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Elizabeth Arden Inc. (NASDAQ:RDEN)

F3Q 2013 Earnings Call

May 2, 2013 11:00 am ET

Executives

Rachel Schacter - ICR

Scott Beattie - Chairman & CEO

Joel Ronkin - EVP, North America

Kathy Widmer - EVP & CMO

Steve Smith - EVP & CFO

Marcey Becker - SVP, Finance

Analysts

Arnold Ursaner - CJS Securities

Bill Chappell - SunTrust

Joe Lachky - Wells Fargo

Connie Maneaty - BMO

Joseph Altobello - Oppenheimer

David Wu - Telsey Advisory Group

Operator

Greetings and welcome to the Elizabeth Arden Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Rachel Schacter, of ICR of ICR. Thank you Ms. Schacter, you may now begin.

Rachel Schacter

Good morning. Thank you for joining us. Before we begin, I would like to remind you that some of the comments made on this call as either prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden's most recent Annual Report on Form 10-K filed with the SEC. If non-GAAP financial information is provided on this call, a reconciliation of the non-GAAP information to the most comparable GAAP financial measure is available in our press release.

I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden. Scott, please go ahead.

Scott Beattie

Thank you very much, and welcome everyone to our Q3 conference call. Joining me here today is Joel Ronkin, our Executive Vice President of our North American Business; Kathy Widmer, our Executive Vice President and Chief Marketing Officer; Steve Smith, our Executive Vice President and Chief financial Officer; and Marcey Becker our Senior Vice President of Finance.

In terms of the agenda today, I will begin by providing an overview of our business performance for Q3 and year-to-date results for fiscal 2013, and including a review of our most important corporate initiatives, the Elizabeth Arden brand repositioning, and the development of our European fragrance business. Included in my overview will be a detailed review of our international business. Finally, I will also provide an outlook for the rest of this fiscal year.

I will then turn the call over to Kathy, who will follow my comments. Kathy will provide a detailed review of the Elizabeth Arden repositioning project, including the performance to-date of our flagship doors, and our key Elizabeth Arden's brand initiatives for skincare, color and fragrance. Kathy will also provide a review of our strategic fragrance brands and their global performance.

Following Kathy, Joe will provide a detailed discussion of our North American business for the third quarter and year-to-date, which includes both our mass fragrance business, our prestige fragrance business, and our Elizabeth Arden prestige distribution business including, Canada and Puerto Rico.

Finally, Steve will provide a detailed review of our key financial metrics for Q3 and year-to-date and outlook for the remainder of the year.

In terms of just overall business performance review, I'll start by saying is frequently discussed in both earnings calls and investor presentations. Fiscal 2013 is a year of transition for us at Elizabeth Arden. The Elizabeth Arden brand repositioning has and continues to be a significant undertaking from all parts of our organization, creating some anomalies in our year-over-year sales, patterns, some inventory positions, and gross and operating margins. These anomalies will continue for the next couple of quarters, but as the management team was extremely confident that the investments we have made, and continue to make in the Elizabeth Arden brand, will accelerate its global revenue growth and its long-term profitability.

In terms of our flagship doors, we are experiencing accelerated growth and retail sales in both North American and International business. As I stated in the press release, total flagship doors since the reset in September and October have grown 19%. Internationally has significantly improved this quarter to 18%, and North America is up to 22%.

The exciting progress that we now see a strong momentum building with our major customers across all markets in all formats. This gives us confidence that repositioning is gaining attraction and will result in consistent growth in the Elizabeth Arden brand as we look forward to fiscal 2014.

Our other key initiative to grow our European fragrance revenues and market share continued to show progress during this third quarter as well. Our total international fragrance business grew 22% in Q3, and 16% year-to-date, lead by the European fragrance business that grew 33% for the third quarter and 22% year-to-date. These growth rates and constant dollars are well in excess of the prestige beauty and fragrance category growth rates in Europe.

In terms of growth within regions within Europe, we experienced growth in every market including the very weak southern European markets, and experienced very strong performance in the strategically important market for us, the UK and Germany.

In terms of overall operating performance for Q3, we executed to the plan that we presented during our Q2 conference call. Although we had our 15th consecutive quarter of year-over-year revenue growth, and growth in both EBIDTA margin and dollar EBIDTA growth, we experienced a decline in year-over-year gross margins of approximately 100 basis points.

This was driven by the year-over-year changes in the mix of our business. We had higher fragrance sales versus the lower Elizabeth Arden brand sales as a proportion of our total business.

As we look forward to fiscal 2014, we're planning for a continued and systematic improvement in gross margin, EBITDA, and return on capital; once the transition anomaly been mentioned earlier have been anniversaried.

In terms of our total international business performance, our revenue growth accelerated to 14% for the third quarter lead by Europe, which is up 19%, Greater China, which is up 10%, and our distributed and travel retail markets, which were up 22%. The one region of weakness for us was our Australian business, and our Korean business in Asia-Pacific. For both, their domestic and travel retail components, which in total was down 4%. In both markets, we performed at or better than the beauty category.

