite common. I think that there’s enough information about if you look at our margins and how they’ve held over the past several years and our SG&A levels and what we’ve talked about particularly with the sales guidance. We tried to be transparent enough that you can make good judgments but not get locked into an EPS number because the volatility comes in the consumer take out in the promotional levels.

Its just so hard to forecast at this point and there’s some, maybe some positive things that happen that even if the economy is not that great in the back half with lower inventory levels, less more edited assortments, maybe there’s a glimmer of hope that there will be less promotional activity. On the other hand we don’t know how the consumer is going to react when they get out into the back half so its just really too volatile to try to forecast at this point with precision. But I think we followed the course of many others and just at least temporarily suspending that. We’ll watch carefully and once we get back to more predictable levels reconsider how we provide guidance.

Todd Slater – Lazard Capital Markets

Is it safe to assume though that inventory is likely to remain, down something double-digits for the rest of the year?

John McClain

Our goal is to certainly have a reduction in inventory and we’re cutting things to order where possible, we’re very cautious on our buys and our goal is to cut it 5 to 10% or more and we watch it very closely every day.

Todd Slater – Lazard Capital Markets

On the CapEx, the guidance for 2009.

John McClain

Yes, $40 to $45 million.

Operator

Your next question comes from the line of David Glick – Buckingham Research

David Glick – Buckingham Research

On interest it looks like its being guided up for 2009 you are going to have a month or two of savings on your $250 million notes and certainly recognize lower interest income given lower rates but is the big driver the fees, the amortization of the fees on your new bank credit agreement.

John McClain

Yes it is.

David Glick – Buckingham Research

Is that all recognized in 2009 or does that, do you amortize that over the life of the agreement.

John McClain

Yes its over the life of the agreement which at the end of the year had about 17 months left.

David Glick – Buckingham Research

In terms of the operating margin, can we have some color on your outlook, obviously you have a head start on lower SG&A, some of the benefit of that being muted by expected lower sales but your inventory is in good shape, what would it take to hold operating margin levels in 2009. Is that a possibility are you thinking in those terms or are you expecting a decline.

Wesley Card

That’s really obviously the only number left is gross margin and that’s the most volatile number so I think you have to make your judgments based on our history and you also should recognize we’ve come through two really difficult promotional years in the last several years and I think if you look back at the track you can make some assumptions but we just don’t want to provide guidance on that at this point.

Operator

Your next question comes from the line of Ben Rowbotham – Goldman Sachs

Ben Rowbotham – Goldman Sachs

I know you mentioned that within the footwear segment that you saw some cost pricing pressures, could you elaborate on that.

John McClain

I think its consistent with what we said before, remember last year if we go back a year ago from where we sit today, the landscape on cost is totally different from where we are today, you had cost of oil rise and the cost of labor rise and issues with the US dollar and those things flowed through and we’re seeing in our third and fourth quarter now those pressures have changed greatly compared to where we are now as certain of those costs, the pressures are all off and in some cases we’re going down.

Its one of the components of what we saw in the fourth quarter.

Ben Rowbotham – Goldman Sachs

As you look forward the $170 million and CFO guidance given where sales could potentially shake out vis-a-vie that guidance what are you really looking to drive on the working capital line to get that back. Is it going to be an inventory situation there or are there other things that you’re going to be tightening up as well.

John McClain

As I said, absolutely inventory is one of the areas that’s your biggest flex point and look to drive as much cash from there as possible but we’re going to look at all other areas of discretionary spending and put controls and make sure we’re doing the right things so its really every area of working capital management is important.

Operator

Your next question comes from the line of Jennifer Black - Jennifer Black & Associates

Jennifer Black - Jennifer Black & Associates

In this environment are the retailers working with you on markdown allowances any differently then they have been in the past.

Wesley Card

Obviously it was a very challenging discussions, we’re all wrapped up at this point and closing our books but I think retailers were obviously looking for as much support as they can get. We evaluate it from a fairness standpoint what our return was and how much support we gave against orders and shipments and the overall environment. I think while it was tough negotiations I think that the retailers were also realistic given the macroeconomic conditions and level of promotions.

I think we ended up in a fair and equitable situation and for the most part I think we’re on to 2009.

Jennifer Black - Jennifer Black & Associates

Are there any changes in your lead times in your supply chains.

Wesley Card

Nothing from the base line but we are working very diligently in all aspects of our business to get faster and recognize that’s critical. In general I think our lead times are pretty good at this point. We’re very fast where we need to be for example in dresses we’re really good at replenishing into the dress business which is basically a reorder type business and we just continue to tighten those processes and try to get as fast as we can as we move because that does help in this environment in terms of being able to cut to order.

Jennifer Black - Jennifer Black & Associates

On your existing brands are there any other brands that, like you didn’t mention Easy Spirit, or categories that you would be looking to actually get out of.

Wesley Card

Absolutely not Easy Spirit, I just want to make sure everybody understands that’s actually doing quite well and we’ve got a lot of new fashion footwear in the comfort zone that’s performing quite well. And our athletic shoe there is selling millions of pairs, doing very well with that.

There’s a couple of small labels that we’re looking at that we certainly we’re not prepared to talk about today, nothing in the core labels. All the major brands, we’re solidly behind and continue to move forward on.

