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FGX International Holdings Limited, Q4 2008 Earnings Call Transcript

February 27, 2009 | about: FGXI

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FGX International Holdings Limited (FGXI)

Q4 2008 Earnings Call

February 26, 2009, 8:30 am ET

Executives

Alec Taylor - Chairman and CEO

Anthony Di Paola - EVP and CFO

Jack Flynn - President

Analysts

Bill Chappell - SunTrust Robinson Humphrey

Mark Miller - William Blair

Liam Burke - Janney Montgomery Scott

Doug Lane - Jeffries

David Wells - Avondale Partners

Sam Panella - Raymond James

Kelly Duvall

Chris Krueger - Northland Securities

John Curdy - Principle Global Investment

Linda McGuire - Freid Associates

Presentation

Operator

Good morning everyone and welcome to the FGX International Incorporated Announces Fourth Quarter and Year-End 2008 Results Conference Call. Presenting today from FGX International are Alec Taylor, CEO and Anthony Di Paola, Executive Vice President and CFO.

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

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

A replay of the conference call will be available through Friday, March 6, 2009. To access the replay by phone, the domestic dial-in number is 1-888-203-1112, and international dial-in is 1-719-457-0820. The access code for the replay is 8092482. To access the replay via webcast, please visit www.fgxi.com under the tab Investors.

Now I would like to hand the call over to Mr. Taylor. Please go ahead sir.

Alec Taylor

Thank you operator, and good morning everyone. We appreciate you joining us for the FGX International fourth quarter and full-year 2008 earnings call.

With me today are Jack Flynn, our President and Anthony Di Paola, our CFO. Also joining us is Idalia Rodriguez at ICR, our Investor Relations Department.

As is our custom, I will open with some overview comments, following which Anthony will give a more in depth financial review. Thereafter Jack, Anthony and I will answer appropriate questions.

Beginning with Q4, we ended our first full-year as a public company with another outstanding quarter. Sales of $66.2 million in the fourth quarter were up 5% from the fourth quarter of 2007, which was no small achievement given the very poor retail environment we were operating in.

We acquired Dioptics on November 26th. It benefited from approximately $2 million of revenue in the quarter for med, which was EPS neutral. Currency fluctuations cost us about the same amount in revenues of $2 million.

Earnings per diluted share were $0.31 compared to $0.07 a year ago, and EBITDA was a very strong $18.1 million versus $14.2 million in the fourth quarter of 2007, a 28% increase.

Once again, these results met prior guidance, which we are very proud of given the rapid deterioration of consumer spending that occurred in the fourth quarter. Gross margin for the quarter was flat at 56.8% in, both day sales outstanding and days on hand of inventory improved.

Regarding sales by segment, Sunglasses and Prescription Frames sales were up an impressive $8.3 million, or 50% from the corresponding year ago quarter. Again, we did get about $2 million in sales at the end of the quarter from Dioptics. But the remaining $6 million increase was organic but the big piece of that be rollout of the previously announced Walgreen’s program.

Readers sales were flat Q4 2007 to Q4 2008 with the two principle factors. First, this was the first quarter in which we experience the effect of the loss of the Wal-Mart opening price point program which costs us $2 million to $3 million in high margin revenues. Second, we experienced inventory de-stocking in this category about several major retailers during the back half of the quarter in the range of $3 million to $4 million. Although POS trends remained overall satisfactory. These factors will partially offset by organic sales growth which was particularly strong in the dollar a club store classes of trade, and the previously announced rollout to the Hudson News airport locations. Jewelry was again down in the quarter.

We told you earlier that the business was under strategic review, and we thought we have had something to announce in that regard in this release. But anyone evaluate a jewelry business for purchase once to look at holiday sales plus financing for smaller potential buyers is challenging currently. So, we must ask your further indulgence as we continue our review of this business. In the mean time we are running to very tight.

Our international business was off 18% from Q4 2007, but on the constant currency basis it was actually up 4%. We believe we are starting to make progress to the U.K. and are in the range for a couple significant pieces of reader business. Our Canadian business while operating in a very challenging retail environment remains solid.

Turning now to 2008. For 2008 fiscal year sales reached $256.1 million with EPS of $0.79 and EBITDA of $54 million. At the start of the year, we guided the revenues of $256 million to $262 million, EPS of $0.72 to $0.80 and EBITDA of $54 million to $59 million. Given the challenge in the economic environment we have operated in for the most of the year I believe delivered these result all within the guidance is noteworthy.

By category our Sunglass business was up 28% year-over-year driven by the Walgreen's rollout to Wal-Mart pallet business, organic growth at about $2 million of the Dioptics sales.

We are coming off three consecutive years of excellent Sunglass sales, which I attribute to our product styling, marketing and to some extent consumer trade down to lower price points.

Readers were up 8% for the year which is excellent performance in this over-the-counter drug category where low single-digits growth is [de novo]. The same factors that influenced the fourth quarter Readers sales also contributed to the full-year results. The new account rollout and organic sales growth offset by inventory de-stocking in the loss of the Wal-Mart early price point business. Also recalled it in the fourth quarter of 2007, we had the Reader rollout to Walgreen making the 8% increase of sales all the more impressive.

