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Perry Ellis International, Inc. (NASDAQ:PERY)

F4Q09 (Qtr End 01/31/09) Earnings Call Transcript

March 19, 2009 11:00 am ET

Executives

Francisco Hoffmann – IR

George Feldenkreis – Chairman and CEO

Oscar Feldenkreis – Vice Chairman, President and COO

Anita Britt – CFO

Analysts

Pauline Forge [ph] – Needham & Company

Eric Beder – Brean Murray, Carret & Co.

Jody Kane – Sidoti & Company

Jeff Mintz – Wedbush Morgan Securities

Robin Murchison – SunTrust Robinson Humphrey

Ronald Bookbinder – Global Hunter Securities

Kelly Duval – BB&T Capital Markets

Kelly Becher [ph] – Eaton Vance

Operator

Good day, everyone. Welcome to Perry Ellis Fourth Quarter and Fiscal 2009 Earnings Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Francisco Hoffmann, Investor Relations and Strategy. Please go ahead, sir.

Francisco Hoffman

Thank you, operator. Good morning, ladies and gentlemen, and welcome to the Perry Ellis fourth quarter and full fiscal 2009 conference call. You should have received a copy of the press release that went out this morning, including the income statement and balance sheet. If you have not received a copy of this release it can be found on our website at www.pery.com

Before we begin, I would like to remind you that some of the comments made on the call, either as part of the prepared remarks or in response to your questions, may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties as described in the press release and in documents that we have filed with the SEC.

Joining us today for this call from Perry Ellis are George Feldenkreis, Chairman and CEO; Oscar Feldenkreis, Vice Chairman, President and COO; and Anita Britt, our new Chief Financial Officer.

I would like now to turn the call to Mr. George Feldenkreis, CEO. George.

George Feldenkreis

Thank you, Francisco. Good morning. A worse year in business finally came to an end on January 31st. At this stage, it is redundant to speak about the tremendous upheaval in the financial markets and the worldwide recession that is affecting almost every business sector around the globe.

I would like to talk today about the reasons why our performance was below our expectation, while at the same time dissecting our results to explain how in the midst of a very bad year we still generated an EBITDA profit of $45 million. I will also focus on what we are doing to improve our performance this year and Oscar will provide details on the various business opportunities that we are growing and the many opportunities that lie ahead.

Last fiscal year, we began with the acquisition of two contemporary ladies companies. At that time and to this day contemporary products are the best performing in the women’s sector. While C&C California and Laundry by Shelli Segal are extraordinary brands, we found the companies in much worse shape that we could have ever expected or could have analyzed through the due diligence process. After the acquisition, we had to terminate the New York design team and move the Laundry creative process back to California, where it began, to regain the brand’s flair and innovative design.

We revamped the product line as well as the design and management looks. We expected this business to be accretive last year, but is actually (inaudible) unforeseen losses in the midst of a deteriorating economy.

Another factor that affected our performance is the market disappearance of many men’s specialty stores, which have been buffeted [ph] by higher rents, slower sales, and an inability to obtain credit insurance from the factory – factoring organizations. This affected businesses like Axis and Tricots St. Raphael. We have substantially discontinued this business and avoided the losses this year that we had last year.

Our retail businesses, which currently produce about 5% of total revenue, was affected by the general slowdown in consumer traffic and by the end of the year it became a loser rather than a winner. It ended the year with losses rather than being the profit maker it was the previous year.

On the international side, our U.K. business, which represents another 5% of our business, has been a steady contributor in the past, was not profitable last year. We revamped the whole organization, hired new associates for the five top management positions and we have set a course that should make this operation profitable again. Financial results for the division were also negatively impacted by the pound sterling losing 25% of its value last year and by the consumer slowdown in the U.K.

In licensing, we maintain our same level of revenues as last year. During the last 12 months we have strengthened considerably our licensing division with the hiring of a new President, an additional sales associate, and we look forward to growing our royalties and adding licensing partners in the year ahead.

In the face of all these factors, we find it remarkable that we were able to finish the year with revenues of $851 million, only 1.5% below the previous year, when you compare it with drop in sales for most retailers, and with a gross margin that deteriorated by only 1% to 32.7% versus 33.8% last year as we consider that our markdowns went up by almost $10 million versus a year ago.

As we analyze the performance of our business units, our core wholesale business platform performed well and not only generated the $45 million in EBITDA, but also covered for the losses in the business I enumerated before as well as the non-recurring expenses associated with our restructuring initiative to reduce our expense (inaudible).

On the SG&A side, our expenses increased by $21 million and this positive considering that $80 million of that amount were the SG&A expenses for the ladies contemporary business and a $4 million amount was for the additional eight retail stores opened. This means that our SG&A basically remained flat last year and will be lower this current year.

For the current year, we are projecting a drop in revenues in the high-single to low-double digit range with a corresponding drop in gross profit in the low-single digits. However, we are equipped to handle this drop with the measures we have taken to reduce our expense structure and focus in turning around the businesses that underperformed last year.

I would like to share with you some of the thoughts on the impairment of brand issue, which is the mark-to-market of the apparel industry. During this quarter, we have taken impairments for $22 million, mostly related to the appraisal of some of our brands. Perry Ellis has invested $207 million acquiring brands. This portfolio of brands is independently appraised by a professional organization at over $375 million. However, accounting rules do not look at our portfolio of brands as a whole, as a basket.

Each brand is appraised individually based on its current book-of-business. For example, a few years ago, Chanel or (inaudible) would have been appraised at a small fraction of their current value. While in the aggregates our brands generate an income that justify the same higher price that we pay for them individually, some of them do not. Consequently, to comply with the GAAP regulations, we took the required impairments. However, within the context of our total brand portfolio, the reality is that our brands continue to worse substantially more than when is reflected in our books.

