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Executives

James Palczynski - ICR

Jill Granoff – Chief Executive Officer

David P. Edelman – Chief Financial Officer

Analysts

Scott Krasik - C. L. King & Associates, Inc.

Sam Poser - Sterne, Agee & Leach

Heather Boksen - Sidoti & Company

Kenneth Cole Productions Inc. (KCP) Q4 2008 Earnings Call March 3, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2008 Kenneth Cole earnings conference call. My name is [Jeri] and I’ll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. James Palczynski from ICR. Sir you may proceed.

James Palczynski

Thank you operator and good afternoon to everyone. I’d just like to start by reminding you all of the company’s safe harbor language. Statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995.

Actual future results might differ materially from those projected in such statements due to a number of risks and uncertainties including but not limited to demand and competition for the company’s products; the ability to enter into new product license agreements or to renew or replace existing product license agreements; changes in consumer preferences or fashion trends; later than anticipated store openings; and changes in the company’s relationships with retailers, licensees, vendors, and other resources.

The forward-looking statements contained herein are also subject to other risks and uncertainties that are described in the company’s reports and registration statements filed with the Securities and Exchange Commission.

Thank you. With that out of the way I’d like to introduce you to Jill Granoff, Chief Executive Officer of Kenneth Cole Productions.

Jill Granoff

Thank you James. Good afternoon and thank you for joining us to review our fourth quarter and full fiscal year results. With me on the call today is David Edelman, our Chief Financial Officer.

As you know we are currently facing the most difficult retail environment in decades. Our financial results are in line with our pre-announcement from mid-January. David will go through the details of our financial performance in a moment, but I’d like to run through a few of the highlights.

First, our revenues for both the fourth quarter and the full year were down approximately 4%. We showed an operating loss of approximately $13 million for the fourth quarter and $12 million for the full year due to gross margin erosion and some very significant charges. And we posted a net loss per share for the year due primarily to the fourth quarter performance.

While these results are unacceptable there are also some financial successes in both our quarterly and yearly results. First our balance sheet remains strong and we ended the year with $65 million in cash and no long term debt. Second, our cash flow for the year was healthy. We generated $22 million in cash flow from operations. Third, inventory at year-end was down 10% to last year. Fourth, our e-commerce and outlet business performed well with each showing increased sales and improved gross margin for the year. Perhaps most importantly, we have streamlined and restructured our operations and eliminated over $20 million of existing annual expenses from the business.

On our last conference call we shared our strategic plan to achieve increased growth and profitability. We were seeing good results from our initial steps towards implementing the plan, including improving comp store sales trends until our business performance changed dramatically in October as the economic environment deteriorated. In response to declining mall traffic and lower sales we increased our focus on inventory management, cost reduction and liquidity. In addition we accelerated a planned realignment of our organization to support our strategic plan and insure we are a leaner, more agile company.

Now it’s important to understand that the majority of our cost cutting activities are not just about reducing expenses. They are part of a carefully conceived and comprehensive plan to create a more efficient and effective corporate structure. We are eliminating operational silos and the redundancy they created; streamlining the organization to enable better and faster decision making; and increasing role clarity and accountability. We are also creating centers of excellence in design, merchandising and sourcing to insure we provide our customers with cohesive collections of compelling products that meet their expectations of high quality and great value consistently.

In the first phase of our organization realignment we cut 10% of our corporate workforce. In the second phase of our corporate realignment which just occurred last week we cut an additional 10% of total headcount. These actions alone have created over $10 million in annualized cost savings and enabled us to consolidate and simplify our management structure. For example, we will now have one leader for our wholesale business with responsibility for all products categories. In the area of visual merchandising we will have one leader with responsibility for wholesale, consumer direct and international to insure we have one face of the brand on a global basis.

