Kenneth Cole Productions Inc. Q1 2009 Earnings Call Transcript

May. 5.09 | About: Kenneth Cole (KCP)

Kenneth Cole Productions Inc. (NYSE:KCP)

Q1 2009 Earnings Call Transcript

May 5, 2009 4:30 pm ET

Executives

James Palczynski – IR

Jill Granoff – CEO

David Edelman – CFO and Treasurer

Analysts

Scott Krasik – CL King

Jeff Van Sinderen – B. Riley

Sam Poser – Sterne, Agee

Heather Boksen – Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Kenneth Cole earnings conference call. My name is Kamisha and I’ll be your coordinator for today. At this time all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today’s call Mr. James Palczynski. Please proceed sir.

James Palczynski

Good afternoon everyone. Before we get started, I’d just like to remind you of the company’s safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

Thank you and with that out of the way I would like to now turn the call over to Jill Granoff, Chief Executive Officer of Kenneth Cole Productions.

Jill Granoff

Good afternoon and thank you for joining us to review our first quarter results. With me today is David Edelman, our Chief Financial Officer. As you have seen in our press release our financial results for the first quarter were in line with our expectations.

While Kenneth and I are certainly disappointed in our financial performance, we remain very encouraged about our future potential. David will go through the numbers in a few moments, but first I would like to discuss the key factors that contributed to our first quarter performance along with the actions we are taking to return the business to profitability.

Our overarching goal is to evolve Kenneth Cole Production from a predominantly US wholesale driven footwear company to a portfolio of global retail driven lifestyle brand built upon a strong foundation in footwear. We have mapped out and are implementing a plan to realize the significant sales and profit potential of our business over the next several years.

While our company like many others have been effected by the severe pull back in consumer spending and by inventory cut backs at our major whole sale partners. Our vision for the future has not changed. This is a time of opportunity and we are continuing to lay the foundation for future growth, while simultaneously addressing the reality of the current marketplace.

As you know, market conditions deteriorated rapidly in the fourth quarter of 2008. On our year-end conference call, at the beginning of March, we said that our response to the change in the environment was to convert our seasonal inventory to cash, reduced planned receipts of new merchandise to balance supply with demand, further reduce cost, and continue to pursue our strategic initiatives to revitalize the business.

We have made progress in each of these areas. During the first quarter, we cleared excess merchandise through an aggressive promotional strategy in both our consumer direct and wholesale business. This was successful, although it impacted our sales and gross margin results.

Last quarter, we said that we expected inventories to be balanced by the late second or early third quarter. We are tracking well against this plan and believe that our inventory will be in line with demand by the close of the second quarter. Also during the first quarter, we successfully implemented a second round of expense reduction initiative.

Over the course of fiscal 2008, we cut about $10 million of expenses. In the first quarter of 2009, we cut an additional $10 million of expenses for a total of $20 million in expected annual savings. At the same time it is important to remember that we plan to reinvest approximately $5 million of these cost savings into selective areas of our business to drive profitable growth.

These areas include design, sourcing, new store development, and merchandising. We have reviewed and continued to address all factors of our company in order to create a more efficient and effective business. This is particularly true and wholesale. During the first quarter we discontinued our unprofitable Bongo license and will cease shipping at the end of the third quarter.

You will recall that we also transitioned our Tribeca business into other brands. These changes rationalized our wholesale portfolio and enabled us to devote the majority of our resources to our core Kenneth Cole brands. Now in past calls and in meetings with many of you, we’ve talked a lot about our strategic plan to reshape the business. As a reminder there are six key initiatives to the plan.

Number one, energize the brand. Number two, create compelling product. Number three, accelerate retail. Number four, revitalize wholesale. Number five, go global. And number six, create a winning consumer driven culture. I want to update you on the progress we are making with each initiative.