While we have decided not to give guidance for the year because of the uncertainties created by current economic situation, we project that the quarter ending this April 30th will be a profitable quarter.

At this stage, we continue to be focused on positioning ourselves to take maximum advantage of the eventual reversal of the economic pendulum as well as to disappearance of some of our competitor. While our profits have been heavily impacted by the financial crisis this past year, we have taken the necessary steps to make sure that this Company continues its growth and increases its profitability going forward. We feel that our core businesses performed exceptionally well even in a dramatically hostile environment.

Actually, what we call in our Company the periphery or the outside of our core business like outlets, men’s specialty, contemporary women, and European operation, are what dragged our earnings down. We are committed to turning those businesses around and we know that all of them will do better this year. We have new management running this division and we are confident that as we focus on our efforts in these areas, they will become the contributing division within the next 24-month period.

We have done it in the past. We have been able to turn around many of our businesses that today are very profitable and we confident that this time again we will succeed. These are difficult times, but we must remember that there are 140 million Americans receiving a check every week.

We are confident that our business model, which contains diversified distribution channels, great sourcing and design capabilities, strong management and financial discipline, backed by superior information systems, and coupled with the commitment of our 2200 associates, will move our Company forward and will bring us to new heights in the years to come. Thank you. Oscar?

Oscar Feldenkreis

Thank you, George. Good morning. We started fiscal 2009 strongly. Through the first nine months of the year we grew revenues by $10 million and improved gross margins by 52 basis points despite an increasingly difficult environment with sales reductions due to retailers filing for Chapter 11 during the year, the exiting of over $30 million in bottoms private label business, and the restructuring of our U.K. business.

Businesses such as swim, Hispanic brands, golf, denim, and Perry Ellis delivered outstanding results. However, this last holiday season was the most challenging I have experienced in my 20 plus year career in the apparel and retail industry. By now everybody is aware of the difficulties in the overall economy and particularly of retail during the fourth quarter. Rather than dwelling on the consumer environment, which other companies have discussed at length, I would like to talk about the trends we see in the market that favor Perry Ellis International in the year we are starting and the actions we are taking to benefit from these trends. These combinations of opportunities and actions will help Perry Ellis International to come out stronger and better positioned within global economy rebounds.

First, the consumer is still buying, not at the same level as last year’s, but wherever there is newness and performance advantages, the consumer is still inclined to purchase. Excluding our replenishment programs and the exiting of our men’s specialty store business, we shipped almost 16 million units during the fourth quarter, approximately the same number of units as the fourth quarter last year, despite a 10% reduction in net sales. Also, as last week’s governmental retail reported detail during January and February of this year, overall retail sales were up, particularly at apparel stores, which reported a 2.8% increase in February.

Second, diversification is a key advantage of our Company and a successful strategy in today’s environment. While luxury specialty and department stores had a particularly challenging fourth quarter, some of them experienced double digit revenue decreases. Our brands grew in the distribution channels that have better weathered the environment. For example, at Kohl's and J.C. Penney, we grew over 20% during the quarter and by 6% for the year, primarily driven by our golf, Hispanic, and niche businesses.

Diversification in the product categories is also key. Nike, Jantzen, Jag, and other swim divisions in general delivered another outstanding quarter with revenue growth of over 7% and annual growth of above 10% while also growing market share. Another example of our product diversification strategy is our denim business. Once we detected the decline of the casual bottoms as a category at retail, we made the investment to develop a denim business as a substitute. In fiscal 2009, those investments paid off. With growth of over 15% across all distribution channels and bottoms brands Perry Ellis, Perry Ellis America, Savane, and Axist, et cetera, reaching nearly $40 million in revenues this past year, poised for a strong growth in the current year.

As part of our strategic review process, we exited those areas that are not meeting our expectations while continuing to nurture business that provide strong financial results. As previously announced, we exited the men’s specialty store business, primarily because of lack of credit in the market to insure the receivables of smaller stores. This has significantly reduced our overhead in sales, design, and marketing and merchandising, plus back-end service. We are also exiting the outerwear Dockers license as the business didn’t achieve the financial thresholds we established when we acquired it. Combining these two exits, we expect annual savings between $7 million to $8 million starting in fiscal 2010.

We begin fiscal 2010 with a powerful portfolio of brands like Perry Ellis, Nike, Jantzen, Original Penguin, PGA Tour, Laundry by Shelli Segal, C&C of California, and Cubavera, which are nationally and internationally recognized.

Today, we are pleased to announce that our portfolio has been strengthened with the addition of Callaway Golf. We are very excited about the prospects of this new partnership, which strengthens our golf business with the preeminent brand in golf worldwide. Callaway’s addition also opens up further opportunities for us as this license encompasses not only men’s apparel, but also women’s, and leather belts. Fiscal 2010 will be transition year for Callaway from their previous license, and for us from the PING brand, but we firmly believe that this opportunity has the potential to become a major contributor to our growth in the years to come.

As related to golf, we are exiting the PING golf brand. After 10 years of working with PING and developing it into a 60 million worldwide wholesale apparel golf brand, we will let the license expire at the end of this year. PING golf apparel revenues declined last year by almost $5 million in the U.S. driven by general weakness in the green grass, and corporate market. And there were discrepancies with our licensed store and the direction of the brand. We are working closely with PING golf to ensure a smooth transition out of this business.

Callaway selected Perry Ellis International as their new partner because of our outstanding record in the golf category. We continue our market penetration in all distribution channels, yielding outstanding financial results. Our golf business grew by almost 20% for fiscal 2009, primarily driven by the performance of the Grand Slam at Kohl's, PGA Tour at J.C. Penney, and other retailers and champion stores at Macy’s in terms of door penetration. This spring, our products are available in all of Kohl's doors, all J.C. Penney doors, and the majority of Macy’s doors. In total, today, we are serviced in 3842 doors up 773 doors compared to spring 2008. With the addition of Callaway Golf, we will be able to reach a higher retail distribution for the brand and strengthen our presence in the ASI and corporate market.