These changes empower our management to move faster and be more coordinated and importantly are more efficient from a cost standpoint. Now I have to say the process of reducing the size of our workforce was very, very difficult on a personal level. However, it was essential to get costs in line and implement our new strategy quickly. At the same time I would like to point out that this restructuring has enabled us to promote many talented people within our organization and expand other roles while selectively adding new talent to give us the team we need to move from good to great.

Now I’d like to discuss some specific cost reduction initiatives. We have spent significant time reviewing our compensation and benefit structure and made important changes. To respond to the pressures of the current environment, we have suspended merit increases and a matching contribution to our 401(k) plan for 2009. While we intend for these to be temporary changes, we have adjusted our bonus program to be based entirely on a pay-for-performance model. In 2009 bonuses will be tied to earnings per share and EBITDA targets to better align the organization’s goals with those of our shareholders.

We are committed to building a winning culture that rewards performance that delivers results. Now to save additional costs we have cut certain discretionary expenses such as trade show and travel expenses. Far less business is done at the trade shows than in the past and we are harnessing technology to reduce the need for travel. We are also looking at our sample costs more closely and are planning our assortment more carefully, thus reducing over development.

The challenging retail environment also prompted us to adopt a more aggressive promotional strategy for our seasonal inventory. During the holiday season we proactively turned inventory into cash while mall traffic was high to enter the spring season as clean as possible. While this had an obvious impact on our gross profitability in the fourth quarter, we ended the year down 10% in total inventory. Unfortunately because of timing we were not able to cut back spring receipts as aggressively as we would have liked to match the current environment. Therefore our inventory will not be balanced until late second quarter or early third quarter and we anticipate continued margin pressure throughout the spring season.

With respect to marketing, we have narrowed our creative activities to fewer, more effective campaigns, thereby reducing expenses significantly. However, we are maintaining our media spend. We believe that now is the time to reinforce our unique voice in the market and to amplify our position as well priced designer fashions. We believe our new creative campaign with aspirational models and lifestyle branding is resonating well with consumers and reinforcing our contemporary brand position.

From a capital investment perspective we decided to eliminate almost 20% of our planned expenditures by reducing some non-essential IT projects. We have also scaled back shop and shop plans for some department store doors. Finally, we have made the decision to suspend our dividend indefinitely. We believe that this is a prudent and responsible course of action in these challenging economic times and represents just one more step in our overall effort to preserve cash and manage liquidity. We will revisit this decision as business conditions improve.

Now I’d like to spend a few minutes discussing the progress we have made on the six key initiatives outlined in our longer term strategy which essentially remains the same. As discussed with you in the past, our first initiative is to energize the brand. We are clarifying our position as the quintessential, metropolitan lifestyle brand that is confident, clever and cool.

We have developed a comprehensive marketing campaign for spring ’09 to build fashion credibility and we will be leveraging it nationally in print media, store windows, our website and in department stores. We believe this consistency across all platforms and consumer touch points will help us capture share of mind and hopefully share of wallet. You can see the first signs of our progress this month as the new spring campaigns break. We think they are the best imagery and message we’ve had in some time.

Our second initiative is to create compelling product. We have modified our assortment to provide a more balanced mix of core and fashion items. We have also introduced a number of products to address more casual wear occasions and are seeing good traction in many of these categories including denim, polos, T’s, and casual footwear, all with the Kenneth Cole design aesthetic. And we have introduced good, better, best pricing tiers to capture opening price points while maintaining high fashion content at the tip of the pyramid. Kenneth’s increased focus on product is already having a positive effect both on the product and on the energy in the design department and we are very optimistic about achieving success on the product front.

Third, we are accelerating our retail development. Our outlet stores are still performing even in this environment and we continue to expect to open approximately 10 to 15 new outlets this year. Similarly our e-commerce business is growing very fast and can be a significant contributor to our long term success. We’re very pleased with our new fulfillment partner, GSI. In terms of our full price stores we are moving forward with our plans to optimize the existing fleet through a combination of store closures, right sizing and remodeling. We are also negotiating rent concessions.