In terms of the EA brand performance, which was essentially flat in the international business, as a result of these Asia-Pacific markets being weak, and both of those markets are strong Elizabeth Arden brand markets. The rest of the international region, the Elizabeth Arden brand was strong up between mid and high single digits, which is very encouraging.

I'd now like to just briefly discuss some of the issues that we talked about last quarter that affected our revenue and earnings performance in Q2, and year-to-date as of Q2, and there are three issues that we discussed last conference call with our performance of our U.S. mass retail business, some timing differences in our travel retail shipment component, and also the performance of our Greater China business. We provided a brief update at each of those.

Our U.S. mass fragrance business continues for the most part to perform above our budgeted retail plans, and we are gaining market share. There are pockets of weakness, which Joel will discuss in more detail that are particularly affecting mass retailers dependent on the low to middle income consumers. We expect this trend to continue until we see a significant improvement in the economy and the unemployment rate.

In terms of the travel retail shortfall in the second quarter that's been corrected and during the third quarter our travel retail business was up 13%. In terms of our Greater China business, the overall business was up 10% year-over-year. But most exciting in our top door, is our top 10 doors in Mainland China, we're up 30%. We have, for the last several quarters, been concentrating our resources on our top 100 doors in the prestige department store channel in China, and we're confident we've a plan to greatly expand the revenues and productivity of these doors, particularly with our Elizabeth Arden skin care repositioning.

I'd now like to introduce Kathy Widmer, our CMO to discuss in more detail the EA brand repositioning and our fragrance portfolio performance.

Kathy Widmer

Good morning. I'm pleased to update our Arden brand repositioning initiative, followed by quarterly results across Elizabeth Arden, as well as our key fragrance brands. We're now fully renovated across all of our key global flagship doors. They've been converted with our new counter design, renovated packaging, product assortment, communications and visual elements, and some new formulation.

I'm pleased to share that these doors have delivered 19% retail sales growth to-date, 22% in North America, and 18% in international. This increase sparks these growth industries for the beauty category, despite economic head wins, in a few significant Korea doors, which have negatively impacted overall growth. We continue to analyze the performance in the flagship doors, isolating the key drivers, and broadening them across the larger segment of the business.

Meanwhile, the overall Elizabeth Arden brand was flat in net sales for the third quarter, reflecting the challenges of inventory conversion and consumer adaptation during this early period of the repositioning. Skin care was down 1% on softness and ceramide shipments compared to last year's launch of Ceramide Premier. Fragrance was down 5% on declines in retail brands, offset by color, which grew 17% on the launch of newly reformulated and repackaged Sponge-on foundation.

While brand shipments for the quarter did not reflect steady straight-line growth compared to last year, recent retail results, however tell a far more exciting story with solid week-on-week growth momentum. In the UK, for example, retail performance has steady improved from up 3% for the past trailing 12 month period to up 14% for the past three months, driven by 22% growth in skin care.

The U.S. likewise have delivered steady growth in retail improving from the past 12 month trailing performance of down 2% to up 5% growth in retail for the past three months, again driven by skin care, which is up 13%. PREVAGE has been a key driver in recent consumption momentum. PREVAGE Intensive Anti-aging Serum has garnered numerous best of beauty awards and provides Clinical Lash and Brow Serum has generated significant beauty editor, blogger, and overall PR support.

Year-to-date Arden brand retails have largely been driven by skin care, as color renovations have been more spread out across quarters, and fragrance has had little new. It's encouraging to note that color renovations are steadily heading retail counters and retail sales performance has likewise improved, up 12% in the U.S. for the past quarter for example. And we're very pleased to announce the launch of this July of a significant new color fragrance for the Arden brand called Untold, which we anticipate to be a strong global modern addition to our fragrance portfolio with potential to bring a new customer to the brand.

Moving on to other fragrance brands, our overall fragrance portfolio delivered 19% growth in net sales for the third quarter. This growth was driven by continued expansion in Western Europe, as well as, growth among Juicy Couture, Taylor Swift, Justin Bieber, Nicki Minaj, and John Varvatos fragrance houses.

Our Western European fragrance expansion initiative focused on generating disproportionate growth in the $16 billion fragrance market delivered 33% growth for third quarter compared to last year. Growth was driven by strong performance in the UK, Scandinavia, Spain, and Germany.

The house of Juicy Couture grew 7% in net sales for the quarter, behind pillar innovations on both Viva La Juicy and the original Juicy Couture, as well as continued strong retail sales momentum. In the U.S., Viva La Juicy has ranked number seven year-to-date among all women fragrances, and U.S. Prestige drove stronger overall brand retail sales for the quarter, up 20% compared to last year. Retail results in the UK were likewise up 20% for the quarter.