A majority advantage for Perry Ellis International is our ability to identify and address niches, which today is more important than ever. Our investment over the last two years in state-of-the-art planning systems allows us to track sales by door, product, color, and size, and find under-deserved areas that match a store’s customer profile. We believe that as retailers continue to have difficulties with comp sales, and as the price-value relationships become more important, it will be crucial to have the right product in the right size with the right color in each door and the best way to improve sales-throughs and increase margins along these lines. We are excited about the prospects that the (inaudible) Macy’s opens for our Company. As we become more familiar with the details of the initiatives, we believe that we are in a very favorable position to be a major partner based on our planning capabilities and our filed presence within a team of over 65 merchandise coordinators.

Our investment in demographics software also continues to help us in developing our Hispanic brands. Cubavera and Havanera, and Centro continue to be important growth vehicles for us as retailers are looking for ways to connect with the Hispanic consumer, the faster growing consumer segment in the U.S. Our Hispanic brands produced a revenue increase of 6% during the fourth quarter, and of 8% for fiscal 2009. We keep increasing our door penetrations of these brands with Cubavera available in 824 department store doors for spring’09, Havanera in 252 J.C. Penney stores, and Centro at 461 Kohl's doors. As a category, our Hispanic products are available in over 1500 doors in spring’09, an 8% growth in door penetration.

In our actions sports business, Gotcha expanded from a test of 100 doors in spring’08 to 678 doors in spring’09, primarily at Kohl's and other mid-tier regional retailers. Gotcha more than doubled its revenue in fiscal 2009 and continues developing strong momentum in its channel, promising another strong year for fiscal 2010.

About our women’s contemporary brands, Laundry by Shelli Segal and C&C of California, last year we made the required investments to develop and turnaround these brands. Today, we see several opportunities to gain market share, given the smaller companies are finding it challenging to perform in this environment. We have built-in infrastructure today to support retailer’s complexity such as planning and in-store merchandising, which allows us to identify product niches by market and need.

Our women’s contemporary brands have started to deliver results with strong sell-throughs thanks to better product and positioning within the department store channel. Although the depressed consumer environment hurt us last year on the turnaround of these brands, we are very confident that we have the right gene, sourcing and strategically to return these brands to profitability within the next 12 to 24 months.

Finally, we believe that there will be a number of opportunities for a financially strong company such as Perry Ellis International. As less efficient competing brands exit the market, many companies don’t have the ability to serve today’s retailer due to their complexity and sophistication. Once the economic environment starts improving, we will look for new M&A opportunities in areas such as swim, denim, and contemporary, which we believe will keep driving our top and bottom line growth.

In summary, although the retail environment remains challenging, we are confident about our current opportunities and our ability to find new niches and growth areas. We have the right diversification strategy with extraordinary brands. We have developed one of the most efficient business platforms in the industry with state-of-the-art planning systems.

Perry Ellis International’s management team is determined to maximize shareholder vale and will take all necessary actions to reach our financial targets. We remain disciplined in our inventory management, working capital, and cost structure. As we enter this uncertain year, we are confident that with all the actions that needed to be taken have been taken and that we will come out stronger than ever from this economic recession.

Now, I would like to welcome the latest addition to our management team, Anita Britt, our new CFO, who will discuss our financials.

Anita Britt

Thank you, Oscar. First of all, I would like to just start out. I am very pleased to join the Perry Ellis International family. I am working very closely with both Oscar and George. I am also pleased to be joining one of the most dynamic and solid companies in the industry that has established a benchmark for excellence. I would like to thank Tom D’Ambrosio for the excellent job he has done over the last two year. I am looking forward to working together with him and to continue building on the foundation he had laid out during his time as Interim CFO.

Now, turning to our numbers. Our fourth quarter fiscal 2009 revenue were $191 million versus $212 million, a decrease of $21 million or 10% compared to fourth quarter last year. As Oscar laid out, although we were above plan on our golf and Hispanic categories and reported a solid performance by our swim division, we experienced an overall decline in total revenues attributable to a higher level of sales allowances to our retails partners, the planned reduction of our replenishment in private label bottoms business, the continued effort of retailers that are operating under Chapter 11 protection, and the sales reduction of certain brands in the specialty store channels.

For the full fiscal 2009, revenues declined to $851 million from $864 million, a 1.5% decrease over the same 12-month period last year. Although through nine months, we had improved our gross margin by 52 basis points, our overall fiscal 2009 gross margin was significantly impacted by the highly promotional holiday season, which required an increase in margin support of approximately 200 basis points to our retail partners.

In addition, we liquidated 290,000 units of products below cost related to the exiting of our specialty store business and inventory targeted for retailers who filed for Chapter 11, both of these impacts occurring during the fourth quarter of fiscal 2009. As a result, gross margin in the fourth quarter decreased 640 basis points to 29% from 35.4% for the same period last year. And gross profit declined from $75 million to $55.5 million. On a yearly basis, our gross margins for fiscal year 2009 were 32.7%, a decrease of 110 basis points over prior year margin of 33.8%.

As George discussed, during the fourth quarter, the Company recorded a non-cash impairment of $22.3 million related to the reduction in value of trademarks, primarily related to our specialty store channel and businesses in companies in liquidation as well as some leasehold improvements. The Company also further impaired the carrying value of its marketable securities, which were classified as available-for-sale for a total of $2.8 million for fiscal 2009. In total, the Company incurred $25.1 million in non-cash impairments during fiscal 2009.