In addition our full price retail store test will begin in April and we remain confident that we can garner the information we need to create a viable economic model. Ultimately we still believe that our consumer direct business can support 100 outlet locations and 150 full price stores, more than double the total store count that we have today.

Our fourth initiative is to revitalize our wholesale business. One of our key goals is to simplify our portfolio of brands so we can focus our efforts on Kenneth Cole New York and Reaction. We have already announced that we have transitioned our Tribeca to other labels. Tribeca was not a profitable business so we should see some improvement in our segment results. We are also focusing on improving wholesale assortments with the goal of improving margin and term. We will name a new leader for our wholesale business in the near future to help revitalize our performance in this channel.

Fifth, and this is admittedly a longer term piece of the strategy, we are laying the groundwork to grow our international business to a new level. We’ve made progress by opening key retailers in important markets in Europe to build a profile for the brand and to attract the right kinds of partners for expansion in Asia and India.

Finally, we are taking important steps to create a winning culture. The changes to our organization’s structure and staffing are a big part of this. We are building a team here that can and will win, regardless of the environment we have to operate in. While this will not happen overnight, we are going to make it happen. Our brand is bigger than our business and we believe we have a tremendous opportunity to increase both our market share in the fashion industry and the value we deliver to our shareholders. We take each of those responsibilities very seriously.

I firmly believe that true excellence is a mandate only when it is ingrained in an organization’s culture. That is what we are doing here at Kenneth Cole, recreating excellence in every area of the business. Thank you for your attention and I’d like to now pass the call to David for a detailed review of the financial results.

David P. Edelman

Thank you Jill. Good afternoon everyone. Our financial results for the fourth quarter are consistent with our pre-announcement made on January 13. Consolidated net revenues for the fourth quarter were $126.6 million compared to $132.1 million in the year-ago quarter. Fourth quarter wholesale revenue decreased 7% to $57.6 million from $61.9 million. Fourth quarter consumer direct sales were relatively flat at $57.3 million versus $57.6 million in the year-ago quarter, driven by a comp store sales decrease of 10.7% but offset by revenues associated with new stores and e-commerce growth.

Licensing income in the quarter was $11.7 million versus $12.6 million in the year-ago quarter. The decrease was primarily due to our exit from the PGI license for men’s sportswear.

Consolidated net revenues for the year were $492.3 million compared to $510.7 million in fiscal ’07. Wholesale revenue decreased 8.1% to $267.2 million; consumer direct sales increased 3.3% to $181.4 million; and licensing income decreased 1.3% to $43.7 million. Gross margin for the fourth quarter reflected the aggressive promotion needed to convert our inventory to cash and to keep our assortment as fresh as possible. Gross profit for the fourth quarter was $48.3 million or 38.1% of total revenue versus a year-ago level of $60.2 million or 45.6% of revenues. There will continue to be pressure on gross margin primarily in the first half of 2009.

We were able to make considerable progress with respect to our inventory level, resulting in consolidated inventory being down 9.8% to $43.3 million from $48 million in the year-ago period. Within that wholesale inventories were down 11% and consumer direct inventories were down 9.2%. Comp store inventories were down 15.7% offset partially for 11 new outlet locations. We have adjusted our purchasing and believe we can begin to see a return to much better gross profitability rates beginning with the fall season. Gross margin for the full year was 40.4% of revenues versus 43.7% in fiscal 2007.

Total SG&A expenses for the fourth quarter excluding severance and impairment were flat at $56.1 million versus last year. This reflects the impact of cost reductions taken prior to year-end offset by incremental expenses relating to operating 11 new outlet stores, increased costs related to the company’s retail holiday gift of giving initiative and an increase in bad debt reserve. However, due to the lower sales, total SG&A as a percent of revenues rose to 44.3% versus 42.4% last year.