Net sales to the house of Taylor Swift were up 31% for the third quarter, and up 77% fiscal year to-date. North America sales were up 21% for the quarter behind strong sales of Wonderstruck in mass, as well as sales of enchanted in prestige accounts. International sales were up 58% driven by both fragrances.

We're pleased to sponsor Taylor's current global concert tour, which launched in the U.S. in March, and have plans for a global launch of her third fragrance brand this summer.

The John Varvatos fragrance brand was up 49% for the third quarter driven by continued growth of its collection fragrances, as well as STAR USA. Sales growth was balanced across North America and international, which were up 50% and 47% respectively.

We're currently executing plans for a global platinum limited edition launch and we'll introduce an exclusive launch in the UK in Debenhams this May. The newly acquired Ed Hardy fragrance brand plays a key role in our fragrance portfolio, driven primarily by demand in North America. Our latest innovation called Ed Hardy Skulls & Roses, which launched in October of last year, now represents 40% of North America prestige sales for the ED Hardy brand for third quarter, with further plans for a rollout in international, as well as in upcoming limited edition for holiday 2013.

We continue to be pleased with the strong sales performance of our recent fragrance license acquisitions Justin Bieber and Nicki Minaj. Both fragrance brands are delivering against expectations, driven by substantial digital marketing plans, creative execution, and their unprecedented social media following, over 86 million for Justin Bieber and 37 million for Nicky Minaj. The digital program and support of Justin Bieber Girlfriend in fact recently won an esteemed Webby award for excellence in social media marketing.

We're currently executing against the launch of Justin's third fragrance, as well as Nicky's second's fragrance, which will ship later this summer. This concludes the marketing updates. I'll now turn over to Joel.

Joel Ronkin

Thank you, Kathy. I'm going to discuss the performance of our North America business, including an overview of our sales performances, retail sales trends, and the status of some of our key initiatives.

North America business comprises about two-thirds of total company net sales and includes all sales of our products in the prestige and mass channels in North America, as well as our outlet stores and our global e-commerce business.

Third quarter net sales in North America were up 9% compared to last year, reflecting growth in both prestige and mass. On a fiscal year-to-date basis net sales for North America have increased by 12%, with growth of 34% in prestige, and 5% in mass.

In our prestige business, net sales were up 31% for the quarter due to growth in fragrances related to the new launches, as well as existing brands, coupled with increases in sales of the Arden brand.

As Kathy just indicated, our flagship doors in North America continued to show strong retail sales growth of 22% since reset, and we're encouraged that the rest of the Arden prestige business is also showing continuing positive retail sales trends throughout the quarter.

As I mentioned on last call, we're in the process of taking our learning's on the reposition doors to additional doors, and we're already seeing some payoffs from these activities. We gained 50 points of market share in prestige account so far this fiscal year.

During the fourth quarter, we expect to continue this positive momentum, with strong in-store support programs and the continuation of the rollout of our Arden repositioning.

Turning now to direct-to-consumer business, we continue to grow rapidly. We opened two new outlet stores this spring in addition to three we opened in the fall. In total we now have 14 stores open. Comp store sales in these 14 stores are up 26% year-to-date. Our e-commerce business is likewise growing quickly with a 27% sales increase in the third quarter, largely as a result of our repositioning efforts with the Arden brand. Fiscal year-to-date sales in this business have grown 25%.

Focusing next on our mass business, net sales grew 2% in the third quarter. The newly launched brands Justin Bieber Someday and Taylor Swift Wonderstruck are performing well, exceeding our retail sales plans.

As we discussed on our last earnings call, we've see significant variation in retail sales trends among our retailers. Most of our mass retailers have continued strong retail sales performances and are achieving or exceeding our expectations overall. However, trends at some other retailers and in particular at one key mass retailer remain weak.

Fiscal year-to-date our retail sales are up overall slightly against a low single-digit decline for the category. This has resulted in a 160 basis points increase in market share. As we head towards the end of our fiscal year, we are focused on our key initiates.

Critical and first among these is the Arden repositioning where we've extended our rollout to more doors and have strong infill programs and a major fragrance launch planned. In mass, our efforts to reinvent the mass channel continue. We've just completed meetings with most of our key mass retail partners on various categories reinvention initiatives and are encouraged by their commitment to those initiatives.

And now, I would like to turn the call over to Steve Smith.

Steve Smith

Thank you, Joel. I'll discuss our third quarter financial results, working capital and balance sheet matrix, and will also provide comments regarding our outlook for the fourth quarter of fiscal 2013.

Gross margins, after adjusting for the acquisition and non-recurring Elizabeth Arden repositioning costs, declined by 100 basis points for the quarter and has increased 20 basis points year-to-date. Our third fiscal quarter is our lightest quarter in terms of sales volumes. As such minor increases in discounts and allowances in terms on dollars have a disproportional impact to the quarterly gross margin percentage.

