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R.G. Barry Corporation (NASDAQ:DFZ)

F3Q13 Earnings Call

May 7, 2013 9:00 AM ET

Executives

Roy Youst – IR

Jose Ibarra – SVP, Finance and CFO

Greg Tunney – President and CEO

Analysts

Walter Winnitzki – Nicusa Capital Partners

Jeff Stein – Northcoast Research

Aaron Syvertsen – Sidoti

George Prince – RBC

John Curti – Singular Research

Operator

Good morning, and welcome to the R.G. Barry Corporation’s Third Quarter 2013 operating results conference call and webcast. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Roy Youst of R.G. Barry. Please go ahead.

Roy Youst

Thank you, and good morning. Our news releases are available at the Investor Room section of the corporate website, rgbarry.com. You also can contact us at 614-729-7200 to receive a release or be added to our distribution list. An audio replay of this call will be available shortly after its completion and a written transcript will be posted on our website later this week.

Joining me today on our call are R.G. Barry Corporation President and Chief Executive Officer, Greg Tunney; Senior Vice President Finance and Chief Financial Officer, Jose Ibarra, and Corporate Controller, Gary Sandefur.

Please note that statements contained in this call which are not historical facts should be considered forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to all safe harbor qualifications set forth in our news releases, investor communications and SEC filings. Actual events affecting the company and the impact of those events upon our operations may differ materially from what is currently anticipated. For a list of some potential risk factors, please refer to our news release or most recent Form 10-K.

And now let’s turn the call over to Jose.

Jose Ibarra

Thank you, Roy, and good morning, everyone. Our third quarter produced the best earnings results for a March ending quarter in the company’s history. Based upon our performance to-date and our full-year visibility, we remain confident that we will end fiscal 2013 with a very solid profitable performance. We currently expect full-year consolidated net sales to be in the range of approximately $10 million to $12 million below last year’s record of $156 million.

As we have been telling you for nearly a year, the shortfall reflects in part the elimination of some lower margin footwear business exited at the end of fiscal 2012, the loss of our JC Penney’s men’s footwear program and reduction of the size of two seasonal footwear programs in the club channel.

On the plus side, the Accessories segment revenue is expected to grow in fiscal 2013 at or above its planned mid-teen rate, offsetting some of the lost revenue in the footwear business. We expect consolidated gross profit as a percentage of net sales for the full year to run in the mid 40s and our consolidated operating margins to remain relatively consistent in the low to mid-teens.

Turning to the results reported today, consolidated quarterly net sales rose nearly 3% to $26 million versus the prior year and net earnings were up 85% to $1.5 million, or $0.13 per diluted share, from approximately $800,000, or $0.07 per diluted share, one year ago. Our third quarter consolidated gross profit as a percentage of net sales was 45.9%, up 130 basis points from one year ago and quarterly SG&A expenses were $9.6 million, down about 3% versus last year.

Nine-month consolidated net sales in footwear was $122 million, compared to $131 million a year ago and nine-month net earnings declined 8% to $13 million, or $1.13 per diluted share. Consolidated gross profit as a percentage of net sales for the nine months was 43.9%, up 80 basis points from the equivalent period last year. Nine month SG&A expenses declined 2% to $32.5 million, reflecting lower accruals for the annual incentive plan and lower expenses in a broad range of categories.

This marks the seventh consecutive March-ending quarter in which we have reported breakeven or better results. This change is directly related to the success of our efforts to diversify our business and even out its heavy seasonality. Expansion in our quarterly consolidated gross profit, expressed as both dollars and as a percentage of net sales, reflects the contribution of our higher margin Accessories segment and the elimination of lower margin components of the footwear business.

Looking to the segments, Accessories quarterly net sales increased 17% to $9.4 million over last year’s comparable quarter, resulting in an operating profit of about $2 million. For the nine months, Accessories produced $27.4 million in net sales, up 15% and an operating profit of $5.5 million, up 13% over last year.

Quarterly footwear net sales declined by 4% to $16.4 million, producing an operating profit of $2.5 million, which was up by about 5% over one year ago. Nine month net footwear sales were $94 million, a decrease of about 12% versus last year, yielding a nine-month operating profit of about $23 million, which is 14% less than the comparable nine-month period of fiscal 2012. The year-to-date decrease is primarily the result of the previously mentioned issues.

Some additional financial highlights on a consolidated basis include: Cash, cash equivalents and short-term investments were nearly $45 million, up from $40 million in a comparable period last year. Net inventories were $17 million, up fractionally compared to one year ago. Net shareholders’ equity increased by nearly – by $10 million to $85.5 million at the end of the third quarter.