In addition, as a result of a strategic review initiated during the third quarter, the Company incurred non-recurring charges related to severance and real estate rationalization totaling $1.2 million in the fourth quarter and $1.7 million for fiscal 2009, and those were in line with our expectation. The strategic review resulted in the identification of approximately $20 million in annual savings mainly through overhead reduction, office consolidation, and disciplined spending in information technology system as well as marketing.

Net of certain required expenses related to personnel retention and motivation incentives, the anticipated SG&A reduction for fiscal 2010 approximates $15 million. As most actions necessary to realize our restructuring savings in fiscal 2010 were taken during the fourth quarter, our total SG&A increased for the quarter by $2.5 million to $54 million compared to $52 million last year. This increase includes $1.2 million in the restructuring charges that I just spoke to and approximately $4.2 million in ongoing operating expenses for the women’s contemporary division. And these were partially offset by some of the expense savings that we are starting to realize.

For the fiscal year 2009, total SG&A increased $20.9 million to just under $237 million from prior year’s $260 million. This increase includes $4.1 million related to one-time restructuring charges for the strategic review process, the Q2 restructuring of our U.K. operations, and the infrastructure development of our women’s division, plus ongoing expenses of $18.2 million for the contemporary platform as well as $3.8 million related to the opening of eight new retail stores during the year.

Excluding $25.1 million in non-cash charges on trademarks, leaseholds, and marketable securities, and $4.1 million for the one-time non-recurring restructuring items, the Company generated cash earnings of $45.6 million for fiscal 2009. The Company continues to apply a very disciplined approach to cash flow and working capital management.

During the fourth quarter, we incurred $4.4 million in interest cost, which represents an increase of $650,000 compared to the same period last year. For the year, our interest expense decreased by $103,000, remaining relatively flat at $17.5 million compared to $17.6 million for prior year.

Our loss per share for the quarter was $1.58 including the $1.17 effect attributable to the non-cash impairment of trademarks and leasehold improvements, a $0.01 effects for the impairment of marketable securities, and $0.06 from the cost related to our strategic review. Adjusted for these non-recurring items, we reported a loss of $0.34 per share for the quarter.

Similarly, our fiscal 2009 loss per share at $0.89 includes the fourth quarter charge of $1.17 for the impairment, $0.15 in impairment of marketable securities, and $0.21 related to cost from the strategic review. Considering these one-items, the Company reported earnings of $0.65 per share compared to $1.80 for prior year.

We remain in excellent financial condition. From a liquidity perspective, we ended the fourth quarter of fiscal 2009 with $54.4 million in borrowings on our revolving credit facility, which totals $125 million as well as $8.8 million of cash on our balance sheet.

Total debt at the end of the year was $225 million versus $176 million in prior year. Although overall debt increased by $53 million it includes $33 million for the acquisition of women’s contemporary as well as $11.6 million for the share repurchase, which on average (inaudible) about $6.54 average price repurchase for the year.

We continue to maintain a very disciplined approach to our inventory investment as well, ending the year with $139 million in inventory, which supports our first quarter shipments. Our inventory increased over prior year by 1.9% or $2.6 million, which includes a $6.8 million increase for women’s contemporary, which was not in the prior year’s numbers, as well as $2 million for seven new Perry Ellis stores, and one Original Penguin store, which opened during fiscal 2009. Adjusted for these businesses, inventory actually decreased to $130.3 million, a 4.5% reduction compared to prior year.

Our inventory turns also improved to 4.3 time turns during this year versus 4.2 for prior year. Accounts receivable totaled $142.9 million as of year-end, a $4.8 million increase over prior year’s $138 million. Receivable levels continue to be very well managed and our days outstanding approximate 68 days, even with prior year’s.

We continue to closely monitor the financial position of our customers and continue to take actions such as insuring higher risk accounts that has minimized our bad debt despite the recent retailers’ filing for Chapter 11.

During the first 12 months of fiscal 2009, we incurred approximately $10.7 million of capital expenditure in technology and systems, retail stores as well as some other expenditures. Depreciation expense for the year was $14.7 million versus $13.3 million in prior year.

I would like to highlight that effective for fiscal 2010, the Company has revised its fiscal reporting calendar to a retail calendar. As a result, our fiscal quarter will end on a Saturday. This change is not anticipated to be material to our quarter or annual year-end and the change allows us to be consistent with our retail partners.

With respect to our view on fiscal 2009 performance as indicated in our press release, given the current uncertainty and the macroeconomic environment, we will temporarily suspend our policy of providing annual guidance until there is further clarity in the consumer and retail environments. We have provided directional guidance in our press release in regards to revenue, gross margin, and expenses for the full year.

In summary, we have taken decisive, but necessary actions to ensure the financial strength of our Company. We have reduced our cost structure, restructured underperforming businesses, exited product lines that have been marginal performers, as Oscar discussed, and injected increased discipline into our working capital and cash flow management. As both George and Oscar have expressed, we are confident about our prospects not only for the fiscal year we are starting, but for the future go forward.

With that, we will open up the call to questions. We do ask that you limit your questions to one at a time, so everybody has an opportunity to get their question in. I will now turn the call over to the operator.

Question-and-Answer Session

Operator

(Operator instructions) We’ll go first to Pauline Forge [ph] with Needham and Company.

Pauline Forge – Needham & Company

Good morning and welcome to Anita. Congratulations on an exciting announcement with Callaway. We are hearing from other vendors out of the tradeshows that retailers are buying much more closer to need. So, are you seeing this as a shift in buying patterns for the industry or more of a short term correction to heal some of the wounds that were suffered during the fourth quarter?

And also if I may, I recall – if I recall correctly, you had mentioned that by far [ph] the inventory system maybe too lean, do you still feel that way now? Thank you.