We are committed to reducing our SG&A to improve our profitability. As Jill has previously mentioned, we made significant strides in streamlining our cost structure prior to year-end and by enacting a 10% reduction in our corporate workforce, increasing controls over discretionary spending, and reducing non-media marketing costs. These actions alone will reduce existing categories of expense by approximately $10 million on an annualized basis.

Since the close of the fourth quarter we have taken additional actions. We have eliminated our 401(k) match, suspended merit pay increases for the year, and moved to 100% pay for performance bonus plan tied to financial targets. Additionally, we have renegotiated with a third party warehouse distributor for lower rates, further cutting our discretionary spending budget; eliminated a significant amount of budgeted trade show expenses; and further reduced our corporate workforce. While we do plan to reinvest in some areas of the business, cost reductions to date total over $20 million on an annualized basis.

SG&A expenses for the full year excluding severance and impairment were slightly down at $206.2 million or 41.9% of revenues compared to the 2007 level of $207 million or 40.5% of revenues. As a result of the sales and margin reductions, our operating loss for the fourth quarter was $12.8 million versus $7.3 million in the year-ago period. The operating loss for the full year was $12.3 million versus operating income of $4.9 million in fiscal 2007. As you can see, the operating loss for the year was driven entirely by the fourth quarter performance.

Interest income in the quarter declined to $93 thousand from $1.3 million in the year-ago quarter. This reflects lower cash balances due to the use of cash for the Le Tigre acquisition and our repurchase of 1.6 million shares since the prior year along with the reduction in average interest rates. Interest income for the full year was $1.7 million versus $5.7 million in fiscal 2007.

During the quarter we incurred $3.7 million of investment impairment charges due to declines deemed other than temporary. For the year we incurred $7.8 million of investment impairment charges.

The net loss for the quarter was $12 million compared to a net loss of $3.1 million last year. On a per share basis, the GAAP loss was $0.67 per diluted share, in line with our recent pre-announcement. However, you should keep in mind that included in these results are approximately $8.8 million or $0.40 per share of fourth quarter charges relating to severance, asset impairment, and investment write-downs. Our loss per share on an operational basis excluding these charges was $0.27 per share. These levels are all consistent with our pre-announced expectations.

The net loss for the full year was $14.8 million compared to net income of $7.1 million last year. For the full year on a GAAP basis, we booked diluted loss per share of $0.80 per share compared to a gain of $0.35 in fiscal 2007. Excluding charges related to severance, asset impairment and investment write-downs from both years which we believe is a better pure performance indicator, our comparison would be a loss of $0.19 in fiscal 2008 versus a profit of $0.70 in fiscal 2007.

We do expect given the additional cost reduction actions that we’ve taken since the close of the year to be some additional charges in the first quarter though we’re not in a position to detail those as of yet.

Turning to the balance sheet, cash and marketable securities at the end of the year totaled $64.7 million versus $90.7 million at the end of the same quarter last year, a reduction of $26 million. Keep in mind that over the course of the year we used $37 million for the acquisition of Le Tigre, dividend payments and for the repurchase of stock. I’d also note that the year-end cash level improved by approximately $15 million since the close of the third quarter.

We continue to have no debt on the balance sheet and sufficient liquidity to fund operations and capital expenditures. Inventory at the close of the quarter was $43.3 million, down 9.8% from $48 million at the close of the year-ago quarter.

With respect to guidance, in the short term we expect to remain promotional to remain competitive in the marketplace. Further, consumer activity currently remains weak with our comp store sales down in the mid-teens thus far in the first quarter. If this trend holds at the present time we believe that on an operational basis we are likely to report a loss per share in the range of $0.40 to $0.45. This would exclude any restructuring charges we incur, which are likely given our recent business decisions, specifically with regard to corporate workforce reductions.

While we are not providing specific guidance beyond the first quarter, directionally we believe that we will see a return to profitability in the second half of the year as the result of our cost reductions, the improvements we are making in our inventory position, and enhancements in our product assortment.

