Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Tumi Holdings, Inc. (NYSE:TUMI)

Q4 2012 Earnings Results Conference

March 20, 2013 04:30 PM ET

Executives

Jerome Griffith - President, CEO, and Director

Michael J. Mardy - EVP, CFO, and Director

Jean Fontana - ICR, Inc.

Analysts

Lindsay Drucker Mann - Goldman Sachs Group Inc.

Amy Noblin - William Blair & Company

Brian Tunick - J.P. Morgan

Christian Buss - Credit Suisse

Oliver Chen - Citigroup

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2012 Tumi Holdings Earnings Conference Call. My name is Ursula and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Jean Fontana at ICR. Please proceed.

Jean Fontana

Thank you. Thank you for joining us today for the discussion of Tumi Holdings fourth quarter 2012 earnings conference call. Hosting today’s call will be Jerome Griffith, Tumi’s Chief Executive Officer and President and Mike Mardy, Chief Financial Officer and Executive Vice President.

Before we begin, I would like to remind you that today's conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflects Tumi’s current views with respect to among other things, future events and performance and Tumi’s preliminary cements for the full-year of fiscal 2013.

These statements may discuss net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, growth, strategies, plans, achievements, dividends, capital structure, organizational structure, future store openings, market opportunities and general market and industry conditions. Tumi generally identifies forward-looking statements by words such as anticipate, estimate, expect, intend, project, plan, predict, believe, seek, continue, outlook, may, might, will, should, can have, likely or the negative version of these words or comparable words.

Forward-looking statements are based on beliefs and assumptions made by management using currently available information. These statements are only predictions and are not guarantees of future performance, actions or events. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management’s underlying beliefs or assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement.

These risks and uncertainties include those set forth under “Risk Factors” in Tumi’s filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. Tumi expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

With that, I will turn the call over to Jerome Griffith.

Jerome Griffith

Thanks, Jean, and thanks everybody for joining us today to discuss Tumi’s fourth quarter and full-year 2012 earnings. I will view some highlights from the quarter followed by an update on our growth initiatives and then I'll turn the call over to Mike, for detailed financial review, an update on our financial 2013 outlook.

We were pleased with the performance for the fourth quarter and during our first year as a publicly traded company as we grew across product lines, channels, and geographies. We made great strides during the quarter and continued to see positive consumer reaction to our new product introductions and brand extensions. We also opened three new stores in North America and saw improved retail performance in the EMEA zone, continued strength in our EMEA total wholesale business and strong growth in the Asia-Pacific region.

For the fourth quarter, net sales grew by 19% to $127 million while net income rose 33% compared to last year’s fourth quarter. In North America our indirect business grew 12% while our direct business increased by 26%, driven by continued strong comparable stores sales grew as well as 19 successful new store openings during 2012. In the fourth quarter we open three new stores all of which open strong and are running on or above plan. These three new stores accounted for an addition of approximately 3,700 square feet to our retail footprint in the fourth quarter.

Importantly, we continue to drive transactions in our stores, which led to increased store productivity. At the end of the fourth quarter, average net sales per square foot was $1,051 compared to $972 a square foot a year-ago. We believe the increase in productivity was attributable to favorable consumer reception to new product introductions and to the exceptional in-store experience that we provide to our customers. In the indirect business we’ve seen a very positive response to our new product introductions in the wholesale channel as consumers have come to rely on Tumi for a broad line of travel and business merchandise with superior innovation, quality, durability and functionality.

I will now turn to our International business, which experienced continued healthy growth despite the difficult macro environment. Direct-to-Consumer international comp store sales excluding e-commerce, again accelerated during the quarter increasing 24% in local currency. While market conditions in the EMEA region remain challenging, we are gaining traction with the steps we’ve taken to this strong business to grow meaningfully in this region. The recent management changes at our retail stores have given as an increased focus on staff training and conversion and are beginning to yield dividends as we concentrate on presenting Tumi in the best possible manner at every point of sale.

We were also very encouraged by strength in the EMEA wholesale channel and we continue to grow brand awareness in the European and Middle Eastern markets. In Asia we saw a robust growth during the quarter. We are confident that the strength that we’ve seen in Asia will continue as we work for the local operating partners to reach consumers and expand our footprint within that region.