International revenues were down 6% on the year and our currency neutral basis sales were off about 3% with the satisfactory year in Canada being somewhat offset by a (inaudible) in the UK where again we see signs of improvement.

Turning now to the Dioptics, this is the first time we have spoken to shareholders since the November 2008 acquisition of Dioptics medical products. We are now approximately 90 days removed from the closing, and I can tell you we bought a great business. It's over category Dioptics leads with its SolarShield and PolarEyes brand it's very under-penetrated at retail. There are abundant cross selling opportunities for us with our product line and we already have two nice wins in the grocery channel.

We are pursuing the Dioptics' products line nearly daily it's seems to existing FGX account and responses being overwhelming. We see a lot of upside in this business and it will be a key growth driver this year and beyond. Additionally, we are ahead of schedule on synergies and integration.

Finally, we are very impressed with the Dioptics management team. It is hard for me to curve my enthusiasm about this acquisition and its potential upside for FGX.

Turning now to key account update. We had a nice account win in our reading glass business in the fourth quarter with OfficeMax, a 1000 store office supply chain with $1 million to $2 million of annual revenue potential. Along with our staples business we now control the office supply category and are aggressively pursuing other companies in this space.

This is another example of FGX opening up a category like we have done in the past with book stores and airport gift shops it quickly becoming a leading player. We also had a several significant renewals of existing accounts most notably a new five-year deal for readers and Shoppers Drug Mart, Canada's largest drug chain.

Turning now to advertising and marketing. On February 9th we kicked off $5 million TV advertising campaign for Magnivision and Foster Grant readers. I hope you have had the opportunity to see both ads by now, but if you haven’t they are posted on our website. The Foster Gant ad features Raquel Welch will bring back the iconic “Whose that behind those Foster Grant” tagline. While the Magnivision that is a classic over-the-counter problem solution peak. We believe these ads will make a big difference in driving brand in category awareness and every indication is that these ads are being well received. It's too early to have any meaningful data but this spending behind the brand is what we will believe will boost awareness of FosterGrant and Magnivision brand and drive category growth.

Turning now to guidance. First looking at 2009 we see revenues of $283 million to $295 million, EPS of $0.98 to a $1.10 and EBITDA of $57 million to $62 million. Focusing first on EPS we have a pick up around $0.15 to $0.16 per share with depreciation and amortization that rolls off in 2009 and another $0.08 to $0.10 per share pick up from Dioptics plus mid to upper single-digit growth that our Reader and Sunglass businesses. This is somewhat offset by three quarters of loss opening price point, Reader sales at Wal-Mart, anticipated continuing unfavorable foreign exchange rate.

Continuing declines in the jewelry business and irregular inventory order re-patterns by retailers, particular the reader category, which we expect to last at least through mid-year. As a reminder, 2008 was a 53 week year versus 52 weeks of 2009. Also we have approximately $1 million additional share outstanding in 2009 compared to 2008 due to the Dioptics acquisition.

For the first quarter, we see results at essentially breakeven with the same plus and minus factors that work as for the year, plus $3 million of incremental advertising spend for the Reader TV campaign that we just had last year. Without this spend we be about flat with $0.10 per share we earned in Q1 2008.

I want to caveat this guidance by adding that there is a great deal of uncertainty regarding the economic environment in 2009 and thus predicted results are very equivalent. We have best used wider ranges in 2009 than we did in 2008. And we are planed to update this guidance on a quarterly basis.

I would also urge investors and analyst to look at the full-year guidance and not focus on a single quarter. We are becoming overly concerned with Q1 which is totally explainable by the ads we did, its very short sighted in our opinion. We take a long-term view in running the business and we urge to do the same.

In closing, I would like to thank our employees for it's oustated first year as a public company. Against very long odds we delivered financial results they maybe coming would be proud of. In the previous quarter, I spoke of the momentum that we have captured in our business. It is still there, despite the significant headwinds we are facing on a daily basis. Our business model is strong and really too significant in growing categories with the competition is fragmented.

Finally, we are bringing brand advertising into the game for the first time in our largest emerged profitable business segment which gives us reason for excitement. Thus I remain cautiously optimistic about our prospects for 2009.

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

Anthony Di Paola

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

We are pleased that with another strong quarter of growth and challenging consumer retail environment. Revenues increased 5%, EBITDA grew 28% and our gross margins remained consistent. Again, for the full-year revenues were up 7%, EBITDA was up 11% and gross margins include 60 basis points. Additionally, we continued to improve on our working capital metrics during 2008.

In current quarter and fourth quarter of 2007, gross margins were 56.8%. For the year, gross margins improved to 54.8% from 54.2% in 2007. Improvement was driven by margin growth in the Reader, Sun, and International segments, and reflects our continuing focus on a metric that we regarded is very important.

Margins on our reading glass segment declined slightly this quarter versus the same period a year ago, largely related to loss of the opening price point in Wal-Mart which impacted this during the fourth quarter.

For the year, we had benefited from leveraging our buying power and negotiating better pricing with our suppliers. The Sunglass segment margins improved for both the quarter and fiscal year when compared to prior period. We expect its improvement to continue in 2009, as we had the higher margins Dioptics product line [this mix].