Oscar Feldenkreis

The – I will answer the questions, this is Oscar, the retailers are purchasing much closer to the vest. They are also leaving dollars available for liquidity based on performance of product and we are receiving reorders on product that is performing at retailer. Please take – please keep in mind that last year the spring season was probably – was a good season in – if you compare spring season to spring season for last year. Also, the bottom really fell out of the market. We began to experience difficulties in the market, most – like in the May timeframe. So, that’s why right now you are seeing retailers are adjusting their inventory plans more according to what they experienced in Q4. And they are buying closer to vest and we are working much, much closer using our sophisticated systems to ensure that we are constantly feeding them needs to replenish their inventory on product that is performing well. Also, take into account that Easter – there is an Easter shift this year where last year Easter was in March, this year it’s in April. So, there is definitely a change in when they are actually going to build up more of their inventory needs. We will probably come in at the end of this month, going into the beginning of next month.

Pauline Forge – Needham & Company

Right, thank you.

Operator

We’ll go next to Eric Beder from Brean Murray.

Eric Beder – Brean Murray, Carret & Co.

Good morning

Oscar Feldenkreis

Good morning, Eric.

Eric Beder – Brean Murray, Carret & Co.

Could you talk a little bit about the men’s specialty business? How big a business was that? I know you talked about the units you got rid off in Q4, but how big a business was that in terms of the overall picture?

Oscar Feldenkreis

You are looking at in total of about $12 million business that was generated between Tricots and Axis. We felt that that business was continuing to decline. It was at one stage a $20 million business back in ’08, but we kept on seeing the further depreciation of that business. Also, Penguin was impacted because of again the specialty store market, but we believe that with – we are going to focus our specialty store business going forward more on the contemporary side, which is really where the – that consumer is really finding that there is a bigger opportunity versus a traditional men’s business that in the past Tricots and Axis was doing.

Eric Beder – Brean Murray, Carret & Co.

And on the contemporary business, you talked about how it – had losses in 2008 and how it can be eventually profitable. Do you expect to see – what was the nature of losses last year? What do you expect to see it have – how do you expect to roll it out this year and move forward profitability.

Oscar Feldenkreis

On our ladies business?

Eric Beder – Brean Murray, Carret & Co.

Yes.

Oscar Feldenkreis

Well, our ladies business, number one, we have improved the sourcing dramatically, which we believe that one of the foundations of our business and our capabilities has always been sourcing. So, that was issue number one from last year when we acquired the business in February. We basically, the first half of the year was it really acquired – the inventory was actually purchased from the – from Liz [ph]. So, basically there was very, very little improvements that we can do. The other thing is that we have much more discipline today on the product merchandising and design side where we are designing within what our margin goals are and as well as we are generating sales. Also have hired a stronger sales organization today than what we were before. We are projecting the Laundry business to grow this year from last year close to – I’ll tell you right now – we are expecting that business to grow about 30% year-over-year and we feel that there is still – based on sell-throughs, we can go ahead and continue to grow that business. We are focusing in on niche businesses within the laundry world like prom dresses. We are also looking at the day dress, which currently today is much stronger than the social side of the business.

On the C&C side, we’ve evolved today the brand not only to be a niche business but also to add wovens and some of our best-selling product in C&C at retails is our woven business. So, as we continuously evolve these brands and make it much more of their – what they represented or they should have represented, we feel that there is a lot of upside opportunity. Plus the new sales force is much more focused on making sure that this is done.

Eric Beder – Brean Murray, Carret & Co.

Okay. Thank you.

Oscar Feldenkreis

Thank you, Eric.

Operator

We’ll go next to Jody Kane from Sidoti and Company.

Jody Kane – Sidoti & Company

Thanks. Hi, can you talk a little bit about the sales decline that you are expecting, how much of that is from exited business and how much is just from organic decline?

Oscar Feldenkreis

This year, the year we just finished, we are looking at – if you look at basically just in businesses that we have exited, not including the $30 million from the specialty store, not including the bottoms business of $30 million, you are looking basically almost at $60 million that have either businesses that we have gotten out of that represented specialty store businesses, the Dockers outerwear business, plus the $30 million in lost businesses in the bottoms private label that really came more from the mass side such as Wal-Mart. We – that’s the total dollar amount that we are experiencing negativities going in from the ’09 year into the – excuse me going into the fiscal ’09 versus last year.

Jody Kane – Sidoti & Company

And do you have an idea of what that will be for fiscal 2010 in terms of the declines of low or high middle single digits to low double digits, what percentage of that will be exited business versus declined?

Oscar Feldenkreis

Well, we hope not to exit anymore businesses. We are projecting next year a – 10% decline in total wholesale revenue, going into fiscal 2010.

Jody Kane – Sidoti & Company

Okay.

Oscar Feldenkreis

This current year.

Jody Kane – Sidoti & Company

And the number of – are you seeing an increase in door closures or just a reduction in the amount of product that’s – that people are – that retailers are expecting to sell?

Oscar Feldenkreis

We have – well basically what’s happening is that retailers are running at very, very conservative and in some cases down plan in the first half of the year. So, that’s why you are seeing – we are projecting our first half of the year to be down to’08, predominantly driven by better inventory control by the retailers and looking up the second half of the year more going into the fourth quarter as really the upside because that’s really was the most difficult. Keep in mind also that last year retailers shut down their entire replenishment inventories because they don’t want to carry – they don’t want to build up inventory going into the January month and wanted to clean up as much inventory as possible. We are not experiencing that type of situations today with the retailers as we move into 2000 – as we are currently in this year.

