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FGX International Holdings Limited Q2 2009 Earnings Call Transcript

August 06, 2009 | about: FGXI

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FGX International Holdings Limited (FGXI)

Q2 2009 Earnings Call Transcript

August 6, 2009 8:30 am ET

Executives

Alec Taylor – Chairman and CEO

Anthony Di Paola – EVP, CFO and Treasurer

Jack Flynn – President

Analysts

William Chappell – SunTrust Bank

Mark Miller – William Blair

Doug Lane – Jefferies & Company

Sam Panella – Raymond James

Kelly Duval – BB&T Capital Markets

Chris Krueger – Northland Securities

Liam Burke – Janney Montgomery Scott

Presentation

Operator

Good morning, everyone. Welcome to the FGX International second quarter conference call. Presenting today from FGX International are Mr. Alec Taylor, CEO and Mr. Anthony Di Paola, Executive Vice President and CFO.

I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. The same language applies to the forward-looking statements that management will make during today's call.

We encourage you to read the company's SEC filings and earnings release, which will discuss important factors that could cause actual results to differ from those made in any forward-looking statements.

A replay of the conference call will be available through Thursday, August 13, 2009. To access the replay by phone, the domestic dial-in number is 1-888-203-1112, and the international dial-in is 1-719-457-0820. Again the domestic is 1-888-203-1112, and the international replay number is 1-719-457-0820. The access code for the replay for both phone numbers is 2103439. To access the replay via webcast, please visit www.fgxi.com under the tab Investors.

Now, I will hand it over to Mr. Taylor. Please begin sir.

Alec Taylor

Thank you, operator and good morning everyone. Thank you for joining us for the second quarter and first six months of 2009 FGX International earnings call. As you saw from the release issued last night, we had another excellent performance in the quarter with earnings exceeding both last year's results and guidance.

Joining me today are Anthony Di Paola, our CFO and Jack Flynn, our President. Jack is calling in from the road as he is on a sales call. So, we apologize in advance if we have any technical difficulties. Also joining us is Idalia Rodriguez from ICR, our Investor Relations Firm.

As is our custom, I will open with some overview remarks, following which Anthony will give a more in depth review of the second quarter and first six months. Thereafter Jack, Anthony and I will answer appropriate questions.

Our revenues for the second quarter were $75.1 million, up $8.3 million or 12% from a corresponding year-ago quarter. Reading glass segment was up 6% and when you take out the opening price point business at Wal-Mart that we had in 2008, but not this year, we were up a robust 15%.

Sales of Sunglasses were up $9.5 million or 37%, led by sales of Dioptics medical products which was purchased last November. We have now fully integrated Dioptics into our Sunglasses segment and we do not separate breakout sales in this business.

However, we believe our non- Dioptics business was down about $2 million or 7% to 8%. We believe this decline was attributable to the cool wet spring we experienced in much of the country and Wal-Mart reducing the number of summer time sunglass pallets from 6 to 2.

Given these two factors, we believe our sunglasses segment performed satisfactory during the quarter. Our international division was off 17% on a constant currency basis due to a large reading glass rollout of the UK in Q2 2008 that was non-anniversary this year.

In the second half of 2009, we expect our international business to post positive results on a constant currency basis when compared to second half 2008, due to a strengthening reading glass business in the UK and easier comps.

Turning to the first six months of 2009, revenues were up approximately $12 million with both the reading glasses and Sunglasses segments posted year-over-year gains. The international segment was down approximately $6.5 million due to non-anniversary reader at sunglasses rollouts.

As Anthony will discuss whether we sold the constant jewelry business shortly after the end of the quarter. As we discussed in the first quarter call, this business has become – had become a distraction. It was not consistent with our long-term strategy to earn high gross margin in branded consumer products.

We should also see some gross margin pick up in the second half of 2009 as a result of the disposition of this business. I will also want Anthony to cover most of the discussion of margins, operating expenses and working capital, but I did want to highlight a few points.

First, we had a 110 basis point pickup in gross margin year-over-year, which should continue to accelerate in the second half of the 2009. We also saw our operating income profit margin wise to 15% of net sales in Q2 as we did an excellent job of managing operating expenses.

