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Kenneth Cole Productions, Inc. (NYSE:KCP)

Q2 2009 Earnings Call

August 6, 2009 4:30 pm ET

Executives

James Palczynski - Principal, Integrated Corporate Relations, Inc.

Jill Granoff - CEO

David Edelman - CFO

Analysts

Scott Krasik - C.L. King

Sam Poser - Sterne, Agee

Jeff Van Sinderen - B. Riley

Heather Boksen - Sidoti & Company

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Kenneth Cole Earnings Call. My name is Gerry and I will be your coordinator today. At this time, all participants are in a listen-only mode. (Operator Instructions)

I would now like to turn the presentation over to Mr. James Palczynski with ICR. Sir, you may proceed.

James Palczynski

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

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

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

With that out of the way, I’d like to now turn the call over to Jill Granoff, Chief Executive Officer of Kenneth Cole Productions.

Jill Granoff

Thank you, James. Good afternoon and thank you for joining us to review our second quarter results. With me today is David Edelman, our Chief Financial Officer.

We continue to make progress against our operational and strategic plan during the second quarter. I’m encouraged to note that our financial results, while still unacceptable, were better than expected.

For the second quarter, we reported revenues of $94 million and a loss per share of $0.18. This compares favorably to our guidance of revenue in the range of 90 to $95 million, and a loss per share of 25 to $0.30. As everyone knows, we are experiencing the worst economic environment in decades. We have seen dramatic changes in shopping patterns, increased price sensitivity, and significant retailer de-stockings. Nevertheless, we remain focused on returning to profitability and generating long-term growth.

David will go through the numbers in detail in a few moments, but first I’d like to review some key highlights since our last call. Number one, very importantly we reduced our inventories by 28% versus the year ago level and ended the quarter with healthier and more balanced inventories as we committed.

Number two; our gross margin was 100 basis points better than the same quarter last year and 850 basis points better than the first quarter. This resulted from both reduced promotional activity and a better merchandise mix versus the prior periods.

Number three; the impact of our ongoing cost control initiatives is reflected in the quarter’s results. You’ll see that our SG&A was down $4.1 million versus the year ago period. This is especially noteworthy considering that our numbers include expenses associated with operating 10 net new stores versus the prior year.

Number four; we have continued to see promising results in our test of a new full priced retail concept. We know now that we can achieve a better economic model in a smaller footprint. In the test stores, comps are running approximately 20 points above the control group and margin is running six full percentage points higher.

Number five; we have also strengthened our capital position generating almost $12 million of cash in the second quarter. We continue to have no debt and ended the quarter with approximately 58 million of cash. Additionally, I’m pleased to report that since the close of the quarter, we converted our existing credit line to an asset-based facility providing us with increased availability and strategic flexibility if needed.

Number six, and perhaps most importantly, we believe that our product is improving steadily driven by Kenneth’s creative and strategic leadership. We are increasing our focus on product innovation, and as a first step we have reinvented our Kenneth Cole New York Women’s Footwear business with a revolutionary comfort technology. I will tell you more about this exciting re-launch in a few minutes.

While this progress is encouraging, we are still disappointed in our overall financial results. To drive improved performance and return to profitability, we are continuing to reduce costs, increase margin and create sales growth.

As I highlighted, we have reduced our inventory by 28% versus last year. Our assortments are much tighter. We have implemented a good; better, best merchandise mix with a healthier balance between fashion and core across all classifications.

Our forward receipt plan now mirrors our expectations for the business and market conditions. We are also doing a more effective job of designing into key out-the-door price points. The combination of these activities should lead to further reductions in promotion and markdowns resulting in better gross margins.

In addition to enhanced gross margins, we believe that there are incremental opportunities to cut costs, particularly through process efficiencies including test and react initiatives, enhanced fulfillment capabilities and improved speed to market.

I’d now like to update you on the progress we’ve made on our six core strategic initiatives. Number one, create compelling product. Number two, energize the brand. Number three, accelerate retail. Number four, revitalize wholesale. Number five, go global. Number six, create a winning consumer driven culture.