Mix of sales also impacted gross margins, as we had higher sales of fragrances as a percentage than Elizabeth Arden branded products as compared to the prior year.

Given this trend, for fiscal 2013, we now expect relatively flat adjusted gross margins plus or minus 25 basis points over fiscal 2012. As we transition away from the integration of last year's acquisitions, take the key drivers of our success from the Arden repositioning project, and broaden them to a larger segment of the business, we plan to show systematic improvement in key financial matrix, including gross margin, operating cash flow, EBIDTA margin, and return on invested capital.

For the quarter, recurring SG&A expenses increased by 6.5% or $6.8 million as compared to last year. Year-to-date recurring SG&A expenses increased by 8.6% or $31.9 million as compared to last year, due to higher advertising and sales expenses to support all the acquired brands and fragrance launch activity, as well as marketing cost related to the Elizabeth Arden brand repositioning.

As a result of improved operating leverage, we were able to increase our investment in brands worth by 190 basis points, including a 20% increase in advertising activities. Year-to-date as a percentage of net sales, recurring overhead expenses were lower as compared to the prior year, decreasing by 3.2% or $5.50 million from 17.7% of net sales down to 15.5% of net sales.

The increase in depreciation and amortization and interest expense for the quarter and year-to-date versus the prior year periods is due to incremental amortization expense and higher borrowings for the acquisitions we completed in the fourth quarter of last year.

The adjusted tax rate for the quarter was 63.6% and this resulted from the increase -- the increase in the Q3 tax rate was due to an adjustment we recorded in the third quarter, based on a realignment of the mix of earnings between foreign and U.S. jurisdictions, and that brought the expected full year effective tax rate to 25%. We also expect to record a discrete item in the fourth quarter, which were affected by about $0.02 a share and as such the effective tax rate for the full year is now anticipated to be about 26%.

Turning to the balance sheet and cash flow metrics at the end of the quarter with inventory of $326 million, the increase versus prior year is due to investment in the new fragrance brand and inventory buildup to the Elizabeth Arden brand repositioning. We expect inventory at the end of this fiscal year to be slightly ahead of last fiscal year.

Accounts receivable increased 34% versus the end of the third quarter fiscal 2012, reflecting the sales increases, timing of sales within the quarter, and customer mix in our international business. As a result, cash used in operations was $9 million year-to-date. Specifically, as it relates to operating cash flow, we plan to show market improvement next year in our performance, as we transition away from last year's fourth quarter acquisitions and broaden the Arden repositioning rollout.

Short-term debt, net of cash was $84.8 million at quarter-end. The increase in the credit line balance versus last year is due to the working capital to support the acquisitions and the Elizabeth Arden brand re-launch and share purchases. Our priorities for cash remain for working capital investments behind the Elizabeth Arden brand repositioning, acquisitions, and share repurchases. And during the third quarter, we repurchased about 323,000 shares for $12.50 million.

Capital expenditures totaled $30 million through the third quarter. The increase versus the prior year is primarily, the increased investment in the Elizabeth Arden brand repositioning.

We also expended $7.6 million so far this year towards the minority investment in the Red Door salons that we announced in September. We expect to invest the remaining amounts for that investment of $2.1 million in fiscal 2014.

We're confirming our sales guidance for the full fiscal year. We expect net sales to increase 9% to 11% over fiscal 2012 at GAAP rates, with currency expected to have a negative impact to sales growth of about 70 basis points. We are maintaining our EPS guidance of a range of $2.30 to $2.50 of share and the EPS guidance is before non-recurring expenses related to the Elizabeth Arden brand repositioning and acquisitions. And with that I will turn it back to Scott.

Scott Beattie

Thanks very much. Operator, we are available now to answer questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is coming from the line of Arnold Ursaner, CJS Securities. Proceed with your question.

Arnold Ursaner - CJS Securities

When you spoke about the Arden brand you mentioned that, if well, not for some factor which I missed, it would have been up mid-to-high-single-digits, just remind me what that factor was please?

Scott Beattie

Well, Arnie what I had said in our international business, if you look across all regions of international for the Arden brand, vast majority of them were up mid-to-high single-digits. We had significant weakness in a couple of markets Australia area and in Korea. So it's sort of an indication that we're gaining momentum on the overall brand as Kathy went through. And as Joel mentioned we're starting to see a kind of a halo effect on the flagships that the performance of their overall brand at retail is also accelerating. So that's encouraging.

Arnold Ursaner - CJS Securities

So again, to be clear, you only actually have 1% growth in net sales of Arden brand. Was there still inventory plead that impacted that or what other factors caused it to be as modest growth as it have in the quarter?

Scott Beattie

Well, it's primarily, the weakness in those markets that I just described. That -- that's the primary weakness in the performance.