In terms of energizing the Kenneth Core brands, our new marketing campaign has received terrific feedback from our customers, retail partners, and licensees around the world. It is much more fashion focused than in the recent past and retains our unique social voice.

This campaign reinforces our position as the quintessential metropolitan lifestyle brand for modern men and women who are confident, clever, and cool. While we have cut back on our marketing expenditures, we have maintained immediate spend and increased consistency across consumer touch points to capture a greater share of minds. With respect to product, Kenneth is focusing a lot of his time here and the design organization is very invigorated.

As a result, we believe our fall assortment is compelling across many classifications with key items and price points that consumers are looking for. I hope that some of you have seen our fall look books. We think the improvement in the product is obvious with modern head to toe dressing and day to evening outfit. We have increased the mix of core versus fashion to improve our turn in margin.

In direct response to the current environment, we have designed into some lower opening price points to offer great value to consumers and improve margins. We are focusing on some key seasonal categories such as denim, T-shirt, and casual footwear. We have been under penetrated in these categories and are starting to gain traction.

In addition, Kenneth and the team continued to focus on product innovation and we have several new product initiatives in the pipeline, which we will share with you in the near future. In terms of our retail development, we have a laser sharp focus on improving consumer direct profitability.

I want to address this with some detail because it is the single most important long-term initiative we are working on. It has the potential to really move the needle once we get the business model right. I would like to address our full price stores first. On our last call, we discussed that we would conduct a test of a new store model designed to generate increased productivity and four walled profitability.

We have now opened seven test locations that feature a smaller real estate footprint, new visual store design, and improved mix of merchandise, and other enhancements. We officially began the test just five weeks ago. While it is somewhat premature to say we found a solution or to share a lot of data. The initial test results are positive. The seven test stores are running comp, nearly 20 points above the balance of the chain.

Just as important our gross margin in the test stores is more than five percentage points higher than the rest of the full price stores. These preliminary results are very encouraging. A strong full price concept, which transmits a great customer experience and has a solid economic model, reinforces the brand and the business. This is an important key to the future of our company.

In the meantime, we continue to work to improve the remainder of our full price stores. We closed two stories during the quarter, relocated one, and downsized one to a better footprint. We will continue to make these kinds of changes opportunistically. We're also working to negotiate rent concessions where possible and to maximize labor productivity.

We are making progress in both those areas. The biggest opportunity to improve results is to increase a comparable store sale and we are optimistic that our new product assortments will drive that in the second half as we have seen in our test stores. Our outlet store model works. We have the right real estate plan, the appropriate merchandising model and our stores exceed the mall average for productivity.

We expect new stores will demonstrate a cash on cash payback horizons within 24 months even in this tough economic climate. Additionally, every store we open helps leverage the infrastructure required to support the change. We are currently operating 54 outlet locations and plan to open about ten additional outlet stores this year.

Our fourth initiative is to revitalize the wholesale business. In addition to rationalizing our portfolio, as I have just discussed, we have recently realigned our structure to create a unified sales organization across all product categories. We are also very pleased to have new leadership in this division. We have hired Chris Nakatani who has a history of building brands with top-notch companies in the apparel industry.

He is a great complement to our strong management team and we are in active discussions with several key wholesale partners to build our business and leverage our position as well priced designer fashion, a clear advantage in this economy. Our fifth initiative is to increase our penetration in international markets.

During the first quarter, we made progress in building our business in the UK, Germany, and Canada. We have also continued our dialogue with potential partners in China and India. This will form a foundation for an accelerated push in the future. Finally, we are continuing to enhance our culture.

During the first quarter, we completed our transition to a pay for performance, bonus program to better align our goals with those of our shareholders. Accountability is key for every company, but particularly true for an organization in transition such as we are. We are focused on achieving both operational and organizational excellence.

This includes a heightened emphasis on a range of important metrics that cut across departments, including margin, inventory turn, speed to market, expense management, and improved profitability. David will detail some guidance for our second quarter in a moment. We expect to improve performance beginning in the third quarter as a result of our new product line, cleaner inventories and the full measure of our cost reduction efforts.