We continue to see margins pressure on our jewelry business due to lack of purchasing power with our existing supplier base. As Alec mentioned earlier, we continue to review this business segment.

In International segment, our margins improved during the fourth quarter and full-year 2008, compared to earlier period. As pointed earlier the result of the shipment and product mix through our profitable reading glass line.

First quarter of 2009 should see margins declined slightly compared to 2008. As Sunglass sales, which had lower margins or greater percentage of our overall revenue. For full-year 2009, however, we do see gross margins improving 50 to 100 basis points as we continue to see improvements in cost of goods and leverage our logistic [entrusted] capability.

This should begin to show up during the second half of the year, as we made inventory purchases from suppliers in the first half of this year. We have seen some inflationary factors in working our sourcing efforts that we splendidly pulled down.

Now on at operating expense. Excluding abandoned lease charge that was reported in the fourth quarter of 2007, operating expenses percentage of net sales improved 37.1% in the fourth quarter of '08 versus 37.4% in the fourth quarter of '07.

For the full-year, operating expenses as a percentage of net sales were 41.4% for 2008 compared to 39.9% in 2007. As we have talked about, the increase in the year-to-date numbers were primarily due to incremental cost, is being a public company stock comp expenses, higher appreciation charges. As we look to 2009, we should begin to see the leveraging effects from our operating infrastructure with higher revenues and the reductions in one-time public company cost.

Our goal going forward is to bring operating expenses to approximately 40% of net sales for 2009. From a tax perspective, our reporting tax rate for the quarter was just under 39% underlying with our expectation. Based on current planning the effective rate for 2009 is expected to be in the similar range. However, developing strategies to lower the tax within a key initiative [we are up yet] and we are working to see if we can improve on that rate 2009.

Now, on the balance sheet and cash flow. Now, as a result of our improved collection effort, day sales outstanding has dropped 76 days for fiscal 2008 compared to 85 days in 2007. Additionally, we were able to reduce our days on hand from 108 to 112 days in 2007.

Given our all Asian sourcing strategy maintaining control of inventory level, we will continue to be a focus in 2009 as we face challenges in forecasting some our customer orders given the inventory that Alec spoke about earlier. We continue to focus our efforts in improving these working capital metrics, but are pleased with the results we achieved in 2008.

The free cash flow improved to $14 million for the fourth quarter compared to $9.9 million for the same period in 2007, and for the full-year free cash flow improved to $39.4 million compared to $33.1 million in 2007.

Due to usage of our strong free cash flow, primarily to pay down debt for an acquisition. In 2009, we have approximately $15 million of scheduled principal repayment and this will be our first priority as we bring our leverage ratio below two times. As you note that we recently extended our stock buyback authorization to February 2010. Although it’s nice to have this authority in effect this will not be a top priority for us in 2009.

Capital spending was $4.1 billion during the fourth quarter of 2008 bringing the full-year capital spending to $14.6 million. We only expect to invest primarily in store display fixtures in 2009 and capital spending we planned to be several million dollars well within 2008.

Depreciation and amortization is expected to be in the range of $16 million to $17 million in 2009 of which approximately $2 million is due to Dioptics acquisition. The balance relates to FGX slightly higher than the guidance we provided during our third quarter call. Previously announced savings of approximately $0.18 per share is expected to be close to $0.15 to $0.16 per share and results from the timing that we anticipated 6% in 2009.

Given that we amortized fixtures over relatively short time, shifts in the timing of capital spending and impact on our depreciation expense. From a liquidity perspective, we currently have borrowing capacity in excess of $40 million under our existing credit agreement which doesn’t expire until 2012. We believe that this facility together with our strong free cash flow will provide us adequate liquidity to meet our operating income, [respectively].

In summary, we enjoyed a very good quarter and are pleased with our results for our first full-year as a public company. Our operating margins, cash flows, and working capital metric all showed significant improvement during the year and we are pleased with our accomplishment in 2008.

As we look forward, 2009 will not only present us with challenges even the global economic climate but also with opportunities to continue to serve FGX as a leader in this business segment.

And with that I will turn it back to you, Alec.

Alec Taylor

Anthony, thanks. And operator with that we will open it up for appropriate questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And we go and take our first question from Mr. Bill Chappell.

Bill Chappell - SunTrust Robinson Humphrey

Good morning.

Alec Taylor

Good morning, Bill.

Bill Chappell - SunTrust Robinson Humphrey

I guess first on FX, is there a way to quantify what unfavorable, because I guess Canadian and UK FX did to the quarter and what the outlook is on the profit line for '09?

Jack Flynn

I think Bill on the top line for Q4 is a couple of million dollars little less than that. I think as we start going through '09 unless the FX rate moved back. So that impact will be there each quarter in 2009. In terms of the P&L impact, it do source both the UK and Canada sourcing US dollars, so they don’t have an impact on the cost of goods, but it will be obviously less than $1 million I think for the first three quarters of that impact.

Bill Chappell - SunTrust Robinson Humphrey

So, it maybe $0.02 or $0.03?

Jack Flynn

$0.02 or $0.03, yes.