Arnold Ursaner - CJS Securities

Going back to the brand repositioning and the doors. Remind us how many doors you were in, going into this quarter. And I think you had talked about perhaps expanding an additional 200 doors this fiscal year that's still your game plan?

Scott Beattie

Yes, I think Joel mentioned that that we're flagship and we've just reported on the flagship because so that it's a consistent comparable benchmark as we move forward. But as we mentioned in the Q2 call we had a Joel and Kathy and our head of international Dirk Trappmann have all been working on the next phase of rollout and we've identified a couple of 100 doors that were focused on that are key strategic retailers and very important doors within those retailers. And we're starting to roll that out and I think as Joel mentioned in his remarks, we're seeing good momentum in those doors as well. We're on track that in that initiative.

Arnold Ursaner - CJS Securities

Hey, two more quick ones your customers would likely working down basic stock inventory given the sales issues in the holiday season. What impact do you think that had on your gross margin this quarter/

Scott Beattie

I don't think that was a big. I think what Steve comments where were the real driver is. The fact is we had a larger percentage of our business, which is fragrances this year than it was last year and the fragrance business is the lower margin than our skincare. And that's the primary driver and there was some additional price promotions in some of our markets, given the economic environment, particularly in Europe that put some pressure on margin. But it's mostly the mix year-over- year change in the mix. And that's frankly and it's a very small revenue quarter. So, as a result it doesn't take very much to change that gross margin. We're pretty confident that as we move into next year, as we get some of these anomalies behind us that we will get back on track of that systematic year-over-year improvement in gross margin and EBITDA margin and return on capital matrix.

Operator

Thank you. Our next question is from the line of Bill Chappell with SunTrust.

Bill Chappell - SunTrust

Just wonder maybe a little further clarification on Arni's question. If you exclude the flagship doors would the Elizabeth Arden brand have been up kind of in the U.S. or in U.S. and Europe may be?

Scott Beattie

Yeah.

Bill Chappell - SunTrust

And then looking just to the customer issues that you talked about and particularly one large customer, do you have any more color and I think you talked in last quarter about that just being more of the economic conditions in paycheck to paycheck. But didn't know if there is any kind of lingering issue or that it needs to be a restage how you go-to-market on the mass channel or anything from that standpoint?

Joel Ronkin

We do not believe it is anything fundamental that we would our strategy on how we would go-to-market. We saw just the other way with particular one retailer. So, we've a lot of good things going on in terms of in the store. We're growing share overall and on with every retailer. And so we're doing the right things. We just have to, when the consumer come backs a little bit I think you'll see that move in the right direction. But overall we're really pleased with the direction of our fragrance business. So, I don't think there's anything fundamental.

Bill Chappell - SunTrust

And then Scott you had talked I think on the call that some of these issues that happened in the last quarter will last for another couple of quarters. So, that applies it kind of lingers into the first part of next year. Is that just we need to cycle through the holiday season or are there other issues that I should be looking for?

Scott Beattie

No, I'd say that we re-launched the Arden brand in September and through those flagships last year and from that point forward, we started to cascade the new product and so on. So, there's just anomaly that to be have to anniversary out of our numbers until we get the comparable year-over- year performance. But there's certainly decline as we move forward, but there's still there and they have the impacts on comparative year-over-year sales numbers. They've in some cases margins issues and so on that.

But I think what we're trying to express I think Joel and Kathy's remarks particularly is that we're very, very excited and confident about the momentum that we've on this Arden business right now. And as it builds, we've got a great innovation, plan, and activation of new fragrance for the next fall. And that combined with the really consistent improvement of retails around the world.

And even in those markets like Korea and Australia and a few others in Spain and Italy where you've got weak, weak economic trends. We're still performing above the category. So, we're very confident that we're on the right track here and we don't turn a brand like Arden around in a quarter or two. It's going to be multiyear process and we're going to be focused on this as we're and have been on a monthly basis door-by-door and make sure that we're executing with that the learning's that we've incorporated from the flagship project and really focused on what's working and adjusting that aren't working.

Bill Chappell - SunTrust

Got it, and last one from me. Just looking back to last year, I can't remember when you were doing kind of the restage and bringing back some of the older inventory. Did that penalize gross margin last year or wasn't much of an impact?

Scott Beattie

You're right. It helped gross margin last year and it helped the Arden brand performance last year because we were promoting some of the programs particularly in skincare and color that we needed to transition out the retail inventory as you recall. We wanted to be able to sell-through that inventory before we pipelined in the new inventory. So, we actually have a larger contribution from those products this past quarter, the fourth quarter and the first quarter of next year.

Operator

Our next question is from the line of Joe Lachky, Wells Fargo.

Joe Lachky - Wells Fargo

First off in Europe it appears growth is kind of accelerated there and I guess I know we're working off a very small base here. So, maybe I'm reading a little bit too far in to it, but I mean is this kind of a new higher run rate going forward as far as the year-over- year growth?