I will reserve some additional comments for closing, but I would like to now turn the call over to David to provide detail on the financials for the quarter.

David Edelman

Thank you, Jill. Good afternoon. I would like to start with our income statement for the first quarter. I will note that our financial results were consistent with our prior guidance. Consolidated net revenues declined 15.6% to $103.4 million versus the year ago total of $122.5 million.

Wholesale revenues were down 16.8% to $61.7 million versus the year ago level of $74.1 million. This decline is directly related to the overall unfavorable economic condition, particularly in the challenging department store channel, as well as increased dilution from market downs and discounts.

In addition, we are starting to see the effect of our decision to exit the unprofitable Tribeca and Bongo businesses. Consumer direct revenues decreased by 15.1% to $32.7 million versus the year ago quarter. Revenue growth from new outlet locations were offset by consolidated comp store sales decline for the period of 20.4%.

We believe this comp decline was directly attributable to the difficult market conditions and resulting reduction in traffic or retail. I will note that our store comps were further lowered by the Easter holidays shipping to the second quarter of this year versus the first quarter last year.

Royalty income in the quarter was $9 million, 8.9% below the year ago quarter of $9.9 million, due to the full amortization of certain key money and declines in select international markets. Gross margin in the first quarter was 33.9% versus 41% in the year ago quarter.

This reflects the promotional stands we took to move our inventories in the current environment both in our own stores and as a result of the discounts necessary for our wholesale business. We continue to make progress with respect to our inventory. As we mentioned on our last call, we adjusted our purchasing and a reduction in our OC [ph] plans is taking place now.

We believe our inventories will be a right size for our ongoing business by the end of June. Accordingly, we believe we can begin to see a return to better gross margin rates beginning with the fall season above prior year levels. Total SG&A expenses for the quarter were down $1.4 million to $47.7 million versus $49.1 million in the year ago period.

The company achieved approximately $4 million of expense reduction versus the prior year's quarter, partially offset by severance costs associated with new stores and one-time charges relating to two store closures. We continue to make strides in our cost reduction effort and since our last call consolidated and eliminated additional job, as well as further reduced discretionary spending budgets.

Interest income at $206,000 for the quarter was down versus the year ago level of $880,000, reflecting both lower average cash balance and lower interest rates. During the quarter, we incurred a $1.1 million net charge for severance and asset investment impairment write-down.

Net of these items, our loss per share for the quarter was $0.41 in line with our prior guidance. On the GAAP reported basis, our loss per share was $0.46 versus earnings per share in the same quarter of last year of $0.04.

Turning to the balance sheet, cash at quarter’s end was $46.3 million versus $71.5 million at the end of the first quarter last year. While cash was down $25 million, we used $36 million over the course of the 12 months for the following, $17.5 million for share repurchase, $5.5 million for our investment in Le Tigre, $8 million for capital expenditures, and $5 million for dividend payment which has since been suspended.

Inventory at the close of the quarter was down 4% to $44.1 million from $45.8 million at the end of the first quarter last year. However, comp store inventories were down 20% in line with our comp store sales. Included in this quarters ending inventory was inventory associated with operating eight net new stores and inventory requirements for the six additional new outlet stores planned to open in the second quarter.

We expect continued sales and margin pressure throughout the second quarter as we work to reduce our wholesale inventory to match our sales expectations. However, as Jill mentioned our policy fall receipt plan is now aligned with our sales plan and we believe we will have inventory levels right sized for the business by the close of the second quarter. Our margins should begin to improve at that point.

Consolidated net receivables of $47.3 million, a decrease of $12.9 million compared to last year, due primarily to the year-over-year decline in wholesale sales. Collections on accounts receivable remain strong and the overall quality of our accounts receivable was good.