Thank you. I’ll now turn the call back to Jill for closing comments.

Jill Granoff

Thank you David. We are in unprecedented times and it is difficult for anyone to predict when economic conditions will stabilize. We have taken decisive actions to respond to marketplace realities while protecting our brands and laying the foundation for future growth in support of our strategic plans.

Let me summarize the steps we have taken in the past six months to improve our financial performance. We have simplified our portfolio by closing Tribeca. We have reduced our corporate workforce by approximately 20% to become leaner and more responsive. We have put in place expense reduction initiatives totaling over $20 million in annualized costs, including the payroll reductions from the organization changes above. We have closed our office in Italy. We have reduced our inventories by 10% to last year. And we have suspended our dividend to conserve cash.

While the majority of fiscal 2009 will not be easy for anyone in retail, I remain optimistic about the Kenneth Cole brand and our business in total. Our direction is clear. Our strategies, both short and long term, are well thought out and already having an impact. I think we’ve taken decisive action to become a stronger company and will continue to be flexible and responsive to challenges and opportunities. We have a strong balance sheet to enable us to do this. At the same time, we will stay focused on our long term goals to build a truly excellent organization and leverage the power of our brand to deliver extraordinary value to our consumers, our partners, our customers and to you our shareholders.

Thank you for your attention and I would now like to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Krasik - C. L. King & Associates, Inc.

Scott Krasik - C. L. King & Associates, Inc.

I appreciate your identifying your customer. That’s helpful. Jill, how do you think your customer is doing in this environment? What’s your impression of their shopping habits and how do you think that progresses over the course of a year? I would guess, you know, in urban areas some of your customers probably the hardest hit. But you know how do you view them as shopping this year going forward?

Jill Granoff

Well, first, Scott, I’d like to say that we don’t necessarily view our customers as urban customers. We really view our customers as those that really want to live more of a metropolitan versus a traditional lifestyle. And I think it’s really important to differentiate. We tend not to use “urban” as a descriptor.

You know, in terms of shopping patterns, you know, we like everyone else are seeing, you know, declines in traffic patterns. We are very much focused on increasing conversion. And what we see is that they are looking for value first and foremost. At the same time, if we have a unique product that’s innovative and differentiated from other products they have, and it makes them feel good, we see that they’re buying it. So traffic is down but we know that we have an opportunity with our conversion and we’re doing the best that we can to insure we have compelling product to [incent] them to make the purchases.

Scott Krasik - C. L. King & Associates, Inc.

I guess by “urban” I just meant city folk as New York, Los Angeles, Miami, but – and then how does that translate to your licensing partners? How do you feel, you know, about your licensing income here on a go forward basis? Is their product in line with your view of the brand right now? And should that hold up similarly to your wholesale sales or how should we view licensing revenue?

Jill Granoff

Well, you know, we’re very fortunate to first have a very diversified, you know, group of licensee partners. And second to have, you know, within that portfolio among the best and strongest players in the industry. You know, if you think about whether it’s, you know, a Coty or a PBH or [G3] we have very, very strong licensee partners. And we have been working much more closely with them than ever before to insure that we have consistency in our product assortment.

And you know having me here really frees Kenneth up to spend much more time focused on the product and you know we’re very pleased. We’re also seeing many of the wholesale partners are actually looking to bring the Kenneth Cole brands back into the fold. Lord and Taylor, Nordstrom in several product categories, they like our price positioning and whereas in the past everyone was trading up, now they see that customers are really looking for, you know, well priced fashion and value. So you know we feel good about the future licensing streams.

Scott Krasik - C. L. King & Associates, Inc.

Have they lost shares similar to footwear and handbags in department stores? Or it’s case by case?

Jill Granoff

I would say it’s absolutely case by case. You know, in some examples we’ve actually increased share because we’re doing so well. In some we’ve stayed the same. In some, you know, we may have lost a table or two. It really is case by case and account by account.