While we realize that we’re operating in the difficult international economic environment, we believe that we are still in the early stages of our International growth. We see international and particularly the indirect consumer international channel as a primary area of future growth and believe that we have excellent operating partners in each region, who will help position Tumi to continue strategically expanding. So we are very encouraged by the results that we’ve seen in 2012 and we view this brand as being in the early stages of reaching its growth potential.

As we’ve said in the past, Tumi is much more than just a travel company. In fact, less than half of our sales and only a quarter of our units sold come from travel related items. We believe that the strength of our brand name and royalty of our customers will continue to allow us to expand into new categories, but also continuing to create high-quality innovative travel goods for our consumers. Importantly, our strong results over the recent timeframe confirm for us that there is opportunity for additional expansion.

As we look at our non-travel related categories, our accessories area has grown 34% in the fourth quarter over the fourth quarter of 2011. As we continue to grow our accessories line that provides us the opportunity to take the Tumi brand and make it more accessible to more consumers worldwide. Our accessories business includes small leather goods, gifts, outerwear, eyewear, electronics, and other growing product categories. And while we made great progress since we launch this business in 2008, we believe there is still a lot of room for growth.

Another non-core area of the business that’s performing well has been our woman's collection, which was introduced to complement existing product lines. Our woman's area grew 19% from the fourth quarter of 2011. Woman also continues to buy many of our men's products for themselves, which speaks for the opportunities that we have to grow and expand the women's collections through new merchandise offerings. We continue to believe that our multi-channel strategy offers robust support for our extended product offering. On the retail front we believe that we have a market opportunity to triple our store base globally and have identified approximately 200 potential retail locations for new company owned stores.

We also see the opportunity to further develop outlet stores. We have plans to open somewhere between 8 to 16 stores in 2013, focusing our market that are underserved or where we see a high potential to convert consumers. We are also focused on driving productivity in existing stores through a retail maximization program and by providing an innovative and high-quality product offering.

In our e-commerce business, we are focused on driving traffic and conversion through social media and online marketing, including both direct e-commerce and the e-commerce business of our indirect partners, total e-commerce sales represent about 11% of total – of net sales. We are pleased with the strong growth in this channel and plan to continue expanding the markets where tumi.com is accessible.

In summary, we’re very pleased with the 2012 results and believe that we have great momentum going into 2013. I’m proud of the entire Tumi team who have worked incredibly hard during our first year as a public company to continue to successfully implement our growth strategy.

The Tumi brand in our product portfolio have a long history of success with consumers looking for high quality, innovative and functional travel and business products. And with this foundation in place, we are confident that our increasing brand equity, strong operational structure and dedicated team of industry leading designers will allow us to continue delivering consistent growth over the long-term.

Now, I would like to turn it over to Mike for a detailed financial review.

Michael J. Mardy

Thanks, Jerome, and good afternoon everyone. I will begin my comments with a review of our fourth quarter 2012 results and our results for the full-year ended December 31, 2012, and then update you on our outlook for the coming year.

We are pleased to have delivered another quarter of strong financial performance. Net sales for the fourth quarter increased 18.6% to $126.8 million as compared to the $107 million in the fourth quarter of 2011. As Jerome outlined, our operating segments benefited from positive reaction to new product introductions, brand extensions, new store openings in North America, improved retail performance in the EMEA zone, continued growth in the Asia-Pacific region, and strength in our EMEA wholesale business.

Net sales in the Direct-to-Consumer North America segment increased 25.8% to $63.5 million, driven by comparable store sales growth including e-commerce sales of 14.2%. Combined with – we opened three new stores in the fourth quarter of 2012, 19 stores altogether in 2012. Combined with these store openings our performance was quite satisfying. Of the 19 new stores opened in 2012, 15 were full priced and four were outlets. We closed two doors – two stores over the same period, excluding e-commerce sales, Direct-to-Consumer North America comparable store sales, increased 9.4% in the fourth quarter of 2012.

Net sales in our Direct-to-Consumer international segment increased 25.4% to $5.9 million in the fourth quarter compared to the same period last year. In U.S. dollars comparable store sales rose 19.2%, including e-commerce sales. Excluding e-commerce, comparable store sales increased 18.6%. In local currency, comparable store sales including e-commerce increased 24.6% and that local currency is the euro principally. Excluding e-commerce comparable store sales were up 23.9%. The increase in our international business is partially attributable to the upgrade in management of our European stores.