Bill Chappell - SunTrust Robinson Humphrey

Okay. And then second on the Dioptics field have you had any I know it's earlier any success and expanding the distribution there, do you have any of that baked into your expectations this year for expanding the channels of where Dioptics distributed.

Alec Taylor

Yes, what Jack elaborated on this, we have had two nice, we mentioned grocery chain wins and these guys are aggressively presenting the new accounts. I think that represent the most, and I will let Jack take it.

Jack Flynn

The Dioptics plans, there is some new business not a gigantic number. We haven't authorized as it further goal. Meaning here with all of the people, there people, our people, and there is a lot of cross-selling going on as we speak, the reception of the retail has been terrific getting some money into Q1 has been a little more difficult, it's chaotic out there, but we are really optimistic we got a good story to tell, with some good underlying financials. We can offer the kind of support that Dioptics wasn't able to offer at retails. So, from my point of view there is definitely a good upside to what’s in the Dioptics plan.

Bill Chappell - SunTrust Robinson Humphrey

And Jack would you see that relatively near-term or is it like some of the other contracts where you don’t really sign it up until closer to second half of the year.

Jack Flynn

Well I think the good thing about Dioptics is probably I think we can have some wins all during the year. I don’t think this is cited to a contractual piece. This is a kind of unique product, unique approach of retail. So I expect it to be booking new business every quarter in Dioptics.

Anthony Di Paola

Bill, if founded our due-diligence quite a big as that. Our great interest was that Wlgreen to where we actually distributed for that eight of the top ten selling. I think this is right, Jack. (Inaudible) is not just selling Sun SKUs last year were Dioptics SKUs that this over product is very consistent sellers, not as much fees analysis you see at other side. Net back together with as Jack said our ability to service just a greater brand. We offer the ability to service, and the fact that a number our customers really don't have a quick model fits over business. Let me give you, this way we though the business we feel lot of upside.

Alec Taylor

Bill, if you look at it what we really like about Dioptics, its going to cut across all our class of the trade. I think Dioptics bought a mind is. I don't care if it's an import location, we are going to test it in local, but I have it in office, regional national map, in grocery, in audited chain drug. So, I got to cut across all of that class of trade, so we have a lots of opportunities out there.

Bill Chappell - SunTrust Robinson Humphrey

Okay. And this one last question, can you maybe just touch upon the 900,000 share filing related Dioptics, is there any near-terms plans for that?

Anthony Di Paola

Not to our knowledge, the seller we bought the business far new (inaudible) 90% of those not at a 54,000 shares, Bill, roughly 600 of those not at about to (inaudible) escrow service and tendency under the stock purchase agreement don't come out of escrow. So at least the first year or end of the first year (inaudible). We do not thought to take '09 or we walk it with respect but we know of no plans we had, but actually a pretty small number of those 3,000 so would be the only thing he can do with right now as we wanted to.

Bill Chappell - SunTrust Robinson Humphrey

Great. Thanks so much.

Anthony Di Paola

Okay, thank you.

Operator

And we will take our next question from Mark Miller from William Blair.

Mark Miller - William Blair

Hi, good morning.

Alec Taylor

Hi Mark.

Mark Miller - William Blair

Can you elaborate on your perception of point of sales trends which I think are still tracking still slightly ahead of consumer spending. I know you talked to readers on right now but the readers have slowed some. Just if you could speak about what you see is consumer behavior in the category. And then, clearly, the retailers are very motivated to drive sales. We had a Walgreen's with the buy one get one free promotions. Do you think there might be any de-stocking at the consumer level right now?

Anthony Di Paola

I think there has to be some de-stocking at consumer level, no question about it. But we also think it's something that we can't last forever. As you look at the reading glass piece of it, we know its ultimately it’s a (inaudible). It may hang on to a power little longer before they trade up. They may think if they stay together, they get another few months. But eventually they're going to come back, we think those purchases will be realized at store levels.

Sunglass is also a [big meat] category and, still early we like what we see, optimistic that maybe there is some trade down from the upper class of the trade and for what we think is a good value for our position. And our Sunglass business and our class of the trade. No deterioration so far as terms of average price points seems to be holding up. We feel, on a POS side, we really felt pretty good about our business going forward. We hopefully have the de-stocking issues for some of the financial restructuring. And a little bit of a chaos that went along with holiday in Q1 will settle down. And if retailers follows the new plans we have for them, the collaborative plan we worked so hard to get to, coming out on holiday, our POS should hold up as planned.

The de-stocking issue, I like to think the worse is behind us. There might be a little bit more, we are anticipating and have factored in the things that we do know and I think maybe some more, best Q1 a little bit of Q2 hopefully after that things will settle down and again which will support our POS efforts at some time.

Alec Taylor

I would also say I hope that the advertising as a counter to that as they see POS pickup, we hope as a result of the advertising bills, they will have to order back into that presumably.

Jack Flynn

And then looking at the 2009 outlook, I mean roughly how much point of sale growth or how much comp store sales growth do we need to see in your categories. And then also within the guidance, what level do you need for new business win. So, and over what proportion the way are you there already with OfficeMax?