Day sales outstanding came down by 12 days year-over-year, while days on hand of inventory dropped today is our keen focus on the balance sheet and working capital management continue to pay dividends.

Turning now to new products, at our last call we talked about the many new products we would be introducing to our customers this fall, and I wanted to give you a brief update on our selling efforts for these items. The computer readers are our number one selling SKU, at Staples and are now being introduced at OfficeMax where the reception has been excellent.

The click reader, the product with the magnet at the nose bridge, tested well at CVS and Meyer as well as at certain airport gift shop locations. It has also proven to be a nice introductory item into certain male dominated classes of trade like, Home Improvement stores that we have – previously been able to penetrate.

The eco friendly readers gain distribution at Wal-Mart as a part of their latest reader fixture reset and it is also helping us open us up the chained vitamin and health food store channels. The Microvision product will be seen in the bookstore class of trade.

We also have several more items in various stages of testing, as we work to create a steady pipeline of compelling new products to introduce to customers.

Turning to a discussion of advertising; the second quarter saw the conclusion of this year’s sunglasses at Reader’s TV advertising campaign. To recap, we spent approximately $5 million in media, on the first ever television reading glasses campaign that feature both the Foster Grant and Magnivision brands in over 5500 spots over a combined 12-week period. The Foster Grant sunglasses advertisement featuring Raquel Welch ran for eight weeks with over 2300 spots being aired with a media spend of approximately $1 million.

We feel that both campaigns were a success, and believe the readers ads in particular contributed to the excellent first half results by that segment.

During the second half of the year, we will do additional consumer research in the both of our two key product categories, as we develop our 2010 campaigns. We will spend about 4.5% of net revenues on advertising in 2009 and investors should expect to see our spirit at similar levels in 2010.

We had a significant new account win during the second quarter with the addition of over 700 stores in the Kroger chain which will carry both our sunglasses and reading glasses programs. We had a small piece of Kroger business before, but now our products will be displayed in almost all of the Kroger banner stores generating $3 million to $4 million of annual revenue.

Jack and his team worked very hard to win this business away from our key competitor. A combination of our superior styles and branding, field service capabilities and supply chain management were key factors in achieving this important win. Our sales team has really gone the extra mile to present new programs to existing customers and hustle new accounts in this tough economic environment.

Turning now to international, our Canadian and Mexican businesses has turned in solid performances in the second quarter, but our UK business continue to struggle due to a combination of a tough retail economy there and a difficult year-over-year comparison. We have enjoyed some limited success there however, in getting the test of some of the Dioptics items at the Lloyds Pharmacy chain and getting distribution of our (inaudible) by Foster Grant sunglasses and boots.

We do see signs of this businesses turning around after a difficult period and expect to see positive results on a constant currency basis during the second half compared to the corresponding period in 2008.

Turning to acquisitions, we are continuing to look at small tuck-in deals in the optical space that compliment our existing business and add either a new brand or new channel of distribution. I would say its still 50-50 that we complete something by year end. Any such transaction would be funded out of the existing credit facility.

We have also embarked on a longer range strategy of looking for a third leg to the stool, now that we've exited the jewelry business. We are looking for businesses that will diversify us somewhat, yet leverage our capabilities and marketing, supply chain management and field service in the mass channels of trade. Nothing is immanent, but we think it is important to begin this process as we continue to build our company.

Turning to guidance, we are reaffirming our full year guidance excluding jewelry given in our February earnings release of 265 to 275 million in sales, $0.96 to $1.06 in earnings per share and 58 to $60 million of EBITDA.

For the third quarter, we see revenues of 58 to 62 million, EPS of $0.26 to $0.30 and EBITDA of 14 to 16 million. This would compare favorably to the third quarter of 2008 when revenues were 59 million, EPS was $0.18 and EBITDA was $12 million.

Achieving both, the third quarter and full year results will not be easy as the retail environment remains challenging. And as with every year at FGX, the biggest risk continues to be deferral of sunglasses rollouts. We’ve received no indication of that from any key customer, but it's always a risk.

In conclusion, as I look at our first half 2009 performance, I'm extremely proud of what we've accomplished in a climate that saw challenges raging from the worst economic environment in 60 years to record rainfall that made selling sunglasses tough.

Despite these challenges, our team was able to deliver results that exceeded guidance or showing good stewardship of our balance sheet resulted in the creation of long-term shareholder value.