Net sales in the quarter in our Indirect-to-Consumer North America segment grows 12.3% to $30.3 million. Sales were driven by strong growth in the wholesale and third-party e-commerce business as well as strong positive reactions in new products.

Finally, net sales in our Indirect-to-Consumer international segment grows 9.5% in the quarter, reflecting strong demand for Tumi product abroad and favorable response to new product introductions. We experienced strong growth in Europe, the Middle East, and Africa and resume strong growth in Asia.

Moving to gross profit performance for the fourth quarter, gross profit increased 15.6% to $73.2 million. Gross margin percent actually declined in the fourth quarter by 1.5 points to 57.7% when compared to the fourth quarter of 2011, due to a number of factors. Higher retail margins were more than offset by investments we’ve made in the fourth quarter in our pick, pack, and ship operations to service our rapidly growing e-commerce business as well as the rapidly growing e-commerce business of our wholesale partners. We added a third shift and have increased the foot print of our warehouse, in Vidalia, Georgia to accommodate the fulfillment needs of these businesses.

Additionally, there was a successful promotional activity in the fourth quarter to move discontinued product and seasonal colors in order to make room for new product offerings arriving at 2013. We anticipate the aforementioned investments will serve us well in the coming months as the Internet business continues to grow.

Total operating expenses were $44.1 million for the fourth quarter of 2012 compared to $38 million in the fourth quarter of 2011. The increase was due to the store openings, higher revenue share fees for our web services provider due to the strong Internet sales results, higher marketing investments, greater sales commissions for our wholesale sales force, additional incentive compensation accruals and the one-time costs incurred that’s approximately $600,000 in connection with the secondary common stock offering completed in November of 2012. Operating expenses as a percentage of net sales was 34.7% in the fourth quarter of 2012 compared to 35.5% in the fourth quarter of 2011, as we continue to leverage our operating expenses on strong sales growth.

The resulting operating income for the fourth quarter was – of 2012 was $29.1 million with an operating income margin of 23% compared to an operating income margin of 23.7% in the fourth quarter of 2011. Operating income increased 14.9% in the fourth quarter of 2012 versus the fourth quarter of 2011. Excluding the aforementioned one-time expense incurred in conjunction with the secondary common stock offering completed in November of 2012, operating income would have been $29.7 million and operating income margin would have been 23.5% in the fourth quarter of 2012.

I will now take a look at operating income by segments. Operating income in the Direct-to-Consumer North America segment increased 19.7% to $22.6 million in the fourth quarter of 2012. As a percentage of net sales, operating income in the segment was 35.6% compared to 37.4% the same quarter last year. And this reflects increased upfront costs due to new store openings. As Jerome indicated earlier, we opened up three new stores in 2011 – 2012 fourth quarter and in 2011 fourth quarter we had only opened up one.

Operating income in our Direct-to-Consumer international segment was $1.1 million compared to a virtual breakeven amount in the same quarter last year. As a percentage of net sales, our operating income was 18.8% in the fourth quarter compared to 1.6% in the same quarter last year. This turnaround resulted from management changes in our Direct-to-Consumer international business in the first half of 2012. This is despite the difficult economic situation in Europe.

Operating income in our Indirect-to-Consumer North American segment increased approximately 4.3% to $11.6 million and as a percentage of net sales was 38.4% in the fourth quarter of 2012 as compared to 41.3% in the same quarter last year. This reflected investment made in our pick, pack and ship operations for our wholesale internet business as well as an increase in some mark downs for the discontinuation of certain T-Tech products sold exclusively in the wholesale channel to make room for new products in the coming year.

Finally, operating income in our Indirect-to-Consumer international segment increased approximately 3.7% to $6.5 million, reflecting good results across all regions. As a percentage of net sales, operating income was 24% in the fourth quarter compared to 25.3% the same quarter last year. Unallocated corporate expenses increased $1.7 million to $12.8 million in the fourth quarter of 2012 to reflect higher marketing and design expenses and higher public company costs. In the fourth quarter, one-time operating expenses in conjunction with the secondary common stock offering completed in November 2012 was approximately $0.6 million.