Depreciation and amortization through nine months was $2.1 million and we expect it to be approximately $2.8 million for the full year. Nine-month cash from operating activities totaled $11 million, primarily reflecting the year-to-date profitability, timing related to inventories and accounts receivable, and our lower level of accrued expenses.

Accrued expenses of about $7 million for the nine months mostly reflected incentives and estimated taxes based upon our expected fiscal 2013 performance and $1.2 million related to the acquisition of the Mosey brand. And finally, we expect our blended tax rate for this year to be approximately 39%.

And now, Greg has some additional comments.

Greg Tunney

Thank you, Jose, and good morning. With fiscal 2013 nearly complete, I’d like to spend the next few minutes talking about some of the initiatives that are going to impact our company going forward.

The usefulness of our investments in R.G. Barry brand over the past few years is well-illustrated when viewed in the context of their positive impact on fiscal 2013. The new, more profitable business units brought some much needed balance and product offerings and seasonality. The addition of best-in-class business systems and processes added more efficiency and more reliability to our model. As a result, we will end our year among the industry’s top performers in productivity, profitability and return on invested capital this year, despite dealing with a very difficult year in our footwear segment.

Since our last conference call in February, we have completed the integration of our former sourcing agent’s China-based operations into baggallini’s business unit. This strategic move brings extensive talent in all phases of handbag development, sourcing and supply on to the R.G. Barry sourcing team. It reduces duplication and cost across our handbag platform, while positioning us for continuing growth in this segment of our business. We would like to officially welcome Tom Wilkin and the entire Mosey team in joining R.G. Barry.

In conjunction with the sourcing transaction, we bought Mosey consumer fashion handbag brand for approximately $1.2 million in cash. Mosey is a small, relatively new handbag and accessory line that is principally sold through department stores such as Wal-Mart and Dillard’s, and in some select international markets. It is sourced from the same factories that produce baggallini and it carries an average price that is well above $100 at retail. Mosey has joined the KIVA brand as part of our handbag coalition and we believe that it has a great future as part of the R.G. Barry portfolio.

For us to become a $200 million to $250 million company within the next three to five years, we must continue to invest in and diversify our business. Our growth strategy is simple; first, invest in and grow existing brands both domestically and internationally; next, leverage our portfolio through branding and channel diversification; and third, seek out and acquire authentic brands that can multiply our rate of profitability and sustainable growth.

In our footwear segment, Dearfoam remains the number one slipper brand in the marketplace and DF by Dearfoams is the top performing footwear brand in all of Wal-Mart US. Despite these strengths, we are experiencing some real, short-term revenue pain in footwear this year. That is in part the result of our decision to eliminate certain non-performing footwear assets and refocus our components of the business for a long-term profitable growth. These changes are definitely the right thing to do, but they also carry a cost. With this completion, we can now look forward to growing Dearfoams into a global lifestyle brand synonymous with comfort, not only in accessory footwear but in areas such as sleepwear where we have had recent success.

Beginning with fiscal 2014, we are introducing a new footwear segmentation strategy that addresses product and pricing issues we face as a result of Dearfoams’ broad penetration at retail.

Shoppers will find Dearfoams with unique designs at distinct price points whether they shop in upper-tier stores, e-commerce, retailers, national chains or mass merchants. All Dearfoams, good, better or best, will deliver the quality and comfort that is the brand’s hallmark. Differentiation will be found in design elements, the use of technology and quality of materials used.

baggallini and Foot Petal will comprise our Accessories segment and hold significant promise for the future. Next year, baggallini will continue its work on broadening markets and product offerings with a long-term goal of growing to the size of our footwear business.

They will also continue the integration of the recently acquired handbag sourcing organization and the KIVA and Mosey brands. Over Foot Petals, we continue focusing on growth in the core business, brand extensions and the development of new products and channels. We are working to ensure that Foot Petals’ products becomes even more synonymous with stylish, superior foot cushions and foot solutions.

Acquisitions remain one of our primary pillars, upon which we will build the future of our business. Our goal is to complete one to two meaningful acquisitions each year for the next three to five years. Currently, we are seeing a good deal flow at the $20 million to $50 million range, which we consider meaningful.

We continue working to balance the free flowing M&A market with what we think is appropriate for us at R.G. Barry based on our strategic acquisition filter. We’ve come very close this year on a couple of larger acquisitions, but at the end of the day, the filter told us the fit was wrong and we walked away from these deals.