Anthony Di Paola

We probably need whole single-digits to realize our rough plan of the POS level. We have some accounts we have to get more funds we have some good healthy businesses out there offset by the businesses that may be les healthy. But overall we are talking about low to mid single-digit on a pure comp basis they will get us there.

The new business, what we have for next year is not a outrageous number I think it’s around $8 million to $9 million.

Anthony Di Paola

I think a year before that it was 20, it’s a much more modest amount that we had in year span.

Jack Flynn

We are not rolling into our plan Andy, big wins if you will there are a couple of contracts that come up late this year. But we are not rolling those into our plan, we have a great modest new business plans that I fully expect to bring into the full there.

Anthony Di Paola

I like to elaborate on Jacks previous comment I mean to say, if you see its not all agreement (inaudible) to trade we have a drug classes is probably flat slightly up. I mean the dollar stores as I mentioned in my comments the dollar store, club store sales are really on fire and its another classes it might be a little slower, but overall but POS is satisfactory we don’t need, big POS gains year-over-year to make the guidance.

Mark Miller - William Blair

And then on the new account I guess we always tend to ask you about business wins but I should ask you, have you experienced or you expecting any client losses?

Anthony Di Paola

It has not happened expected none. We have even going through we mentioned albeit Shoppers Drug Mart in Canada, but we have been successful in all our contract that have come up and ongoing people, so I am not anticipating any loss of business. Our relationship there in this turbulent time in retailers, I think has really improved with our retailers. I mean we have (Inaudible) in this plan. We realized there are going through a lot of changes, but we are working with them on a constant basis, we brought this advertising to the table with it to drive our business and that’s what they need right now. So our reception at retail with our existing customer and as we go to new customers we are telling the story that I don’t think anybody else is telling right now.

So, I knew it's a good time to solidify our comp business and our ongoing business, but I also think it’s a good time for us as we start to look at some new business wins, we telling a great story right now.

Alec Taylor

I agree, I think that’s old thing. This out I am taking advantage of good recession, it’s a great time for us in a longer term due to this. We are the guys with the bandwidth to handle these accounts, it's profitable business, it's been a growing business. We brought the advertising to bear, Jack and his team are just on the road constantly now, a lot of with our travel restriction with. (Inaudible) back to a lot of pointers and has we are in front of the customer and I think of anything, I just had to agreed what I hear back through our sales people read by Jack, customers are very pleased with what we are doing for them right now.

Mark Miller - William Blair

That’s great, I have a couple of other questions, but I am going to turn it over and if there is time I will get back in the queue. Thanks.

Anthony Di Paola

That’s alright. Thank you, Mark.

Operator

And our next question comes from Liam Burke.

Liam Burke - Janney Montgomery Scott

Thank you. Alec, you've talked about progress in the UK and the international side. Could you give us little more detail on what that progress is, assume it from a Sunglass side.

Alec Taylor

Well, as you know it's really been more reader. We really emphasize that we made the management change. You got to become a reader focus business, selling sunglasses in the UK has a great (inaudible) you can imagine, Canada now better. Unless this is sort of UK focus, (inaudible) very solid and really runs very successfully with that a lot of, we are not spending a lot of time on that. UK is where we had the issues, the reader business we had a nice win at boots. We got about half boots store now. And again there is tremendous other penetration like two-thirds of the boots stores have a re-glass fixture but they don’t even have a fixture.

We are back in front of several other major accounts there with presentations right now. There is a lot of collaboration. Jack has really stretched himself because our Managing Director there already has been in touch with Jack for our instructions on any major account call, we get to the debt whether we go through the presentation with them. So, most of it is reader focused and boots will be a notable, there is several as I might recall as others because we are in front of, you can probably guess you see three or four retailers in the UK that really matter and we are in front of all of them right now in reader programs. And I would add that on the Sun side as they see an opportunity with Dioptics. There is literally no clip on fit over business in the UK period. And they are going to would that be a real point of emphasis on there. Surely the more year-end program and a program that you have a lot of returns.

So, we don’t worry that pretty big picture goes yet, but I like the way we are headed and I like the way this new team is responding and I do see, if you ask for potential upsides for '09, I would say international perhaps being one.

Liam Burke - Janney Montgomery Scott

Great, thank you.

Alec Taylor

Yeah.

Operator

The next question is coming from Doug Lane, Jeffries.

Doug Lane - Jeffries

Hi. Good morning, everybody.

Alec Taylor

Good morning Doug

Doug Lane - Jeffries

Can you tell us how much you spent in advertising and promotion in '08, and what you are planning to spend in 2009?

Anthony Di Paola

Sure. I think in '08, we spent a little north of $8 million, or a little about 3.5% of our net sales. We are currently budgeting to spend about a point, point and a half more, so that will bring it almost $13 million.

Alec Taylor

Doug yeah. We said that we would hope that it would be in the range of 3% to 5%. We also said it is working. You should see to go to the higher rate of that range, which is sort of where we are going.

And I think you will see most of behind our reader business, maybe a $1 million to $2 million behind the sun business that is small pieces kind of around like the action sports business, what have you, but the biggest piece of that.

So that's working and non-working media. We classify that the piece that you spend on working the actual, you are buying advertising time. I might also add that we really just committed out through sort of mid Q2 on this.