George Feldenkreis

Jody, I would like to add that I mentioned that we only dropped 1.5% compared to last year because it’s a great testament to the fact that we dropped almost $50 million or $60 million in business, which is a huge amount, and we only dropped a million a the end, which means we were able to grow our businesses on a much better profit than – and better long term views than they were before. For example, we dropped a lot of business with Wal-Mart because the profit margins were really not good for the Company. And it came to a point that you have to take the hard medicines and go forward. And we had exited businesses that were not producing or were actually were creating losses. So we cannot look only at the revenue side of it, but we have to look at the bottom. And the bottom is that we made $45 million in profit despite taking all those hits, so we are in an excellent position now going forward. And I have to add that the Callaway transition has not – because – actually the final documents were signed yesterday – none of the Callaway possibilities for this year are in our budget. And they won't be for a while until we can probably we’ll have a better idea when we announce the – our Q1 numbers and at that we’ll be able to give better guidance as to what impact we could have on Q4 with the great Callaway brand.

Jody Kane – Sidoti & Company

Right. And just finally, you did say that you expect first quarter to be profitable not unprofitable, right?

Anita Britt

Correct.

George Feldenkreis

Correct, yes.

Jody Kane – Sidoti & Company

Great. Thank you very much.

George Feldenkreis

We expect it to be more profitable than last year for sure.

Jody Kane – Sidoti & Company

Yes.

Operator

We’ll take our next question from Jeff Mintz from Wedbush.

Jeff Mintz – Wedbush Morgan Securities

Thanks very much. Anita, could you talk a little bit about the interest expense expectations for fiscal 2010 and kind of where you see the debt going over the course of the year?

Anita Britt

Yes, now absolutely. In terms of interest expense, we’re expecting that to be fairly consistent with prior years, so just in that $17 million sort of range. In terms of our revolver, we just came off the highest borrowing rate at this period in time because we are building inventory. So, we are starting to see that come down, so we do anticipate that by year-end our revolver is actually going to be down year-over-year because of cash EBITDA as well as better management of our working capital and quicker turns in our inventory.

Jeff Mintz – Wedbush Morgan Securities

Okay great. And then if I can just sneak in kind of a ministerial question, do you have the ending share count for the end of the fiscal year, just the actual diluted shares at the end of the year?

Anita Britt

We ended the year at 13.65 million – 13,650, it’s on the press release.

Jeff Mintz – Wedbush Morgan Securities

Oh, it is, okay.

Anita Britt

Yes.

Jeff Mintz – Wedbush Morgan Securities

Great. Thanks very much.

Operator

We’ll go next to Robin Murchison from SunTrust.

Robin Murchison – SunTrust Robinson Humphrey

Thanks everyone. Did I miss it – did the press release also say how much stock you bought in fourth quarter, I think you said for the year, earlier?

Anita Britt

Yes. No, it does not have the amount that we purchased in the fourth quarter.

Robin Murchison – SunTrust Robinson Humphrey

Is that–?

Anita Britt

We’ll follow up with you after the call on that, Robin.

Robin Murchison – SunTrust Robinson Humphrey

Okay. Also, some of the vendor manufacturers are indicating in this tough environment what sort of decline in sales they can experience and remain to a cash flow neutral position. Have you all looked at that?

George Feldenkreis

Earlier we – Oscar just said that we expect a 10% decrease in revenues, but since we expect to have better profit and better cash – more cash this year because of it, we expect to end up on a normal line where we would not make an acquisition, which we are not contemplating right now to make, we should end up at the end of the year with less borrowing. So, that would mean that we are in a much stronger financial position.

Robin Murchison – SunTrust Robinson Humphrey

Okay. I may follow up on that. I also want to ask you about the women’s business. Understanding that you are planning laundry up about 30% this year and I presume C&C is also planned up this year?

Oscar Feldenkreis

C&C is – it’s up about 15%.

Robin Murchison – SunTrust Robinson Humphrey

Okay. And some of the other things we are hearing out there, just wondered if you could comment about what sort of opening price point discussions or just generalized price point discussions you are having with your retailers? We are certainly hearing, for example, that Nordstrom is requesting or working with their vendors on lower opening price points and I wondered if you could touch on that? Are you affected if this was with your customer base? Thank you.

Oscar Feldenkreis

That is happening to everybody and those vendors are not doing it I am sure that they will continue to see loss of revenues and partnership with the retailers. As we are dealing today in a – I would say that there has been a correction in the market on retail pricing, and I feel that in today’s environment when there is a consumer that is shopping, it’s better for you to have your product better priced and value priced at that time rather than them going out and marking it down at 50 off 30 off or whatever the activities that need to be had in order to promote and liquidate that merchandise. So, yes, everybody – I mean we have definitely done that. We have reviewed all of our prices and we continue to do that to ensure that the price to value relationship is proper. And wherever we feel that it’s not, we will go ahead and continue to look at that as a form of making sure that our products sells through at regular price in the inception rather than waiting for it to be liquidated, which is more costly at the end.

Robin Murchison – SunTrust Robinson Humphrey

Hey, guys, thank you very much.

Operator

We’ll go next to Ronald Bookbinder with Global Hunter.

Ronald Bookbinder – Global Hunter Securities

Good morning.

Oscar Feldenkreis

Good morning.

Ronald Bookbinder – Global Hunter Securities

To follow up on that, so because you are seeing sort of pricing pressure in the environment on opening price points, is that why you are looking at gross margins being down in the first half of the year? Does that have a lot to do with it?

Oscar Feldenkreis

Anita.

Anita Britt

Yes, I – you know, at the end of the day, I don’t think it’s so much that it’s opening point pressure because we do – when we price our products, obviously we are looking at value in the product that we are providing. So we do believe that when we go out we are appropriately priced and we have a different strategy that Oscar has talked about in each of our brands. What we are really looking at versus – or why it was such a strong first half, we do believe that just from a margin perspective, we have planned (inaudible) a little bit up in the first half, so we do believe that that comparison will be a little bit tougher in the first half. And when we look at the second half, especially going into the holiday season, retailers planned their businesses a little too aggressively [ph] and there was excess inventory out there. So, we do believe that in terms of when we look at second half of the year, inventories are going to be planned much tighter. And there is going to be less (inaudible) support and obviously less inventory going into the off price market.