During our May Investor Call one year ago, we cautioned that this would be a challenging year for our footwear business. As we entered the final weeks of 2013 year, the validity of that warning is apparent. Fortunately, our model allows us to adapt for the up and down cycles of our business. Although fiscal 2013 won’t reach the record levels of revenue and earnings growth, we have come to demand from ourselves it will end with a very healthy and positive performance.

Now, operator, we are ready for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Walter Winnitzki of Nicusa Capital Partners. Please go ahead.

Walter Winnitzki – Nicusa Capital Partners

Yes. Good morning. Two questions, if I could. First, I wanted to focus on the leverage that we saw from a margin perspective and how that fell down to the bottom line. Maybe you can just spend a moment and talk about each of the businesses. Looking through my model, it looks like the operating margins in footwear could be a record for the March quarter.

Given all the changes that you’ve made here now, is this – do you feel comfortable that you’ve got that operating margin at a level in that business where you’d like it, so you can kind of have these margins sustainable? And then Accessories seem to have a very nice jump in the margins as well.

And maybe kind of the same question there, it looks like some of the investments that you’ve made over the last 12 months to 18 months may be starting to pay some dividend. So, maybe you can talk about this success that you’ve had on a margin – from a margin perspective and the sustainability of some of those margins now?

Greg Tunney

Sure. Thank you, Walter. This is Greg. I’ll make a few comments and then I’ll turn it over to Jose on more specifically on the margins. As we started a couple of years ago to start to diversify our portfolio, one of the challenges we had is we were looking for businesses that ran at higher gross margin rates than our current footwear business.

And it’s interesting, as you fast forward the calendar now two years after that happened, because believe it or not, it’s actually been two years this last month that we finalized the baggallini acquisition. Today, even though we’re at a run rate right now of the Accessory division between baggallini and Foot Petals this year running a sales rate of 25% of our total sales, it looks right now they’re on a run rate to run about 30% of our total profit for the year.

So, you’re starting to see really a shifting and a diversifying of our business that we really were trying to do starting a couple of years ago with these new brands. And so, yes, your analysis of what the third quarter looked like in our footwear division even though the sales were down, I think that’s very apparent that the margin expansion as a result of really diversifying out of some of those non-profitable businesses that we felt we didn’t want to go forward with and then also the expansion of what we’re seeing in our baggallini margins as well as Foot Petals. Jose, any other further comments on that?

Jose Ibarra

Just to add to that, Walter, clearly the third quarter in the footwear segment reporting was clearly a point in time where you see the benefit of what we did here a year ago in terms of divesting of some of the lower margin product categories. So, we knew that this, when we got to this quarter we were going to see the impact of that and clearly so the model is so – it reflects that that’s what we achieved in the third quarter.

Very pleased, very happy, how we ended up the quarter on both sides, the footwear division did well and our Accessories business beginning to show the trend and the traction that really is pretty evident on how they can achieve and accomplish some of the goals that we set out for those two units.

Walter Winnitzki – Nicusa Capital Partners

Okay, great. Second question on the footwear business, maybe you can talk about, it looks like while the sales were down, the rate of decline was not as steep as we’ve seen in the past. Maybe you can talk about if there are any additional opportunities that you’ve been able to see in the business there.

Greg Tunney

Well, last year at this conference call, this was the time of year that we actually had shared with people our idea of divesting out of some of the less profitable businesses in our footwear business. And we came out publicly at that time and said that we were going to diverse out of about $15 million in sales this coming year.

And right now, I can tell you, Walter, that we’re on pace probably not only to hit that number but to actually over-exceed it. Well, it looks like we’re going to probably end up at the end of the day out of that divestiture strategy losing about $18 million instead of the $15 million. That is a result of – and your question is it doesn’t look like it was as bad.

Well, in this fourth quarter, this is when we truly exit out of the final Levi’s numbers, which was a predominantly more of a sandalized program. So, this fourth quarter coming up we’ll kind of take our last chunk of pain of that divestiture strategy. But we’re going to actually come in a little bit higher than we even had anticipated for the year.

Walter Winnitzki – Nicusa Capital Partners

Okay. Thank you.

Operator

And our next question comes from Jeff Stein of Northcoast Research. Please go ahead.

Jeff Stein – Northcoast Research

Hi, good morning, Greg. Again, congratulations on a great quarter. A question on – a couple of questions on footwear. Number one, are you done divesting out of low-margin categories. So, wondering if we should expect to begin to see a re-growth in the footwear category next year.

And number two, what’s your thinking about managing the risks around JC Penney, now that there’s a change in leadership and the company has just gone through a very tough year. Are you more inclined to try to manage that business down over the next 12 months, or are you a Mike Ullman fan and willing to make a bet with them?