Now, in terms of creating compelling product, great product is essential to our success. This means having high quality trend-right products and proper assortments with compelling price value. Kenneth is focused on re-inventing our business classification by classification. Our first major initiative is the re-launch of Kenneth Cole New York ladies footwear, with our patented comfort technology.

As you may remember, we acquired Gentle Souls four years ago, and we have now been able to engineer that patented comfort technology into attractive high-heeled shoes, a classification of women’s footwear that until now has never been able to be made truly comfortable. This re-launch is already generating excitement across our entire business.

Kenneth describes this product as “The most comfortable shoe a woman ever looked good in... Guaranteed”. If you watch Good Morning America tomorrow, you’ll see Kenneth talking about the shoes and the re-launch. This new footwear line is currently exclusive to our own full-priced retail stores to enable us to build momentum and drive traffic before we expand into wholesale distribution next year.

We have already pre-sold several thousand pairs of five limited edition styles at full price, which we believe is unprecedented in this market environment. The shoes will be available for pickup beginning tomorrow. We expect to sell through the entire initial delivery at full price.

In terms of our broader product assortment strategy, core product is now 40 to 50% of the mix versus only 20% at this time last year. We are very focused on product that consumers can wear now, is appropriate for more than one season, is versatile for a variety of wearing occasions and thus delivers greater value.

We’re excited about the new fall lines and we are seeing success in modern wear-to-work apparel including suits separates for men and dresses for women as well as casual fashion such as Denim, Ts and ath-leisure footwear.

In addition, we are working very closely with our licensing partners to develop Kenneth Cole into a global lifestyle brand. In particular, we continue to be very pleased with the performance of our women’s sportswear, men’s tailored clothing, outwear, dress shirts, ties and belts.

In terms of our brand initiatives, our fall marketing campaign has received great feedback. Our marketing more clearly communicates our fashion identity while retaining our unique social voice. Our goal is to maintain our media presence while reducing our creative expense to generate a greater return on our overall marketing investments. We’ve also embraced social networking and the blogosphere to build a brand oriented community and strengthen the connection with our consumers.

Perhaps, our most exciting current initiative is the re-launch of our Kenneth Cole New York women’s shoes. I hope some of you will join us tomorrow morning at 9:00 AM for a special event at our Rock Center store. Hundreds of people have told us, they are coming to pick up their shoes and meet Kenneth.

As I mentioned, Kenneth will be appearing on Good Morning America tomorrow and will be on the Today Show next week talking about the product, which will also be featured in dozens of publications.

Now moving on to Consumer Direct. We are focused on improving productivity to leverage our occupancy costs as well as our divisional overhead. As you know, our outlet business has remained relatively strong and is profitable, we’re continuing to open new outlet locations with seven additional company stores planned to open in premium outlet centers in the second half.

In addition, we opened a new Le Tigre outlet concept in July. We’re testing this store to confirm what we think is a domestic and International opportunity for the brand. The store will have a full lifestyle assortment with the appropriate depth of inventory and merchandised presentation.

Full price retail continues to be challenging. Many of our stores are oversized and our rent structure is too high. We have been working with our landlords and have received some concessions, but we must create a profitable and replicable full priced economic model. To this end, we created our test store concept to identify the right store size, layout and design and mix of product.

During the quarter, comparable store sales in the test stores ran approximately 20 points higher than the control group and gross margin ran approximately six percentage points higher. This is great directionally but we want to see sustained incremental improvement before we make any decisions about how to proceed with our entire full price chain.

Moving on to wholesale; wholesale sales in the second quarter were down approximately $12 million versus the same quarter last year. This was due to a combination of retailer destocking, a generally soft market and planned reductions in off-priced footwear. We also saw an impact from the planned exit of the Tribeca and Bongo lines and our withdrawal of Kenneth Cole New York ladies’ footwear from wholesales in anticipation of the exclusive re-launch in our own retail stores.

In order to better compete in this environment, one important part of our wholesale strategy has been to broaden the accessibility of the line and incorporate items at key price points especially in Reaction. We are now confident that we have a good price value mix for today’s consumer and expect broader door distribution in the future with key accounts. From an International perspective, we continue to gain traction in the United Kingdom and Canada. We are also continuing to explore expansion opportunities in other regions around the world, particularly in Western Europe and Asia.