Scott Beattie

Well I don’t think. Again the third quarter is a small quarter for us and as you say it from very low basis in most of these markets and in the business. So, I don’t want to use that as the benchmark for our future growth in all quarter that’s for sure.

Joe Lachky - Wells Fargo

And then secondly on the Brazil affiliate that you guys started in February, if you could remind us where are you guys are distributing your products that mass, prestige, is it door to door at all. And how far and how is the response so far been in Brazil?

Scott Beattie

Well, we just started the business in the beginning of February and we're testing different go-to-market strategies, where we've always had some products in the prestige channel. We're testing some fragrance product in the mass channel and we’ve actually got a pilot project with the direct seller too in that market. So, there's a number of different things that we're trying and it's, so far it’s executing as we planned. Unfortunately it took us a little longer because of the complexity of the accounting and financial and just the stepup of the affiliate in that market. It was delayed somewhat as we talked about from October to February, but it's a very exciting fragrance market, particularly and we hope to build it in to a, significant contributor to our overall business overtime.

Joe Lachky - Wells Fargo

And then in China I just wanted to kind of ask about your, the reason for focusing on the top 100 doors there. If you could kind of go over your strategy and as focusing on those 100 stores versus maybe expanding distribution further. I guess if you could kind of contrast those?

Scott Beattie

Well frankly we, when we entered that market, we expanded distribution probably too far. For the maturity of the prestige market and for the, our capability in terms of driving productive growth in those doors and so over the last year-and-a-half or so we've been focusing in on the top most important prestige doors where the majority of the business is being done and where we need to win and be ranked competitively with the other prestige brands, and so we've really focused on building market share and growing our skincare business in those doors. And at the same time we've been closing some of the other doors that we think at least in the short to medium term they don't they're not as important and probably don't have the opportunity to be as productive as we need them to be or the retailer needs them to be. So it's a much more targeted focused strategy, and it's very comparative to all of our other leading prestige competitors. So we need to win head to head with those things, global brand things. That's what we're focused on doing.

Joe Lachky - Wells Fargo

And then just last quick one on your guidance for the rest of the fiscal year. I guess why you're keeping such a wide range as far as EPS. I guess given, it's a, the fourth quarter is kind of a seasonally slow quarter. I mean is there anything to read into that. Is there any sort of you know marketing spending, new product flows that could really swing the EPS?

Scott Beattie

Well it isn't really this slow quarter actually. It's our second largest quarter in terms of EPS and sales. And there are I mean the mix of the Arden business can have an impact on the both gross margins and profit margins. So we continue to see accelerated performance in that business that can move us to the higher end of the range and so that will have an impact.

And then there's a number of resets of brands in our mass business. There is some back-to-school programs and summer promotions that are presented during that period. So there's quite a lot of activity and again the mix between North American international has an impact on the leverage, operating leverage that we've in our business.

Operator

Our next question comes from the line of Connie Maneaty of BMO Capital Markets. Please proceed with your question.

Connie Maneaty - BMO

Hi, on the Elisabeth Arden rollout, besides the 50 flagship stores we know about, how many stores have been converted since? How many are done already?

Scott Beattie

Well Connie we're still rocking. We're overall working with another 200. But want to open up every week and its different stages of conversion. So it's kind of hard to put a number on. But I'd say we're about halfway through this process of rolling out the next group.

Connie Maneaty - BMO

And how would these Arden rollup and these new counters as extensive as the ones in the flagship door and have you convinced retailers to help pay for it?

Scott Beattie

Well an answer to the first question is no, they're not as extensive for the most part as of the original flagship doors. We're taking the best performance from them and applying them in our learning's and I think doing it in a much more cost effective basis and it depends, in the second part, it really depends around the world on the retailer. Some cases yes and in some cases no.

Connie Maneaty - BMO

Can you remind us what the factors will be in gross margin expansion once you get past the anomalies that are affecting this year?

Scott Beattie

The most important contributor will be the growth of our skincare and color business. They're a lot less seasonal. There's a lot more regular replenishment of those items and they're generally higher gross margins. They'll also be major contributor to the EBIDTA margin as well, the Elizabeth Arden brand because we don't have royalties or licensing fees. So that would the primary driver. The secondary driver will be just growth of our international platform, both with Arden and fragrances. And the improvement in operating leverage that we can obtain as we grow the revenue base of that business. So those would be the two most important drivers.

Connie Maneaty - BMO

So given where you are in roll out of Elizabeth Arden, does it make sense which way will gross margins go in the first half of the next fiscal year, would they be up or down? Do we need four quarters of margin declines before you get to us a gross rate again?

Scott Beattie

Well, I do not want to get into providing next year's guidance sort of directly here implicitly. But I mean, I do not want to anticipate as having continued weakness in gross margins.

Connie Maneaty - BMO

Okay. And then, just one detail. Are you sponsoring all of Taylor Swift tour or part of it and what is your investment there?