And with that, I will turn it over to Anthony for a more in-depth financial review. Anthony?

Anthony Di Paola

Thanks, Alec and good morning everyone. As Alec has covered the highlights of our results, I’m going to review a few more P&L items, the divestiture of our jewelry business and also provide some additional financial information.

We are pleased to have delivered bottom-line results exceeding the upper end of our dines, we’re operating in the challenging economic environment. We were able to improve gross margins and leverage our operating expenses leading to a successful completion to the first-half of the year. Additionally, we were able to complete the sale of the jewelry business in July.

As Alec, briefly mentioned in his remarks, our gross margins for the second quarter increased to 54.2% compared to 53.1% in the year-ago period. Gross margins improved across both the reading and sunglass segments during the second quarter.

We continue to expect overall gross margins to improve with 100 basis points for the full year 2009 compared to 2008 as we benefit from our buying power with suppliers and take advantage of improved freight rates. We have devoted significant time and effort to expanding gross margins and expect those efforts to pay dividend in the back half of the year.

Before we cover operating expenses and the balance sheet, I like to spend a few minutes discussing our divestiture of the jewelry business and the related charges associated with the disposal.

On July 23rd, we completed the sale of our jewelry business for approximately $1.3 million, as a result of our decision to exit this business we recorded a pre-tax charge of $5 million net of proceeds in the second quarter. These charges relate primarily to inventory and fixed asset write-offs and cost for future product returns associated with the sale of the business.

Accordingly, result of the jewelry segment has been presented at discontinued operation in our financial statements. The decision to sell our jewelry business was reached after careful consideration and analysis. We believe this decision allows us to focus on a more profitable branded optical businesses and positions us for the future growth in the reading and sun categories.

From an operating expense perspective, operating expenses as percentage of net sales decreased to 39.3% in the quarter compared to 41.8% in the same period last year. The 250 basis point improvements is largely due to tighter control over operating expenses as well as the leveraging effects of higher revenue in the current quarter.

As we discussed previously we are beginning to leverage our operating infrastructure and that operating expenses as a percentage of net sales will be approximately 40% for the balance of the year. We continue to work diligently in managing operating expenses and are pleased with our efforts to-date.

From our tax perspective, our reported tax rate for the quarter was 38%. We continue to work at reducing our effective tax rate through tax planning initiatives and expect these strategies to be implemented in the near future to reduce our overall tax rate to approximately 37% on a full year basis for 2009.

On the balance sheet and cash flow, accounts receivable at the end of Q2 were 46.6 million which is down 4.1 million when compared to the end of 2008. Our DSOs for the second quarter improved to 50 days compared to 62 days for the same period in 2008. This improvement was driven by increased collection efforts and timing of payments from several significant accounts, highlighting our emphasis on working capital management.

Inventories of 33.5 million decreased 2.0 million at the end of the second quarter compared to the end of 2008 and inventories days on hand improved to 94 days for Q2 compared to 95 days for the same period a year-ago. We continue to focus on reducing days on hand and managing our inventory levels.

As we expected, capital spending was 1.8 million for the second quarter of 2009. We invest primarily in store fixtures to support our existing customer base and continue to expect full year 2009 capital spending to be in the $10 million to $12 million range.

Capital spending is expected to be 3 to $4 million during the third and fourth quarters. Free cash flow was 13.8 million for the second quarter, compared to 9.9 million for the same period in 2008. The increase in free cash flow is principally the result of improved profitability of our business during the quarter.

Few thesis of our cash flow will be to fund accretive acquisitions, reduce borrowings, including $15 million of scheduled principal repayments in 2009. In summary, we enjoyed very strong second quarter and first half of 2009. Our operating margins cash flows and working capital metrics all showed significant improvement during the period and we are looking forward to building on these trends for the balance of the year.

With that I'll turn it back to Alec.

Alec Taylor

Thank you, Anthony. And with that, operator, we will open it up for appropriate questions.

Question-and-Answer Session

Operator

Thank you, Mr. Taylor. (Operator instructions) And we'll go first to Mr. Bill Chappell with SunTrust Bank.

William Chappell – SunTrust Bank

Good morning.

Alec Taylor

Good morning, Bill.