Scott Krasik - C. L. King & Associates, Inc.

And then David on the expense side, obviously this $20 million number is a gross number, what do you intend to recognize in 2009? If you answered it already I’m sorry I missed it. And sort of can you capture that in the first half of the year or would that be back half loaded?

David P. Edelman

I think if you look at some of the reinvestments and the annualization of the cuts that we made, we probably would be looking at about a $15 million net reduction. And it’s going to be sort of flattish in the first quarter with our savings done in the fourth quarter being offset by incremental outlet stores and then building throughout the back half.

Operator

Your next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

Just following up on Scott’s question about the savings, can you walk through that again, David? The $15 million?

David P. Edelman

Yes. We’ve done a couple of rounds. We started in the back half of ’08 so some of the savings that we have if you annualize them they’re about $20 million run rate. Some of the additional investments we’re going to make back into the business, we’re expecting the net number to be about $15 million.

Sam Poser - Sterne, Agee & Leach

So looking at it does that mean the SG&A should be $15 million less than it was this year in 2009?

David P. Edelman

Yes.

Sam Poser - Sterne, Agee & Leach

So we should be looking for about $190 million or $191 million in SG&A?

David P. Edelman

[Inaudible] $15 million less. It’s going to be a little bit back weighted so some of the savings in the first quarter for example are going to be related to a corporate workforce reduction that Jill mentioned we did just last week. Obviously we’re two months into the quarter so you’re not going to really see that until Q2.

Sam Poser - Sterne, Agee & Leach

So in pure dollars, SG&A will be down in Q1? I mean, I’m just trying to get to the guidance you gave for Q1. Or gross margin’s going to be lower in Q1, lower on a year-over-year basis than it was in Q4.

David P. Edelman

To give a little flavor on Q1, I mentioned our store comps have been running down mid-teens. We expect that to continue. Our wholesale business will be down. Our SG&A will be flattish with the savings offset by some of the incremental outlet stores.

Sam Poser - Sterne, Agee & Leach

Can you talk about the investments that you wrote down, exactly what was it that needed to get written down there? And also the Le Tigre brand and what the plans are there? I mean in the cutting back, is that going to exist or how are you looking at that?

Jill Granoff

One of the write downs was on our auction rate securities and the second write down is on a stock position that we hold in a public company, so it’s really those two items together that lead to the reduction from an investment perspective. What was your second question, Sam? I’m sorry.

Sam Poser - Sterne, Agee & Leach

Could you go into some more details? You talked about the – I asked about Le Tigre specifically, but can you also go into more details about, you know, streamlining the business to focus on Reaction and Kenneth Cole because you do have some of those other brands there including Le Tigre?

Jill Granoff

I think there are really two parts to the streamlining. One is that we’re looking to optimize the portfolio. We have a lot of brands as you know so one example was Tribeca, which was not profitable for us and we were able to convert that into other lines. We are looking at some of our other brands. Let me give you an example. With Bongo we’ve recently negotiated to eliminate the minimum so, you know, that will help us as well. So we’re looking across the portfolio of brands and we are shifting our resources where possible to really drive Kenneth Cole New York and Kenneth Cole Reaction.

But the major area of streamlining has to do with the organization and how the organization was aligned. So for example, in the past we had two presidents of wholesale. Now we’re going to have one. We had two heads of visual merchandising. Now we’re going to have one. And as we move from more of a wholesale driven to more of a retail driven model, it’s critically important that we have consistency across our product categories.

So we’re moving from a category structure to a structure that will really build, you know, excellence. We will have a creative director that oversees design for all product categories. We never had that before. We will have a head of wholesale over all product categories so that we could really fit top to top with our key partners and determine how we optimize our positioning as a lifestyle brand. We’ve never had that before. So the streamlining in many ways was, you know, reducing or eliminating some senior management positions. We will still have support for channels and categories, you know, at mid-management and lower levels, but a lot of the streamlining had to do with the realignment to be more vertically retail focused which at the end of the day is about optimizing sell through at point of sale.