Scott Beattie

We are sponsoring the portion of the tour that is in the U.S. And then, we have a couple of markets that are currently investigating their ability to sponsor the tour when she entered their markets outside of the U.S.

Connie Maneaty - BMO

So is this a big investment?

Scott Beattie

It is not a bit investment but it is a very responsive marketing tool because we essentially capture the target in the arena, but it is not an expensive investment.

Operator

Our next question is from the line of Joseph Altobello of Oppenheimer. Please proceed with your question.

Joseph Altobello – Oppenheimer

Hey, guys. Good morning. First question, I would like to just go back to the margin in the quarter and specifically, the mix issue you mentioned. You saw more fragrance when you thought you would. Is it that fragrance was stronger than you expected or was skincare and color weaker than you expected or a combination of two?

Scott Beattie

No. Well, we acquired additional fragrance business which we did not have last year. So as a proportion of our total business, both the fragrance piece was bigger through those acquisitions, those new licenses. And we had a number of new launches last fall, which we did not have last year. So that disproportionately increased that fragrance component.

Joseph Altobello – Oppenheimer

Yeah. But it just caused you to lower your full-year guidance and you knew about those launches, you knew about the acquisitions when you gave that guidance. So just I am trying to understand what changed since then?

Scott Beattie

Well, nothing specifically. The macro level has changed dramatically. Just again, these have normally come up and you cannot -- we provide our guidance as best as we can cross all the line items, sales, gross margin and EBITDA. We know what caused this in the third quarter. It is not a material dollar amount for us, but it is a weakness in the Arden brand and in international. And as Steve mentioned, some additional promotional activity in fragrance in Europe. But I guess that is the best explanation I can make it for the last.

Joseph Altobello – Oppenheimer

Okay. And just two quick ones one the Arden brand. It looks like, I guess in the quarter and year-to-date, in constant currency basis the Arden brand is up about 1%. First, is that inline what you expected coming into the year? And two, what was the retail sales growth in the quarter for the Arden brand?

Scott Beattie

I think Kathy and Joel tried to sort of gave as much retail. We do not have retail sell through data for most of our international business. We track it at our flagship doors because it is a manageable number of doors to do it. And part of the selection process of our flagships was to be able to have a retail sell through data available to us. So we cannot give you a sort of global retail sell through number. But the overall performance of the Arden brand is slightly less than what we budgeted for. We expected that we talked about in the second quarter. We expected that the brand would perform better, the overall brand would perform better as a result of the excessive the re-launch. And we are probably up by quarter to two in terms of the momentum of that. What we are now seeing is run rates generally across the marketplace that are closer to what we budgeted for the year. So I would say that things are on track.

Certainly, the flagships are performing. And the momentum improvement in the flagships, we are very happy with. And now, we are starting to see the overall retails performed but it is probably, as they say a quarter or two later than what we had expected they impacted beyond our --

Joseph Altobello – Oppenheimer

Okay. So you are where you wanted to be. But it just took little longer, I guess this is the way you put it?

Scott Beattie

Yes.

Joseph Altobello – Oppenheimer

All right.

Scott Beattie

And I hopefully laid that out back in August, when we talked but probably, was not conservative enough or as a group we were not conservative enough in terms of the time we take. But we are on the track. We are absolutely confident. We are on the right track in terms of this re-launch. And we can map out the future growth of this brand fairly confidently over the next several years.

Operator

Our next question comes for the line of Jason Gere, RBC Capital Markets. Please proceed with your question.

Unknown Analyst

Hi, this is Jeff (inaudible) for Jason. Just following up on the EA brand repositioning. It seems like you are either having a lot of success in the stores which you have re-launched. Do you guys have any internal capabilities to ram up the expansion plans or sort of there is going to be a more deliberate case to get up to all your stores eventually?

Scott Beattie

Where we are today, I think as we reported is we are about six months into the flagship doors. And we have started about two or three months ago except the first few months results in those doors and identified efficient means with which we could take that success to our broader set of doors, which we've begun to do in North America and are shortly in a position to do for international. So, it becomes relatively complex to report in this environment because we will ultimately have a set of flagship doors, another set of doors which is the next round of what we call intensification. But all doors are receiving elements of the repositioning through packaging reformulations, new assortment and communication. So, it becomes a little challenging to break it up in terms of volatile segment.

I think what you see though is because of the recent momentum in the overall Arden brand in the markets that we can measure retail sales and that is our indication that those elements that are hitting all doors are starting to affect the momentum of the overall business. And at a slightly lower rate than what we are seeing in the flagship doors and that is what you would expect. So I think our anticipation is that over time we will see continued momentum in the flagship doors. And then, these waves of performance on broad respective doors will start to approximate the performance of the flagship doors. Well, we are able to accomplish that with less investment because we have been able to analyse what really worked and what really drove performance in the flagship doors and move on those items versus all of the items executed in the flagship.