And for some reason we don't see the pickup, or you are out of budged ads that, the rest is not committed. We haven't bought the Media, so you can dial that back if needed. I hope that's not the case, but that's kind of the way the media plan its setup..

Doug Lane - Jeffries

And actually how nimble you are there. On the other hand if it starts to get traction is that something you can adjust to as well sooner?

Alec Taylor

Absolutely. And media rates are growing right now. As you can imagine, media is on sale. And we are getting some great nearly two to one type of, measured media versus the actual. So, a good opportunity there, if things go well, and as you get attraction, I think we got chance to send up, I would.

Honestly, nothing would make me happier to big spending some of that ad business around second half of the year, what are the plans, that was really beginning in the second of the at the second half of the year.

Doug Lane - Jeffries

Okay, I know it has only been a couple of weeks since the ads broke, what your early read?

Alec Taylor

I think the early read is good, I mean it's early, emphasis on and I think we have seen that couple of accounts, couple of key accounts. You have seen some POS trends getting a little bit better.

I think you normally think that you need to have it out there three to four weeks to really make an impression advertising more adages got to see the ad three times to make an impression, but we did do some testing on this brought his bag a trick, but he knows.

Alec Taylor

We predict a testing of persuasion and harder breakthrough on ads that we did on both that Magnivision and Foster Grant ad. If they tested very high and that's generally predictive of good sell-through, so it's a little early, but certainly want to see an early returns it gives you cost to think that this should work.

Doug Lane - Jeffries

Okay, thank you.

Alec Taylor

Thank you, Doug.

Operator

The next question will come from Mr. David Wells, Avondale Partners

David Wells - Avondale Partners

Good morning, everyone.

Alec Taylor

Hey, David.

David Wells - Avondale Partners

First off just anything about interest expense for the year. What is your expectation for '09 there?

Anthony Di Paola

We should be right around $6.5 million I think right now as we are projecting. Again all that based on what the current following costs etcetera. And every knows that our facility and then based on our leverage ratio, but currently $6 million to $6.5 million.

David Wells - Avondale Partners

Okay. And then thinking about the advertising spend. How much of the benefit from that is baked into your guidance. And if you were to see a lift you can't. There is enough inventory in the channel, take advantage of that of the sales that are coming through the door?

Alec Taylor

Hi, (inaudible) I would like to add. We have modest amount of sales increase behind the advertising under 5 million bucks that, Dave, you can now recall as new sales that we look at, hopefully that that is modest.

We are always particular at the business where [Rick] I, use to work. You can pretty well, easier to predict there is a new category. They were advertising so it was just hard to read. We are pretty conservative. We got a little bit base for the advertising, but not a lot again you hope that, you hope to see some upside, and you hope to have that inventory. It is a real concern I mean inventory management thing is there right now, but you just kind of these kind of your irregular ordering patterns, what have you,

but this is kind of regular orderly patterns would have you but, we keep up certain amount of, sort of the basic styles, we keep pretty good stock then so you have to get it back quickly, you could airplane product we don't like to do that, but I think we could handle give it up take pretty easily and that's one of the things we have tighten up too, used to 90 days. Again their product. I think sort of can't always would show a 10% 75 day order turns, but I think we can handle even that?

David Wells - Avondale Partners

Okay. And I guess just thinking about margins for the full year, and operating expenses I guess, if you are getting let's say $5 to $6 million pickup from G&A, and I think your ad cost are up about 6, should we be thinking about selling expenses flattish year-over-year or there will be some based on Dioptic there, how should we be thinking about that?

Alec Taylor

And I think from a modeling perspective, for the year we are coming in a little early, we are coming in a little north of 41%. We are hoping to get that better. We are going to start leveraging it, we are going to start overlaying all the public company cost that we have gone though this year in the first half, so we will start leveraging that business as the revenues pick up.

And plus we also give readers some of the other thing. I mean working and focusing on managing our operating expenses is something we get up everyday those including a lot of metrics that we look at and a lot of focus on this area, so our goal is to get those operating expenses net of all with G&A and marketing had just laid out to close to 40% 2009 maybe we really care about that.

David Wells - Avondale Partners

Okay. And I guess last question, in thinking about the Dioptics business, does it exhibit a similar seasonality in terms of Q2 and Q4 being little bit heavier from the top line or how should we think about that?

Alec Taylor

It does, but not on the same curve like sunglasses. It's not the flat line that we have in readers. It tracks closer to sunglass, but not as exaggerated in the tunnel. So , it is a 52-weeks business. Make no mistake about it.

It doesn't have that big peak in the middle of some of and the entire United States where it kicks in. But if those track [kicks off].

David Wells - Avondale Partners

Okay, great. Thank you very much.

Alec Taylor

Thank you.

Operator

(Operator Instructions). And we will take our next question with Mr. Sam Panella.

Sam Panella - Raymond James

Hi, it was miss.

Alec Taylor

Sam Panella.

Sam Panella - Raymond James

Good morning, everybody. Just thinking about the depreciation expense benefit, how should we thing about that on a quarterly basis? Is that more back half loaded?