Jennifer Black - Jennifer Black & Associates

If you had to guess which would do better the outlet malls or the regular full priced malls, do you have any thoughts on that over this next year.

Wesley Card

I think based on what happened last fall and what we’re seeing so far the value channel outlets are going to continue to drive traffic and I think they’re going to be stronger generally. Mall traffic has been very slow as I think everybody is aware. So we continue to focus on that as a good supplemental distribution point.

Operator

Your next question comes from the line of Omar Saad – Credit Suisse

Omar Saad – Credit Suisse

I wanted to get your thoughts, the industry is obviously going through a lot of changes, Macy’s one of your biggest accounts is going through a major restructuring, we’ve kind of reached a point where perhaps this kind of consumer downturn will force a lot of these companies to rethink their historical models, how do you feel about the traditional department store markdown system, now you’re selling into Wal-Mart which takes a different approach with its suppliers and maybe you’re learning some things with that experience, do you think the traditional markdown system is something that’s going to be reevaluated as a lot of these companies rethink their business models and as a result of this restructuring changes going on in the industry.

Wesley Card

Absolutely I think that the concentration and one of the key things you can do without changing the model is we’re working diligently to provide more initial going [in] margin to the retailers through engineering of product, better sourcing, any way we can get the initial margin in so that the retailers have more cushion to allow them to promote because promotions are pretty much ingrained and that’s the biggest challenges to move away from high level of promotions and some of its going to be less inventory more assortment, less stores, all the things that are happening.

We are experimenting with one of our labels and its part of the Jones collaboration project with Macy’s on a different formula where you have, it really involves the first part, more front margin, more going in margin to protect them and then capping around success or failure depending on the market trying to cap the amount of markdown exposure that you have, the benefit that they get is capped as well as the downside and so we’re experimenting with that, we’ll see how that plays out this year.

The idea of that is to move away from the big discussion at the end of each season which can become acrimonious at different levels. The key factors though I think you have to really focus on, instead of so much changing that model, how do you retail at less promotional, even at promotional levels, how do you generate better margins. And in Signature we’ve done that through we’ve introduced [inaudible] items for Macy’s, we’ve, a lot of collaboration to generate stronger margin forgetting about how you settle up at the end, that’s the key focus and that’s something we’re working on in each division to improve those margins.

I do think over time the model is going to change to somewhat, although the problem is what happens is we haven’t experienced that but put in a new plan that has a fixed formula and then it doesn’t work then what do you do. So it’s a hard one to fix.

Omar Saad – Credit Suisse

Anything you want to add on the cash and obviously you ended with a nice amount there, is your priority there just to kind of conserve it at this point, maybe longer term strategies what you might do with your free cash flow.

Wesley Card

Right now we’re focused on getting through this environment so that strong cash balance, we are making sure we have the funding out of cash to pay for that $250 million in debt that comes due, and still have some cash at the end of the year. Not use our revolver. We’re just focused on that and working capital management and on the core businesses. And then for the future we’ll see how things develop but that’s the highest priority as we go through this year.

Operator

Your next question comes from the line of Dana Tesley – Telsey Advisory Group

Dana Tesley – Telsey Advisory Group

Can you talk about how are orders being adjusted for the timing of delivery, I know you had mentioned product exclusive as an opportunity in the past, is there any updates to that and how big can ecommerce become.

Wesley Card

My goal on ecommerce and I’m not going to put a time limit around it but I want to get to at least $100 million business over some period of time because I think it could be substantial, it drops to the bottom line very nicely and its also a great marketing. Its one of the benefits to come there, you go on the website and you learn about our brands and our company and it really, if you look at our websites, all four of them are fantastic at this point and its developing into a real strength but we think we have a big business opportunity.

Of course this year we’re going to be over $40 million, last year we did $19 million in 2007, to over $30 in 2008, going to do well over $40 this year and so you can see this kind of track we’re on there. In terms of exclusives and timing of delivery, I’m not sure what you’re thinking about there. Obviously we collaborate on that and something we constantly focus on trying not to get, deliver spring product too early. This year we are delivering sandals a bit later then we did last year deliberately to try to match up to when demands start and so we’re constantly addressing those kind of issues.

When you do an exclusive it makes it easier because you can really collaborate and discuss, you’re dealing with just one customer and you can come to resolution quicker. But the focus on wear now buy now is really important, make sure the goods are turning that hit the stores.

Operator

Your next question comes from the line of Emily Shanks – Barclays Capital

Emily Shanks – Barclays Capital

Do you utilize factoring at all and can you also comment if you utilize insurance at all.

John McClain

We’re a big company we have not had the need to utilize either of those programs.

Emily Shanks – Barclays Capital

Can you comment on what the exact availability was under the revolver at your end.

John McClain

We were undrawn on the revolver, we had some letters of credit outstanding that go against it. I don’t have the number right here, I think it was roughly $175 million of LCs.

Emily Shanks – Barclays Capital

But that’s subject to a borrowing base calculation, correct.

John McClain

Yes, it is.

Emily Shanks – Barclays Capital

I’d like to know what that availability is.

John McClain

It will be in the 10-K which we’ll file.

Wesley Card

That is going to conclude our call. We appreciate everybody’s participation and certainly those Jones associates on the line, appreciate everything that you’re doing for us and all the support we get so thank you and we’ll continue to work through this difficult period.

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