The other income expenses in the fourth quarter of 2012 netted to basically zero compared to an expense of $6.1 million in the fourth quarter of 2011. Total other expenses for the fourth quarter of 2011 included dividend expense on mandatorily redeemable preferred stock and preferred equity interests, which is a non-cash charge. The improvement this year was primarily attributable to the elimination of dividend expense due to the redemption of all our mandatorily redeemable preferred stock and preferred equity interests in connection with our IPO, in April 2012. Excluding this dividend expense, other expense would have been $0.4 million, $400,000 essentially in the fourth quarter of 2011.

Provision for income taxes for the fourth quarter of 2012 was $12.2 million; effective tax rate was 41.9%. GAAP net income for the fourth quarter was $16.9 million or $0.25 per diluted share based on $67.9 million diluted weighted average shares outstanding. Adjusting for the one-time secondary offering cost of $24 million after tax net income in the fourth quarter would have been $17.3 million or slightly more than $0.25 per diluted share, actually around to $25.49 per diluted share, but we’ll call it $0.25 amongst friends.

This compares to net income of $12.8 million or $0.24 per diluted share in the fourth quarter of 2011 based on $52.5 million diluted weighted average shares outstanding in the fourth quarter of 2011. Net income of $4 to $5.7 million cash done dividend expense, the cash, non-cash dividend expense on mandatory review o preferred stock and preferred equity interests would have been $18.5 million or $0.35 per diluted share, and these shared -- the cents per shares are largely as a result of increases in the share count as you can see.

Turning to the balance sheet as of December 31, 2012 cash and cash equivalents were $36.7 million compared to $32.7 million at the end of December 2011. The revolving credit facility at year-end totaled $45 million compared to that of $64 million at the end of December 31, 2011. Inventory balances of $70.9 million, that $70.9 million were reduced by $8.5 million compared to the balances at the end of the third quarter as we had predicted they would be reduced. Inventory was $10.4 million higher than the balance as of December 31, 2011 which is consistent with the top line -- an amount necessary to fund at the top line sales growth.

For the full-year ending December 31, 2012 net sales increased approximately 21% to $398.6 million. Operating income increased 18.6% to $71.7 million. During 2012, Tumi paid $5.5 million, $3.1 million after tax one-time special bonus through its CEO and President and Director in connection with the successful completion of it's IPO in April, 2012. Excluding this operating income would have increased approximately 27.7% to $77.2 million in 2012. Excluding the aforementioned one-time secondary common stock offering expense incurred in the fourth quarter of 2012 of $0.6 million, operating income would have increased to $77.8 million.

On a GAAP basis, EPS was $0.58 per diluted share versus $0.32 per diluted share for the year ended December 31, 2011. Excluding the one-time special bonus paid of $3.1 million after tax, the non-cash dividend expense on mandatory review of preferred stock and preferred equity interest of $7.9 million and a one-time secondary common stock offering expense of $0.4 million after tax. Diluted earnings per share would have been $0.76 a share for the year ended December 31, 2012. This compares to diluted earnings per share of $0.75 for the year ended December 31, 2011 which excludes $22.9 million of non-cash dividend expense on mandatory review of preferred stock and preferred equity interest. Weighted average common shares outstanding used in calculating EPS were 66.3 million shares for 2012 and 52.5 million shares in 2011.

I would now like to take a look at our outlook for fiscal 2013. For 2013 net sales are expected to increase between 18% and 20%. This estimate assumes a comparable store sales growth of Direct-to-Consumer North America segment in the mid-to-high single-digit range, and comparable store sales growth for the Direct-to-Consumer international segment in the mid single-digit range. Net income in 2013 is expected to increase between 53% and 59%. Diluted earnings per share are expected to be in the range of $0.82 to $0.86 per diluted share. This estimate assumes diluted weighted average common shares outstanding of approximately 68.4 million shares at an average weighted GAAP tax rate of about 38%. Capital expenditures for 2013 are expected to be in the range of $21 million to $26 million. With that, I will turn it over to the operator to begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lindsay Drucker Mann with Goldman Sachs. Please proceed.

Lindsay Drucker Mann - Goldman Sachs Group Inc.

Hi, thanks guys. How are you?

Jerome Griffith

Hello, Lindsay.