Capital expenditures for the quarter were $2.3 million. We estimate CapEx for the year to be approximately $10 million primarily for our outlet expansion and rightsizing are oversized full priced stores. Depreciation and amortization was $2.3 million for the quarter and we estimate the year to range between $10 million and $11 million.

Now, with regard to guidance for the second quarter, we are assuming that the current trend in comp store sales will improve slightly for the second quarter and I hope that will even the pressure. We expect licensing revenues to be down approximately 5% versus prior year. We therefore are expecting revenues for the second quarter to range between $90 million and $95 million.

In the short-term, we expect to remain promotional to clear inventory and to remain competitive in the marketplace. As a result gross margin will continue to be soft in the second quarter, but it should improve significantly as receipts moderate and initial markups improved.

SG&A expenses will continue to trend lower on an absolute basis as the full measure of our cost-cutting takes effect or will be high as a percentage of sales compared to last year. As a result of those factors, we currently anticipated second-quarter loss in the range of $0.25 to $0.30 per share. We do believe that our financial performance will improve in the second half, but they are not yet providing specific financial guidance beyond the second quarter.

Thank you and I will now turn the call back to Jill for some closing comments.

Jill Granoff

Thank you, David. I thought I would share with you that today is actually my one year anniversary with the company. I've been reflecting on the past year and what we have accomplished, along with what we think next year is going to look like. Over the past year, we have achieved the following.

We successfully implemented a new leadership model with Kenneth as Chairman and Chief Creative Officer and me as the CEO running the day-to-day operations. We completed an in-depth review of our business and developed a comprehensive long-term strategic plan. We clarify our brand position as the quintessential metropolitan lifestyle brand for the modern men and women who are confident, clever, and cool.

We introduced a new marketing campaign that is more fashion focused and lifestyle driven, while maintaining our unique social voice. We balanced our fall product assortment in terms of core and fashion products and good, better, best pricing to generate better sales and margins.

We've implemented a full price retail store test designed to create an economic model that works in a smaller real estate footprint. We have accelerated growth in our outlet and e-commerce businesses based on their successes today. We rationalized our wholesale portfolio, including the closure of Bongo and Tribeca, so we can focus increased efforts on core Kenneth Cole brands.

We realigned and streamlined our organization in support of our strategy and hired new leadership in wholesale, human resources, marketing, Kenneth's renewed leadership in design and marketing has also had a strong impact. Additional strategic hires will be announced soon.

We eliminated over $20 million in annual expenses including a nearly 20% corporate headcount reduction and the closure of our Italy office. We have improved our business processes with a particular focus on inventory management and speed to market to make us leaner and more responsive.

We have moved to a pay-for-performance bonus program to better align our objectives with those of our shareholders. We maintained a healthy balance sheet with cash and no debt. Most importantly, our entire team is reenergized and we are creating a culture of true excellence throughout the business.

This has been a tough year and we are not quite through the transition. The second quarter will continue to be challenging. However, we are confident that we are on the right task and believed that we will begin to show profit improvement in the second half of 2009 as we realize the benefits of our expense reduction activities, new product introductions, and better inventory management.

In addition, as we gain further traction with our product, marketing and channel initiative, we expect to enter 2010 with a renewed capability to drive growth and increase profitability for our shareholders.

Thank you and we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Scott Krasik from CL King. Please proceed.

Scott Krasik – CL King

Hi guys, thanks and Jill, congratulations on one year. The question I have relates to your comment about going to one sales organization for all brands, can you explain to me sort of how that’s going to work and what it means for your brand identity in terms of reaction in New York and your price points going forward and how you're going to differentiate those to the buyers?

Jill Granoff

I think I need to clarify Scott that we will retain separate salespeople that are focused on footwear and handbags and apparels and that will be dedicated to either Kenneth Cole New York or reaction, foreign listed, but what we are now doing is we're putting those teams together under the leadership of Chris Nakatani. This enables us to look at our business holistically, so that when we sit down with our key wholesale partners, we could really leverage the power of our brand across categories.