Sam Poser - Sterne, Agee & Leach

One last question, you mentioned the Bongo negotiated the elimination of the minimums, with your licensing revenue and I ask this question but I don’t usually get an answer – with the licensing revenue, how much of your licensing revenues were based on guarantees versus over the top, I mean, or what percentage of the licenses or something to that effect? If you can speak to that and how you’re looking at 2009 in the same way.

David P. Edelman

Yes, Sam, we don’t really break that down. I mean, some go over and we recognize what we call over royalties, and some are a little bit under and we’re recognizing them [in].

Jill Granoff

And also, Sam, just to go back to Le Tigre, Le Tigre will be accretive in 2009.

Operator

Your next question comes from Heather Boksen - Sidoti & Company.

Heather Boksen - Sidoti & Company

Just curious, with regards to the quarter and I guess what you’re seeing so far in the first, men’s versus the women’s sides of the business. Is either side significantly weaker or stronger than the other?

Jill Granoff

No, we’re not seeing a major difference in men’s versus women’s. What we are seeing though, and I know that we are counter to most other trends, we are actually seeing that our apparel business is stronger than our footwear category. And I know, you know, that that comes as a surprise to many. But we think that’s a change that we’ve made in our assortment model, to really address casual wear occasions, has really moved our apparel business forward and we’re seeing traction there, whether it’s dresses in women’s or denim in men’s, you know, it’s overall. We are seeing some nice traction in apparel. So not big difference men’s versus women’s but certainly we are seeing a difference by product category.

Heather Boksen - Sidoti & Company

And if you called out a backlog number I missed it, but can you tell us what the backlog was at the end of the fourth quarter?

David P. Edelman

Yes, the wholesale backlog at the end of Q4 was down 18%.

Heather Boksen - Sidoti & Company

And I guess with regards to the wholesale environment, obviously everybody’s claim to inventories cautiously, what kind of feedback are you guys getting from some of your bigger partners?

Jill Granoff

I mean the type of feedback we’re getting is they really like the improvements that they’re seeing in our product and, you know, we have really focused as I’ve said on our assortment model to really address the lifestyle of today’s consumers. For example, you know, in footwear, you know, the feedback was you guys have too many dressy shoes, too many Oxfords, you know, we see better selling now in loafers just as one example. I think also in men’s footwear for the fall, you know, we’ve had very positive feedback from our wholesale partners especially on having greater differentiation between Reaction and Kenneth Cole and they love the fact that we have developed product at opening price points. They say, you know, “Looks like you guys really want to do business.”

So I would say overall, you know, people have been receptive to the product changes that we’re making. We also have a fit and quality taskforce to insure consistency of our product. You know, we are tackling all angles so they’re happy with the product evolution which is good. Clearly everyone’s open to buys are challenged but they have been very receptive to the changes that they’re seeing.

Heather Boksen - Sidoti & Company

Just one last housekeeping question, David, CapEx and D&A plans for ’09?

David P. Edelman

For ’09 we’re looking at about $10 to $12 million in CapEx, primarily in our outlet store chain.

Heather Boksen - Sidoti & Company

Depreciation?

David P. Edelman

It’ll be similar to where we ran last year, maybe plus another $1 million in the $10 million area.

Operator

Your next question comes from Scott Krasik - C. L. King & Associates, Inc.

Scott Krasik - C. L. King & Associates, Inc.

Jill, I just happened to notice that your apparel licensee – your women’s apparel licensee, Bernard Chaus, is running up with some liquidity issues. How does that impact you and what are your plans for the women’s apparel business, either in terms of further rollout, expansion, etc.?