Michael J. Mardy

Hello, Linda.

Lindsay Drucker Mann - Goldman Sachs Group Inc.

Just a couple of questions on the inventory and margins in the quarter. So, first of all; in the North America Direct business, can you help us understand -- you had very strong comps, but the divisional margin didn’t expand as you might have expected given those strong comps. So, maybe can you quantify how much the expense’s that you identified in the quarter contributed to the margin behavior and perhaps do you construct the 15 comp to how much of that was the clearance increment because of low margin kind of clearance sales versus some of the ongoing or new product that you introduced?

Michael J. Mardy

As far as clearance goes this year versus last year, it's more or less going to be flat to LY when you look at percentage of sales coming from that. Where we did see a big increase so that affected margin was the amount of effort that we put into pick, pack it and ship for ecommerce. Not only our own ecommerce, but also third party ecommerce that was -- we had really high demand and higher than what we thought over that time period particularly in the month of December, so that was weighing down on the margins for us.

Jerome Griffith

Yeah, Lindsay we started building the addition on to our warehouse in Vidalia in the beginning of the third quarter and that along with adding a third ship and along with all of the pick, pack and ship, packing the equipment that we put in and frankly the volume was just tremendous in our ecommerce business. That had a – I think a pretty significant impact on our margin performance. But frankly those are investments that we made. We knew we had to make them. And as we come into the New Year we’re seeing a – what I will call a healthy return to more normal margin levels. You would expect in our business that in the fourth quarter we’d have very high retail mix margin impact, and we did have very strong retail mix margin impact, but the investments we made were significant. I think we went from a 285,000 square foot in Vidalia to a 325,000 square foot warehouse in Vidalia. Not an insignificant increase in the size of the warehouse and all the pick, pack and ship issues that we dealt with. And then we had – we did have some promotional activity. Principally in November and principally to get to dispose of some discontinued items – not dispose but to move some discontinued items and seasonal callers and in the wholesale business to move a discontinued line out. Those were, I would call one-offs and frankly I think the margins – we will expect the margins to improve as we come into the New Year, the gross margin.

Lindsay Drucker Mann - Goldman Sachs Group Inc.

On the inventory side, those came in I think it's higher than -- correct me if I’m wrong, but you had talked about as of the last quarter, can you talk about the composition of those inventories and your expectations going forward?

Jerome Griffith

Yeah, I think what I’ve said Lindsay, is that we were at $85 million of inventory at the end of September that we would expect the number, the inventory number to get at or slightly below $70 million. And having said that, more like the high 60’s and having said that our inventories were reduced pretty dramatically. We sold through most of that inventory and ended with $70.9 million, about $900,000 to $0.5 million more in inventory than I thought. So, I think we’re pretty accurate of predicting what would happen with inventories. And that brings a fair number – fair amount of cost to the P&L as well as you reduce inventories.

Now having said that I think we’re very well positioned and our wholesale, retail inventories I think they’re very on a very healthy – at a very healthy level and I think things are improving as it relates to inventory levels. And we're actually at a stop in some of our, what I’ll call our mover centers – what I’ll call a holistic nylon the heavy weight road warrior type of items, we’re actually running out of stock on some of those things. So, I feel pretty good about where we are with inventory levels to support almost 19% increase in sales having something like 10% or 15% more inventory is pretty good.

Lindsay Drucker Mann - Goldman Sachs Group Inc.

Okay. Thanks guys.

Operator

Your next question comes from the line of Amy Noblin with William Blair. Please proceed.

Amy Noblin - William Blair & Company

Thanks and congratulations on a great year. You’re coming off a strong year of new product introductions; obviously this is an important hallmark of the brand. As you look out to 2013, how do you feel about the line up for new product introductions and any anticipated changes to cadence et cetera as we look out to this year? Thanks.

Jerome Griffith

We don’t see a lot of change Amy, on cadence. Still new product introductions are going to be pretty similar to 2012. You guys saw or probably have seen we launched Anna Sui in the beginning of 2013, we’ve launched high (indiscernible) in the beginning of the year, and we’ll have additional new product launches coming out throughout the year similar to what we did in prior-year.

Operator

Your next question comes from the line of Brian Tunick with J.P. Morgan. Please proceed.