Anthony Di Paola

It is. It's just the penny or two in Q1 and then it will ramp up from there.

Sam Panella - Raymond James

Okay. So, we can pretty much spread it evenly between the last three quarters?

Anthony Di Paola

Yeah.

Sam Panella - Raymond James

Okay. And then, also just thinking about your revenue guidance for '09, does that include any incremental business from our Longs Drug?

Alec Taylor

No, not really. I mean, the Longs name could be part of our new business piece. The opportunity for us to make that conversion, quite frankly, I think both of those conversions won't be made so late in the year, when converting our stores for Longs key big part of our new business.

Sam Panella - Raymond James

Okay. So, its more 2010.

Alec Taylor

Yeah.

Sam Panella - Raymond James

Okay, great. Thanks and good luck guys.

Alec Taylor

Thank you, Sam.

Operator

Thank you. And we will take our next question from [Kelly Duvall]

Kelly Duvall

Hi, good morning.

Alec Taylor

Morning.

Kelly Duvall

I wonder if I get your thoughts on given the environment, what do you think any potential risk would be for increased ship to private labels. Some of your comments that you might think that risk is minimal given that relationship would improve, but I want to get your thoughts on that.

Alec Taylor

Sure. Private label for us, as well as the reading glass category is really a non-issue, some cases I guess we have the private label fees, but we do the open price points for most of our customer all we have to the premium line.

For us, our issues at retail our recent retail, really are not. The consumer on the retail are put their focus on private label, it just doesn't exist in our category. That our opening price point privately, you can do that, well done that anyway.

Kelly Duvall

Right.

Alec Taylor

That coupled with the issues talking forward about your inventories that it just right now direct in to its just right now not an issue from anybody, no request for. I don't see that as a risk for us.

Looking at the fund raise piece. They are all private label pieces with some of our major customers. They should we are pushing it label pieces, but we provide proprietary label for them in some cases not a big part of our business.

What they want is for us the trainee enter the business, our brands that business will be given at the higher range and that business quite frankly has done pretty well. Always a risk, but I don’t see that as a big risk for '09.

Kelly Duvall

Okay, thanks. And a discretionary phenomenon you talked about sourcing it sounds like you are pretty confident that you can get to gross margin this year and how do you see that developing in from there and how sustainable do you think those gains are?

Alec Taylor

Yeah. This has been a really interesting thing the way it has gone. A year ago, we were worried about inflationary pressures. We were getting a lot pressure from our suppliers to take the cost up. Sometimes we were spot on light, but it's about the way model gross margin, I can expect we had about 60 basis points improvement in the year.

So its turned and I think the deflationary thing that’s going on is certainly for real what I can tell you at Dioptics we got nearly 5% improvement in cost of goods already.

And that's negotiating when they went to ask you that two weeks after we bought, and which was great, that does not show up again so to see that, later in the second quarter because they like us we fall out about six months and only did similarly where we are negotiating actually right now on some of the sun business that reader business we are going to get.

We are going to get some improvements for sure become very competitive, we are on the gas with all the volume and there are 8 or 10 batteries we rely on it you know again as Anthony said 50 to 100 basis point improvement, I think definitely achievable. Again seeing a ramp up as the year goes on and at least visibility we have right now would say that is sustainable at this is its counter balance my visit some of the headwinds you throughout against that retail and with that backs when as you will be deflationary part of the story and our ability with all the quantities we thought to get better pricing.

So we definitely think that’s one of the favorable portion again visibility right now is sustainable.

Kelly Duvall

And then just a quick question on the inventory, how are there inventory at the end of this year? What was the Dioptics?

Alec Taylor

Little less than $5 million actually.

Kelly Duvall

Okay. Great. Thanks a lot.

Alec Taylor

Well thank you.

Operator

We’ll take our next question from Chris Krueger from Northland Securities.

Chris Krueger - Northland Securities

Hi good morning guys. Nice quarter.

Alec Taylor

Chris welcome aboard, we are glad to have you riding on.

Chris Krueger - Northland Securities

Thanks. I missed a little of the call so I apologize if you are repeating anything but on the depreciation that falls off this year, I think I caught that most in final three quarter of the year, is that correct?

Alec Taylor

That’s correct, it should ramp up.

Chris Krueger - Northland Securities

And is it approximately $6 million in total?

Alec Taylor

The G&A we talk a little bit about Chris, it's going to be the drop off is going to closer of the $16 million to $17 million in total, of which $2 million is Dioptics incremental costs, so yeah, it should be $5 million to $6 million.

Chris Krueger - Northland Securities

And a lot of people almost of gotten calls already believe its quite lead from first quarter to the remainder of the year to get to the guidance range for the full year besides the $3 million in advertising spending and the fact that this D&A isn't really dropping off yet. Are there any other key factors that are effecting first quarter or start to kick in help in the second quarter makes us more comfortable with that, that we would?

Alec Taylor

Again as we said, this does not, our plan is not based on any crazy things to ready to happen that we have modest POS increases best for the year. Again you have a full year for this year the Dioptics business. So really is it, we have got every quarter plan for the where go through the next three quarters but every quarter play us up year-over-year and we think on very achievable revenue increases really spread across sun and reader business. As you know just a combination again relatively modest new business less that we have in the past plus what we think is achievable POS increases so again we can not laugh about some of the comments we got about people.