Ronald Bookbinder – Global Hunter Securities

Okay, and–

George Feldenkreis

I would like to add that that is – now the department stores have had – the retailers have had these switch from brands to private label. I think that the difference between private label and brands actually had narrowed recently and that’s – they add more value to the brands. Number one. Number two, the reality is that product today is being quoted at lower prices in the (inaudible). So, as the year progresses, there will be improvement on that sector, but it’s – they are quantifiable at this point or how will that affect the business.

Ronald Bookbinder – Global Hunter Securities

Okay. Thanks. On the Callaway new license, how much in annual wholesale revenues were the licenses that you’ve acquired – what were they generating for Taylormade?

George Feldenkreis

$50 million was the total for 2007 of the Callaway brand. That’s what Ashworth was doing it before Adidas acquired it.

Ronald Bookbinder – Global Hunter Securities

Okay. And–

George Feldenkreis

But the businesses that we are taking, which we are going to be developing, which is really the retail and the corporates part of the business, were a very, very small part of that number.

Ronald Bookbinder – Global Hunter Securities

Okay. And when do you expect to start generating revenue from these licenses even if it is the older – that inventory from the previous licensee.

George Feldenkreis

We’ll look to start generating revenues hopefully by the fourth quarter of this year. None of that is planned in our budgets for this year. So anything of Callaway is really plus. We feel that the momentum is really is going to take more into effect on the first quarter of next year. But we are trying to generate some momentum for the fourth quarter of this year, as this is really a transition year going out of the old license into with us. And we are very excited of the partnership that this brings.

Ronald Bookbinder – Global Hunter Securities

Okay. And just lastly, the payables leverage, you had been getting a slight improvement on your payables leverage throughout 2008 and then it dropped in Q4. Was there something that happened in Q4 that you weren’t able to get any – you actually got a shortfall in payables leverage and what shall we expect going forward?

Anita Britt

Yes, not really. At the end of the year what you are basically saying is just more of a timing. We do believe that there is an opportunity for more leverage in our payables on a go forward and it is one of our mechanisms as we look to better manage our working capital going into 2010.

Ronald Bookbinder – Global Hunter Securities

Okay, thank you and good luck in 2009.

George Feldenkreis

Thank you.

Operator

(Operator instructions) We’ll go now to Kelly Duval with BB&T Capital Markets.

Kelly Duval – BB&T Capital Markets

A couple of questions on your margin outlook for next year. If I have understood correctly there is an opportunity for some sourcing benefit on gross margin, but your outlook, as you have mentioned here, hasn’t really baked any of that in, is that correct?

Oscar Feldenkreis

That is correct.

Kelly Duval – BB&T Capital Markets

Okay and do you feel that that opportunity could be substantial in ‘10?

Oscar Feldenkreis

Really that has a large dependence on what you use. Right now, it also depends on oils maintaining at where it is today and hopefully it will, some of the raw materials. The impact would really be more on Q3 since we work in a four to five-month lead time, so you won’t see the benefit of margins really into Q3. Remember that the majority of our Q1 products was purchased back in October, November, and December, so that’s why we are not generating the – probably gross margin impact in the first half of the year.

Kelly Duval – BB&T Capital Markets

Okay, thank you. And then on the SG&A savings, the $15 million, how do you foresee that falling quarter by quarter, is it something that’s more back-half weighted?

Oscar Feldenkreis

We do it evenly.

Kelly Duval – BB&T Capital Markets

Okay. And then, have you provided – if I’ve missed this, I am not sure – an outlook for CapEx and D&A for the year or could you give some insight to that?

Anita Britt

Yes we –

Oscar Feldenkreis

About eight – go ahead, Anita.

Anita Britt

Yes, we are expecting to spend somewhere in the neighborhood of about $7 million to $8 million in CapEx for 2010. We are looking to spend that as frugally as possible in terms of certain systems investments and so forth, but somewhere in that $7 million to $8 million range. And then D&A will actually be down slightly from this year because of some of the impairments on the leaseholds, which are amortizable, so that will come back slightly. Unfortunately, the impairments on the longer term trademarks don’t benefit us.

Kelly Duval – BB&T Capital Markets

Okay.

Anita Britt

And just to point out to you the CapEx, I think I cited when we discussed, our CapEx was about $10.5 million this year, so we are planning that down a couple of million dollars.

Kelly Duval – BB&T Capital Markets

Okay and then just finally real quick I wanted to ask on the private label bottoms business, you talked about not exiting anymore businesses this year, how about the outlook for the private label bottoms did that stabilize? Are you still looking at reducing that business more?

Oscar Feldenkreis

That business has basically stabilized. The area where we have seen the majority of the deficit or the decline, we had a large size business in Mervyn’s last year. We did their basic opening price point (inaudible), which went away of course, and then we had large sized programs with Wal-Mart as well, which also went away as they went on the direct basis. So those are basically the two main reasons where we – last year we suffered a $30 million revenue loss. Also, as we make more and more of our shift towards the branded side of the business, we believe that even working on a smaller size business or flat business this year margin should definitely improve. And we feel that we will not be looking at a further decline in the bottoms business.

As a matter of fact, the existing of Mervyn’s in Southern California I think will represent additional opportunities with some of our customers that are strong in that area such as Kohl's and J.C. Penney, which are definitely reaping the benefits of that exit. We have strong private label programs and as well as branded programs.

Kelly Duval – BB&T Capital Markets

Thank you.

Operator

We’ll take our last question in queue from Kelly Becher [ph] from Eaton Vance.

Kelly Becher – Eaton Vance

Hi thanks, most of my questions have been answered, but I did want to verify one point, in Oscar’s opening remarks, I believe you said something that you are looking at M&A opportunities, and later on I believe George you said that you should end the year with less borrowed under the revolver if you don’t do M&A. So can you just kind of clarify that, what you are thinking, what you are seeing out there, and how disciplined you are looking to be with preserving the cash this year?