Unknown Analyst

Understood. That you are looking to stay (inaudible) the last half of doors you are getting into that would be going faster than this initial half, as you recall. I do not know the exact break.

Kathy Widmer

Well I think that's fair to say because it’s a very comprehensive initiative with a lot of moving parts and our ability to track each one of those elements and its timing. When you put it altogether it's very challenging and perhaps a few months aggressive in terms of when we thought all or most of them would be impacting our overall performance. But as time goes on, it should be shaping up into something more and more consistent.

Operator

Our next question comes from the line of David Wu of Telsey Advisory Group. Please proceed with your question.

David Wu - Telsey Advisory Group

And its great to see that top line acceleration this quarter. First on the EA brand repositioning. What do you think would be a more sort of normalized rate of growth for the EA brand, once you start to anniversary the impact from the transition and have you seen sort of more opportunity to enter new doors, especially given the (inaudible) and the strong sell-throughs that it's currently been generating.

Scott Beattie

First of all I think I don't want to get ahead of ourselves here. We've only had six months of repositioning. So we'll reassess where we're when we provide our forward guidance for next year in August and that will reflect sort of what we're confident. I think a little bit more conservatively this year while we're confident that we can drive growth on.

I think long-term there's no question that there is going to be markets and retailers that we will enter, that we haven't previously had the opportunity to enter. There's already proposals in front of us with retailers to re-launch the brand or introduce the brand in the high-end prestige department stores and certain perfumeries. But again as we've stated when we did the re-launch in the flagships is that the big part of this is for us to gain confidence with our existing retailers and that the stronger the existing business becomes the more confidence we've in entering new markets or having new retail relationship. So I think it will be a stage kind of rollout over the next several years and that's frankly will be the next leg of growth for us over a multiyear plan to double the size of the business.

David Wu - Telsey Advisory Group

And can you talk about your strategy to expend your fragrance distribution in Europe and obviously we saw good attraction there this quarter. But if you could talk about sort of, where you see sort of the most meaningful channel opportunity either with some of the department stores, the pharmacies or special TBD doors and how you plan to leverage your existing local infrastructure and acquisitions could be likely over the near-term as also way to penetrate the market?

Scott Beattie

Well, I think we’ve got through before that the UK and Germany are the markets that are the strongest and largest fragrance markets for our brand mapped most appropriately into those markets. So, they for us are the most important drivers of market share and growth going forward and we're gaining both market share and sales growth above the overall European market in those two markets.

But we're also expanding in Eastern Europe through distributors including Russia and Poland. We got a plan to enter the Middle East and certain other markets like Turkey as we go in to next year. And in terms of the channels of distribution they will be, where our brands are most suited. What we've done is we have mapped our brand portfolio to comparative brands that are successful in those markets and we've looked at not only where they, what countries they are in best too and what specific retailers we need to win with and even what doors we need to win within those retailers.

So, we have a very clear tactical plan on how to build share and expand by brand and by retailer within each of the geographic markets and it just takes time. It has to be done systematically and particularly with fragrance it's a very seasonal business so your success is in distribution measure more on an annualized basis than on a quarter-to-quarter basis.

David Wu - Telsey Advisory Group

Great and how the travel retail trends performed in the quarter and may be still seeing pretty solid sell-throughs?

Scott Beattie

Yes, we actually had 13% improvement in our travel retail business this quarter and it was pretty strong performance right across the board and I think with the combination of the Arden repositioning as well as the growth of our fragrance portfolio in the domestic, European market that also help our travel retail business particularly in Europe, so.

David Wu - Telsey Advisory Group

And if you minus, is it about the mid single-digit percentage of your overall sales the travel and retail channel?

Scott Beattie

Yes.

David Wu - Telsey Advisory Group

And just lastly I know you just mentioned on seeing a little bit more promotions in Europe fragrances, but can you comment on sort of what are you seeing in terms of the overall promotional environment especially in sort of the mass channel and if you expect competition to intensify or to maintain sort of a similar level through the remainder of the calendar year.

Scott Beattie

Well I'll let Joel comment on the mass business here in North America, but if you look at across the whole global business it’s a competitive environment. Everyone is chasing revenue growth and market share and in an economically weak environment, promotions and price discounting, whether temporary price reductions or additional promotional kind of programs are way to drive your business and so we're doing it in reaction to the category and to the overall business.

But it’s I wouldn’t say it’s dramatically different this quarter, the function of having slow economic growth in most of the developed markets. I'll let Joel talk about the mass business.

Joel Ronkin

There hasn’t been a meaningful to promotional activity in the mass channel in North America really in anyway. We don’t see a heavier discounting than usual, okay, price is far bit and we're actually slightly up.

Operator

At this time we've come to end of our time for today’s question-and-answer session. I will now turn the floor back to management for closing comments.

Scott Beattie

Thank you very much everyone for joining us today.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. We thank you for your participation.

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