William Chappell – SunTrust Bank

I just wanted to first talk a little bit about guidance. Obviously, it looks like you beat the numbers, maintain the full year guidance. I understand you're kind of conservative always on the deferrals in the fourth quarter, was there anything else going on there?

Alec Taylor

No. I would say that I feel good about the second half of the year; certainly I think were added to it about the business, it's good. I think we'll see a retail environment slowly getting a little better. I think we're seeing a little bit of pick up at some key accounts. So I think we feel good about the overall business but it is so much of this business just comes in the fourth quarter and frankly comes in December. So, that's why we elected to reaffirm guidance but nothing else going on. Again, I'd say overall our attitude about the business is good.

William Chappell – SunTrust Bank

And then, when I look at the readers business, should we expect kind of a double digit trend to continue as you've lapped the Wal-Mart exit this quarter?

Alec Taylor

I would say that you will continue to see a good results out of the reading glass business, we do have one more quarter largely, one more quarter without that. There is a positive thing going on here to settle but Wal-Mart, Jack can speak for this as well and better than I did. Wal-Mart reset this year was at July instead of September, so we're going to get actually two months, the reset was at the end of July, we've really just started seeing in the first couple of weeks of revenues there. But the Wal-Mart reset is an improvement. Again Jack is traveling, I had a bit of it this morning but it seemed some retail data for the first 10 days since that reset and we are tracking edge the opening price point to levels where we were in a year ago. We are – this particular week, tracking towards $1 million retail week which we haven't had one of those in a long time. So, that's gives me cause for some hope there that reading glass business will continue to track well. I would call the growth rate sort of mid to upper single-digits still and with hopes that there might be some upside to that. Jack, I don't know if you’d like to elaborate?

Jack Flynn

No, no, Alec, I agree. I think we're feeling a little bit about retail in general and the reading business in particular, I would say that more to the mid to the high single-digits in terms of over the kind of performance is what we're looking at between now and the end of the year.

William Chappell – SunTrust Bank

Great. And then two more, Jack while I have you and then one for Anthony. Can you going with the Kroger deal give us an idea what the grocery channel looks like in terms of readers, I mean is it still untapped? Or is it just winning, trying to find new places to put kiosk? And then Anthony with the tax rate getting to 37% for a full year and I think 38% this quarter is there a quarterly that September or December where we'll have a catch up or be at normally lower?

Anthony Paola

Yes, let me jump in first Jack and then you could finish that. Yes, it should be, Bill. The way we are thinking about is putting the tax paying initiatives in towards the beginning of Q4. So it's sort of startling it, there will be a catch up if that works that way, we will have a catch up in Q4.

Jack Flynn

Bill, as far as grocery goes, grocery is an established class of trade for readers and sunglass business. What we’re doing is we’re taking a more aggressive role in terms of taking that business from existing vendors in that class of trade.

William Chappell – SunTrust Bank

Got it. Thanks so much.

Alec Taylor

Thank you, Bill.

Operator

And next we'll go to Mark Miller of William Blair.

Mark Miller – William Blair

Hi, good morning.

Alec Taylor

Good morning, Mark.

Mark Miller – William Blair

So some view that down trading may begin to be losing steam here across retail, and I'm wondering if you're seeing any changes in your mix. And as the economy recovers, how are you thinking about changes in the assortment or what should we anticipate for collective strategy changes you might anticipate with retailers?

Alec Taylor

I want to take just one sent to that then give it to Jack. This would be very interesting. Our overall unit selling price through the register has been flat to maybe even slightly up year-over-year. So, yes the price points and our reader – well really both of our categories or so relatively low, that we did not see any big trade down going on during this recession. That said, we've offered up some nice looking styles at upper price points, getting to the upper 20s that in certain classes of trade in certain locations have sold pretty well throughout the last several quarters. And Jack would – can better elaborate on that than I.

Jack Flynn

Look, with every customer and every class of trade, I think we’re really focusing on going forward on our value proposition in each one of our segments. So we are trying to make sure that, whatever we have on our modulars, whatever we’re adding to our modular is going to give us the lift that we need. So I don't necessarily think that we are saying that, yes, we can take our pricing up per se, but we are I think in a lot of cases adding value in each one of the segments to really en-pace the consumer as things improve.