So for example, if we see that footwear is doing well, casual footwear that might pose an opportunity for casual sportswear, there's a customer in the store that's wearing Kenneth Cole. So, in the past we were restructured by product category and now we have a unified wholesale team, but we are retaining unique people underneath dedicated to specific categories and sub brands.

Scott Krasik – CL King

Then, will Doug report to Chris or how does that work?

Jill Granoff

Well, Doug is taking on a new role and Doug will be the Chief Merchandising Officer. So in the past, we were structured by product category, now we have a design team, a merchandising team, a sourcing team, and then we will also have a wholesale team, the same way we have our consumer direct team. We believe that this create centers of excellence and also ensures that we operate much more like a vertical retail model, where we can have consistency of our products across categories and really leverage the power of the brand.

Scott Krasik – CL King

Okay. And then do you feel like, obviously apparels are much newer business for you, but in terms of your sportswear is it from a style standpoint and from an identity and recognition, is it where it needs to be to present the whole thing?

Jill Granoff

Well, our men's sportswear business, we actually, our sales were flat in the quarter. We are seeing improved results both in our retail stores, as well as in our wholesale channel. We think the design has always been very good, but what we have done in certain cases is relax the fit. For example, in denim, we often had skinny jeans and now we have boot cut and straight leg and we had black jeans, we now have blue jeans with different washes and back pocket details.

So the design is set, I think still very consistent with Kenneth Cole's overall positioning in the modern and contemporary state, but certainly what we have done and is, we have balanced the assortments to include more core items and in addition, we have really established entry price points in selected categories to help your momentum in this challenging economic environment.

Scott Krasik – CL King

Okay. And then couple for David. On the inventory, down for, where is the bigger issue on in wholesale and retail?

David Edelman

Right now actually our comp store inventories were down 20% in line with our comp store sales. So right now we have a little bit of excess inventory in wholesale, which we are working our way through and as I mentioned our receipt plans are way down and when we first cut the plans we were playing catch up a little different, we feel like we've got it now. We will be totally in line by June 30.

Scott Krasik – CL King

Okay. That is good to hear. And then, I know you don't want to give specific guidance, but I think you had talked about perhaps a return to profitability, are you backing off from that right now?

David Edelman

No. I think, you know the current environment makes it extremely difficult to forecast the full-year. So, we're really trying not to give specific financial guidance beyond the second quarter. What we are trying to do is give you directions. We believe that our gross margins are going to be up and our expense is even going to be down towards the back half, which will get us back towards profitability.

Scott Krasik – CL King

Okay. Then how many full price stores at the end of the quarter?

David Edelman

We had 41 full price does and 50 throughout [ph].

Scott Krasik – CL King

Okay great. Thanks very much.

Jill Granoff

Thanks Scott.

Operator

And your next question comes from the line of Jeff Van Sinderen from B. Riley. Please proceed.

Jeff Van Sinderen – B. Riley

Good afternoon. Wondered if you can talk a little bit more about your outlet business, the differences you are seeing there in terms of performance versus full price?

David Edelman

Our outlet business has been full or profitable and comping positive up until last quarter – last year's fourth quarter and then we ran into the headwinds that everybody is running into. So, right now where we are in the outlet business, we are struggling on the top line a little bit, so we are maintaining margins and we've been fall well profitable, but not as profitable as we had been in the past. Our full price stores were still under significant margin pressure and are not making money in those stores.

Jeff Van Sinderen – B. Riley

Okay. So there's a big difference then between your full price stores. I assume they are comping closer to the minus 20 and then your outlet stores are comping negative, but much less negative, is that fair to say?

David Edelman

We don’t really break out the comp between the two stores, but our outlets are doing better than our full priced. For July, we are doing the whole 70 store testing really trying to change the model.