Finally, with respect to our culture, we have made two new additions to our already strong management team. We’ve recently hired Ingo Wilts as our new Creative Director, reporting directly to Kenneth. Ingo comes to us from Hugo Boss where he was Creative Director across all categories for both men and women. We have also hired Peter Charles as Chief Supply Chain Officer. Peter is a 20-year footwear veteran who joins us from Nine West where he was EVP of Sourcing and Production. Peter and his team will focus on cost-effective sourcing, quality, margin, and speed-to-market.

I’d also like to welcome Michael Blitzer to our Board of Directors. Michael is a 30-year veteran of the apparel and footwear industries. He has helped to lead and direct a number of companies, including Macy’s and Phillips-Van Heusen where he retired as Vice-Chairman. Michael is currently a Principal at Portsmouth Partners, LLC, an advisory firm to the private equity market focusing on retail and wholesale consumer industries.

I’ll reserve some additional comments for closing, but I’d like to now turn the call over to David to provide detail on the financials for the second quarter.

David Edelman

Thank you, Jill. Good afternoon. I’d like to start with our income statement for the second quarter. As Jill mentioned, our earnings per share for the second quarter were above the guidance we gave on our first quarter call.

Consolidated net revenues declined 15.5% to 93.9 million versus the year ago total of a 111.2 million. Wholesale revenues were down 20.3% to 46.1 million versus the year ago level of 57.9 million. Consumer Direct revenues decreased by 10.2% to 38.6 million versus 43 million in the year ago quarter. Revenue growth from new outlet locations was offset by a comp store sales decline for the period of 14.7%.

Royalty income in the quarter was 9.2 million, 10.8% below the year ago quarter of 10.3 million. The reduction in royalties is due in part to the completion of amortization of certain key money and declines in sales at certain licensees.

Gross margin in the second quarter was 42.4% versus 41.4% in the year ago quarter, an increase of 100 basis points. Total SG&A expenses for the quarter were down 4.1 million to 45 million versus the year ago level of 49.1 million. This reduction was achieved despite the expenses associated with operating 10 net new retail stores versus the prior year period.

Interest income at a $100,000 for the quarter was down versus the year ago level of 300,000 reflecting both a lower average cash balance and reduced interest rates. Our loss for the quarter was $0.18 per share compared to the prior year’s second quarter loss of $0.11 per share.

Turning to the balance sheet. Cash at quarter’s end was 57.9 million, up 11.6 million versus the end of the first quarter and compared to 72.9 million at the end of the second quarter last year. While cash was down 15 million year-over-year, we had used 24.4 million for the following, 4.4 million for share repurchase; 3 million for our investment in Le Tigre; 13.8 million for capital expenditures; as well as 3.2 million for dividend payments, which has since been suspended.

Our capital expenditures in the second quarter were 4.9 million and in the second half we estimate CapEx of roughly three to four million. As Jill discussed, consolidated inventory at the close of the quarter was down 28.2% to 35.1 million from 48.8 million at the end of the second quarter last year. This compares favorably to the revenue decline in the quarter of 15.5% and is better aligned with sales demand going forward.

You should keep in mind that our second quarter ending inventory included inventory associated with the 10 net new stores. Our inventory is now right-sized for the business and we believe that gross margins should continue to improve. We announced today that we have amended our credit facility to convert it to an asset-based line tied to receivables and inventory. Prior to this amendment our ability to borrow against the line was tied to a trailing operating formula, which limited our borrowing capacity.

This new structure now provides us increased availability and flexibility, if needed. Now with regard to guidance for the third quarter, while we believe sales will remain under pressure we expect to see continued improvement in gross margins and total expenses to be down versus last year. We forecast revenues for the third quarter to range between 100 million and 105 million and anticipate a loss per share in the range of $0.03 to $0.08.

While we are not yet providing specifics on fourth quarter guidance, we do expect to show an operating profits for that period.

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

Jill Granoff

Thank you, David. While we clearly continue to face challenges, we are demonstrating quarter-over-quarter improvement in our efforts to return to profitability. Let me summarize what we accomplished since our last call; we balanced our inventories, we improved our margins, we reduced our SG&A expense, we increased our liquidity and strengthened our balance sheet, and we added some terrific new leadership to compliment our talented team.

While we will maintain our focus on inventory, margin and expense management, we know the next step is driving top line growth through enhanced product, marketing, and merchandising. To this end we are improving our assortments and the price value relationship we offer our customers; introducing compelling new product lines with a particular focus on ladies and men’s footwear, modern wear-to-work dressing and casual apparel that provide versatility in wearing occasion.

Rolling out a terrific new marketing campaign that reinforces our position as the quintessential metropolitan lifestyle brand with a unique social voice; and demonstrating improved retail results in a seven store test, which should form the foundation for a new retail model with improved economics. We believe that we will see better levels of volume in consumer direct and wholesale in 2010, as we leverage our competitive position as well priced designer fashion.

Kenneth and I are committed to delivering results, we can all be proud of. Thank you, and operator; we’d now like to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Scott Krasik with C.L. King. Please proceed.

Scott Krasik - C.L. King

Yeah, hi, thanks guys. Gross margin up was certainly a positive. Let me ask you, Jill, is the improvement in gross margin, is that more from rightsizing the inventory or cleaning out the inventory versus, just better margins less markdown, money, paid to department stores?

Jill Granoff

It’s really a combination of all of those items.

Scott Krasik - C.L. King

So, in terms of thinking about, you know, the gross margin improving in the back half of the year, are you assuming better sell-through and less markdown assistance or is it just because of how low the inventories are right now?

Jill Granoff

We’re really driving for improved turn. So we have certainly looked at our receipts and looked at the assortment. But also we are partnering on the wholesale side to ensure that our products are really targeted to the needs of the customer base. We’re designing in at out-the-door prices, and so we believe that there will be better sell-throughs, less markdowns, and as a result less give back. So it’s really a combination of what we expect to see, faster turns that we’re driving in our own stores as well as improved sell-throughs at the department store level.

Scott Krasik - C.L. King

So, should the wholesale segment return to profitability then in the second half, the third quarter perhaps.

Jill Granoff

David?

David Edelman

We have a $0.03 loss to $0.08 loss in the third quarter and our top line in wholesale remains under pressure so the margins are going to improve. Our infrastructure and support expenses will go down, but until we get some leverage on the top line it’s going to be very tight.

Scott Krasik - C.L. King

Okay. Then just, you don’t usually comment month-to-month in terms of the comps, but is there anything showing signs that that will improve or should we still look for mid-teen negative comps?

David Edelman

In terms of our comp store assumptions in the guidance we gave, we assumed the current trend will continue for most of the quarter before trending better in September.

Scott Krasik - C.L. King

Okay.

Jill Granoff

I think, it’s also important to note that we’re up against some favorable comparisons from last year since we are actually running some positive comps last year in the third quarter.

Scott Krasik - C.L. King

Good, good. Then just, maybe talk about with the lack of any momentum, how did you get the launch on the women shoes, did they meet expectations, did it come in below expectations, did -- you said something about full price, but did you have to make some guarantees as well, just talk about that.

Jill Granoff

Well, I think, the key thing, Scott, is that it’s actually launching tomorrow and that’s what’s so exciting about this. We have been in presale mode for the past month. Actually consumers don’t have the shoes. They were so excited about the concept and the ability to try them on in store that they’ve bought them. But tomorrow they will be able to pick them up. So really the launch is ahead of us, and we’re very excited about what we believe this represents.

Scott Krasik - C.L. King

Okay, good. Well, good luck.

Jill Granoff

Thank you so much.

David Edelman

Thank you.

Operator

Your next question comes from the line of Sam Poser with Sterne, Agee. You may proceed.

Sam Poser - Sterne, Agee

Good afternoon. Just a question, how do you -- I just want to just follow-up on Scott’s question about the revenue for the next two quarters or for -- are we looking to continue the same kind of weakness in the wholesale that we saw this quarter down 20%. Can you give us a breakout of how you’re looking at the whole thing, David or Jill?

David Edelman

Yes, sure, Sam. First of all, in wholesale, our backlog is under pressure due to a number of factors, retailer destocking, a generally soft market, and our planned exits from the Bongo and Tribeca businesses. In addition, we’re trying to clean up some of our distribution and we’re limiting our planned sales to the off-priced channel.

That said, our backlog today is down about 30%, we think that’s probably indicative of the quarter. I gave you the comp assumptions, we should be down around where we’re running today 15% for the first couple of months with the -- a better September. Then in licensing, we’ve been dropping about 10% in licensing over the course of the year, half of that is due to the completion of amortization of key money and the other 5 points is due to just a little bit of a tougher sales environment.

Jill Granoff

I just want to build upon that, Sam, while we’re not giving guidance for Q4. I do want to say that better margins for us mean better margins for the retailers, which means better volume through reorders and pre-booked orders in the next season. So, we’re seeing some nice traction in both Reaction men’s and ladies shoes, which is great as we’re partnering as I said with our key retailers, and we believe -- we will get some expanded distributions really going into spring ‘010.

Sam Poser - Sterne, Agee

Cool. With the gross margin improving in the back half, to what degree -- I mean, when I look back at the gross margin 2007, I mean, are we looking -- are we looking somewhere in between -- we didn’t return to 2007 levels but we’ve -- you made a good -- it was good work towards it, in the second quarter. How should we be thinking about the margin as -- what kind of improvement there, especially in Q4?

David Edelman

I think what you’re going to see is gross margins improving year-over-year and accelerating throughout the back. So, September will be better than -- the month of September year-over-year is going to be better than August, and then the fourth quarter is going to be better than the third quarter, so it’s going to keep increasing.

Sam Poser - Sterne, Agee

Well, I mean, but I mean, like you did 42 -- a little over 42% gross margin this quarter, we can expect that to be -- to improve in Q3 over that number and then improve again over that number?

David Edelman

Yeah, I’m looking at it more in terms of the spread, so we did 100 basis points better than last year, we’re going to do better than that in the third quarter and better than that in the fourth quarter.

Sam Poser - Sterne, Agee

The fourth quarter is an easier comparison --

David Edelman

Absolutely.

Jill Granoff

Absolutely.

Sam Poser - Sterne, Agee

Relatively -- I mean -- okay. Then you mentioned that you’re cleaning up the distribution just now. What about as you work with your very large retailers, the major department stores, but not the off-priced guys -- how are you working with them to tighten the mix to key in our -- key up on the key items so you don’t face the kind of markdown requirements that you had a year ago and so on?

Jill Granoff

Well, we’ve had a lot of across the top meetings with our key department store partners. We’re actually pre-lining in many ways even before some of the big shows to talk about the opportunities and really working with them on tight assortments at key price points. So that is really helping us when we get together. Kenneth likes to talk about the fact that the historical days of the beauty concept are over. We’re partners, we have to sit on the same side of the table, we have to understand where the opportunities are and we have to work together to fit into those needs. The other thing that I would say is that we are really focused on having more EDI product; and again, in partnering up front with our key department store partners we’ve identified selected styles and we have identified those for quick replenishment, which certainly is very helpful in terms of margin and turn.

Sam Poser - Sterne, Agee

For everybody. Then David one last thing about the SG&A, you came in pretty much where we expected to see it. Could we look at those kind of decreases and -- should the decrease in dollars be equivalent in the next two quarters or is that going to -- how is that, how should we look at that?

David Edelman

We’re continuing with our ongoing cost initiatives, looking at process improvements and other efficiencies and I think we’ll actually get a little better than that in both the third and fourth quarter.

Sam Poser - Sterne, Agee

From a dollar perspective.

David Edelman

Absolute dollars, yes.

Sam Poser - Sterne, Agee

Thank you. Good luck.

Jill Granoff

Thank you.

David Edelman

Thank you.

Operator

(Operator Instructions) Your next question from the line of Jeff Van Sinderen with B. Riley. Please proceed.

Jeff Van Sinderen - B. Riley

Good afternoon. Just trying to discern between sell-through and anticipated sell-in. Are you saying that your sell-throughs at retail improved in Q2? Is that what you’re hearing from your retailers?

Jill Granoff

We are hearing that in selected product categories. We’ve had great traction in Q2 with our Reaction ladies footwear. The Glam construction has been very, very successful and we know that that has sold through well, and we’re also seeing some nice results on selected men’s styles.

Jeff Van Sinderen - B. Riley

Okay. Is that do those styles -- I guess, I’m trying to get a sense of, is that a large part of your business or are these just sort of early green shoots in a small part of your business in Q2?

Jill Granoff

No, the Reaction footwear business is actually a large part of our business and we have seen nice traction, as I said in both men’s and women’s. The other thing I would say is that we are seeing improved sell-throughs in our own stores. I only answered the wholesales part of the question, but certainly as we have pulled back on our receipts and tightened up our assortments we’re seeing better sell-throughs as we’re looking to drive faster turns.

Jeff Van Sinderen - B. Riley

Okay. Then maybe if we can switch over to your retail business for a minute. Any more color you can give us there in terms of the metrics, AUR, UPT or the transaction count in terms of what you saw in the quarter?

David Edelman

Yeah, our AURs are down about 14%. Conversion is around the same, but our traffic has been down, and the units per transaction are almost unchanged.

Jeff Van Sinderen - B. Riley

Okay.

Jill Granoff

I mean, what we are seeing is obviously consumers are searching for value. We’re also seeing a trend, as I mentioned, to a more casual product. So as we’re selling things like PK polos and tees and denim, that is lowering the AUR. We’re seeing some incremental units move as a result of that, but we really have to get the traffic up and the conversion up to offset some of the declines we’re seeing in the AUR.

Jeff Van Sinderen - B. Riley

Okay. Then sort of as a follow-up to that, maybe you can just touch a little bit more on your low price point strategy and what that entails and what we should look for there?

Jill Granoff

I think the key is we’re not changing the price points at the top end of the pyramid. What we’re doing is extending the accessibility of the brand at the bottom part of the pyramid on some core items and key construction. So what we’re doing is we’re identifying maybe three styles in men’s footwear where we will come in with a lower price point, maybe that’s 20% below where we were before in order to be competitive. Clearly, in this economic environment everyone seems to be adjusting their price points to the new consumer reality and we think it’s important that we be competitive. We’re certainly not doing it across the board, but we think it’s better to design into key price points than to have prices that are set artificially high and then have to mark them down and then take the margin hit. So we’re just trying to be realistic with the new consumer and competitive reality.

Jeff Van Sinderen - B. Riley

Okay. Then it sounds like your new full price store model is promising. Just wondering what else you need to see in that -- with those test stores in order to move forward with rolling that out to some of the existing stores in the base. I guess maybe you can just -- if you can just talk about how you’re approaching that?

Jill Granoff

We really want to see sustained results for longer than the three-month period of time. We’re very pleased with the results, but still it’s not hitting our ROIC hurdles to invest additional capital. We do expect to see pickup in the back half of the year and if that in fact happens that will give us confidence to look at potentially rolling out stores in the back half of 2010. But we need to see improved comps beyond where they are today to ensure that we have an economic model that works.

Jeff Van Sinderen - B. Riley

Got it, okay. Thanks very much and good luck.

Operator

The next question comes from the line of Heather Boksen with Sidoti & Company.

Heather Boksen - Sidoti & Company

Good afternoon, guys. Just curious with regards to the 9-2-5 collection. Going forward right now it’s just the five skews, when would we expect to see a more expanded assortment? Along the same lines, as far as the spring order book goes for that, are people buying it in addition to what they were buying of the Reaction or New York, New York product or in lieu of it or how are buyers responding to it?

Jill Granoff

First of all, Heather, I’m so glad that you asked about 9-2-5 because we are so excited and hopefully you will try on a pair and try to come tomorrow morning. The 9-2-5 shoes, as we’ve said, we launched initially in pre-sell and tomorrow with full sale with these five limited edition styles. But we will be putting the comfort technology into all Kenneth Cole New York ladies shoes. So you will actually see that in our stores this season. There actually some products out now.

I think it’s important to reiterate that this is an exclusive launch in our stores only for the fall season. We will look and consider extending into wholesale sometime next year, but for now we think it’s critically important to drive traffic to our stores to build momentum, to control the presentations and the price points to really make this a very successful launch and then we will look at rolling out to wholesale as well as international next year.

To answer the other part of your question, we do see this as distinct from Reaction, different positioning. This is really a lot of wear-to-work shoes. There’ll be a broader assortment, but we certainly see this as an incremental opportunity once we do roll out to wholesale.

Heather Boksen - Sidoti & Company

All right. Just to clarify, as far as in the stores -- the merchandise – the 9-2-5 in the stores right now, that five skews, it should be -- it sounds like pretty soon that it’ll be in more stuff than just the five I can see right now.

Jill Granoff

Yes. As a matter of fact I was at WSA last week, I was in our Las Vegas store and I saw that some of the additional styles that we have developed have begun to hit the stores. So they will be certainly the five styles in all stores and we will be rolling out additional styles and you’ll start seeing them in stores soon. It’ll be fully there for fourth quarter.

Heather Boksen - Sidoti & Company

Sounds good, guys. Thanks.

Operator

You have a follow-up question from the line of Scott Krasik with C.L. King. Please proceed.

Scott Krasik - C.L. King

Thanks. David, so what was the store count at the end of the quarter?

David Edelman

The end of the quarter with 101 stores. We have 40 full price stores and 61 outlets.

Scott Krasik - C.L. King

Okay. Jill, where do you guys stand in terms of the strategy for promoting Kenneth Cole New York, Kenneth Cole Reaction, Kenneth Cole by itself? I assume the launch of the 9-2-5 is Kenneth Cole New York. How do you view that for probably 2010 as first time?

Jill Granoff

Well, I mean the new footwear line is indeed Kenneth Cole New York and our goal there is no markdowns, no promotion, we really believe that this is a patented technology and we want to accept the consumer demand and we’ll roll it out from there.

Reaction, as you know, is much more accessible. We have some Reaction in our stores, more Reaction in our company stores and really we have a very, very strong Reaction business in our wholesale arena and certainly that is a brand, which we will promote as appropriate, but certainly not excessively.

Scott Krasik - C.L. King

Okay. So spring 2010, you’re not trying to promote Kenneth Cole as a brand; you’re still using both New York and Reaction?

Jill Granoff

I mean, Kenneth Cole is the master brand and Kenneth Cole New York is a sub brand and Reaction is a sub brand and Unlisted is a sub brand. They all have the same sort of core DNA in terms of being much more metropolitan, we talk about confident, clever, cool, sort of a downtown sophistication. So I think it’s important to think of it as Kenneth Cole the brand with New York, Reaction and Unlisted as sub brands.

Scott Krasik - C.L. King

Then for spring ‘10 where do you see the pricing, for example, on Kenneth Cole Reaction Oxfords or Loafers or something like that? Will it be under 100?

Jill Granoff

Yes. We will have some key items under 100.

Scott Krasik - C.L. King

Okay, good. Then did I hear right that the comps at the test stores were 20 bps better than the store base?

Jill Granoff

20 percentage points.

Scott Krasik - C.L. King

20 percentage points.

Jill Granoff

Yes.

Scott Krasik - C.L. King

Okay. So that’s giving you some positive look, but it’s not at the level to invest?

Jill Granoff

Correct.

Scott Krasik - C.L. King

Okay. All right, thanks, good luck.

Jill Granoff

Not yet anyway.

Operator

This does conclude the question-and-answer portion of the conference. I would now like to turn it back over to the Kenneth Cole management team for any closing remarks. You may proceed.

Jill Granoff

Kenneth and I would like to thank everyone in the organization for the hard work and dedication that they have been showing us. We would also like to thank our customers, suppliers and shareholders for their continued loyalty and support. Thank you, again.

Operator

And we appreciate your participation in today’s conference. This does conclude the presentation. And have a great day.

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