Greg Tunney

Thank you, Jeff. Good – very good questions. First of all, in regards to our business and anything left that we needed to diversify from, our opinion is, is that we really have selected those and the $18 million that we’ll walk away from this year, we think that that is it. We don’t anticipate anything else on the horizon of what we have with our businesses. And so, if you look at it, I would tell you, no.

Last year, at this time, we gave some color in regards to our visibility on orders for next year. And we’re now through the month of April, going into May and have some pretty high visibility on orders. In fact, we’re making and shipping goods on the water right now for the fall season. So, when we look at that, we look at our backlog right now and it really looks flat for next year.

So, I would say that we have gone through the process of diversifying. We’ve now flattened it out. And I think as we go from 2014 to our 2015 fiscal, that we should be back on the growth rates that we have discussed in the past on our footwear division. But it’s definitely right-sized and has the right margin structure so that we can grow and invest in that brand long-term.

In regards to JC Penney’s, we are big Mike Ullman fans. Mike was always a big supporter. And for those of you who were familiar with our story, when Mike was in place at one time, we did a 100% of their men’s program and when management changed, we lost that entire business there. So, we’re excited to see Mike back.

I can tell you that I was with the senior merchant group from JC Penney’s last week. I can tell you that there is a huge sense of relief and positive vibe there. They were talking about how excited they were to have Mike back and that they really feel that there is some stability in place now, which I think is critical for us long-term.

I can tell you from the standpoint of risk, we haven’t seen any slowdown in JC Penney’s payments. They continue to be on track. Our women’s business is actually growing there. So, we feel good about that and we think there’s possibility of getting the men’s back on track. It wouldn’t be for this fall because fall has already been placed. But we definitely feel there is the opportunity for us to grow and get that men’s back – men’s business back going for 2015.

Jeff Stein – Northcoast Research

Terrific. And one final question, can you talk a little bit about your Wal-Mart business at Foot Petals, how that’s going and are you planning to add additional doors over the next 12 months?

Greg Tunney

Yeah, I can tell you that the latest on our test that we had there is the testing that we’ve been doing. We have finally figured out the right product, the right stores to be in. And so, we had a goal there of reaching in excess of 5,000 units a week in our test markets that we have there and we’re now at the point of shipping to close to 7,000 units a week.

So, the test is definitely on track, the relationships with management there in regards to the Foot Petal’s program is better than ever and we would expect to be expanding that in the future, Jeff. So, it took us about six months to get that test right, but we feel really good about it and the growth potential there in the future.

Jeff Stein – Northcoast Research

Great. Thank you.

Operator

And our next question comes from Aaron Syvertsen of Sidoti. Please go ahead.

Aaron Syvertsen – Sidoti

Hi. Good morning, guys.

Jose Ibarra

Morning.

Greg Tunney

Good morning, Aaron.

Aaron Syvertsen – Sidoti

Just a couple of quick questions. One, kind of touching on what you hit a little bit on earlier, if you could expand on the gross margin expansion you saw in the Accessories segment that kind of 60-basis-point bump, kind of what was the primary cause of that and is that something that is we should maybe continue to see going forward?

Jose Ibarra

The – this is Jose, Aaron. The primary cause of that was basically a mix of that revenue line in the third quarter in the Accessories segment businesses. We’re very pleased that we were able to gain some price leverage in some of those programs that we have. And that’s the right direction those businesses are going to go. They have the ability to not only sustain that but hopefully inch that a little bit as we move forward with those two businesses. So, very pleased. We sort of expected that as we monitor these businesses from one quarter to the next. These – very pleased to us to see the results, not surprising though that we got to what we got at the end of the quarter.

Aaron Syvertsen – Sidoti

That’s great. And then, I guess, just a couple of higher level questions for you, Greg. I know on the acquisition front, and you had spoken earlier in the year that the multiples that you were seeing kind of came down to levels that were more favorable. Are you still seeing that? Obviously, a couple of deals didn’t quite make it through, but as far as a multiple point of view, are you kind of comfortable with what you are seeing?

Greg Tunney

Right now, we’re – the good news is we’re seeing a lot more visibility to deals out there and I think that from the model that we have developed that the market fares well for it.

I think our challenge is, is just valuing in our category truly what is an A plus brand, what is a B brand, what a C brand is. And of course, all of the C and B brands want to have valuations there what A brands are. And so, our biggest job is to make sure we understand what kind of brands that we’re buying, are they brands or are they just labels. And then what valuations are we willing to pay for that.

So, it appears that the A brands plus are getting 10 multiples plus, and the B brands and C brands are definitely falling off in the mid single-digit to 7 or 8 multiples. So, it’s just a matter of priority.

Our priority right now is really focused more on A brands. We think long-term that having global brands are important for the next 10 years, 20 years to be competitively. And so, we would rather identify and pay the multiple on a better brand and then pay a higher multiple on a B or C brand. So, that’s what we’re seeing in the marketplace today.

Aaron Syvertsen – Sidoti

Good. Thanks for the color there. I guess, in general, is it safe to say you’re still as optimistic to get that one to two deal done in 2013 as you were earlier in the year?

Greg Tunney

I would say on a calendar year, yes. On a fiscal year, no.

Aaron Syvertsen – Sidoti

Right, right, yeah, that’s in the end of the calendar year.

Greg Tunney

Somebody asked me that question the other day, and yeah, we’re confident that by year end that there’s opportunities out there. But the fiscal calendar is just around the corner, so hopefully we can get something done either this summer or this fall.

Aaron Syvertsen – Sidoti

Sure. And then just one last one for me, is there any kind of updates worth talking about on the kind of international front? I know I haven’t heard too much of it recently, but couple of consultants and conservations you’ve had, has that evolved at all in terms of kind of what your levels of optimism are in terms of kind of expanding that international channel?

Greg Tunney

Yeah, I think the probably the most important part on that is just the long-term perspective, is we believe we’ve invested and brought in the right people to manage that business, and we’re starting to put the infrastructure and the foundation in place. But it’s really a long-term focus that we’re looking at for the next five years. But definitely we’re optimistic. We’re finding out that brands such as Foot Petals really does transfer across the globe. We’re finding out that baggallini definitely transfers across the globe.

Right now, if you look at it, we really over-index in a country like Canada for the size of what baggallini is domestically here. So, we know that we have some opportunities there. With the acquisition of Mosey and that team, one of the strategic alignments that we had there was that Tom Wilkin was a key senior executive at one of the largest retailers in the world in the Far East and he comes along with that package.

And Tom will be really the Country Manager for us in the Pacific Rim in the Far East, and we think that that’s a big opportunity for us long-term. So, we hope that as we turn the calendar year and as we go forward that we’ll be able to share more with you. But long-term, we’re very excited about what that represents.

Aaron Syvertsen – Sidoti

Okay, great. Thanks. That’s it for me.

Greg Tunney

Thank you.

Jose Ibarra

Thanks.

Operator

And our next question comes from George Prince of RBC. Please go ahead.

George Prince – RBC

Hey, guys. Nice quarter.

Greg Tunney

Hey. Good morning, George. How are you doing?

Jose Ibarra

Good morning, George.

George Prince – RBC

I’m good. Hey, I apologize. I think I’ve missed the first couple of minutes. So, if this is a little redundant, I apologize. But you guys are proving that you’re very good on these acquisitions and on these new brands and that it’s really working. So, can you talk a little bit more about your philosophy here on purchasing another company or two? And again, is the filter a little bit too harsh, are you giving up some opportunity here and not serving your strengths?

Greg Tunney

That’s a good challenge, George. And we’ve had some other people ask us on that and, is our disciplined approach with our filter too stringent at times? And my experience, I’ve been at this for about 15 years of acquiring and merging businesses in, and one of the things you don’t want to do is you don’t want to overpay because that’s the sin that keeps on paying.

And so, we’re trying to make sure that we’re being opportunistic, but at the same time, being disciplined and we evaluate each and every deal on its own merits. And so, there isn’t anybody that would love to add another business on to our platform, because I agree with you, I think the platform we’ve proven that it works. We believe that our ability to find and integrate on a very quick basis and realize immediate returns is valid. So, as we look at opportunities out there that allow us to unlock value, it will just be based on the merits of each deal.

And we came pretty close this year of making two pretty significant deals, but at the end of the day we weren’t able to get the deal done and pretty disappointed and spent some real time and some real resources on it. But the filter continues to be our guide. We’ll continue to adjust it appropriately and we’ll keep you guys updated on it, George. But I think it’s a good challenge and we’ll continue to look at it and continue to review it with the board.

George Prince – RBC

All right. Well, you clearly have a talent for it. So, one a day would be fine.

Greg Tunney

Your lips to God’s ears. Thanks, George.

Jose Ibarra

Thank you.

Operator

(Operator Instructions). And our next question comes from John Curti of Singular Research. Please go ahead.

John Curti – Singular Research

Good morning, everyone.

Greg Tunney

Good morning, John.

Jose Ibarra

Good morning, John.

John Curti – Singular Research

Nice quarter. A question with regard to Mosey, beyond picking up the brand, and that’s probably more of a longer-term opportunity, could you talk a little bit in the short-term in terms of the synergies and the reduction in cost and how much that might be able to benefit things over the next couple of years?

Greg Tunney

Sure. I think long-term, obviously, we bought Mosey because we thought that it was a great niche brand that actually had a footprint and a foundation that we could build on for real growth long-term at a pretty significant rate, being as small as they are. But at the end of the day, this acquisition that we did was really driven by strategic reasons.

When we acquired baggallini back two years ago, the Mosey Group was actually the sourcing group for baggallini and we had made a strategic decision back then, we had signed up a two-year agreement, which allowed us to get to know them and operate with them, and also got them an opportunity to understand our culture and how we operate as a team.

This April was really the end of that two-year agreement, and we started talking about six months ago the idea of acquiring them and making them a full-time part of our group. And to your point about what was the realized synergies, just in sourcing fees in that alone, there’s somewhere in the range between $300 million to $400 million that are –

Jose Ibarra

Thousand.

Greg Tunney

Excuse me, $300,000 to $400,000 in savings on an annual basis just in sourcing fees alone. So, they will come on to our platform on our China office. We get those savings as real savings and real dollar savings immediately as we go forward. So, there was definitely some synergistic opportunities for us to do it besides the brand diversification, besides strengthening our supply chain, besides strengthening our sourcing team.

So, I think it’s a win-win for them. They get to be part of a bigger organization and I think it strengthens our organization and expertise in a category or a coalition that we call the bag coalition that we see long-term growth and a lot of our focus on acquisitions in that bag coalition.

John Curti – Singular Research

So, does that also benefit the KIVA brand as well?

Greg Tunney

Absolutely. I’m sorry, I didn’t bring that up. Just as well absolutely sits on the same platform.

John Curti – Singular Research

And with respect to their handbag brand, at the present time, what’s the mix USA, rest of the world. I know it’s very, very small. I’m just trying to get an idea.

Greg Tunney

Yeah, I would tell you that they have a platform that set up and right now, if you looked at it domestically versus internationally, it’s about a 60/40 mix. So, it’s 60% domestic and about 40% international. So, when they started from day one, international was something that they had some expertise in and that was the focus of where they started. So, for them to already be where they’re at, they’re ahead of the game on it compared to us.

John Curti – Singular Research

You mentioned the 2014 an emphasis on segmentation strategy for Dearfoam, good, better, best type approach. Do you anticipate the loss of any business as you transition to this more defined strategy for that product line?

Greg Tunney

Good question, John. I think that our opportunity is actually one of growth in that strategy. And that, I think, we have a very diverse brand that – I don’t know many brands. They go through the multiple channels of distribution that we do. We go from mass all the way up to department stores. And if I ask you today how many brands do you know that can do that, we’re one of the few that I know of.

And so, what we believe we have an opportunity to do is we really kind of own the mass in the mid-tier. When you look at that upper tier and you look at what’s going on in department stores and dot com and independents, which is all really kind of premium priced, full-priced type retailing, that is something we have not excelled at.

So, what we believe is by segmenting the brand and really having clear segmentation in Dearfoam so there is a good, better, best strategy in regards to product, in regards to pricing, in regards to packaging, in regards to channel distribution strategy, we think there is a huge side of it. And we need a much more disciplined approach. We have engaged with some of the best consultants in the industry on this and we think that long-term that is why we felt we could divest out of some of the licensing agreements we had, because we believe that we’d rather invest in our own brand and really build it for the future.

John Curti – Singular Research

Within that premium segment, how large a market segment is that? What’s potentially the opportunity, the overall opportunity within that?

Greg Tunney

Yeah. To break it down, there’s really three key parts of that upper tier and one is dot com, one is the independents, and then one is the better department stores like Nordstrom’s, Dillard’s, et cetera. And what happens with that, John, is first and foremost, we’re really kind of locked out from slipper sales in the dot com world. And the reason why that is right now is our average price point is below their minimum.

So, when you’re looking at a typical dot com that is shipping a product for $7 shipping cost and the product cost $19 in sales, it’s not a very good value proposition. So our dot coms have come back to us and said, hey, look, we want to do more slipper business with you guys, but we have to have price points that are in the $30, $40, $50 range in order for us to make our model work because of the shipping cost involved.

So, that right away just opens up the marketplace that quite frankly we have not allowed them to play in with us, just because our price points were at that level. And as long as there’s different – true segmentation and true differentials between the mass and mid-tier that we’re doing versus the better, we believe there’s a true marketplace for the brands.

So, you’ll start to see that rolled out this fall to the marketplace and we think that there’s some real equity that we can build upon our brand long-term in that marketplace. And the independent zone, we’re really taking a page from baggallini, where they have over 3,000 independents and we’ve already picked up close to a third of that independent base that we did not have before, and are layering that end.

And then I think as we establish ourselves full-price at dot com and the independents, it will allow us to go with a value proposition to the better department stores long-term with the brand.

John Curti – Singular Research

Over maybe a three- to five-year period that $18 million of revenue that was divested you’ll be able to gain a good chunk of that back.

Greg Tunney

Yeah. We believe so. We believe that there’s an untapped market that we haven’t played in just because of the way we’ve built our products and what we focused on. So, that’s one of the reasons why we did it. We feel it’s more profitable and lucrative than what we would have been doing going after a license or other up businesses. So, we’re very excited about it.

John Curti – Singular Research

And then, could you kind of talk about plans for later in this calendar year with respect to baggallini and your segmentation there and new product development as we head into the holiday season this year?

Greg Tunney

Yeah. If you look at the growth rate, I mean we had come out publicly and said, hey, look, we believe our Accessory category between Foot Petals and baggallini should be growing at 10%, 15% on an annual basis. And the good news is it continues to do so.

In fact, baggallini will over-achieve the high range of what we established this year. And probably their biggest growth that we’re seeing right now is last year, if you guys remember, we instituted a pricing policy in place for baggallini. In the short-term, we actually took some hits in regards to revenue but it definitely strengthened the brand. And you’re not seeing us promote it 365 days on the Internet.

So, we now are starting to see in that e-commerce business growth going on with baggallini that seems to be the biggest range and then also in some of the price points that we’re starting to be able to move up to. We’re finding out that with baggallini in regards to new products that it does have the elasticity to grow in price point. The customer is allowing us to do that. If we can develop and deliver the right product, it absolutely has the elasticity to go up in price points. But the growth for them next year primarily will be in the dot com non-promotional business.

We’re seeing a little bit slower track in regards to better department stores as we have rolled that brand out. It’s one thing when you compete in stores against the competition than we do in some of independents and dot coms, but when you get into the department store mix, the higher demand on fashion is something that baggallini continues to raise its game on and in order to compete side-by-side with Michael Kors and the Marc Jacobs and everything else. baggallini has to continue to expand that fashion side of it.

And this last year was really our first step into that. And so it was definitely some growing pain, some learnings that we learnt that, one, we could expand into new price points. But it also told us that in order to play in that game we have to expand the fashion quotient just as much. And so, we’ll continue to do that. Dennis, who runs that division for us, Dennis Eckols, last year he brought in a couple of designers and we’re actually adding more this upcoming year to build upon that success.

John Curti – Singular Research

I know it’s very tiny, but if you could just comment about what your plans are for KIVA in the balance of the calendar year?

Greg Tunney

John, tiny is the keyword there, but I’ll be glad to elaborate on a little bit. KIVA was strictly focused on the idea that there is a channel of distribution out there called the outdoor industry that continues to grow healthy and continues to have healthy margins, and we saw long-term that we wanted to be in that channel of distribution. KIVA is a supplier that has been awarded, the 40s show award, which is a prestigious award in the outdoor zone that 40 years – excuse me, 40s show straight, so that’s 20 years straight that they have been a part of that.

And that whole industry is based on seniority that had been in the marketplace. So, for us to get the placement in that market and everything else, it’s something that would have took us 5 to 10 years to get. So, KIVA has really helped us to jump start to get into that. I will tell you that KIVA is not as much focused on handbags as it is on travel gear, travel bags, backpacks, et cetera. That is really more of the focus of KIVA versus handbags. But you are correct, John, it is on the same platform, done in the same factories that baggallini and Mosey are made in and shares some of those synergies.

So, we hope long-term that we can reinvent KIVA and that we now have a place marker, if you will, in a new channel, in a new category that we think long-term is very important for our company.

John Curti – Singular Research

And is it more focused towards the independent outdoor?

Greg Tunney

Yes. Right now, the biggest part of their business is dot com and catalog. One of their biggest customers out there is TravelSmith, and then other independents. But we are getting ready for the August show and we already have appointments with people like REI and Gander Mountain and Eastern Mountain Sports. So, we’re looking to take that proposition to some bigger players out there, but they primarily have been playing in the dot com and independents.

John Curti – Singular Research

Okay. All right. Thank you very much.

Greg Tunney

You’re welcome, Jeff.

Operator

And our next question comes from Ethan Stuart of (inaudible). Please go ahead.

Unidentified Analyst

No, I haven’t joined the retail business, but good morning.

Greg Tunney

Welcome, Ethan.

Unidentified Analyst

I’m just curious, what distinguishes or sets the Mosey brand apart from the competition and who is the target audience?

Greg Tunney

Well, one of the biggest things about Mosey that sets it apart is, I know there’s not a lot of information out there, but there is a whole recyclable environment safe process to it. All of the bags are made out of recycled plastic bottles. And so it is probably the most environmental-friendly, safe-to-the-earth brand out there in the category.

So, that’s one of the niches it has on there. It is a younger brand than baggallini. It’s definitely going after that Y generation, X generation – or, just much younger in attitude. And if you look at the bags and really compare them, it’s just a much younger mindset, probably 20 years below the age point in fashion quotient than a baggallini customer.

Unidentified Analyst

Okay. And so, is there a website for the brand?

Greg Tunney

Yes, there is. You can go on to moseylife.com and you can actually see the product, buy the product and take a look at it.

Unidentified Analyst

Okay. And so to what extent do you think the R.G. Barry will be able to increase sales and distribution of Mosey?

Greg Tunney

Well, Mosey is so young in its infancy stage that they have been growing double-digit, but it’s – they’re only I think two years – two and a half years into their incubation process. So, those growth rates are a little deceiving, if you will, but they are brands that we believe that we can definitely grow in the 15% to 20% a year for the next two to three years going forward as we build that brand. But it’s all done at full price, it’s never promoted and that’s one of the things that we continue to focus on.

If you look at a Foot Petals product, since the beginning of that brand, it’s never been promoted, it’s not promoted. Same with baggallini, we put a pricing policy in place so that we could keep that as a full price brand and that’s one of the things we liked about Mosey is that it’s not sold promotionally. And one thing that I had shared with John earlier, I think I said it was a 60/40 mix on Mosey and actually it’s more of an 80/20 mix. It’s 80% domestically and 20% internationally, but still two years out of the box been a domestic-borne brand. I think that’s a very good footprint to be that quickly out of the box internationally.

Unidentified Analyst

Okay, good. Any progress on increasing number of doors for baggallini and Foot Petals, not the derivative brand, not the sub-brands of Foot Petals, but Foot Petals themselves?

Greg Tunney

Yeah, I would tell you on Foot Petals, I think that our focus is not so much on door expansion at this point, as it is on product innovation and product expansion. If you look at it right now, we just recently launched into Macy’s. We have a, I believe it’s a 300-store test that is doing extremely well, double-digit sell-through each and every week and that test has proven out very well. So, whether it’s a Nordstorm’s, Dillard’s, Macy’s, Wal-Mart, Target, we have great distribution with that brand.

Now, it’s about getting the efficiencies in the business, it’s about expanding the product categories and really maximizing where that’s from. So, I will tell you in 2014, our plan there isn’t so much about door expansion as it is about product expansion and they have some new launches that’ll be coming out at this coming show that we think that we’re pretty excited about.

Unidentified Analyst

Okay. Any look on the men’s shoe and shirt business?

Greg Tunney

Not at this point. I think quite frankly that our interest in men’s may come through an acquisition that’ll help jumpstart that. But right now, all the focus is on women’s and maximizing the women’s growth. And with the growth and the returns that we’re getting on that investment that we’ve made so far, we think that we’d rather double down on that and try to diversify a little bit further our funds.

Unidentified Analyst

Okay. I realize you may not be able to comment on this one, but I’m wondering if there are any recent updates on the Isotoner litigation.

Greg Tunney

I don’t have any updates. Jose, if?

Jose Ibarra

We do not comment on pending litigation matters, Ethan. So, at this point, we’re not going to be able to do that.

Unidentified Analyst

Okay. Thank you very much. I look forward to fiscal year-end results.

Greg Tunney

Thank you.

Operator

(Operator Instructions). Showing no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Greg Tunney for any closing remarks.

Greg Tunney

Thank you. We’ll be taking part in the Piper Jaffray 33rd Annual Consumer Conference on Thursday, June 13, in New York. Our investor presentation is scheduled for 4 p.m. and will be available on the Internet. Webcast details will be made available prior to the event.

Just seven weeks remain in our fiscal 2013. Despite the marketplace challenges of the past 10 months, we are confident that this will be a solid, profitable year for our company. We are focused about the future and R.G. Barry brands and people and the tools and strategies to make the next three years some of our most exciting ever, and we look forward to the challenge.

Thank you for your participation today. We hope you will join us in September when we will report on our full fiscal 2013 year, until then, good bye.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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