George Feldenkreis

Well, we have always looked at M&A possibilities, but we are a very – despite what some of my investors think about – we are a very disciplined acquirer, and if you go back the records, we didn’t acquire really any business in ’06, ’07, and in ’08 we acquired a contemporary business at a very low price we feel, if you look at it in the long run. We continue looking at opportunities, bankers keep on calling us because we are one of the survivors. There are many other companies that won’t survive or won’t be able to make acquisition. We could make acquisition if we wanted to do it. We don’t feel that right now is the best moment, but those are things that can change and I don’t know if you read the Warren Buffet letter where he said that there are so many opportunities to buy companies at great prices that he feel like a mosquito on a beach looking at whom to attack. So that’s the situation frankly that we look at the business now, but we are very disciplined on what we are going to do and that’s why I said that if we make an acquisition obviously we are going to have to increase the revolver. If we don’t, we will be borrowing less at the end of the year.

Kelly Becher – Eaton Vance

Okay. And then just on the working capital front, I was a little bit surprised in the fourth quarter, how are you looking at working capital for this fiscal year, do you believe that it will be a source of cash?

George Feldenkreis

I don’t know why you are surprised on the inventory we are about $2 million, over $3 million the previous year, but compared to the previous year we had the ladies business we didn’t have last year. And January is – the quarter that we are going through now is our biggest quarter, and we have to have merchandise to be able to ship the amount that we are going to ship, number one. And number two a lot of the department stores and many of the retailers that are not department store, decided in the month of January to stop replenishment. So, frankly, we weren’t – and we talked about it before and actually in December a lot of them stopped replenishment, the theory being that if somebody is going to buy a pant and he needs 38 by 32 size, if he doesn’t find it in Perry Ellis he will find it in another brand, and hopefully he will buy something in the store. So that theory of replenishment program by brand were closed, and that – if wouldn’t that happen we would probably be in a much lower inventory position than we were the same time last year. Having said that, that product keeps on moving and it goes into sales in February, March and they had to open up the doors quickly in February after they also closed the year. So we don’t feel that is a big issue on the receivables side. Maybe we were $5 million to $10 million higher than we should have been using the numbers on the shipments in Q4. However, the month of January because they closed so much in November, December shipment, for us the month of January was our biggest month ever. We shipped about $110 million. So when you look at our receivable figure, you are really looking at almost $110 million – not almost, but $110 million that we are doing in January – that we shipped in January. So you are going to see a big reduction in receivables and a big increase in the cash situation after April 15th, which is when we expect to have all the January payments in.

Kelly Becher – Eaton Vance

Okay that’s really helpful. Then just on the revolver, so excluding possible acquisitions will you get the revolver cleaned down by year-end?

George Feldenkreis

Well I don’t think that we can clear it up because if you are looking at the previous year you have to remember that the acquisition of the two ladies brand costed about $25 million plus the operating side of that business, which is probably in the $15 million area. So we owe about $40 million more than we did the previous year. Having said that, if you are looking at $54 million in receivable – in revolver borrowings as of January 31st, without this $40 million, it will give us about $40 million additional that should be cash profits for this – the way we look at – I look at it, we should be no more than those $40 million barring on acquisition we shouldn’t be even at $40 million in borrowing at the end of this year.

Kelly Becher – Eaton Vance

Okay.

George Feldenkreis

Those are very quick numbers that I making up in my mind, but that’s how I see the year.

Kelly Becher – Eaton Vance

Okay.

George Feldenkreis

We should end up with less than $40 million in borrowing at the end of this year plus we are very – we have been very focused in the last months in really sharpening up on inventory and some of the businesses we have exited required inventories that we are not buying obviously anymore.

Kelly Becher – Eaton Vance

Okay that is helpful. And then lastly you said that first quarter will be more profitable than last year so do you think–

George Feldenkreis

No I didn’t say that. I said that the first quarter will be profitable, but not more than last year because we do expect a drop of 10% to 15% in Q1, but with the reductions in expenses I think it’s going to be a very profitable quarter.

Kelly Becher – Eaton Vance

Okay and then in the –

George Feldenkreis

But not better than last year.

Kelly Becher – Eaton Vance

Okay, thanks for that clarification. And then just one more, on the SG&A reductions then I just felt that those savings should come at a steady clip throughout the year so are we are going to achieve a full $15 million of savings or is it going to be – you will get to that run rate by the end of the year?

Anita Britt

That’s the full projected savings that should be implemented for the full year. So in terms of how that is going to be realized every quarter we see that consistent but those – based on the strategic review the initiatives were put into place this year. So that is a full year savings that we should realize.

Kelly Becher – Eaton Vance

And can you just tell me one more time what buckets those fall into, you said it pretty quickly in your opening remarks?

Anita Britt

You know what –

Kelly Becher – Eaton Vance

Overhead reductions.

Anita Britt

It is really across the board, I mean it is in various reductions in terms of headcount, advertising, various initiatives, we can work through it with you after the call.

Kelly Becher – Eaton Vance

Okay, I appreciate it. Thank you very much.

Operator

This concludes today’s question-and-answer session. At this time I would like to turn the call over to George Feldenkreis for any additional or closing remarks.

George Feldenkreis

Well, as I said before, we had a bad year, but I think the economy had a terrible year, and but the fact that we were still able to make $45 million profit gives us a lot of confidence on having a much better year this year barring again unforeseen mega economic circumstances. And I do thank you for your patience and your support.

Operator

This concludes today’s conference. We thank you for your participation. Have a wonderful day.

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Source: Perry Ellis International, Inc. F4Q09 (Qtr End 01/31/09) Earnings Call Transcript
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