Jill Granoff

I think (inaudible) should say is that you know we really feel that we have the model firmed up for our core outlet business in terms of store size and the merchandise mix, which is one of the reasons why our outlet stores are performing so well. In our fall price stores, we believe that our stores in general are oversized and as you know several years ago we had smaller very productive boxes. We made the decision to increase box size. Sales did not increase, commensurate with the increase in box size and as a result our profitability declined.

The whole purpose of the test is to identify an economic model that works in a smaller real estate footprint. So, for example on average today our stores are about 5,000 square feet and we believe that the ideal size is closer to 3,500 square feet. And as you can see we are doing increased sales in a smaller box. If this continues over the course of the test, we then believe we can open new stores in a smaller footprint and we will have improved economics because our rents and our fuel expense, as well as the build-out will be lower.

Jeff Van Sinderen – B. Riley

And at this point you only have 41 full price stores, is that correct?

Jill Granoff

That is correct.

Jeff Van Sinderen – B. Riley

Okay. So, how many of those stores are coming up for renewal in the next few years or how is it going in terms of trying to get the box size down with those stores, or rents down?

Jill Granoff

You know, we have done a store by store review and if we don't believe we can ever get that stores profitability, in a few cases we have decided to close those stores, as David mentioned, we close two in the quarter, but many of our stores are in excellent real estate locations and they have sufficient frontage. So, we are working to actually downsize or right size those boxes, which will improve the economics.

We were successful in doing that with one store in the first quarter, there'll be several more that we do throughout the balance of the year. In addition to that for stores that are approaching renewal, in some cases we are looking to move within an existing model towards smaller box, where we believe we will have increased productivity. And then in other instances, we are working with our landlord and our real estate partners on the economic model and rent.

As we work towards really propelling, our full price store model forward with enhanced assortments, marketing, merchandising etcetera. So, you know it is really on a store by store basis, we have looked at that optimize our fleet.

Jeff Van Sinderen – B. Riley

Okay. And then men’s sports wear you sounded a little bit more, I don’t if optimistic is the right word, but are you seeing bookings there improve or are you seeing sell-throughs improve, maybe you can just give a little more color on that?

Jill Granoff

Sure. Well on the wholesale side, you know we are slightly down to plan in the low single digits, but we are up versus last year and I have to say people love our positioning in this economic environment, well priced designer fashion, you know we have a very strong position in the modern contemporary zone and our wholesale partners are very happy that we are modifying the assortment to have a better balance between core and fashion item and that we are designing into some key opening price points. So that really is very helpful and we are looking at this very carefully for holiday sweater program etcetera.

In addition, we are seeing improved results in our own stores in men’s apparels and it is important that when we think about the men's sportswear initiative, we recognize that products that are developed in men's sportswear are sold in wholesale, in retail, in our outlet stores, as well as in the international marketplace. So, again the benefits that we are seeing are really moving throughout and again that would be a lot in the denim category also in tees, our tee’s our tee’s are doing very well and in our separates.

Jeff Van Sinderen – B. Riley

Okay, good. And then, if we shifted footwear for a minute, in terms of your bookings, is there anything you can tell us about fall, how that looks? Holiday, if it is, or maybe it is to early to start going into holiday, but is there anything you can tell us there about, you know it sounds like you feel like their product line is better, how are retailers reacting to that, was there any tangible we can talk to?

David Edelman

So, I think we talked about the backlog at the end of the first quarter. So net off them, we exited the Bongo and Tribeca businesses, so our wholesale backlog is down about 22% and we feel that for Q2 that is probably a good indication of where we are running wholesales and just in general, I think our retail partners are ordering closer to season and therefore tracing trends and therefore it's kind of early for us to seek at a really good read on the holiday.

Jeff Van Sinderen – B. Riley

Okay, fair enough. And then any shift in – you sounded like you are pleased with the results of your advertising in Q1, just wondering if you are changing your plans or doing anything differently in the second half, when you feel like you will have better product in the channel?