We said if we had not advertised we guided in the first quarter to $0.09 to $0.12 with people be all concerned about things because basically if you add the depreciation of the back year to the number this year plus the Dioptics number, it comes flat, does it take a lot to get there.

So, I think people with all their respect to numbers its only comments we've a bit of little overreacted to the Q1 somehow they think it’s explained with one word, advertise.

Chris Krueger - Northland Securities

Okay on the Dioptics I know someone asked for seasonality is the first quarter kind of a low point for that business?

Anthony Di Paola

Yeah it is there has been this quarter here will be above the $7 million and in some cases just like ourselves that they went through some de-stocking issues in late W4 so they are getting themselves back in the business if you will want to key retailers but about $7 million in Q2 pretty strong in Q3 I think probably Q4 if our plan in Q1 as you look at the (inaudible).

Chris Krueger - Northland Securities

Okay and can you comment just on kind of how the quarter went or maybe going back to September up through mid-February as far as the environment out there has been volatile or steady or getting worst or getting bad, can you comment on that overall of kind of monthly returns?

Alec Taylor

Tracy if you want to.

Chris Krueger - Northland Securities

That true

Anthony Di Paola

We looked at our business, we saw a lot of things in happening in retail, we feel a lot of things happening in retail for us it really was probably the things that closed to Thanksgiving. I think other product categories might have suffered earlier again without performance over the counter I think people are going after basis on our slower moving category. Things that tough for us I would say in November that's when everybody started to move towards getting their inventory down by year end and that mean everybody had a dig to find. So some retailers were pretty upfront with us, yes, we are going to do, we going to get down to this number work with us.

Other just kind of did it on their own and we just kind of had work with them. So, in the Q1, I think the issue really for us there is some additional de-stocking if you will. We had to go back and redo some of our plan because they were looking for a higher turn. They were really kind of focusing, getting their volume slow inventory fast which we work with them on.

We had some sunglass deferrals some of our business that we set up the sunglasses later this year and that's painful thing in Q1. We will get that Q1 and we will start getting our reorders in Q2. So, it's come down a little bit now we are starting to see some more regularity if you will but November, December, January have been particularly difficult. Again we are not running away from that we are putting ourselves up. We want to get good collaborative planning with retail understand where they can go so we can get up that's where we are at right now.

Alec Taylor

The elaborating on point that Jack made. In the sun business while we have had people still take orders quite little later. We did not, we would have 80 cancellations, no cancellations. I mean there has been a little bit of push out in bridge some of the larger gas fits maybe ship a little later on the sun but nobody has said forget sun for '09 and I can't do that at all. I think most of our accounts again I am going to predict that we are going to have a good study because I think we will see what happened to last three years you will see trade down in response to the advertising and people going to lower price point and I expect to see that again and certainly see places like the Dollar Stores and the club stores. But its sun belt locations, very robust same with US.

Chris Krueger - Northland Securities

Alright last question for me, probably get a quick answer here but with the current US dollar being so strong as far as your sourcing is concerned does that impact that at all do you have any benefit R&D revenue benefit as you told us.

Alec Taylor

Yeah of course, is actually US the points out in US Canada source of US dollars so don’t have enough things here.

Chris Krueger - Northland Securities

Okay

Alec Taylor

New growth top line will be a bit this quarter the bid is probably almost $2 million and similar numbers to that. So that dollars be strong that will carry good balance of the year.

Chris Krueger - Northland Securities

Okay thank you.

Alec Taylor

Thanks.

Operator

And next question will come from John Curdy from Principal Global Investments

John Curdy - Principle Global Investment

Good morning

Alec Taylor

Hey John.

John Curdy - Principle Global Investment

I’ve got a question on advertising; you mentioned the incremental $3 million spend in the first quarter and the program continuing on into mid second quarter. So should we look for another couple of million dollars of incremental spend into the second quarter? Is that right?

Alec Taylor

Yeah that’s very much right

John Curdy - Principle Global Investment

Okay. And with respect to your guidance through the year are you including the jewelry operation for a full year.

Alec Taylor

Yes.

John Curdy - Principle Global Investment

Planning that down from '08 levels.

Alec Taylor

Slightly down from '08 levels, yes.

John Curdy - Principle Global Investment

Okay thank you.

Alec Taylor

Thanks John.

Operator

And we will take our final question from [Linda McGuire from Freid Associates]

Alec Taylor

Hey, Linda.

Linda McGuire - Freid Associates

[Freid Associates]. Jack, thanks, Hi guys. Just taking couple of quick ones and I apologize if you already discussed these, I gone over late but then the Dollar Store and club business you said that's on fire how is that ASP and our business compared to other channel?

Jack Flynn

The average sale price, yeah its held pretty its Jack, because that area is still a quite really held up actually maybe even picked a little bit if the dollar stores but we had a modest price increase last year at readers and is still very nicely but we, that we have reversed out there.

Alec Taylor

That’s the actually above that we did change our pricing strategy our average sale force right around 6000 both of our product ratings.