Mark Miller – William Blair

Thanks. On gross margin, nice source of upside versus our estimates, did you achieve better results versus your own plan as well? And then, if you could I guess give us some perspective on how things might flow, maybe over the next year. I guess I'm thinking you should have some upside as we go into the beginning of 2010. But do you think the opportunities are still there to continue to drive some incremental margin even beyond this year?

Anthony Paola

Yes, it’s Anthony, from an internal forecasting perspective, we weren’t real surprise with the margins as they came out, they were pretty much in line with our expectation. I think the back half is we're going to see good uplift in the gross margins, quite honestly. And we see absolutely no reason why that trend should not continue into 2010. I mean we have just been doing a real good job with our sourcing and getting cost out of our products as well. It should be, Mark, our visibility here is pretty good because we buyout six months or so in advance. So we're now seeing things that, you're absolutely right, should carry forward and certainly at least Q1 and all the indications where we're getting some very good gross margin pick up at both segments. Freight continues to be favorable, both freight in and freight out. And I just, again as I said in my remarks that, you should see some acceleration in gross margin. It is one of the nice upsides and positives for the second half of the year along with the improvement in the tax rate.

Mark Miller – William Blair

Okay, that's great. And my final question on the third leg of the stool, things you're looking at. Should we think about that as being more consumer staple or potentially consumer discretionary? And then if you acquire or grow that, do you think that is a potential drag on earnings? Or do you think it can be immediately accretive?

Alec Taylor

Yes anything will do, after any expenses associated with the deal, we're going to look for things that are absolutely accretive right away, where this would be very much in keeping with the strategy of the overall business here that we've really had all along. And I do think consumer staples market we're looking for more of these – I love being masters of the mundane and things that market leading positions. Perhaps something that, could be advertising sensitive that where, it's branded. We really first and foremost I think we know we're good in the mass channel of trade, I mean we're either over 600,000 doors. And we look for products that are there or that we have much like – as we do with the optics the ability to expand distribution because of our strength, where we could perhaps put our servicing capabilities to good use, our source-aided things. So I think we would be looking for things, deal related expenses that would be immediately accretive and also things that would be fit into the consumer staple categories.

Mark Miller – William Blair

Yes mundane or borrowing is good. Thanks.

Alec Taylor

Thank you.

Operator

And next we'll go to Doug Lane of Jefferies & Company.

Doug Lane – Jefferies & Company

Hi, good morning, everybody.

Alec Taylor

Morning, Doug.

Doug Lane – Jefferies & Company

Alec or Jack could you remind us what significant pieces of business are coming up that you're looking at, just I know some of them have come and gone. But there might be other ones out there. Just can you refresh our memory on that front?

Alec Taylor

I'm not trying to be evasive, but I'm little reluctant on those pieces. We're in a very competitive environment out there and, I know a lot of people who have access to this call. But there are several and pieces are coming up late next year in 2010 that we are very focused on in our existing classes of trade and I like to kind of leave it at that.

Doug Lane – Jefferies & Company

Okay fair enough I understand. And also Alec since your last call there has been some chatter about FGXI and the Italian company Safilo and just could you update us on what the genesis of that was and where you stand with that?

Alec Taylor

Yes, that was really subject to (inaudible) of our largest shareholder we grew in holdings but not as I want to emphasize the board of FGXI hadn’t authorized any initiative there, company management spending their time on it. I think we grew at holdings thought that perhaps it would be an interesting transaction from what I read I think (inaudible) got something else going on but you should not expect there is no expectation on our part of the transaction like that. We are very focused on our business, focused on acquisition that would be almost surely be domestic in nature. I do think longer term that for us to do something in Europe that would gain distribution into mass channels. As we try to grow our European business could be something that we would do but Safilo is, as I understand their business I know nothing more what I read is just a luxury goods business really not complementary to what we do.

Doug Lane – Jefferies & Company

Okay. Thank you.

Operator

And next, we will go to Sam Panella of Raymond James.

Sam Panella – Raymond James

Hey good morning everyone. Looking at your SG&A expenses they came in better than what we are looking for, can you just talk about some cost controls going on there and if those should continue as well?