Jill Granoff

We are going to maintain our current campaign, we think it is very important to have consistency and as I mentioned earlier, we are seeing and hearing very positive feedback, from customers, I think you know from our wholesale partners, from our licensee's, from our international partners. So, in that regard we are going to say the course.

The other thing that we will do his more traffic driving initiatives, things like e-mail blast, which have minimal cost and we are testing some direct mail campaigns, we recently did a partnership with Vogue and GQ on the nine essential, for ’09 we are going to be reading that now, but we think it is important to drive traffic to the store and the other thing that we're looking at is doing really community advance at the store level. They have very low costs, it also helps us to leverage our awareness initiative and charitable tie in and in these difficult times, you know people like to get together, you know talk with one another and we have seen some nice results from these inexpensive community store events.

By the way, we did just shoot our fall campaign this past weekend and I got a sneak peak and it is looking really great. And again, you will see head to toe dressing, you will see big emphasis on products, but again footwear, apparel, accessories, you know jewelry, a whole host of different product classifications, and you know the response we are getting is people saying wow this looks really great and that is aspiration and motivating people to go to stores. So, we are hopeful that we're going to see good results from our marketing efforts.

Jeff Van Sinderen – B. Riley

Great to hear. Thanks very much and good luck.

Jill Granoff

Thank you.

Operator

(Operator instructions) And your next question comes from the line of Sam Poser from Sterne, Agee. Please proceed.

Sam Poser – Sterne, Agee

Good afternoon. I'd have a whole bunch of questions. Number one, back to the men's sportswear for a second, you talked about the business looking a little bit better, but how are the margins there?

David Edelman

Margins have been under pressure Sam and we think, again part of our issue in wholesales has been that we had – when the cut our receipt plans it takes four to five to kind of deduct everything and we think that, while we clear out those inventories that's been putting pressure on the margins. So, we believe our margins in Q2 will be much improved, but margins in Q1 are a little bit tough.

Sam Poser – Sterne, Agee

So I guess just a follow-up, how – I'm sorry.

Jill Granoff

I would just say, what one of the other things that we were doing is we are really looking to design into some key price points and so we have looked at the competitive landscape. We are not lowering the top end of the price range, but we are introducing selected products at the lower end of the price range and designing into that with greater volume so that we will have better initial markups.

Sam Poser – Sterne, Agee

That's great. You mentioned that you are some sort of pleased with the men's sportswear business considering it was flat, how telling is that though considering that you've been working your way out, I guess with the margin pressure, is that – is it telling – or there regular price goods that are selling within that that are giving you the confidence there?

Jill Granoff

Well, I would say Sam, as we are relatively pleased, we know that we can do better, but the fact that we're up to (inaudible) the fact that we are in very active conversations with many of our wholesale partners to increase penetration and existing doors is encouraging to us and we are also seeing traction in our test stores in the men’s sportswear categories. So, it is all relative, but certainly we are seeing nice signs of life in selective classifications within men's sportswear.

Sam Poser – Sterne, Agee

Cool. I got a few more. The speed to market, I mean what are you doing specifically to improve that and how has it changed or do you see it change in the next – over the next year I will call it?

Jill Granoff

Well, I mean we have seen improvements in speed to market on actually, in men's sportswear, I think, if you know roughly 30 days. So, again I think more careful planning calendar management, you know partnership with our suppliers to ensure that we deliver our products on time. And the key here is that we have really adopted a retailer mentality. The closer in we can get, you know when the products are going to hit the floor, the better off will be in terms of really understanding trends.

So, it is a lot about better internal processes and improved cross functional coordination to get our product out. The other thing we're doing is we have invested in our China office, we have a new head there, as I mentioned before and building some of the capabilities there, so that helps. And then the other part would be the actual capabilities with our selected items that we can catch in our own stores and then we could ramp that up for distribution to the balance of the changes.