Brian Tunick - J.P. Morgan

Thanks guys, and I’ll add my congrats as well. I guess, couple of quick questions here, I guess first you talked about 8 to 16 store openings for 2013 pretty wide numbers. So, just curious how many leases you already have signed today and how should we be thinking about the timing of store openings, that’s number one. Number two, I guess you guys are almost done now with the first quarter. So, just wondering if there was anything you would comment on here in terms of the consumer, obviously a lot of noise out there or how you feel about the current consensus Q1 estimates. And then the third question would be on the productivity drivers you talked about, Jerome before, 1050 today what is sort of your longer term goal and what is some of your most mature Tumi stores doing? Thanks very much.

Jerome Griffith

Sure. I’ll take a couple of points to that. Mike, will talk a little bit about the guidance. On store openings we are right now at completed. We’re going to be around a dozen stores domestically, one internationally. We’ve got a few more in negotiation both domestically and internationally, so I do not feel bad about thinking that we’ll be at the top-end if not a little bit higher than what our guidance is right now for new store openings. We’re sitting in pretty good space right now. We’ve got some good cities that we’re going into where we don’t have stores currently which will be, I think given us some pretty good openings for 2013. For the productivity numbers, my guidance has always been that we’ll be somewhere between $1200 and $1400 of put in the long run. I mean we’ve got stores that generate well over $5000 bucks a square foot in some areas of the world. In the U.S. probably our highest generator is going to be in the $8000 a square foot range. But from an average standpoint now we’ve got big stores that open up and we’ve got small stores that open up. We’ve got stores in A cities; we have got stores in B cities. So, on the average we look to get to around $1200 over the next lets say four, five years as we continue to add on comps year-in, year-out. So, you should be seeing those numbers rise at a similar rate I think over the next few years we’ve gone from 972 to 1051. We still see stores coming up with increased square footages from where we thought they would be when we open them. They’ve been outperforming, generally new stores have. So, we’re relatively confident that we’ll be able to hit those numbers in the next few years.

Michael J. Mardy

Brian, we don’t give quarterly guidance, but I would tell you and again I – with guidance its some things as every once in a while one or two of the sell side guys – sell side people go off the reservation and maybe give a little bit of buoyant about what you’re doing. But we’re very consistent with our message. I think that it's -- based upon what we’re seeing not that we can talk about it too much, but we’re very comfortable with our guidance for the full-year between 18% and 20%. We already have 15 stores leases signed, and that’s early in the year. We’ve opened up I think three stores already, and they’re all doing very well. I think that we’re going to see gross margin expansion certainly off of the fourth quarter gross margin expansion because a bigger and bigger portion of our business is retail, and that has a salutary effect on gross margins, so that’s going to improve and expand. And we’re continuing to enable leveraging of the operating expenses, keep on dropping as a percent of sales not withstanding the kegs of store openings. And frankly we’re very comfortable with the annual guidance we’ve given and there’s nothing that we have learned in the last few weeks of operating in the New Year that would cause us for concern. Our comps are still – our comp store sales are still very strong, maybe stronger than our – what I’ll call conservative guidance would indicate but the fact that the matter is stuff can always go wrong. So we’re very, very comfortable with our annual guidance and feel that there’s nothing that we’ve learned in the last few weeks of operating in the New Year 2013 that would give us cause for concern.

Jerome Griffith

And basically Brian, and the business still continues along the way that you’ve seen it being dealt over the last several quarters which has been our own stores as in ecommerce and all other stores internationally and the international business all seem to be running along the same line, that’s what we’ve been given guidance on. So we feel pretty confident.

Brian Tunick - J.P. Morgan

That’s very helpful. Good luck with spring.

Jerome Griffith

Thank you, Brian.

Operator

Your next question comes from the line of Christian Buss with Credit Suisse. Please proceed.

Christian Buss - Credit Suisse

Thank you very much. So, it looks like you’ve significantly expanded the product offering for spring. You have a much broader array of colors and more women style. Can you provide some color on what the response to that product has been?

Jerome Griffith

Yeah, and the [added] spring stuff specifically has been received very well, differently around the world and that it wouldn’t be so earth shattering for you to hear this. America has been really good or North America has been really good. Asia has been phenomenal. Europe has been okay. But colored accessories in general has been very good all over the place with our wholesale business and with our – on retail business and our travel business, so a travel retail business globally, all of it's been received very well, even better in many cases than what we expected it to be.