Alec Taylor

Sure, yes, absolutely. The cost controls really has been sort of top to bottom we really have left no stone unturned, we've done all the blocking and tackling things that you typically do and managing the P&E and that sort of thing. And it's something that we expect to continue. I hate to put a goal down and say, we're going to get to 40% from an ongoing basis to their advertising and so forth but, it really is an initiative that's been high visibility on our end and high focus and its things that we're going to continue. And yes, for the back half of the year we should be in that 40% range.

Jack Flynn

Sam, to elaborate, we have a hiring freeze on here, then we hired and so we've got a couple of just critical positions that has been open for sometime that we've completed but that has been hit. We have a salary freeze, we would normally do a mid-year salary increase, we did not do that this year. Everybody agreed that that was the right thing to do. We've been extremely type fisted on travel, it's I have been proud of our efforts and I kind of like what we did in this quarter that under 40% as a nice ring to me. Well, we keep pushing on that and I like it, I like this mid-teens or better operating profit margin, there is no reason in the world we can't sustain that in this business. We have the appropriate infrastructure and then leverage the business and it's just –

Jack Flynn

Sam, this is Jack Flynn, and I've been on the road for three days and two of the days they booked me into a camp ground. So…

Sam Panella – Raymond James

Looks that everybody is adhering to the cause control.

Anthony Paola

Jack I was going to say, did you have a room mate that they are here John Fernandez [ph], no worry, never there. Even the sleeping bag next to me.

Sam Panella – Raymond James

Okay. Well, one other question with respect to your international business. You mentioned that – I think strength and readers in the UK. Can you give us an update there? And then also an update on Italy as well? Thank you.

Alec Taylor

Yes, I think the UK reader business is getting there. We – but first of all I would say it’s a kind of almost comical reside. It seems like one out of every about five years here will have a lousy sunglasses year because of the weather, it happened to be this year. But it so happened that in the UK they actually had a pretty good sunglasses year. They had some sun through the first half of their summer. On the reading glass side, we picked up some distribution at Boots. We also were on a, in front of or in a number of major different accounts there. We have some things going on with Boots as a buying co-optic it goes into the continent and distributes to some smaller change. And we have some things going on there to grow the reader business. We also, in reference to Italy, we had some, that markets or brands in Europe under the Turkey name. They haven’t installed us in. It, I think it’s a dozen to 15, both airport gift shops and at train station gift shops. We're really excited about that. They are, they were actually at the building yesterday and I think we see a good opportunity to leverage that. But I think those fixtures will be in store, Jack I believe by Q4.

Jack Flynn

Yes.

Alec Taylor

So I think there is some reason for, optimism would be too strong a word. But I think we're getting more, we're getting hopeful about that business. And again, centering it around the reader segment.

Sam Panella – Raymond James

Okay, great. Thanks guys.

Alec Taylor

Okay. Thank you, Sam.

Operator

And next we'll go to Kelly Duval of BB&T Capital Markets.

Kelly Duval – BB&T Capital Markets

Hi, good morning.

Alec Taylor

Hi, Kelly?

Kelly Duval – BB&T Capital Markets

Hi, there. I wanted to ask you about a, just a couple of your kind of the new I guess aspects to your business, both the newer products that you talked about, the Microvision, to the reader, and then also the e-commerce, just want to get a sense of how you see those two performing in '09? Are you seeing any acceleration in e-commerce? And then any commentary on ultimately how big you see growing both aspects of the business any more investment in the e-commerce and so on.

Alec Taylor

Yes. It's a good question. We started an effort here, we're calling our ultimate channels area. I think in e-commerce we saw in our action sports business Angel and our Gargoyles, I think I've mentioned some place that maybe in a conference that in June it sounds modest. But we started websites that we're actually selling product and sold over $10,000 of product in June for those products. So that sort of shows we can do it. We're looking at some other channels. We've learnt some from that our Dioptics friends are good at selling both our QVC. They know how to sell, they know how to sell. They're good at selling their product through the Internet. We see some other channels that we like, much like Jack's answer, but for competitors reasons I might not going to say, what some of the things we're focusing on. But there is a whole segment of business that I would call alternative channels. That’s a significant channel that we should get to look.

We're the overwhelming leaders in this reading glass business, and we are leaving some doors that we are not getting to and some opportunities that we’re not getting to that we should, and we're going to really start focusing on that, having internal effort that way I'm not going to try to quantify quiet yet. But to say it's a kind of real. We've got a team working all that, we think we can do something there. These new products are exciting. I mean, I think we said that we thought that should be $5 million to $8 million of selling of those products at the last call and I think we absolutely have the ability to do that this year. But Jack elaborated in a minute. But each of these items, this eco-friendly reader is big. I mean we're in distribution with Wal-Mart, it's a product made with recycled plastics with tagging on it. It's made with recycled product. We've had real interest in the healthy class. We're getting ready to do something there for the first time. We have a vitamin selling class of trade that's of interest there. It's microvision, is the little fold up product that goes all the way down to the size of a wider to several classes of trade that like that. So I think these new items, I think this is to get something, a pipeline of new products that keep retailers excited with new items, what we've got to do and we've challenged our product development people to do that. And I think you just will continue to see more of this and hopefully it will accelerate. Jack, you might want to elaborate a little on some of the specific selling efforts there?

Jack Flynn

Yes, I think those new product categories for us, really we look at them, I think kind of really three ways. One is to open up some new business areas, new accounts, new classes of trades, that's certainly part of the initiative. In the lot of cases, we’re trying to extend our existing module. We have core reading glasses, we have fashion, we have some technology. But bringing these products to market and a significant number of products that we're trying to extend our module, extend that business area. And the last thing of course is I think even in existing customers, we might take one, two or three of these items and go off modular to another section of the store, maybe there is a lot of interest in the men's business now. Maybe we can get over into the men's area, let's say, where shaving is get over into an eye care, et cetera, they are also over into where they are selling computers or even computer accessories. So it's kind of a three plan debit as far as these new items go.

Kelly Duval – BB&T Capital Markets

Thank you, very informational. Thanks.

Operator

(Operator instructions) We'll go next to Chris Krueger of Northland Securities.

Chris Krueger – Northland Securities

Good morning, guys. Nice quarter.

Alec Taylor

Yes. Thanks, Chris.

Chris Krueger – Northland Securities

All right, a lot of my questions were answered. But, just one I missed little bit on the call, if you went over this, I apologize. But can you give us a little more feedback on your advertising efforts and whether or not you have, some internal metrics or any way to gauge how successful that has been so far?

Alec Taylor

Yes, I know 50% of our advertising dollars were wasted, I wish I just knew which 50%. It's hard to judge. Nielsen does not cover or ROI do not cover these categories, so you can't really judge yourself against others. I think what we look at there's a couple of metrics we're doing there. First of all, we had some reader focus groups in Boston and Chicago last week that were very interested in. There are two brands and two brands only that consumers recognize. First and foremost, Foster Grant, we were with women ages 40 to mid-50s everybody recognizes Foster Grant. Magnivision they recognize they sort of struggle with the name a little bit, but they recognize it largely by where they have brought the product.

But, I think we definitely gained on the name recognition. We also did some post-diagnostics on things that we just saw this report this week on persuasion and breakthrough and probably not surprisingly because Magnivision was almost at a standing start, where Foster Grant really is a iconic name and the Foster Grant both breakthrough and that aided by have been working well to obviously but those were if the normal is 50% we were at the 60s. So that was very good scoring for their Magnivision still has ways to get it back actually and that what’s the best thing to look at.

Let’s look at sales, we are up nicely in both the quarter and the first half of the year and so we are convinced, we remain convinced that this category it should be much bigger than it is. It’s a $650 million at retail category that we tested it several different ways. We keep coming back and say this category has potential to be a $1 billion category. That’s a growing category because the aging Baby Boomer and on and on. So we believe that the way to really get at that is the reader advertising and so we think the first year it’s a long-term process, it’s a category that’s never been advertised but we think it’s a worthy effort. We are going to stay after it and you may have missed this part Chris but I would say we are going to spend this year about 4.5% net revenues on advertising. That’s just going to be kind of consistent number, it goes all the way back to IPO we said it is going to be 3% to 5% and as you saw that number going towards the 5% soon we received the success and I think we would reiterate that.

Chris Krueger – Northland Securities

Alright. Thank you.

Alec Taylor

Thank you.

Operator

And next, we will go to Liam Burke of Janney Montgomery Scott.