Sam Poser – Sterne, Agee

Got you. I don't know, if I had probably missed it, the wholesale revenue and the retail revenue for the quarter did you give that specifically David?

David Edelman

I did.

Sam Poser – Sterne, Agee

Could you give it again? I'm confused.

David Edelman

Yes, I will look for my numbers out. The wholesale revenue for the quarter was $61.6 million versus last year's $74.1 million and consumer direct was $32.7 million versus 38.5.

Sam Poser – Sterne, Agee

Cool. And then the inventory levels, could you give us an idea of a specific number that you are looking at to call in line, I was just looking back through, I am trying to figure out sort of what a number we should be looking for based on the guidance that you gave at the end of the quarter, and, what in-line mean relative since you're not telling us what your sales, you don’t know what sales are going to be on the back half of the year just yet?

David Edelman

In line with inventory, we are focusing on being within demand or lower than demand.

Sam Poser – Sterne, Agee

Lower than future demand, like so based on whatever your guide the back half to your inventory should be lower than that on a percentage basis for at least Q3?

David Edelman

Right.

Sam Poser – Sterne, Agee

Okay. And then, last question, based on the visibility, the lack of visibility when you are talking about even directionally seeing improvement in the back half, I see you are doing a lot of changes, but is there not – what gives you the confidence even to step up and say something like that in this environment?

David Edelman

Well, I think first we have made significant cost reductions and have made another rounder then in Q1 and the full effect of those are going to take place throughout the back half. We are getting a lot of positive feedback on our product, so we are comfortable that we are going to start making margin improvements and then finally we have an ease of comparison in Q4.

Jill Granoff

And then, the other thing I would say, Sam, is Kenneth is spending much more time on product, and we are really seeing the benefits a bit. You know, we are seeing it in men's footwear, you will be hearing some exciting news in our women's category in the not too distant future, he is spending a lot of time in apparel working with our licensee partners and the team is really energized and invigorating and we are leveraging Kenneth's strengths in product and marketing’s.

So, that gives us some confidence. Obviously, the other is inventory, you know our numbers have been significantly impacted both in Q4 and in Q1, by having supply in excess of demand and as a result of that we've had to take some mark downs to move through the seasonal goods, You know we try to cut back our receipt plans, we were successful in some, but we believe that supply and demand will be much more in line for the back half of the year. So, again it is hard to say what the demand is going to be and what the traffic levels are going to be, but we believe that we will have improved profitability as a result of three things, the expense reduction initiative, the new product introduction, and improved inventory management.

Sam Poser – Sterne, Agee

Thank you very much and good luck.

Jill Granoff

Thank you.

Operator

And your next question comes from the line of Heather Boksen from Sidoti & Company. Please proceed.

Heather Boksen – Sidoti & Company

Good afternoon, most of my questions have been answered, just curious getting back to the inventory, what does it look like in channel right now if you guys can give some color on that?

David Edelman

Well, I think I talked a little bit about it, our comp store sales, our comp store inventory levels are down about 20% and that is inline with our comp store sales and our wholesale inventories are a little bit high as we bring them down to match future sale plans.

Heather Boksen – Sidoti & Company

Alright, on the wholesale side, some of your retail partners, what do their inventories look like?

David Edelman

I think they are just ordering closer to season and having wanting to chase trend. So, we are not really hearing anything in terms of problems with that.

Heather Boksen – Sidoti & Company

Alright. Okay thanks.

Operator

At this time, there are no further questions. I would now turn the call back over to Ms. Jill Granoff for closing remarks.

Jill Granoff

So, I just want to thank you all for joining us on this afternoon's call. Clearly, I want to thank all of our associates for their continued hard work, obviously the environment is very tough and we appreciate everyone’s on going commitment and dedication and without a doubt we also want to thank all of our loyal shareholders for their continued support of our team. Thank you.

Operator

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

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