Jill Granoff

So you know Chaus has been a great partner and our business is continuing to grow with them. I mean we were with them just earlier this week and we are getting, you know, positive responses from, you know, most of the retail partners. We’ve actually introduced petite and some plus sizes, so we’re seeing growth in that regard. That said, you know, obviously you’ve seen the [queue] as have we and we are certainly, you know, talking with Chaus actively. They feel very, very good about fall product which we’ve just seen. They are in market right now and so they feel that that is really going to help them out and that said we also are exploring alternatives should that be needed.

Scott Krasik - C. L. King & Associates, Inc.

David and then if you said it I missed it, where are you coming out on cash flow after CapEx this year? Do you expect to be cash flow positive?

David P. Edelman

In 2009?

Scott Krasik - C. L. King & Associates, Inc.

Yes.

David P. Edelman

Well, we didn’t give guidance on the income line but if you model out that we have about $17 million in non-cash depreciation, amortization and non-stock stock compensation charges. If we breakeven we kick out about $17 million of free cash flow. And then we said $10 to $12 million of CapEx spend so we have $5 to $7 million of free cash flow on a breakeven.

Operator

Your next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

On the auction rate securities is there a potential to still sell them back if you litigate it? Some of the other companies are speaking about these days.

David P. Edelman

I don’t know about litigating it. I think when the secondary market opens up we feel that we’ll be able to sell them back. Right now we had a third party independent appraisal come in and give us a conservative valuation and that’s why we took the write-down. They’re on our books at about 50, 55% of their value.

Sam Poser - Sterne, Agee & Leach

Lastly on the leases, I think when we had spoken out at ICR you talked about having Rock Center up on the – you know, actively trying to do something with Rock Center as well as a few of the others. Can you talk to any headway being made there?

Jill Granoff

Actually there could be some headway. We have a couple of parties that have expressed interest in Rock. So you know we are obviously pursuing those conversations, seeing a very little bit of pick up. We know that the Rock Center location is one of the best in the world, you know, huge traffic. It’s a great store it’s just too big for us. So for people that want to be on Fifth Avenue, sort of between Rock Center and 60th Street, there’s really very, very little available. So we’re beginning to see some interest there. And you know we will certainly continue to pursue that.

As I think I may have mentioned out at ICR, we are making progress on some of our other locations as well where we are looking to potentially downsize including SoHo, Michigan Avenue, possibly Dallas. We did have a tenant for Grand Central but backed out so we have to go to RFP there again but we are seeing some momentum in our downsizing or right sizing.

Sam Poser - Sterne, Agee & Leach

And you also mentioned that there were possibly some lease concessions or can you speak to any of the lease concessions [inaudible] stores you’ve been getting into those maybe?

Jill Granoff

Yes, we have been meeting and are planning to meet with, you know, all of our real estate partners and many of them have actually, you know, come to our office. Others we’re making trips, but there’s been a very open dialog and a partnership, you know. They really believe in the brand. We have a healthy balance sheet. We’ve stated that we have growth plans for retail in the future and, you know, they really want to work with us.

So you know we have seen some, you know, initial reductions in the early years, other people moving to percent rent deals and hopefully we’ll be able to share more in terms of the aggregate impact of this on our next call. Right now it’s premature but the dialogs are going quite well.

Operator

This concludes the question-and-answer portion of your conference. I would now like to turn the call over to the Kenneth Cole management team for closing remarks. You may proceed.

Jill Granoff

I just want to say thank you again for joining us on today’s call. Of course I want to thank our shareholders for their continued patience as we navigate through these difficult times. Hopefully you see that we really are taking, you know, aggressive steps to improve our profitability and also for any other associates that may be on the line, we want to thank them as well for their continued support and commitment. You know last week was not easy but the team is actually feeling quite energized now. They believe in the future and we want to thank the team for their continued support and hard work. Thank you and we’ll now end the call.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Have a good day.

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Source: Kenneth Cole Productions Inc. Q4 2008 Earnings Call Transcript
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