Christian Buss - Credit Suisse

That’s great to hear. Could you also provide us a little bit of an update of the Korean distributor, it seems like there were some challenges there last quarter. Are you comfortable with their inventory position? Have inventories flows there normalized?

Jerome Griffith

Yeah, it's gotten back a little bit to normal. What I’m really looking at for those guys to be honest with you is sell out. And our sell out numbers which we look at monthly which really gauges the health of their business are still pretty strong. So, we’re comfortable with that and the Korea guy is an individual operator. He runs Tumi exclusively for us there, that’s his only business. And as he grows and gets that business going and grows season-on-season he gains a little bit more experience in how to manage his inventory.

Michael J. Mardy

Christian we talked – the last time we talked and I can’t remember we chatted in our conference call after Sandy, because we were basically out of power, but and no telephone service, thank you AT&T. But we – when we talked the last time we were concerned that we had a dip in third quarter Indirect-to-Consumer sales because people had over stopped and really that came back nicely in the fourth quarter where they had sold through that stuff and have actually reordered kind of healthy amounts. So the business has resumed its growth pace and they work through as I said before, they work through their stocking issues and we feel very comfortable both in our international wholesale business and a domestic wholesale business, but inventories are at very healthy levels, not healthy in a bad way, not healthy too much, not healthy too little, but right at the right level to allow the kings of our business in those segments to continue. So we’re feeling real good about it. I’m very happy that we actually reduced our inventory levels to where we got, in fact we just continue to pay down our revolvers so in very short order we’ll be completely debt free which is a little bit bizarre since we’re borrowing money like 0.25%.

Christian Buss - Credit Suisse

Would you consider repurchase activity or dividend?

Michael J. Mardy

Yeah, I mean this -- I’ll be very Obama esque here and say nothing is off the table. I mean, we certainly look at every thing. And we’ll get there – when we come to that bridge we’ll have the discussion. We had the discussion already. But when we come to that bridge we’ll cross it as they say.

Christian Buss - Credit Suisse

Okay. Mike, last one housekeeping question. Women’s as a percent of sales and accessories as a percent of sales, where did that shakeout in the year-over-year there?

Michael J. Mardy

Accessories are shaking out around 14%, and women’s are shaking out around – right between 11% and 12%.

Christian Buss - Credit Suisse

Okay. And what was that last year?

Michael J. Mardy

Each ones picked-up one or two full points depending on – [as a matter of accessories], the accessories went from either 11% to 14% or 12% to 14%, and women’s was like 10% to 11% or 12%.

Christian Buss - Credit Suisse

Okay, great. Thank you very much, Jerome. Thanks a lot, Mike. Best of luck.

Jerome Griffith

Welcome, Christian. Thank you.

Operator

And your next question comes from the line of Oliver Chen with Citigroup. Please proceed.

Oliver Chen - Citigroup

Hi, guys, thanks. Regarding the guidance, how should we think about the composition of the gross margin versus SG&A? And just to be clear, the GM was disappointing relative to our expectations. Are you saying that going forward, do you expect the GM to be up every quarter? Well do you – it sounds like you’re pretty positive on the state of the inventories, so you don’t expect to have incremental promotional selling to (indiscernible)?

Jerome Griffith

Yeah, Oliver, that’s a good question. Thank you for it. Our cadence of promotion is remarkably consistent year-after-year. And as I may have said before, at any given point and time on an annual basis I think it's less than 12% of our product is actually sold in a promotional way, and almost all of it is done as it relates to discontinuing seasonal colors and or introducing new products as you read through SKUs. The bottom line on gross margin, Oliver, is that a little bit more than half of our sales in very, very short order more than half of our sales are going to be retail sales and that has a retail mix, positive impact on gross margins.

I was a little disappointed in the gross margin performance but frankly all the investment we made in those operations in the fourth quarter will yield and are yielding very positive results and as far as – so as you progress through the year and as more and more of our sales are retail sales, I would expect to see gross margins improve and expand and we continue to do a very good job at elaborating our operating expenses as you can see, in the fourth quarter we did a very good job doing that. And I think that over time that pace will continue.

We’ve said in some of the road show stuffs that we’ve done in the past that we would want to be – have our operating margins in the mid-20s, while we’re rapidly approaching that in fact we’re going to I think get there in short order. So, we feel pretty positive about the continued pace of margin expansion not withstanding the fact that when you rapidly open a lot of new stores you have a temporary what I’ll call a stutter step with respect to margin expansion because you’re spending all that money upfront, and the way accounting works is you have to book a lot of costs upfront before you actually get the full benefit of sales. So, this business is going in the right direction from a margin perspective in a short answer to our question.

Oliver Chen - Citigroup

Okay. So should we model more gross margin expansion or more SG&A leverage when we think about your outlook?

Jerome Griffith

Well, I can’t tell you how to model, but I would tell you that what I just said is that we’re going to continue to expand our gross margin and that you’ll continue to see incrementally leveraged operating expenses.

Oliver Chen - Citigroup

Okay, thanks. That is helpful, and the indirect channel it remains an important channel and it looks like it's been somewhat volatile. I mean, do you expect a more consistent growth rate next year or is that just a factor of the channel. It kind of seems like the implied growth rate on the indirect is potentially in the high-teens if I back into the outlook.

Jerome Griffith

Yeah, I think if you look at – you have to kind of bifurcate the indirect channel. You have to look at indirect North America and indirect in international. The principle growth driver of our indirect international growth has been APAC sales, and very continued strong sales in the Middle-East primarily because our Indirect-To-Consumer business in international is composed of Europe, Middle-East, Africa and Asia Pacific. And we see Asia Pacific -- I mean we’re so small in Asia Pacific we see the growth there being able to continue at a very healthy rate as we expand distribution and then Asia Pacific particularly in Mainland China, we operate in kind of single -- we have our distributors who basically open Tumi shops that look, smell and feel like a regular Tumi store even though it's a wholesale business. So, that’s been the principle driver of our international wholesale business.

In North America the principle driver of our wholesale business has been really the expansion of wholesale ecommerce. There’s not a lot of door growth in North America frankly, but lot of specialty luggage guys who chose to be most of our business, they’re actually shrinking, the number of doors they have the better operators remain and are still a very profitable source of business for us. But the principle growth driver in North America has been our ecommerce business, our wholesale ecommerce business which we made a pretty big investment for in the fourth quarter there in Vidalia, and our initiative, B2B initiatives where we sell to other businesses Tumi products that people want to give to their sales forces or give to their cast parties or give to their high rollers in Las Vegas. And we have a Canadian initiative where we’re trying to build Canada up to be what it should be. And there’s – other than that there’s not a lot of wholesale door growth in North America. So, it is a little lumpy frankly, our retail business is much easier to predict than the wholesale business, but they’re two very complimentary businesses. And as you know, as you’ve correctly pointed out, Oliver that the wholesale business still remains a very robust source of profits for us. So, that’s kind of like what's going on with the – you have to look at international and domestic wholesale kind of in a bifurcated way.

Oliver Chen - Citigroup

Thank you very much. Our last question is, just could us give us a big picture on the comp. You do report comp in many ways which is helpful detailing. Going forward are you expecting the comp to be driven a lot by transaction? Are you guys keeping your AURs flattish or is there a mix benefit to AUR?

Jerome Griffith

The big driver on comps for the coming year we think is going to be a combination of conversation rates and items for transaction. Conversion rates have been something that we’ve been concentrating on. It's been growing every year for the last several years, it's still growing, and it's a major focus for our store; so that’s a big plus. And in increasing items for transaction, mostly because of our accessories business has been a big part of the comps as well. Now, when you look at online – our online business is also a factor of increased traffic online as well. So you get like three elements that are working for you in your online business. But stores have been, really done a good job on their conversions and a slight increase in items for transaction.

Michael J. Mardy

And Oliver I’ve given those comps every which way to Sunday basically you had a good call out. I want an overall comp and that’s what we’ve tried to give you.

Oliver Chen - Citigroup

Yeah, it's great. Thank you. Thanks, Jerome. Thanks, Mike.

Jerome Griffith

You can slice and dice it.

Operator

And there are no further questions at this time.

Jerome Griffith

Well, thank you everybody. Thanks all for participating. Bye-bye.

Jerome Griffith

Bye.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Tumi Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts